The impact of Foreign Direct Investment on the Indian retail sector – December 2011


The 24th of November 2011 was a historic day for Indian retail. The cabinet of ministers of the Government of India cleared the commerce ministry’s proposal to permit 51% foreign direct investment (FDI) in multi-brand retail (with several riders), as well as 100% FDI in single-brand retail (51% was already allowed in single-brand retail).

On a panel discussion on CNN-IBN, serial consumer activist Bejon Misra was shouting at the top of his voice that FDI in retail is not good for Indian consumers.  When being asked by R.Subramanian, founder of Subhiksha, to explain his logic, Misra retorted that his kirana, Guptaji, gave his family goods on credit, while organized sector hypermarkets and supermarkets did not.

“I don’t need credit, I need the choices that hypermarkets offer me, which kiranas don’t” said Sriram Khanna, Managing Trustee, Consumer Voice, “while no one is stopping you from continuing to shop at Guptaji’s kirana store, how can you stop me from getting the choices I want? After all, India is a free-market democracy, so let 1.2 billion consumers decide where to shop, instead of you deciding for all of India.”

This probably sums up the mood of the Indian consumer – GIVE US CHOICE. As one travels through Rishikesh in the North, Ajmer in the West or Mysore in the South, you can see more and more consumers flocking to neighbourhood supermarkets which are giving them a choice of brands and products at different price points, allowing them to participate in India’s consumer boom. How can anyone representing a small section/segment of society decide how 1.22 billion people should shop?

Raj Jain, MD & CEO of Bharti Walmart said: “We are grateful that the Government has realized and appreciated the value that Wal-Mart will bring to strengthen the Indian economy.   This will positively impact the Indian market and will also contribute toward India’s image as one of the world’s fastest growing economies and a welcoming destination for international businesses. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation.”

Bharti Walmart Private Limited is a joint venture between Bharti Enterprises (better known for their telecom brand Airtel) and the $405 billion Walmart, the world’s leading retailer, renowned for its efficiency and expertise in logistics, supply chain management and sourcing.  Walmart employs over 2.1 million people across 9826 stores under 60 different banners in 28 countries. The joint venture has wholesale cash-and-carry and back-end supply chain management operations in India. The JV has nine Best Price Modern Wholesale stores which employ 3,372 people. Bharti Retail, wholly-owned subsidiary of Bharti Enterprises, operates neighbourhood stores called Easyday, compact hypermarkets called Easyday Market and hypermarkets called Easyday Hyper.

Kishore Biyani, MD of Future Group (Pantaloon Retail India Limited) agrees: “Its a big win for the agri-sector as investments in back-end in the agri-sector will result in better prices for the sector and reduce inefficiencies, thereby getting better prices for the farmers.”  Pantaloon Retail had sales of Rs.122.12 billion ($2.35 billion) in fiscal 2011, with operational retail space of 15.24 million square feet, with more than 50% of that space occupied by its hypermarket format called Big Bazaar.

“It will help at the farm level by improving productivity and possible better earnings for farmers, as well as investment in food processing. It will also help in generating employment at the farm level as well as in the supply chain,” commented Saloni Nangia, SVP Retail, Technopak Advisors.

Adds Goldie Dhama, Associate Director, PwC India: “Increased investment in back end (supply chain and cold storage) infrastructure will help in reducing the wastage percentages of 30-40% of food produce from farm to fork. Technology transfer to Indian companies will enable best practices in crop management and food safety and hygiene – thereby improving the quality of food products across the board.”

One needs to ask how kiranas will get affected differently by foreign food & grocery (F&G) players, compared with Indian giants in this business (Reliance, Tata, Aditya Birla, Raheja and Future Group) and by foreign retailers such as Wal-Mart and Spar, who are operating through licensing or similar arrangements. What can new foreign retailers do (to harm kiranas) that these players cannot?

“This is a very progressive step and consumers will get a far wider range of quality products at better prices,” said Viney Singh, MD of Spar’s licensee Max Hypermarkets, part of the Dubai-based Landmark Group, “it will also benefit farmers and the industry that feeds into retail. Currently, many states do not permit us to procure directly from farmers, as these state governments feel that farmers will get exploited with so few organized F&G retailers in India. With many more players (with the capital, scale and organizational capabilities) now coming in and building the scale required at the front-end, the same state governments will understand that the farmer will get the best prices, as he will have many organized buyers to choose from. So I expect a lot of change in local APMC laws going forward.” Spar currently has 10 operational stores in India and Singh expects to close the current year with a turnover of Rs.5.8 billion ($0.116 billion). In 2010, Spar worldwide had retail sales of $39 billion from 12,136 stores in 33 countries. Singh does not believe there will be any change in the Spar – Landmark Group relationship, as Spar does not invest in most foreign markets, where it follows a licensing/franchising model.

By 2015, Urban India will have a population of 423 million people. They will need 635 million square feet of total space for food retailing (includes grocery, pharma, beauty & FMCG), at 1.5 square feet of per capita food retail space, compared to about 511 million square feet today, including space occupied by modern trade as well as traditional retailers and neighbourhood kiranas. The western world has an average of 3.1 square feet and South-East Asia 1.82 square feet.   If we assume that the organized sector (including existing players) will capture only 7.5% market share in four years, we will have an estimated 47.63 million square feet of hypermarkets, supermarkets, convenience stores, pharmacies and drugstores by 2015, compared to about 15.3 millon square feet today.

The main opposition party BJP and the permanent opposition left parties say that foreign retailers will cannibalise the business of kiranas. Even if foreign retailers capture 50% of the organized sector’s total market share (which itself is a tall order) and thus have 23.82 million square feet of retail space, at an average ownership of 1200 square feet of retail space per small business (kirana) owner, this will only affect 19,850 businessmen and not crores of businessmen, as has been hyped by some politicians.

Most discussions about opening up multi-brand retail only talk about food & grocery, but there’s much more to retail than just food & grocery.  423 million urban Indians will need 3680 million square feet of space for non-food retailing, at 8.7 square feet per capita. Assuming 20% market share for the organized sector in non-food retail, the organized sector is estimated to have 736 million square feet of non-food retail space.

Let us look at how many jobs will be impacted. “My initial estimates are that it will create over 4 million jobs in the country and in logistics about 5-6 million jobs in three years,” Commerce and Industry Minister Anand Sharma told reporters.

At one direct job for every 180 square feet of retail space (across formats), an estimated 4.354 million people will be employed across the 783.63 million square feet of space occupied by organized retail.  With 1.5 indirect jobs (in supply chain and logisitcs) per direct job, it adds up to a total of 10.89 million jobs.  Therefore, Anand Sharma is bang on.

A vast majority of the employees will be those who have studied only up to primary school.  What other job opportunities (of this magnitude) are there for such people, who either cannot afford to finish high school, or just don’t have the IQ required?  They will have benefits such as PF and ESI, thus bringing them lot of stability and security.  More importantly, the organized sector is not just giving these people employment, but is augmenting their skills through training and personality development, thereby making them more marketable.  So what does the kirana do to increase India’s Human Development Index?  In other words, more FDI = better HDI.

“Today, about 90% of children do not pursue education beyond schooling. With a large number of new stores opening, modern trade will become a preferred choice of employment to them,” says Sanjiv Goenka, Chairman of RP-Sanjiv Goenka Group, which runs 220 retail stores including 30 Spencers hypermarkets.

Why would any political party would want to favour 19,850 small businessmen over 10.89 million youth who don’t have many other other job opportunities? The left parties and left-leaning regional parties should be at the forefront of supporting FDI, if they really stand for the upliftment of the economically weaker sections of society.

Let us look at the fine print in the announcement made by the Government of India. In allowing 51% FDI in multi-brand retail, the following restrictions apply:

  1. Minimum investment of $100 million.
  2. 50% of the investment (or minimum $50 million) has to be in back-end logistics, not including investment in property.
  3. At least 30% sourcing from SMEs or small-scale industry.
  4. Stores can only be in cities with a population of more than one million people. (Please see chart with list of these 39 cities)
  5. Government will have first right of procurement of farm produce.



Indian Cities with >1 million   population


City State

Population (2011)


Greater Mumbai Maharashtra



NCR Delhi



Greater Kolkata West Bengal



Bangalore Karnataka



Hyderabad Andhra Pradesh



Chennai Tamil Nadu



Ahmedabad Gujarat



Pune Maharashtra



Surat Gujarat



Jaipur Rajasthan



Lucknow Uttar Pradesh



Kanpur Uttar Pradesh



Patna Bihar



Indore Madhya Pradesh



Raipur-Bhilai-Durg Chhattisgarh



Bhopal Madhya Pradesh



Visakhapatnam Andhra Pradesh



Nagpur Maharashtra



Vadodara Gujarat



Ludhiana Punjab



Agra Uttar Pradesh



Nashik Maharashtra



Meerut Uttar Pradesh



Rajkot Gujarat



Varanasi Uttar Pradesh



Srinagar Jammu and Kashmir



Aurangabad Maharashtra



Dhanbad Jharkhand



Amritsar Punjab



Chandigarh Chandigarh



Allahabad Uttar Pradesh



Ranchi Jharkhand



Coimbatore Tamil Nadu



Jabalpur Madhya Pradesh



Gwalior Madhya Pradesh



Vijayawada Andhra Pradesh



Jodhpur Rajasthan



Madurai Tamil Nadu



Kota Rajasthan


“Although the announcement has taken away the uncertainty, the number of clauses make it quite difficult and very serious concerns remain about state-level decisions,” said Mark Ashman, MD of Hypercity Retail.

“This will definitely help the SSI sector, as they will have a wider choice of buyers,” says Kabir Lumba, MD of the Rs.28 billion Lifestyle (part of Dubai-based Landmark Group), “import duties are very high, so manufacturing will get a boost.”

Darshan Mehta of Reliance Brands had a different point of view. “To source locally, you need to buy minimum 1000 metres shirting of the same colour and design. This will produce 833 shirts, which will require at least 30 stores to sell them from – how long will it take for new entrants to get to 30 stores – so imports (even though costly) will continue for a few more years.”

So what does all this actually mean?  $50 million in front-end by the foreign 51% partner translates to Rs.5.1 billion in total investments by the entity, including the Indian partner’s 49% investment. It will be a similar amount for the back-end.

Of the Rs.7000 per square foot investment required in front-end infrastructure, about Rs.4500 per square foot will be done by the landlord and Rs.2500 per square foot by the retailer. Thus, a retailer has to create 2.04 million square feet of front-end retail space to meet the Rs.5.1 billion minimum investment requirement.

This completely rules out a specialty retailer like the $1.46 billion Sephora (the LVMH-owned world’s largest beauty retailer) from coming in, as they will need to open 680 stores of average 3000 square feet. With only 750 stores worldwide (17 countries) and 400 stores in USA (including 150 shop-in-shop counters at JC Penney), Sephora is certainly not going to open 680 stores in India anytime soon. Bijou Kurien of Reliance Retail should be happy, as Sephora will still need a capable Indian partner (read licensee) and Reliance is reportedly a front-runner.

However, the UK-based Boots ($31.3 billion health & beauty retailer with a presence in 25 countries) may come in. With an average store size of 10,000 square feet, Boots only needs to open 204 stores. With 3,280 Boots stores worldwide, opening 204 in India is certainly not a tall order.  Similarly, the $72 billion American health & beauty giant Walgreens (7,779 stores) can come in.  So can the Hong Kong based $18 billion AS Watson, which has 9,400 stores globally, and will need to open 510 stores of average 4000 square feet each, which is quite feasible in the 39 cities.

The Indian health & beauty retail market is currently at $36.5 billion and is growing at 17% per annum. Organized sector penetration is only 3.2%, compared to >23% in jewellery & watches and >15% in CDIT (consumer durables, information technology and telecom) – this should be exciting enough for any global health & beauty giant.

Let us look at another popular and fast growing multi-brand category – CDIT. With an average store size of 15,000 square feet, a new foreign entrant only needs to open 136 stores (Croma has 73 stores and Reliance Digital 51 stores).  The $32.7 billion Indian CDIT market can easily absorb 850 CDIT megastores doing annual business of $7.7 million each, which will give these types of retail formats a 20% market share.

However, there is another problem here. How will they source 30% from the SME/SSI sector? Surely, Indian consumers will prefer buying LG, Samsung and Sony products, compared to those made by Kumar & Sons or Venkatchalam Industries. Perhaps they will be able to work out the maths by sourcing accessories, components and the like from the SME/SSI sector, but this will need further and deeper study. This may lead to some global players coming in.

“All SME and SSI vendors of the automobile industry became billion dollar market cap companies, so we will see the same benefits coming to retail industry vendors now,” said B.S. Nagesh, Vice Chairman of Shoppers Stop, who now runs a trust called TRRAIN, which is committed to upgrading the lives of people in retail both at work and home,  “Ikea is already sourcing from several Indian vendors for exports, now they will start sourcing for selling in India.”

Most retail experts agree that global bookstore or leisure store chains will probably not be able to take advantage of this policy change, as they will not be able to invest 50% in the back-end.

That brings us to the largest non-food multi-brand retail category – department stores. At an average size of 120,000 square feet, a foreign retailer only needs to open 17 department stores. Shoppers Stop has 46 stores and Lifestyle 34 stores.  Nagesh says that department stores cannot invest the minimum amount for the back-end, as they do not require huge back-end investments. He felt the policy was more oriented towards food retailers. Lifestyle’s Lumba agreed.

This can be looked at from another perspective. To open 25 department stores of 120,000 square feet each, a chain will need 10,000 retail staff and at least 1200 other staff.  At just Rs.150,000 per employee to be spent on recruitment and training, they could invest Rs.1.68 billion on training alone. With 30% sales from private labels and minimum one month’s inventory, they will need Rs.1.08 billion in inventory. That takes care of Rs.2.76 billion of the Rs.5.1 billion minimum back-end investment, leaving Rs.2.34 billion to be invested. This could be easily deployed in investing in other brands’ inventory and negotiating far higher margins than what they are getting from brands under their current business models of “sale or return” or “consignment sales”.

For the $15.5 billion Isetan or $10 billion Takashimaya (both from Japan), the $12.83 billion El Corte Ingles from Spain, $7.74 billion Galeries Lafayette from France or $5.94 billion Lotte from South Korea, $100 million is not difficult to invest. Even Central and Robinson from Thailand are strong contenders. Growth opportunities are restricted in their home markets and the Indian market growth offers a compelling story. All these chains are already present in multiple countries.





Countries present

Total sales FY 2010





$72.2 billion


South Korea



$54.2 billion





$33.4 billion





$31.2 billion





$31.3 billion

AS Watson

Hong Kong



$24.0 billion





$18.2 billion

Gap Inc




$14.7 billion

El Corte   Ingles




$12.0 billion





$10.6 billion





$10.5 billion

Galeries   Lafayette




$3.4 billion





$2.2 billion

Now let us look at where FDI in multi-brand retail will really come in from – the food retailers – actually the hypermarket/supermarket operators.  The Indian market size is $154.4 billion, with less than 3% organized sector penetration.

If 80% of the 47.63 million square feet of total organized sector food retail space is comprised of hypermarkets, at an average size of 70,000 square feet, we are talking about 544 hypermarkets.  India currently has 240 hypermarkets. Of the new 304 hypermarkets, if foreign retailers have to capture 50% market share, they need to build 150 hypermarkets – so there is space for 6-8 players. Who are these going to be?

There is no doubt in anyone’s mind that Wal-Mart, Carrefour and Tesco will be amongst the players. In all probability, the others would be out of the following 11: Rewe from Germany, Auchan from France, Aeon from Japan, Le’clerc from France, Ahold from Netherlands, Groupe Casino from France, Intermarche from France, Shinsegae from South Korea, Shoprite from South Africa, Lotte from South Korea and Giant from HK/Malaysia. Details about these chains are given in the table.





Countries Present

Total Sales FY 2010

Rewe Zentral




$70.6 billion

Groupe Auchan




$56.6 billion

Aeon Co




$54.0 billion

E Leclerc




$41.0 billion





$39.3 billion

Groupe Casino




$38.7 billion





$38.1 billion





$11.2 billion


South Africa



$8.5 billion


South Korea



$7.3 billion





$4.9 billion

“Several Japanese, Korean and South American retailers have retail business models suitable for India. I see someone like Pao De Acucar of Brazil coming in.  Even American retailers like Home Depot and Best Buy may consider coming to India. Carrefour may either buy into an existing Indian retailer or move from B2B model to a B2C model,” said Bijou Kurien, President Lifestyle Business, Reliance Retail, a company which is expected to have a retail turnover of $2.7 billion in the current fiscal, and part of the $50 billion Reliance Industries Limited, India’s largest private sector company.

“There are 25 regional hypermarket chains in the US alone, bigger than most Indian hypermarket chains,” said Mark Ashman, MD of Hypercity retail, part of the Rs.23.8 billion Shoppers Stop group. “The Tata Trent – Tesco arrangment may become a joint venture now,” says Nagesh. Singh of Spar and several others echoed the same sentiment.

Now let us look at the impact of the government allowing 100% FDI in single brand retail.  Four things will happen in this space:

(1)    Retailers who are running 51% owned operations in India with the balance 49% being held by sleeping/silent Indian partners will most likely take 100% ownership. These include the likes of Louis Vuitton, Tod’s and Christian Dior. “There are many 83 year olds in places such as Coonoor and Dharamsala who have facilitated such JVs,” says Darshan Mehta of Reliance Retail, “many global retailers will still prefer to have Indian partners, as the market here is very complex.”

(2)    Some retailers who normally operate internationally only with 100% ownership, and have thus been operating in India through licensing/franchising, will come in with some own stores, while they may parallely continue with the existing licensed/franchised stores. The first name that comes to mind is Apple. Lumba of Lifestyle feels that brands like Mango – where the franchisee has only opened 12 stores of approximately 2000 square feet each – may come in directly. Mehta disagrees: “Mango is here as a franchisor, because they didn’t want to invest; they didn’t take 51% when it was allowed.”

(3)    Retailers such as Ikea, H&M, Uniqlo and Gap/Banana Republic, who have patiently waited for 100% FDI, will now come in. “Ikea will impact Home Centre’s business – we compete very well in seven countries in the middle east region; they will help expand the market, as more people will buy readymade furniture,” says Lumba.

(4)    There are likely to be some investments in the F&B space. Entrants in this space are likely to include Wendy’s, Starbucks, Dairy Queen, Hardees, Popeyes, Quiznos, Chipotle, Panda Express and dozens of others. Many of them would be coming in through the franchising route, so would have come in any case even without this policy change. The Indian F&B market is already at $40.4 billion and is growing at >15% per annum. Organized sector penetration is less than 4.5%.

The action on single brand retail is likely to happen much faster than in multi-brand retail. In single brand, we should start seeing announcements from as early as March or April 2012. In multi-brand, we will probably have to wait till at least July-August to see any major announcements.

“The impact will be seen from the third to the fifth year,” said Nagesh. Reliance’s Kurien says that “the early bird catches the worm, as this is a property grab business”, suggesting that those who take faster decisions will benefit.

“Retailers like Ikea, H&M, Prada and Dolce & Gabbana will come in,” says Timmy Sarna, Chairman of DLF Brands, “and many developers will now start building malls all over again.” Adds Lumba “brands like Uniqlo, which are extremely relevant for India, should come in; H&M is also likely; Gap will probably come through 74% or 100% ownership – this will all lead to a lot more choice, excitement and energy for Indian retailers and consumers.”

Apart from foreign retailers entering India, FDI is also likely to come from overseas PE/VC investors who may invest in established Indian retailers. This will happen in both, multi-brand as well as single brand space, including online retail. We have already seen PE/VC investments into retailers such as Nilgiris, Nirulas, Lilliput, Kimaya, Spykar and Fabindia.  Several more old & established Indian retailers are ripe for investment.

“FII was constrained by FDI in India,” says Kurien. Ashman agrees. “Indian groups got few years to establish themselves in retail and now they will be ready to offer their platform to foreign investors to come in and also get good valuations,” adds Nimesh Shah of Equirus Capital.

There is also likely to be M&A activity. “This will certainly be met with open arms by several domestic retailers. In particular, players such as Pantaloon Retail and Vishal Retail need to ease their current debt levels. Foreigners looking to capitalise on this new policy may help support them. Vishal Retail has around Rs 70 billion of debt as of June 2011, Pantaloon Retail is also carrying a debt burden of Rs 40 billion,” says Parita Chitakasem of Euromonitor International.

At estimated sales of Rs.2000 per square foot per month in 2015, the 783.63 million square feet of organized retail space will generate annual revenues of Rs. 18.807 trillion and taxable profits of Rs.564 billion (assumed at only 3% of revenues). This translates to Rs. 2.594 trillion in GST collections (@ 16% GST) and Rs.174.28 billion in corporate income tax. The government is losing minimum 50% of this potential tax revenue because half of the business of the unorganized retail trade is probably escaping the tax net.

The organized retail sector will have at least 780,000 managers earning an average taxable salary of Rupees one million per annum. This will generate at least Rs.195 billion of additional personal income tax collections.

The total Rs.1576 billion in additional tax collections (Rs.1294 billion in GST [50% of total] + Rs.87 billion in corporate income tax [50% of total] + Rs.195 billion in personal income tax) translates to an increase of more than 11% in the tax collection of the centre and states, wiping out the revenue deficit and making India a revenue surplus economy.

Of the 783.63 million square feet of organized retail space, about 103.9 million square feet already exists – so we are talking about 680 million square feet to be added anew. This will need infrastructure investments of Rs.4.76 trillion (at an average Rs.7000 per square foot at 2012-2015 costs, for building construction, interiors and shop fit-ins) and Rs.1.904 trillion in inventories (@ Rs.2800 per square foot), or a total investment of Rs.6.664 trillion ($128 billion).

If 50% of this is foreign investment (by foreign retailers as well as financial investors), we are talking about FDI of $64 billion in four years, or $16 billion p.a., 80% increase over the actual inflows of fiscal 2010-11.

“We will get around $8 billion to $10 billion of fresh investments coming into the country over the next 5 to 10 years,” said Kishore Biyani to many TV channels and to this magazine.  “I expect at least $15-20 billion of investment over the next 10 years. Initially it will be smaller, but will pick up once international players get a hang of the market,” said Harminder Sahni of Wazir Advisors. According to the BBC, foreign retailers have said that investments will be closer to $40 billion. Certainly, these foreign retailers have done their homework.

“India has been a very exciting market and all this just adds to the excitement,” says Martin Jones, CEO of Marks & Spencer India, “we will not do anything different – we are happy with Reliance as a partner, as both parties bring different skills to the table.”

To sum up, if Dr. Manmohan Singh can make the state Chief Ministers and opposing party leaders (including some UPA allies) understand the tremendous impact that this bold move will have on the Indian economy, he will take Vijay Mallya’s recently vacated position of “the king of good times”.

Almost 11 million youth will have new (or better) jobs.  That’s almost 7.5% of the youth population of urban India. FDI will go up almost 80%, hopefully leading to the rupee bouncing back against major world currencies. The budget deficit will be wiped out, thus putting us ahead of China in this decade. Most importantly, about $180 billion will get converted from black market economy to accountable economy, and we may need a much smaller Lokpal authority.

RBI Governor Dr. D. Subbarao said on 25th November: “For India to regain its growth momentum and indeed accelerate it further, the country has to address key challenges – raise agricultural production and productivity; expand employment; bridge infrastructure deficit; promote financial inclusion; and provide a stable and predictable macro-economic enironment.” FDI in retail takes care of most of this. Can this UPA government do it?



Asipac undertakes strategic research on the retail as well as the retail real estate sectors. In retail real estate, Asipac has provided development strategy, planning and lease management on reail/shopping centre projects of more than 17 million square feet, including seven of the 15 largest shopping centres in India. The company has leased more than 8.5 million square feet of retail real estate in South India alone in just six years. Asipac has current leasing mandates for nine malls in five cities, with combined GLA of 8.2 million square feet.


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