Organised retail market share to touch 10% by 2020 on new FDI norms: Crisil

The recent government move to allow 100 per cent foreign capital in single-brand retail may push the market share of organised retail to 10 per cent by financial year 2020, up from 7 per cent now, says a report.

Last week government allowed 100 per cent foreign direct investment (FDI) in single-brand retail under the automatic route from 49 per cent earlier, and also relaxed the sourcing norms.

According to Crisil, this move alone will push up the market share by 100 bps as the agency had earlier expected the market share of organised retailers to grow to about 9 per cent by financial year 2020, based on healthy revenue growth of about 18 per cent.

"Better operating environment for single-brand retail would also mean the pace of store additions will be faster than the annual 10-12 per cent," Crisil said.

The impact of relaxation in FDI rules will be more pronounced in apparel, luxury goods, home decor, footwear, and electronics, which make up about 45 per cent of the organised retail revenues, Crisil said.

"Global single-brand retailers facing growth headwinds in their key geographies will now be more than keen to peg a tent here," said Anuj Sethi, a senior director at Crisil Ratings.

"And those already present can step up investments. The previous sourcing norms were a bottleneck to scaling up of operations," he added.

While FDI approvals under the automatic route will lower the time to commence business, the relaxation of 30 per cent local sourcing norms for the first five years by allowing inclusion of incremental sourcing for global operations will also provide sufficient time for new entrants to set up and stabilise their sourcing base, he pointed out.

This could mean increase in competition for domestic organised brick and mortar retailers. However, more foreign retailers vending their ware will also lead to sharper focus on, and improvements in, supply chain efficiencies which will benefit the sector over the medium-term, he said.

Further, the report believes that healthy growth prospects for the sector and benefits of scale and focus on profitability, will help offset the impact of higher capital spending over the medium-term.