retail - impact note_sep12

7/29/2019 Retail - Impact Note_Sep12

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CRISILOpinionSeptember 2012

KINGA MM ARKETSF

UNCTIONBETTE

R

YEARS

Indian retail to attract FDI of USD 2.5-3 billion


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CRISILOpinion

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The decision to allow 51 per cent FDI in multi-brand retail will result in investment of USD 2.5 billion-USD 3.0

billion in the retail sector over the next five years, primarily into the food & grocery (F&G) vertical. Capital

expenditure in the back-end supply chain will receive a boost given the mandatory 50 per cent investment

clause. An efficient supply chain will enable direct sourcing of fruits and vegetables, which will boost farmer

realisations by 10-15 per cent and still bring down retail prices by 15-20 per cent. Organised retail

penetration (ORP) is expected to remain moderate at 10 per cent in 2016-17 compared with 7 per cent

currently. Moreover, the share of foreign retailers in organised retail is not expected to exceed 10-15 per cent

by 2016-17.

CRISIL Researchs impact on the FDI in multi-brand retail is enumerated below.

Impact of the policy:

FDI inflows of USD 2.53.0 billion likely over next 5 years

CRISIL Research estimates FDI inflows of USD 2.53.0 billion of the total expected investments of USD 10

billion in the Indian retail industry over the next 5 years, if it is permitted across all states of the country. The

likely FDI inflows in retail are modest in the context of overall FDI inflows of USD 190 billion over the past five

years.

In 2011-12, organized retail accounted for about 7 per cent of the USD 430 billion Indian retail industry. The

food and grocery (F&G) segment -- which accounts for two-thirds of the Indian retail market but has

organized retail sales of only around 2 per cent, the lowest among retail verticals -- is likely to attract a

greater portion of the FDI inflows. This highly price sensitive segment will benefit the most from the scale,

technology and investments in the back-end that would accompany foreign capital.

To improve profitability in F&G, retailers need to control their supply chain costs and build scale. Every

percentage point reduction in supply chain cost and resultant gain in EBITDA margin can improve equity IRR

of an F&G store by 250-300 basis points. Foreign retailers, with their access to capital and technology, are

well placed to leverage this opportunity.

FDI inflows wil l improve organized retail penetration moderatelyCRISIL Research believes that organized retail penetration (ORP) will increase moderately from 9 per cent

to 10 per cent in 2016-17, if all states permit FDI. The same has been arrived at taking into account the likely

supply of quality retail space and the current ORP in large cities. Further, the lead time for organized retailers

to identify appropriate store locations and address issues in rolling out back-end infrastructure will limit the

pace of growth in ORP.


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CRISILOpinion

Organized retail penetration in India

2011-12 2016-17 P 2016-17 P

Pre FDI Impact Post FDI Impact

Total Retail USD Billion 430 850 850

Organised Retail USD Billion 29 72 85

ORP Percent 7 9 10

ORP - Organised retail penetration

P-Projected

Source: CRISIL Research

Foreign retailers unlikely to gain dominant position

Our estimate of FDI inflows indicates that foreign retailers are unlikely to gain a dominant market share in

multi-brand organized retail in the next five years. Depending on whether they buy into existing retail chains

or set up new joint ventures, the share of foreign retailers in multi-brand organized retail would vary between

10 and 15 per cent by 2016-17. In China, where organized retail accounts for 20-25 per cent of total retail

sales, foreign retailers have a market share of 25-30 per cent in organized retail, built over the past 15 years

since FDI in retail was opened up.

Change in operational structure required fo r retailers

We believe that domestic retail chains will have to modify their operational structures before entering into

joint ventures with foreign retailers as currently all states have not agreed to the policy. The restructuring

exercise will be of either creating a state wise SPV or segregating the front end & back end operations.

Player-wise number of st ores

Total Stores Share of stores in

states permitting FDI

Aditya Birla retail 536 23%

Bharti retail 165 50%

Future group 750 49%

Reliance retail 1200 46%

Spencer's retail 323 23%


Farmer realisations to improve

Capital expenditure in the back-end supply chain will receive a boost given the mandatory 50 per cent

investment clause. An efficient supply chain will enable direct sourcing of fruits and vegetables, boosting

farmer realisations by 10-15 per cent and still bring down retail prices by 15-20 per cent.


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The Cabinet, on September 15, 2012, permitted 51 per cent FDI in multi-brand retail, subject to a number of

riders. This proposal had earlier been cleared on November 24, 2011 but the decision was put on hold due

to political opposition.

Key riders of the policy include:

1. Approval from state governments a must for setting up foreign multi brand stores

FDI funded retail companies will be allowed to operate stores only in those states which have agreed

to allow foreign investment in retail. So far only nine states and two union territories have agreed to

allow foreign investments in retail. The amount of FDI inflows that India can attract over the next 5

years would be limited by the number of states in which FDI is permitted.

2. Investments to be confined to cities with population of over 1 milli on

The organized retail market in India is highly concentrated in the larger cities. CRISIL Research

believes that these larger cities will anyway be the initial target market for foreign retailers. As per the

2011 census, 53 Indian cities have a population of over 1 million. However, in light of the current

situation where 9 states and 2 union territories have agreed on foreign investment in retail, only 20

cities are potential locations where foreign retailers can operate. The policy states that in states/

union territories not having cities with population of more than 1 million, outlets may be set up in the

largest city.

Potential cit ies where foreign retailers can operate

State/ Union Territor y Cities

Delhi Delhi

Maharashtra Mumbai, Pune, Nagpur, Nasik, Vasai-Virar, Aurangabad

Andhra Pradesh Hyderabad, Vishakhapatnam, Vijaywada

Assam Guwahati *

Rajasthan Jaipur, Jodhpur, Kota

Uttarakhand Dehradun *

Haryana Faridabad

Manipur Imphal *

Jammu & Kashmir Srinagar

Daman & Diu Daman *

Dadra & Nagar Haveli Silvassa*

* - In states which do not have cities with more than a million population, the largest city has been considered


3. Investment in back-end infrastructure

The policy states that at least 50 percent of the foreign investment should be in the backend

infrastructure within 3 years of induction of FDI, with land costs excluded. Backend infrastructurewould include investment made towards processing, manufacturing, distribution, design

improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce


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CRISILOpinion

infrastructure etc. In our view, this specified proportion of investment is in line with the commercial

requirement in the F&G vertical, where supply chain inefficiency breeds wastage of food produce.

CRISIL Research estimates that about 27 per cent of Indias annual production of fruits and

vegetables, worth Rs 700 billion, is wasted due to poor cold storage and transport facilities. About 50

per cent of this wastage can be prevented if retailers develop an efficient supply chain. Investing in

the back-end supply chain to reduce the wastage will be necessary to ensure reasonable margins in

the F&G segment, which is highly competitive and price sensitive.

4. Minimum investment of USD 100 milli on

Given that 50 per cent of this amount would need to be invested for developing back-end

infrastructure, the minimum investment will fund the establishment of 1 million sq ft of front-end store

space, equivalent to 10-15 hypermarket or departmental stores. We expect foreign retailers, who

intend to achieve scale and efficiency of operations, to invest significantly larger amounts.

5. 30 per cent sourcing of merchandise from SMEs

As organized retail companies already source a significant portion of their private label merchandise

(especially in the food and grocery segment) from domestic SMEs, this stipulation is unlikely to deter

investments. Private labels accounted for 15-20 per cent of the sales of large organized retailers in

2011-12.


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Annexures:

Presence of retailers i n cit i es where states are suppor ting FDI

Format

More

supermarket &

hypermarket

Easyday,

Easyday

Market &

Hyper

Big Bazaar &

Food Bazaar

Reliance

Fresh

and Mart

Hypercity

Spencer's

Neighbourhood

& Hyper

Star

Bazaar

CompanyAdi tya Birla

RetailBharti Retail

Future

Group

Reliance

Retail

Shoppers

Stop

Spencer's

RetailTrent

Aurangabad 4 - 3 4 - - 1

Dehradun - - 1 - - 1 -

Delhi 9 15 15 36 - 1 -

Faridabad 3 3 3 8 - 3 -

Guwahati - - 2 - - - -

Hyderabad 9 - 13 36 1 26 -

Imphal - - - - - - -

Jaipur - 6 5 23 1 - -

Jodhpur - - 1 4 - - -

Kota - - 2 - - - -

Mumbai 3 1 22 33 3 1 3

Nagpur - - 2 4 - - -

Nasik 1 - 3 6 - - -

Pune 12 1 8 17 1 19 2

Srinagar - - - - - - -

Vijaywada 2 - 1 1 - 2 -

Visakhapatnam - - 3 9 - 7 -

Total 43 26 84 181 6 60 6



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CRISILOpinion

(Please note that the views expressed here are those of CRISIL Research and not of CRISILs

Ratings division. CRISIL Research operates independently of and does not have access to

information obtained by CRISIL's Ratings Division.)

Analytical Contacts:

Binaifer Jehani, Dipali Modi, Monisha Majumdar

Director, CRISIL Research Associate Director, CRISIL Research Analyst, CRISIL Research


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KINGA MM ARKETSF

UNCTION

BETTE

R

YEARS


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