Nod for 100% FDI in single brand retail


January 12, 2012

Vrinda Oberai

RETAILER, New Delhi, January 12, 2012

The Manmohan Singh government has finally given its nod for the relaxation on the existing 51 per cent FDI in single brand retail, increasing it to a much awaited 100 per cent.

The move has paved way for single brand foreign retailers’ to own 100 per cent of their operations in the country, possessing fully-owned stores here. However, the decision comes accompanied with a rider that 30 per cent of the value of products sold would have to be mandatorily sourced from small Indian industries/village and cottage industries, artisans and craftsmen, (collectively referred to as ‘suppliers’).

The new policy is advantageous for international players like Gap, Starbucks, Adidas, Nike, etc, as it allows them to buy out domestic partners and fully own Indian operations. Also, according to sources, it is learnt that foreign brands still prefer the JV mode or franchise model of doing business in the country. The reasons for the same can be many, the immediate ones being a nascent luxury market, shooting real estate costs and also, most importantly, the knowledge possessed by a local partner.

The new norm is no big game changer for some and this is further confirmed by the comment that we received from Marks and Spencer. "India is an extremely important market for Marks & Spencer. Our journey in India has been exciting so far and our Joint Venture partner, Reliance Retail, has helped us transform our position in this dynamic market. We have been able to open larger stores and realign prices to serve our customers better in India. We have also benefited from working with a partner, which has significant local experience and expertise in managing logistics. We are very happy with our current relationship with Reliance Retail and don’t plan to do anything differently following the recent announcements on FDI,” commented Martin Jones, CEO, Marks and Spencer Reliance India.

Harish Bijoor, Brand Expert and CEO, Harish Bijoor Consults Inc, opined, “I do believe this is a positive early signal of what is due in multi brand retail. In many ways, this is the trailer of the movie to come, hopefully post the assembly elections. This will excite single brand retailers. I hope this sends the right message to the right retailers.”

The shares of retail firms like Pantaloons Retail, Koutons, Provogue India and Shoppers Stop rallied sharply, following the Cabinet’s FDI announcement. A positive expectation from the decision is that a bolder initiative shall soon follow for FDI in multi-brand retail, too. “I think this is a step in the right direction, more so as this gives an extremely positive intent as far as the government and reforms are concerned. This will now have a snowballing effect, going forward in other sectors crying for reforms like aviation,” said Sugato Bose, Brand Head, Pure Home+Living.

Bose added, “As far as Indian brands are concerned, I do not immediately see any major shakeout of any kind in the immediate future. This will only make sense if any Indian brand is looking to sell out. On the other hand, we will definitely see renewed interest in a lot of international mainstream as well as fringe brands to enter the Indian market now.”

FICCI also gave its ‘happy’ reaction to the decision of the Cabinet. “The move will not only mean more FDI but also lead to employment and more choices for consumers. Global retailers are bound to bring in global best practices and technology that will lead to a more competitive marketplace benefiting the consumers. The sourcing clause will lead to a direct benefit for the SME sector,” said Dr Rajiv Kumar, Secretary General, FICCI.

Devangshu Dutta, Chief Executive, Third Eyesight, also shared his view point and said the government can benefit, in terms of indirect and direct tax collection, from these more structured, “on-the-books” businesses. “We cannot run 21st century supply chains on dirt roads, with unpowered storage and a poorly educated workforce. The benefits of FDI in retail will remain largely unrealised for the overall nation if there is no simultaneous investment by the government in three key areas – transport infrastructure, electricity and education. The Indian government must be a ‘co-investor’ and active partner in developing and maintaining these aspects much more aggressively,” wrote Dutta in one of his recent blogs. (Click here to read it: "FDI in Retail: More Heat than Light")

(This article was published in the magazine "Retailer".)