One Foot Forward
May 1, 2006 12:00 PM, Dominic Perella
Retailers around the globe have been licking their collective chops of late as the Indian government takes steps toward allowing foreign direct investment (FDI) in India's growing retail sector. But the big prize — the opening of the 1 billion-resident Indian market to the big-box retailers that could anchor a shopping mall — is still on the horizon.
Still, the Indian government has begun to pare away some of the barriers. It took the most significant step Jan. 24, allowing single-brand foreign retailers to own a 51 percent share in a business with government approval. Companies that sell their products through single-brand outlets, like Nike or Hugo Boss, can set up their own stores in India as long as they are willing to find an Indian partner‥
Meanwhile, some chains, like Germany's Metro, have taken a first step into the market by setting up wholesaling operations, allowed under current law. And Wal-Mart has applied to set up an entity in Bangalore, India, to perform market research and business development. It also has sent delegations to India to lobby.
Analysts say Wal-Mart's preparations are prescient because, like it or not, change is coming to India. According to a recent report by PricewaterhouseCoopers, the “organized sector” of India's retail trade — the multi-outlet, professionally managed segment — will grow from 3 percent to about 10 percent by 2010. Pricewaterhouse consultant Asitava Sen says a substantial portion of that growth will come from domestically owned chains, and thus competitive pressures for some small Indian retailers are inevitable, FDI or no FDI.
The report also notes that once-cramped retail space is “no longer a constraint for growth,” predicting 35 to 40 million square feet of new space by the end of 2006.
“The sentiment is that it's a matter of 18 to 24 months from now” that the market ill open to multi-brand retail, says Sen. “The view here is that the government is very very keen to open up the retail sector in the country to foreign direct investment,” he says.
Pricewaterhouse analysts say the country shouldn't fear the change. The report predicts that even when foreign retailers do arrive in India en masse, they'll largely be confined to the urban areas, and only about 1 percent of India's 12 million retailers will potentially be displaced. That loss would be more than offset by the 8 million jobs that could be created by expanded modern retail operations, according to the report.
The share of the organized sector in retail trade in just 3% today.
It is expected to reach 10% in 2010, indicating a huge market for prospective new players
The retail sector in India contributes 10 percent of annual GDP
Over the last decade, Indian GDP has registered an average growth of 6%
The retail market in India is $210 billion and is growing at an annual rate of 5%
The middle-class population has grown to 300 million people
Currently, about 40 million square feet of retail space exists.
Mom-and-pop shops control 97 percent of the market
India is home to the youngest population in the world, where 50 percent of the citizens are under 25 years old
Source: PricewaterhouseCoopers
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