fdi in retail for print out-1

8/6/2019 FDI in Retail for Print Out-1

1/58

1.1 FDI in Retail

After farming, retailing is Indias major occupation. It employs 40 million people. A sizeable

majority of owner/employees are in the business because of lack of other opportunities. The

decade of liberalisation has so far been one of jobless growth. It is no wonder that retail has

become the refuge of these millions. Lopsided economic development is transforming India

from an agrarian economy directly to a service oriented post-industrial society.

The Indian retail industry is highly fragmented. According to AC Nielsen and KSA Techno

park, India has the highest shop density in the world. In 2001, it was estimated that there were

11 outlets for every 1000 people. Since the agriculture sector is over-crowded and the

manufacturing sector stagnant, millions of young Indians are virtually forced into the service

sector. The presence of more than one retailer for every hundred persons is indicative of how

many people are being forced into this form of self employment, despite limitations of capital

and space.

The current debate on allowing foreign direct investment (FDI) in Indias retail trade

primarily focuses on two issues employment and consumer welfare. Supporters of this

move have developed consumer centric arguments while the opponents are more concerned

with its adverse impact on employment. In a recent article in the Economic and Political

Weekly, Guruswamy et al. (March, 2005) deliberated on this issue in detail and made an

empirical estimation of the future job losses, should the government allow entry of FDI in

retail sector. The estimated job loss ranged between 4,32.000 and 6,20,000. In percentage

terms this works out to over 1.0% 1.5% of current work force of around 40 millions (The

Telegraph; UK, estimates it as 80 millions) engaged in retail trade in India. Though FDI in

retailing is not allowed (as of December 26, 2005), the Government of India has a more

liberal policy towards wholesale trade; franchising and commission agents services. Foreign

retailers have already started their operations in India through


2/58

joint venture where the Indian firm was an export house

franchising (KFC, Nike)

sourcing from small-scale sector;

cash and carry operation (Giant in Hyderabad)

non-store formats- direct marketing (Amway).

Large international retailers of home furnishing and apparels like Pottery Barn, Gap and

Ralph Lauren have made India as one of their major sourcing hubs. In February 2002, the

worlds largest retailer, Wal-Mart opened a global sourcing office in Bangalore. Up to 100%

FDI is allowed in Cash and Carry wholesale. The Great Wholesaling Club Ltd is one such

example. (Mukherjee, 2000).

In the latest revised conditional offer submitted by the GOI to WTO in August 2005, under

article XIX of the GATS, India has offered to undertake extensive commitments in a number

of sectors/sub-sectors including wholesale trade services and distribution services (limited to

services incidental to energy distribution but excluding energy trading and load dispatch

function), marine and air transport services.

In the revised offer by the GOI under the on going GATS negotiation, we observe a

systematic move towards creating the basic infrastructure essential for the smooth

functioning of modern retail chains. The bottlenecks like lack of proper storage facilities and

efficient logistic services have been addressed through liberal FDI policy in air and maritime

transport services and maritime auxiliary services, which included storage and warehousing

services in the ports.

To analyze the effect of FDI on Indian retail sector, we have made two different projections

of Indian economy in the next five years when the level of FDI inflow is expected to increase.


3/58

Scenario 1 - The economy grows at a faster rate, say 8% or above and the benefits of growth

flows down the line (not simply trickles down) benefiting even the poorest of the poor.

Economic and social disparity reduces, poverty line becomes a topic of economic history,

and purchasing power across different economic class increases and Human Development

Index (HDI) improves substantially.

Scenario II - Economy grows, as predicted, at a higher rate of say 8% but the benefits of

growth trickles down at a slower rate. Economic and social disparity widens, middle class

and poorer sections get marginalized, purchasing power of the majority of the population

does not improve, transition towards market economy becomes painful, and we observe a

phase of jobless growth. The working class looses its bargaining strength and HDI does not

improve much.

If the social economic condition in the next five years prevails in the same way as described

in Scenario 1, issues like employment loss would loose to attract much attention, as the

expanding economy with better distributional equity would be able to absorb such shocks.

Moreover, with a general rise in purchasing power, consumer would prefer more choices and

better quality of products, which a modern retail chain would be able to offer.

If however, we observe the recent social economic trends, the projection as per Scenario II is

more likely. One of the special features of economic growth in India in the 1990s was the

decline of employment elasticity (employment generated per unit growth of output). In

specific terms, while the employment elasticity of the 1980s and early 1990s was 0.5, it

decreased to 0.16 in the late 1990s. The higher capital intensity of economic growth due to

globalization and competitive pressure was responsible for this. No FDI in Retail 5


4/58

To tackle the problem of jobless growth which became the defining feature of economic

development of India in recent times, the Planning Commission had set up two expert groups.

The first Task Force, under Montek Singh Ahluwalia, was set up in 1999 and produced its

report in 2001. It recommended a number of programs of economic policy reforms, such as

de-reservation of small industries and expanding the role of FDI in small industries and trade.

It emphasized more on the increase in the rate of growth than special programs for creating

jobs. Dissatisfied by the approach of the Task Force, the Planning Commission had set up a

Special Group in 2001 under the Chairmanship of Dr. S. P. Gupta, Member, Planning

Commission, to study the same problem. In the order appointing the Special Group, the

Deputy Chairman of the Planning Commission pointed out that the earlier Task Force had not

paid adequate attention to the issue of the large backlog of under-employment. The Planning

Commission was obviously not quite happy with the emphasis laid by the Task Force on

growth per se (Venkitaramanan, 2002).

Montek Singh Ahluwalia who headed the first Task Force, is back to the management of the

Indian economy with a much higher responsibility as Deputy Chairman of the Planning

Commission. It is most likely that he would pursue the same policies, may be more

aggressively, he recommended earlier. Under such conditions, employment elasticity in the

next five years is likely to decline further resulting to the widening of the economic disparity

among different groups, as projected in the scenario II. Based on this projection, we shall

analyze the likely impact of FDI on major stakeholders of the Indian retail sector through

addressal of few important issues.


5/58

IUniqueness of Indian retail market

The Indian trading sector, which enjoys a few thousand years of history, has some unique

features. These features identified as under, should be considered before allowing FDI into

retail trade.

1. Products and services normally reach the end consumers from the manufacturer / producers

through two different channels: (a) Producers sell via independent retailers (vertical

separation), (b) directly from producer to consumer (vertical integration) .In the later case,

producers establish their own chain of retail outlets; develop franchise (Lafontan and

Slade,1997).

2. In India however, the above two modes of operations are not very common. At present,

less than 3% of the retail transactions in India are done in the organized sector (vertical

separation), which is likely to be increased to 15%- 20% by 2010 (Fitch Ratings, 2003). Till

date, it is restricted to metro cities only. The second type (vertical integration) is common to

few national and subsidiaries of global firms. Moreover, Indian wholesale trade is not

properly organized. Apart from few government initiatives like formation of Tea, Coffee,

Spices Boards; State Trading Corporations- most of which have become defunct by now,

private initiatives have mostly remained localized. The two notable exceptions could be the

recently launched e-procurement network e-chopal, developed by ITC Ltd- a diversified

cigarette company in which the global tobacco giant the British American Tobacco (BAT)

has substantial stake. Through e-chopal, ITC wants to procure agricultural products directly

from the farmers for their food division. The other initiative has been made by Hindustan

Lever Ltd. (HLL) the Indian subsidiary of global FMCG giant Unilever. HLL had opened a

separate food division few years ago. Though this division has not contributed much in terms

of revenue, HLL has put in huge resources No FDI in Retail 7


6/58

to develop this strategic business unit (SBU). In the last two years, different distribution

models have been tried/ experimented. Recent developments indicate that HLL-Unilever is

moving towards geocentric mode of operation from the age-old polycentric mode. In the new

operational structure, the food division may become the hub for Unilevers global food

operation.

Baring these exceptions, the commonly used model in India, unlike in developed countries

where large trading companies play a significant intermediate role -like the 11,000 odd

trading companies (shosha) of Japan , is the dominance of small and medium players. The

trading sector is highly fragmented with large number of intermediaries. The wholesale trade

in India is also characterized with the presence of thousands of small commission agents,

stockiest and distributors who operate strictly at a local level. Apart from these, in many

cases the small producers - mostly artisans and farmers, sell their goods directly to the end

consumers through their participation in the market as sellers. Existence of thousands of such

individual producer cum sellers (in some cases it becomes a family affair when say, the father

is a producer and the son is a seller and so on) are examples of vertical integration of the

Indian retail sector.

3. The Indian retail sector exhibits a unique example of customer relationship management

where numerous small vendors develop customer relationship with their consumers by

staying closer to them, either by opening a tiny outlet in the residential area or by hawking

goods at the doorstep of the consumers. In this process, a personal relationship, most often

extending beyond the business interest, develops.

4. Another note worthy feature of the Indian retail sector is the absence of any barrier to entry

or exit. Any one can enter or leave the Indian retail sector at any point of time. No FDI in

Retail 8


7/58

5. Retail sector contributes 14% of the Indian GDP. Apart from its economic contribution

retail sector immensely contributes to the political system by acting as a shock absorber and

maintaining social stability. Thus when a factory shuts down rendering people jobless; the

farmers remain idle during off seasons or get evicted from the land; the stagnant

manufacturing sector fails to provide jobs to the thousand of unemployed youths; the retail

sector absorb them all. Skilled labor turns into a street hawker, a farmer delivers milk packets

door to door, an educated unemployed youth hawks newspapers and a better off unemployed

person starts a telephone booth and retails telecom cards as an add on service. Again when

the factory reopens (in exceptional cases); harvesting time arrives; some of these new

entrants leave the retail trade and return back to their respective jobs.

6. After agriculture, probably, the incidence of disguised unemployment (and under

employment) is highest in the Indian retail sector. Small retailers (nearly 12 million outlets)

most of whom operate in the unorganized sector, dominate the trade. Though Guruswamy

(2005) estimates that more than 6 lakhs of people involved in the unorganized retail sector

would be displaced if global players like Wal-Marts capture even 20% of the retail trade, in

reality we may not observe any visible change in the unemployment level. Only the

percentage of disguised employed (rather disguised unemployed) population in the retail

sector would increase.

7. The organized retail sector in India is in its nascent stage. Not a single firm in India (except

retail oil outlets of petroleum companies) has a nation wide presence. All major retail TNCs

still get identified with the home countries like Wal-Mart (USA), Royal Aholds

(Netherlands), Carrefour (France). Absence of a major Indian player with a nation wide

multi-product retail chain will put the Indian retailers at an uneven platform in any form of

bargains vis--vis their overseas big brothers It is only fair that the above-No FDI in Retail 9


8/58

discussed unique features of the Indian retail sector should get due consideration in the

current debate on inviting FDI in retail trade. No FDI in Retail 10


9/58

IIIdentification of major beneficiaries of FDI the push and pull factors

Why is the government so keen in inviting FDI in the retail sector? While searching for

this answer, we must remember that already major retailers have entered into the retail

market through franchise and other arrangements. FDI is another such arrangement through

which foreign firms can exercise more control in the management of their Indian operations.

There could be the following possible reasons for inviting FDI in retail trade:

Organized domestic retailers want to collaborate with the world leaders to expand their

existing business.

Proprietary expertise in retail trade exists with few global players only. The latter would not

transfer their expertise to local firms unless they are allowed to operate in the domestic

market.

The government needs FDI to meet foreign currency crisis

Only the global retailers can satisfy the rising and varied demands of Indian consumers.

Foreign firms are interested in the growing Indian domestic market.

India is an emerging procurement hub for global retailers especially for handicraft products

(including textiles) and semi-processed local food items.

Share of FDI in the trading service is declining in the developed countries. Capital is

looking for a better pasture. Major players are loosing their popularity.

New rules in international trade encourage movement of FDI across nations to maximize

return on investment.

Analysis of the above possible reasons reveals the truth behind the move. The findings,

which have been presented in a table as, pull and push factors give a better insight into this

debate. The first four possible reasons as above may be termed as pull factor and the

remaining four as push factors No FDI in Retail 11


10/58

1. Business Today (May 8, 2005) reported that, among the big Indian retailers, views on FDI

issue was mixed. Those in favor of FDI argued that huge amount (up to Rs.10,000 crore)

would be required in the next five/six years to improve the share of organized retail in India

from current 3% to 10% of the total retail trade. Indian investors were reluctant to invest such

a huge quantity. In this context, it may be argued that unlike in manufacturing, capital

requirements in retail is very low. The vendors substantially finance a large component of the

business the working capital (Mukherjee, 2002).

2. In the literature on retail, presence of any cutting edge proprietary expertise either

technical or managerial could not be traced. FDI movement could not be linked to transfer of

any such expertise.

3. The Government of India at present is burdened with huge balance of payment surplus. As

of August 2005, the surplus was $ 133.6 billion. The argument in favor of inviting FDI to

attract foreign exchange is not acceptable.

4. Domestic organized retailers can offer wide range of important products to the consumer.

Moreover through franchise channel, global retailers like KFC, Subway, etc. can offer high

quality service to the domestic clients. On the question of wider choice, new findings suggest

that availability of wider options develop complexity in the consumer decision taking process

leading to stronger brand loyalty! Research reveals that an average grocery store in USA,

offers 35,000 to 40,000 SKUs (stock keeping units) versus 12,000 to 15,000 thirty years ago.

The suppliers offer about 20,000 new items each year; with 1,000 being new efforts while the

rest are line extensions. However, the top 5,000 items still account for about 90 percent of

sales, as they did thirty years ago (HBS Working Knowledge, Readers Respond: Is Less

Becoming More? November 14, 2005). Below we mention few recent findings (Heskett,

2005) on this important issue. No FDI in Retail 12


11/58

Management experts questioned whether there were benefits for producers, particularly

those producing increasingly varied products targeted for smaller and smaller market niches.

They reported, nearly 70 per cent of managers admit that excessive complexity is raising

their costs and hindering their profit growth. This implied that too much innovation merely

increased complexity without creating economic benefits for either the producer or the

consumer.

Another expert commented that there were problems associated with too much choice on

the customers side. As choice increased, search costs increased, and decisions involved

evaluation of more options. Since human by nature were elementally rational beings, this

could mean that consumers discounted or ignored a lot of the options. This could increase

brand loyalty as a mechanism that reduced search and evaluation costs.

There was also the issue that with more options, it took longer time to make a decision. At

the same time, due to social changes, consumers had even less time to make choices,

especially for everyday products that have smaller wallet share. This again indicates relying

on known branded items. On the seller side if one could satisfy customers well once, they

might be more likely to stick with that seller even though they have more choices.(HBS

Working Knowledge, Readers Respond: Is Less Becoming More? November 14, 2005).

5. Among the top ten emerging market retail destinations, India ranked 2nd in term of

attractiveness (Business Today). The richest 20% of the Indian population (over 200

millions) who as per 1999 data grabbed over 43% of the total consumable items (HDR 2005,

Page 235) is a significantly large market for attracting global retailers. Between 1999 and

2003, the No FDI in Retail 13


12/58

disposable income of Indian middle class (300 million) has increased by 20% (The

Telegraph, UK).

6. Major retail chains like Wal-Mart and Tesco have already opened their procurement

centers in India. For large-scale procurement operation, they will have to invest in

infrastructure and develop an efficient supply chain. This requires huge investment. By

opening retail chains in the host country they would like to exert monopoly power

eliminating other major buyers from the market. In this context, we must remember that India

is fortunate to be part of two major bio- diversity hot spots out of a few remaining bio-

diversity hot spots of the world. The wide food variety and rich heritage of textile and other

handicrafts makes India a very attractive sourcing destination for retail giants. In the absence

of national champions like Marubenis in India, the small and medium enterprises/ suppliers

of this country will loose the opportunity of earning better revenues in the global market. But

they will have to bear the additional risks of global market fluctuations. Wal-Mart had

procured goods worth $ 1.5 billion from India in 2004, which is expected to touch $ 2. billion

this year. From India, Wal-Mart mainly sources home furnishings, T-shirts, night-suits etc

(HBL, November 15, 2003; May 13,2005). It has also been reported that Wal-Mart has

already proposed to the West Bengal government to take over the fresh food markets of in

and around Kolkata. Though the government has not accepted the proposal as yet, it has not

rejected it either. The government has kept the multinational company waiting.( HBL,

October 29,2005).

7. Analysis of FDI stock for service sector by industry indicates, between 1990 and 2002, the

share of inward FDI stock in the trade has declined from 25% to 18%. In the same period,

outward FDI stock has declined from 17% to 10%. During the same period, out of the total

inward FDI in trade, developed countries share declined to 78% from 90%. Of the remaining

22%, developing countries share were 4% and that of Central and East European (CEE)

countries were No FDI in Retail 14


13/58

18%. Undoubtedly, this region has emerged as the hottest destination for trade FDI.

It must be understood that the share of developed countries had declined from 99 per cent in

1990 to 88 per cent in 2002. The estimated world inward FDI, average annual flows, by

sector and industry, between 1989-1991 and 2001-2002 figures indicate that after finance,

trade, and business activities, transport, storage and communication, is the only other

service industry, which attracts relatively high FDI. However, if we take in to account the

share of FDI in trade, compared to other prime service industries, we find a remarkable

decline (between 1991, and 2002) in the share (from 20.15% to 12.35%) of trade but steep

rise in the share of transport, storage and communication sector - a sector related to supply

chain management (SCM). In a global economy, SCM is an integral part of trading services.

The above table on FDI data flow also indicates the increasing attractiveness of developing

and CEE countries trade sector to the foreign investors.

In February 2005, Wal-Mart Canada, the Canadian arms of Wal-Mart Stores, closed one of

its two Quebec stores, after the company announced the stores financial situation was

precarious. (Datamonitor, 2005), Apart from market saturation in developed countries, it is

reported that retailers like Wal-Mart are facing opposition from local communities.

According to a recent survey under taken in US, 38% respondent had expressed negative

view about the Wal-Mart Stores. 56% of the Americans agreed with the statement that Wal-

Mart was bad for America and its prices came with high moral and economic costs (HBL,

December3, 2005). Many European countries have also initiated different measures to restrict

the market distorting power of giant retailers. All these factors might have contributed to the

movement of FDI from developed to emerging markets. No FDI in Retail 15


14/58

8. Trade liberalization and improvement in communication systems have increased the

opportunity for the retailers to buy their products from producers worldwide. Some of the

factors that have contributed to this trend are: reduction in tariff, incentive in foreign

investment, cheaper real time communications, and cheaper transport. Cut throat competition

among major retailers in the develop countries compelled them to take advantage of this

opportunity to maintain their profit. No FDI in Retail 16


15/58

IIIPossible impact on marginal producers and work force - The experiences of other

countries

The third important missing issue in the whole debate is the possible impact of such

action on numerous small and marginal producers especially in the agrarian and handicraft/

handloom sectors. To get an idea about the possible impact on marginal producers and

workers, we shall restrict our discussion to previous research findings on this issue.

1. In April 1999, the Director General of Fair Trading (DGFT) referred to The Competition

Commission, UK, for investigating the supply of groceries from multiple stores in Great

Britain. The Competition Commission identified 24 multiple grocery retailers who supplied

groceries from supermarkets with 600 sq. meters or more of grocery sales area, where the

space devoted to the retail sale of food and non-alcoholic drinks exceeded 300 sq meters and

which were controlled by a person who controlled ten or more such stores.

The major findings of the Commission were:

Examination of the price trends in the industry revealed an overall decline of 9.4per cent in

the real price of food from 1989 to 1998.

Regarding pricing practices, the Commission examined five practices allegedly carried out

by the main parties, about which they had received complaints and concluded that three of

them (a) (b) and (c) below distorted competition and gave rise to a complex monopoly

situation. The first two of these (a) and (b) also operated against the public interest:

(a) It was found that all the main parties (with the exception of two) were engaged in No FDI

in Retail 17


16/58

the practice of persistently selling some frequently purchased products below cost, and that

this contributed to the situation in which the majority of their products were not fully exposed

to competitive pressure and distorted competition in the supply of groceries.

(b) It was also found that the practice of varying prices in different geographical locations in

the light of local competitive conditions, (Price flexing), was carried on by major retailers.

(c) The Commission observed that Asda, Booth, Budgens, the Co-ops, Safeway, Sainsbury,

Somerfield, Tesco and Waitrose adopted pricing structures and regimes that, by focusing

competition on a relatively small proportion of their product lines, active competition on the

majority of product lines could be restricted. This distorted competition in the retail supply of

groceries because not all the parties products were fully exposed to competitive pressure.

The Commission received many allegations from suppliers about the behavior of the main

parties in the course of their trading relationships. Most suppliers were unwilling to be

named, or to name the main party that was the subject of the allegation. As the Commission

could anticipate a climate of apprehension among many suppliers in their relationship with

the main parties, the Commission had put a list of 52 alleged practices to the main parties and

asked them to tell which of them they had engaged in during the last five years.No FDI in

Retail 18


17/58

It was found that a majority of these practices were carried out by many of the main parties.

They included requiring or requesting from some of their suppliers various non-cost-related

payments or discounts, sometimes retrospectively; imposing charges and making changes to

contractual arrangements without adequate notice; and unreasonably transferring risks from

the main party to the supplier. A request from a main party amounted to the same thing as a

requirement. These practices, as per the Commission, gave rise to a complex monopoly

situation.

To address these adverse issues effectively, the Commission recommended a statutory Code

of Practice.

2. Oxfams research project investigated the condition of millions of poor workers mostly

women who work in different developing countries to fuel export growth. For this, it

interviewed hundreds of women workers and many farm and factory managers, supply chain

agents, retail and brand company staff, unions and government officials. In all, the research

included interviews and surveys spread over 12 countries with 1,310workers, 95 garment

factory owners and managers, 33 farm and plantation owners and managers, 48 government

officials, 98 representatives of unions and non-government organizations (NGOs), 52

importers, exporters, and other supply chain agents, and 17 representatives of brand and retail

companies The research documented the experiences not only of women workers, but also of

their employers, the managers and owners of farms and factories. Few important findings of

the report are:

Retail and brand companies have positioned themselves as powerful gatekeepers between

the worlds consumers and producers. Their global supply chains stretch from the

supermarket No FDI in Retail 19


18/58

shelves and clothes rails in the worlds major shopping centers to the fruit and vegetable

farms of Latin American and Africa and the garment factories of South Asia and China.

Globalization has hugely strengthened the negotiating hand of retailers and brand

companies. New technologies, trade liberalization, and capital mobility have dramatically

opened up the number of countries and producers from which they can source their products,

creating a growing number of producers vying for a place in their supply chains. These

companies have tremendous power in their negotiations with producers and they use that

power to push the costs and risks of business down the supply chain. Their business model,

focused on maximizing returns for shareholders, demands increasing flexibility through just-

in-time delivery, tighter control over inputs and standards, and ever-lower prices.

Under such pressures, factory and farm managers typically pass on the costs and risks to the

weakest links in the chain: the workers they employ. For many producers, their labor strategy

is simple: make it flexible and make it cheap. Faced with fluctuating orders and falling prices,

they hire workers on short-term contracts, set excessive targets, and sub-contract to sub-

standard unseen producers. Pressured to meet tight turnaround times, they demand that

workers put in long hours to meet shipping deadlines. And to minimize resistance, they hire

workers who are less likely to join trade unions (young women, often migrants and

immigrants) and they intimate or sack those who do stand up for their rights.

The demands for just-in-time delivery have typically cut production times in few sectors

by 30 per cent in five years. Coupled with smaller, less No FDI in Retail 20


19/58

predictable orders and high airfreight costs for missed deadlines, the small producers are

pushed to the walls. Moroccan factories producing for Spains major department store. E1

Corte Ingles must turn orders round in less than seven days. The shops always need to be full

of new designs, we pull out all the stops to meet the deadline our image is on the line said

one production planning manager. But the image they hide is of young women working up to

16 hours a day to meet those deadlines, underpaid by 40 per cent for their long overtime

working.

Global supply chains have created new opportunities for labor-intensive exports from low-

cost locations. The result is a dramatic growth in the number of producers, heightening

competition among the worlds factories and farms for a place at the bottom of the chain. At

the top end, however, market share has tended to consolidate among a few leading retailers

and brand names. Such an imbalance between intensely competing producers and relatively

few buyers in the global market put the small suppliers at the receiving end. The owner of a

Brazilian shoe factory, facing intense international competition to sell to leading footwear

retailers in Europe commented: We dont sell, we get bought.

Over the past twenty years, fresh produce and food service industries have headed towards

global consolidation. In the food service industry, US-based Yum Brands has 33,000

restaurants including Taco Bell, Pizza Hut, and KFC in over 100 countries, and is

especially focusing on expansion in China, Mexico, and South Korea. Supermarkets

grocery retailers with multiple stores dominate food sales in rich countries and are rapidly

expanding their global presence.No FDI in Retail 21


20/58

In the USA, by 1997, supermarkets and even bigger super-centers owned by companies

like Wal-Mart and Kroger controlled 92 per cent of fresh-produce retailing. In the UK, by

2003, just five supermarket chains controlled 70 per cent of the market.

Since supermarkets are increasingly controlling food retailing, the worlds farmers are

competing for a place in their supply chains. It can be good business, especially for farmers

selling top-quality and out-of-season produce. But fresh produce is a risky business. And the

extreme imbalance in negotiating power between a handful of supermarkets and the worlds

farmers means that most of the gains from trade are captured at the top. Supermarkets are

pushing price and payment risks onto farmers and growers, controlling packaging and

delivery requirements, squeezing producers margins, and focusing on technical, not ethical

standards.

3. In 1981, an UN study also suggested similar picture of deprivation of local producers. But

Oxfam data shows that during last twenty years, the condition of the poor suppliers of fresh

fruits have deteriorated further. The UN study showed that the retained value from the

Philippines bananas sold in the Japanese market by TNCs in 1974 was only 17% of the retail

price. And the Thailand, fresh pineapples in 1978 canned and marketed by US TNC Dole,

earned only 35% of the final consumer value of canned pineapples. Of this 35%, only 10%

went to the share of the agriculturists and rest 25% to processing, packaging etc. which were

predominantly done by TNCs subsidiaries. In another recent report (Biz/ed, 2004), which

corroborates with the above observation, it was estimated that in case of bananas sold in

European market by US multinationals, the farmer might get around 10% of the price of a

banana with workers getting anything from 9% No FDI in Retail 22


21/58

in the case of Fair-trade bananas to little as 1.5% on traditional farms. In comparison,the

trading companies the likes of Del Monte, Chiquita, Dole and Fyffes could be getting up to a

third of the price whilst retailers took around 40%.

4. In a recent documentary film titled Wal-Mart- the High Cost of Low Price, on WalMart,

its director, Robert Greenwald high lighted various practices of the mega retail outlet which

were not expected from a business house who preached ethical business. Commenting on the

film, in Fortune, November 28, 2005,Colvin (2005) wrote It is ( the film) a response to

the great social disrupter of our times- the emergence of a friction free global economy.

This news film, is a cry from the hearts of the people being wrenched from the old world in

the new and not liking it. There are millions of them, and they will demand to be heard in the

media, the markets, and government.

The government before taking a final decision to allow FDI in retail sector to strengthen this

model of global trade should review the above findings. Small suppliers, unorganized

workers and consumers are the major looser as global retailers and brand owners consolidate

their power through free movement of global capital. GATS have opened up opportunities

before the entrepreneurs of the developing countries to participate in the international trade as

one of the many small suppliers to the global supply chains. The global retailers now

optimize their return on capital through implementation of a complex model of supply chain

management that consists of services, manufactured goods and commodities sourced mostly

from low cost offshore destinations. But this model has an in-built over-exploitive character

that has already been exposed to a large extent by various research findings as above. (Dey,

2005)No FDI in Retail 23


22/58

IVImpact on existing labor laws

In the light of recent police atrocities against labors of Honda factory at Gurgaon and

repeated suggestions by advisers and consultants like McKinsey to bring in drastic reforms in

the Indian labor law to make it more flexible allowing easier implementation of the hire and

fire policy, one of the findings of the Oxfam report may look very relevant. Governments

should strengthen protection of its workers in the face of intense commercial pressures.

Instead many have traded away workers rights, in law or in practice. Under pressure from

local and foreign investors and from IMF and World Bank loan conditions, they have often

allowed labor standards to be defined by the demands of supply chain flexibility: easier hiring

and firing, more short-term contracts, fewer benefits, and longer periods of overtime. It

brings a short-term advantage for trade, but at the risk of a long-term cost to society. The

economic success of the global retailing model as propagated by WalMarts, Royal Aholds

etc requires flexible labor market to survive. Like many other governments, if Indian

government also abolishes the safe guards it had enacted over the years, to protect its labor

force, the business environment would become conducive for global integration. Enough

indications are already there to apprehend that the government is also planning to bring in

changes, as desired by the external forces, in the existing labor laws.

The government of India has taken an initiative to allow the existing textile firms toexercise the option of dividing their employees into core and non core workers. While the

existing labor laws would be applicable to core groups, the firm would have the flexibility

to recruit and retrench the non core workers provided the unit undertakes that each of these

workers would be employed for 100 days a year. (HBL October 31, 2005) Recently it has

been reported ( ABP 16.11.05) that the communist government of the state of West Bengal

has been seriously considering to ban trade union activities in IT enabled services like Call

centers. The Ministry of Labor, Government of India has already proposed (HBL, October16,2005) to amend the Contract Labor Act of 1970. No FDI in Retail 24


23/58

The industries that the Labor Ministry has suggested for exclusion from the purview of the

Act included, IT, services in ports, railway stations, hospitals, education and training

institutions, guest houses, constructions and maintenance of buildings, roads and bridges,

export oriented units established in Special Economic Zone. We may recall that most of the

services proposed for exemption of the existing contract act are part of the latest submission

of the GOI to the existing negotiation process under GATS. No FDI in Retail 25


24/58

V Safeguard options available with the government to protect the interest of small

producers and suppliers

Service TNCs are putting all their efforts to bring in suitable changes in the GATS to

safeguard their vested interest. For example, major associations of global retailers like FTA

(Foreign Trade Association) and European Services Forum (ESF), which has global retail

firms such as Metro, Ahold and Marks & Spencer as members, have taken renewed initiatives

to introduce a separate agreement under WTO on trade and investment to safeguard their

overseas investments. For example in a position paper on trade and investment in April 2003,

European Services Forum demanded, a legally binding, comprehensive WTO agreement on

rules for investment. According to that document (ESF, 2003), a WTO agreement on

investment should:

Be legally binding and based on the fundamental legal principles of most favored nation and

of national treatment (i.e. non-discrimination);

Contain:

(a) A stand-still against the introduction of new barriers on to investment;

(b) Post investment protection;

(c) Protection of all material and intellectual property of the company;

(d) Effective protection against direct expropriation as well as against indirect

expropriation through discriminatory treatment

(e) A mechanism for compensation in the case of expropriation

(f) Independent and bind disputes settlement mechanisms;

(g) Right of the company to determine its own ownership structure and provisions on

legal, regulatory and administrative transparency;No FDI in Retail 26


25/58

Promote scheduling of concrete and specific commitments by WTO members, to further

open their markets to foreign direct investment.

Earlier in 2001, FTA demanded for the abolition of any restriction neither product

exclusion nor sectoral limitation for mode 3 (Commercial presence). It also called for the

strengthening of the investment rules (GATS). Euro Commerce, the employers

confederation, not only lobbies for liberalization under the GATS agreement, but also pushes

for the reduction of tariffs in NAMA and Agriculture, since the retail sector wishes to import

its merchandise as cheaply as possible.

Before investing in the emerging economies, the global TNCs now want concrete and

specific commitments on unlimited freedom of operation from the host countries. They

expect, all such commitments to be made under GATS frame work so that once any

commitment is made; the host government looses the option to retract from it in future. In

this context, the experience of Thailand, which opened up its retail sector for FDI in the

1980s, could be an eye opener for us. The Thai government liberalized their trading sector

before the GATS negotiation process was started. European retail giants Tesco, Royal Ahold,

Carrefour had set up their operations in Thailand. As expected, many of the traditional

retailers had to down their shutters unable to compete with global firms in an unequal fight.

For example, traditional traders controlled 74% of the retail market in 1997 but by 2002, their

share came down to 60%. Faced with severe criticism from local retailers, the government

announced that they would put control on large retail establishments by imposing the zoning

policy regulation. In 2002, the Retail Business Act was enacted to control the expansion of

foreign retailers. However, the Thai government changed their decision on zoning regulation

allegedly under pressure from European Commission (EC) who had requested Thailand to

open up their retail sector through GATS negotiations. As WTO lists zoning laws as trade

barriers, it is feared that the Thai government would loose the most effective tool to control

the expansion of giant retail chains if they further open their retail sector throughcommitments under the GATS negotiation process. (Deckwirth Christina)No FDI in Retail 27


26/58

India is a larger economy than Thailand with a mature political system. In the changed

global trading environment, to protect the interest of its small producers and workers how

much safeguard the government of India will be able to bargain in the on going GATS

negotiation process, is another important issue that should be monitored carefully. No FDI in

Retail 28

Benefits of larger FDI

The benefits of larger FDI can be tangibly felt in the domains pertaining totechnological

advancements, generation of export, production improvements, and hastening of

manufacturing employment. Capital inflow into India has increased and so have the exports

from the country. Thanks to the economic boom India is experiencing, some Indian

companies are doing better than even the multinational corporations.

The benefits of larger FDI have been briefly elaborated below:

1. Improved human capital: Indian industries are predominantly labor based but there is

also a significant number of capital based companies. A capital intensive set up is

indeed an expensive proposition but with the existing as well as potential labor

intensive industries, India can look forward to more professional and sophisticated

number of workers and employees at every level. Human capital, in terms of quantity

was never a big problem in India, thanks to its huge population and quality and

efficiency in work has been ushered in by the MNCs.

2. Competition Effect: The benefits of larger FDIs will include the launching and

marketing of new products and brands in the Indian market. New products are used by

the multinational corporations and then demonstrated in the Indian market. The

processes followed by MNCs in India serve to have ademonstration effect on Indian

companies which in turn improves market competition and the standard of products.

This had started in the 1980s due to Japanese firms and as a result, Indian

firms started inculcating the practices of QC, JIT, and QA.

3. Manufacturing Employment: Larger FDIs definitely generate more and

more employment opportunities. The opportunities are highly experienced in the


27/58

manufacturing area. This not only includes the quality human resource but also

provides for quick and efficient work and effective outcomes.

4. New Technology: Technological advancements take place as larger FDIs come in. In

fact, three-fifths of the FDIs result in new and advanced technologies. The local

industry is benefiting from this to a large extent. This as a result, would encourage

more and moreforeign firms for investment.

The benefits of larger FDI are, however, very few in number but as India capitalizes on the

above mentioned benefits, there will be more competition in the market at large and the rural

sector of the country will be in the process of reformation, thus bringing about a socio-

economic stability.

Social Impact of Larger FDI

The social impact of larger FDI is dependent on India's policies and institutions. The

flexibility of the labor market would determine employment opportunities. The extent to

which the lower income groups can take advantage of the growth policies determine the

growth-poverty relationship. The production in the fields of physical and social infrastructure

determine the regional developments. The Indian industries are predominantly labor based

but there are also many capital based companies. Capital intensive set up is an expensive

proposition but India can look forward to more professional and sophisticated number of

workers and employees at all levels. Human capital in terms of quantity was never a big

problem in India due to its huge population added emphasis must be laid on the quality and

efficiency in work. This is brought about by MNCs.

Foreign Direct Investments foster relations, co-operation, and harmony between India and

foreign countries. The social impact of larger FDI include the product market as well because

many new products come into the market as a consequence of FDIs. As a result, the people of

India enjoy unprecedented exposure to branded and quality goods. In fact, various training

methods, personality grooming, and soft skills are given bymultinational

corporations which impart value to human resources.


28/58

Owing to social impact of larger FDI, India also enhance its educational system. Since 2003,

the Indian government has been allowing 100% FDIs in education, which means that foreign

schools, colleges, and universities can set up wholly owned subsidiaries in India. Students

passing out of these institutes will be awarded foreign degrees and certificates. The social

impact of larger FDI in education is such that the number of foreign students pursuing higher

education in India has increased by a large margin. Also, the 'brain-drain' issue has also been

checked to a significant extent since the number of students going out of India has also

reduced.

Even the civil society can work with the government and help in reducing bureaucratic

hassles and interferences. The increase in FDI in India is also helping in the liberalization of

labor through which the inequality in wage earnings will be reduced. There is

implementation of higher education and training for the laborers. The health facilities also

increase with better and sophisticated products and processes. India is definitely developing

in a much faster pace now than before but in spite of that, it can be identified that

developments have taken place unevenly. This means that while the more urban areas have

been tapped, the poorer sections are inadequately reached out to. To get the complete picture

of growth, it is essential to make sure that the rural section has equal amount of development

as the urbanized ones. FDI helps to focus in this area thus,fostering social equality and at the

same time a balanced economic growth.

The social impact of larger FDI brings about a more broadminded outlook in the Indian

society, leaving alone a few who would be a bit conservative. However, the condition of the

Indian urban sector has improved drastically thereafter, which we still await the

developments from other areas of the Indian economy.

FMCG Majors Eye Rural India

Rural India is vast with unlimited opportunities. So its not surprising that the Indian

FMCG majors are busy putting in place a parallel rural marketing strategy.

The fast-moving consumer goods (FMCG) sector is an important contributor to Indias GDP.

It is the fourth largest sector of the Indian economy. The FMCG market is estimated to treble

from its current figure in the coming decade. Penetration levels as well as per capita

consumption of most product categories like jams, toothpaste, skin care and hair wash in


29/58

India are low, indicating the untapped market potential. The growing Indian population,

particularly the middle class and the rural segments, present an opportunity to makers of

branded products to convert consumers to branded products. The Indian rural market with its

vast size and demand base offers a huge opportunity for investment. Rural India has a large

consuming class with 41 per cent of Indias middle-class and 58 per cent of the total

disposable income.

FMCG sector in India

The Indian FMCG sector has a market size of $13.1 billion. Well-established distribution

networks, as well as intense competition between the organised and unorganised segments

are the characteristics of this sector. FMCG in India has a strong and competitive MNC

presence across the entire value chain. It has been predicted that the FMCG market will reach

$33.4 billion in 2015 from $11.6 billion in 2003. The middle class and the rural segments of

the Indian population are the most promising market for FMCG, and give brand makers the

opportunity to convert them to branded products. The Indian economy is surging ahead by

leaps and bounds, keeping pace with rapid urbanisation, increased literacy levels and rising

per capita income. The FMCG sector consists of consumer non-durable products, which

broadly include personal care, household care and food and beverages. It is largely classified

into organised and unorganised segments. The sector is buoyed by intense competition

between these two segments. Besides competition, it is marked by a robust distribution

network coupled with increasing influx of MNCs across the entire value chain. The sector

continues to remain highly fragmented. Indias FMCG sector creates employment for more

than three million people in downstream activities. The total FMCG market is in excess of Rs

850 billion. It is currently growing at double-digit rate and is expected to maintain a high

growth rate.

Exports

India is one of the worlds largest producers of a number of FMCG products but its exports

are a very small proportion of the overall production. Total exports of food processing

industry were $6.9 billion in 2008-09 and marine products accounted for 40 per cent of the

total exports. Though the Indian companies are going global, they are focusing more on the

overseas markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries

because of the similar lifestyle and consumption habits between these countries and India.

Hindustan Lever Limited (HLL), Godrej Consumer, Marico, Dabur and Vicco Laboratoriesare amongst the top exporting companies.


30/58

Investment in the FMCG sector

The FMCG sector accounts for around 3 per cent of the total FDI inflow and roughly 7.3 per

cent of the total sectoral investment. The food-processing sector attracts the highest FDI,

while the vegetable oils and vanaspati account for the highest domestic investment in the

FMCG sector.

Market Survey

Investment potential in rural markets

The Indian rural market with its vast size and demand base offers a huge opportunity for

investment. Rural India has a large consuming class with 41 per cent of Indias middle-class

and 58 per cent of the total disposable income. With population in the rural areas estimated to

have risen to 153 million households by 2009- 10 and with higher saturation in the urban

markets, future growth in the FMCG sector will come from increased rural and small townpenetration. Technological advances such as the Internet and e-commerce will aid in better

logistics and distribution in these areas.

Critical operating rules

1. Heavy launch costs for new products on launch advertisements, free samples and product

promotions

2. Majority of the product classes require very low investment in fixed assets

3. Existence of contract manufacturing


31/58

4. Marketing assumes a signifi-cant place in the brand-building process

5. Extensive distribution networks and logistics are key to achieving a high level of

penetration in both the urban and rural markets

6. Factors like low-entry barriers in terms of low capital investment, fiscal incentives from

government and low brand awareness in rural areas have led to mushrooming of the

unorganised sector

7. Providing good price points is the key to success

Demand for FMCG products is set to boom by more than 100 per cent by 2015. It will be

driven by a rise in the share of the middle class from 67 per cent in 2009 to 88 per cent in

2015. The boom in various consumer categories, further, indicates a latent demand for

various product segments. For example, the upper end of very rich and a part of the

consuming class indicate a small but rapidly growing segment for branded products. The

middle segment, on the other hand, indicates a large market for the mass end products. The

BRICs report indicates that Indias per capita disposable income, currently at $556 per

annum, will rise to $1150 by 2015another FMCG demand driver. Spurt in the industrial

and services sector growth is also likely to boost the urban consumption demand.

SWOT Analysis of the FMCG Industry

Strengths

1. Low operating costs

2. Established distribution networks in both urban and rural areas

3. Presence of well-known brands in the FMCG sector

Weaknesses

1. Lower scope of investing in technology and achieving economies of scale, especially in

small sectors

2. Low exports levels

3. Me-too products, which illegally mimic the labels of the established brands. These

products narrow the scope of FMCG products in rural and semi-urban markets

Opportunities


32/58

1. Untapped rural market

2. Rising income levels, i.e., increase in purchasing power of consumers

3. Large domestic marketpopulation of over one billion

4. Export potential

5. High consumer goods spending

Threats

1. Removal of import restrictions resulting in replacing of domestic brands

2. Slowdown in rural demand

3. Tax and regulatory structure

Rural marketing

Rural marketing has become the latest marketing mantra of most FMCG majors. True, rural

India is vast with unlimited opportunities, waiting to be tapped by FMCGs. So its not

surprising that the Indian FMCG sector is busy putting in place a parallel rural marketing

strategy. Among the FMCG majors, Hindustan Lever, Marico Industries, Colgate-Palmolive

and Britannia Industries are a few of the FMCG majors who have been gung-ho about rural

marketing. Seventy per cent of the nations population, i.e., rural India, can bring in themuch-needed volumes and help FMCG companies to log in volume-driven growth. That

should be music to FMCGs who have already hit saturation points in urban India.

Government policy

The Indian government has enacted policies aimed at attaining international competitiveness

through lifting of the quantitative restrictions, reducing excise duties, automatic foreign

investment and food laws, resulting in an environment that fosters growth. 100 per cent

export-oriented units can be set up by government approval and use of foreign brand names is

now freely permitted.

Central and state initiatives

Recently, the government has announced a cut of 4 per cent in excise duty to fight slowdown

of the economy. This announcement has a positive impact on the industry. But the benefit

from the 4 per cent reduction in excise duty is unlikely to be uniform across FMCG

categories or players. The changes in excise duty do not impact cigarettes (ITC, Godfrey


33/58

Phillips), biscuits (Britannia Industries, ITC) or ready-to-eat foods, as these products are

either subject to specific duty or exempt from excise. Even players with manufacturing

facilities located mainly in tax-free zones will also not see material excise duty savings. Only

large FMCG-makers may be the key ones to gain on excise cut.

Foreign direct investment

Automatic investment approval (including foreign technology agreements within specified

norms), up to 100 per cent foreign equity or 100 per cent for NRI and overseas corporate

bodies (OCBs) investment, is allowed for most of the food processing sector, except for

malted food, alcoholic beverages and those reserved for small-scale industries.

Blue-print for the future

There is a huge growth potential for all the FMCG companies as the per capita consumption

of almost all products in the country is amongst the lowest in the world. The demand or

prospect could be increased further if these companies can change the consumers mindset

and offer new-generation products. Earlier, Indian consumers were using nonbranded

apparel, but today, clothes of different brands are available and the same consumers are

willing to pay more for branded clothes. Its the quality, promotion and innovation of

products that can drive many sectors. Explosion of the young-age population in India will

trigger a spurt in confectionary products. In the long run, the industry is slated to grow at 8 to

10 per cent annually to 870,000 metric tonnes by 2011-12.

The Indian FMCG sector is the fourth largest sector in the economy with a total market size

in excess of US$ 13.1 billion. It has a strong MNC presence and is characterised by a well

established distribution network, intense competition between the organised and unorganised

segments and low operational cost. Availability of key raw materials, cheaper labour costs

and presence across the entire value chain gives India a competitive advantage. The FMCGmarket is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration

level as well as per capita consumption in most product categories like jams, toothpaste, skin

care, hair wash etc in India is low indicating the untapped market potential. Burgeoning

Indian population, particularly the middle class and the rural segments, presents an

opportunity to makers of branded products to convert consumers to branded products.

Growth is also likely to come from consumer 'upgrading' in the matured product categories.

With 200 million people expected to shift to processed and packaged food by 2010, Indianeeds around US$ 28 billion of investment in the food-processing industry.


34/58

WHY INDIA

Large domestic market

India is one of the largest emerging markets, with a population of over one billion. India is

one of the largest economies in the world in terms of purchasing power and has a strong

middle class base of 300 million.

Rural and urban potential

Rural-urban profile

Urban Rural

Population 2001-02 (mn household) 53 135

Population 2009-10 (mn household) 69 153

% Distribution (2001-02) 28 72

Market (Towns/Villages) 3,768 627,000

Universe of Outlets (mn) 1 3.3

Source: Statistical Outline of India (2001-02), NCAER

Around 70 per cent of the total households in India (188 million) resides in the rural areas.

The total number of rural households is expected to rise from 135 million in 2001-02 to 153

million in 2009-10. This presents the largest potential market in the world. The annual size of

the rural FMCG market was estimated at around US$ 10.5 billion in 2001-02. With growing

incomes at both the rural and the urban level, the market potential is expected to expand

further.


35/58

India - a large consumer goods spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on

personal care products. The large share of fast moving consumer goods (FMCG) in total

individual spending along with the large population base is another factor that makes India

one of the largest FMCG markets.

Consumption pie

Even on an international scale, total consumer expenditure on food in India at US$ 120

billion is amongst the largest in the emerging markets, next only to China.

Change in the Indian consumer profile

Rapid urbanisation, increased literacy and rising per capita income, have all caused rapid

growth and change in demand patterns, leading to an explosion of new opportunities. Around

45 percent of the population in India is below 20 years of age and the young population is set

to rise further. Aspiration levels in this age group have been fuelled by greater media

exposure, unleashing a latent demand with more money and a new mindset.

Demand-supply gap


36/58

Currently, only a small percentage of the raw materials in India are processed into value

added products even as the demand for processed and convenience food is on the rise. This

demand supply gap indicates an untapped opportunity in areas such as packaged form,

convenience food and drinks, milk products etc. In the personal care segment, the low

penetration rate in both the rural and urban areas indicates a market potential.

FMCG Category and products

Category Products

Household Care Fabric wash (laundry soaps and synthetic

detergents); household cleaners (dish/utensil

cleaners, floor cleaners, toilet cleaners, air

fresheners, insecticides and mosquito

repellents,

metal polish and furniture polish).Food and Beverages Health beverages; soft drinks; staples/cereals;

bakery products (biscuits, bread, cakes);

snack

food; chocolates; ice cream; tea; coffee; soft

drinks; processed fruits, vegetables; dairy

products; bottled water; branded flour;

branded

rice; branded sugar; juices etc.

Personal Care Oral care, hair care, skin care, personal wash

(soaps); cosmetics and toiletries; deodorants;

perfumes; feminine hygiene; paper products.


37/58

INDIA COMPETITIVENESS AND

COMPARISON WITH THE WORLD

MARKETS

Materials availability

India has a diverse agro-climatic condition due to which there exists a wide-ranging and large

raw material base suitable for food processing industries. India is the largest producer of

livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of

rice, wheat and fruits & vegetables. India also has an ample supply of caustic soda and soda

ash, the raw materials in the production of soaps and detergents India produced 1.6 million

tonnes of caustic soda in 2003-04. Tata Chemicals, one of the largest producers of synthetic

soda ash in the world is located in India. The availability of these raw materials gives India

the locational advantage.

Cost competitiveness

Apart from the advantage in terms of ample raw material availability, existence of low-cost

labour force also works in favour of India. Labour cost in India is amongst the lowest in

Asian countries. Easy raw material availability and low labour costs have resulted in a lower

cost of production. Many multi-nationals have set up large low cost production bases in India

to outsource for domestic as well as export markets.

Leveraging the cost advantage

Global major, Unilever, sources a major portion of its product requirements from its Indian

subsidiary, HLL. In 2003-04, Unilever outsourced around US$ 218 million of home and

personal care along with food products to leverage on the cost arbitrage opportunities with

the West. To take another case, Procter & Gamble (P&G) outsourced the manufacture ofVicks Vaporub to contract manufacturers in Hyderabad, India. This enables P&G to continue

exporting Vicks Vaporub to Australia, Japan and other Asian countries, but at more

competitive rates, whilst maintaining its high quality and cost efficiency.

Presence across value chain

Indian firms also have a presence across the entire value chain of the FMCG industry from

supply of raw material to final processed and packaged goods, both in the personal careproducts and in the food processing sector. For instance, Indian firm Amul's product portfolio


38/58

includes supply of milk as well as the supply of processed dairy products like cheese and

butter. This makes the firms located in India more cost competitive.

POLICY

India has enacted policies aimed at attaining international competitiveness through lifting of

the quantitative restrictions, reduced excise duties, automatic foreign investment and food

laws resulting in an environment that fosters growth. 100 per cent export oriented units can

be set up by government approval and use of foreign brand names is now freely permitted.

FDI Policy

Automatic investment approval (including foreign technology agreements within specified

norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate

Bodies

(OCBs) investment, is allowed for most of the food processing sector except malted food,

alcoholic beverages and those reserved for small scale industries (SSI). 24 per cent foreign

equity is permitted in the small-scale sector. Temporary approvals for imports for test

marketing can also be obtained from the Director General of Foreign Trade. The evolution of

a more liberal FDI policy environment in India is clearly supported by the successful

operation of some of the global majors like PepsiCo in India.

PepsiCo's India experience

After a not so successful attempt to enter the Indian market in 1985, Pepsi re-entered in 1988

with a joint venture of PepsiCo, Punjab government-owned Punjab Agro Industrial

Corporation (PAIC) and Voltas India Limited. By 1994, Pepsi took advantage of the

liberalised policies and took control of Pepsi Foods by making an offer to both Voltas and

PAIC to buy their equity. TheIndian government gave concessions to the company, Pepsi was allowed to increase its

turnover of beverages component to beyond 25 per cent and was no longer restricted by its

commitment to export 50 per cent of its turnover. The government approved more than US$

400 million worth of investment of which over US$ 330 million has already been invested.

The government also allowed PepsiCo to set up a new company in India called PepsiCo India

Holdings Pvt Ltd, a wholly owned subsidiary of PepsiCo International, which is engaged in

beverage manufacturing, bottling and exports activities as Pepsi Foods Ltd. Since then, thecompany has bought over bottlers in different parts of India along with Dukes, a popular soft-


39/58

drink brand in western India to consolidate its market share. This was followed by an

introduction of Tropicana juice in the New Delhi and Bangalore markets in 1999. Currently,

soft drink concentrate, snack foods and vegetable and food processing are the key products of

the company. Pepsi considers India, along with China, as one of the two largest and fastest

growing businesses outside North America. Pepsi has 19 company owned factories while

their Indian bottling partners own 21. The company has set up 8 greenfield sites in backward

regions of different states. PepsiCo intends to expand its operations and is planning an

investment of approximately US$ 150 million in the next two-three years.

Removal of Quantitative Restrictions and Reservation Policy

The Indian government has abolished licensing for almost all food and agro-processing

industries except for some items like alcohol, cane sugar, hydrogenated animal fats and oils

etc., and items reserved for the exclusive manufacture in the small scale industry (SSI) sector.

Quantitative restrictions were removed in 2001 and Union Budget 2004-05 further identified

85 items that would be taken out of the reserved list. This has resulted in a boom in the

FMCG market through market expansion and greater product opportunities.

Central and state initiatives

Various states governments like Himachal Pradesh, Uttaranchal and Jammu & Kashmir have

encouraged companies to set up manufacturing facilities in their regions through a package of

fiscal incentives. Jammu and Kashmir offers incentives such as allotment of land at

concessional rates, 100 per cent subsidy on project reports and 30 per cent capital investment

subsidy on fixed capital investment upto US$ 63,000. The Himachal Pradesh government

offers sales tax and power concessions, capital subsidies and other incentives for setting up a

plant in its tax free zones. Five-year tax holiday for new food processing units in fruits and

vegetable processing have also been extended in the Union Budget 2004-05. Wide-ranging

fiscal policy changes have been introduced progressively. Excise and import duty rates have

been reduced substantially. Many processed food items are totally exempt from excise duty.

Customs duties have been substantially reduced on plant and equipment, as well as on raw

materials and intermediates, especially for export production. Capital goods are also freely

importable, including second hand ones in the food-processing sector.


40/58

Food laws

Consumer protection against adulterated food has been brought to the fore by "The

Prevention of Food Adulteration Act (PFA), 1954", which applies to domestic and imported

food commodities, encompassing food colour and preservatives, pesticide residues,

packaging, labelling and regulation of sales.

TRENDS AND PLAYERS

The structure

The Indian FMCG sector is the fourth largest sector in the economy and creates employment

for three million people in downstream activities. Within the FMCG sector, the Indian food

processing industry represented 6.3 per cent of GDP and accounted for 13 per cent of the

country's exports in 2003-04. A distinct feature of the FMCG industry is the presence of most

global players through their subsidiaries (HLL, P&G, Nestle), which ensures new product

launches in the Indian market from the parent's portfolio.

Critical operating rules in Indian FMCG sector

Heavy launch costs on new products on launch advertisements, free samples and product

promotions.

Majority of the product classes require very low investment in fixed assets

Existence of contract manufacturing

Marketing assumes a significant place in the brand building process

Extensive distribution networks and logistics are key to achieving a high level of

penetration in both the urban and rural markets

Factors like low entry barriers in terms of low capital investment, fiscal incentives from

government and low brand awareness in rural areas have led to the mushrooming of theunorganised sector

Providing good price points is the key to success

Penetration and per capita consumption

Penetration level in most product categories like jams, toothpaste, skin care, hair wash etc in

India is low. The contrast is particularly striking between the rural and urban segments - the

average consumption by rural households is much lower than their urban counterparts. Lowpenetration indicates the existence of unsaturated markets, which are likely to expand as the


41/58

income levels rise. This provides an excellent opportunity for the industry players in the form

of a vastly untapped market. Moreover, per capita consumption in most of the FMCG

categories (including the high penetration categories) in India is low as compared to both the

developed markets and other emerging economies. A rise in per capita consumption, with

improvement in incomes and affordability and change in tastes and preferences, is further

expected to boost FMCG demand. Growth is also likely to come from consumer "upgrading",

especially in the matured product categories.

Detergent per capita consumption (in kg) (2001)

Tea per capita consumption (in kg) (2001)

Personal wash per capita consumption (in kg) (2001)

Toothpaste per capita consumption (in kg) (2001)

Skin care products per capita consumption (in Rs) (2001)

Ice cream per capita consumption (in litre) (2001)

Shampoo per capita consumption (in kg) (2001)

Fabric wash per capita consumption (in kg) (2001)

The rural urban break-up

Indian FMCG market urban

Indian FMCG market rural

Most Indian FMCG companies focus on urban markets for value and rural markets for

volumes. The total market has expanded from US$ 17.6 billion in 1992-93 to US$ 22 billion

in 1998-99 at current prices. Rural demand constituted around 52.5 per cent of the total

demand in 1998-99. Hence, rural marketing has become a critical factor in boosting

bottomlines. As a result, most companies' have offered low price products in convenient

packaging. These contribute the majority of the sales volume. In comparison, the urban elite

consumes a proportionately higher value of FMCGs, but not volume.

Rural markets: small is beautiful


42/58

By the early nineties FMCG marketers had figured out two things

Rural markets are vital for survival since the urban markets were getting saturated

Rural markets are extremely price-sensitive

Thus, a number of companies followed the strategy of launching a wide range of package

sizes and prices to suit the purchasing preferences of India's varied consumer segments.

Hindustan Lever, a subsidiary of Unilever, coined the term nano-marketing in the early

nineties, when it introduced its products in small sachets. Small sachets were introduced in

almost all the FMCG segments from oil, shampoo, and detergents to beverages. Cola major,

Coke, brought down the average price of its products from around twenty cents to ten cents,

thereby bridging the gap between soft drinks and other local options like tea, butter milk or

lemon juice. It also doubled the number of outlets in rural areas from 80,000 during 2001 to

160,000 the next year, thereby almost doubling its market penetration from 13 per cent to 25

per cent. This along with greater marketing, led to the rural market accounting for 80 per cent

of new Coke drinkers and 30 per cent of its total volumes. The rural market for colas grew at

37 per cent in 2002, against a 24 per cent growth in urban areas. The per capita consumption

in rural areas also doubled during 2000-02.

Consumer-class boom

Household income distribution 2003

Household income distribution 2015

Demand for FMCG products is set to boom by almost 60 per cent by 2007 and more than 100

per cent by 2015. This will be driven by the rise in share of middle class (defined as the

climbers and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom in

various consumer categories, further, indicates a latent demand for various product segments.For example, the upper end of very rich and a part of the consuming class indicate a small but

rapidly growing segment for branded products.The middle segment, on the other hand,

indicates a large market for the mass end products. The BRICs report indicates that India's

per capita disposable income, currently at US$ 556 per annum, will rise to US$ 1150 by 2015

- another FMCG demand driver. Spurt in the industrial and services sector growth is also

likely to boost the urban consumption demand.


43/58

Rise in Indian disposable income (US$/annum)

Identifying the segments in FMCG

A brief description of the Indian FMCG industry is given in the table below.

Product wise production (2004)

Household care

The size of the fabric wash market is estimated to be US$ 1 billion, household cleaners to be

US$ 239 million and the production of synthetic detergents at 2.6 million tonnes. The

demand for detergents has been growing at an annual growth rate of 10 to 11 per cent during

the past five years. The urban market prefers washing powder and detergents to bars on

account of convenience of usage, increased purchasing power, aggressive advertising andincreased penetration of washing machines. The regional and smallunorganised players

account for a major share of the total detergent market in volumes.

Personal care

The size of the personal wash products is estimated at US$ 989 million; hair care products at

US$ 831 million and oral care products at US$ 537 million. While the overall personal wash

market is growing at one per cent, the premium and middle-end soaps are growing at a rate of10 per cent. The leading players in this market are HLL, Nirma, Godrej Soaps and Reckitt &

Colman. The oral care market, especially toothpastes, remains under penetrated in India (with

penetration level below 45 per cent) due to lack of hygiene awareness among rural markets.

The industry is very competitive both for organised and smaller regional players.

The Indian skin care and cosmetics market is valued at US$ 274 million and dominated by

HLL, Colgate Palmolive, Gillette India and Godrej Soaps. This segment has witnessed the

entry of a number of international brands, like Oriflame, Avon and Aviance leading to

increased competition. The coconut oil market accounts for 72 per cent share in the hair oil

market. In the branded coconut hair oil market, Marico (with Parachute) and Dabur are the

leading players.

The market for branded coconut oil is valued at approximately US$ 174 million.

Food and Beverages

Food


44/58

According to the Ministry of Food Processing, the size of the Indian food processing industry

is around US$ 65.6 billion including US$ 20.6 billion of value added products. Of this, the

health beverage industry is valued at US$ 230 billion; bread and biscuits at US$ 1.7 billion;

chocolates at US$ 73 million and ice creams at US$ 188 million. The size of the semi-

processed/ready to eat food segment is over US$ 1.1 billion. Large biscuits & confectionery

units, soyaprocessing units and starch/glucose/sorbitol producing units have also come up,

catering to domestic and international markets. The three largest consumed categories of

packaged foods are packed tea, biscuits and soft drinks.

Beverages

The Indian beverage industry faces over supply in segments like coffee and tea. However,

more than half of this is available in unpacked or loose form. Indian hot beverage market is a

tea dominant market. Consumers in different parts of the country have heterogeneous tastes.

Dust tea is popular in southern India, while loose tea in preferred in western India. The urban-

rural split of the tea market was 51:49 in 2000. Coffee is consumed largely in the southern

states. The size of the total packaged coffee market is 19,600 tonnes or US$ 87 million. The

urban rural split in the coffee market was 61:39 in 2000 as against 59:41 in 1995. The total

soft drink (carbonated beverages and juices) market is estimated at 284 million crates a year

or US$ 1 billion. The market is highly seasonal in nature with consumption varying from 25

million crates per month during peak season to 15 million during offseason. The market is

predominantly urban with 25 per cent contribution from rural areas. Coca cola and Pepsi

dominate the Indian soft drinks market. Mineral water market in India is a 65 million crates

(US$ 50 million) industry. On an average, the monthly consumption is estimated at 4.9

million crates, which increases to 5.2 million during peak season.

ExportsIndia is one of the world's largest producers for a number of FMCG products but its exports

are a very small proportion of the overall production. Total exports of food processing

industry was US$ 2.9 billion in 2001-02 and marine products accounted for 40 per cent of the

total exports. Though the Indian companies are going global, they are focusing more on the

overseas markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries

because of the similar lifestyle and consumption habits between these countries and India.

HLL, Godrej Consumer, Marico, Dabur and Vicco laboratories are amongst the top exportingcompanies.


45/58


46/58

to increase direct coverage to gap outlets and gap towns where Dabur is not present. A

roadmap is also being prepared to rationalise the stockists' network in different regions

between various products and divisions.

Indian Tobacco Corporation Ltd (ITCL)

Indian Tobacco Corporation Ltd is an associate of British American Tobacco with a 37 per

cent stake. In 1910 the company's operations were restricted to trading in imported cigarettes.

The company changed its name to ITC Limited in the mid seventies when it diversified into

other businesses. ITC is one of India's foremost private sector companies with a turnover of

US$ 2.6 billion. While ITC is an outstanding market leader in its traditional businesses of

cigarettes, hotels, paperboards, packaging and agriexports, it is rapidly gaining market share

even in its nascent businesses of branded apparel, greeting cards and packaged foods and

confectionary. After the merger of ITC Hotels with ITC Ltd, the company will ramp up its

growth plans by strengthening its alliance with Sheraton

fdi in retail for print out-1

Documents