Pallavi Srivastava, Pitch

New Delhi, January 13, 2012

Contrary to popular belief that allowing 100 per cent in single brand retail will give impetus to luxury brands in India and bring down costs, experts do not have high hopes.

The government of India, a couple of days ago decided to allow 100 per cent FDI in single brand retail product trading. Till now, only 51 per cent FDI was permitted. However, there’s no FDI still allowed in multi-brand retail trade.

The decision, according to a government notification is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices.

Marketers and brand experts have welcomed the decision as it paves way for more reforms which had taken a back seat lately. Ramesh Srinivas, Partner, Management Consulting, KPMG Advisory Services; and Purnendu Kumar, Vice President, Retail & Consumer Goods Division, Technopak, feel that opening up the sector to 100 per cent FDI “is a good thing” and “brands will love it”.

However, they are disappointed with the riders that the government has put in, particularly the one that makes proposals involving FDI beyond 51 per cent, mandatory sourcing of at least 30 per cent of the value of products sold from Indian ‘small industries/village and cottage industries, artisans and craftsmen’.

The government notification defines ‘Small industries’ as industries, which have a total investment in plant and machinery not exceeding US$ 1 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose.

While many international brands looking to invest in India could ignore the conditions, luxury brands still would not find the market conducive enough. “Most luxury brands will find it very difficult to source from small vendors for fear of brand and quality dilution. This condition will dampen enthusiasm of most foreign luxury brands,” says Srinivas.

Devangshu Dutta, CEO, Third Eyesight, feels that many luxury players already have their supplier base set up, so unless they are look at setting up a supplier base in India separately, they may not be able to comply with the 30 per cent sourcing restrictions. “Especially because it takes certain amount of lead time to develop the suppliers’ network and achieve a certain standard. That lead time should be allowed for luxury marketers who don’t have a supplier base in the country,” he says.

The permission for 100 per cent FDI in single-brand retail could be good news for some luxury brands who wants to take control of their operations in India. Dutta feels that many brands may still want to stick with an Indian partner because it will provide them knowledge about the consumer insight, market conditions and provide management support. “Not everybody will rush to convert existing joint ventures into 100 per cent ownership,” he says.

Another aspect that experts feel that could be a hindrance for luxury market to is the small size of the market in India. Consumers of luxury brands in India are global consumers and as demanding as luxury consumers in a European country or probably even more. “So the standards of quality and service among luxury brands in India are already fairly high. So there won’t be much change on that front,” Dutta says.

On the positive side, experts feel that advertising and promotions of luxury brands might go up a bit if there are new brands looking to create a niche for themselves in the market.

Kumar feels that what eventually will give fillip to the luxury market in India is the “reduction in import duties.”

(This article was published in the magazine "Pitch".)