Never mind 100% FDI, foreign chains may not rush in


January 12, 2012

The Hindu, BusinessLine

Bureaus, January 12, 2012

India Inc has welcomed the lifting of the foreign direct investment (FDI) limit to 100 per cent on single brand retail. Stocks of Indian retailers also rose on the announcement, signifying a thumbs up from investors. But retail sector specialists do not expect a stampede of investments any time soon.

Says Mr Shubranshu Pani, MD, Retail, of real estate consultancy, JLLM, “I do not see a sudden surge of investments. Foreign chains will take on local partners because the rider of 30 per cent local sourcing is something that does not happen overnight. At the same time, these foreign chains will get into agreements, where they have an option of taking their stake to 100 per cent at a later date.”

Under the earlier policy, where a controlling 51 per cent stake was permitted in single brand retail, the response has not been overwhelming. Over the last five years, total FDI inflows in this sector amounted to $44.45 million, a tiny fraction of total FDI inflows.

Luxury retailers were expected to take most advantage of the relaxation. But the local sourcing clause is a major worry. Mr Oliver Petcu of CPP Luxury Industry Management Consultancy Ltd, which has been actively covering India, believes the revised legislation change is “absurd and impossible to apply” in luxury retailing. “Even if there would have been items which could have been sourced locally, the mere thought of international luxury brands being forced into sourcing locally, just because they want to operate directly is going to be a major setback for the already dormant and under-performing Indian luxury market,” he said in a blunt analysis posted online.

“The 30 per cent rider is not what every brand can fulfil,” adds Mr Purnendu Kumar, Senior Vice-President, Retail, Technopak.

The tax structure is another issue. “Absence of 100 per cent FDI was not holding back investments in luxury retail space. It is duties on these products rather than lack of funds, which is a problem,” Mr Kumar points out.

Real estate players, especially those focused on luxury retailing, are also treading cautiously. The Prestige Group, which developed India’s first luxury mall, ‘UB City: The Collection’ in Bangalore, feels that it would be ‘premature’ to gauge the impact of this.

Mr Venkat K. Narayana, CFO, Prestige Group, says at present, the company is in favour of developing its ‘Forum Mall’ concept, which caters to the mass. “The decision to build more luxury malls depends on the interest or awareness of the brands and also affordability, as the targeted customers are an elite few,” he adds.

More than the investment issue, cracking the Indian consumer will be a tougher challenge, analysts say. “I do not see a dramatic shift in the retail space. A luxury brand needs a consistent experience in a new market,” says Mr Devangshu Dutta, CEO, Third Eyesight.

India Inc, though, is upbeat about the development, with industry bodies such as FICCI, CII and Assocham welcoming the move. Overall, says Mr Goldie Dhama, Associate Director, PwC, “Allowing 100 per cent FDI in single brand retail will help in bringing in new products, brands and best practices. It will also help companies already present in India in ramping up their production as they will be able to fund the Indian businesses.”

Brand consultant Mr Harish Bijoor does not think this would make a dramatic difference to the brand presence of foreign brands that are already here. “It would, of course, provide the overseas brand the complete ownership in managing the brand, rather than depend on local franchisees to grow the brand here. This would make a difference to new entities which are entering the country now. They will gain the most. Otherwise, I don’t see the landscape changing much.”