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Retail Wasn’t Born Yesterday


Retail is such a pervasive and dynamic a sector of the economy, that it is impossible to identify a single point at which modernisation began. I’ve met countless people who perhaps entered the retail sector during the last 15 years, and who mark the beginnings of modern retail around then. There is no doubt that there has been an explosion of investment in retail chains in the last 2 decades, but we need to acknowledge the foundation on which this development is built. The current titans of the sector are standing on the shoulders of previous giants who have created successes and failures from which we are still learning.

This piece is not an exhaustive history of the evolution of the retail business in India, nor a census of all the brands operating in this sector, but the aim is to capture the flavours of the phases of development. (PDF available here to download.)

Early Years

If we were to trace back the growth of “organised” retail (mind you, I dislike that word!) or modern retail to the first retail chains, we will have to cast our mind back more than a hundred years. While many businesses of that time have disappeared, a few pioneers continue to survive, straddling three eras: the British Raj, the Socialist Raj and the Liberalised Lion economy. The businesses that continue to stand, having been through multiple transformations, include:

  • Higginbotham’s (1844) – beginning from Madras (now Chennai), it spread to Bangalore, and then to other locations and is known around southern India.
  • Spencer’s (1863) – one of the earliest grocery retailers to grow into a chain across undivided India, it moved to Indian ownership in the 1960s and was acquired by the RPG Group in the late 1980s.
  • AH Wheeler (1877) – launched from Allahabad Railway Station, it has been operating from railway stations (along with Higginbotham’s in some locations) – while it lost its monopoly in 2004, it has certainly played a key role in the growth of paperbacks and magazines in the country, keeping passengers company across billions of kilometres of rail travel.
  • Nilgiri’s (1905) – started with a small shop in Tamil Nadu focussed on dairy products and other groceries, it expanded to a large store in Bangalore in 1936 led by the founder’s son, and then spread across the southern states with a well-established reputation in dairy, bakery and poultry products. In recent times it has been acquired by the Future Group.

Fifty Years of Independence

The 1950s and 1960s remained fertile times, post-Independence and before the heavy-handed Socialist Raj truly began squeezing the life out of Indian businesses. Leading textile companies such as DCM, Bombay Dyeing and Raymond, and footwear companies such as Bata and Carona established chains of retail stores including company-operated stores as well as authorised dealers operating under the companies’ banners.

The 1980s brought the Asian Games, colour television, and a new up-to-date car model to India, all marks of a new vibrancy. Over the 1980s, a new retail wave was led by indigenous ventures such as Intershoppe (launched by a fashion exporter), Little Kingdom and The Baby Shop (children’s products), Nirula’s (fast food) and Computer Point (home computers, PCs and accessories). Many of these were certainly ahead of their time: the critical mass of consumers had yet to develop, the business infrastructure was inadequate, and funding norms were unsuitable to the capital-hungry business of retail. Unlike the textile companies that had large manufacturing and trading businesses, these new retailers were like shooting stars, glorious but visible for only a short period of time. This period, unfortunately, also witnessed the degeneration and disappearance of some of the older stalwarts such as DCM and Carona that were beset by labour disputes, management issues and disconnection from the transforming market.

Numero Uno, an indigenous denim brand, was launched in 1987 soon after VF’s American denim brands were launched, and it took nearly a decade for Numero Uno to reach other geographies in India. Nirula’s, one of the oldest fast food restaurant chains based in North India, expanded across the Delhi NCR in the 1980s and 1990s, and also explored other cities, albeit with mixed success.

Future Group, which today has a large retail and consumer brand portfolio, launched trousers under the name Pantaloons in 1987, initially as a distributed brand, and then denimwear under the brand name Bare. Within a few years the company also launched exclusive stores by the same names, to provide focussed visibility to the brands. About a decade of growth later, the group launched its first large format store under the Pantaloons name, but by now covering a much wider range of products, which became its launch pad for achieving scale.

The RPG group that had acquired Spencer & Co. relaunched it in 1991 in a spanking, new format as Spencer’s in Bangalore, and a short few years later rebadged it again as Foodworld in a joint-venture with a foreign partner. It subsequently went on to launch other formats such as Musicworld and Health & Glow.

Also in 1991, the Rahejas converted an old cinema into a department store, Shoppers Stop, aiming to provide an international shopping experience, although initially focussed on menswear. The store added women’s and children’s sections in subsequent years and the second store was launched four years later after the first one. Subsequent large scale retail expansion only came about towards the end of 1990s.

Little Kingdom is a notable example that I would like to dwell on briefly (partly for the purely personal reason that it was my first retail job!). The business was launched in 1987, headed by alumni of the illustrious IIMs around the country, built on processes and IT systems that could have been the envy of many retailers even 25 years later. The company – Mothercare India Limited – was the first purely retail company to start up and launch a public issue in 1991. During the early 1990s, it was the largest retail chain present across the country, in its categories. In 1991, it also attempted to bring the first home computer, Spectrum, to forward-thinking parents through a mix of in-store sales and door-to-door direct-selling. It was admittedly one of the first to expand internationally, opening a franchise store in Dubai in 1992. During its short life, the team launched multiple brands and formats, including Little Kingdom, Ms (a womenswear brand), The Baby Shop, and became a partner to the international giant VF Corporation’s Healthtex children’s brand and Vanity Fair lingerie brand in India. But, by the mid-1990s – financially overstretched between multiple brands and formats, and backward integration into manufacturing – it was gone.

Physical retail was not the only avenue being explored for growth during these decades. An Indian company imagined replicating the success of western catalogue companies, and launched the Burlington’s mail order catalogue retail venture and even became a joint-venture partner of one of the world’s largest catalogue retailers, Otto Versand (Germany). Other models included direct sales business, such as the Eureka Forbes introducing vacuum cleaners through demonstration parties (which was emulated for the Spectrum home computers mentioned above). With the growth of private television channels, products also began being promoted during non-peak hours through infomercials, though serious TV shopping was still a few years away, coming up in the mid-2000s with dedicated teleshopping channels.

The Foreign Hand and Corporate Retailing

The 1980s and 1990s also saw the launch of international brands from global giants such as VF Corporation (Lee, Wrangler, Vanity Fair, Healthtex), Coats Viyella (Louis Phillippe, Van Heusen, Allen Solly), Benetton (UCB and 012), Levi Strauss, Lacoste, Reebok, adidas, Pepe and Nike, grocery retailers such as Nanz (a three-way German-US-Indian partnership) and Dairy Farm International (with RPG Group’s Spencer’s Retail) and Quick Service formats such as Domino’s, McDonald’s, Pizza Hut, Baskin Robbins and KFC.

India was reopening to business, global management consultants were writing glowing reports about the untapped potential of the (mythical) 200 million middle-class customers and global retailers wanted to own part of the action.

Due to the lack of large-format stores and suitable environments, international brands that entered the Indian market during this phase needed to create exclusive stores to ensure that the brand could be communicated holistically to the consumer, in an environment that was more in the brand’s control, and many of them were, in a sense, “forced” to become retailers in India.

However, around 1996, a very senior member of the cabinet is reported to have said, “Do we need foreigners to teach us how to run shops?” It was an unexpected condemnation, coming as it was from a person and a party otherwise seen as champions of an open economy. It slammed the doors shut to foreign investment and, to my mind, the sector is still yet to fully recover from that ban and the policy contortions that have come over the years to allow international brands and retailers to play a more active role in the market.

Internal weaknesses compounded the decline or exit of some of the businesses. Nanz folded due to various operational challenges and lack of adequate experience. British retailer Littlewoods’ wholly-owned subsidiary pulled out of the market due to problems back home, and in 1998 sold the sole store to the Tata Group, which eventually renamed it Westside.

Despite the early hiccups, India continued to attract international players on account of the high growth and changing social norms. Not only was there greater purchasing power available amongst more Indian consumers, there was a shift in consumer attitude from saving to spending. Several brands, including fashion, luxury and quick service formats, entered the market through licensing, franchising, and joint ventures.

During this period the domestic retail market also drew in more corporate houses, attracted by the apparently abundant market opportunity for them to mine alone or to act as a gateway for foreign companies interested in India. Most were significant diversifications from their existing businesses.

Tobacco, paperboards, agri-commodities and hospitality conglomerate ITC ventured into retailing through Wills Lifestyle and as well as its rural initiative e-Choupal in 2000, followed by John Players and Choupal Sagar respectively. Pantaloon Retail launched a partial hypermarket format Big Bazaar in 2001 and went on to Food Bazaar in 2002, Central in 2004, Home Town and Ezone in 2006. Reliance entered in 2006 with multiple stores of Reliance Fresh being opened simultaneously and over the next few years the company expanded through multiple formats such as Reliance Mart, Reliance Digital, Reliance Trendz, Reliance Footprint, Reliance Wellness, Reliance Jewels to name a few. Telecom major Bharti set up a joint-venture with Wal-Mart at the back end, while the Tata group tied the knot with Woolworths and Tesco in two separate businesses supplying its retail stores, even as it expanded its successful watches and jewellery businesses, as well as Westside.

Even a retail operation like Fabindia, born as an export surplus outlet of a handicraft product business found investors to back a rapid expansion spree, becoming more of a corporate retailer than a front-end for producer organisations and craftspeople.

Through the 1990s and beyond, the market remained in ferment. In 1997 Subhiksha, a small modern retail format for food and grocery was launched. Venture-funded Subhiksha expanded rapidly and over the next decade grew to 1,600 outlets. However, in 2009 the business closed down owing to a severe cash crunch, amidst accusations of criminal mismanagement and fraud.

New product areas emerged highlighting the pace of change of lifestyles, cafes prominent among them. Café Coffee Day opened its first store in 1998 in Bangalore and became the largest organised coffee chain in India by far, though it is now living under the shadow of the recent death of its founder. Barista was also launched in 1999 as India’s Starbucks-wannabe, found its footing, scaled up and lost its way, going on to be sold to Tata Coffee and the Sterling Group, who turned it over to the Italian coffee company Lavazza in 2007, who also exited seven years later. Its current owner, the Amtex Group, is itself going through financial troubles in some of its key businesses.

In the last two decades, while some retailers have gone out of business due to unrealistic business plans, mismanagement or lack of funds, most have taken opportunities to rationalise their operations by shutting down unviable or underperforming locations, aligning businesses to market needs, assessing their brand consistency across various touch points, improving organizational capabilities right down to front-line staff, and focusing on unit productivity.

It’s not just Indian retailers that have faced trouble. Foreign brands have had their own share of problems – some have overestimated the market, or their own relevance to the Indian consumer, while others have had misalignment with their Indian franchisees or joint-venture partners. A number of foreign brands and retailers have also churned partners, or exited the market outright, but most remain committed and invested in the market for the long-haul. The last few years have also seen the successful launch and humongous growth of global leaders such as Zara and H&M, even mass-market Chinese retailers like Miniso, as well as the largest investment commitment made by Ikea (about US$2 billion).

Showing on a Screen Near You

The late-1990s also witnessed a dotcom frenzy that led to a plethora of travel sites, and a few product sales businesses such as Fabmall, Rediff and Indiamart.

However, the online market lacked critical mass in the 1990s and early-2000s. Despite apparent advantages of the online business model, success depended on internet penetration (low!), the appearance of value-propositions that were meaningful to Indian consumers (questionable), investments in fulfilment infrastructure (lacking) and the development of payment infrastructure (regulation-bound). Malls and shopping centres – the new temples of retail – seemed to be sucking up all of the consumer traffic, in any case.

By the mid-2000s the business had reached just about Rs 8-9 billion (US$ 180-200 million), despite 25 million Indians being online. Dotcoms became labelled dot-cons, with an estimated 1,000 companies closing down. However, multiple changes took place in the mid-2000s, among them being the price disruption of the telecom market and explosion of mobile connectivity, as well as a renewed funding appetite among venture funds.

This laid the path for growing the second crop of ecommerce in India. Billions of dollars of investment was poured into creating India’s Amazon wannabes, the high streets ran red by ecommerce-fuelled discounts, aggressive advertising budgets (most promoting discounts) and mergers/acquisitions pushed through by venture investors.

After more than a decade of the second coming, India’s ecommerce business accounts for a market share of total retail in the low single digits. India’s Amazon – if one can call it that – is the Flipkart group, now owned by Walmart, bought at an eyepopping $21 billion valuation and still bleeding cash, and the runner-up is relentless Amazon that continues its aggressive push to own what could be one of the three largest markets in years to come. The Chinese internet giants Tencent and Alibaba are also trying to hack piece off the market, having fulfilled their aim of kicking out Western competitors from their home market.

However, the wild card has just been played by the Reliance Group – having moved from textiles to fibre to oil, the group has made its move into telecom and data (didn’t someone say, “data is the new oil”?). It has strategically pushed handsets and cheap data plans into the hands of the consumers and, according to the latest announcement on Jio Fiber, will soon offer High Definition or 4K LED television and a 4K set-top-box for free. The play is to grab as much of the customer’s share of spend on products and services (including entertainment) as possible.

Looking Ahead

Possibly the biggest driver of modern retail in the coming years will be the shift in the demographic structure of the country. The young consumers who are joining the workforce now are a distinctly different set from previous generations. This is a generation that has grown up in the liberalised economy and has been exposed to innumerable choices since their childhood. The most important factor is that these consumers are increasingly located outside the top 10 or 20 cities in the country, and are becoming more accessible as both physical and virtual access improves for them.

A large number of them may have only occasionally, or perhaps never, experienced modern retail first hand while they were growing up, but they have seen this upmarket environment emerge before them and are not shy of spending within it, even if it is only on select special occasions. Most of them are handling mobile phones (even if it is their parents’) while still in school and being socially active online even on the go. Certainly most of them have hardly ever visited tailors, growing from one set of ready-to-wear clothes to another. It is this set of young consumers whose outlook and habits will drive retailing very differently in terms of product categories and services in the future.

There is another significant set of consumers whose number is swelling annually: that of working women. As they add to the discretionary household income available to spend, they gain influence in purchase decisions, and with them the entire household’s lifestyle also undergoes a shift. There is a greater demand of time-saving solutions and convenience products to make their lives easier. Modern retail environments where their various needs can be taken care of under one roof, and convenience pre-packaged products are natural winners in this shift. Ready-to-wear products for women, grooming, beauty and personal care, women-oriented media products, processed foods and eating out get a boost. Another important shift is that, due to busier lifestyles, they are time-crunched and more likely to rely on branded products and services that they can trust. However, given the nascent stage of the market, these brands could just as well be retailers’ own labels, if they are managed well.

In terms of business, significantly greater efficiency needs to be achieved, both at the front-end and in head office and supply chain operations. Process and system-led planning and execution needs to become the norm. With India’s burgeoning population, people are treated as a cheap resource: on the contrary, each extra person can be expensive beyond just their salary cost to the organisation. Each extra person adds some friction to decision making, reducing the responsiveness of the business. Smart business will begin to realise this, and look closely at employee efficiency and effectiveness in the context of the overall business, rather than just in terms of individual costs.

Even as the retail business in India is far from saturation, and fragmented growth continues, the business will also undergo consolidation simultaneously, as large scale retail operations are enormously capital intensive. Mergers will be a strategy that will be explored to improve the viability of many businesses in this sector.

Should you be tempted to think that, squeezed between large corporates, international retailers and ecommerce giants, it’s “Game Over” for smaller domestic retailers and brands, let me say that the India retail story is not only not over yet, but continues to be written and rewritten. As the market grows and matures, retail businesses also need to differentiate themselves, investing more in product selection or even product development through private label growth to help them stand out in the market. A one-size-fits-all strategy doesn’t work in a country as diverse as India. For the size of the market, we have surprisingly few brands, many of them virtually indistinguishable from their competitors. Development on this front, of indigenous brands and product development capabilities, is an absolute must.

The good news is that already there is more talent available than ever before. Most importantly this management pool has experience of the retail sector not just in good times but during (many) downturns as well.

Eventually, what is needed is a mix that will be healthy for India’s ecosystem at large for a long time to come. This will not be delivered by a blind transplantation of international templates or a rapid-fire expansion across the country, nor by fearful protectionism or regional parochialism. It will only be achieved by the evolution of market-appropriate business models and a mature approach that can be make the Indian retailers robust enough to grow not just domestically, but possibly even globally over time.

Café Coffee Day – steaming or sputtering?

(Published in the Financial Express, 10 May 2016)

In about 20 years, Café Coffee Day (CCD) has grown from one ‘cyber café’ in Bengaluru to the leading chain of cafés in the country by far.

In its early years, it was a conservative, almost sleepy, business. The launch of Barista in the late 1990s and its rapid growth was the wake-up call for CCD — and wake up it did!

CCD then expanded aggressively. It focussed on the young and more affluent customers. Affordability was a keystone in its strategy and it largely remains the most competitively priced among the national chains.

Its outlets ranged widely in size — and while this caused inconsistency in the brand’s image — it left competitors far behind in terms of market coverage. However, the market hasn’t stayed the same over the years and CCD now has tough competition.

CCD competes today with not only domestic cafés such as Barista or imports such as Costa and Starbucks, but also quick-service restaurants (QSRs) such as McDonald’s and Dunkin’ Donuts. In the last couple of years, in large cities, even the positioning of being a ‘hang-out place’ is threatened by a competitor as unlikely as the alcoholic beverage-focussed chain Beer Café.

CCD is certainly way ahead of other cafés in outlet numbers and visibility in over 200 cities. It has an advantage over QSRs with the focus on beverage and meetings, rather than meals. Food in CCD is mostly pre-prepared rather than in-store (unlike McD’s and Dunkin’) resulting in lower capex and training costs, as well as greater control since it’s not depending on store staff to prepare everything. However, rapid expansion stretches product and service delivery and high attrition of front-end staff is a major operational stress point. Upmarket initiatives Lounge and Square, which could improve its average billing, are still a small part of its business.

Delivery (begun in December 2015) and app-orders seem logical to capture busy consumers, and to sweat the assets invested in outlets. However, for now, I’m questioning the incremental value both for the consumer and the company’s ROI once all costs (including management time and effort) are accounted for. The delivery partner is another variable (and risk) in the customer’s experience of the brand. Increasing the density through kiosks and improving the quality of beverage dispensed could possibly do more for the brand across the board.

The biggest advantage for CCD is that India is a nascent market for cafés. The café culture has not even scratched the surface in the smaller markets and in travel-related locations. The challenge for CCD is to act as an aggressive leader in newer locations, while becoming more sophisticated in its positioning in large cities. It certainly needs to allocate capex on both fronts but larger cities need more frequent refreshment of the menu and retraining of staff.

An anonymous Turkish poet wrote: “Not the coffee, nor the coffeehouse is the longing of the soul. A friend is what the soul longs for, coffee is just the excuse.” There are still many millions of friends in India for whom the coffee-house remains unexplored territory, whom CCD could bring together.

India – A Growth Trajectory for Global Fashion Brands

2013 has been a mixed year for retail in the Indian market with multiple factors working in favour of and against the business prospects.

Economic growth had slowed to 5% for 2012-13 (as per advance estimates by The Central Statistics Office, Government of India), down from 9.3% in 2011. The ray of hope is that the growth rate is expected to rebound to 6.8% in 2013-14. Spiralling inflation, with prices of some basic vegetables shooting up almost eight to ten times, distracted the consumers from discretionary spending. The year hardly saw irrational expansions by retail businesses as they primarily focused on bottom line performance.

While the Government of India liberalised Foreign Direct Investment (FDI) policy in retail in September 2012, international investors have been slow to respond and sizeable foreign investments have been announced only recently at the end of 2013.

The political environment also took unexpected turn with the success of Aam Aadmi Party (AAP) at the Delhi Assembly Elections held towards the end of the year. This may augur in a new era of politics driven by performance and results but in the short term it could restrict market access for international multi-brand retailers, as the AAP has declared their opposition to investment from foreign multi-brand retailers.

So is India still a strategic market for international fashion brands to look at?

FDI Policy – Clarifications and Impact

India’s Foreign Direct Investment (FDI) policy has come a long way with foreign investments now being allowed in multiple sectors including retail, telecom, aviation, defence and so on. The Indian government is now exploring the possibility of allowing FDI in sectors such as railways and construction.

The year 2006 was a significant year for international brands in fashion and lifestyle space as the Government of India allowed up to 51 per cent foreign direct investment in the newly-defined category of “Single Brand retail”. In September 2012 the Indian Government liberalised the retail FDI policy to allow foreign investment up to 100 per cent in single brand operations and up to 51 per cent in multi-brand retail albeit with certain conditions related to the ownership of the brand, mandatory domestic sourcing norms for both single-brand and multi-brand retailers and additionally certain investment parameters for the backend operations of the multi-brand retail business. The idea was to attract foreign investment in retail trading a part of which could flow into improving the supply chain while providing Indian businesses access to global designs, technologies and management practices.

Large Investments in the Pipeline

The investments flowed in slowly initially. Some of these have looked at converting existing operations, such as Decathlon Sports which was present in India through a 100% owned subsidiary in cash and carry business. The brand is converting its cash and carry business in India to fully-owned single brand retailing business.

But there have been some significant moves as well. A record breaking FDI proposal in single brand retail is the Swedish furniture brand IKEA’s, that had to apply three times since December 2012 before its’ proposed investment of €1.5 billion (Rs. 101 billion) received the nod from the Government. However, the proposal is reportedly still in the works, as Ikea looks to structure the business to comply with the laws of the land. And as the year came to a close the Government cleared Swedish clothing brand Hennes and Mauritz’s (H&M) US$ 115 million (Rs.7.2 billion) investment proposal. According to news reports the brand had already begun blocking real estate with the goal of launching its stores in India at the soonest.

While the initial response to the relaxation of FDI policy spelt positive inflow for single brand retail, there was no new investment forthcoming in multi-brand retail. The existing foreign multi-brand retailers present in India through the cash and carry format showed a marked lack of interest in switching to a retail business model. On the other hand Walmart, the only foreign multi-brand retailer having access to a network of retail stores through its wholesale joint venture Indian partner, Bharti Enterprises Ltd., ended its five year long relationship and has restricted itself to the wholesale business. Though the company cited that it was disheartened by complicated regulations, it was also caught up in its own corruption investigation as well as allegations that it had violated foreign investment norms. The sole bright spot was the world’s fourth largest global retailer Tesco proposing and getting approval for a US$ 115 million investment into the multi-brand retail business of its partner, the Tata Group. At the time of writing the precise scope of this investment remains unclear.

If you want the full paper please send us an email with your full name, company name and designation to services[at]thirdeyesight[dot]in.

Tesco in India: Will every little help?

[This article appeared in the February 2014 print issue of Retailer, under the headline “Implications of the Tata-Tesco JV“]

India is a civilisation that has borne fruit from thousands of year of international cultural exchange, commerce and investment flowing both inwards and out. It is also one that has suffered from military and as well as economic colonisation over the millennia.

For those reasons, foreign investment into the country is bound to have both vociferous opponents as well as staunch supporters, and this debate is possibly most polarised in the retail sector that touches every Indian’s life daily. Over the last few decades, foreign investment into the retail sector has seen flip-flops from successive governments and political parties across the spectrum, being allowed until the late 1990s, then blocked (by Congress-led UPA), then selectively allowed (by BJP-led NDA, and later by Congress-led UPA). And more recently, with pressures, protests and influences from all sides 2011, 2012 and 2013 have certainly been on/off years during the UPA’s second successive term.

In this time Zara’s joint-venture, set up in 2010, has turned out be one of the most successful and profitable in India. More recently, Ikea announced a €1.5 billion plan for the country, followed by H&M’s US$ 115 million proposal, while Marks & Spencer identified India as its second largest potential market outside the UK. However in October 2013, the world’s largest retailer Wal-Mart decided to call off its joint venture amid investigations of its executives having supported or indulged in corruption and accusations that it had violated foreign investment norms. It decided to acquire Bharti’s stake in the cash-and-carry JV and announced that it would not invest in Bharti’s retail business.

It was soon after, as if to compensate for Wal-Mart’s blow, that India’s Tata Group and British retailer Tesco announced that they would be creating a formal joint venture in India, with Tesco investing US$ 110 million. The Congress-led government went on to quickly approve the proposal, as if to visibly shake off accusations of “policy paralysis”.

Tesco’s investment doesn’t look like much for a country the size of India, especially in the context of Ikea’s ambitious proposal or H&M’s fashion retail business that is possibly less complex than Tesco’s multi-product multi-brand format. However, let’s keep in mind that Tesco is facing tough trading conditions in Europe, took a global write-down of US$3.5 billion last year including its exit from the US market, and merged its Chinese business with retail giant China Resources Enterprise to become a minority partner. In view of all that and the unpredictability of Indian politics, US$ 110 million looks like a reasonable if not disruptive commitment. It also does somewhat limit the downside risk for Tesco if the environment turns FDI-unfriendly after the general elections.

Whenever Tesco expanded into new markets, it has tried to adopt a localised or partner-led approach. In India, since 2007, Tesco has had an arrangement to provide support to Tata’s food and general merchandise retail business. The intent underlying the partnership was clearly to look at a joint retail business when allowed by regulations and not just at back-end operations. The existing structure has provided Tesco with an opportunity to learn about the Indian market and operating environment first-hand while working closely with Tata’s retail team. Tata, in turn, has drawn upon Tesco considerable expertise of operating retail businesses in both developed and emerging markets. At the very least, the FDI inflow from Tesco will deepen this arrangement further, benefiting both partners further.

But there are the inevitable twists in the tale. While the Tesco proposal was in the works, the new Aam Aadmi Party formed a government in surprise victory in Delhi state and announced that it would not allow foreign owned retail businesses in the state of Delhi. This strikes off one of the most lucrative metropolitan markets from the geographic target list at least in the short term. (The central government has pushed back saying that while retail is a state-subject, the decision to allow FDI by the previous Congress government cannot be reversed at will by the current AAP government, but the debate goes on.) BJP-led and BJP ally-led state governments have also indicated their unwillingness to allow foreign retailers into their markets.

So should we even attempt to forecast what Tesco and Tata could do in this environment? I would rather not pre-empt and second-guess the future plans of business executives who are trying to read the intent of politicians who are focussed on elections 4 months in the future! However, whatever the plans, the retailers must comply with the regulations such as they are now and utilise the opportunities that exist. So it is likely that the following scenario will play out.

Tata and Tesco have said that the proposed joint-venture looks at “building on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka”. These are both states where Trent has multiple locations, so a certain critical mass is available. Since current government policy requires the investment to be directed at creating fresh capacity, new stores would also be opened in these states, though the expansion plans look modest, with 3-5 new stores every financial year.

But with the 50 percent investment in back-end also being a regulatory requirement, new procurement, processing and logistics infrastructure which could service stores within these states as well as in other states are is likely to be built. Tesco’s wholesale subsidiary currently supplies merchandise to Star Bazaar stores across states – this relationship is likely to continue as some of Tata’s stores are in states that are not within the FDI ambit. The product mix proposed includes vegetables, fruits, meat, fish, dairy products, tea, coffee, liquor, textiles, footwear, furniture, electronics, jewellery and books.

The norms earlier required FDI proposals to ensure that 30 per cent of product sourcing would be domestic, from small-midsized enterprises. However, in August 2013, the government relaxed this requirement to be applied only at the beginning of the joint-venture operations, and that this requirement would not include fruits and vegetables, an area where Tesco has focussed significant energy. So the immediate focus would be on meeting the domestic sourcing requirements in other categories, and creating a viable business model and scale through an appropriate product mix.

The partners are likely to continue working on improving the performance of the existing Star Bazaar stores which are 40,000-80,000 sq ft in size. However, Tata has also launched a new convenience store format, Star Daily sized at about 2,000 sq ft focussed on fresh foods, groceries and essential items. Retailers with foreign investment are now also permitted to open stores in cities with populations under one million from which they had been prohibited previously, so the new small format can provide significant expansion opportunities and more volume for the back-end operations to reach critical mass quicker.

Would there be a change of name on the store fascia? Unlikely, since Tesco has been operating stores under other brands as well in markets outside the UK and a “Tesco” name appearing on the fascia may not significantly change the consumer’s perception of the store. Other than in lifestyle categories or overtly brand-driven products (such as fashion), most Indian consumers focus on utility, quality, local relevance and price as significantly more important purchase drivers than an international name. In fact, a trusted Indian name like Tata carries as much weight or more weight in many categories than an international brand would. So the stores may carry a joint by-line, but the focus is likely to remain on the existing brand names.

And what of several other retailers who are interested in the Indian market? Will they draw inspiration from Tesco and take their plunge into the market, urged on by the outgoing government eager to demonstrate results during its final months?

Wal-Mart, for one, seems to have returned to the table, having set up a new subsidiary, perhaps preparing the ground for a retail launch with another partner. A European retailer, remaining nameless for now, is being mentioned as being the next proposal in the FDI pipeline.

However, it is likely that most will remain in the wait-and-watch mode until the outcome of the national elections is clear. The real issue is not the regulations themselves as much as the unpredictability of the regulatory environment. Policies are being made, turned around, and twisted over in the name of politics, without a clear thought given to the real impact on the country, the economy and the industry of either the original policy formulation or its reversal.

Until that dust settles down, we should expect no dramatic changes in the near term, no sudden rushes into the market. But then, we could be wrong – policy and politics have taken unexpected twists earlier, and could do so again!

Go Your Own Way

Much has been written about the various relationship break-downs that have happened in the Indian retail sector in recent years. The biggest, most recent high profile ones are between Bharti and Wal-Mart and the three-way conflict playing out at McDonald’s. Other visible ones include Aigner, Armani, Jimmy Choo, and Etam, while Woolworth’s faded away more quietly because, rather than being present as a retail brand, it was mainly involved in back-end operations with the Tata Group.

I think it’s important to frame the larger context for these relationship upsets. Most international companies, non-Indian observers as well as many Indian professionals are quick to blame the investment regulations as being too restrictive, and being the main reason for non-viability of participation of international brands in the Indian consumer sector.

However, India with its retail FDI regulations is not the only environment where companies form partnerships, nor is it the only one where partnerships break up. Regulations are only one part of the story, although they may play a very large role in specific instances. In most cases, FDI regulations are like the mother-in-law in a fraying marriage: a quick, convenient scapegoat on which to pin blame.

Many of the reasons for breaking up of partnerships can be found in the reasons for which they were set up the first place. The main thing to keep in mind is that the break-down is inevitably due to the changes that have happened between the conception of the partnership to the time of the split. The changes can fall into the following categories, and in most cases the reasons behind the break are a combination of these:

  • External factors, including regulations, economic conditions or politics which could fundamentally change the operating environment, close off existing opportunities or open new ones, and raise questions about the logic of the partnership.
  • Internal factors, including differences between the partners in terms of overall business strategy, scale expectations, operating methodologies, desire for management control, margin and return expectations, or investment capability.
  • Changed perceptions, primarily around the strengths and support that each party expected the other to bring into the relationship, or performance they were supposed to deliver, and finding out that the reality differs from the initial perception on one or both sides.

According to Third Eyesight’s estimates, more than 300 international brands are currently operating in the Indian retail sector across product categories, if we just count those that have branded stores, shop-in-shop or a distinct brand presence in some form, not the ones that merely have availability through agents or distributors.

Of these, about 20 per cent operate alone, while other others work with Indian partners, either in a joint-venture or through a licensing or franchise arrangement. The relationships that have broken up in the last decade are only about 5 per cent of the total brands that have come in, and in many cases the international brand has stayed in the market by finding a new partner.

So there’s life after death, after all. And my advice to those who’re feeling particularly defensive or pessimistic because of a few corporate break-ups: take time for a song break. Fleetwood Mac (“Don’t Stop”, “Go your own way”) or Bob Dylan (“Don’t Think Twice, It’s All Right”) are good choices!

Wal-Mart brakes, Indian JV hits the wall

[This article appeared in Daily News & Analysis (DNA) on 10 October 2013, under the headline “Without Wal-Mart, can Bharti play it alone?”]

A year ago, Wal-Mart had called Bharti its natural retail partner in India. But today the companies have jointly and publicly changed their relationship statuses to “single”, calling off the 6-year old marriage. Bharti will buy out or retire Wal-Mart’s debentures in the 200+ store Easyday retail business, while Wal-Mart in turn will acquire Bharti’s stake in the 20-outlet Bestprice cash-and-carry business.

By some estimates, the split was imminent for perhaps a year or longer, as the pressure rose for the two companies due to multiple factors. Several regulatory changes governing foreign investment in the Indian retail sector made it difficult for Wal-Mart to acquire a stake in the existing retail business that the two partners had set up. Anti-corruption investigations in Wal-Mart’s India business (in addition to Mexico, China and Brazil), as well as questions around the legality of US$ 100 million worth of quasi-equity compulsorily convertible debentures issued to Wal-Mart at a time FDI was not allowed in multi-brand retail businesses brought down even more external scrutiny upon the joint business. And finally, pressure against foreign investment in multi-brand retail of basic goods such as food and grocery, continued to exist not just amongst opposition parties but also parties within the ruling coalition and individuals in the government.

The split means that Wal-Mart can now overtly take complete ownership of the Bestprice business, and drive it as it sees fit. The fragmented retail market and the myriad small businesses in India do potentially provide a large customer base for the cash-and-carry business if Wal-Mart chooses to be more aggressive. However, that may not happen immediately. The business has been coasting for over a year without new openings that were already planned and significant personnel changes have happened from the seniormost levels down. Wal-Mart’s investigations of corruption allegations continue and before committing more resources it will definitely want to strengthen systems so as to not be in violation of Indian and US laws.

On the other hand, if it wishes to now enter the retail business, Wal-Mart would also have to look for a new Indian partner to set up new retail stores in a separate company. Retail is capital-hungry so Wal-Mart would need a cash-rich partner who can accept a junior position in the venture in which Wal-Mart would clearly be the driver financially, strategically and operationally.

At this time Wal-Mart seems to have decided to take a step back and evaluate what the Indian market means to it right now and in the future, what sort of investment – both in financial and management terms – it demands, and what returns the investment will bring. It remains to be seen whether it will choose to grow aggressively, coast up incrementally or, in fact, take the next exit out of the market as it has done in some other countries earlier.

And what of Bharti? Will it be able sustain the retail play without Wal-Mart’s close operational guidance and financial participation, or will it choose sell the Easyday operation to another domestic investor? On its part Bharti has stated an ongoing commitment to the business, and has also hired the former CEO of the joint venture, Raj Jain, as a Group Advisor. A 200-plus store chain is sizeable and credible in India’s fragmented food and grocery market, and is seen by the group as “a strong platform to significantly grow the business”.

However, Bharti’s core telecom business is also capital-intensive and highly competitive, and it will be difficult at this time to sustain high-paced growth in another cash-hungry, thin-margin business such as grocery retail. For now the Group’s best bet would possibly be to consolidate operations, unearth more margin opportunities and take a call at a more opportune time whether to further invest in growth or to treat retail as a non-core business and exit it.

Creating a substantial, profitable retail business is a long-term play in any part of the world. In India, as retailers are discovering, it takes just that extra dose of patience.

Free the Golden Bird

About six years ago, Kishore Biyani of the Future Group and I were discussing a presentation I had delivered at CII’s National Retail Summit, during which I had mentioned “Purushartha”. This millennia-old living philosophy takes a balanced view of life. Aspects related to consumption are two of its major components including Artha (wealth, commerce) and Kama (sensory pleasure). Dharma (righteousness in society and individual life) and Moksha (liberation) are the other two. My point was that most “traditionalists” and certainly policy-makers in the country have tended to view the retail sector negatively or dismissively.

Of course, at that time most businesses themselves hardly demonstrated any sense of balance, let alone any connection with the reality of India, whether in terms of the consumer’s needs, or in terms of the operating environment in the country. By and large the theme was: push explosive growth, margins be damned; promote “westernised” consumption aspirations, regardless of capability to fulfil those aspirations. Conversely, the four years after the global financial crisis in 2008 have been possibly the worst that the retail sector has faced in recent decades, whether in terms of total losses or the quantum of lost growth opportunity, and business sentiment has swung to the other extreme.

On its part the government has not done much to encourage the sector. After several policy flip-flops, approving investment proposals of some high-profile global brands is a positive signal to the outside world, but none of them so far have unlocked or grown the value of Indian retail businesses in any significant way. There is no doubt that foreign brands and retailers can and should be an integral part of India’s developing retail landscape, but they cannot be the prime drivers of the retail business in India or the saviours of its supply chain. That vision and energy needs to come from within, and the resultant growth will benefit all – Indian and international companies, consumers and the government.

From the ancient treatise Arthashastra, Professor Thomas Trautman quotes the concept of concept of “shad-bhaag” (the state having one-sixth share) as “entrepreneurial” because it has a sense of mutual interest, promoting production and the growth of everyone’s share. This spirit of co-ownership and entrepreneurial participation is largely missing in today’s governance. Direct and indirect taxation remains a complex net for all but the savviest evaders, not to mention all the other regulation and approvals that each business – large or small – needs to comply with.

Somehow the mandarins don’t seem to see that the retail business is a platform for the multi-fold growth of new enterprise, that it is a vehicle for urban renewal, and that it can help enormously in channelling the economy into visible taxable revenues. It also seems to escape them that the biggest drivers for this growth and change will typically be small entrepreneurial businesses, who themselves can only thrive in a simpler and non-adversarial regulatory environment.

The wishlist is not large, but needs some bold steps: enact policies that free up unproductive real estate to reduce costs, reduce regulatory hurdles, remove tax traps, reduce import duties. For instance, one estimate for illegal imports in watches is 75 per cent, where the beneficiaries are the smugglers and those who oil the wheels for them, not the consumer, not the brands or retailers, not the revenue department.

It is an important budget year politically due to impending elections but also economically due to the dismal GDP growth. The animal spirits that the Prime Minister has referred to in the recent past are more in the nature of a “bheegi billi” right now rather than a roaring tiger. The caged golden bird will not lay any golden eggs. Will the Finance Minister choose to crack the whip this year, or cut the chains? We watch with bated breath.

(An edited version of this piece was published as in Daily News & Analysis – DNA on 19 February 2012, under the title “Foreign brands can’t be prime drivers of retail”.)

Entry Strategy of Global Brands – Impact of FDI

By Tarang Gautam Saxena & Devangshu Dutta

Since the onset of reopening of India’s economy in the late 1980s, fashion is one consumer sector that has drawn the largest number of global brands and retailers. Notwithstanding the country’s own rich heritage in textiles the market has looked up to the West for inspiration. This may be partly attributable to colonial linkages from earlier times, as well as to the pre-liberalisation years when it was fashionable to have friends and relatives overseas bring back desirable international brands when there were no equivalent Indian counterparts. Even today international fashion brands, particularly those from the USA, Europe or another Western economy, are perceived to be superior in terms of design, product quality and variety.

International brands that have been drawn to India by its large “willing and able to spend” consumer base and the rapidly growing economy have benefitted in attaining quick acceptance in the Indian market and given their high desirability meter, most international brands have positioned themselves at the premium-end of the market, even if that is not the case in the home markets. In addition, Indian companies – manufacturers or retailers – have been more than ready to act as platforms for launching these brands in the market and today there are over 200 international fashion brands in the Indian market for clothing, footwear and accessories alone, and their numbers are still growing.

Global Fashion Brands – Destination India

Europe’s luxury brands have had a long history with India’s princely past, but modern India tickled the interest of international fashion brands in the 1980s when it set on the path of liberalisation. The pioneering companies during this stage were Coats Viyella, Benetton and VF Corporation. At the time the Indian apparel market was still fragmented, with multiple local and regional labels and very few national brands. Ready-to-wear apparel was prevalent primarily for the menswear segment and was the logical target for many international fashion brands (such as Louis Philippe, Arrow, Allen Solly, Lacoste, Adidas and Nike). (Addendum: The rights to Louis Philippe, Van Heusen and Allen Solly in India and a few other markets were sold after several years to the Indian conglomerate, Aditya Birla Group, as part of the Madura Garments business.)

The rapidly growing media sector also helped the international brands in gaining visibility and establishing brand equity in the Indian market more quickly. However, this period did not see a huge rush of international brands into India. West Asia and East Asia (countries such as Japan, South Korea, Taiwan and even Thailand) were seen as more attractive due to higher incomes and better infrastructure. In the mid-1990s there was a brief upward bump in international fashion brands entering the Indian market, but by and large it was a slow and steady upward trend.

The late-1990s marked a significant milestone in the growth of modern retail in India. Higher disposable incomes and the availability of credit significantly enhanced the consumers’ buying power. Growth in good-quality retail real estate and large format department stores also allowed companies to create a more complete brand experience through exclusive brand stores in shopping centres and shop-in-shops in department stores.

By the mid-2000s, however, a very distinct shift became visible. By this time India had demonstrated itself to be an economy that showed a very large, long-term potential and, at least for some brands, the short to mid-term prospects had also begun to look good.
While India was a promising market to many international brands, it was not completely immune to the global economic flu. More than its primary impact on the economy, it sobered the mood in the consumer market. Even the core target group for international brands tightened the purse strings and either down-traded or postponed their purchases.

In 2008, in the midst of economic downturn, scepticism and uncertainty, international fashion brands continued to enter India at nearly the same momentum as the previous year. Many international brands such as Cartier, Giorgio Armani, Kenzo and Prada entered India in 2008, targeting the luxury or premium segment. However, given the high import duties and high real estate costs, the products ended up being priced significantly higher than in other markets. Many brands ended up discounting the goods heavily to promote sales, while a few gave up and closed shop.

The year 2009 saw the true impact of the slowdown as fewer international brands were launched during the year. The brands that launched in 2009 included Beverly Hills Polo Club, Fruit of the Loom, Izod, Polo U.S., Mustang, Tie Rack, Donna Karan/DKNY and Timberland amongst others. Some of these had already been in the pipeline for quite some time and had invested considerable time and effort in understanding the dynamics of the Indian retail market, scouting for appropriate partners, building distribution relationships and tying up for retail space, setting up the supply chain and, most importantly, getting their operational team in place.

2010 was better in comparison: although initially slow, the growth of new international brands entering the Indian market in 2010 bounced back later during the year, and some brands that had exited the Indian market earlier also made a comeback. Amongst the new launches, a highlight of the year was the launch of the most awaited and discussed-about Spanish brand Zara. The first store was launched in Delhi to an absolutely phenomenal response, followed by a store in Mumbai, and a third again in Delhi. The Italian value fashion brand, OVS Industry, was launched in 2010 by Oviesse through a joint-venture with Brandhouse Retail from the SKNL group. While in its first year products were imported from Italy, the company had mentioned that it intended to bring in the merchandise directly from the supply source for speed and cost effectiveness, to achieve aggressive growth over the following five years.

2010 indicated a fresh round of optimism as the pace of new brands entering the market picked up, and those already present in the market showing signs that they were adapting their strategies to grow their India business, including lowering prices and entering new segments.

Though the number of new brands entering the Indian shores in 2011 and 2012 may not have matched the numbers in the peak years, both years have been healthy and the list of new brands ready to enter in 2013 already seems promising.

Amongst others, 2011 saw the entry of Australian brands such as Roxy and Quiksilver having tied up with Reliance Brands for distribution. The largest British football club and lifestyle brand Manchester United, signed up with Indus-League Clothing Ltd. to bring the fashion products to India, after having launched café bars in India in 2010 through a franchisee.

2012 brought in luxury brands such as Christian Louboutin, Roberto Cavalli and Thomas Pink, womenswear brands such as Elle, Monsoon and fashion accessories brands such as Claire’s.

Routes to Market – The Evolution

The choice for entry strategy for the fashion brands has evolved over the years. During the initial years licensing was the preferable route for international brands that were testing the market. This shifted to franchising as import duties dropped and brands looked at exerting more control on the product and the supply chain. More recently, brands seem to be opting for some degree of ownership, as they begin to take a long-term view of the market.

In the 1980s and the early 1990s, licensing was a popular entry strategy amongst the global fashion brands, with minimal involvement in the Indian business.

Entry Routes Jan 2012

In the mid-1990s a few companies such as Levi Strauss set up wholly owned subsidiaries while others such as Adidas and Reebok entered into majority-owned joint ventures. This helped them to gain a greater control over their Indian operations, sourcing and supply chain, and brand. In the subsequent years import duties for fashion products successively came down making imports a less expensive sourcing option and the realty boom brought in many investors in retail real estate who became franchisees for the international brands. By 2003, franchising became the preferred launch vehicle for an increasing number of international companies, while only a few chose to enter through licensing.

In 2006 the Government of India reopened retail to foreign investment (allowing up to 51 per cent foreign direct investment in single-brand retail). Using this route, many brands have entered India by setting up majority-owned joint ventures, or moving their existing franchise relationships into a joint venture structure. By the end of 2008, more than 40 per cent of the international brands were present through a franchise or distribution relationship, while more than 25 per cent had either a wholly-owned or majority-owned subsidiary. All these structures allowed the brands to have greater control of operations, particularly of the product.

Amongst the international brands that entered the Indian market, a few were on their second or even third attempt at the market. For instance, Diesel BV initially signed a joint venture agreement in 2007 with Arvind Mills. However, by the middle of 2008, the relationship ended with mutual consent, as Arvind reduced its emphasis at the time on retailing international brands within the country. Within a few months of ending this relationship, Diesel signed a joint venture with Reliance Brands as the iconic denim brand wanted to take on the Indian market full throttle and the Indian counterpart had indicated that it wanted to rapidly build its portfolio of Indian and foreign brands in the premium to luxury segments across apparel, footwear and lifestyle segments.

Similarly, Miss Sixty entered India in 2007 through a franchisee agreement with Indus Clothing. It switched to a joint venture with Reliance Brands in the same year but the partnership was called off in 2008. Miss Sixty finally entered India through a franchisee agreement with a manufacturer of women’s footwear and accessories.

During the turbulence of 2008 and 2009, a few brands also moved out of the market. Some of them were possibly due to misplaced expectations initially about the size of the market or about the pace of change in consumer buying habits. Others were due to a failure either on the part of the brand or its Indian partners (or both), to fully understand what needed to be done to be successful in the Indian market. Whatever the reason, the principals or their partners in the country decided that the business was under-performing against expectations for the amount of effort and money being invested, and that it was better to pull the plug. Amongst the brands that exited the market during 2008 and 2009 were Gas, Springfield and VNC (Vincci).

In the last few years as the foreign direct investment rules are being softened in particular with regard to the more flexibility in the 30% domestic sourcing and clarification on brand ownership norm there is an increasing preference for international companies to enter the India market with some form of ownership while those that are already in the market are looking to increase their stakes in the business.

Several brands have taken the plunge into investing in the Indian operations and moved more aggressively into the market. Since the year 2009, international brands increasingly opted for joint-ventures as the choice for entry into the market. Even the brands already present started looking to modify the nature of their presence in India in order to exert more control over the retail operations, products, supply chain and marketing. Brands that changed their operating structures and, in some cases partners, include VF (Wrangler, Lee etc.), Lee Cooper, Lee,  Louis Vuitton, Gucci, Burberry amongst others. Mothercare, the baby product retailer, which was initially present through a franchise agreement with Shoppers Stop, formed a joint venture with DLF Brands Ltd to enable the expansion through stand-alone stores.

During 2011, Promod changed its franchise arrangement with Major Brands into a joint-venture that is majority-owned by Promod. From its launch in 2005, the brand has opened 9 stores so far. However with the new joint venture in place, the international brand is reported to be looking at opening 40 stores in the next four years with the hope of increasing the contribution of India business to its global revenue to the extent of 15-20% from a mere 3% at present.

After its partnership with Raymond fell through in 2007 and all of its standalone stores were shut down, Gas (Grotto SpA) scouted around for an appropriate partner for India business.  Eventually, the brand set up a wholly owned subsidiary in 2010 for wholesale operation while retail stores were franchised. In 2012 the company formed an equal joint venture partnership with Reliance Brands with plans to ramp up India retail presence.

2012 was a defining year marking the government’s decision to allow 100% foreign direct investment in single brand retail business and permitting multi-brand retail in India. Not only has this encouraged new brands to consider the Indian market but many existing brands have started reviewing their existing operating structures and alliances, and have initiated moves towards greater ownership and a stronger foothold in the Indian market. Some of the brands have taken the decision to step into an ownership position in India as they felt that India was too strategic a market to be “delegated” entirely to a partner (whether licensee or franchisee), or that an Indian partner alone might not be able to do justice to the brand in terms of management effort and financial capital.

S. Oliver restructured its India operations in 2012 by exiting its prior relationship with the apparel exporter Orient Craft and tied up with a new partner through a majority joint venture. To gain a larger share in the Indian market the company has repositioning the brand, changed its sourcing strategy, reduced the entry-level prices by 40% while reducing the store size (from 5,000 sq. ft. to 1,200-2,400 sq. ft.). It has also put in place an aggressive expansion strategy for tier II towns. The change in FDI norms towards the end of last year may cause it to review its position further.

Canali has entered into a majority-owned joint-venture with its existing partner Genesis Luxury. The brand had entered in India in 2004 through a distribution agreement. Through this change the international brand plans to grow its presence in India multi-fold by opening 10-15 stores over the next three-four years.

Pavers England is the first international brand to have applied for and been granted the permission to own and operate its retail business in India through a 100 per cent subsidiary owned by a UK based company. Newcomers such as H&M and Loro Piana are reportedly considering the joint venture route.

As we have already mentioned in one of our earlier papers (“Tapping into the India Gold Rush”) we do not expect a dramatic short-term growth in the number of international brands following the retail FDI relaxation in September 2012. However, at that time we did foresee some changes in the operating structures for the single brand ventures already active in the market, as well as entry of new brands that have been holding back so far as they wanted greater control in their India retail business and this seems to be happening already.

In the luxury sector, 51 percent FDI and distribution relationships are likely to continue to be a norm, since it is virtually impossible for most luxury companies to meet the 30 percent domestic sourcing requirement in its true spirit. In many cases, the local partner in a joint venture is a mere placeholder until FDI rules are liberalised further and, unless the business grows significantly, most brands will be content to keep the existing structures in place.

In the other segments some more relationships could be reconstituted during 2013, taking the international brand at least a step closer to gaining greater control, even if their partners remain the same.

Operating Models Jan 2013

Franchising is still the more common form of route to market for most single brand retail companies although for many international companies an eventual ownership in India business may be desirable. However, licensing should not be excluded from the choice set, especially for companies that are multi-brand retail concepts such as Sephora or those that manage to find a suitable Indian partner that can provide end-to-end support from product sourcing to distribution and retail (for example, the relationship between Elle and Arvind).

Today two thirds of the international fashion brands come from three countries the U.S.A., Italy and the U.K. with nearly 30 per cent originating from the U.S.A. alone.

 COO Jan 2013

 Is This A Lucky 13?

The theme for the year 2013 is positive for most brands, although still cautious.

Amongst the international brands that one can look forward to shopping in 2013 are “Uniqlo” of Fast Retailing, Japan’s largest apparel retailer, Sweden’s H&M, Emilio Pucci and Billabong. But India is not merely a destination anymore for the international brands to grow their business. The country is also increasingly becoming the innovation-platform or testing ground for new concepts and trends. World Co. a Japanese retailer with  more than 3,000 stores in Japan and 200 stores in other parts of Asia is also test-marketing women’s apparel and accessories brands such as Couture Brooch, Opaque.clip, zoc, Tk Mixpie and Hot Beat to gain insights into consumers’ psyche. Italian brand United Colors of Benetton has recently introduced a global retail interior design concept which is present in major European cities but is the first-of-its-kind store in Asia and may well set the trend for the rest of Asia.

Gucci recently opened its largest store in India recently Delhi-NCR after two failed joint ventures. All of its five stores are now run directly by the company and the Indian business also reported to have turned profitable this year.

Brands such as Mango who have chosen the franchise route are tying up with additional partners (e.g. DLF) in the hope of making the Indian business contribute significantly to the overall revenue of the company.

UK-based apparel chain Marks & Spencer is accelerating its expansion in India with plans to add ten stores in the next six to eight months in the country. The company has identified India as one of the key markets to become the world’s most sustainable retailer by 2015. It  plans to increase the number of stores in India from 24 currently to over 30 through the 51:49 joint venture with Reliance Retail.

Puma SE, the global sports lifestyle company for athletic shoes, footwear, and other sports-wear aggressively set out to gain 30 per cent of the Indian organised retail sportswear market within a year, from a share of 18-20 per cent in the top four branded sportswear segments in 2011. To this end the company targeted opening nearly 100 more stores during 2012. While the actual numbers are reportedly short of target, the brand has been opening amongst the largest stores during the year.

The confidence in the India opportunity is rising again, with existing global brands expecting the contribution from India business to grow multi-fold in a few years. However, the approach is of careful consideration and brands realise that India is a unique market, different not only from the West but also from other Asian economies such as China. Rather than adopting a “cut-and-paste” approach one needs to seriously consider the appropriate business model for India. Many of the global players have had to create a different positioning from their home markets. Some have significantly corrected pricing and fine-tuned the product offering since they first launched; these include The Body Shop and Marks & Spencer. Others are unearthing new segments to grow into; for instance, Puma and Lacoste are now seriously targeting womenswear as a growth market.

It is not only international brands that are more optimistic. Indian partners are also reviewing their approach. For instance, the Arvind Group that had looked at reducing its emphasis on international fashion brands in 2007-08 has recently acquired the business operations of Planet Retail which operated the franchises of British fashion retailers Debenhams and Next, and American lifestyle brand Nautica in India. The company termed Debenhams’ franchise as a significant acquisition as it provided an entry into the department store segment. Arvind plans to increase the India presence of Debenhams from 2 stores to 8 over the next three years. It also plants to grow the network of Next, the large-format speciality stores, from 3 to 12 in the same period.

As customer footfall and conversions pick up, international brands are also shoring up their foundations for future expansion in terms of better processes and systems, closer understanding of the market, and nurturing talent within their team. Third Eyesight’s study of the market highlights international brands’ concerns with ensuring a consistent brand message, improved organisational capabilities right down to front-line staff, and focussing on unit productivity (per store and per employee).

India shows signs of a healthier business outlook for International brands but the game has just begun and with competition getting tougher, we can expect interesting times ahead.

International Shoes & Accessories Brands in India – The March Ahead in 2012

India’s economic growth may seem to have taken a dip last year with India’s GDP growth falling to 6.9% for 2011-12 from 8.4% the previous year. But that has not translated into a slower entry of international brands entering the market. There already exist over 200 international fashion brands in India with more than a quarter of these operating predominantly in the footwear and accessories category. Bata may be an exception, having been present in India for over eighty years, but since the 1980s international brands have been trickling in, and the numbers really picked up in the 2000s.

Since 2006, the number of international shoes and accessories brands entering the market has increased 4-fold. The year 2012 has already ushered in international brands such as Claire’s (jewellery), Christian Louboutin (shoes) and Kelme (sports shoes and apparel) within the first three months, while more brands are there on the anvil. While India is expected to grow at 7.6% this year, the pace of growth of international brands may just as well surpass this relatively slow growth rate.

Business Environment & Choice of Operating Structure at Entry

The choice of entry strategy is a key decision for brands entering new markets. This decision hinges on internal and external business factors including the degree of control that a brand wants to exercise on the brand, the product and the supply chain, the market potential, the internal capabilities and strategies of the international brand in their home market or other overseas markets and the government policy pertaining to foreign investment in that particular market.

In the late 1980s and 1990s the Indian retail market was largely unorganized with few national Indian brands and an under developed modern retail network. Import duties were high and there were many investment barriers for foreign brands. The early players entering the market in the shoes and accessories segment were primarily sports footwear and equipment brands targeting the Indian men.  Bata was perhaps a lone brand that offered footwear for the entire family.

The international brands that entered the Indian market at that time largely opted to license the brand to an Indian partner that allowed the international brands to gain quick access to the Indian market with a minimal investment. Brands such as Lotto, Hush Puppies and Puma chose to license the brand to a partner based in India. The Indian partner invested in sourcing or manufacturing, merchandising, branding, marketing, distribution, and even retail while the international brand received royalties and other fees for lending its brand to the market. However, this left the brands with very little control on their growth path in the market. A few formed joint ventures (Reebok, Adidas) or entered into licensing and distribution tie-ups (Nike, Umbro) with Indian partners to leverage the partners’ manufacturing or distribution strengths.

Over time, certain brands decided to move their existing entities (licensed, franchised or joint venture) into wholly owned subsidiaries. These brands may have invested a disproportionate amount of management time and effort initially but the investment has paid off well. Reebok is today the largest international sports goods brand in India with a reported turnover of Rs 600 crores last year, followed by Adidas, Puma and Nike.

The 2000s saw a rising interest of women’s footwear and accessories brands in the Indian market as the market further evolved. Many of these players operated in the luxury segment appealing to a limited few. There was a distinct shift in the choice of entry strategy and franchising emerged as the preferred entry route for the brands stepping afoot in the Indian market testing the waters. The successive lowering of import duties for fashion products resulted in imports being a less expensive sourcing option and the realty boom brought investors in retail real estate that were ideal franchisees for the international brands.

At the same time the count of sports footwear and accessories brands also continued to grow. This product category was primarily distributed through agents, regional distributors and through a combination of exclusive branded outlets, multi-branded outlets and large department chains at the retail end. By 2003, franchising became the preferred launch vehicle for an increasing number of international companies, including Accessorize, Aldo, New Balance and Nine West, while only a few chose to enter through licensing.

In 2006 the Government of India reopened retail to foreign investment (allowing up to 51 per cent foreign direct investment in “Single Brand” retail). Later the Indian government also announced the possibility of gradually increasing the FDI limit in single brand retail from 51% to 100%. The possibility of having part or an eventual complete ownership encouraged brands, seeking a more controlled business in India, to use joint venture as the launch vehicle. International footwear and accessories brands such as Clarks, Fendi, Kipling, Pavers England either entered India by forming joint ventures or shifted their existing structures to joint ventures.

Thus the last decade saw the international brands largely using the franchising route or forming joint ventures to create a presence in the Indian market. While franchising became the choice for risk-averse brands, those that were convinced about the longer-term value of India took the more committed ownership route.

While the government has recently allowed 100% foreign direct investment in single brand retail, it has placed the rider that 30% of the sourcing would happen from small and medium enterprises in India. The lack of clarity as to what this actually means, as well as the need to set up an adequate sourcing presence in India has meant that most brands have not pushed their Indian presence into a 100 per cent ownership structure.

Of course, for a few brands India may be the key source for their entire range and given our government’s manufacturing policy they may already have an existing small and medium enterprise vendor base. These brands may go for complete ownership if India is a strategic and important enough market and sourcing base in their global portfolio.

One such international company is Pavers England, a premium leather footwear brand from UK, which has recently approached the Indian government to allow the retailer 100% foreign direct investment in single brand retail. The group has been present in India since 2008 through a joint venture and currently sells the brands, Pavers England and Staccato in India.

At the moment, 35% of the international brands are present through an ownership business model, either through a wholly owned subsidiary or a joint venture with majority stake which reflects the growth of confidence level of international brands in the Indian market.

Changeovers, Exits & Re-launches

The road to success in the Indian market has not been an entirely smooth ride even for the large brands that are successful globally. Brands that have invested in understanding the psyche of the Indian consumer, adopted flexibility in market approach and displayed persistence, have been paid off handsomely and some of these have even exceeded domestic brands in size and reach. Some others have had to reconcile to being niche operators.

Some brands have shifted their strategy and changed their operating structures and even partners in response to the dynamic market conditions and the increasing importance of India’s contribution in their global business. Some brands that may not have achieved success in their initial stint and have exited the market, only to return with renewed strategy, energy and rigour and more suitable business models and or partners. There are plenty of examples of international brands that have changed over their operating structure, partners, exited the market and yet re-launched again.

Puma, for instance, had first entered the Indian market through a licensing arrangement with Carona in the early 90s to sell sports footwear, but the agreement was revoked in 1998. The brand entered the market again in 2002, this time with a licensing / distribution tie up with Planet Sports. The company positioned itself as a lifestyle brand this time with a wider product range. While the Indian partner was responsible for sourcing of apparel and accessories, distribution and retail, Puma ensured that the quality of footwear being sourced from India was upto mark and also ensured brand consistency throughout all marketing, product and retail efforts. To the international company, India occupied an important position in Puma’s global as well as Asian business. With an aim to strengthen the brand’s position further in the country through greater control over its India operations, Puma set up a wholly owned subsidiary in 2006 subsequent to the end of its licensing tie-up.

Another early entrant, Lotto Italia, re-entered the market in 2005 through a license deal after a gap of ten years. More recently, in an effort to move to the higher growth trajectory, the brand has changed its partner last year and the brand is looking for aggressive growth by planning to grow its network of exclusive stores across India from 50 at the moment to 200 in the next three years. The brand is also undertaking various marketing activities to gain high visibility and connect with the consumers. Recently, the brand has been reported to be working on launching cricket equipment in India in the next six months, which will be a pilot run for the global launch of the product as well.

The renowned Italian brand Gucci was brought into India through a franchise agreement with Murjani Retail in 2006. However, the global economic crisis and its resultant impact on the Indian market, led a shift in the Indian partner’s focus from luxury to premium brands. The franchise agreement with Murjani Retail was terminated and replaced with a new franchisee, Luxury Goods Retail, in 2009. Simultaneously, the international brand Gucci, converted this new franchise agreement into a majority owned joint venture for more control over the Indian operations.

Clarks, a British footwear brand, first entered India in 2005 through a distribution agreement with an India partner and also set up a few exclusive stores across India. It withdrew from the market due to below-par performance. However, after researching and understanding the Indian consumer further it re-entered the market 2011 through a joint venture with Future Group. Now Clarks is offering differentiated products across segments (men, women and kids) with lower price points and is focusing on high brand visibility through exclusive branded stores to break through the clutter. India is an important sourcing base for this company and it is also drawing synergy for its global product range from the products being developed as per the tastes and preferences of Indian consumers. From the new partner the brand hopes to leverage their experience in real estate and their understanding of the Indian consumer.

The Italian fashion brand Miss Sixty exited the market and their partnership with Reliance Brands in 2007. The brand re-launched shoes and accessories in 2009 through another franchise agreement and currently the brand has three stores across Delhi, Mumbai and Chennai.

The German lifestyle brand, Aigner that entered India in 2004 is perhaps a lone brand that has not yet re-entered the market since its exit in 2010, but it will be no surprise if it returns to India again at an appropriate time.

The strategies of international brands have changed due to various factors. Many of the changes in strategy and structure have been due to the actual performance in the market falling well short of expectations and projections. Perhaps, the changes in partnership could have been moderated had the companies been more careful in questioning the criteria and motivations for choosing partners. (This is discussed further in detail in our earlier articles, relating to the International Fashion Brands in India). In choosing their partners, the international brands need to carefully identify what role they wish to play in the market, and what capability and capacity they need operationally to create the success that can truly root a brand into the rich Indian soil.

International Brands: Here to Stay

India is at the early stage of consumer growth and is emerging to be a strategic market to many international brands with a promising market potential. The market conditions are much better and the barriers to entry much lower for the international brands as compared to even the last decade. The overall confidence of the international brands in the potential of the Indian market is highly positive.

So far, the shoes and accessories market has been led by international sports and outdoors brands. Though there are already over a dozen international brands present in this category, we can expect to see more entering this category. The recently announced joint venture between Wolverine and Tata International to strengthen the presence of CAT and Merrell brands in the Indian market and to possibly introduce other brands from the portfolio shows that this segment is far from saturation.

Indian women are emerging as another important segment, drawing more footwear and accessories brands into the market and expansion of the existing brands through stand alone stores for women. There is still open ground available in the premium and value segment of women’s accessories for the growth of both international and national brands.

Over the last decade, the pace of growth of a brand has accelerated; the time needed for a brand to scale up has shortened.  The modern retail network has expanded and there are an increasing number of distribution channels today, even as existing players such as Bata and new ones such as Reliance Footprint offer growing platforms for international accessory brands to plug into.

The online channel is further emerging as an important route to reaching the consumers especially in the tier II and III cities where demand exists but there is low accessibility due to inadequate distribution network. Vans Shoes, an international footwear brand from USA, has tied with online portal myntra.com to widen its consumer reach having entered India last year through a joint venture with Arvind Brands. The online channel also offers the possibility of “pilot runs” and test marketing for brands at the early stage.

Going further, not only do we see more brands customizing their product range for Indian tastes, but India also becoming the testing ground and an inspirational source for global product range.

International brands clearly are here to stay. The more successful brands will be the ones that take pragmatic view of what is achievable and make course-corrections to their India business model as often as required.

2012 – Will India Sizzle or Fizzle for International Fashion Brands?

Among consumer sectors, very few can match up to fashion in terms of its global nature. Despite food having led the way in global trade through spices, it is the fashion sector that led the global march of brands. As the economies in Europe and Asia recovered and grew, historical colonial linkages as well as modern culture-vehicles such as movies carried images of what was cool in the benchmark culture. Fashion brands were the most identifiable representation of cool.

India itself has known international fashion and luxury brands for several decades. From the mass footwear brand Bata to the top-notch luxury of LVMH, some of whose most important global customers included the rulers of Indian princely states, international fashion brands have an age-old connection with India.

In spite of these old links, the absolute base of consumers for fashion brands was small, and for them, prior to the 1980s , India was a relatively low potential market with low attractiveness and low probability of success.

India's changing position as a market

A transition began in the 1980s, as India moved emphasis from central planning and a restrictive economy to a more liberal business regime, and brands and modern retailers started growing in presence gradually. During this transition period, other than the notable exception of Bata, it was mainly Indian brands that were at the forefront of modernisation of retail in India, with the first retail chains being set up for textiles, footwear and clothing. Though the seeds were laid earlier – Liberty is credited with the launch of the first ready-to-wear shirt brand in the 1950s, Raymond with the first ready-to-wear trouser brand in the 1960s – the growth started in real earnest only in the 1980s when apparel exporters such as Intercraft (with brands like “FU’s”), Gokaldas Exports (“Wearhouse”), and Gokaldas Images (“Weekender”) also tried their hand at modern retail, as did corporate groups (“Little Kingdom” for kids and “Ms” stores for womenswear).

Yet, even in the early to mid-1990s, when western companies looked at the Asian economies for international growth, West Asia and East Asia (countries such as Japan, South Korea, Taiwan and even Thailand) were seen as more attractive due to higher incomes and better infrastructure. In the mid-1990s there was a brief upward bump in international fashion brands entering the Indian market, but by and large it was a slow, steady process of increase.

By the mid-2000s, however, a very distinct shift became visible. By this time India had demonstrated itself to be an economy that showed a very large, long-term potential and, at least for some brands, the short to mid-term prospects had also begun looking good. In a few years, from 2005 onwards, the number of international fashion brands entering the market has increased 4-fold.

Growth of international fashion brands in India

Market Still Evolving, but Brands are Confident

The sheer number of brands that are now present in India and the new ones that are entering every year is a clear sign of strengthening confidence among international brands that India is now one of the most important markets that they cannot ignore for long.

There is a visible acceleration of growth in absolute revenues, too, being achieved by individual brands. Brands such as Levi Strauss, Reebok, Louis Philippe (a British brand formerly owned by Coats Viyella, now by Aditya Birla Group for India and other territories) and its sister brands took perhaps 12-15 years to break through the threshold of Rs. 500 crores (Rs. 5 billion) in sales turnover, but industry opinion is that the “0 to 500” trajectories today are faster and that younger brands are likely to take less time – under a decade – to cross the threshold. While modern apparel retail currently contributes less than 20 per cent of the total apparel market, with growing incomes and increased availability of modern retail environments, consumers are spending more on branded fashion than ever before. In the year closing March 2012, at least 2-3 additional brands (including Indian ones) are expected to cross the Rs. 500 crores threshold.

Clearly, there are few markets globally that can support potential growth from zero to US$100 million in a decade, with the potential to even reach a billion-dollar mark within the next couple of decades. However, some of these markets are already hugely competitive, and also going through painful economic churns. India, on the other hand, is a market that is at the earliest stages of consumer growth – it is, in the words of the managing director of a European brand, a market where “a brand can enter now and live out its whole lifecycle”.

In fact, it is tempting to compare the emerging golden bird of India to the golden dragon of China where western brands seem to have rapidly established as products of choice for the newly affluent Chinese consumer during the last 15 years or so.

In our work with brands and marketers from around the world, we have to constantly remind them that not all emerging markets are the same. The explosion of luxury and premium brands in China during the last decade or so has happened on the back of explosive economic growth that came after a long cultural and economic vacuum. When the new money wanted links with the old and when uniform grey-blue suits needed to give way to something more expressive, well-established western premium and luxury brands provided the most convenient bridge.

On the other hand, in India “discernment” may be a new experience to the newly-rich Indians for whom brands can be a valuable guide and “secure” purchase, but discernment and taste are not new to India as a whole. More importantly, differentiation and self-expression never disappeared even during India’s darkest years of “socialistic” economics. Therefore, the Indian market has a more “layered” approach to the premium fashion market and will continue to grow in a more fragmented, more organic manner than the Chinese market. There would be multiple tiers of growth available for international as well as Indian brands. For international brands customisation and Indianisation will be important. This is already visible in bespoke products by Louis Vuitton and Indian products by brands such as Canali (jackets) on the one hand, and significant re-thinking on product mix and pricing by brands such as Marks & Spencer. That brands are willing to rethink their position in the context of the Indian market demonstrates that they see India as a strategic market, worth investing in for the long term.

Another sign of the growing confidence amongst international brands in the Indian market is the number of companies that are looking at directly investing in joint ventures, or even going further to set up wholly-owned subsidiaries in the country.

It is worth keeping in mind that setting up a subsidiary is a decision that is not taken lightly, regardless of the size of the business and the amount of investment, since it involves a disproportionate amount of management time and effort from the headquarters during the launch and early growth phase where revenues are small and profits non-existent.

Among our clients, brands have taken the decision to step into an ownership structure in India when they feel that India is too strategic a market to be “delegated” entirely to a partner (whether licensee or franchisee), or that an Indian partner alone may not be able to do justice to the brand in terms of management effort and financial capital.

In the last few years we have seen several brands take the plunge into investing in the Indian business, among them S. Oliver (Germany), Marks & Spencer (UK) and Mothercare (UK).

During 2011 specifically, Promod changed its franchise arrangement with Major Brands into a joint-venture that is majority-owned by Promod. From its launch in 2005, the brand has opened 9 stores so far. However with the new JV in place, the venture is reported to be looking at opening 40 stores in the next five years.

Most recently, Canali was one of the brands that moved into a majority-owned joint-venture. The brand entered in India in 2004 through a distribution agreement with Genesis Luxury. This has recently given way to a joint venture between the two companies that is owned 51 per cent by Canali. The brand currently operates five exclusive stores in India has plans to accelerate the brands growth in India by opening 10-15 stores over the next three-four years.

Operating Model for International fashion brands in India

The Impact of FDI Regulations

If a “theme of the year” has to be picked for the Indian retail sector in 2011, it must be ‘Foreign Direct Investment’. The debate during the year was hardly a clean and clear “pro vs. con” exchange of ideas. It was a motley mix of extreme lobbying for and against FDI, some balanced reasoning on why FDI should be allowed, and also moderate voices calling for governing the speed at which and the conditions under which foreign investment could be allowed. In many cases there seemed to be dissenting voices emerging from within the government. One possible impact of this uncertainty through the year was that several brands postponed their decisions regarding the potential entry and the strategy that they would follow in India with regard to partnership or investment.

In November 2011, the Indian government announced that 100 per cent foreign investment in single brand retail and 51 per cent foreign ownership of multi-brand retail operations, but was forced to back-track due to vociferous opposition from several quarters. At the very end of the year, the government finally reopened 100 per cent foreign ownership retail operations, albeit limiting it to single brand retail businesses. However, it allowed this under the condition that the Indian retail operation would source at least 30 per cent of its needs from Indian small and mid-sized suppliers.

The condition of 30 per cent domestic sourcing from SMEs is well-intentioned – aiming to provide a growth platform for India’s manufacturing enterprises – but unachievable for brands that do not currently source any serious volumes from India. In fact, for most international fashion brands India contributes less than 10 per cent of their total sourcing, in many cases well under 5 per cent.

Under these circumstances, we shouldn’t expect any dramatic changes, though we do expect the growth in joint-ventures and subsidiaries to continue in the coming months and years.

If an international brand perceives India to be at the right stage of development, and it wishes to exert significant or complete control over its Indian presence, then a majority or completely owned subsidiary seems the most logical step, and the brand will find a way to structure its involvement in India appropriately.

However, many brands that today have a 51 per cent ownership in India are stopping short of climbing to 100 per cent until they can sort out how to meet the SME sourcing conditions.

Getting Over the Sourcing Hurdle

The problem with the 30 per cent sourcing rider is simple. When a brand launches in India, it would like to present the consumer with the most complete product offering that showcases its capabilities and positioning as relevant to the target consumer in India. In most instances, the brand would not be sourcing the full range of its merchandise from India.

This is not a problem if the brand approaches the market through a wholesale or franchise structure, or even with a retail business that is not owned by it 100 per cent.

But for a retailer that wants to own the Indian business completely, complying with the 30 per cent domestic sourcing restriction means developing a new set of suppliers in India from scratch, pulling in the design and product development staff to work with them, and to develop ranges that suit not only the Indian market, but also other markets around the world. Simply putting together an India-specific sourcing team to replicate the entire range to buy small volumes for the Indian business is neither practical nor feasible for most of these brands. This means that the product development and sourcing team must be willing to see India as a strategic supply base for the future, just as their selling-side colleagues may be seeing it as a strategic market.

In this context it is worth repeating something that I have said before: retail managers are generally risk averse, and like to move in packs – where there are some brands, more come in and create a mutually reinforcing business environment. The presence of other international brands – especially from their own country – helps in creating a familiar context at first sight and encourages further exploration of the market. At least for the executives handling international retail expansion, India presents a more ‘familiar’ and ‘developed’ face today than ten years ago.

However, the explosive growth that we have witnessed in terms of the number of brands present in India is not mirrored by the growth of fashion sourcing out of India. In fact, even when compared to what has happened in the global textile, apparel and footwear sourcing environment since quotas were removed in 2005, the India’s export growth looks dispiritingly low, even stagnant. China still remains the largest source for fashion products, while countries such as Bangladesh, Indonesia and Viet Nam have grown their share aggressively. India’s share of clothing exports is a lowly one-tenth that of China.

In our work related to global sourcing strategies for western retailers, on an objective measurement matrix of sourcing competitiveness India rates highly. In several cases, sourcing from India as a hub (and, for European retailers, Turkey as a hub) has been seen as a logical counterweight to balance out the high concentration of current sourcing in China.

However, product development and sourcing is not entirely an objective process – in fact, sourcing habits are sometimes the hardest to change. The buyer’s subjective experiences – sometimes buried deeply in the past career – have a significant role to play. A conversation from 2001 with the sourcing head of a European brand sticks in my mind, when he said, “I don’t really want to buy anything from India – Indian suppliers can do a very limited product range, quality isn’t always good and the shipments are always late.” On probing further, I discovered that his last transaction was in 1992, after which he never set foot in India again. Much as we might present statistics and facts about the developments in the Indian textile and apparel industry, a personal injury early in his career has left a deep scar that obviously influenced this gentleman’s buying decisions worth over €300 million in global apparel sourcing, or about €700-800 million worth of sales.

There is clearly much to be done in terms of encouraging modernisation and better organisation amongst apparel suppliers, and making those changes visible to buyers. Even brands that are well-engaged with the Indian supply base have between 40-70% of their people here focussed on in-line and post-production quality issues. We are today at a stage where larger and better-equipped apparel exporters would be best placed to address the needs of international brands within India, but find the volumes too small to bother with setting up entirely different documentation and accounting processes.

Health & Safety and Labour compliances are also areas in which the brands will not forego their corporate standards. Can we imagine a brand saying that its European customers do not want their products made in sweatshops, but for the Indian consumers of the brand this is not (yet) an issue? While this may be a fact, would a high profile brand risk its global reputation to source competitively for its small Indian business?

So a government dictat to international brands’ fully-owned subsidiaries to ensure that they source 30 per cent of their needs is not enough. At best it will encourage some of the brands to start looking at India more seriously, but a more likely scenario for most brands is that they will carry on business as usual until the supply base in India pulls up its socks, or until the business in India becomes large enough to be interesting to their existing Indian suppliers who are currently focussed on exports.

Certainly the government itself needs to do much for more manufacturing-friendly policies, as well as focussed investment in infrastructure that can provide rapid, efficient and cost-effective transportation from the country and within the country.

It is time to bridge the gap between “textile exports” and “fashion retail” in the country. Remember, the explosive growth of brands in China followed the manufacturing explosion, not the other way round. Until the Indian apparel, textile and footwear manufacturing sector grows strongly, the actual volume growth of modern fashion retail will remain hobbled, regardless of the number of brands that enter the market.

To me this statement by a senior professional from one of Hong Kong’s largest apparel companies says it all: “The Indian industry looks like a formidable competitor, the day it decides to wake up.”

Drawing the Full Circle of Confidence

In closing I would like to mention the least acknowledged, but a very important part of the growth of international brands in India: the acquisition of brands overseas by Indian companies. The Aditya Birla group laid an early foundation when it bought out, for India and several other territories, the perpetual rights for Coats Viyella’s brands including Louis Philippe, Van Heusen and Allen Solly. Lerros was a slightly different example – being a brand that was set up by the House of Pearl in Germany – but that also circled back to India. More recently (2010) we have the example of the Swiss company Switcher Holdings, whose with brands including Switcher, Respect and Whale, was bought by PGC Industries.

In markets such as the EU, there are today brands that may be available because they are finding difficult to survive in harsh trading environments and that do not have the financial or management bandwidth to take on initiatives in growing markets like India. These offer a legitimate growth platform for Indian companies that are strong in manufacturing those product categories and want to move higher up the value chain from being a generic commodity “supplier”.

Although exporters may initially approach these brands for franchise or license relationships, to some it soon becomes clear that if they are in a position to make an incremental investment they could well own the perpetual rights and perhaps the whole business, rather than investing in building up someone else’s brand, especially in the business in India is likely to grow very rapidly. Obviously, this new-found confidence needs to be backed with solid management capability, but as other consumer goods companies such as Tata (beverages, automotive), Mahindra (automotive) and Dabur (personal care) have shown, it is entirely feasible to look at growth in India as well as internationally by using an existing international brand as a stepping stone.

It also presents a challenge of classifying such brands as international or Indian. Bata was founded in the Czech Republic and went global from there – however, today it is legitimate to treat it as a Canadian brand since its headquarters moved there in the 1960s. Among other products, Gloria Jean’s Coffee was founded in the USA, but is now completely Australian-owned. In that sense, today would that not make Louis Philippe, Allen Solly, Switcher Indian brands?

I think this puzzle is a challenge that many people in the industry in India would look forward to contributing to.

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Additional comment after reading the following blog post on Forbes on Single Brand Retailing (March 12, 2012):

Policies restricting foreign investment are not the biggest barrier to entering the Indian market. Brands and retailers that are clear that India is a strategic market with which they wish to engage will find a way. Even the largest global retailers have created structures that allow them a toehold in the market, awaiting a larger opening, despite the current ban on FDI in multi-brand retail.

The biggest barrier to entering India is actually the comfort zone within which the management team of an international retailer or brand may be operating. For some, the business environment of India needs at least a small step outside that comfort zone, for others it needs a big leap of faith.

There are encouraging signs of this happening already. Research carried out by Third Eyesight shows that the number of foreign brands operating in India in the fashion segment alone have quadrupled since 2005-2006, and a significant chunk of these are operating with direct investment in the Indian operations, whether as 100 per cent owned subsidiaries or as joint-ventures, indicating their growing comfort and confidence in the market.

One last word of advice: assess the opportunity pragmatically; don’t come looking for “a small percentage of the 1.3 billion population” in the short term – it takes time and patience to develop a meaningful share in the market.