Franchising to be hurt by FDI norms in multi-brand retail:KPMG

DIPP had clarified that front-end stores set up by MBRT entity will have to be company-owned and company-operated only

India may need franchising set-ups valued at$36 billion by 2017 but the segment could be hurt by the government's recent move to allow foreign retailers to open only company-owned and operated multi-brand stores, says a KPMG report.

"Recent clarifications issued by the Indian government on FDI regulations in multi-brand retail allowing foreign retailers to open only company-owned and company-operated outlets could be a big blow to growth in retail franchising in India," said KMPG's report on Franchising Industry in India 2013.

Over 43,000 franchisee establishments valued at$36 billion may be required by 2017 to meet the growing demand in the retail sector from the current base of 13,000 valued at$10.6 billion, it added.

"India drives only about 2.5% of total retail sales (organised and unorganised) through franchise formats, as against nearly 50% in the US, indicating huge potential for the market in future," the report by the consultancy firm said.

Last month, Department of Industrial Policy and Promotion (DIPP) had clarified on FDI policy in multi-brand retail trading (MBRT), saying "front-end stores set up by MBRT entity will have to be company-owned and company-operated only".

The KPMG report, however, said the recent overall FDI reforms in single brand and multi-brand retail are likely to lure more global retailers to participate in India. Existing retail majors are under pressure to consolidate and increase their franchise network reach.

"Meanwhile, several multinationals such as IKEA, Wal-Mart are looking to establish their brands in India. Franchising is expected to continue to be one of the most popular business formats among organised retailers to tap the emerging consumption boom, specifically in the tier 2, tier 3 and smaller cities," it said.

The report highlighted changing landscape in retail industry due to factors such as favourable demographic profile, rising disposable income levels and the industry appetite to cater to this emerging consumption boom.

According to KPMG India estimates, franchising industry can contribute almost 4% of India GDP in 2017, growing from a current estimated contribution of 1.4% of GDP.

"This is also expected to create job opportunities (including both direct and indirect) for an additional 11 million people by 2017," it said.

The organised retail is largely concentrated by retail franchisers in the apparel, consumer durables and food groceries space with around 80% share.

Organised retail is expected to be around $79 billion in 2017 as against$24 billion in 2012, report added.