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February 26, 2013
Liz
Morrell, Retail Week
February
26, 2013
India
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
its business.
Political considerations
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."
Partners preferred
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
in 2008.
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,"
says Cross.
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.
Insurmountable difficulties?
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
says.
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
