Devangshu Dutta
April 2, 2009
(Based on the special address By Devangshu Dutta, Chief Executive, Third Eyesight opening the second day of Prime Source Forum 2009, Hong Kong)
I’d like to thank the organizing team at Prime Source Forum for this opportunity to address this distinguished group of top management from the global apparel and textile industry.
I’ll take you through a brief presentation that’s slightly different in flavour. it’s a little bit of a step back from what we discussed yesterday and will continue to discuss during the day today. It’s looking at the world as we’re seeing it evolve and unfold – discuss things are possibly being seen, heard but not really understood.
I’ve titled my presentation “Itches, Cuts and Fractures” and I’ll explain that seemingly strange title shortly.
First of all, as all of us were discussing yesterday and you must have felt it – there’s a sense of uncertainty; nobody seems to have the answers. Certainly not the experts; the experts got us here. The experts had all the answers till about six months ago and all the answers turned out to be wrong.
Instead, I’d like to take a step back and look beyond numbers, beyond rationales. All explanations and analysis seem to ignore one of the strongest drivers of humankind – emotion. Underneath all the thinking, reasoning, logical layers, it is emotions that actually drive many of our decisions.
When it comes to uncertainty – when it gets to an extreme – we tend to get into a fearful situation. When we don’t know what’s happening, or what’s going to happen, fear is actually the emotion that drives a lot of the decisions. We’re beginning to see a lot of that in the world, around the world in different countries. You might think that this might happen in the more developed economies, others might think that this is likely to happen in the less developed economies, but it is actually happening around the world.
And when it comes to another step further, fear actually causes friction.
As students of Zoology, we learn about how animals respond when they are threatened. In a shifting environment with many potential threats, fear and survival instincts trigger the “fight or flight response”. The animal can either try to fight the threat or to escape.
It is no wonder, then, that ‘friction’ is the first reaction in a world where there is a lot of uncertainty and lots of fear.
And we’re beginning to see the signs of that…if you caught the news yesterday about what’s happened in London while the G-20 leaders get together for the Summit. There’s clearly a lot of anger, a lot of resentment which is bubbling over. You might remember a small news item from a few weeks ago, about somebody’s expensive car being torched by a group of youngsters in western Europe, some of whom had recently lost their jobs.
In uncertain times, not only do we stand up to fight potential threats, we even see many more things as threats than we did earlier.
Let me ask you this question – how many of you remember how the 1930s Great Depression ended? It didn’t end in a “Great Revival”, it actually ended in a World War. I don’t mean to sound alarmist, but people do stupid things when they are under pressure. We all do. That is something that nobody wants, but sometimes your hand is forced and you end up taking actions that you regret later.
This is one of the issues that I think should concern all of us, and I’d like to talk a little later about how to deal with that.
If you look at some of the actions that have happened in the political domain, it’ll be clear how this is affecting what we have discussed in this area – the global trade in apparel and textile products.
Well, we’ve already seen in the last 2-3 months the push-backs coming from different political parties in various countries, raising barriers, taking actions that are essentially “warlike”.
In fact, not very far from here [Hong Kong] American and Chinese ships actually got into aggressive posturing on the high seas. This may have been a political statement from either side. We don’t know what was going on or who was right, but clearly there is conflict arising out of friction.
This could go on to its logical conclusion, or we have the choice of a step back.
When you look at the textile and apparel business, and I mentioned this yesterday, is one of the most international around the world, this becomes critical whether you are looking at sourcing or exploring new markets. How do I know which countries are safe to go to?
A few weeks ago The Economist very helpfully published a table rating 165 countries. I could say it is surprising but it is not. Of the 165 countries rated in 2007 and 2008, only 2 countries showed an improvement from the previous year’s score, 12 showed no change (of which 7 were anyway in the very high risk or high risk category), and the rest all showed an increased vulnerability to economic, social and political unrest.
There is no surprise in the list of the countries at the top of the table or at the bottom of the table. What is surprising is the change in the rating, or the risk outlook. Countries like New Zealand, Austria, Australia, Mauritius, Norway…look at the change…as a percentage the change is very high. These are countries which you would think are fairly stable. So it is not just the already unstable becoming more so, but the potential of friction and conflict rising in relatively stable countries as well. The map looks redder – indicating higher risk – than it did last year.
So there is clearly a lot of uncertainty – we don’t know when it’s going to end, we don’t know when this recession will bottom out and we’ll see the light at the end of the tunnel. The situation looks fairly grim and the question is, what do we do?
We talked about the fight response, let’s talk about the flight response. One of the responses we have available is to not fight but to retreat, to protect ourselves.
That leads me to the other form of dealing with a threat – flight or escape. In individual terms this may literally mean running away from a location, in other cases this can mean deploying protection measures to cocoon oneself: a tortoise retracts within its shell, a squid squirts ink, while a hedgehog deploys its prickly quills.
What you’re trying to do is to protect yourself, your mind and emotions included, from all the uncertainty outside the boundaries you define.
Since countries can’t physically run away, governments build walls and engage in protectionism in the form of tariff barriers as well as non-tariff barriers such as procedural hassles in the way of imports, and get into trade fights which are essentially delaying tactics. You don’t really project too much aggression so as to get into a conflict but enough so as to present a barrier.
But – the good news is that there is hope! I believe that, fortunately for us, as Homo sapiens – “thinking humans” – we are not locked into our biological response systems alone. We have a third choice: to discuss and debate, to open a dialogue.
Partners who have turned opponents seem to be talking – there seems to be willingness to sit down at the table and talk things through. How quickly and what result will emerge remains to be seen. It is encouraging to see in this morning’s South China Morning Post a quote from the White House that the USA and China in their meeting yesterday “also agreed to work together and address the economic crisis, resist protectionism and to resume discussion about human rights as soon as possible.”
So, should we wait to see what emerges from these talks in London, and from the policy measures being announced by governments around the world? What do we do, as businesses, as individuals?
Well, I don’t think that freezing into indecision is an option. I don’t think inaction is an option. We have no way of knowing how the market will shape up, how the supply base will emerge, but we need to take steps to address our business concerns. Proactively or reactively we need to take action.
All the companies represented here in this room clearly need to respond to an economic situation that most of its management has never faced and most may never face again.
I have found as I have talked to people in the US in January, in the UK, in Europe, in India that many, many companies are postponing decisions, and the postponement is not rational. It is not to say that something will happen, and I know the window of time in which that event will happen, therefore I am postponing my decision to that future. They’re just postponing – it’s just “I’ll look into this later”, it’s procrastination – it’s not even postponement of a decision. And that is not an option. I don’t think we can sit tight and wait for this to blow over.
So what should we do? How should we respond – on the sourcing side and on the market side?
I’ll talk about the sourcing side first.
The first thing we need to do, is to break from what one author called “the Tyranny of Or”. For instance, in discussions with colleagues from the industry I’m struck by how much we think along bipolar lines of growth. We prefer things to settle either one way or the other way, for them to be conveniently predictable for us.
I would suggest that rather than debate between extremes, we need to accept that different markets and supply bases will evolve differently. It is not a choice between consolidation or fragmentation, globalization or localization (“could manufacturing move back to Europe, or to the US?”). Should we be strategic or be reactive? There has been discussion about partnership, long-term relationships, but that partnership was shaped in a world very different, many months or years ago when the world was very different. Shouldn’t we react to that change?
Should we look at getting the lowest cost or should we look at speed? Clearly when you look at speed, you would be looking at supply bases that are more capable and potentially more expensive. Should there be a trade-off?
That leads me to a second issue: eggs. That is, risk. There are two philosophies.
One philosophy says: put all your eggs in one basket and watch it very very carefully. The other more common saying advises that we should spread your risk around a little bit and spread the eggs in different baskets.
That’s the thing about risk – you can try and minimize risk, but you also need to try and mitigate risk , diversify risk.
Well, if there is just one thing we need to learn about risk, it is to “diversify, diversify, diversify”. Minimizing risk is only possible to a certain extent. So I would tend to go along with common wisdom here. And even if you believe in the first philosophy, it only works even partially if you have multiple eggs.
Yesterday we talked about a few other things – consolidating the business, conserving cash flows and being careful with our resources, and so on. But it also leads to conservatism. If you look around the room and see the number of black suits around, including the one on the stage, you’ll get a flavor of what I mean. These things are not divorced from each other. We deal with our business and rational decisions through the lens of our emotions. And when things are looking uncertain, we tend to contract, whether to regroup our energies or to protect ourselves – fight or flight which is a very instinctive, natural response.
The thing that we need to remember is that when you look at the fashion and the retail businesses, both of these businesses are fundamentally entrepreneurial in nature. Of course there are corporate businesses as well, but the successful ones promote entrepreneurship within the corporate.
And the thing about entrepreneurs is that there is a certain quality…you could call them mavericks. The night before last there was a conversation about how the average size of manufacturers and brands in this industry is much smaller than in other sectors. The reason for that is that the entrepreneurial drive actually takes precedence over any corporate diktat. The industry actually allows and encourages entrepreneurs to break off, and go and do their own thing. And that causes fragmentation.
Standing here today, after all that discussion on the sourcing panel yesterday about supply base consolidation, I have to say this: fragmentation, to my mind, in the current scenario is a good thing. You might call me crazy, but let me give you my reasoning for saying that.
Think about a beanbag – there is a lot of air in between the small pieces of foam, and the bean bag is a lot softer than one single solid piece of foam. The cushioning effect comes from the fact that there is a lot of air in between.
We need the cushion of diversity in the industry at the moment because there is no way – no way – we can predict who will succeed.
Some of the best known names in the industry have disappeared in the last six months. Twelve months ago nobody could have said, with any certainty, that they will disappear. So how do we decide what’s good, who should consolidate with whom, who will survive? We can’t! Nobody has a crystal ball, nobody can identify certain survivors. I would urge you to allow fragmentation to exist rather than just travelling on the consolidation route.
I think supply base consolidation and market consolidation has gone beyond strategic considerations, and almost become a fad. Consolidation does have some logic, but when it comes to risk, diversification is certainly preferable.
The recent crisis in global financial systems dramatically demonstrated not just how risky it is to depend solely on a few large institutions but also how the risk gets multiplied manifold due to these institutions might be interconnected.
In the textile and apparel business, instances such as SARS and the temporary re-introduction of quotas have demonstrated, again and again, the fallacy of over-depending on consolidated supply chains.
Also, too many people believe that the industry worldwide has no choice but to consolidate, that mergers and acquisitions are inevitable, and that large companies will dominate the business from retail to fibre. We forget that we are talking about the fashion industry, not the automotive or aerospace industry. Entrepreneurship here doesn’t cost billions or even millions of dollars.
We also need to look at balancing our approach – everyone has been looking at efficiency, which is a great driver: you strip out extra cost, extra time etc. but what I said about the risk is also true of innovation. You want different sources of innovation. There is not a single company in this room, or around the world in this sector, has the prerogative of being the only innovative company in the world.
As I said, this sector is entrepreneurial, and there is innovation coming from all kinds of people, from all kinds and sizes of companies. There is the need to allow that to happen and we would miss out tremendous innovation opportunities if we consolidate all our eggs into one or a few baskets.
So when you next look at dropping suppliers, think about what capabilities you might be losing or what risks you might be multiplying.
When you look at what that means for the sourcing approach, obviously you do want to reduce costs, when you are dealing with a predictable product, but the share of unpredictable is growing with every passing month.
In uncertain times such as now, and with unpredictable products, the prime driver is to “Catch the Trend” and the focus must be on “Response”. So you need to look at making the buying decision closer to the season and closer to the market. Development lead times must be shrunk and the lead time heavy decisions (such as fabric commitments, lab-dip approvals etc.) must be taken out of the critical path. This may even drive more sourcing from supply bases that are close to the market.
The panel on sourcing talked about lead-time yesterday. A lot of lead time is spent just going back and forth in the supply chain. The only way to handle this is for suppliers to not only become more capable, but to stand up and say “we are more capable”. They need to be able to say, “We don’t just convert fabric into garments, we can also do a lot of other stuff – we can design and develop new product, we can actually look at your sales trends and tell you what products we should be developing together.” This is an art, or a science, that seems to have disappeared (or is disappearing) over the last 15-20 years, as we’ve gone into this, dare I say, management consulting-led ‘strategic sourcing’ drive. The art of being a merchant is not only a retailer’s prerogative, but also something for a supplier to do. You need to be able to read the market, not just respond to a tech-pack, and I think that’s a skill set that needs to be emphasized and encouraged in the current market.
What should buyers do? Certainly, speed to market strategy is at the top of the agenda. Another response to this is to look at sourcing closer to home.
In this environment suppliers in global hubs should certainly be more concerned about reducing their “sketch-to-shop” lead times.
In fact, today buyers may look to proximity for more than just speed-to-market and the concern for clothing miles (“proximity sourcing is environmentally friendly”). Underlying that is the sense of security – that it is closer to home, more in the known territory than unknown, more “predictable”, it’s familiar – “I can manage it better”.
We’re going to see more of that – I don’t think we have a choice. Buyers are human beings, despite what several suppliers sitting in this room might think. Emotions do drive buyers’ decisions as well, and that is one of the emotions that will be driving some of the decisions.
Just a quick word on the market side: both factories and their buyers need to define the value that they bring to the market,
There is a lot of talk about partnership in this sector but, let’s be honest, there isn’t much partnership in this sector around the world. Companies do need to question what is the value they are bringing to their customers, and whether that value is greater than last year.
You can’t take it for granted that the consumer will trade down, or even trade up to a better product that will last longer. Why should they buy your product?
One of the kneejerk reactions in this kind of a market is to cut down on marketing. There is a need to sustain investment in branding (as targeted to the consumer or within the trade). In fact, if you are a supplier and have not invested in this area so far, I would suggest that the time to sow the seeds is now. Whether it is developing markets, new segments in a developed market, a country that is new to you, it takes a few years to develop a credible market presence. It’s cheaper right now – marketing costs are lower now, people are available, advertising is cheaper; the time to plant the seed is now.
On a different note, I would like to reiterate a particularly significant concern.
The fashion industry has one driving principle – that everything becomes unfashionable. We have what is called planned obsolescence. Without planned obsolescence how do you make next year’s sales? Any consumer business is built on the same principle, but the fashion industry is particularly important because it is very visible and raises the aspirational level very high.
Imagine the population as a cylinder, and imagine aspirations being pulled upwards like a piston. This upward aspirational pull affects not just those who can afford to indulge their aspirations, but also those who can’t. The stress is felt most at the bottom end.
I have to confess, this slide is about 3-years old, when I used it at a conference organized by the Confederation of Indian Industry. I used it again today because the signs that were just becoming visible at the end of 2006 are now on the news every day. The crime and the conflict arising out of this stress is apparent around the world. [Edit.: Articles referencing the original presentation are in the Business Standard of 30 November 2006, and on ]
What if the fashion industry’s consumers decided to opt-out? What if they said, we don’t want to buy more, we want to buy less? What would the business look like in that environment?
I think we need to start thinking about that now, because many companies will face that in their market. I think there are certain companies and segments in the US market that are already facing that pressure, and we will find that happening across the world.
Our business models are geared towards outdating merchandise in a matter of weeks or days or hours, and selling more to replace stuff that is still fairly serviceable. What if consumers got into the mode of conservation that many people in this room are already getting into: that “I need to conserve my resources”. Let’s not forget, we’re all consumers. Let’s looking at our spending behaviour; is it the same as last year? I would guarantee you, 80-90% of the people here would say that they have made some cutback since last year.
So how do we get out of this situation? Well, the situation is out there in the market and we can’t just get out of it, so we need to deal with it.
The manufacturing of apparel products has been and remains a great vehicle to spread income and wealth to the financially less well-off people. Also, the textile and apparel industry has such low barriers to entry that I believe it is also one of the greatest vehicles to promote entrepreneurship and self-reliance.
Finally, a word on the pain that many of us are feeling. I would like to share a very short video from Ted.com that might help to put things in perspective. [Transcript of talk continues below the video frame.]
The reason I shared that video is to explain the strange title of my talk.
I believe that many of us are experiencing the equivalent of an itch or maybe a scratch. Some have a cuts and bruises, and a few have fractures. But the fact is that we’re not dead yet. Most of us have lost much less than David Hoffman, whose presentation you just saw on the Ted.com video.
Let’s not forget: this industry has faced downturns before and has come out of them; it will again. Meanwhile we need to get our heads down and go through with doing whatever we are supposed to be doing.
Someone said: this crisis is too good to waste. There is too much opportunity in this crisis to not use. We can make changes that would be difficult in the best of the times. In the best of the times you’re going strong, everything is going well, there is no motivation to change.
The kind of transitions that look tough at other times, those investments that you can’t make at other times – this is the time to make them.
Mark Twain said, “If you feel like you’re going through hell, just keep going.” And I think that’s what we need to do.
Thank you.
Devangshu Dutta
December 13, 2008
News items seem to be ringing the death-toll for offshoring (Here’s one from the Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2008/12/10/AR2008121003574_pf.html.)
Job transitions across borders are an emotive issue at any time, certainly even more so during times of economic upheaval such as now.
But should the debate be about “offshore vs onshore” or about management competence?
A management team whose effort isn’t structured well enough to deliver on their customer’s expectation of a good product (service included) could also find many things on which to pin the blame for poor service, including the geographical location of the support engineers, their native language or what they had for breakfast.
(Or, maybe we should reword the old saying: success has many fathers, but failure is the neighbour’s baby.)
My experiences of phone support around the world range from the superlative to the abysmal, sometimes within the same day in the same country. Painting in broad brush strokes and generalizations (“onshore is high quality and prompt, offshore is low quality and frustrating”) totally miss the point.
The best illustration is when you walk into two brick-and-mortar retail stores on the same high street, and receive dramatically different levels of service. In any country.
To my mind, it is senior management that drives service – vision, culture and the processes. Senior management is responsible for creating the environment, and for creating the hiring and training standards. If you are encultured for fantastic service, your location or origin on the globe is immaterial.
Remote servicing is challenging even without differences in time zones, languages, cultures. The lack of technical or any other sort of individual competence shouldn’t be added to the mix. And that goes for both (onshore) management and (offshore) support staff.
Lastly – followers of BBC sitcoms may be the only ones with whom this might ring a bell – Fawlty Towers should be on the must-watch list for anyone who has anything to do with customer service. Especially if they are part of the management.
Sharmila Katre
April 30, 2008
India has a rich tradition of textiles which dates back many centuries. The history of the Indian readymade garment industry, however, is very recent and can be traced back to the Second World War.
During the Second World War, as a contribution to the wartime needs of British rulers, clothing units for mass production were set up to manufacture military uniforms. With India’s independence in 1947, the industry stagnated as the policies of the Government were now diverted towards building a new nation. However, the industry began to expand after 1959 with the revision of the textile policy to allow the import of machinery for manufacturing.
The 1960s witnessed social shifts as a whole generation of young people questioned the very basis of their existence, and the hippie movement was born. Tired of their materialistic ‘man-made’ lifestyle, these young people began to seek answers in communing with all things natural, love and peace being the anthem. They began traveling, to explore, to seek the ancient philosophies of the East.
This voyage of discovery not only led to a change of lifestyle, but also the way they dressed. Natural fibres were rediscovered, and principally amongst them “Cotton”. India, with its natural abundance of this fibre, was an automatic choice of a supply source. Simultaneously, the growing settlement of Indian abroad led to a ready outlet for a variety of India merchandise and clothing textiles as an article of trade because of its growing demand.
This sudden demand for cotton garments resulted in the Indian industry growing by leaps and bounds in a very short period. Export of “High Fashion” garments from India started off with the cheap cotton kurtas and hand-block vegetable dye printed wrap-around skirts in cotton sheeting to meet the demands of the western youth.
Cashing in on the boom any and everybody got into the manufacture of clothing. The Government, realizing the potential of earning foreign exchange for the country, announced incentives and tax exemption for exporters. The fallout was an industry that grew in an unorganized manner and developed a reputation for producing low cost, low quality, volume merchandise.
The 1980s established that the industry was here to stay but, in terms of product profile, India still had not been able to move out of the lower end of the world market and continued to have an average unit value of under US$ 5.
The 1990s saw the industry make a conscious effort to shake off the image of being producers of cheap, low-quality merchandise with unreliable delivery schedules. The second generation had begun coming into the business, and contributed to reorganizing their firms for clearer structure and professionalism. Funds were ploughed back into the business with the emergence of large and modern production facilities. Even though most of the export houses were family-owned, trained professionals were inducted into the business for clear-cut departments and areas of functions. Consolidation and retention of business was the focus of the late nineties as the abolition of quotas planned for the new millennium became a reality.
The industry was euphoric but at the same time apprehensive of what the post quota era would bring. Many of the producers looking for a synergy in the business and also to sustain the large production facilities began tentative forays into domestic retail. The face of the Indian consumer was changing. Exposure to the western society via the electronic media helped in creating a ‘borderless’ world for lifestyle products, and contemporary fashion merchandise found a ready market in domestic retail.
The new global consumer over the years has evolved as a demanding and yet discerning individual. The novelty factor along with price and quality has become the watchword of the new millennium consumer. As consumers around the world change, so does the product strategy to keep consumer interests alive and ensure loyalty.
The new millennium has seen the emergence of the ‘Quick Response’ or ‘Real Time’ merchandising in fashion as a strategic solution to nurture, retain and grow the business. ‘Fast Fashion’ was born. Retailers could no longer work on the concept of two major retailing seasons with a couple of promotions thrown in. Product planning and the merchandise on the racks had to be constantly current and trendy.
Fast Fashion is not simply a solution to increase consumption by introducing greater product variety but a strategy to retain, consolidate and sustain the market through proactive product development and efficient product delivery to consumers, and thereby grow the market by increasing market share or developing new markets.
However, fast fashion has been tried and tested in different avatars through the years. In the 1960s and 1970s it was present in the quick reaction time of the unorganized sector to service the demand for block-printed ethnic clothing merchandise. In the 1980s and 1990s it was represented in the proactively researched product development at the source market level by wholesale importer/designer buyers (like Rene Dehry, Giorgio Kauten, Diff and Steilmann). Today it is technology-aided product research and development techniques (practiced by Anthropologie, Rampage, Zara and H&M), coupled with responsive buying processes.
In product design terms, India has moved on from producing and selling ‘fashion basics’ to ‘basic’ merchandise, and now back to ‘fashion basics’ once again. History says that this is where India’s inherent talents and strengths as a source market lie. Rather than reinventing the wheel or try to catch up with other competitors strengths, India should cash in on its strengths to practice and master fast fashion.
Devangshu Dutta
March 26, 2008
As brands and retailers expand their operations nationally, they begin to look at consolidating their back-room operations. Typically finance is already centralised, but other operations such as store opening project management, logistics etc. are also centralised for smoother and more efficient operation.
And then comes a big day when someone senior decides that the company should have a single toll-free or local dial number that customers from around the country can call.
Of course, India is already acknowledged as the call-centre of the world, so this should be easy. Right?
Wrong.
Call centres that are operating internationally from India have become famous (notorious?) for acclimatization, enculturation, liguistic training etc. of their staff. After all, they have figured, a customer in Texas is pobably much more comfortable speaking to a Sam than a Samir or to a Jack rather than a Jaikishan. And, beyond the name, they are also provided detailed background on the environment in which their customers live, so that they can have a “conversation” rather than sound as if they are script-driven phone-jockeys.
Domestic contact centre staff (and their domestic customers) are not so lucky. The hardware may be in place very quickly and efficiently, but the softer aspects have huge gaps. Either this is because the costs are too high (compared to the revenue available domestically), or it may be because this has not even occured to the company as being as issue they should think through.
Languages and accents apart, there is a world of a difference even in terms of the way people deal with each other across India. A customer care person sitting in Chennai may have as little in common with a Punjabi customer from Delhi or a Bengali customer from Kolkata, as they might have with a Spanish-speaking customer based in Mexico.
To companies who are looking at providing single-point phone contact for consumers across the country, I would suggest looking at India just as one would look at the EU.
(For instance, a German company wanting to provide EU-wide single-number dialling would need to ensure that the calls originating from France land at the desk of a person who can speak French and is comfortable with the context of the French customer, and similarly for Poland etc. India is actually no different in its diversity.)
Acknowledging the differences and gaps would be the best first step in building true bridges with customers across the country, and providing better service.
Devangshu Dutta
March 3, 2006
In February, just before the mega-blitz of “India Everywhere” at the World Economic Forum, the Indian government took a step forward. Amidst shrill outcries from its coalition partners and domestic anti-FDI lobbies, it finally decided to bell the cat, and let foreigners invest in retail again!
About a month has passed since the cabinet announcement, the dust has settled, and it is a good time to consider what has happened.
Since the initial euphoria of the early-to-mid 1990s when international retailers entered the market including companies such as Benetton (50% JV) and Littlewoods (100% subsidiary), this revised policy provides the first opportunity for large global companies to participate in the Indian market’s growth.
The key questions being raised are:
What Is Allowed, and Who Might Enter?
Let’s first deal with what the government has actually allowed. In a nutshell, a foreign retailer can set up a company in India in which it holds 51% equity, the balance being held by an Indian partner. This subsidiary can operate retail stores in India under one brand name. All products in the store must also carry the same brand name, and this branding must have been applied during the process of manufacturing.
This means that, as yet, a foreign department store selling multiple national and international brands cannot set up its own 51% owned operation in India. Nor can a supermarket or hypermarket chain like Wal-Mart, Carrefour or Tesco, sell their wide range of products under any name but their own, if they decided to take a majority stake in a retail operation.
In theory, you could have a Wal-Mart store selling Wal-Mart cola (not Pepsi), Wal-Mart butter (not Amul or Mother Dairy), Wal-Mart chocolates (not Cadbury’s), Wal-Mart cookies (not Britannia or Sunfeast), Wal-Mart T-shirts (not USI or Duke). You could have Tesco jeans (not Levi’s or Numero Uno) or Carrefour luggage (not Samsonite or VIP). This obviously dilutes the consumer proposition of the store, which may then have to primarily focus on a single-point agenda – such as low prices – to draw consumer footfall.
On the one hand, the cabinet decision clearly allows companies such as Starbucks and The Body Shop to step in with a majority stake, provided the branding is clearly by the primary name (store name) – thus, you may not be sold the famous “Tazo Tea” in Starbucks, but get “Starbucks Tea” instead.
However, to a brand such as Starbucks, this policy change is significant as its international expansion is largely through owned operations, especially in potentially large and strategic markets such as India. Starbucks would now have the option of not only controlling the retail operation through a 51% ownership, but also the raw material sourcing, storage and wholesale operation.
On the one hand, this may mean nothing to a retailer such as The Body Shop, whose international strategy in Asia has been largely driven through franchise relationships. This is true now of India as well, as The Body Shop announced its master franchise arrangement with Planet Sports in India.
A retailer such as Gap would need to set up separate retail operations for Gap, Old Navy, Banana Republic and Forth & Towne. There obviously are ways to consolidate operations even with the diverse retail corporate structure, but it does mean that the foreign retailer will be operating several corporate entities in India.
An existing company such as Benetton does not benefit from this change in regulation. In 2005 Benetton actually increased its stake in its joint-venture to 100%, but in the bargain had to forego the stores it was running. Its current network comprises entirely of franchise stores, and will have to remain so, unless Benetton reduces its stake to 51% in order to be able to run stores in India, which is highly unlikely.
Other existing international brands such as Levi Strauss, Adidas and Nike are not retailers in themselves, and are not dramatically affected by the change in policy at all. All of them operate subsidiaries in which they have complete or majority ownership. Brands such as Tommy Hilfiger, Wrangler and Lee are also present through licence or franchise relationships, and unlikely to change their strategy.
Will Global Retailers Come?
All of this obviously raises the question whether government regulations preventing foreign investment in retail were or are actually keeping foreign companies out of the Indian retail market.
The answer to that is both “No” and “Yes”. The reason is that companies that are looking at international expansion apply criteria that are specific to their own business needs which can lead to very different evaluations by each company.
Laws allowing or preventing FDI in retail are only one of the several factors that any global retailer would look at, when considering a market.
Other factors, such as various market options possible at the time, the state of development in the market, existing sourcing and other relationships, scale and scope of investment required vs. the rate of return expected, the risk factors involved, and the retailer’s own business strategy, all play a part in their decision-making process.
Thus, in one company’s case India may be the hottest market in which it would like to open a store at the earliest possible date this year, while for another company India may be of interest only after 5-7 years.
Opening single-brand retail to foreign direct investment, therefore, is at best an encouraging signal that the government has provided. It is unlikely to prompt international retailers to look at India any sooner than they might otherwise have.
The second key issue is whether FDI itself is of any consequence to whether the retailers enter India. This again is related to the individual retailer’s own strategy and business context, as well as how they perceive the risk-return ratio.
Thus, while China may not have any restrictions on foreign investment in retail, western retailers may still prefer to go with a local partner due to the differences in cultural and market nuances. Even in other unrestricted markets international retailers may prefer to enter through licensees or franchisees because the effort and investment in setting up their own company may not be compensated by the size of the opportunity, or their own investment strategy may not be in line with setting up international subsidiaries.
Some companies such as Wal-Mart, Tesco, Gap and Starbucks prefer to invest in international operations themselves, as ownership gives them a higher degree of control over the business. Of course, both Tesco and Wal-Mart have set up joint ventures in markets that are starkly different in cultural and business norms from their home markets but, by and large, where feasible these companies prefer majority or 100% stake in the business.
Other companies, such as Mothercare, Debenhams and The Body Shop, have expanded their international presence through franchises. Their premise is proprietary product and an enormously powerful brand that translates well across cultures. These companies have taken the less intensive route of franchise. In India, too, they have signed master franchises. Mothercare has assigned master franchise rights to the Rahejas’ Shoppers Stop. Debenhams and The Body Shop have both signed up with Planet Sports (soon to be renamed Plant Retail), which is also the franchisee for Marks & Spencer.
Thus, while allowing FDI may help some companies, it is unlikely to have investors beating down the door in a rush to enter.
What Does FDI in Retail Mean for India?
Permission for foreigners to invest in retail businesses in India obviously mean different things to different stakeholders in India.
For real estate owners, especially shopping centre developers, new entrants are always welcome, since it provides a wider basket of brands to present to the consumer, and the opportunity to differentiate one shopping centre from another.
To existing retailers, it does mean potentially more clutter in the market, possible higher marketing expenditure for them to maintain their position. However, it also means that more players can encourage the growth of the market, which otherwise can end up looking stale and in-bred. Brands that are entering the market for the first time can also bring fresh ideas in terms of merchandise, store planning and display, advertising etc.
To the question of whether Indian retailers are prepared to handle the competition, I would say that, while global best practices help, retail is a uniquely local business. Indian retailers who bother to listen to the consumer and constantly upgrade their own business are possibly in a stronger competitive position than a foreign brand that wants to impose its own alien sensibility on the market.
For suppliers, new brands bring in new avenues for business growth. Many of the international brands will look to increasing their sourcing from India, to take advantage of local labour costs and skills, or to down-play the disadvantage of duties on imported merchandise. Thus, especially for suppliers of fashion goods this is definitely a growth opportunity. Retailers might even prefer to work with the supply base from which they already source for their operations in other markets. Thus, the growth opportunity exists for exporters – the question is how many of them are willing and able to make the transition to begin supplying locally.
Not only do new retailers bring the prospect of increased business, but also the possibility of better systems and skills, improved product development, and in all, an opportunity for the supply base to upgrade itself. This will certainly have a positive fall-out for exporters, since their business is likely to become overall more competitive globally, too.
Let’s consider another stakeholder, who we tend to miss – the government itself. Organised retailers, including global companies, tend to be more constrained by law than a retailer from the unorganised segment. Based on that assumption, a large international retailer (and his Indian counterpart) will set up a local company that will carry out business by the book, recording all sales and purchase transactions. All local sales and purchases will be subject to VAT and sales taxes, while all imports would be documented and therefore subjected to import duties. All of this means more revenue for the government.
On the other hand, do foreign retailers pose a threat at all?
Well, there is certainly a threat to those retailers who insist that the market needs to remain structured the same way that it has been for years, and who refuse to upgrade their own business. There may even be a threat to the large Indian corporate retailers who are competing on the basis of their scale relative to the rest of the market. With the presence of global retailers with deeper pockets, these large Indian retailers will no longer be the big boys on the block. But the positive outcome for the many seems to outweigh the negative outcome for the few.
What I would certainly like to see is how quickly the government translates the promise of opening into a concrete plan that can benefit the Indian consumer, the Indian supplier, the Indian real estate market and the government itself.
