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".)

Vrinda Oberai

RETAILER, New Delhi, January 12, 2012

The Manmohan Singh government has finally given its nod for the relaxation on the existing 51 per cent FDI in single brand retail, increasing it to a much awaited 100 per cent.

The move has paved way for single brand foreign retailers’ to own 100 per cent of their operations in the country, possessing fully-owned stores here. However, the decision comes accompanied with a rider that 30 per cent of the value of products sold would have to be mandatorily sourced from small Indian industries/village and cottage industries, artisans and craftsmen, (collectively referred to as ‘suppliers’).

The new policy is advantageous for international players like Gap, Starbucks, Adidas, Nike, etc, as it allows them to buy out domestic partners and fully own Indian operations. Also, according to sources, it is learnt that foreign brands still prefer the JV mode or franchise model of doing business in the country. The reasons for the same can be many, the immediate ones being a nascent luxury market, shooting real estate costs and also, most importantly, the knowledge possessed by a local partner.

The new norm is no big game changer for some and this is further confirmed by the comment that we received from Marks and Spencer. "India is an extremely important market for Marks & Spencer. Our journey in India has been exciting so far and our Joint Venture partner, Reliance Retail, has helped us transform our position in this dynamic market. We have been able to open larger stores and realign prices to serve our customers better in India. We have also benefited from working with a partner, which has significant local experience and expertise in managing logistics. We are very happy with our current relationship with Reliance Retail and don’t plan to do anything differently following the recent announcements on FDI,” commented Martin Jones, CEO, Marks and Spencer Reliance India.

Harish Bijoor, Brand Expert and CEO, Harish Bijoor Consults Inc, opined, “I do believe this is a positive early signal of what is due in multi brand retail. In many ways, this is the trailer of the movie to come, hopefully post the assembly elections. This will excite single brand retailers. I hope this sends the right message to the right retailers.”

The shares of retail firms like Pantaloons Retail, Koutons, Provogue India and Shoppers Stop rallied sharply, following the Cabinet’s FDI announcement. A positive expectation from the decision is that a bolder initiative shall soon follow for FDI in multi-brand retail, too. “I think this is a step in the right direction, more so as this gives an extremely positive intent as far as the government and reforms are concerned. This will now have a snowballing effect, going forward in other sectors crying for reforms like aviation,” said Sugato Bose, Brand Head, Pure Home+Living.

Bose added, “As far as Indian brands are concerned, I do not immediately see any major shakeout of any kind in the immediate future. This will only make sense if any Indian brand is looking to sell out. On the other hand, we will definitely see renewed interest in a lot of international mainstream as well as fringe brands to enter the Indian market now.”

FICCI also gave its ‘happy’ reaction to the decision of the Cabinet. “The move will not only mean more FDI but also lead to employment and more choices for consumers. Global retailers are bound to bring in global best practices and technology that will lead to a more competitive marketplace benefiting the consumers. The sourcing clause will lead to a direct benefit for the SME sector,” said Dr Rajiv Kumar, Secretary General, FICCI.

Devangshu Dutta, Chief Executive, Third Eyesight, also shared his view point and said the government can benefit, in terms of indirect and direct tax collection, from these more structured, “on-the-books” businesses. “We cannot run 21st century supply chains on dirt roads, with unpowered storage and a poorly educated workforce. The benefits of FDI in retail will remain largely unrealised for the overall nation if there is no simultaneous investment by the government in three key areas – transport infrastructure, electricity and education. The Indian government must be a ‘co-investor’ and active partner in developing and maintaining these aspects much more aggressively,” wrote Dutta in one of his recent blogs. (Click here to read it: "FDI in Retail: More Heat than Light")

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

Pia Heikkila, The National

UAE, January 12, 2012

Indians could soon experience the unique frustration of assembling Scandinavian flat-pack furniture as stores such as Ikea are to be allowed to open in the country under new laws on foreign direct investment (FDI).

The government is allowing single-brand retailers such as Ikea, Nike, Starbucks and Marks & Spencer to operate in India without local partners.

Previously, to operate in the country, a foreign company was required to take a local partner and could hold no more than a 51 per cent share in the joint venture.

The likes of Ikea stand to benefit most from the decision, said Devangshu Dutta, the chief executive of Third Eyesight, a consultancy.

"It is an important step for those companies who want to control the Indian business directly and completely," he said. "Ikea is such an example. It has mentioned in the past that it finds limited value from having a partner in the business and that it would like to control the value chain from source to consumer."

The decision was the latest development in wrangling over the FDI rules. In November, the government announced it was planning to ease the strict rules preventing multi-brand retailers such as Carrefour and Tesco from operating in India, but the change was scrapped at the last minute amid a political backlash.

Why all the drama? Because there is big money at stake. The Associated Chambers of Commerce and Industry of India estimates that the country’s retail sector will be worth US$1.3 trillion (Dh4.77tn) annually by 2018.

India is ranked as one of the world’s most lucrative markets for retailers because of increasing consumption by its growing middle class.

Market watchers say the potential for FDI is huge.

"Retailers who are willing to source domestic manufacturing units to enter the emerging retail scene of India will surely come in," said Raghu B Viswanath, the managing director of Vertebrand Management Consulting. "Along with them, brands like Ikea and fashion brands who have been long awaited in India, bringing in investment along with them."

Many overseas brands will still find it useful to have partners that understand the complex Indian business environment and can also share in the financial risks.

"The move will not change the retail landscape dramatically," said Saloni Nangia, the president of Technopak retail consultancy. "There may well be few more brands entering the country, but many will still need partnership because local partners have a better understanding of the market."

Indian suppliers enjoy some protection, as the new policy mandates 30 per cent sourcing from local small and medium enterprises for any retailer looking at more than a 51 per cent stake in an Indian retail business.

"This could be a barrier for companies that are viewing India mainly as an export market, since they would need to invest additional time and management effort in developing local sourcing links," Mr Dutta of Third Eyesight said. "For retailers who already have sourcing links in India, this will not be a problem."

India is determined to become more open for businesses. The FDI move comes a week after the country unveiled a move to increase foreign-investor access to its stock market. The government is also considering raising the cap on FDI in the aviation sector.

(This article was published in The National on January 12, 2012.)

The Hindu, BusinessLine

Bureaus, January 12, 2012

India Inc has welcomed the lifting of the foreign direct investment (FDI) limit to 100 per cent on single brand retail. Stocks of Indian retailers also rose on the announcement, signifying a thumbs up from investors. But retail sector specialists do not expect a stampede of investments any time soon.

Says Mr Shubranshu Pani, MD, Retail, of real estate consultancy, JLLM, “I do not see a sudden surge of investments. Foreign chains will take on local partners because the rider of 30 per cent local sourcing is something that does not happen overnight. At the same time, these foreign chains will get into agreements, where they have an option of taking their stake to 100 per cent at a later date.”

Under the earlier policy, where a controlling 51 per cent stake was permitted in single brand retail, the response has not been overwhelming. Over the last five years, total FDI inflows in this sector amounted to $44.45 million, a tiny fraction of total FDI inflows.

Luxury retailers were expected to take most advantage of the relaxation. But the local sourcing clause is a major worry. Mr Oliver Petcu of CPP Luxury Industry Management Consultancy Ltd, which has been actively covering India, believes the revised legislation change is “absurd and impossible to apply” in luxury retailing. “Even if there would have been items which could have been sourced locally, the mere thought of international luxury brands being forced into sourcing locally, just because they want to operate directly is going to be a major setback for the already dormant and under-performing Indian luxury market,” he said in a blunt analysis posted online.

“The 30 per cent rider is not what every brand can fulfil,” adds Mr Purnendu Kumar, Senior Vice-President, Retail, Technopak.

The tax structure is another issue. “Absence of 100 per cent FDI was not holding back investments in luxury retail space. It is duties on these products rather than lack of funds, which is a problem,” Mr Kumar points out.

Real estate players, especially those focused on luxury retailing, are also treading cautiously. The Prestige Group, which developed India’s first luxury mall, ‘UB City: The Collection’ in Bangalore, feels that it would be ‘premature’ to gauge the impact of this.

Mr Venkat K. Narayana, CFO, Prestige Group, says at present, the company is in favour of developing its ‘Forum Mall’ concept, which caters to the mass. “The decision to build more luxury malls depends on the interest or awareness of the brands and also affordability, as the targeted customers are an elite few,” he adds.

More than the investment issue, cracking the Indian consumer will be a tougher challenge, analysts say. “I do not see a dramatic shift in the retail space. A luxury brand needs a consistent experience in a new market,” says Mr Devangshu Dutta, CEO, Third Eyesight.

India Inc, though, is upbeat about the development, with industry bodies such as FICCI, CII and Assocham welcoming the move. Overall, says Mr Goldie Dhama, Associate Director, PwC, “Allowing 100 per cent FDI in single brand retail will help in bringing in new products, brands and best practices. It will also help companies already present in India in ramping up their production as they will be able to fund the Indian businesses.”

Brand consultant Mr Harish Bijoor does not think this would make a dramatic difference to the brand presence of foreign brands that are already here. “It would, of course, provide the overseas brand the complete ownership in managing the brand, rather than depend on local franchisees to grow the brand here. This would make a difference to new entities which are entering the country now. They will gain the most. Otherwise, I don’t see the landscape changing much.”

Fibre2fashion
January 12, 2012

Apparel retailers in India are extending their end-of-the-season discount sales period to clear inventory that has been piled up due to slowdown witnessed in earlier months.

Apparel sales in India have been affected due to the increase in prices by 30-40 percent in last 12 months. The rise in the price of raw material and the imposition of excise duty by the Government on branded apparels has led to the increase in prices.

The consumer sentiment had also been affected due to rising inflation that had left shoppers with lesser money to spend on clothing, according to analysts.

Mr. Abhinav Zutshi, Brand Head – Jack & Jones (India), told fibre2fashion, “Winter season was little delayed this time. Secondly, the market did not get enough boost that it needed during October-December period – the best quarter for retail. So, most companies have either advanced or extended their sale period to cover up on that.”

“People have become skeptical because of recession in Europe and the US. So, people are holding back the money in big cities. Secondly, customers have more choices now. There are more brands, so the money is getting split among brands, especially in big cities,” he adds.

Analysing the approach of extending discount sales, Mr. Devangshu Dutta, Chief Executive, Third Eyesight, says, “The decision about timing and duration of any retailer’s discount sale, and the level of discounts offered are determined by two major factors: how much inventory needs to be cleared, and what the competition is doing.”

“Sales over the last few months have been below expectations, and I believe retailers have also been careful in growing the square footage. Put together, that means that there is excess inventory in the stores and distribution centres that needs to be sold, to free up cash and to create space for fresh merchandise. This is especially true in cases where there is a clear season-based change of merchandise as it happens with most fashion brands,” he explains.

Explaining consumer sentiment and discount sales equation, he says, “Consumer spending, especially discretionary purchases such as fashion, is highly susceptible to sentiment. At this time, consumers are certainly being careful with their money, though the spending sentiment has not hit the lows seen in 2008 and 2009. In such an environment, discount sales are certainly a way to get consumers into the stores. The problem, of course, is that everyone is spending on “loud advertising” at the same time. For most retailers, it is a Hobson’s choice – to spend on promoting discounts, or to not promote at all.”

Forecasting about the current year for apparel retailers in India, he comments, “Everyone has to remember the old saying: ‘This, too, shall pass!’ India’s growth story will continue, more people will come into the folds of the middle-class. Apparel retailers just need to ensure that their business is alive and around to benefit from that growth. If margins have to be sacrificed to achieve better cashflows, it is better to do that, than to hold out the pricing.”

Mr. Aditya Nadkarni, Brand Head – Debenhams at Planet Retail, adds, “The speed of evolution of the Indian customer is amazing, its like stone rolling down the hill – the speed increases at an accelerated pace. The consumer is very aware of the international trends and is also now very demanding about the offer, the price, the ambience, etc. So, it is very important for apparel retailers to be ready to serve today’s customer.”