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Damp squib

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April 22, 2013

Vandana, The Week
Mumbai, April 22, 2013

It has been six months since the Indian government allowed 51 per cent FDI (foreign direct investment) in multi-brand retail. However, in spite of numerous attempts at wooing foreign retailers, there has hardly been any investment. Global retailers who had lobbied for access to India’s multi-brand market have, so far, shied away from entering. “It is not enough to criticise the government,” said Finance Minister P. Chidambaram. “India Inc. should go back and loosen their purse strings.”

Commerce Minister Anand Sharma and his team at the department of industrial policy and promotion (DIPP) have been meeting foreign retailers, consultants and industry representatives. They networked with the who’s who of global trade at the World Economic Forum in Davos in January, but FDI in multi-brand retail in India remains elusive.

“India is not an easy market to do business,” said Devangshu Dutta, CEO of Third Eyesight, a specialist management consulting firm focusing on consumer products and retail. “Retailers will have to put infrastructure in place along with a host of government clearances. A calibrated opening would have been better. China took 11 to 12 years to open up its retail sector. They [the government] should have consulted people across the spectrum, rather than hasten the process. They have overstated economic benefits and understated adverse effects.”

None of the global retail giants—Sainsbury’s, Walmart, Carrefour and Tesco—has expressed a desire to enter the Indian multi-brand retail sector. “We have not received any proposal for relaxation of norms,” said Saurabh Chandra, secretary, DIPP.

Sainsbury’s and Tesco have opened sourcing offices in India but are still noncommittal on multi-brand entry. “We have no plans to open stores in India as we are continuing to focus on growing our business in the UK,” said Tom Parker, spokesperson for Sainsbury’s.

A reason for the reluctance of prospective investors is the continuing protests by local traders and politicians. “The presence of global retailers will lead to loss of jobs and local shops will not survive,” said Praveen Khandelwal, secretary general of Confederation of All India Traders. “They will bring predatory pricing and end competition. Even in the case of cash-and-carry, they have been flouting norms. We will continue our opposition.”

India’s first wholesale joint venture Bharti Walmart’s cash-and-carry store in Agra has 48,000 registered members. The store is abuzz with activity as local shopkeepers and traders pour in to stock up their shops. They make impressive margins. “I save Rs.8 to Rs.100 on various products,” said a shop owner. Seeing its popularity, Carrefour has opened a store in another part of Agra.

The cash-and-carry business serves as a learning ground for global retailers, who first want to get comfortable with wholesale operations, infrastructure and supply chains before venturing into multi-brand retail. However, there are other reasons, too.

The FDI policy states that each state can decide if it wants to allow foreign retailers into its territory. With Gujarat, Kerala, Odisha, Uttar Pradesh, West Bengal, Madhya Pradesh and Bihar expressing their reservations, retailers are left with few options.

“Allowing foreign investment in the retail sector is clearly in violation of Gandhian principles and ideology,” said Odisha Chief Minister Naveen Patnaik. “FDI in retail will also lead to loss of income for small traders across the country.”

Even in states that have welcomed FDI, the opposition’s stand on the subject is key as retailers are at risk of losing their investment if the government changes.

“While a lot of background work is being done by global retailers looking to enter the Indian market, the uncertain political environment makes them jittery,” says Darshana Shah, business head of marketing and visual merchandising, HyperCity Retail. “With elections round the corner, people are still waiting and watching. Many foreign retailers are visiting stores, doing surveys and due diligence, but it will take time.”

The policy states that foreign retailers can open their outlets only in cities with a population of more than 10 lakh. Going by the 2011 census, there are 45 cities that make the cut. Of these, only 19 can attract FDI as the remaining 26 are in states that oppose it.

The sourcing clause is also a contentious issue. Under the policy, multi-brand retailers should source 30 per cent of manufactured or processed products from Indian ‘small industries’ with investment in plant and machinery not exceeding $1 million. “Apart from worries over quality, the mandatory sourcing norm will restrict retailers in getting products with technical specialisations,” says Pinakiranjan Mishra, partner and head of retail and consumer products at Ernst & Young, India. “Retail players will have to incur high costs towards training a large number of small suppliers, with the brand reputation at stake. Foreign retailers can’t keep monitoring whether the small industry has exceeded $1 million.”

The policy also requires foreign retailers to invest 50 per cent in ‘back-end infrastructure’ within three years. The government’s argument for the clause is that it wants to strengthen supply chain infrastructure. Globally, however, the supply chain is either outsourced or shared between various players.

“Everyone investing in their own supply chain is a highly inefficient model,” said Arvind Singhal, managing director of retail consultancy Technopak. “There are concepts of third-party and fourth-party logistics wherein the third party builds the cold chains and warehouses that are used by several players.” The major chunk of back-end cost will comprise land cost and rent of warehouses, but many foreign retailers already have back-end facilities for their existing wholesale ventures.

The slowdown of the world economy has made foreign retailers all the more cautious. Most are from countries currently under severe financial strain. So, they would rather put their house in order before venturing out.

Deterrents to foreign multi-brand retailers
* Mandatory 30 per cent sourcing from Indian small industries
* Political uncertainty
* Mandatory large investment in back-end infrastructure
* Violent protests from trade unions and shop owners
* Global slowdown and reputation issues. Walmart’s Indian unit under the government scanner

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Global Report: India

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April 20, 2013

Caroline Perry, Drapers
London, April 20, 2013

With a youthful population, and growing affluent middle class that is projected to grow tenfold by 2025, retailers have long eyed up this vast country as one ripe for expansion, but it has remained a complex proposition with many challenges.

"There is still a lot of low-hanging fruit in India," says Ira Kalish, head of consumer business at consultancy Deloitte. "But the retail market is still dominated by family-owned stores. Only about 15% of the market is modern retailing."

This slow growth has been due to India previously being closed to foreign direct investment. Until the beginning of 2012, retailers interested in opening in India had to do so with a partner, as regulations only allowed them to own 51% of their Indian business.

While such regulations remain in place for multi-brand retailers, single-brand retailers can now own 100% of their operation, although there is a stipulation that the Indian arm of the business sources 30% of its stock from small to medium-sized Indian suppliers.

Devangshu Dutta, chief executive of management retail consultancy Third Eyesight, says India accounts for about 10% of total sourcing for most international fashion brands: "We shouldn’t expect any dramatic changes, though we do expect the growth in joint ventures and subsidiaries to continue in the coming months and years."

Having a local partnership can also be key to navigating India’s complex foreign trade and legal regulations, says Jonathan Coates, relationship director for fashion, retail and wholesale at Natwest/RBS banks. "Local expertise is key if you’re looking to export to India but you must research potential partners properly first."

According to Dutta, there are about 10 groups that work as franchisees, licensees and joint-venture partners to a substantial number of international brands in the market, including franchise operator Future Group, retail giant Reliance, textile business Arvind and smaller entrepreneurial companies such as Genesis Luxury.

Footwear retailer Clarks formed a joint venture with Future, India’s largest retailer, for its launch into the market in 2011. Although that predates the regulation change, Andrew Martland, Clarks’ president for Asia Pacific, says it has no plans to change strategy: "We wanted a partner that understood the dynamics of the market, such as where to actually locate the stores. There was so much mall development at the time – we wanted to make sure we picked the right malls. Plus a local partner has bargaining power with the landlords."

Clarks has 26 stores across nine major cities, including Delhi, Mumbai and Bangalore. The majority are located in shopping malls, although it does have some high street locations. Its first store opened on a big shopping destination street in Delhi, which Martland said was a statement location for Clarks when it opened.

Clarks’ experience mirrors the kind of property availability there is in India, with malls and shopping centres increasingly popular. During the boom years, from 2004-08, retailers had to speculatively rent space to ensure they would get into the right locations, but real-estate costs have risen and more conservative growth in recent years means retailers have become more selective.

Meanwhile, Dutta adds: "I would say the ability to evaluate site feasibility is a bigger issue than availability of sites."

Clarks’ partnership with Future also gave it access to its logistics business, FutureLogistics, which handles its physical stores. This allowed Clarks to avoid dealing with India’s fragmented logistics market. Although, the footwear retailer recently appointed a specialist ecommerce logistic partner to service its website, which launched at the end of last year.

Dutta says it is common for retailers and brands to use a combination of logistics operators. "A majority of retailers blend services of large and small third-party logistics operators, especially if their store network is dispersed across the country."

There are mixed reports on the reliability of India’s infrastructure, with the majority suggesting it is comparatively poor, although Martland contests it is developing quickly with a motorway network "of sorts" and improved airlines.

Anita Balchandani, partner at OC&C Strategy Consultants, believes the non-food infrastructure is at an early stage, which means there are difficulties in the last-mile service for retailers considering online as a way of testing the market. India has a nascent ecommerce business, which is expected to be driven by mobiles rather than desktop PCs.

Import duties are quite high, particularly for footwear because it has a big domestic manufacturing market and is seeking to protect it. "Customs and import is complicated," says Martland, who adds that it is a difficult regulatory market, even for getting shops and establishment licences for each store. There is also a complex tax structure and, for many retailers, the level of bureaucracy can be overwhelming.

To succeed in India, there are certain things specific to Indian consumers such as the demand for a range of styles driven by the regional differences in weather, says Martland. "There are lots of brands that have come to India – some that are successful and some that aren’t," he explains. "It is those willing to adapt that survive."

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Women driving demand for branded sunglasses

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April 16, 2013

Suneera Tandon, MINT (A Wall Street Journal Partner)
April 16, 2013

Currently 40-45% of the collection in terms of volume is devoted to women’s products by Luxottica. The category is growing at 30% compared with 20% for men’s sunglasses, the company said.

According to a March 2012 report on the sector by the Associated Chambers of Commerce and Industry of India (Assocham), the sunglasses market was estimated at Rs.2,200 crore in 2012. The report suggested that premium sunglasses—brands such as Esprit, Giorgio Armani, Cartier, Tommy Hilfiger, Ray-Ban, Dolce and Gabbana, Calvin Klein and Police—are growing at 40% a year and that high-end eyewear accounts for about 30% of the market.

Maui Jim, the American eyewear brand that has been present in India since 2009, has increased the proportion of women’s sunglasses to 30% from 5%.

“We are seeing a big demand from women consumers coming from cities such as Mumbai, Delhi, Bangalore,” said I. Rahumathullah, managing director, Maui Jim India. Higher disposable incomes and the need to match occasion and ensemble are among the reasons for this, he said.

While women are adding to the growing consumer base, the availability of multiple brands and a marked shift towards them are driving growth in the category, according to experts.

The availability and visibility of such products in retail areas such as malls is helping boost demand for sungalsses, said Devangshu Dutta, chief executive of New Delhi-based management consulting firm Third Eyesight. The difference in the growth rates is also because men generally go with one look that combines style and practicality, while women have a keener eye for style.

“Men would buy shades for protection and quality while women would go for multiple brands to suit different occasions,” Dutta said.

The availability of branded products has helped push sales, said Ravi Kant, chief executive officer, eyewear business at Titan Industries Ltd, which operates 220 Titan Eye+ stores in 72 cities that sell brands such as Vogue, Cabana, Esprit, Fastrack and Ray-Ban, among others.

“Earlier, the optical outlet was the brand, but today consumers differentiate one brand from another,” he said, adding that people who come into the stores now ask for brands by name.

Preferences differ by region, according to the trade. In the north, women like glasses with logos prominently emblazoned on them. Consequently, luxury labels such as Armani and Dolce and Gabbana are popular there.

Kolkata-based retailer GKB Opticals has seen demand for brands at its 60 stories across the country, with customers seeking out sunglasses carrying names such as Jimmy Choo, Vogue, Ray-Ban and Prada.

Over the past two years, women sunglasses buyers have doubled at GKB, according to Dibyendu Roy, national sales manager, who feels that the presence of dedicated multi-brand retail outlets have improved the sales scope of the item.

The growing number of women consumers is good news for companies as they tend to spend more than men, according to Amit Chaudhary, co-founder and chief operating officer at Lenskart.com, the online retailer that said it gets up to 2,000 orders per day for products such as frames and sunglasses.

He said the average price of sunglasses bought by women is higher than that purchased by men. “They spend more time reviewing the product and are more focused on quality. Men are impulsive buyers,” he said.

The site sells brands such as Prada, Burberry, Ray-Ban, Maui Jim and Vogue. The proportion of women online shoppers has risen to 35% from 25% about two years back.

“Consumers are spending more on the category overall,” said Roy of GKB, which also witnessed a rise in average price tags of sunglasses sold, especially to women.

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Marks & Spencer’s boosts sub-brands

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April 10, 2013

Raghavendra Kamath, Business Standard

April 10, 2013

The newly opened 23,000-square-feet-standalone flagship store of UK’s department store chain Marks & Spencer (M&S) at Koramangala in Bangalore has a different look from the existing stores of the chain in the city.

Each of the eight brands of the British retailer are clearly segmented and displayed using props and visual merchandising. For instance, its brand ‘Limited Collection’ has been given a fashion-focused feel with an illuminated catwalk, while women’s casual-wear brand ‘Indigo Collection’ has been displayed with trestle tables and denim mannequins. Another women’s wear brand ‘per una’ is presented with white-washed wooden wardrobes and chandeliers.

"The new format is a part of our global strategy of upgraded stores. Sub-brands have been relaunched with clearer differentiation so that navigation becomes easier," says Venu Nair, managing director, Marks & Spencer Reliance India.

In fact, the £600 million-revamp, involving 800 stores, started in its home market UK in September 2011 after a study that reflected the difficulty faced by customers in moving around in the stores.

M&S, which has a 51:49 joint venture with Mukesh Ambani’s Reliance Retail, has opened half-a-dozen new format stores like the one in Bangalore with an average size of 20,000 sq ft to 23,000 sq ft. The chain wants to open five more in the next couple of months. Currently, it has 29 stores.

Consultants say the government allowing foreign direct investment (FDI) in multi brand retail has partly played a role in M&S focusing on sub-brands.

"Earlier, under the single brand regime, the rule was that besides having your brand name on the store, every product should have the brand name of the company. With FDI allowed, it would be easier for foreign retailers to launch sub-brands here," says Devangshu Dutta, chief executive, Third Eyesight, a retail consultant.

However, M&S’s Nair says it wants customers to have the same store experience as they would have seen in its stores in international destinations.

But, will this strategy work?

Dutta says sub-brands help target more specific segments (by age, gender, usage occasion etc.), if they are handled well. "This can help fine tune not just product needs, but also create specific or limited promotions without it being carried over to other parts of the store or other sub-brands," he adds.

Even home grown fashion retailers such as Shoppers Stop, Future Group are focusing on their sub-brands to drive sales. For instance, Shoppers Stop has run specific activations around its apparel brand Haute Curry and extended that to jewellery and footwear. But that can’t be strictly compared with M&S, as unlike them, M&S only sells brands that are owned by it.

Such revamps are crucial for established brands such as M&S given that the Indian fashion scene is changing fast with the entry of fast fashion brands such as Zara and Mango, and the expected foray of fashion brands such as H&M, Uniqlo and others.

For M&S, the revamp is the second such major experiment in its 12-odd year presence in India. In 2007, it cut prices of its merchandise by 35 per cent to reposition itself as a mid-market retailer. It also introduced more lines as customers perceived its prices to be too high and designs limited and not suitable for Indian context

While its rivals say M&S was stuck between premium department stores such as Shoppers Stop and mass market retailer such as Big Bazaar, executives at M&S Reliance say that the strategy was well thought out. "If you are a premium retailer, and have prices more than Rs 3,000 apiece, the volumes are going to be low. We thought it is better to be a mid-market player here," an executive adds.

M&S has also increased sourcing from India and south Asia significantly. It sources around 61 per cent of its merchandise from the region which helped it to offer lower prices here.

Marks & Spencer Reliance made losses of Rs 18.66 crore and Rs 9.13 crore in FY 2010, FY 2011 respectively, and the company is still making losses. But same-store sales growth is good at all stores. Nair says many of the chain’s categories are doing very well. For instance, men’swear sales jumped 31 per cent during the December quarter and lingerie went up 28 per cent.

While the chain is reportedly set to bring its food section here, its peers and ad consultants say this could be challenging given that food is normally associated with hypermarkets.

(With inputs from Sounak Mitra)

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Decathlon sets off with 100% FDI in sports retail

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April 2, 2013

Nilofer D’Souza, Forbes India
April 2, 2013

In what could put the government’s controversial new foreign investment policy in retail to an impact test, French group Auchan has announced its first retail store, Decathlon, in Bangalore. It is the first big-format niche retail chain to open in an increasingly fitness-conscious urban India that craves for sporting space and quality equipment.
The Euro 43 billion French group’s venture is one of the early bird licences under a new investment policy which allows 100 per cent foreign funding of single-brand retail stores. Though the government had cleared the policy in November, some niggling issues regarding local sourcing had remained and it was finally notified in January. Auchan’s proposal to invest Rs 700 crore went through on February 13, the same day that the FIPB also cleared single-brand retail plans of Promod SAS, Le Creuset and Fossil.

Most of Decathlon’s stores now sport an ‘open to all’ sign to indicate the change in its policy. It states the change on its Facebook page too. In a comment to customers, Decathlon Mumbai, says, “FDI in retail did not allow foreign retailers to sell to individuals directly. We were respecting the law of the land by being a wholesaler.”

Decathlon does not have a clear competitor as the sports goods retail market in India is populated with small over-the-counter stores or a few hundred square feet space in department stores. It has been present in the wholesale market with a cash-and-carry model for the past three years. This would be the first test of big-format retail’s impact on small merchants in a niche segment.

Decathlon stores are big—sprawling over at least 4000 square feet. In comparison, sports goods shops in the country are tiny. Even in malls or supermarkets, sports goods get only a corner, about half the area of a typical Decathalon store. It uses the extra space for indoor sporting facilities.

“It could turn out to be a category killer, and create and define the category because of the experience and product mix it has,” says Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy, “Even with wholesale operation in Bangalore, they have done fairly well. They broke even fairly quickly,” he says.

The company opened a store in Mumbai last week and plans to open in Hyderabad and Chandigarh too. About 3000 customers thronged the store on the first day. That is a big draw for a niche segment currently valued at Rs 2,500 crore but estimated to grow to $6 billion by 2025 in India.

In cities, people are starved for entertainment beyond movies, restaurants and malls. Decathlon has potential to provide weekend entertainment alternatives. That fits with its own target audience – the family.