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Retail franchises may turn into joint ventures

Ramnath Subbu

Food and grocery revenues bound to multiply

MUMBAI: The government's decision to allow 51 per cent foreign direct investment (FDI) in single-brand retailing has been largely welcomed by the industry in spite of the general feeling that those that might enter would largely be the luxury brands and that this move would not significantly impact the sector.

Gibson Vedamani, CEO, Retailers Association of India (RAI), which represents a number of larger organised retailers, said, "Basically two things will happen. Brands, which had hitherto not looked at licensing or franchising, will now consider it as an option and a larger number of joint ventures will take place. Existing retailers will willingly look to converting existing franchises and licence agreements into joint ventures. Even China, in its initial stages of opening up of its retail sector to FDI, saw more than 300 joint ventures being entered into."

According to a Cris Infac study, organised retailing in India is expected to triple its revenues by 2010. "The organised retail industry is on a high growth trajectory, and is expected to grow at 25-30 per cent per annum in the next five to six years. The market size is forecast to grow to Rs. 109,500 crore by 2010 from Rs. 35,000 crore in 2004-05, entailing an investment of about Rs. 3,100 crore per annum up to that period.

Although food and grocery stores account for the largest share of retail spend by the consumer at about 76 per cent, 99 per cent of this market is in the unorganised sector. This is likely to change in the next few years and Cris Infac estimates that food and grocery revenues in the organised retailing market will multiply five times, taking its share to 30 per cent.

The RAI had suggested allowing FDI in the luxury segment first. "We would like the retail pie to grow but not affect sensitive sectors or harm the farm sector," said Mr. Vedamani.

Welspun Retail India is now making its foray into the sector and has also been the franchisee for the multinational brand, Tommy Hilfiger, in India. According to its CEO and Managing Director, Anshuman Singh, "franchising and licensing have been earlier allowed and foreign brands are coming in anyway. So, from the earlier franchising arrangements, we will now see joint ventures with equity participation. This is the path for the future and is required in any case. It is not going to open any floodgates for FDI but is a step in the right direction."

While earlier fears of multinationals swamping the industry seem misplaced, Reliance has announced its entry into the sector last week with a proposed investment of more than Rs. 3,000 crore in hypermarkets and super stores across cities. "Now the existing players will have to contend with someone of the same stature as the multinational giants,'' said Nagarajan Narasimhan, Head, Research, Cris Infac. According to Mr. Narasimhan, the sectoral growth is strong and is being spurred by domestic players and international players and will further accelerate. "The FDI announcement is a move that signals that the government is open to FDI in retail but anyway, we do not see any significant step towards allowing further FDI in the retail sector this calendar year."

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