Various policy conditions for foreign direct investment (FDI) in multi-brand retail makes mass grocery and apparel the two most favourable segments to invest in, says a report by consultancy firm Deloitte.
“Mass grocery and apparel are two of the fastest growing organised retail segments in the country today. In both these segments, there are large domestic retailers who can be potential joint venture partners for foreign retailers,” Senior Director of Deloitte Touche Tohmatsu Gaurav Gupta said in the report.
“Foreign retailers can enter the country by forming a new joint venture company, which shall have multi-brand retail stores. Alternatively, the foreign investor may also consider acquiring 51 percent stakes in the existing business set-up of the potential local joint venture partner,” he said.
Another advantage in the segment is that existing domestic mass grocery retailers already source many products directly from producers and “small” food processing units.
To meet policy guidelines on sourcing and to have better margins, foreign retailers will have to cultivate relationships with local manufacturers.
Multi-brand retail in speciality stores such as consumer electronics, footwear, furniture and furnishing are expected to expand and mature in the next few years, he said.
However, the policy condition on sourcing will continue to be a major bottleneck for FDI in many of these segments, the report added.
It states that the primary concern for the mass grocery segment will be the condition to invest a minimum of Rs 220-250 crore in the first three years towards back-end infrastructure like food processing unit, cold chains, etc.
While other segments such as apparel, beauty & wellness and consumer electronics have limited requirements in the back-end.
As per the policy, land cost and rentals that may be incurred for warehousing are not included in the definition of back-end infrastructure. The policy, however, does not specify whether investment in back-end infrastructure needs to be a fresh investment or if foreign companies can buy stakes in already established back-end infrastructure.
The new FDI policy also presents a unique set of implications for domestic retailers. On the one hand, it exposes domestic retailers to competition from foreign retailers, while on the other, it seeks to safeguard them with a slew of protective measures.
FDI in multi-brand retail is a state subject and as per the policy, e-commerce is not allowed as an alternate channel, as it can serve the customer beyond the physical location of the store.
“Restriction on foreign retailers from conducting multi-brand retail in towns with population less than one million can be construed as an enabling policy by domestic retailers, who should now focus their efforts to expand their retail footprint,” Gupta says.