FDI IN RETAIL

INDIAS BID TO A BRIGHTER FUTURE OCTOBER 2012

A Cushman & Wakefield Research Publication

EXECUTIVE SUMMARY
Post a long period of ambivalence, the Government has finally consented to 51% Foreign Direct Investment (FDI) in multi-brand retailing in India with a few conditions. While this decision has evoked a host of responses from different States and different walks of businesses, on the whole India is expected to emerge as an attractive retail destination for international retailers. Since 2006, the retail market in India has undergone a series of structural changes owing to the rapid policy and socio-economic transformations. The retail real estate sector is now struggling to keep pace with the demand for quality retail space in India, limited to a few cities. Considering the current scenario, the Indian retail real estate sector has sufficient propensity to become a global retail hotspot. In this paper, Cushman & Wakefield Research evaluates the impact of the new FDI policy.

www.cushmanwakefield.co.in

OCTOBER 2012

October 2012

A Cushman & Wakefield Research Publication

ADVANTAGE INDIA
? has a relatively young population with a median age of India 26.5 years, the lowest among the BRIC countries. Moreover, 29.3% of the population is in between the age group of 0-14, which is the highest among the BRIC nations. (Source: Census of India - 2011, CIA Factbook)

GDP COMPOSITION (2011)

Brazil Russia India China 5.8% 4.2% 18.1% 10.1% 6.1% 0% 31.1% 20% Agriculture 40% Industry 60% 26.9% 37.0% 26.3% 46.8% 62.9% 80% Services 100% 67.3% 58.9% 55.6% 43.1%

AGE STRUCTURE
Brazil Russia India China World 0% 26.0% 67.1% 6.9% 13.1% 65.2% 73.5% 65.9% 40% 15 -64 60% 80% 5.6% 9.1% 7.9% 100%

World

15.4%
29.3% 17.4% 26.3% 20% 0-14

71.4%

Source: Cushman & Wakefield Research

GDP COMPOSITION TREND

80% 70% 60% 50% 40% 30% 20% 10% 0% 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

65 years and over

Source: Cushman & Wakefield Research

DEMOGRAPHIC PROFILE: BRIC NATIONS VS WORLD

8.0 7.0 Population (billion) 6.0 5.0 4.0 3.0 2.0 1.0 World Number Total Median Age Total China India Russia Brazil Number Male Median Age Male 20 30 25 40 35 45

Agriculture

Industry

Services

Source: Cushman & Wakefield Research

? Service industry accounted for 57% of the GDP in FY 201112, although agriculture is the predominant occupation in India.

Number Female Median Age Female

Source: Cushman & Wakefield Research

? is the tenth largest in the world by nominal GDP and India the fourth largest by purchasing power parity (PPP). (Source: International Monetary Fund, 2011) ? per capita Gross National Income has tripled from India's USD 470 in 2002 to USD 1,410 in 2011, averaging 14.7% compounded annual growth rate over these nine years.

FDI IN RETAIL OCTOBER 2012

EVOLUTION OF INDIAN RETAIL

The story of Indian retail has been an intriguing one with diverse opportunities and challenges. Till the 90's Indian retail market was primarily dominated by traditional retailers, 'kirana' (Mom & Pop) stores. However, with growing corporatisation, India has become increasingly exposed to organized retail in the last decade. The transition was gradual, with 100% FDI in Cash and Carry/ wholesale formats allowed in 1997 and 51% FDI in single-brand retail permitted in 2006. However, cumulative FDI in retail trading (single-brand) till May 2012 was noted at INR 2.04 billion representing only 0.03% of the total FDI inflow according to the

Department of Industrial Policy and Promotion. The growth of organized retail is being propelled by the rise of Indian middle class, a fast changing consumer mindset and increasing disposable income. Riding on the favourable demographics and a steady economic growth, Indian retail sector soon emerged as one of the fastest growing sectors in the domestic economy. With 100% FDI in Cash & Carry format, India witnessed the entry of retail giants like Metro AG and Walmart. The growth was also fuelled by retail real estate infrastructure developments in the country. Wide range of retail categories and innovative formats like supermarket, hypermarket, and cash & carry categories evolved across the India.

EVOLUTION OF ORGANIZED RETAIL IN INDIA EXPANSION AND ENTRY OF GLOBAL RETAILERS

III

INITIATION
I

CONCEPTULIZATION
II

CONSOLIDATION
IV Large scale consolidation Stiff competition Movement to smaller cities and rular areas

Size of Industry

Pure play Retailers, realizing the potential start to test waters, stall most of them in apparel segment

Entry of large global retailers

More aggression from International Players Large Investment Commitments by large Indian corporates More than 5-6 players with Revenues in excess of US$ 700mm Specialty formats based on finer segmentation of the market Private brands getting established

Manufacturers opening their own outlets

Expansion by leading Product Brands

Pre 1995s
Source: Technopak

1995 to 2005

2005 to 2010

2010 Onwards

October 2012

A Cushman & Wakefield Research Publication

FDI POLICY FRAMEWORK

With the recent policy approval from the Central Government, the second generation reforms have stepped on a higher rung. Whilst 100% FDI in single-brand retail is applicable to all the States, it is left to the discretion of the States to implement the policy for 51% FDI in mult-brand retail. As of September 2012, Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand and the Union Territories of Daman & Diu and Dadra and Nagar Haveli have endorsed the multi-brand FDI policy.

Large retailers operating in the hypermarket, supermarket and department store segment are raring to set up stores. Some foreign retailers have already tied up with domestic retailers for entry into India and others are in the process of chalking out of the entry plans in joint venture with appropriate domestic partners. While some believe that the mandatory local sourcing norms act as a deterrent and give rise to the problem of quality control and supply, in reality, the norms are aimed at encouraging inclusive growth within India. KEY HIGHLIGHTS OF THE RETAIL FDI POLICY
? Government has introduced 51% FDI in multi-brand The

According to Cushman & Wakefield Research, the retail market in India is expected to exceed USD 650 billion by the year 2016. With the current estimated retail market size of USD 450 billion. Currently organised retail is just 5% of the entire retail market and is expected to grow at the rate of 18% and reach USD 42 billion by 2016 from USD 22 billion in 2012.

retail for attracting global investments

? While the Central Government has allowed FDI in multi-

brand retail, power rests with individual state governments to allow the set-up of retail outlets in their respective States
? Government allows multi-brand retail FDI only in cities

comprising of population above 1 million

? minimum FDI limit has been set at USD 100 million The

The healthy GDP growth of 6.5% in 2011, coupled with the steeply rising per capita income of Indians bodes well for the retail market. The fast expansion of urban agglomerations and the increasing demographics indicate ample potential for the retail industry. With current encouraging regulatory scenario and favourable socio economic scenario, the retail industry is receiving an impetus for tapping the latent demand in the Indian market. GDP GROWTH: BRIC NATIONS VS WORLD
20 15 Percentage (%) 10 5 0 2007 -5 -10 China India Russia Brazil World 2008 2009 2010 2011 9.1 6.5 4.3 2.7

? mandatory to invest at least 50% of total FDI It is

(minimum USD 50 million) brought in 'backend infrastructure' within three years of the induction of FDI
? least 30% of the procurement of manufactured/ At

processed products must be sourced from India small industries, which have a total investment in plant & capital machinery not exceeding USD 1 million

Source: Cushman & Wakefield Research

FDI IN RETAIL OCTOBER 2012

IMPACT ON REAL ESTATE

The revised FDI policy is expected to bring in some significant changes in the Indian retail realty market:
? Organized retail will gain further impetus in the country as

? Organized retail will see consolidation and joint ventures and

simultaneously a lot of development in supply chains is expected to take place. Cold chains and warehousing facilities will also grow, thus giving a much needed thrust to infrastructure development.
? parcels near highways at nodal locations, for the Land

the sector will attract foreign investments over a period of time. Primarily, the front-end presence of foreign retailers at different main streets and malls will be the most evident change. The transaction velocity is expected to pick up in medium term and is anticipated to continue northwards.
? penetration of organized retail will improve and the The

creation of logistics hubs and parks, are expected to witness increased demand and better valuations.
? Fresh mall supply might be fast tracked in micro markets

development of modern retail will be spread out beyond the traditional cities. India's 53 urban agglomerations with population in excess of 1 million (Census 2011)offer immense opportunity to increase penetration.

witnessing dearth of quality space with large store formats like hypermarkets, supermarkets and department stores acting as anchor tenants.
? Innovative retail formats in the form of standalone

infrastructure may come up at prime locations and change the metrics of the retail sector.

October 2012

A Cushman & Wakefield Research Publication

THE ROAD AHEAD

The recently revised FDI norms are envisaged to start a new wave of retail sector transformation marked by expansions, consolidation, influx of foreign brands and diversification of retail formats, further causing an upward movement in the velocity of

retail real estate activities. This policy is expected to give the local small and medium-sized industries a boost. Resultantly, a jump in employment levels in different stages of retail and ancillary services can also provide a wide all-inclusive growth in the Indian economy not only in urban areas, but in rural areas as well.

POTENTIAL CATEGORIES Food and Grocery Retail

? Business Monitor International (BMI) forecast that sales through Mass Grocery Retail outlets to

reach to USD 27.67 billion by 2015

? According to industry estimates, lack of supply chain infrastructure results in 40% loss of farm

produce; investment in back-end infrastructure should help reducing this

? Sourcing of processed food from SMEs could result in higher margins ? Political support for FDI in food and grocery may face challenges and many states may not allow

FDI or may place some more restrictions

? Hypermarkets and supermarkets are the best suited retail structure for this segment

Apparel Retail

? Readymade and western outfits are growing at 40-45% annually ? Opening of multi-brand apparel retail for FDI is not expected to face major political hurdles ? apparel retail, investment in back-end infrastructure lies in creation of warehouses For ? Manufacturing facilities (for private label brand) and logistics is most likely to be outsourced ? International retailers could have private label brands sourced from SME segment ? Departmental store is the best suited retail structure for this segment

Furniture and Furnishings

? Category faces stiff competition from small time traditional retailers as well as individual

carpenters
? furniture retail, options for investment in back-end infrastructure lies in creation of For

manufacturing facilities/ warehouses

? of the furniture products could be sourced from the SME segment Some ? in furniture retail is not expected to face major political hurdles FDI ? Specialty retail outlet is best suited structure for this segment

Beauty and Wellness

? Penetration level of modern retail is just 4% and there is a huge untapped potential in this segment ? Private label brands in some of the product categories can be sourced from the SME segment ? in multi-brand beauty and wellness stores is not expected to face major political hurdles FDI ? Specialty retail outlet is the best suited structure for this segment

Gems and Jewelry

? Branded jewelry has rapidly acquired a niche over the past few years. Increasing purchasing power

and disposable income of India's middle class has resulted in growth of this industry
? Opening of multi-brand gems and jewelry stores is not expected to face major political hurdles ? Special design products could be sourced from the SME segment ? segment for retailers are largely in the metros and tier-1 cities Target

FDI IN RETAIL OCTOBER 2012

POTENTIAL CATEGORIES Consumer Durables

? Traditionally, market is largely dominated by branded store, penetration of modern retail is 12% in

consumer electronics segment

? Consumers are brand conscious for consumer durables hence sourcing of products from SME the

segment is not favorable

? segment for retailers would not just be restricted in the metros and tier-1 cities, it would Target

also include tier-2 cities

? in consumer durables sector too is not expected to face any major political hurdles FDI
Source: Deloitte

October 2012

A Cushman & Wakefield Research Publication

ABOUT THE RETAIL SERVICES GROUP

At the core of Cushman & Wakefield Retail Services is our thorough understanding of the retailing processes, logistic needs and the dynamics of the retail industry in India. Our experts understand that retailing is much more than shops or shopping malls; it is the whole experience that culminates in the sale of a product or service to a consumer, including administration, design, distribution, marketing/ positioning, planning, storage and real estate. With over 100 dedicated retail professionals across Asia, we advice on every stage of the project life cycle: from initial research and development consultancy to leasing, management as well as investment. Our teams are equipped and experienced to counsel as well as execute specialised and sophisticated retail requirements encompassing retail project management, mall management and mall marketing apart from retail consulting and brokerage, offering you tailor-made focussed solutions. Our broad scope of service includes: Real Estate Advisory Retail Agency Mall Marketing Project Management Mall Management To discuss your retail needs please contact: Jaideep Wahi Director, Retail Services, India Tel: +91 124 469 5555 E-mail: jaideep.wahi@ap.cushwake.com Anand Dutta Associate Director, Retail Services, India Tel: +91 124 469 5555 E-mail: anand.dutta@ap.cushwake.com

For more information about C&W Research, Contact: Siddhart Goel National Head - Research Services Cushman & Wakefield siddhart.goel@ap.cushwake.com

Cushman & Wakefield is the worlds largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the worlds major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917 it has 246 offices in 60 countries and more than 14,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $4 billion in assets under management. Cushman & Wakefield established operations in India in 1997 and was the first international real estate service provider to be granted permission by the Government of India to operate as a wholly owned subsidiary. We are a strong team of over 1,500 employees, operating across New Delhi, Gurgaon, Mumbai, Pune, Bengaluru, Chennai, Hyderabad, Kolkata and Ahmedabad. In addition, we service over 40 other cities such as Ahmedabad, Nagpur, Cochin, Mysore, Mohali, Chandigarh, Goa, Ludhiana, Jaipur and Coimbatore amongst others. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge

Authors of the report: Megha Maan Senior Manager Research Services megha.maan@ap.cushwake.com Sarbani Chatterjee Manager Research Services sarbani.chatterjee@ap.cushwake.com

Disclaimer This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts to responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. 2012 Cushman & Wakefield All Rights Reserved