JLL: FDI in multi-brand retail… Hope In Abeyance

Indias decision to allow foreign direct investment (FDI) in multi-brand retail towards the end of 2012 and its FDI policy modified in April 2013 put the country back on the retailing map of the world. However, this is not the first time that India has invited global retailers to set up their shops. In 1997, the government approved 100% FDI in cash and carry wholesale stores under the automatic route and, in 2006, 51% FDI was allowed in single-brand retailing, although with prior approval from the government. In December 2011, the government fully opened up FDI in single-brand retail stores. A number of international retail brands such as IKEA and Carrefour were excited to enter the Indian market and announced their plans to start talks on investment proposals with the concerned ministries. In the much-debated and politically-sensitive multi-brand retail space, however, partial 51% FDI was proposed only in September 2012, with parliamentary approval in December 2012. Retail in India - A Growing Story

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) predicts that the Indian retail sector is poised for 15% year-over-year growth over the next five years through 2018. This robust growth picture also is painted by AT Kearney, whose 2012 Global Retail Development Index (GRDI) puts India as the fifth most favourable destination for global retailers. In 2011, Indias retail industry accounted for 22% of Indias GDP and employed close to 9.4% of the labour force. Organized retail in India currently constitutes only 6-7% of overall retail trade in India, although by 2016-17 this share is projected to grow to 10%. Economic growth of about 7% over the next 10 years, rapid urbanization, a growing young demography with rising income, easy access to credit and rising brand consciousness are indeed contributing to the growth story for the country, but inconsistencies in policy-making, glaring inefficiencies in supply-chain logistics, the high cost of real estate and a shortage of good quality retail properties are the main constraints in achieving the projected growth. While there is no doubt about Indias huge market size that attracts the worlds largest retailers, retail real estate in India is still a young industry. With a history of approximately only 13 years, Indias malls make up only 80 million square feet (sq ft) of space. The global financial crisis and its lingering impacts have resulted in major delays to retail-supply additions planned for over the last five years, with 2012 seeing the lowest number of new mall completions in India since 2006. If all of the planned new supply targeted for completion between 2013 and 2015 gets delivered, India will have 100 million sq ft of mall space by the end of 2015, still a fairly small number given the market size. Visible Impact of FDI Will Take Time

With the relaxation of the FDI policy, the government has ended a waiting period of more than seven years for multinational retailers to enter the market. The impact is likely to be a mixed initially as small retailers and middlemen/agents will face increased pressure on their business with the entry of the international retail-chain operators. However, it will work positively for farmers and small-scale manufacturing hubs as they will find large-scale buyers for their products. It will also be beneficial for customers as this will increase one-stop shopping options with access to international brands. It could require an additional 6-10 years for the market to mature. Even in China, the international giants like Wal-Mart, Tesco, Carrefour, Auchan and Costco had a long settling-in period contrary to a general perception that streamlined approval systems, government facilitation and shorter construction periods can help retailers settle down quickly. While the relaxation in FDI rules will allow a big-bang entry by global retailers, some of them have already set up their business in some way or have collaboration arrangements in place with Indian companies. For example, Carrefour opened its first cash-and-carry store in India in New Delhi, German-based Metro opened six wholesale centres in the country, Wal-Mart plans to invest about US$2.5 billion over the next five years in a joint venture with Bharti Retail and Tesco has signed an agreement with Trent Ltd., the retail segment of the Tata Group, to set up cash-and-carry stores. Additionally, Swedish fast-fashion retail giant H&M has sought permission from the Foreign Investment Promotion Board (FIPB) to invest US$120 million in India to start a fully-owned company that will open 50 H&M stores. IKEA is currently waiting for the final approval from FIPB to open 25 stores with an investment of US$150 million. U.S. casualwear retailer Gap Inc., French apparel retailer Celio and Japanese fashion brand Uniqlo are also ready with their plans to enter India. Some Hurdles To Overcome

The impact of FDI is closely linked with how India can address economic, political and social hurdles. One of the economic hurdles is the high cost of real estate. Rents in India easily account for 9-15% of retailers revenue, which is significantly higher than the global average of 4-10%. International retailers, sensitive about real estate costs, will help to reduce the dominance of central city locations. Good but off-centre locations can bring down the land cost substantially and eventually developers can pass on these savings to their retailer occupiers with rent that is compatible with their retail business. Another hurdle is the role that Indian state governments can play in allowing FDI in the states they rule. Though the central government has allowed FDI in multi-brand retail at the Centre level, the state governments are at liberty to make their own decisions about the implementation of the policy. With Indian elections due to take place no later than May 2014, the decisions of retailers to enter India could be deferred by a few months. Also, the government has laid down some requirements before allowing FDI in retail and these can affect the business planning for international retailers. The retailers must fulfil the conditions of not less than 30% of the value of procurement needs to be sourced from Indian small industries, at least 50% of FDI brought into India should be invested into backend infrastructure (distribution centres, warehousing and logistics) within three years, minimum FDI investment of US$100 million, multinational retailers can conduct their business only in cities with a population of more than one million (54 such cities as of 2011) and a requirement of a minority Indian partner. While these conditions appear fair to most, it will still take at least 12 to 24 months before India can actually experience the fruits of FDI in multi-brand retail. India is likely to witness a new era in retailing which will be defined by the emergence of new formats and, vastly improved collaboration among the various stakeholders and experimentation with concepts such as tourism, luxury and destination-focused retail and rural retail. Upcoming large townships, mixed-use retail developments, retail centres at transport nodes and in office districts, along with a research driven approach by developers, will assist in bringing in quality supply of the right size and in the right place - and hopefully addressing the demand from foreign brands waiting to tap the extensive and mostly under-exploited Indian market.

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JLL: FDI in multi-brand retail... Hope In Abeyance