Gap inks franchise agreement with Arvind Lifestyle Brands


August 22, 2014

Sapna Agarwal, Mihir Dalal, Mint
Mumbai/Bangalore, 22 August 2014

Gap Inc., which sells brands such as Banana Republic, Old Navy and Piperlime, has signed a franchise agreement with Arvind Lifestyle Brands Ltd, a unit of Arvind Ltd to enter India.

The agreement will be formally announced on Friday.

After the Indian government allowed 100% foreign direct investment (FDI) in single-brand retail in September 2012, a handful of companies including H&M Hennes and Mauritz AB and Swedish furniture retailer Ikea announced that they would enter the Indian market on their own.

However, a majority of global retailers prefer the joint venture and franchise route to launch operations in India.

In 2013, eight of the 10 new international fashion brands that launched operations in India entered the country through franchise or distribution partnerships, according to research by Third Eyesight, a consulting firm.

“Franchising is seen as a lower-risk, arms-length model that allows brands to maintain control on products and the supply chain, which are important to maintain consistency, while keeping minimal involvement and investment in the market itself. On the downside are added costs due to low margins and potentially different operating philosophies between the franchiser and franchisee,” said Devangshu Dutta, chief executive officer (CEO), Third Eyesight.

Gap operates both company-owned stores and franchise stores around the world. The retailer has company-operated stores in the US, Europe, Hong Kong, China, Japan and Taiwan. Gap ended fiscal 2013 with 3,164 company-operated and 375 franchise stores around the world, it said in its annual report.

The decision to enter India through the franchise routes comes after almost a year of discussions. In November, Mint reported that the two companies were in discussions for a possible joint venture agreement for the Indian market. Arvind is also a supplier of denim to Gap.

“When you come to a new country with a credible partner, it does not matter what kind of an agreement it is,” said Arvind Singhal, managing director, Technopak Advisors Pvt. Ltd, a retail consulting company.

It is often seen that brands that view India as a strategic market have been moving towards equity investments through joint ventures or subsidiaries, which allows the brand more control or influence on the business, and also reap the returns, Dutta said.

For instance, clothing brand Ed Hardy made its first entry in 2007 with a franchise agreement with Mumbai-based Wadhawan Lifestyle Retail Pvt. Ltd.

In 2011, the brand was acquired by Iconix Group, which is a partner to over 20 brands. In 2013, the group formed a joint venture with Reliance Brands Ltd to launch and manage its fashion and lifestyle brands in India.

On Thursday, Arvind Lifestyle Brands also announced a franchise agreement with The Children’s Place, the largest children’s speciality apparel retailer in North America. Arvind aims to become the country’s largest kids wear retailer.

“In the next five years we will invest Rs.150 crore to scale The Children’s Place to 50 stores,” said J. Suresh, managing director and CEO, Arvind Lifestyle Brands. He is optimistic that the company will become a dominant kids wear retailer.

With The Children’s Place label, Arvind will directly compete with higher-priced kids wear brands Mothercare and Benetton Kids.

The company, which also sells other kids wear brands including US Polo Assn. Kids and Elle, plans to increase its kids wear sales to more than Rs.700 crore from Rs.150 crore over the next three years, said Suresh of Arvind Lifestyle Brands.

“Kidswear is a very large market but very fragmented and dominated by local (companies). We hope that with this format we should be able to get a good chunk of the local market,” Suresh said.

(Published in MINT.)