Foglamp Overseas Insight: Q1 2012
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In this issue
FOGLAMP INSIGHT: Single Brand Retailing – INDIA
FOGLAMP SERVICE: Weekly or Monthly Foglamp Market Updates
CONTRIBUTOR PROFILE: Our Teams on the Ground
SINGLE BRAND RETAILING – INDIA
The Government of India recently further opened the country’s retail sector to foreign investment: the allowable foreign direct investment (FDI) of single brand retailing in India has increased from 51% to 100%. With the removal of the 51% investment cap, single-brand foreign companies (think Apple, Nike, or Gucci) can now compete in the retail market without domestic partners.
Supporters of the policy argue that increased investment and competition from foreign companies will result in increased employment, improved quality, and reduced prices. They also claim that attracting foreign capital and technology will modernize the retail sector through improved supply chain management and distribution infrastructure. Domestic small and medium enterprises also stand to benefit, as the policy requires all foreign single brand retailers to source 30% of goods locally and invest in infrastructure.
Opponents argue that opening the retail sector to foreign competition will kill domestic businesses and local independent retailers. This is the domestic equivalent of small-town grocers and shopkeepers arguing to keep Walmart out of their town.
Given the change in the regulatory environment, we thought it would be interesting to hear what senior managers from leading retail companies in India think will be the effects of the new policy. Leveraging our team of local Foglamp contributors in India, we asked them to identify the retail companies (domestic and/or foreign) that stand to win and lose because of the recent policy change. Here is a brief synopsis of the chatter we heard:
1. Unsurprisingly, expert views on winners and losers in broad categories such as ‘local retailers’ vs. ‘single brand foreign retailers’ were mixed. Some argued that local retailers would benefit most, while others argued the opposite. Some forecasted no effect at all. What is most interesting is the attention paid to the policy requirement of local sourcing as the driver of their forecasts. Specifically, some experts cited the advantage enjoyed by local retailers of having established networks to source local goods. On the other hand, others argued that the increase in competition for local goods would harm local retailers.
2. There was a general consensus that foreign and domestic retailers across various subsectors would benefit from FDI in some way. Groceries/Food/ Beverages/Supermarkets and Health/Beauty subsectors were noted as potential top gainers. Among domestic food retail brands, predicted big winners included Spencer’s Daily and Nilgiri’s. Foreign food predicted winners were Starbucks (SBUX) and fast food chains including McDonald’s (MCD), KFC (YUM), and Domino’s Pizza (DPZ). In the Health/Beauty segment, predicted domestic winners included Lakme and Big Bazaar. The predicted foreign winner was Body Shop (OR: EN).
3. Home Furnishings, Apparel/Footwear and Jewelry/Accessories were all indicated as subsectors that would benefit from the change in investment policy. The predicted big domestic winner in Home Furnishing was Godrej, and the foreign winner IKEA. As for Apparel, many experts mentioned domestic firms Pantaloons and FabIndia. The top predicted foreign winner was LVMH (MC:FP). In the Jewelry sector, two domestic winners were consistently identified: Tanishq and Gitanjali.
4. Nearly all experts identified Food Processing, Logistics/Shipping/Transportation and Commercial Real Estate Development as related industries that would benefit from spillover effects of the new policy. Specifically, senior retail managers identified Snowman, a domestic food processing company, and Gati, a domestic shipping company, as potential big winners. A large number of interviewees forecasted high growth in commercial real estate development, particularly in companies that build malls such as the multinational corporation GVK Group.
5. Identifying potential losers was more difficult than picking winners. We heard little chatter in this area, presumably because most senior managers felt the change in policy would benefit domestic and foreign companies alike. One trend we did track was the mention of small domestic Indian firms, particularly in the unorganized sector, as potential losers. Although difficult to define, the Government of India describes this sector as having a low scale of organization, typically family-owned/household enterprises that are unregulated and unprotected.
6. When asked whether they thought the Government of India would allow a majority foreign stake in multi-brand retailers (for example, Tesco or Carrefour) in the next two years, the majority said yes because FDI is beneficial for most parties (though a sizeable number of managers interviewed were more skeptical). The most commonly cited reason for this was the upcoming election period and the sensitivity of FDI as a political lightening rod in India.
For better or worse, the change in policy regarding FDI in Single Brand Retail in India has many looking to the future. Leaders in the industry are predicting winners and losers and accordingly, working towards keeping their businesses competitive.
If you would like this type of information on a specific topic of your own interest, please get in touch with us at Foglamp!
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Contributor Profile: Our Teams on the Ground
Foglamp continues to see interest in Russia. Whether it be due diligence work on corporate executives or industry surveys and market information, clients want and need to better understand the issues and risks prevalent in Russia.
This Foglamp contributor holds a Ph. D. in Economics with experience in banking and finance, energy and consulting. This contributor has worked on numerous client projects for Foglamp and can utilize contacts to help research and verify information on a range of topics including state owned media, distribution and supply chain, as well as oil and oil and gas services.
Foglamp is a customizable in-country research service providing clients with access to a network of more than 1,300 on-the-ground information miners in more than 120 countries. Our research is provided in the form of short memos, surveys, interviews, and market research; by reaching out to a range of market participants, clients are able to glean insights from dozens of local managers rather than just one or two industry experts. Our network of field contributors can be used for due diligence work, market scanning, and other in-country research activities to help clients in geographies where resources are difficult to find. Please see our website at www.foglamp.org for more information and contact us (firstname.lastname@example.org ) to schedule a follow-up conversation.