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GOVT Working on FDI in Retail
Tuesday, May 26, 2009

Retailers, local and global, as well as private equity (PE) investors are closely tracking the new government’s moves on foreign direct investments (FDI) in retail. In a few weeks, plans are expected to get clearer to pave the way for the next round of fresh retail strategies. Currently, the cash-strapped sector is desperately seeking fresh funding and partnerships with foreign retailers. The sector is growing at around 15% this year, with value retailing bringing in most of the footfalls. The sector is through with its initial round of corrections after the initial euphoria a couple of years ago. Across the sector, companies have focussed on trimming fat where high cost structures and a competitive business landscape hurt bottomlines. Kishore Biyani, CEO of Future Group, is optimistic on this front and keen that the market opens up. “FDI has to happen. That is the next way to encourage big-ticket moves and push consumption in India,” he says.

Favourable demographics, upbeat consumer trends and changing lifestyles saw modern retailers growing at over 40% in the past few years. Initial concerns over foreign retailers having an edge over local retailers have worn off and partnerships seem to be the way ahead. In 2006, the government gave its nod to 51% FDI in single-brand retail and may now okay 100% FDI in single-brand and partial FDI in multi-brand retail, according to government officials familiar with the development. “We are, at the moment, neutral about it. We have a good arrangement with Woolworth. Maybe, the new government will encourage some developments on this front,” said Ajit Joshi CEO of Tata’s Infiniti Retail which owns durable retail chain, Croma.

Industry officials said retailers burnt their fingers in the neighbourhood format space due to high dump rates — wastages in the supply chain — competition from low-cost kiranas and unviable operational costs in a low-margin food and grocery business. Most have trimmed the number of formats and are trying to focus on destination malls or big-box formats where margins are significantly higher. “India is a huge market. Organised and unorganised retail can co-exist and benefit by working out the right partnerships,” said the CEO of a leading national discount format. Currently, traditional retail constitute over 95% of total sales in the country. Organised retail comprises 5% of the total retail business and is expected to touch 10.4% by 2012, as per KPMG estimates. There are no longer any protests from kiranas about modern formats hurting their businesses. In fact, mom-and-pop store formats are not just doing well, but are bullish about their expansion plans. International retail giants Wal-Mart and Tesco have already formed back-end JVs with domestic retailers while France’s Carrefour is in talks with potential partners in India. For the moment though, there is a clear shift to value retailing. Discount formats and hypermarkets like D’Mart and Big Bazaar are reporting brisker sales than lifestyle retailing. Retailers are focusing on the mass end of the market to whip up volumes.


 

 

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