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'Foreign Retailers ought to get ready now'

Announcement  |  Corporate 

There are all indications that the Indian government is likely to commence a phased liberalisation of the retail sector and is expected to announce the final policy within the next six months to a year. Deloitte in India is of the view that though the picture may be unfolding slower than foreign retailers would have liked, those with a long term view on the growth potential of India’s retail sector need to get ready now. With total retail spending estimated to double in the next five years, foreign retailers who have been patiently waiting in the wings should begin the groundwork for their India entry.

“One aspect seems to be clear: - there will be no 'one-shot, big-bang’ kind of approach toward introducing FDI in multi-brand retail. Instead, we could expect a phased liberalisation approach with a number of conditions laid down, at least initially, for foreign retailers to enter India”, said Rajan Divekar, Senior Director, Deloitte in India. “These conditions would be intended to assure the opposition parties, the local retailer lobbies, the farmer and trade unions, etc. that the government has adopted a 'balanced/mid-way' kind of approach after due consideration of the views of all stakeholders involved.”

Of the various conditions that are being discussed for entry, the most significant, from a foreign retailer perspective, are likely to be:- the minimum investment threshold for entry, and the permissions/support required from local State governments to enable foreign retailers to set up business in their respective states.

Among the larger and important states (from a retail market perspective), Maharashtra, New Delhi, Punjab, Andhra Pradesh, Tamil Nadu, West Bengal and Gujarat are likely to support the policy faster than other states such as Karnataka and Uttar Pradesh.

Although all the retail segments offer growth opportunities for foreign retailers, the largest opportunity in terms of potential market size and scalability is in grocery retailing, particularly for the supermarket and hypermarket formats. The food and grocery segment is the highest contributor to the retail sector (60%) with minimum penetration of organised retailing. However, the large population of 'mom-n-pop'/'kirana' grocery stores and a few established organised players are likely to be a force to reckon with for new foreign entrants in the grocery sector. Penetration of modern retail is maximum (23%) in the clothing and fashion segment, which is 10% of the total retail sector. Besides, organised retail in beauty, wellness and electronics through specialty stores is growing at a rapid pace.

Foreign retailers will have some gainful time now, as the liberalisation is likely to be more phased and calibrated. With their competitors eyeing for the same cities and probing for the best locations, potential entrants should start developing their plans, strategise their store locations and initiate discussions with their local partners. Also, India being a large and complex market with under-developed logistics and back-end infrastructure, adequate time and attention needs to be given on this specific area since the back-end retail infrastructure that has been taken for granted in developed countries (even in China for that matter) is still at a nascent stage in India.

The Indian retail market is currently estimated at USD 396 billion and is likely to grow further at 12% to increase to USD 574 billion by 2015. It is the second largest employer after agriculture, employing more than 35 million people with the wholesale trade generating an additional employment of 5.50 million. The growing disposable income in the country is resulting in increasing consumer spending habits. Organised retail is currently growing at an estimated CAGR of 22% and is increasing its share of total retail expenditure compared to traditional retail.

First Published: Mon, September 19 2011. 17:07 IST