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Single brand retailers keen to mingle with great Indian middle-class

Raghavendra Kamath, Business Standard

Mumbai, November 28, 2013

India’s retail sector needs no bigger testimony than the one it got from the CEO of Britain’s largest clothing retailer Marks & Spencer (M&S), Marc Bolland. On a recent trip to India, he said the company has plans to make India its biggest international market, outside its home market. In fact, India tops its list of priority markets, ahead of China too.

The British retail chain, which has a joint venture with Mukesh Ambani’s Reliance Industries, plans to more than double its stores in the country and open some of world’s first sections, such as M&S Lingerie and beauty department in its stores in India.

However, M&S is not alone in its optimism over India. The government has cleared single brand retail proposals worth more than Rs 12,000 crore (nearly $2 billion) in the last one year.

The biggest among them is Swedish furniture retailer Ikea’s Rs 10,500 crore proposal. Others include Swedish apparel retail maker H&M’s Rs 700 crore plans and Decathlon’s Rs 700 crore plan. Since 2006, the government has cleared 60-70 proposals of single brand retail after the segment was opened to foreign investors.

International brands such as Zara, Marks & Spencer, Benetton and Tommy Hilfiger have reportedly grown at 20-50% on year-on-year basis in the last financial year, despite the slowdown in the economy. Clearly, shoppers are not cutting down spends on foreign brands. .

This is perhaps why global retailers have forged ahead with their India plans, despite the alleged red-tapism in India. Ikea is so bullish about India it pursued its India plans for the past couple of years, despite Indian government’s pointed objections on its applications at various points.

The furniture giant is expected to take three years before it opens its first store in the country. Even H&M, which has 3,000 stores globally, pursued its Rs 700 crore application to open stores religiously, despite government raising queries on mandatory local sourcing norms and brand use here. Swedish retailer H&M are yet to hear from the Foreign Investment Promotion Board.

Consultants say, global retailers are betting on the huge potential of Indian markets. According to AT Kearney’s Global Retail Development Index (GRDI) 2012, India is the fifth most favorable destination for international retailers. Of the total Indian retail market, 8% constitutes the organised retail and this segment is estimated to grow at a rate of nearly 30% by 2015, as against the overall retail market, which is forecast to grow by 16% in the same period.

“There are very few countries in the world which offer market potential the way India does. Some international brands may say conditions are not right and require huge investments, there are equal number of players which say they are not worried about these things,” said Devangshu Dutta, chief executive of retail consultant Third Eyesight, which works with global retailers.

However, FDI in multi brand retail is still stuck, as none of the big retailers — Walmart, Tesco, Carrefour — have not sought permission to open stores in India, despite the government allowing 51% FDI in multi-brand retail.

Though retailers such as world’s largest retailer Walmart, UK’s Tesco, French retailer Carrefour lobbied hard with the central government open up the multi-brand retail sector, none of them, it appears, are comfortable with stringent conditions put by the government for them to enter the retailing business here.

A retail consultant on the condition of anonymity said retailers such as Walmart, Tesco and Carrefour entered cash and carry segment with the plan that they will enter front end retailing in the country once that is opened for them but that has not happened.

While allowing 51% FDI in multi-brand retailing, the government put several conditions, including the 30% mandatory sourcing from small and medium enterprises. Central government also played it safe by leaving the permission to allow the international retailers to respective states themselves.

Despite the slight tweaking done by the governmentin August this year, global retailers have not shown interest. The government said foreign retailers are allowed to open stores in cities that have a population of less than one million as the 53 cities where they could set up stores. Overseas retailers can now source goods from SME firms, where the investment cap will be $2 million instead of the earlier ceiling of $1 million.

Says a senior executive from global retail chain: “I think for three reasons have made us stay away from India-policy restrictions, the political environment, and upcoming festival season globally,”

Many such as Rajat Wahi, partner, Management consulting at KPMG believe the uncertainty around multi-brand retail will continue till next year (elections) due to the challenges the segment faces on scale, supply chain challenges, exorbitant real estate costs, state-wise permits required and rule on 50% of FDI to brought in the first tranche. Single brand retail faces no such issues and will continue to invest in India.

(Sourced from Business Standard.)

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