FDI in Indian retail - economics and strategy management

Abstract

1. Introduction Retail sector is one of largest industries in the world; it is the second largest industry in the US and generates about $3.8 trillion in retail sales annually ($4.2 trillion if food service sales are included)1. It is the world’s biggest private industry with 9 retail companies having made it to the Fortune 100 list. Indian retail sector is not far behind. According to an A T Kearney Report, the current size of the retail sector in India is about USD 320 billion and it contributes nearly 10% of India’s GDP2. Considering that it has the largest employment after agriculture, employing about 8% of the workforce, with an expected CAGR of 7% over 2006-10E (figure below), the importance of this sector cannot but be overlooked. But what does retail trade exactly mean? Retailing is the interface between the producer and the individual consumer buying for personal consumption. A retailer buys goods or products in large quantities from manufacturers or importers, either directly or through a wholesaler, and then sells individual items or small quantities to the general public or end-user customers at a margin of profit. Thus retailers are atthe end of the supply chain and retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. The Indian retail scenario is highly fragmented with 12 million outlets but at present only about 3% of retail stores falling in the organized category. Food and grocery market is large but highly fragmented and is mainly dominated by mom-and-pop (Kirana) stores. The share of the various sections of the organized retail pie is shown in the figure below3.Segment wise Share Clothing Rextils and Fashion Accessories Home Décor Books Music and Gifts Beauty Products Durables Food and Grocery Jewellery and WatchesFor the past years there has been a lot of buzz about the retail industry with new players coming in. But the most important and controversial of the trends in this sector has been the policy of allowing foreign direct investments. There is an ongoing debate about the implications of this decision, especially on the small players. This report would try to address this debate by looking into examples from other parts of the world where a similar step was taken. Since foreign players like Wal-Mart are already entering the country through joint ventures, the aim would be to suggest some measures that can be taken to survive and benefit from the change happening in the sector.