2. Wal-Mart In India What’s the Impact of Giant Retailers?

3. Back Ground – Key Points India is the Second Largest Retail Market India is the Second Largest Retail Market India is Slowly Opening its Retail Sector for FDI India is Slowly Opening its Retail Sector for FDI Huge Opportunities exist for Global Retailing Giants in India Huge Opportunities exist for Global Retailing Giants in India Population > 1.1 Billion!! Population > 1.1 Billion!! GDP >~ $800 Billion in 2003 GDP >~ $800 Billion in 2003 GDP > $1.5 Trillion by 2012!! (Estimate) GDP > $1.5 Trillion by 2012!! (Estimate) Economy Growth Rate 8.2% Economy Growth Rate 8.2%

4. Back Ground – Retail Sector Highly Fragmented Retail sector!! Highly Fragmented Retail sector!! India has 30 Million Retailers! India has 30 Million Retailers! Retail sector is the Second Largest Employer Retail sector is the Second Largest Employer Organized Retail trade is $247 Billion Organized Retail trade is $247 Billion Unorganized Retail trade is estimated at $600+ billion Unorganized Retail trade is estimated at $600+ billion

5. Retail Sector Analysis Most Retailers are Mom-Pop operation Most Retailers are Mom-Pop operation Large Retail Chains are few and mainly Concentrated in 6 Cities – Delhi, Mumbai, Bangalore, Kolkotta, Chennai & Hyderabad. Large Retail Chains are few and mainly Concentrated in 6 Cities – Delhi, Mumbai, Bangalore, Kolkotta, Chennai & Hyderabad. In addition to small retailers, there are Street Vendors, Push cart vendors In addition to small retailers, there are Street Vendors, Push cart vendors Retail sector employs about 40 Million people Retail sector employs about 40 Million people

6. Government Rules & Regulation Foreign Investment Promotion Board in 1997 set up rules that govern Foreign Investments in Retail Sector which categorized foreign companies into 3 broad types:  Companies that set up domestic manufacturing facilities and sold products manufactured domestically.  Companies that came in to trade prior to the 1997 norms.  Companies that came in to trade after the 1997 norms were adopted.

7. Policy Favors Domestic Manufacturing No restrictions on the sale of products made in India. No restrictions on the sale of products made in India. Sony, LG, Samsung & Phillips etc, manufacture and sell products in India. Sony, LG, Samsung & Phillips etc, manufacture and sell products in India. They also import and sell other high-tech products like laser printers and photocopiers etc They also import and sell other high-tech products like laser printers and photocopiers etc Provided that current manufacturing techniques and costs do not yet permit them to manufacture these items domestically.Provided that current manufacturing techniques and costs do not yet permit them to manufacture these items domestically. And they undertake to do so in the near future.And they undertake to do so in the near future.

8. Rules for Global Retailers Global Retailers planning to setup shop in India need to: Global Retailers planning to setup shop in India need to: Setup Wholly Owned Subsidiaries in IndiaSetup Wholly Owned Subsidiaries in India Sell only to Whole SellersSell only to Whole Sellers Cannot sell to Retail CustomersCannot sell to Retail Customers Whole Sellers are defined as “Government certified Whole Seller who holds a Sales Tax registration Number” Whole Sellers are defined as “Government certified Whole Seller who holds a Sales Tax registration Number”

9. Regional Government Rules In Addition to the Federal Rules, there are Local rules which govern the location & size of Retail Stores. In Addition to the Federal Rules, there are Local rules which govern the location & size of Retail Stores. Retail Stores cannot be in City CentersRetail Stores cannot be in City Centers Land Availability conditions imply that New Mega retail stores to be setup at the outskirts of the city.Land Availability conditions imply that New Mega retail stores to be setup at the outskirts of the city. Must get permission from Local municipality or City CorporationsMust get permission from Local municipality or City Corporations

10. Current Scenario German Retail Giant Metro GmbH set up operations in 2003 German Retail Giant Metro GmbH set up operations in 2003 Metro GmbH entry was cleared by Late Cabinet Minister for Industry and Commerce Murasoli Maran. Metro GmbH entry was cleared by Late Cabinet Minister for Industry and Commerce Murasoli Maran. Metro GmbH was permitted to Metro GmbH was permitted to Setting up of state-of-the-art cash and carry wholesale complexesSetting up of state-of-the-art cash and carry wholesale complexes Sell only to Whole SellersSell only to Whole Sellers Not permitted to have retail outlets or sell products to consumers directly.Not permitted to have retail outlets or sell products to consumers directly.

11. Metro’s Experience Metro GmbH was a huge success in the very first year of operation. Metro GmbH was a huge success in the very first year of operation. Metro instituted a Costco style Membership program Metro instituted a Costco style Membership program Has over 250,000 members in 9 months!! Has over 250,000 members in 9 months!! Local Retailers are upset – Setting a stage for Political Backlash Local Retailers are upset – Setting a stage for Political Backlash

12. Controversy Local Retailers allege Metro GmbH has violated its terms of entry by: Local Retailers allege Metro GmbH has violated its terms of entry by: Issuing membership cards to other businessmen and professionals like Doctors, Architects, Consultants etc.Issuing membership cards to other businessmen and professionals like Doctors, Architects, Consultants etc. Issued membership cards to those without a registered sales tax certificate.Issued membership cards to those without a registered sales tax certificate. Sold Items in single numbers, like in retail trade and not in large volumes like in a whole sale tradeSold Items in single numbers, like in retail trade and not in large volumes like in a whole sale trade Metro did not specify a minimum value for purchaseMetro did not specify a minimum value for purchase

13. Political Battle India had been a closed Socialist Society for last 50 years India had been a closed Socialist Society for last 50 years India has a Strong & Vibrant Democracy India has a Strong & Vibrant Democracy Year 2004 is an Election year!! Year 2004 is an Election year!! India has about 40 million people employed in retail sector, Most of them are registered voters! India has about 40 million people employed in retail sector, Most of them are registered voters!

14. Political Battle – Contd. Foreign Retailers is now an Election Issue! Foreign Retailers is now an Election Issue! Federation of Associations of Maharashtra state (FAM), a state-level organization of small traders, Communist Party of India (Marxist) and Swadeshi Jagaran Manch (SJM) – wing of the ruling party are opposed to Foreign Retailers Federation of Associations of Maharashtra state (FAM), a state-level organization of small traders, Communist Party of India (Marxist) and Swadeshi Jagaran Manch (SJM) – wing of the ruling party are opposed to Foreign Retailers Confederation of Indian Industry (CII) supports FAM on this issue Confederation of Indian Industry (CII) supports FAM on this issue

15. Battle Lines FAM, SJM, CPI(M) & others have a strong political lobby – A key factor in an election year FAM, SJM, CPI(M) & others have a strong political lobby – A key factor in an election year Metro GmbH has hired former Minister for Commerce Mr. P Chidambaram as its chief consol Metro GmbH has hired former Minister for Commerce Mr. P Chidambaram as its chief consol Final outcome will be decided in Courts Final outcome will be decided in Courts Election Results will not affect Metro Election Results will not affect Metro

16. Learning for Wal-Mart & Others Metro’s court case will decide on the nature of Foreign Retail business Metro’s court case will decide on the nature of Foreign Retail business Companies cannot afford to ignore regional governments & Political groups Companies cannot afford to ignore regional governments & Political groups Socialists might force a unionized labor Socialists might force a unionized labor India has very liberal union lawsIndia has very liberal union laws Federal Rules for Foreign Retailer might change – Depending on Court’s decision Federal Rules for Foreign Retailer might change – Depending on Court’s decision

17. Long Term Outlook India is an attractive Market India is an attractive Market Retail giants cannot afford to IgnoreRetail giants cannot afford to Ignore Rules & Regulations will change with time to level the playing fieldRules & Regulations will change with time to level the playing field Wal-Mart’s “No Union” policy may be challengedWal-Mart’s “No Union” policy may be challenged Indian Retailers will be tough competitors Indian Retailers will be tough competitors Current opposition is similar to those faced by Wal-Mart in many US towns and Cities Current opposition is similar to those faced by Wal-Mart in many US towns and Cities Companies must not read too much about Metro’s woes, These are part of business environment Companies must not read too much about Metro’s woes, These are part of business environment

18. Competitive Landscape Small retailer may look unsophisticated and cash strapped but … Small retailer may look unsophisticated and cash strapped but … Small retailers will be tough competition Small retailers will be tough competition Small Independent retailers are a part of Indian CultureSmall Independent retailers are a part of Indian Culture Have better relationships with customersHave better relationships with customers Often offer better service than giant retailersOften offer better service than giant retailers Unorganized retail sector has hidden tax benefits (many evade taxes or pay minimum taxes)Unorganized retail sector has hidden tax benefits (many evade taxes or pay minimum taxes)

19. Global Retailers in China As on December 1 st 2004, China will open its retail sector for foreign investment As on December 1 st 2004, China will open its retail sector for foreign investment Foreign firms can setup wholly owned distribution & retail operations – without central government approvalForeign firms can setup wholly owned distribution & retail operations – without central government approval Any foreign wholesaler or retailer can import or export goods Stores can be set up anywhere – but with approval from municipal government Setting the stage for rapid domestic growth, increasing local consumption & modernization of retail sector