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Imported food items may cost up to 20% more on rupee slide

Suneera Tandon & Vidhi Choudhary, MINT

Mumbai, June 22, 2013

The slump in the value of the rupee against the dollar may force dealers of imported foods such as cooking oil, snacks, cereals and cold cuts to raise prices by as much as 20%, although they are reluctant to do so because of sluggish demand, experts said.

Some items could possibly go off the shelves as importers stop imports for a few months in the hope that the Indian currency will become less volatile. The rupee has plunged to a record low as investors have been exiting markets after US Federal Reserve chairman Ben Bernanke signalled a possible end to stimulus spending.

“We have streamlined imports for the next three months. We will wait and watch,” said Amit Lohani, managing director at New Delhi-based Max Foods Pvt. Ltd, which distributes Doritos chips and Danish cookies and products from companies such as Kraft foods (UK) and Nestlé coffee through retailers across India. If the rupee weakens further, Lohani said prices could rise by a fifth.

Uday Chugh, who runs New Delhi-based Vriddhi Specialty Foods Pvt. Ltd, has suspended imports. “The costs are just not working out for us,” he said. “I have halted all my shipments coming in from America as of Thursday.” The company imports cooking oil, snacks and sauces from the US and Europe.

As most importers work on a shipment cycle of 35-40 days, the impact of the depreciating rupee will be strongly felt in the next few weeks and months, if not longer. Shop prices are determined by factoring in the rupee value along with its impact on freight and transport cost.

Chugh is wary of price increases that could hurt demand. “We are very hesitant to take further price hikes,” he said, adding that he will absorb as much as he can before passing higher costs on to consumers.

Rakesh Banga, who runs Banyan Finefoods India Pvt. Ltd, a New Delhi-based importer of cold cuts and packaged products such as tuna and breakfast cereals, fears that customers could dry up.

“Demand for certain categories will completely erode if things don’t improve,” he said, adding that he anticipates price increases to the tune of 15-20%.

He’s still placing orders though. “I cannot afford to stop shipments as business will get impacted,” he said.

Demand is already under stress because of the inflationary environment, Lohani said.

“Imported foods are a luxury for consumers, but when price hikes like these take place alongside high costs of living, consumers will see the pressure,” adds Lohani.

Arvind Singhal, chairman of retail consultancy Technopak Advisors Pvt. Ltd, agreed. “The biggest cause for this is not just a depreciating rupee but the general slowdown in the economy, which has led to a decline in discretionary spends, especially for products which have local substitutes available at cheaper prices, with the exception of the very affluent consumers,” he said.

Venkat Narayanan, chief merchandising officer at supermarket chain Spencer’s Retail Ltd, which has 134 stores across India, said the company hasn’t seen any erosion in demand as prices have been constant.

“While we continue to monitor the value of the rupee, we have not made any changes to the pricing of our imported product range. As a result, there has been no appreciable change in consumer demand either,” he said.

About 8% of the chain’s portfolio comprises imports—processed food, staples and dairy products besides chilled and frozen items among others.

“Of course, if the rupee continues to stay depressed in the long term, it will definitely have an effect on pricing but we do not foresee an immediate impact on demand unless the (rupee) fall is dramatic,” Narayanan said.

Mohit Khattar, managing director at gourmet food chain Godrej Nature’s Basket, is confident of being able to ride out the rupee storm.

“Even if there is a decline in this market, it will not have such a great impact on our existing consumer base since they are well insulated from such price hikes,” he said.

If the rupee doesn’t get back on even keel, however, store footfalls may remain stagnant, he said.

Pramod Gupta, owner of New Delhi’s Defence Store that sells imported confectionery and grocery items, said: “Since this (rupee decline) might impact importers, it’s possible that they stop purchases of stock for sometime, although, I feel this is only a temporary glitch and it’s too early to say anything.”

The store, located in delhi’s defence colony and operating since 1952, gets 30% of its sales from imported food categories.

Specialty gourmet stores have over the past few months found it difficult to sustain business because of sluggish demand, rising real estate costs and import duties. “Real estate cost as well as people cost are crucial deciding factors here,” said Devangshu Dutta, chief executive at retail consultancy Third Eyesight. “With a price increase of 10-15%, the mass market demand for these products from consumers who were essentially occasional buyers will get hit,” he said.

A high price for fashion?

Shikha Kumar, DNA

Mumbai, June 16, 2013

When American brand Forever 21 launched in India three years ago, Delhi-based Mehak Sagar was most excited. She hit the store on the opening day with her friends only to get a rude shock. “The prices were nearly double the prices in the US. Forever 21 was always my favourite brand when I went to New York since it was fast fashion yet reasonably priced. But I can’t say the same of the India outlets,” says the 26-year-old, who blogs at peachesandblush.com.

As the retail sector booms, global fashion names like Mango, Zara, Forever 21 and Vero Moda have an established presence in India (the third-largest global economy after the US and China) and are even looking to expand. Higher disposable incomes and availability of credit have significantly enhanced consumers’ buying power and this is good for these brands. But the catch is that their customers are well-travelled, Internet savvy and more aware than ever before. This means they are acquainted with prices of labels abroad and in typical Indian style, tend to compare prices of the label abroad to prices in stores in India. What they find out doesn’t make them happy.

Price woes

“It’s a fact that prices differ. I got a pair of shoes from Zara abroad for $30 (approx Rs1740). In India, they wouldn’t cost less than Rs3,000,” says Samidha Sharma, a business journalist and blogger at Street Style India, who shops extensively in India and abroad.

Sagar claims that in India, Forever 21 retails under the ‘luxury’ category for youngsters (like pocket-money receiving students), while in the US it is a budget brand that retails dresses that cost as little as $10 (less than Rs 600).

This phenomenon is not restricted to clothing labels alone. Aashumi Chudgar, an accessories merchandiser in Mumbai, says brands like Accessorize and Claire’s known for their shoes, bags and jewellery also price themselves higher than they do in stores abroad.

“When I was in the UK, Accessorize was an affordable brand. Here, it’s quite expensive with an average bag costing Rs3,000,” says Chudgar. Claire’s launched in India last year and is also priced more than at its stores in the West.

Shoppers say that purchasing power is also a very big factor here. “Bringing brands at the same prices doesn’t make sense since our purchasing power is lower. So, if an outfit costs 20 Euros abroad and Rs1,500 here, it’s still expensive for us. I don’t understand the economics of that,” rues Sagar.

Local taxes extra

One of the main explanations for higher prices is that local taxes and other costs tend to be higher in India. This is passed on to the customer.

Higher costs because of import duties and real estate prices lead to brands being more highly-priced in India as compared to in their home markets, agrees Tarang Saxena, lead consultant at Third Eyesight, a leading retail consultancy firm.

Inflation and occupancy costs in India are a cause for great concern, says Vishal Trehan, the India business head of clothing brand Forever New, that entered India in 2007, just a year after it was founded in Melbourne.

“Occupancy costs in Australia are around 12% while in India they’re 18 to 20%. All this adds to the costs and even profits take a hit.” He adds that Forever New merchandise in India is actually 5 to 10% cheaper, a fact that is confirmed by comparing the prices on the brand’s India and Australia websites.

Ayush Tainwala, brand head, Accessorize, echoes Trehan somewhat. Higher taxation and customs policies in India lead to higher prices he says. “We don’t get deductions in India.

Also, the rupee has been depreciating against the pound by 10 per cent every year.”

Similarly, Kristin Strickler, the spokesperson for Forever 21 in India says that a difference in prices, if at all, is only due to VAT because the brand offers merchandise in India at roughly the same prices as in the US.

Bring on the competiton

The flurry of brands opening in India may be a good thing for the customers as more competition means reduced prices. “I recently noticed that Mango has reduced prices by nearly 20-30% since its launch several years ago. Brands do feel the pressure of competition,” says Sharma.

And with H&M (a budget brand in Europe) also slated to enter the Indian market soon, the customer will eventually be the winner.

“Initially, international brands positioned themselves at a higher level in India as compared to their home markets, charging a premium for being a "foreign" (read "desirable") brand,” says Third Eyesight’s Saxena, "But with an increased awareness amongst shoppers now, brands are feeling the pressure to align their pricing in India to global prices. Some have also realised that higher prices restrict their access to a larger market in India."

Will FDI be the game changer?

With FDI now being allowed for single-brand retail, will prices go down?

“With liberalised FDI, the brand may decide to take a hit and reduce prices so that entry-level prices draw the target audience. But whether the brand chooses to reduce the prices or not depends on their individual strategy in India,” says Saxena.

Accessorize’s Tainwala says the new FDI rules won’t really change pricing.

But Prashant Agarwal, MD, of Bestseller India that owns labels like Vero Moda, Only, Jack and Jones, is diplomatic when he asserts that Bestseller will always try to reach price points that appeal to their targeted consumer segment.

Media professional Nikita Shah, whose favourite brands are Promod and Zara, has a better idea. She says that while it’s great to see more and more global brands coming to India, the country needs to develop its own high-street brands to take on those from abroad.

“We need more homegrown brands here. Indian brands should take a cue and start designing fabrics and styles keeping in mind Indian sensibilities especially since they know that customers are ready to pay.”

Star Bazaar, too, has a pre-paid card now

Sayantani Kar, Business Standard

Mumbai, June 12, 2013

Hypermarket chains are launching pre-paid cards to boost their brand’s stickiness. These are a mode of payment for consumers and often come with consumer benefits. However, experts say the benefits accrued to the retailer are why some of them have launched pre-paid cards in quick succession. For branded retail chains, such cards bring in ready cash and, even, repeat visits from the consumer.

Star Bazaar, the hypermarket chain of Tata’s retail arm, Trent Hypermarket, has launched its gift cum recharge card called ‘Easy Shop’. It will provide shoppers with a cashless payment option. Star Bazaar’s card, which is essentially a pre-paid card, comes after Future Group’s Big Bazaar had rolled out its prepaid card scheme called ‘Big Bazaar Profit Club’ this April.

Unlike the latter’s scheme which required users to pay Rs 10,000 and a one-time processing fee of Rs 100 upfront, the former’s prepaid cards entail no added charges and can be obtained for a minimum of Rs 250 and a maximum of Rs 49,999, with top-ups of Rs 50. Both are valid for a year.

However, Big Bazaar’s pre-paid card came with an additional Rs 2000, enabling the consumer to shop for Rs 12,000 in a year, having paid Rs 10,100 in all. Star Bazaar’s card, if bought or refilled for Rs 1,000, will get the user 2 per cent extra in an introductory offer.

Devangshu Dutta, the CEO of the retail consultancy, Third Eyesight, says, "Pre-paid cards drive upfront sales and yes, ready cash, for the retailer. It also ensures sustained stickiness with the brand, since the card-owner will be coming back to buy the card’s worth of product. If designed well, it can even ensure frequent visits by the consumer, increasing the chances of additional purchases by the same consumer." Dutta refers to Big Bazaar’s card which allows shoppers to claim no more than Rs 1,000 worth of products each month on the pre-paid card. If a shopper wants to buy more, she will have to shell out additional money.

The Easy Shop card from Star Bazaar can also be used during sales and discounts. Sushmita Paul, head of marketing, Star Bazaar, says, "We have kept the card flexible without too much of restrictions. Given the different spending patterns, we have not kept the minimum amount too high, even though the average ticket price at our stores can range from Rs 1,250-2,000. It can be used as a gift card too. The cashless nature ensures that people can even hand it over to their domestic help for shopping." The card can be used at any of the 14 Star Bazaar outlets across Mumbai, Bangalore, Ahmedabad, Chennai, Pune, Aurangabad, Surat and Kolhapur.

It will be marketed through print ads, the Internet and in-store promotions. Vijay Boppa, CEO and MD at Payback India, the loyalty programme brand, says, "Such pre-paid cards can be used to capture an opportunity that the existing payment tools could not. Used as gift cards, they can act as referrals. Whereas, loyalty cards are payment-agnostic, used to drive footfalls, repeat purchases and gather insights on marketing."

Even though Dutta points out that retailers share part of the interest they might be earning on the deposited cash, through consumer discounts, there are costs that they incur. Marketing and backend systems are some of the major cost centres for such schemes.

New FDI rules a setback for foreign, local retailers

Nandita Bose, Reuters

Mumbai, June 7, 2013

New rules requiring foreign supermarkets to set up their own warehouses and stores in India are likely to further delay the entry of companies like Wal-Mart, increase costs and hurt cash-strapped local retailers eager to partner with foreign companies.

India allowed foreign chains to enter the country to set up retail stores in September 2012, but ambiguities in the policy means that so far, no foreign company has applied to the government for permission to set up shop in the $500 billion industry.

Under the new rules, the government late on Thursday said global supermarket operators cannot acquire existing assets of Indian companies and said the initial mandatory $100 million investment to set up supply chain infrastructure and stores must be new.

That means any existing supply chains, including those owned by a domestic retailer that a foreign company might look to buy, will not count towards the $100 million minimum.

"In a nutshell this will delay everybody’s plans," said Devangshu Dutta, who heads retail consultancy Third Eyesight. "Companies like Wal-Mart, Tesco can acquire assets later on but not initially and that means more time to start their operations," he said.

A spokeswoman for a joint venture between Wal-Mart and Bharti Enterprises said the company was studying the government’s clarification on retail rules. Bharti Walmart Pvt Ltd is a wholesale joint venture started in 2007.

Companies such as Future Retail Ltd, which runs the Big Bazaar hypermarkets, Shopper’s Stop Ltd, which runs Hypercity, and Trent Ltd with its Star Bazaar hypermarkets, are all open to selling stakes in their operations to foreign partners in an effort to access funds required for expansion.

"These rules are disappointing and will delay our plans," said the chief executive of an Indian retail firm who did not wish to be named. "It will make it difficult to do business, but obviously this is not the end of the road," the executive said.

Shares in Future Retail fell as much as 3.4 percent on Friday after the announcement. The stock ended down 3 percent. Trent ended down 2.7 percent and Shoppers Stop ended 0.7 percent lower.

(Reporting by Nandita Bose and Abhishek Vishnoi; Editing by Tony Munroe and Matt Driskill)