Liz Morrell, Retail Week
February 26, 2013
has long been an attractive target for international expansion
thanks to its size and a young, increasingly affluent population.
Retailers have been extolling its merits for some time, but it’s
a market where UK retailers have been hampered by everything from
regulatory restrictions to cultural challenges.
India closed off foreign direct investment (FDI) into retail
operations in the second half of the 1990s, and although it began
reopening the sector to FDI in 2006, it has taken until this year
for the country to announce changes that may finally make a difference
to UK retailers.
In November last year, the Indian cabinet passed a bill to allow, for the first time, the opportunity for single brand retailers to enter the market alone rather than with a partner.
While retailers that sell more than one brand – such as Tesco
– cannot own more than 51% of their Indian operations, single
brand outfits such as luxury fashion retailer Mulberry – which
already has a presence in the country – could now own 100% of
Within weeks, however, the bill was on hold after several political
parties opposed the decision. Planet Retail retail analyst Manu
Ghai says that politicians are trying to protect traditional retailers
in the country.
PricewaterhouseCoopers chief retail adviser Christine Cross agrees,
saying: "There is a paranoia in the local market." Many
smaller Indian retailers are worried about being put out of business
by their Western counterparts. The Indian government has been
nothing if not indecisive on the issue. In January, it reverted
to its November decision, meaning single brand retailers are now
able to enter the market by themselves. "The recent announcements
have led to an expectation that a lot of the luxury brands will
announce their entry or accelerate their growth plans for India,"
says PricewaterhouseCoopers director of corporate finance mergers
and acquisitions Alex Priestley.
Luxury houses that have been reluctant to partner with domestic
players in the past now have more options, and brands already
in India through joint ventures or partnerships may look to gain
more control over their operations.
A number of retailers are already in the Indian market by virtue
of working with franchise partners. But the policy change is likely
to prompt brands such as Ikea – the largest single brand retailer
in the world – to accelerate plans. "As of now, India is
a very interesting potential retail market for the Ikea Group,"
says an Ikea spokeswoman. "We are currently evaluating the
requirements of the FDI decision and hope to be able to present
more information shortly about our possibilities to establish
retail operations in the country once the conditions are right."
But other experts believe retailers will still prefer to use
partners. "From the retailers we speak and work with, the
majority will probably still think about doing it with a partner
because it’s not just the regulations – it’s about life on the
ground too," says Julie Carlyle, head of the UK retail team
at Ernst & Young.
And that provides its own challenges – good partners are hard
to find. "There aren’t that many of them and they are being
wooed," says Ernst & Young head of fraud investigation
and dispute services group John Smart.
A decision on multibrand FDI, which would open up the market
to yet more retailers, is likely to be another couple of years
at least. This is further holding up the expansion plans of retailers
such as Tesco which currently operates 15 Star Bazaar hypermarket
stores under a franchise agreement with Trent – part of the Tata
Group conglomerate – but had talked of about 50 at its launch
Walmart, Carrefour and Metro have all also made in-roads into
India, setting up wholesale operations, dedicated supply bases
and other back-office functions, according to Priestley. But most
of this activity so far is in preparation for future growth. "While
of some benefit to their global operations, this is likely to
be all in readiness for when or if the multibrand retail environment
is opened up," he says.
But FDI restrictions aren’t the only challenges retailers face.
Understanding the regulatory framework, including tax laws, is
essential and by no means easy.
Many retailers also underestimate the bureaucracy involved, with
regional as well as central authority permissions required for
simple processes such as opening stores.
There can also be a tendency to simply underestimate the challenges
the sheer size of the country brings, which is reflected most
acutely in a poor supply chain infrastructure. "The distribution
infrastructure is pretty torturous – especially for chilled and
frozen food which further north is practically non-existent,"
There is also an increased risk of shrinkage according to Smart.
"There are always shrinkage risks in the supply chain, but
there are slightly more risks around intellectual property protection
in India because there are lots of small outlets where your product
can be diverted to," he says.
The scale of the country also brings the challenge of different
tastes, which vary widely across India. "Its continental
scale, as well as the mix of languages and cultures, makes it
as complex as the EU, or even more so," says Devangshu Dutta,
chief executive of Third Eyesight, which has helped a number of
UK brands enter the market. "Retailers that have been prepared
for this reality have done better in the country than those that
have taken a cookie-cutter approach," he says.
In contrast, those that performed the worst tried to impose their
global standards for everything onto the Indian business.
There is a concern that retailers could grow bored of the difficulties
of the market and turn their attentions and investment elsewhere
– something Ikea has previously hinted at – but Ghai says that
would be a foolish move. "It’s a vast, growing market with
a high spend. It’s going to take another couple of years to get
to where developed countries were in the 1970s or 1980s, but it’s
growing quickly and retailers really can’t ignore it," she
Dutta says India’s track record speaks for itself. A few retailers
may have exited the market over the past two decades, but they
are a tiny fraction of the number that have entered.
"If a retailer approaches India as a market with low-hanging
fruits, they will be disappointed. India needs to be approached
with a long-term view on sales and investment," Dutta says.
India’s size alone makes it worth the effort – it may not be an easy market to break into, but for those that manage it, there are some big prizes to be won.
UK RETAILERS IN INDIA
– Marks & Spencer has 25 stores with its partner Reliance Retail, opening around a store a month
– Mothercare boasts 74 stores in 17 cities, around half of which are franchise and half with its joint venture partner DLF brands. Has plans for 200 stores by 2015.
– Next has a wholly owned call centre in India and began trading online last year
– Debenhams has a franchise store in Delhi and has pledged further expansion
– French Connection Has more than 25 stores through its licensee Brand Marketing India. More are planned
– Hamleys has stores in Mumbai and Chennai
– Accessorize has nearly 20 stores in India including six in Mumbai
– Austin Reed Is present in 17 Shoppers Stop stores.
– Clarks Has opened its first exclusive store in India in New Delhi last April, having first entered the market in 2005
Ashish K Tiwari & Nupur Anand, DNA (Daily News & Analysis)
Mumbai, February 26, 2013
walking into a McDonald’s outlet for a McSpicy Paneer burger
and also getting to pick up a cup of cappuccino from a Cafe Coffee
Day (CCD) counter inside.
Going by a buzz, McDonald’s and CCD operators in India could very well team up to create co-located stores.
Officials of both companies denied the move.
“There has been no move to tie up with or create associations with Café Coffee Day or any other brand in India presently,” said Smita Jatia, managing director, Hardcastle Restaurants Pvt Ltd (McDonald’s west & south India operations).
K Ramakrishnan, president – marketing, Café Coffee Day, also refuted any such collaboration being worked out with McDonald’s.
Industry sources, however, say it makes sense for quick service restaurants (QSRs) to operate in a co-location format with rival brands that offer complementary product lines.
Call it the ‘frenemy format’, if you please. The least it can do for the players is help exploit synergies and increase footfalls and conversions by building on each other’s strengths and creating a fulfilling experience for customers.
“This may be for sharing property and floor space, for better supply chain management or for other franchisee synergies,” said Arvind Singhal, chairman, Technopak Advisors.
A recent collaboration between cafe chain Braista Lavazza and Mumbai based ice-cream chain Hokey Pokey is a case in point. Under the tie-up, those visiting Barista outlets can also savour ice cream flavours specifically launched for the cafe chain, said Rohan Mirchandani, co-founder, Hokey Pokey.
But there’s a caveat, said Devangshu Dutta, chief executive of consulting and advisory firm Third Eyesight. “Such offerings can work in certain catchment areas… But in case there is a conflict between what is being offered, then a format like this will not work.”
Luxury is an ill-defined concept. There is no specific line or limit of price, quality or availability that separates the luxurious from all that is not.
However, like other similarly intangible attributes such as power or grace, we all immediately recognise luxury when we experience it.
In fact, experience — vague as that may sound — is key to differentiating luxury, more than the tangible product being consumed. It’s not just the person’s own direct sensory experience, but also the prestige and status granted by others around her or him that creates the luxury experience.
Surely, with such intangible notions of experience, power and prestige, luxury brands should be among the most influential in the market. They should be pioneers that set the tone for change in improving retail management practices, upping customer service standards, driving quantum leaps in quality.
But is it so? The response from the rest of the retail sector may not quite be “meh”, but I suspect that it would not be far off.
There are strong reasons why luxury brands would have a lower influence as benchmarks in India and why, in fact, they may draw in more influence from the market themselves.
Market presence and location
As an example, in physical presence, luxury brands seem to demonstrate a delayed response to changes in the market, both in terms of market entry and location selection.
Prior to the entry of global brands, luxury products and services in India were naturally defined by niche, largely owner-managed businesses. Business scale was curtailed by internal limitations, and due to the small size, its market reach was also limited. While there were some designer brands that would occasionally get copied by mid-priced retailers, by and large luxury brands lived in their own separate bubble, with little or no influence on the heaving mass of the market.
In contrast, in the Western economies, from where many of today’s luxury brands originate, they are looked up to for inspiration. So, it is natural to expect Western luxury brands to lead the charge into the newly emerging modern retail economy of India. However, according to Third Eyesight’s research of international fashion and accessory brands in India, in the last 25 years it is mid-priced and premium brands that have opened the market. It is only in the last 10 years, well after the economic and retail growth was underway, that luxury brands stepped up their presence.
Sure, during the so-called “retail boom” from 2004, luxury brands went up to one-quarter of all international fashion and accessory brands present in the market. Then, when practically the whole world was in a recessionary mood, and mid-priced and premium brands took a call to defer their India launch plans, luxury brands pushed ahead. In 2009, luxury fashion brand launches accounted for two-third of all foreign fashion brands launched in India. Maybe the brand principals felt that this market could take on the burden of slowing growth elsewhere, or perhaps it was their Indian counterparts who were the source of optimism. Either way, the optimism took a hit in 2010 and 2011 when it was luxury brands that became cautious.
In terms of store openings and location selection too, luxury brands seem to have waited for the overall market to upgrade itself, and have then latched on to that growth. Previously luxury brand stores, such as there were, largely restricted their presence to five-star hotel shopping arcades, while a few took up non-descript sites as they were confident of being destinations in their own right or clustered together to create a precious few bohemian locations in surroundings that were far from luxurious. As modern shopping centres emerged in recent years, these presented an environment where rich consumers — especially the ‘new’ rich — could flock to buy globally benchmarked lifestyle statements. While these were mainly targeted at mid-market to premium brands, some of them are now even attracting designer brands such as Canali at Mumbai’s Palladium mall rubbing shoulders with Zara. These new luxury stores in mid-market or premium locations are performing better than the original “luxury” sites.
Thus, in terms of expressing confidence in the market, luxury brands seem to be following market trends rather than leading them. And far from being the anchors to create demand, they seem to be following where the demand goes.
Design and product development
The most important impact that luxury brands could have on the market is by influencing product design. This fashion trickle-down is supposed to work in two ways: one, through “inspiring” knock-offs by cheaper brands; two, making luxury customers act as opinion leaders and trend-setters for other consumers.
However, various factors dilute the luxury brands’ product and design influence in India: the preponderance of domestic (“ethnic”) style and colour, especially in womenswear, the existing domestic variety in products, the flood of premium (non-luxury) international brands and a customer base that is oblivious to the difference between the premium and luxury segments. In spite of their small size, Indian luxury and designer brands possibly have a larger direct impact, not to mention the massive Bollywood machine that drives mainstream fashion trends on a day-to-day basis. The international luxury giants are conspicuous by their small influence.
In fact, increasingly the influence is flowing the other way. A few luxury brands have attempted to create India-specific items to give the customer what they might want. Some of these may be indulging in superficial pandering such as putting an Indian image on a global product, but others have created Indian products that genuinely reflect what the brand stands for. While some use India as a production sweatshop to minimise the cost of high-skills jobs, others are now beginning to use Indian crafts to design products that are relevant to other global markets. A few examples, without passing judgement on which category they fit into, include: Lladro’s Spirit of India collection, the Hermès sari, the Jimmy Choo “Chandra” clutch bag, Louis Vuitton’s Diwali collection and Canali’s nawab jacket.
Slow, but not yet steady
Another issue with India is the sheer numbers, or the lack thereof!
China’s GDP is about four times the size of India’s but its luxury market size is estimated to be six times that of India. There are 1.7 million households in China that meet the high net-worth criteria, as compared to 125,000 in India. What’s more, according to industry estimates, only about 30 per cent of luxury consumers in China are actually wealthy, while the overwhelming majority are people with mid-market incomes who are given to conspicuous consumption, whether buying luxury goods for themselves or as gifts.
Indian consumers also have a penchant for buying overseas rather than shopping from the same brands’ stores in India. This is not just due to higher costs and import duties in India, but because of wider and more current selections of merchandise in stores overseas. Indians’ luxury shopping destinations include the usual suspects: London, New York, Paris, Milan, Singapore and Dubai. This has meant that while luxury brands recognise Indians as a large, emerging base of customers, for most brands India itself remains an operating market for the future.
Having said that, when compared to any other sector of business, luxury brands in India probably get the most media coverage for every rupee of sales earned. Although they are a small fraction of the sales, luxury brands rule in terms of column centimetres or telecast seconds. The coverage is not restricted to consumer-oriented media such as lifestyle magazines or mainstream newspapers, individual luxury brands are also extensively covered in business media.
One may argue that such is the nature of luxury: this disproportionate visibility and share of mind happen because luxury is not just aspirational, but inspirational. However, that inspiration and influence is yet to become apparent in the business at large. Until we see significantly larger numbers of upper-middle-income customers in India, luxury brands will find it difficult to expand their reach beyond the small base of ultra-rich consumers. The aspiration and price gap is just too wide for the Indian middle class, and there are very few who will emulate their Chinese counterparts and save up a year’s salary for a single luxury item.
One thing is beyond doubt: the luxury sector in India is undergoing significant change. We could even say it is in active ferment. There has never been so much interest among so many people, or so many brands so widely promoted, as now.
The question is still open on whether it is a good ferment such as the one that produces wine from raw grape juice and fine cheese from plain curds, or the unguided rot that results in a putrid, smelly mess unfit for consumption.
My bet is on the first possibility. In the short term, the luxury business appears to be a mess, littered with fractured partnerships and bleeding financial statements. But the brew needs time to mature. Gradually, as the luxury segment matures along with the rest of the market, we will see the influence trickling down into other segments. But remember, the finest brews do not only impart their flavour to the cask, but imbibe the cask’s characteristics into themselves. So it is with luxury and the Indian market. The message that we have given many other international businesses seems to hold doubly true for the global purveyors of influence, the luxury brands: “As much as you think you would change India, India will change you.”
Pia Heikkila, International Bar Association
Mumbai, February 18, 2013
Multinational corporations such as Vodafone, Shell and Nokia are rarely out of the business pages as the Indian tax officials seemingly never-ending chasing of unpaid taxes gives daily fodder to the Indian press.
But, while it’s tempting to lump all three companies’ cases together under the headline ‘unpaid taxes’, each is, in fact, very different.
Take Shell, the Anglo-Dutch fuel giant. Indian tax officials are claiming unpaid taxes of over £1bn over an equity infusion undertaken four years ago worth £120m. The tax authorities are claiming that Shell underpriced its shares and as a result paid less tax on the internal shares transaction.
Shell India has described the demands as ‘absurd’ and says it will challenge the notion that alleged tax evasion is done by underpricing share transfer between member firms. ‘We do need the right signal that India is going to be a stable fiscal, legal, tax regime. We are not going to have surprises along the way,’ said Yasmine Hilton, the India Head of Royal Dutch Shell in a report by Firstpost.
The Finnish handset maker, Nokia, however, has come under fire for an entirely different reason. Nokia, the Indian tax department alleged, has violated the country’s transfer pricing rules. According to unanimous sources in the local media, Nokia’s case is related to tax payments the company made for supplying software from its parent company in Finland for devices produced in India.
Nokia India objected to officials entering its factory in Chennai, one of its biggest facilities and described the incident as ‘excessive, unacceptable and inconsistent with Indian standards of fair play and governance’.
Vodafone, on the other hand – the world’s largest mobile operator – is fighting a case over paying taxes of nearly £2bn on its 2007 majority stake buy in a local telecom company from Hutchinson. The company is also facing a charge from Indian authorities for underpricing an issue of shares of its Indian unit to a Mauritius-based group company by about INR 13bn (£200m). But Vodafone is fighting back and denies the charges.
These cases have one thing in common: the tax is being collected on transactions retrospectively. It seems, the experts say that India has gone on a hunt for unpaid taxes to boost its coffers. ‘With the slowdown of the global economy – and, more so, the Indian economy – tax collections in the country have been below estimates. Further, with rising concerns over the fiscal deficit scenario, every attempt is being made by the tax authorities to shore up tax collections to bridge the gap,’ said Girish Vanvari Partner and Co-Head of Tax at KPMG in Mumbai.
It could look like a witch hunt for foreign of multinationals operating in India. But, says Devangshu Dutta, CEO of Third Eyesight, a specialist management consultancy firm, ‘there is valid reasoning behind the government’s stand that for value gained on assets that are primarily in India, tax should be paid in India, and should not be avoided/evaded purely through offshore corporate structures that have no inherent value of their own.’
The lines between what is tax evasion and what is tax planning appear increasingly blurred today. ‘Each country should have their own rules but ultimately the idea is that you should pay appropriate taxes within the framework of law in that country,’ said Vanvari. ‘There is global trend by each country to increase their tax bases by taxing the superrich, transfer pricing adjustments, off shoring taxes and so on. Transitioning into these new concepts especially for years gone by is leading to debates, chaos and confusion.’
But continuing tax debacles can seriously tarnish India’s image and alienate foreign investors and companies alike. ‘Retrospective changes such as this affect the image of India as an investment destination not only in the eyes of foreign investors, but domestic investors as well,’ said Dutta.
Business leaders say there is much more to be gained from creating a policy environment that allows entrepreneurial and social energy to be unleashed – rather than be subjected to a constant barrage of rules and regulations.
Sadly, however, these cases and other tax-related litigation are not going to disappear any time soon experts warn.
‘However good or bad the case is, legal battles in India usually tend to be long. Once a tax demand is raised, a portion of the same needs to be deposited whilst litigation is ongoing,’ said Vanvari.
Ultimately India is still trying to get to grips with its own speed of change. But the government should be wary of sending out the message that it can bend the law at will. ‘In that environment, business and non-businesses that can contribute to positive changes and growth feel stifled and don’t do enough to achieve their own fullest potential, or otherwise they just move to another jurisdiction where they can,’ Dutta noted.
(This article appeared on the website of the
International Bar Association on February 18, 2013.)
About six years ago, Kishore Biyani of the Future Group and I were discussing a presentation I had delivered at CII’s National Retail Summit, during which I had mentioned “Purushartha”. This millennia-old living philosophy takes a balanced view of life. Aspects related to consumption are two of its major components including Artha (wealth, commerce) and Kama (sensory pleasure). Dharma (righteousness in society and individual life) and Moksha (liberation) are the other two. My point was that most “traditionalists” and certainly policy-makers in the country have tended to view the retail sector negatively or dismissively.
Of course, at that time most businesses themselves hardly demonstrated any sense of balance, let alone any connection with the reality of India, whether in terms of the consumer’s needs, or in terms of the operating environment in the country. By and large the theme was: push explosive growth, margins be damned; promote “westernised” consumption aspirations, regardless of capability to fulfil those aspirations. Conversely, the four years after the global financial crisis in 2008 have been possibly the worst that the retail sector has faced in recent decades, whether in terms of total losses or the quantum of lost growth opportunity, and business sentiment has swung to the other extreme.
On its part the government has not done much to encourage the sector. After several policy flip-flops, approving investment proposals of some high-profile global brands is a positive signal to the outside world, but none of them so far have unlocked or grown the value of Indian retail businesses in any significant way. There is no doubt that foreign brands and retailers can and should be an integral part of India’s developing retail landscape, but they cannot be the prime drivers of the retail business in India or the saviours of its supply chain. That vision and energy needs to come from within, and the resultant growth will benefit all – Indian and international companies, consumers and the government.
From the ancient treatise Arthashastra, Professor Thomas Trautman quotes the concept of concept of “shad-bhaag” (the state having one-sixth share) as “entrepreneurial” because it has a sense of mutual interest, promoting production and the growth of everyone’s share. This spirit of co-ownership and entrepreneurial participation is largely missing in today’s governance. Direct and indirect taxation remains a complex net for all but the savviest evaders, not to mention all the other regulation and approvals that each business – large or small – needs to comply with.
Somehow the mandarins don’t seem to see that the retail business is a platform for the multi-fold growth of new enterprise, that it is a vehicle for urban renewal, and that it can help enormously in channelling the economy into visible taxable revenues. It also seems to escape them that the biggest drivers for this growth and change will typically be small entrepreneurial businesses, who themselves can only thrive in a simpler and non-adversarial regulatory environment.
The wishlist is not large, but needs some bold steps: enact policies that free up unproductive real estate to reduce costs, reduce regulatory hurdles, remove tax traps, reduce import duties. For instance, one estimate for illegal imports in watches is 75 per cent, where the beneficiaries are the smugglers and those who oil the wheels for them, not the consumer, not the brands or retailers, not the revenue department.
It is an important budget year politically due to impending elections but also economically due to the dismal GDP growth. The animal spirits that the Prime Minister has referred to in the recent past are more in the nature of a “bheegi billi” right now rather than a roaring tiger. The caged golden bird will not lay any golden eggs. Will the Finance Minister choose to crack the whip this year, or cut the chains? We watch with bated breath.
(An edited version of this piece was published as in Daily News & Analysis – DNA on 19 February 2012, under the title “Foreign brands can’t be prime drivers of retail”.)
Taneesha Kulshrestha, Outlook Business
New Delhi, February 16, 2013
the first Debenhams outlet opened in India in October 2007, the
British retailer was more than optimistic about the road ahead.
Never mind that the store — opened in partnership with Planet
Retail at Gurgaon’s Ambience Mall — was nearly 18 months
behind schedule. Debenhams’ international director, Francis
Mcauley, declared that he would be disappointed if the company
did not have 30 stores in India over the next 10 years, by when
the Indian operations could be the retailer’s biggest outside
the UK, he predicted. Now, six years later, those forecasts are
nowhere close to realisation — the department store has just
three stores across India, two in the national capital region
and one in Mumbai. The brand also has a new partner in Arvind
Lifestyle Brands, which bought out Planet Retail’s interest
in November 2012. Expectations are rising again, although they
are considerably more muted than the last time. “I am confident
that within the next five years, we will have around eight Debenhams
stores in the five biggest cities,” says a company spokesperson.
At the other end of the spectrum, several high-end brands, too, have switched partners or changed business models. In 2009, the Murjanis parted ways with Jimmy Choo and Bottega Veneta, both of which moved to Genesis Colors. Aigner, meanwhile, dumped Genesis Colors in 2010, while last year, Versace and Corneliani ended their franchise agreements with Delhi’s Blues Clothing. Again last year, Giorgio Armani quit its joint venture (JV) with DLF Brands and moved to Genesis Colors. DLF terms the termination a “strategic” one. “The luxury business cannot be scaled up in India as fast as we previously believed. So, for now, we will focus on the premium segment of the fashion and retail business,” says DLF Brands CEO Dipak Agarwal, adding that Armani, too, has scaled down its expectations. “The move to end a JV and enter a franchisee model shows that the brand has narrowed its business interests in India,” he adds.
Despite the promise of a big consumer market — a growing middle class with rising disposable incomes, growing awareness of international brands and trends and an increasing willingness to spend on them — many international fashion brands have been forced to rethink their India ambitions. Research by Delhi-based retail consultancy Third Eyesight shows that since 2006-07, some 50-odd brands, including Next, Guess, Gas, Etam, Rifle, Morgan, Saville Row, Lerros, Corneliani and S.Olivers, among many others, have either exited India or have restructured their operations in the country. And the trend continued in 2012, despite the government allowing 100% foreign ownership for single-brand retail outfits in January last year. Brands such as Versace and Alfred Dunhill are said to be eyeing the exit sign currently. How did so many brands get their India strategy so wrong?
Misreading the market
Since 2005, there has been a four-fold increase in the number of international fashion brands entering the Indian market, triggered by the government decision to allow 51% FDI in single-brand retail in January 2006. It didn’t hurt, either, that import duties on apparel came down sharply from about 100% in the 1990s to 35% currently. The result: the organised fashion retail market more than doubled from about Rs 1,000 crore in 2005 to Rs 2,500 crore currently and is expected to touch Rs 6,000 crore by 2015, according to Technopak.
At the same time, for many brands, finding the right business model and understanding the Indian consumer has been an uphill task. “Some find India too complex a market. Besides, partners also tend to have differences when it comes to dealing with the marketplace, the waiting time and investments required to make things work,” points out Devangshu Dutta, CEO, Third Eyesight.
Ankur Bisen, VP, retail and consumer products, Technopak, offers
another reason. “The mistake many people make is they think
of India as one big market, when it is actually many markets in
one.” For instance, Delhi starts buying winter clothing when
it is still hot in Chennai. And people in the north have different
colour and style preferences than those in South India. “Add
to that poor retail infrastructure — the lack of trained
manpower, high rentals etc. — and you know why brands have
been finding it tough.”
Consider Marks & Spencer (M&S). The British retailer entered India in 2000 with a franchisee agreement with Planet Retail, positioning itself as a luxury brand although it was just a high-street label back in the UK. All merchandise was imported from the UK and, not surprisingly, was substantially overpriced. In 2009, M&S switched to an equal JV with Reliance Brands and has started sourcing and manufacturing 60% of its merchandise in India and South Asia, which has brought down its prices by almost 20-30%. The store has also repositioned itself as a mid-market retailer and is making clothes more suited to Indian preferences — longer lengths, higher necklines and more colour options. “We have a better understanding of local taste and style now and our range has been tailored to suit these,” says Venu Nair, MD, Marks & Spencer India.
Similarly, in October 2012, Esprit broke its seven-year licensing and distribution deal with Madura Fashion & Lifestyle after reportedly suffering losses of Rs 20-25 crore every year. German brand Lerros, which had a JV with House of Pearl, too, met a similar fate in 2008 and switched to Numero Uno instead.
Like M&S, these brands also misread the market completely, charging way too much and trying to pass themselves off as premium offerings when their international positioning was more middle market. British brand Next, too, signed up with Arvind Lifestyle recently, breaking a seven-year relationship with Planet Retail.
As it is, most exits or change of Indian partner have some common threads — increasing cost pressures with aggressive expansion of the brands at expensive locations; high pricing due to costly merchandise imports and little or no local sourcing; and the inability to position and price a brand correctly and communicate it to the target customer group.
That’s what happened with Benetton. The iconic Italian fashion
brand was one of the earliest entrants into India, with a 50:50
JV with the DCM group in 1991. In 2004, it split with DCM and
began operating as a wholly-owned subsidiary. But by then, Benetton
was already seen as a T-shirt company that was always on sale
— the company advertised heavily during its two annual sales
but did virtually nothing the rest of the year; it didn’t
help that the ads showed products that weren’t available
in India. The Italian parent brought in a new team, focused on
increasing local sourcing and made the product offering more up
to date. “Earlier, there was a view in the company that the
Indian consumer did not have the same sensibilities for fashion
as international customers. That was a mistake,” concedes
Sanjeev Mohanty, Benetton’s MD in India. Now, the Indian
stores are on par with stores in London, Paris and Milan, with
the same clothes and visual merchandise effects, although all
manufacturing is done locally. There’s also been a change
in how Benetton sells in India: the company is now a pure wholesale
player in India, catering to over 500 stores across 110 cities,
with reported sales upwards of Rs 650 crore. “We own no stores
and have instead appointed master franchisees that distribute
our products,” says Mohanty. “We do have a complete
grip on design, marketing and guidelines for selling our products,
The Local edge
Where Benetton and M&S have realised the need to source locally, many brands falter by insisting on importing merchandise. “This alone can push up costs by 30-35%,” says Third Eyesight’s Dutta. If the retailer can’t pass on the increased cost to the customer, margins are immediately hit. Several international brands have faced this problem and are now increasing their local sourcing or giving licences to Indian partners to manufacture on their behalf. At Lacoste, for instance, long-time partner Sports & Leisure Apparel has the licence to manufacture and retail the French company’s apparel in India. “Manufacturing in India has helped in cutting costs, allowing us to maintain a better bottomline. We are also able to get new designs and clothes to the market faster,” says Rajesh Jain, CEO, Lacoste India.
It’s not only about cost; importing apparel also means limited scope to adapt sizes and styles. “India has very local aesthetics and some brands don’t allow for that. They try to plug and play and that’s where the trouble starts,” says Max India executive director Vasanth Kumar. The Dubai-based Landmark Group’s value clothing brand has a design team of 20 people working in India to adapt Max’s global lines to local sensibilities. That hasn’t saved it from mistakes, though: over the past six years, the chain has grown to over 70 stores but has also closed outlets at places like Jalgaon and Nanded. “It takes time to understand the different tastes and needs of consumers across the country,” points out Kumar.
Trouble is, foreign brands can be rather impatient and their
haste to expand can backfire. High-cost rentals were part of the
reason Gas exited India the first time and it’s also a key
reason why S.Oliver is yet to make a profit here. The German brand
entered India in 2007 through a joint venture with Orient Craft
and opened large stores — 5,500 sq ft on average — in
prime locations; the brand reportedly signed a long lease for
a 7,000 sq ft store in Delhi’s Select Citywalk mall for Rs
3 crore. In May 2012, Orient Craft sold its 49% holding in the
JV to Design Pod India. The new strategy includes halving the
size of outlets to 1,200-2,400 sq ft. While clothes will still
be imported, they will be procured directly from hubs like China,
Bangladesh and Hong Kong instead of being routed through Germany.
Prices are also being slashed by almost 30-40% to bring the brand
in line with rivals like Zara, Benetton and Mango.
It’s not only the foreign brands that are unhappy with how their Indian operations are being run. In May 2009, at a luxury conference in Delhi, Mohan Murjani, chairman, Murjani Group, took everyone by surprise when he declared the termination of the Murjani Group’s JVs with brands such as Gucci and Jimmy Choo, citing unfavourable terms of trade. Most foreign brands did not partner the Indian owner for losses, but wanted all profits to accrue to them in the form of royalty and profit share. “Sadly, brand owners have pursued one-sided and imbalanced agreements, which have now started to unravel,” Murjani noted at the conference.
But some of that problem also stems from the fact that Indian partners oversold the India potential to their own peril. That’s the reason DLF Brands snapped its four-year-old ties with Ferragamo and Armani in 2012. “We found that we could only open five or six stores for these brands and there isn’t much potential for the luxury market over the next five or six years. So, we have decided to focus on mid-market and premium brands such as Mothercare, Alcott and Boggi,” says Agarwal. Incidentally, Mothercare is another foreign brand that’s switched partners in India — the British chain came into India through a franchisee agreement with Shoppers Stop but changed to a 30:70 JV with DLF in 2009, which has since been expanded to a 51:49 arrangement in favour of Mothercare.
There’s also trouble when the Indian partner underestimates just how deep its pockets need to be to develop a fashion brand. Blues Clothing was started by Dinesh Sehgal in the mid-1990s to sell suiting material from premium international brands such as Cadini and Canali at the family’s stores in Delhi’s posh South Extension. Since 2005, the company signed on a number of brands such as Corneliani, John Smedley and Versace but has suffered heavy losses. While Versace has moved on to a partnership with Majgenta Fashions, Corneliani has formed a JV with OSL India, which also holds dealerships of BMW and Volkswagen.
Unfortunately, the list of failed marriages is a long one when it comes to the luxury business. But the good news is that, despite the stumbling blocks, foreign brands are a long way from breaking ties with the Indian market. M&S plans to open 10 more stores by Summer 2013, its biggest expansion in a single year after having been in the country for over a decade. India is among the four biggest emerging markets for Lacoste globally — the Indian operations grew 33% last fiscal and Jain is confident of maintaining the pace this year as well. Benetton, Levi’s and Max have stuck on over the years and now have turnovers in excess of Rs 650-800 crore. Market research firm Booz & Co expects organised apparel retail — which accounted for 17% of the $36 billion market in 2010 — to grow to 25% of the market by 2015 as the apparel retail industry, too, continues to grow by 5-10% in the same period. That means an opportunity of nearly $10 billion awaits apparel industry players who hang around for the next few years. Surely that’s reason enough to cultivate a little patience and tolerance.
Mayu Saini, WWD
New Delhi, February 14, 2013
The Indian government on Wednesday approved foreign direct investment, or FDI, in single-brand retail by four retailers – French brands Promod, Decathlon and Le Creuset and U.S. firm Fossil Inc.
The four companies will invest a total of 7.5 billion rupees, or about $140 million, in India, according to an official of the Foreign Investment Promotion Board.
According to officials, Fossil Inc. and Decathlon, both of which already are present in India, applied for 100 percent FDI. Promod, which first entered India with a franchise agreement that was changed to a joint venture with Indian company Major Brands in 2012, continues to look at a joint venture model. Promod is in nine locations at this time, including New Delhi, Mumbai, Pune and Bangalore.
Decathlon, the giant sports retailer, will bring in foreign equity of 7 billion rupees, or $130 million, officials said. Promod and Fossil are smaller, at 300 million rupees, or $6.1 million, and 220 million rupees, or $4.1 million, respectively.
"The move to invest directly in the Indian market for all three brands is a demonstration of longer-term commitment and confidence," said Devangshu Dutta, chief executive of Third Eyesight, a specialist consulting firm focused on the consumer products and retail sector. "For these and other brands who have joint ventures or subsidiaries in India, the engagement goes beyond the financial investment, it also needs a commitment of senior management time and attention."
He said that Promod’s move from a distribution or franchise arrangement to a joint venture has "been in the pipeline for a while. Fossil has also been distributing through various channels, and a fully owned retail business will enable them to take direct control of how the brand interfaces with the discerning Indian consumer. Decathlon entered the market about three years ago with a fully owned cash-and-carry [wholesale] venture, which has given them an advance insight into the market; the change to a retail business will now enable them to directly tap into the growing consumer demand for sporting goods and sportswear in the country."
Allowing foreign direct investment in retail has been a politically
sensitive issue for the last decade, and 100 percent FDI in single-brand
retail was permitted only in September 2012. Global retailers
are now looking at the Indian market with a different perspective
to evaluate the long-term gains and the potential of a retail
market that is still growing at more than 20 percent a year.