Food and clothing to gain in India

15 January 2013

NEW DELHI: Mass grocery and apparel are the two categories that will benefit most from the Indian government's recent decision to allow foreign direct investment in multi-brand retailers such as supermarkets, a new study suggests.

The report from consultancy Deloitte Touche Tohmatsu India - Indian Retail Market: Opening More Doors – assesses the likely impact of last year's announcement that foreign retailers would be permitted to invest up to 51% in existing multi-brand retail businesses or to set up a joint venture.

Organised retail, by businesses registered for taxes, accounts for just 8% of India's retail sector, but is expected to grow to around 20% by 2020. And within the organised retail sector, 'apparel' is the largest segment, accounting for 33% of sales, followed by 'food and grocery', on 20%.

Both segments have large domestic retailers who could be potential partners for foreign retailers. But investment could be hampered by various conditions such as minimum investment levels, sourcing requirements and restricted geographical access.

The current policy stipulates a minimum investment of US$100m, with around half of that devoted to back-end infrastructure, the definition of which does not include land costs and rental for warehousing.

The report considers this condition might be a concern for some sectors, such as apparel, which has limited back-end requirements. It would be less important for the mass grocery segment, which typically needs significant investment in items such as food processing units and cold chains.

A further requirement that 30% of sourcing should come from "small" industries, indicates a level of private label or unbranded items that would not be a problem for grocery or apparel, where many such suppliers already exist, but could be an issue for other sectors such as beauty and wellness or consumer electronics.

Investment is only permitted in the 53 cities with a population of more than one million, but as more than 80% of existing multi-brand stores are already in cities of this size, the report judges that this condition will not significantly affect operations in the majority of retail segments.

Data sourced from Deloitte; additional content by Warc staff