Various policy conditions for foreign direct investment (FDI) in multi-brand retail makes mass grocery and apparel the two most favorable segments to invest in, says Deloitte Touche Tohmatsu India Private Limited in its report titled ‘Indian Retail Market-Opening more doors’.
Closely examining the implications of the policy the report says that each of the conditions will have a different impact on the various sub-segments of the retail industry in India.
“Mass grocery and apparel are two of the fastest growing organized retail segments in India today," says Gaurav Gupta, Senior Director, Deloitte Touche Tohmatsu India Private Limited. "In both these segments there are large domestic retailers who could be potential joint venture partners for foreign retailers.”
Gupta says foreign retailers could enter India by forming a new joint venture company, which shall have multi-brand retail stores in India. Alternatively, the foreign investor may also consider acquiring 51 percent stake in the existing business set-up of the potential Indian joint venture partner.
Another advantage in the segment is that existing mass grocery retailers in India already source many products directly from producers and “small” food processing units.
To meet the policy guidelines on sourcing and to have better margins, foreign retailers would need to cultivate relationships with local manufacturers to drive strong private label brand.
Whereas, multi-brand organised retail in specialty stores such as consumer electronics, footwear, furniture and furnishing, among others, are expected to expand and mature in the next few years. However the policy condition on sourcing will continue to be a major bottleneck for FDI in many of these segments.
The report states that the primary concern for the mass grocery segment would be the condition to invest a minimum of INR 250-220cr (US$40.6 - $46.1million) in the first three years towards backend infrastructure. For example, food processing unit, cold chains, etc. While, other segments such as Apparel, Beauty & Wellness and Consumer Electronics have limited requirements in the backend.
Further, as per the policy, land cost and rentals that might be incurred for warehousing are not included in the definition of backend infrastructure. Hence, meeting this policy constraint would be a challenge for any player in the retail segment other than mass grocery.
The policy however, does not specify whether investment in backend infrastructure needs to be a fresh investment or if foreign companies can buy stakes in already established backend infrastructure.
“Our opinion is that policies evolve with changes in the business environment and the political landscape," says Gupta.
The FDI policy for single brand retail has evolved as the Indian market becomes more mature and the political situation more stable. Similarly, FDI policy for multi brand retail or its implication on the business may also evolve in future.
The new FDI policy also presents a unique set of implications for domestic retailers.
On one hand, the policy exposes the domestic retailers to competition from foreign retailers; while on the other hand, it seeks to safeguard them through a slew of protective measures. FDI in multi-brand retail is a state subject and as per the policy, e-commerce is not allowed as an alternate channel as it can serve the customer beyond the physical location of the store.
“Restriction on foreign retailers from conducting multi brand retail in towns with population less than one million can be construed as an enabling policy by domestic retailers who should now focus their efforts to expand their retail footprint,” adds Gupta.