The Indian economy may not return to an eight percent trajectory anytime soon, but even if it treads at five to six percent GDP growth rate, with retail revenue growing at 20 percent, it should fare well to attract FDI chasing growth.
Barrels of ink have been wasted on the shortcomings and challenging implementation aspects of FDI regulations in multi-brand retail. Decibels were also raised about the need of FDI in retail or the lack of it. Policy experts across the spectrum (starting from left, left of the centre and right) bombarded confused investors, exploited consumers and hapless farmers about the positive and negative aspects of FDI in retail. All this while, the implicit assumption by all parties concerned was that global retailers, in dozens, are waiting to enter the Indian market.
Of course, one has seen the meaningful presence and activity of at least three global retailers in India. And, despite the recent five percent GDP growth rate, India continues to figure among the high-growth nations globally. But the question remains: Is the promise of revenue growth enough to attract a large number of retail par. Let’s see how attractive the Indian proposition remains.
Lure of Revenue Growth
As per Deloitte’s report titled ‘Global Powers of Retailing 2013, the revenue growth of large global retailers are in the range of 4 to 5 per cent. In comparison, most pan India large retailers tend to exhibit revenue growth of around 20 per cent, even during this current downturn. Of course, domestically, same-store sales growth (SSSG) has dipped, and is in the range of 5 to 8 per cent. The high revenue growth is often driven by addition of new stores and infusion of capital (often debt) causing revenue growth. Most of the global retailers, often belonging to matured markets, may not have the luxury of chasing revenue growth by investing capital.
However, in terms of revenue attractiveness, Indian retail growth rate has close competition from growth rate in the Middle East and African regions. Latin America, too, with retail revenue growth rate of mid to high teens also poses credible competition.
The Indian economy may not return to an eight percent trajectory anytime soon, but even if it treads at five to six percent GDP growth rate, with retail revenue growing at high teens to 20 percent, it should fare well to attract FDI chasing growth. However, one can only hope that the current anaemic Private Final Consumption Expenditure (PFCE) of well below 3 per cent grows at a more respectable 5 to 6 percent range so as not to belie growth promises.
Size of investible market: The revenue of top 10 global retailers is estimated at US$ 1.1 to 1.2 trillion, of which the non-home country revenue is estimated at US$ 350 to 380 billion. The Indian retail market size is estimated by various agencies at US$ 430 billion to US$ 500 billion. However, the organised portion is usually assumed to be at 5 per cent of the overall market. While the penetration of organised players is expected to increase along with overall market size, by 2020 organised retail is expected (by various agencies) to be well over US$ 200 billion.
However, if FDI comes in the short to medium term, it is likely to come to listed players or large unlisted players. If one looks at organised retailers and focuses on listed and large unlisted players, the revenue is to the tune of Rs 35 billion to Rs 45 billion. At Rs 60 per US$, the investible market for FDI has revenues in the range of US$ 6.0 to US$ 7.0 billion. It may be argued that this group of well-established retailers may grow faster that the overall market and touch the US$ 70 billion mark. Compared to the current non-domestic revenue of top ten global players, the current investible retail assets may not add significantly to their revenue. Of course, potential long-term growth may enhance the attractiveness.
Limited impact on global balance sheets: Some of the top ten global retailers may perceive such investments as having relatively low risk. As such, a potential failure or below par performance is unlikely to impact their consolidated balance sheet, while an investment in an Indian retail asset, which is expected to be very small in comparison to their overall asset, may provide strategic diversification and access to a market with higher growth potential than a matured market. While business performance risk may be well tolerated by such global investors, they may be less amenable to expose themselves to perceived regulatory or reputation risks..
More than Once Bitten, Somewhat Shy
As such, a significant portion of global retailers has met with limited success from operations outside their home country. Among the large global retailers, it appears that players diversified across multiple countries often exhibit lower returns than players with limited or no diversification. The reasons for such below par performance are usually one or more of these reasons: over-paying for retail assets; over-paying for commercial real estate; and inability to crack the country-specific customer code, particularly customers in emerging markets. Global retailers face added prospects of regulatory risk in home countries due to rules such as Foreign Corrupt Practices Act. Investment in emerging markets, which are differently regulated in comparison to the home countries of these global companies, often becomes a challenging business decision for them. As such, these pose risks, which even high returns may not always mitigate.
Necessary Not Sufficient
Clearly, growth is a necessary criterion to attract FDI in any sector. However, to the extent India will compete with other countries for attention of more or less the same set of investors, growth, or for that matter return, may provide limited benefit to differentiate India. The country should focus on reducing the actual or perceived risks to investment therein. Thus, allowing FDI in multiband retail is possibly the first among the many steps necessary to attract FDI. But, a plethora of follow-up legislations may be required to attract a very significant chunk of investment.
In fact, passage of GST-related law, expected to improve logistics efficiency, may actually be some of the less challenging laws to pass. Implementation of initiatives to improve backend infrastructure in retail may potentially throw up issues, which may make the land acquisition issues of road or power developers appear like a cakewalk. If large-scale procurement from farmers is done with significant marginalisation of the middleman then substantial backlash from vested interests may be expected. To what extent the various state and local laws enable such developments needs to be watched. Of course, there will be states that will be more willing to make such enabling rules while others will not. But then, the scale and promised pan India growth will not be available to the investor.