Must-know: Will India's new government affect your portfolio? (Part 4 of 6)
India as a retail market
With over 1.2 billion people and a growing middle class, India has caught the attention of retailers around the globe, including Wal-Mart Stores Inc. (WMT), Carrefour of France, and Tesco of Britain.
With a growing middle class and increasing urbanization, India is the second hottest market for retailers around the world, after China, especially as revenue growth for these retailers in developed countries has slowed. So retailers around the globe are looking to become part of India’s growth story by investing in the country directly. In December 2011, the government of India fully opened foreign direct investment (or FDI) in single-brand retail. FDI is investment in business or production in a country by residents or companies of another country.
The government has so far cleared proposals for single-brand retailers such as Fossil Inc. (FOSL) and IKEA. A lot of retailers, such as JC Penney (JCP) and Macy’s, have resorted to e-commerce to ship products to India. Starbucks (SBUX) entered India through a joint venture with Tata Coffee Limited in 2012 after the government cleared FDI in single-brand retail.
Foreign retailers have been allowed to operate cash-and-carry stores since 1997. The cash-and-carry model is a form of the wholesale model that differs from the traditional wholesale model in that customers settle invoices in cash and arrange for their own transportation.
Amazon (AMZN) operates its Indian e-commerce portal through a marketplace model, while other sellers sell their products on its website.
However, FDI in multi-brand retail has been a hotly debated topic in Indian Parliament since the current government, led by the Congress Party, announced FDI in multi-brand retail in September 2012. Supermarkets, hypermarkets, and convenience stores where products of multiple brands are sold under one roof form the multi-brand retail segment. Walmart (WMT) and Target are examples of multi-brand retailers.
BJP is opposing FDI in multi-brand retail, as it feels that the entry of foreign retailers in India will harm small businesses and result in a loss of employment. BJP also believes the move will act against consumer interest, as the currently fragmented retail industry in India will consolidate, resulting in loss of options for consumers.
So a government change would mean that retailers such as Walmart (WMT) would have to stay away from the world’s second biggest retail market by population for at least some time to come. To illustrate the consequences of this decision, we’d like to cite the example of Mexico. Mexico, with a population of 118 million, generates $31 billion in revenues for Walmart (around 6.7% of the company’s global sales) through its roughly 2,200 stores. While India’s per-capita GDP, at around $1,500 per annum, is much less than Mexico’s $10,600 per annum, the population is over ten times that of Mexico. Moreover, India’s growth rate is higher than Mexico’s, offering huge opportunity for retailers. Without the approval for FDI in retail, this would be a lost opportunity for Walmart and its likes.
To find out about the impact of changes in India’s government policies on other sectors, read on to the next part of this series.
Browse this series on Market Realist:
- Part 1 - Must-know: Why India’s elections matter to US investors
- Part 2 - India’s elections: Analyzing the biggest event in the world
- Part 3 - Why investors should have a sense of India’s new ruling party