Grocery, apparel to be favourites for FDI in retail, says Deloitte

The policy on foreign direct investment (FDI) in multi-brand retail makes mass grocery and apparel the two most favorable segments to invest in, says Deloitte Touche Tohmatsu in a report ‘Indian Retail Market-Opening more doors’.

“Mass grocery and apparel are two of the fastest growing organized retail segments in India today. In both these segments there are large domestic retailers who could be potential joint venture partners for foreign retailers”, said Gaurav Gupta, senior director, Deloitte Touche Tohmatsu.

Big Bazaar, Reliance Fresh, Aditya Birla's More are the main players in the organized grocery retail while Pantaloons, Shoppers Stop, Westside are the other players in the apparel segment.

 “Foreign retailers could enter India by forming a new joint venture company, which shall have multi-brand retail stores in India. Alternatively, the foreign investor may also consider acquiring 51 per cent stake in the existing business set-up of the potential Indian joint venture partner”Gupta said.
 
Another advantage in the segment is that existing grocery retailers in India already source many products directly from producers and “small” food processing units. To meet the policy guidelines on sourcing and to have better margins, foreign retailers would need to cultivate relationships with local manufacturers to drive strong private label brand.
 
Whereas, multi-brand organized retail in specialty stores such as consumer electronics,footwear, furniture andfurnishing etc. are expected to expand and mature in the next few years. "However the policy condition on sourcing will continue to be a major bottleneck for FDI in many of these segments," the report said.
 
The report states that the primary concern for the mass grocery segment would be the condition to invest a minimum of Rs 250-220 crore in the first three years towards back-end infrastructure.  For example, food processing unit, cold chains, etc. While, other segments such as Apparel, Beauty & Wellness and Consumer Electronics have limited requirements in the backend.
 
The new FDI policy also presents a unique set of implications for domestic retailers. On one hand, the policy exposes the domestic retailers to competition from foreign retailers; while on the other hand, it seeks to safeguard them through a slew of protective measures. FDI in multi-brand retail is a state subject and as per the policy, e-commerce is not allowed as an alternate channel as it can serve the customer beyond the physical location of the store.
 
“Restriction on foreign retailers from conducting multi brand retail in towns with population less than one million can be construed as an enabling policy by domestic retailers who should now focus their efforts to expand their retail footprint”, added Gupta.