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September 15, 2016
Sapna Agarwal, Mint
Mumbai, 15 September 2016
Foreign
luxury, apparel, and accessories companies that can own their own
retail chains in India—the government allowed foreign investment in
so-called single-brand retail in 2012—still continue to operate through
local franchises and distributors.
Of the 28 apparel and
accessories brands which have entered India since the country allowed
100% foreign direct investment (FDI) in single-brand retail, 23 came in
through a franchise or distribution partnership, according to data from
Third Eyesight, a retail consulting firm.
Under a franchise or
distribution agreement, a global retailer partners with a local
company. The latter pays a fee to the brandowner, and invests in
marketing and launching the brand in India. In the last year, Gap Inc,
Aeropostale Inc, Desigual, Rider and Ipanema have entered India through
franchise agreements.
“Most
companies do not see India as a strategic market, and tend to take
lower-risk export-oriented approach through franchise or distribution
relationships,” said Devangshu Dutta, chief executive officer, Third
Eyesight.
Foreign
investment into the business, regardless of the quantum, is an
indicator that a company is making a serious long-term commitment to
the country, since it brings along with it investment of management
time and effort as well.
One
exception is H&M Hennes and Mauritz AB. The Swedish fast fashion
retailer, which has come in through the FDI route, will have 12 stores
in India by the end of the year.
“The government’s decision to
allow single-brand retailers to open stores by themselves came at right
time,” Janne Einola, country manager, H&M India, said in an
interview in August while explaining that the timing matched the
company’s internal research which showed that India was emerging as a
good retail market to set up shop.
India is the second-most
attractive market for global retailers to expand after China, according
to the 2016 Global Retail Development Index by consulting firm AT
Kearney. According to the firm, India has, in the past couple of years,
improved the ease of doing business. Clarity on foreign direct
investment (FDI) regulations too have helped.
To be sure, the
challenges remain. India continues to be a complex market for foreign
retailers, where understanding dynamics at the local level is important
as the country’s 29 states have the power to opt in or out of FDI
reforms. Infrastructure bottlenecks, including archaic labour laws,
complex regulations, high attrition rates and limited high quality
retail space, remain important areas of concern for retailers, said the
AT Kearney report, adding that still, the potential is vast as the
country presents a $1 trillion retail market.
Meanwhile, even
the firms entering the country through franchise and distribution
partnerships have become a lot more sensitive to the challenges of
doing business in India.
Many are working with their local
partners to ensure that the products are right for the market, and also
available at the right price. Products sold through franchisees may
turn out to be costlier due to multiple margins (the brand owners, and
the distributor’s).
“We are collaborating with our partners at
every level— from store fit-outs to (product) assortment for India.
Also, they sell to us at manufacturing cost which then allows us to
price the goods at a globally competitive price in India,” said J.
Suresh, MD and CEO, Arvind Brands Ltd, the franchise partner of Gap and
Aeropostale in India.
In March last year, Arvind exited a franchise agreement with UK retailer Debenhams citing the chain’s steep pricing.
(Published in Mint)
