INDIA RETAIL 2.0 AND THE WAY FORWARD CBRE RESEARCH | 2018 INDIA RETAIL 2.0 AND THE WAY FORWARD CONTENTS 02 04 INTRODUCTION REGULATION AND INVESTMENT 10 16 RETAILER CONCLUSION OPERATION DYNAMICS B | CBRE RESEARCH © 2018 CBRE, Inc. | 1 INDIA RETAIL 2.0 AND THE WAY FORWARD INTRODUCTION Figure 1: The True Size of India The Indian market provides an extremely wide customer base considering its one billion plus population SIZE OF THE CITY YOUNG MARKET DYNAMICS DEMOGRAPHIC 1 J&K = C 1.3 billion people across More than 40 cities with Nearly 35% c 29 states and 7 union population between of its population aged Pradesh territories; 33.2 % of the 0.5 - 1 million, nearly between = population is in 45 cities with population 15 and 34 years3 n n urban areas between 1 – 5 million and Pn Cn = nc 8 cities with population = Vn P 2 above 5 million En n = na = Sikkim n n = = n Delhi = C c National Capital Region (NCR) radesh = B Rn = n Assam = Peru B n = Latvia = n n = c PURCHASING Meghalya BOOMING radesh n = POWER Gujarat = I = = n Economy of E-RETAIL Turkey I Mizoram = Timor-Leste 4 E-retail has potential Kolkata USD 2.6 Trillion - to be C to be a USD 52 billion Tripura = Cn B 3rd largest consumer = market by 2022; expected to Orissa market by 2025. In Q1 2018, Maharashtra n = W Bn registered a YOY growth in grow at a CAGR of nn = = the volume of FMCG goods; more than 20% c 6 Mumbai Pune n strongest in APAC5 (2017-22) Hyderabad Pn n n n radesh L n 2 = 20 n Goa = E 0 B Kn = 100 I 100 Major Cities Chennai Bangalore REACH TO INVESTOR Pc = Mauritius CONFIDENCE T MARKET = Close to 500 million Ranked first in Kerala = Cn n internet users in India; A.T. Kearney’s 2017 internet penetration rate Global Retail Development of ~65% in Index8 urban India7 Source: CEIC, Economist Intelligence Unit 1. International Monetary Fund (IMF) | 2. Census 2011 3. Ministry of Statistics and Programme Implementation (MOSPI) 4. International Monetary Fund (IMF) | 5. Bloomberg | 6. Statista 7. National Association of Software and Services Companies (NASSCOM) 8. A. T. Kearney 2 | CBRE RESEARCH © 2018 CBRE, Inc. | 3 INDIA RETAIL 2.0 AND THE WAY FORWARD REGULATION AND INVESTMENT How India’s Retail Regulatory Environment has changed over the years Figure 2: Mapping Retail Development with Easing Regulations LIMITED ACTIVITY PERIOD OF INITIATION GAINING TRACTION 100% FDI IN RETAIL FIPB ABOLISHED; 100% Period of heightened activity, number of ALLOWED; E-COMMERCE AUTOMATIC FDI Indians used to shopping at Liberalisation of economy, malls mushroom all over the country, PICKS PACE neighbourhood markets, shopping for 51% FDI in cash and carry permitted 2017 – A new FDI policy came into increased footfalls due to novelty value readymade apparel not the norm in 1997, New retail formats emerge, 2011- 100% FDI permitted in single effect from August 2017; Foreign Crossroads – India’s first mall opens in brand retail, 51% FDI in multi brand retail Investment Promotion Board (FIPB) 2001-2003: DT Mall, MGF Mall, Manufacturers such as Raymond, Bata, Mumbai in September 1999 abolished, Institutional investments in Sahara Mall operate through exclusive outlets of 2015-16 onwards- Period of retail cross USD 0.8 billion franchisees Ansal Plaza, Delhi’s first mall 2004- Forum Mall (Bangalore), Inorbit e-commerce boom; 100% FDI in online commences operations in 1999 Mall (Mumbai) retail under the marketplace model 2018- Government allows 100% FDI Brands operational: Bata, Raymond, 2007: Ambience Mall Institutional investments in retail pick under the automatic route for single- Vimals Brands operational: Shoppers Stop, 2008: Select City Walk pace, GIC, Blackstone, Xander make brand retail Benetton, Pantaloons, Revlon, Loreal, 2009: DLF promenade investments Marks and Spencer Brands Operational: IKEA, H&M, Brands operational: Tommy Hilfiger, Brands operational: Promod, Mango, Dyson, Bath &Body Works, Kate Spade Nine West, Fossil, Aldo, MAC Debhanams, Charles and Keith, DKNY, FCUK, Inglot, Zara EARLY 80s AND 90s 1991-2000 2001-2010 2011-2016 2017-18 Source: CBRE Research, Q3 2018 4 | CBRE RESEARCH © 2018 CBRE, Inc. | 5 INDIA RETAIL 2.0 AND THE WAY FORWARD 2017 – 2018: New Policy Ushers in Winds of Change As highlighted in the graphic above, a new foreign direct investment (FDI) policy came into effect from August 2017 wherein the Foreign Investment Promotion Board (FIPB) was abolished and measures were enumerated to ensure easier and quicker approval processes and timelines. Positive investor sentiment resulted in India’s ranking in the World Bank’s Ease of Doing Business index jumping 23 positions - from 100 in 2017 to 77 in 2018. In January 2018, the government allowed 100% FDI under the automatic route for single-brand retail trading and construction development. The table below highlights the key changes that have been made to the consolidated policy from a retail perspective in the last 1-2 years: Table 1: Retail Trading Foreign Direct Policy and Amendments Segment Previous Provisions Revised Provisions Single Brand Indian Manufacturer: An Indian manufacturer 2017 FDI Policy: The clause “Indian manufacturer Retail Trading is permitted to sell its own branded products in any is permitted to sell its own branded products in any (SBRT) manner i.e. wholesale, retail, including through manner i.e. wholesale, retail, including through e-commerce platforms. e-commerce platforms” has been removed, thereby providing clarity to single brand retailers having Other Retailers: While Indian manufacturers FDI. could trade in any manner, other companies needed to have brick and mortar operations to sell The 70:30 rule has been done away with, thereby their goods online. bringing cheer to manufacturers that were under contract/outsourcing manufacturing. The 70:30 Rule: An Indian manufacturer was defined as an investee company, which Clarity on sourcing norms clause and provides that is the owner of the Indian brand and which a committee of DIPP would examine claims and manufactures in India, in terms of value, at least suggest relaxations for products being in the nature 70% of its products in house, and sources at most of 'state-of-the-art' and 'cutting-edge' technology, 30% from Indian manufacturers. where local sourcing is not possible. Sourcing Norms: SBRT entities undertaking 2018 Policy Update: Proposals involving FDI trading of products having 'state-of-the-art' and beyond 51% would need to ensure mandatory 'cutting-edge' technology and where local sourcing sourcing of at least 30% of the value of products is not possible, were allowed to seek exemption sold, to be done from Indian small industries/ from these sourcing norms for a period of 3 village and cottage industries, artisans and years from opening of their first store. Thereafter, craftsmen. The SBRT entity will be allowed to set off the sourcing norms would become applicable. its incremental sourcing of goods from India for However, the definition of “state-of-the-art” global operations during the initial 5 years of the technology remained unclear. opening of the first store, beginning April 1 of the year, against the mandatory sourcing requirement of 30% of purchases from India. After completion of this five-year period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India operation, on an annual basis. E- Commerce The government came out with guidelines on FDI The current policy has clarified as to how this 25% (Value of in the e-commerce sector in 2016 which restricted of the sales will be calculated – the policy has Sales) an e-commerce entity from permitting more than defined it as 25% of value of sales, on a financial 25% of the sales affected through its marketplace year basis. The norm was introduced to provide from one vendor or their group companies. a level playing field for vendors and discourage e-commerce players to derive a majority of the sales from their sister/related companies. Source: CBRE Research, Q3 2018 6 | CBRE RESEARCH © 2018 CBRE, Inc. | 7 INDIA RETAIL 2.0 AND THE WAY FORWARD Easing Norms Fuelling Investor Appetite sector over the last few years through investments in high-end retail developments across not only tier I, but also tier II cities. Blackstone, through its Indian retail subsidiary – Nexus Malls has bought stakes in Thanks to policy changes that have resulted in an investor-friendly business environment as well as the major malls such as Seawoods Grand Central (Mumbai), Pavilion (Pune), Elante (Chandigarh) among economy’s sturdy market fundamentals, global interest in investing in India remains high. That is why, others. Other PE funds have also transpired strategic investment platforms for investing in the retail the country was ranked second among all emerging markets on A.T. Kearney’s FDI Confidence Index segment, these include CPPIB’s Island Star Mall Developers Pvt. Ltd (ISMDPL) and Xander Group’s 2018. Virtuous Retail. Some of the key investors and their portfolios as of October 2018 are as follows: Figure 3: FDI Confidence Index (Scale of 3) Table 2: Key Investors and their Portfolios in India High Cnnc 2. Brand Retail portfolio: Projects 2.0 1.82 • Elante Mall; Chandigarh 2 1.81 1. 1. 1.2 1. • Treasure Island & Treasure Island Next; Indore 1. • Seawoods Grand Central – Mumbai 1.8 1. 1. Blackstone ~6 million sq. ft. • Westend Mall & Pavilion; Pune 1. • AlphaOne Mall; Ahmedabad • Esplanade One; Odisha • Mall of Amritsar; Amritsar 1 0. Canada Pension ~1 million sq. ft. operational, • Phoenix Market City; Bangalore and has malls Low Plan Investment plus 3 million sq. ft. upcoming coming up in Pune, Bangalore & Indore (UC) Cnnc 0 IE AE CA ER IE I CI JAPAN RCE ARI IER ITALY INDIA IRE Board (CPPIB) Note: Values are calculated on a scale of 0 to 3, with 3 being High confidence in a market as a future destination for FDI c .