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.”

Sayantani Kar, Business Standard

Mumbai, January 09, 2012

The entry of Future Supply Chain Solutions into multi-brand retail via a subsidiary has given some regional brands the kind of exposure they could only aspire to before.

Shopping for the humble bathing soap has now become an arduous task for the tiny tot’s mother. She now has to choose not just among proven national brands like Johnson & Johnson or Himalaya, or for that matter Wipro’s Baby Soft; time permitting, she has to examine the benefits of picking a Doy Kids versus a Woodwards or a Mysore Sandal baby soap, and carefully evaluate the pros and cons of deploying shapes such as elephant, lion and bear and many others that grace the shelves of modern retail.

FMCG and food sections in such stores have seen an influx of smaller and regional brands in recent months. But the rules of distribution for modern chain-stores are very different from distribution for kirana stores. While the tussle between large brands and retailers make news headlines, smaller brands have more often grappled with margin issues, delayed payments and supply chain shortfalls. Enter FSC Brand Distribution Services (BDS), a subsidiary of Future Suppy Chain Solutions (FSCS), the logistics arm of the Future Group. A Big Bazaar or Food Bazaar may or may not stock the above brands but an outfit such as this helps brands of any size access a full-fledged modern trade servicing team, complete with logistics, store management as well as strategy.

More than the large pan-India brands, it is the regional brand which stands to gain by riding on modern trade. Devangshu Dutta, chief executive, Third Eyesight, a retail consulting firm, says, “Small or new brands offer the modern retailer more margins while the retailer, in turn, affords them consistent demand and a scale to grow. Future Group has done it more aggressively than others.”

Most of the brands that have signed up with BDS first came into modern retail, and often wide national circulation, through Big Bazaars and Food Bazaars which stock non-food FMCG products as well. Modern trade may still comprise 5-6 per cent of the overall FMCG market of Rs 130,000-Rs 140,000 crore, but in urban areas it hovers at 20 per cent. Devendra Chawla who is the president of food and FMCG at Future Group and has studied brand-play closely at its retail stores, says, “The many categories of Indian packaged food are still restricted to their original markets in their regions. Some of the regional brands are also challenger brands which lack the wherewithal of large brands in distribution. Modern retail stores can incubate these over time, building customer loyalty. For such brands they also provide the quickest route to the national market.”

As many mid-sized and small brands (below Rs 500 crore) lack the volumes to justify a separate team or investment in a supply chain to keep in stride with organised retail, they take the next best option — to enter some sort of distribution understanding with the big daddies of the game — such as the Future Group, Hypercity, Reliance and more.

At the same time, organised retailers, which are often large national players, don’t bend terms to suit such brands. Future Supply Chain CEO Anshuman Singh explains, “Organised retail chains expect brands to manage shelves, offer promotions and take replenishment orders through automated systems.” In general trade, the brands would just sell stocks to a distributor/stockist who would take care of the supply chain from there on. He would sell it to dealers and retailers who place orders ad hoc, on the phone.

The larger players in the FMCG space service organised retailers themselves while others resort to logistics companies and transporters or even general trade distributors who supply to stores on their routes. But these players are not comfortable with the different set of rules. For example, when servicing modern trade, distributors who have to buy stocks from brands and then pass it on to modern retail stores, might have to wait for payment since organised retailers have longer credit periods than the stockists in general trade. They often pay those brands first whose stocks fly off the shelves the fastest.

The task of labeling and packaging is another bone of contention as is the longer time taken for delivery. Most modern trade outlets have a designated time for deliveries leading to a narrow window and a queue unlike general grocery stores. At the end of the day, if the shelves remain empty, as they would with a brand’s average of 70 per cent fill rate in general trade, organised retailers just fill their shelves with other brands.

What brands get

Large FMCG companies by now have a modern trade cell. But for some brands, it would mean a distraction from the core business. Ajay Gupta, managing director at Capital Foods (in which Kishore Biyani has 40 per cent stake through Future Ventures), makers of Ching’s Secret and Smith & Jones, says, “In the long term, we would like to focus on building our brand and leave the modern trade distribution to a specialist for a country as vast as India. There is a huge range in food, limited shelf life, high substitution since people don’t wait over and above the issue of local taste.”

The Rs 118-crore company has handed over 30 per cent of its modern trade distribution to BDS with plans to hand over more. In Delhi, where BDS has taken over, Capital Foods has seen a jump from 44 per cent to 70 per cent in fill rates. Singh reasons, “General stores are in millions, and hence need so many distributors. But in modern trade, which has about 40 retail chains with 2,000 stores across India, a national distributor not only can service but also bring in supply chain efficiencies.”

Rajheev Agrawal, director and CEO of Nilon’s Enterprises, which is India’s largest pickle manufacturer with a turnover of Rs 240 crore, says, “We wanted to free ourselves from following up on purchase orders, payment collections and even merchandising at the large stores. Except for some areas which BDS does not service such as Guwahati, almost 80 per cent of our modern trade distribution is handled by them.” Modern retail returns about 15-16 per cent of Nilon’s revenues, with same store growth clocked at 25 per cent after signing up with BDS.

Ravi Chandra, general manager, sales and marketing at Super-Max Personal Care, says BDS helps with improved fill-rates and reaching smaller town which its own sales force didn’t reach. Gupta of Capital Foods agrees, “We can now reach tier 2 towns, thanks to their footprint.” Singh elaborates, “Distribution to smaller towns comes at a large cost. The volumes might not fill entire trucks for general distributors. But we already have our own transport business in the Future Supply Chains, which we ride easily.”

Ameve Sharma, president of Baidyanath Ayurved Bhawan, says, “In modern trade, every single outlet expects me to deliver stocks to it from my depot, manage inventory and negotiate consumer schemes. It is a full-time job.” This even though modern trade is less than one per cent for its Rs 410 crore turnover.

Some of BDS’ clients have seen huge jumps in their sales as a result, according to analyst estimates. They estimate 300 – 1,000 per cent increase in modern trade sales of for some of the brands BDS services. Singh says, “There is a thin line between national and regional brands. Some brands might be widely available in south India. But their presence in, say, Delhi, would be counted as presence in the north, even though it would be just one city.” Brands have to shell out a slightly higher percentage of margins for BDS’ services (11 per cent instead of 5-8 per cent on the product, according to some clients).

The big push

Future’s Singh says, “We entered FMCG distribution because we had access to both the back-end and the front-end of FMCG retail.” BDS will only be handling distribution of FMCG brands in modern trade. “We will stick to what we know best,” points out Singh. At work is the integration on the retail side with Future Group’s 208 Big Bazaars. For example, BDS works with the small brands on promotions at Big Bazaar well in advance. Plans for the discount days around January 26 — which is an annual feature now — are already afoot, with these brands manufacturing and storing stocks for additional demand.

Chandra of Super-Max and Gupta of Capital Foods point out the assortment of products based on store location is a lot better with the help of BDS’ insights. Singh says, “Understanding what flavours of wafers will work in which regions comes to us naturally, and are of help to brands like Dukes, for example.”

The front-end integration ensures that BDS always has a retail chain, the country’s largest, as its client. However, Singh claims that gradually other retailers too are subscribing to its services. Singh says, “About 20 per cent of the business (Rs 310 crore) now involves servicing other retailers.” BDS reaches 1,700 stores of other retailers.

Logistics heritage

While logistics companies would not have an in-house retail chain to learn from, retail distributors would not have a supply chain set-up like BDS has. Dutta of Third Eyesight reminds that other retailers such as Reliance had drawn up plans for supply chain integration but it was scuppered by the downturn. FSCS had been building up its logistics capabilities over the last four years. Singh believes the supply chain automation which FSCS has invested in will stand it in good stead when dealing with FMCG products.

The supply chain set up that BDS has access to offers more advantages than what is offered by regular distributors. Apart from the technology, it also incorporates features such as roll-cages which make the consignments from the warehouses to the stores shelf-ready. These allow store attendants to unpack right at the shelves with pre-sorted packaging and labeling, instead of unloading at a warehouse of the store and sorting. Shrinkage, which is a result of product pieces missing along the supply chain due to damage or stealing, has been reduced by almost 90 per cent as a result. Loading and unloading times have been reduced by 20 minutes, vital when the window to deliver goods at retail chains for everyone is about three hours.

Real-time tracking of vehicles of within one metre further saves on time and lets brand owners view their consignments. BDS’s six distribution centres which consolidate stocks also allow the flexibility to meet additional demand from one store, which the general distributors might not have met.

The use of technology by the BDS team is acknowledged by competitors as well — for instance, its ‘Put to light’ sorting which ensures that the BDS team can send shelf-ready product pieces to respective stores rather than cartons. Compared to supply chains which don’t have this technology, the speed of picking an order at the distribution centres of BDS has improved by 40 per cent while the order-picking for the various retail stores from the distribution centres is 100 per cent, says Singh.

Ashutosh Chakradeo, head, buying, merchandising & supply chain at Hypercity Retail, says, “BDS, given its lineage, understands our needs better as well. We needed shelf-ready packs rather than cartons for delivery which they have enabled. We can do it for larger brands but for smaller brands the volumes don’t justify investments.”

BDS plans to put its own salespeople in modern retail chains to push its bevy of products, another service that individual brands might not have been actually able to afford. Sampling, which is critical in modern trade, will get a boost without the need for additional ad spends, says Singh.