E-Newsline March 2011
Multi-Brand Retailing in India: curse or boon? Introduction
India’s retail industry is divided into organized and unorganized sectors. Postliberalization, organized retail has grown exponentially and is a testament of the Indian middle class’s burgeoning purchasing power. As a consequence, the opening up of the wholesale and single brand retail sector to foreign direct investment (“FDI”) was inevitable. India is ranked as the third most attractive nation for retail investment among 30 emerging markets1 with domestic companies like the Future Group, Tata’s Westside, Reliance Fresh, Raheja Group and Bharti Retail competing for market share. Multi-brand retail comes in different formats like supermarket, hypermarket, compact hyper and the ubiquitous mall. The success of this sector is best reflected in the fact that the shares of retail companies are well represented in all top mutual funds. However, the sector is constrained by several factors, primarily by a highly restrictive licensing regime and overall poor infrastructure. These factors have contributed to restrict organized retail to only about 3% of the total retail industry. This newsletter examines the prospects of FDI in multi-brand retail in India, and builds a case as to why the sector needs to be opened. 1. A case for FDI in multi-brand retail
The current regulations on retail allow 100% FDI in wholesale cash-and-carry trading. In single-brand retailing, 51% FDI is permitted while it is prohibited in multibrand retailing. The question arises whether opening up of FDI in multi-brand retail will create problems or provide opportunities. There is no clear answer and ample views have been expressed by those in favour and against FDI. In our view, the benefits, described below, will, in the long run, outweigh the problems. Some of the key benefits of permitting FDI in multi-brand retail are: 1.1 Opportunities galore: While it is important not to lose sight of the local “Mom and...