Tarang Gautam Saxena
March 19, 2010
India has been consistently rated amongst the top destinations for consumer businesses year after year. While international fashion brands had earlier entered India at a steady pace, there was a greater surge of the global brands in the Indian market since 2002.
Interestingly many international brands opted to choose the franchise route for their entry into India. There were changes in the market environment and government policies that made the business environment favourable for growth through franchising.
Firstly, as a signatory of the WTO, India reduced import duties consistently. Consequently products could be sourced from other countries at more competitive prices and international brands could create an internationally-consistent product offering, with greater control on the supply chain.
Secondly, with more international brands vying for a share of consumer’s wallet, there was a need for brands to create a distinctive brand identity. Exclusive branded outlets increasingly became a marketing tool through which the brands could not only showcase a complete product range but also create the full brand experience.
Simultaneously the real estate market grew significantly, bringing in many “investors” who did not have the capability or the desire to develop their own brand. The availability of potential master franchises ready to invest capital and real estate created an environment conducive for growth of franchising.
As per Third Eyesight’s report (“Global Fashion Brands: Tryst with India”), by the end of 2008, just under half of the brands were present through a franchise or distribution relationship.
Unlike more developed markets where brands have sizable networks of large-format store as a launch and growth platform, in India there are still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Also, having a local partner as a franchisee provides a closer understanding of the market and the ability to adapt to changing consumer needs.
For a successful relationship it is vital that a franchisee should have an entrepreneurial mind-set. The essence of the brand needs be well understood, and the franchisee must have operational involvement rather than a “passive investment” approach.
The question is whether franchising would continue to remain the preferred entry mode as a new decade starts. Liberalisation of foreign investment norms has already led to many brands transitioning into a joint venture or subsidiaries. (See the more recent version of the report on International brands in India.)
However, while for many international brands it would be ideal to have ownership and control over the operations in a strategic market like India, direct investment does also increase their risk and the investment is not financial alone.
Therefore, for many brands, franchising would still remain the more practical choice whether by using a national master franchisee or using site-specific franchise relationships in combination with a direct wholesale presence in India.
admin
January 7, 2010
By Tarang Gautam Saxena, Chandni Jain and Neha Singhal
In Retrospect
While India was a promising market to many international brands, it was not completely immune from the global economic flu. More than its primary impact on the economy, the global downturn sobered the mood in the consumer market. Even the core target group for international brands, that had just begun to splurge apparently without guilt, tightened their purse strings and either down-traded or postponed their purchases.
In 2008 in the midst of economic downturn, skepticism and uncertainty, the international fashion brands had 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 players ended up discounting the goods heavily to promote sales while a few also gave up and closed shop.
As the Third Eyesight team had foreseen last year, 2009 saw a further slowdown and fewer international brands being launched during the year. The brands that were launched in 2009 included Beverly Hills Polo Club, Fruit of the Loom, Izod, Polo U.S., Mustang, Tie Rack and Timberland. Some of these had already been in the pipeline for quite some time and invested a 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.
International Fashion Brands in India
After many deliberations, the well-known global brand Donna Karan New York set foot in the Indian market in 2009 through an agreement with DLF Brands to set up exclusive DKNY and DKNY Jeans stores India. The brand is also reported to have signed a worldwide licensing agreement with S Kumars Nationwide Ltd to design, manufacture and retail DKNY menswear in certain specific countries.
Second Chances
Amongst the international brands that have recently entered the Indian market, a few are 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, and the partnership intended opening 15 stores by 2010. However, by the middle of 2008, the relationship ended with mutual consent, as Arvind reduced its emphasis on retailing international brands within the country. Within a few months of the ending of this relationship, Diesel signed a joint venture with Reliance Brands for a launch scheduled for 2010. Both partners seem to be strategically aligned with a common goal as the international iconic denim brand wants to take on the Indian market full throttle and the Indian counterpart has indicated that it wants 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, despite plans to open more than 50 stores in the first three years of operations. Miss Sixty has finally entered India through a franchise agreement with a manufacturer of women’s footwear and accessories. The company has currently introduced only shoes and accessories category and is looking at potential partners for its label Energie and girls’ range Killah.
Other brands that have re-entered the Indian market include Germany-based Lerros whose first presence in India was back in mid-1990s. The brand re-entered the market in 2008 through own brand stores and is growing its presence through this route as well as through multi-brand stores.
Oshkosh B’gosh is another brand that had entered India in mid 1990s, through a licensing agreement with Delhi based buying house, Elanco. The licensee found the childrenswear market hard to crack, and closed down. In 2008, Oshkosh re-entered the Indian market through a licensing partnership with Planet Retail and is now available through shop-in-shop counters at Debenhams stores. Reports suggest that it may consider setting up exclusive brand outlets.
During the turbulence of 2008 and 2009, a few brands also exited 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 and for the amount of effort and money being invested, and that it was better to pull the plug.
Some brands that have been pulled out of the Indian market during 2008 and 2009 include Dockers, Gas, Springfield and VNC (Vincci). Gas (Grotto SpA) is reported to remain interested in the market but has not found another partner after its deal with Raymond fell through in 2007 and all dozen of its standalone stores were shut down.
The Scottish brand Pringle and its Indian licensee did not renew their agreement upon its expiry. The Indian partner has reportedly signed an agreement to launch another international brand in India, while Pringle is said to be looking for new licensee.
The good news is that successful relationships outnumber every exit or break in relationship possibly by a factor of ten. Some of the brands that have sustained are among the early entrants having a presence in India since the late-1980s and 1990s or even earlier. These include Bata, Benetton, adidas, Reebok (now also owned by adidas), Levi Strauss and Pepe. Having grown very aggressively during 2006 and 2007 Reebok quickly became the largest apparel and footwear brand in India, while Benetton and Levi’s are expected to cross the $100-million mark for sales this year.
Entry Strategy & Recent Shifts
As envisaged in Third Eyesight’s report from a year ago, with changing market conditions and a growing confidence in the Indian market, there has been a shift among international brands in the choice of the launch vehicle. While franchising has been the preferred mode of market entry in the recent past for risk-averse brands, more brands today demonstrate a long-term commitment to the Indian market, and are choosing to exercise ownership through wholly or partially owned subsidiaries and through joint ventures.
In 2009, we have seen a noticeable shift in favour of joint-ventures as the choice for entry into the market. Even the brands already present are looking to modify the nature of their existing presence in India in order to exert more control over the retail operations, products, supply chain and marketing.
Current Operating Structure
(End 2009)
Brands that changed their operating structures and, in some cases partners, in recent years include VF (Wrangler, Lee etc.), Lee Cooper, Lee, and Louis Vuitton amongst others.
Mothercare, the baby product retailer, which is present through a franchise agreement with Shopper’s Stop has, in addition, recently formed a joint venture with DLF Brands Ltd to enable the expansion through stand-alone stores. Gucci, which had initially entered in 2006 with the Murjani Group as a franchisee, has recently changed over to Luxury Goods Retail, and is now in the process of restructuring the relationship into a joint venture.
VF has also been reported to be looking to license Nautica, Jansport and Kipling to a new partner. Until now, these brands were handled through the joint venture with Arvind Brands. Arvind has increasingly focused on its core business, closed stores and scaled down expansion plans for the international brands.
Burberry that had entered India in 2006 through a franchisee arrangement with Media Star opened two stores under this arrangement. It has now set up a new joint venture with Genesis Colors and plans to open 20 stores across the country.
More recently Esprit has also been reported to have approached Aditya Birla Nuvo to deepen its engagement by moving from its distribution arrangement into joint venture as the international brand sees excellent potential in the Indian market.
Buckling up for 2010
Throughout 2009, the one fact that became clear was that the Indian market was resilient. Now, as the global economic condition stabilizes, confidence levels of brands and retailers in India have also improved.
Several launches are already expected in 2010, and possibly many more are being worked upon. In the following 12 months, consumers can expect to find within India acclaimed brands such as Diesel, Topman, Topshop and the much-anticipated Zara. Many more Italian, British and French brands are examining the market.
Most of the international fashion brands already present in the market are also projecting a cautiously upbeat outlook in their plans, while a few are looking positively bullish.
For example, Pepe, an old player in premium and casual wear segment, has reported plans to grow its retail network further and open 50 more franchise stores by September 2010. Similarly the German fashion brand S. Oliver that entered the Indian market in 2007 is looking to grow significantly. It has already moved from a franchise arrangement with Orientcraft to a joint-venture with the same partner, and has stepped up its above-the-line marketing presence. The brand has recently reported its plans to scale up its retail presence to 77 stores by the end of 2012 while also strengthening its presence through shop-in-shop in multi-branded outlets in high potential markets.
Those international brands that have tasted success have not achieved it by blindly importing business models and formulas from other markets. Most have had to devise 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 which decreased its prices by up to 30% this year, and Marks & Spencer which reduced prices by 20-40%. Others are unearthing new segments to grow into; for instance, Puma and Lacoste are now seriously targeting womenswear as a growth market.
On the operational side, the good news for retailers and brands is that the average real estate costs have reduced significantly, although marquee locations remain high. In several locations lease models have also moved from only fixed rent to some form of revenue sharing arrangement with the landlord. And, while the sector has seen some employee turmoil as many non-retail executives who came into the business in the last 5-7 years have returned to other sectors, employee salary expectations are also more realistic.
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 recent work with international brands’ business units in India highlights the international players’ concern with ensuring a consistent brand message, improved organizational capabilities right down to front-line staff, and focus on unit productivity (per store and per employee).
We may yet see a few more exits, and possibly some more relationships being reshuffled and partners being changed. However, all things considered, we can look forward to a net increase in the number of international brands in the country.
The Indian consumer is certainly demonstrating more optimism and as far as there are no major unforeseen global or domestic shocks, this optimism should translate into a healthier business outlook for international brands as well. According to early signs, 2010 could be an excellent curtain-raiser for a new decade of growth for international fashion brands in India.
[The 2009 report is available here: “International Fashion Brands – India Entry Strategies”]
(c) 2010, Third Eyesight
[Note: This report is based on information collected from a combination of public as well as proprietary sources, and in some cases may differ from press reports. However, no confidential information has been shared in this report.]
Devangshu Dutta
December 18, 2009
(Contributed to the BusinessWorld cover story – “What 2 Expect in 2010”, issue of January 4, 2010)
Everything that can be said and assumed about the Indian market is true at some level of granularity. Very simply, in India there is a segment for every product, an opportunity for every service, be it ever so small. But when bubbles are bursting all over, as the Noughties Decade comes to a close, the puzzle that is Indian consumer market also warrants a fresh look.
For most of the Noughties Decade India has seen Generation-C, the “Choice” generation, coming of age. They have moved over from being “secondary customers” consuming off their parents’ incomes, to entering the work-force and becoming customers in their own right.
It may sound trite, but Gen-C customers have grown up with many models of 2-wheelers and 4-wheelers and colour television with multiple channels. They have many more career options and many more opportunities in each career. Not only have they grown up on a diet of choice, they have also grown up with much higher confidence about the future, about their place in the world and what they can expect. And they have infected the outlook of generations older than them as well with a similar confidence.
Therefore, for most of the decade, it has been a distinctly rosy picture for consumer goods marketers and retailers. Business plans routinely expected 20-50% annualised growth, and businesses even delivered those figures on some basis or the other. Organizations as diverse as retailers and management consultants were inspired by India’s age-old image as the Bird of Gold. Supermarket chains mushroomed like never before, department stores and speciality retailers grew their footprints, quick-service and casual dining expanded covers, while electronics, durables, leisure companies, and car brands all counted India among their hottest markets.
Product off-take reflected this outlook. Amongst the FMCG sector, while basic items such as the bath and shower segment demonstrated a steady annualised growth of about 7%, premium cosmetics galloped at almost 20% a year. While the relatively mature 2-wheeler market grew at just over 7.5% annually between 2002-03 and 2008-09, the 4-wheeler passenger vehicle market demonstrated growth of almost 14% a year in the same period.
All this was before the recent rude interruption.
A speed-breaker began showing up in the consumer market in late-2007 and grew larger through 2008. Once the global financial markets melted down in late-2008, media sentiment turned acutely negative about the Indian market as well. And, eventually, with uncertainty prevailing around the world, consumer spending in India did take a hit. Consumers cut back on the frequency of purchases or traded down.
On the trade side, retail businesses began acknowledging that stores were performing below plan and went into rationalisation mode. For branded suppliers, where some of the growth had come from stuffing the pipeline and filling new shelves, wholesale order books became thinner.
Yet, as painful as the economic scenario might have appeared, the Indian consumer market has shown remarkable resilience. Demand in smaller cities and towns has remained robust. Regional brands, especially, found plenty of opportunity to grow in markets and geographical regions where they were under-penetrated or absent.
And as the mood lifted through the latter half of 2009, consumer demand clearly moved back up. The speed at which the demand rebounded would suggest that the Indian market was relatively sheltered from the global economic storm.
However, there are some critical differences to understand.
On the one hand, Gen-C’s confidence shook for the first time – a generation that has only seen upward mobility, witnessed job cuts and salary freezes or declines even if only second-hand. Comparisons with the Great Depression may be exaggerated but it is a scenario they can now imagine as a possibility. At least three new professional academic batches have or will have moved into the job market under these sober conditions. On the other hand, tremendous inflation in basic costs supports some amount of uncertainty about the future. The fact that many of the Gen-C would have just begun or would be about to begin families serves to only heighten such anxiety.
So, let’s recognise two immutable facts about the Indian consumer market in the current environment.
First: that the ancestral “steel safes” are back, at least figuratively if not literally. Customers do want to save more for now. And if they are spending, they want to feel that they are extracting far more value than the price they are exchanging across the counter, value that will last long after the transaction at the store. In recent years, this inherent ‘value orientation’ of the Indian consumer was neglected by many. Now every product, service or brand must aim to deliver this sustainable value, and demonstrate the value repeatedly.
Secondly, each business needs to look at the lifetime value of a customer if it can. Rather than cutting the golden bird open and trying to extract all the golden eggs at once, one needs need to keep the bird well-fed, happy and healthy, and enjoy its rewards over several years. Rather than creaming the market, pricing, branding and distribution need to be structured for a sustainable relationship with the customer.
Some businesses will work better than others in this market, and strategies will need to be adapted. A lifecycle approach may handy in identifying the business segments which might meet the steel safe criterion, or the golden goose criterion, or both.
The first segment that comes to mind is weddings. Wedding expenditure is seen as a “social investment” for both the families, and the actual items bought are an investment into the couple’s future together. So, bridal trousseaux and wedding wardrobes, wedding arrangers and catering, and household goods provide significantly more tangible and intangible value than the money spent.
Similarly, “first child” isn’t usually a segment in any marketing handbook, but should be. The couple’s first born, especially if the baby is the first in its generation will usually get a disproportionate amount of attention and spending on clothing and utilities. A baby’s growth into a child, of course, can provide a relationship and marketing opportunity that can last for years, but the first 2-3 years are specifically valuable. What’s more, given India’s demographic dividend in the form of a sustained under-30 age group, baby products have a sustained and growing value as a market.
As the child grows, there are clear indicators of current and future value that can drive purchases. While base schooling is an essential expenditure, extra-classes and tuitions are a high-value discretionary investment that parents are choosing to make. Sports, on the other hand, however essential they may be to a child’s development are often seen as a distraction. That is, unless the child is attending sports coaching and the parents have an eye on helping the child create a career from it – in which case, a coach who is apparently good, branded equipment and kit are definitely worth investing in. So a cricket coaching franchise might just be the ticket to fortune, while a toy company may struggle. Some may decry the decline in art, craft, philosophy and fundamental sciences, but these are not on the list of priority of most parents. In the short to medium term, parents would continue to disproportionately push their wards into academic disciplines that are seen to develop marketable skills and pay well. Expect continued growth in the engineering, medical and management education market, but also in other vocational disciplines.
On the other hand, everything is not an investment for the future. Present comforts may also provide extra value, through convenience.
Some of these comforts may be as small as enjoying out-of-home exotic meals (pizza and pasta still qualify as exotic for the bulk of the population). Or if eating out looks out of budget, ready-to-eat and ready-to-cook meals are an easy substitute. Jubilant, Yum, McDonald’s, Haldiram, Sarvana’s, Nirula’s and the thousands of other casual dining and snack food chains have a long clear highway of growth ahead, as do snacks and packaged food companies such as Nestle, Britannia and ITC.
Brown goods and white goods that offer comfort and convenience – coolers, water heaters, convectors, air-conditioners and kitchen gadgets – continue their onward march, despite the huge shortfall in electricity. Even if the big brands struggle with their price points and overheads, regional brands and private labels will continue growing strongly in these segments.
Health is another area for significant investment. With prevalence of lifestyle-ailments, from stiff necks to high blood pressure, basic pharmacists to cardiovascular specialists are all in demand. Anticipate significant growth to continue in over-the-counter medication, medical devices, as well as clinical and hospital care.
At the other end of the scale, with decent and adequate public transport lacking in most cities, we can expect personal vehicles to increase multi-fold, despite the small blip in 2008-09. About 60 million 2-wheelers and over 10 million passenger vehicles have already been added during the decade, and the growth trend looks set to resume from 2010, unless there are significant oil price or vehicle taxation shocks delivered by the government.
And as consumer confidence resurges, more overt displays or personal spends will return as well, including apparel, footwear, home products, accessories, vacations, fitness and recreation, but we would expect them to follow behind the higher priority “safe” or “geese” segments.
Finally, the one thing that marketers in any product need not be really concerned about whether there is a future in this market. Even, Hindustan Unilever, a mature FMCG company with very high distribution penetration built over decades, still counts less than 60% Indians as its customers.
Surely most companies have a much longer road ahead before they need to be worried about their markets becoming saturated.
Devangshu Dutta
May 16, 2009
The world’s largest retailer earned bouquets as well as a few brickbats when it recently opened a Hispanic version of its large store format, named Supermercado de Walmart. The signs around the store are in Spanish as well as English, selling traditional Mexican national brands as well as traditional Hispanic food like tacos, tortas, aguas frescas, sopes, carnitas and barbacoa at the chain’s customary low prices.
The surprise, if any, was that this store was not in a city in Mexico but in Houston, Texas, USA.
Wal-Mart’s logic behind the format is that it would be more relevant to the heavily-Hispanic population in the catchment of the store in Houston, and that it was a natural evolution to what they had been doing for years.
However, some customers and observers do not agree. Quite a number of people are up in arms against this “pandering to immigrants”, which they see as a threat to the unity, homogeneity and identity of the United States of America. One internet commentator condemned this segregation with a rather unique view, saying that segregating customers like this was actually “racist” and belittled the Hispanic customers who live in that area.
We should probably wait for the dust to settle on this debate. Spanish-speaking customers may actually respond positively – or not – to this new format. Yes, some defensive or aggravated English-speaking customers may also boycott Wal-Mart over this move.
As for me, I believe that it is a good move for Wal-Mart to test how far customization can help their business and how finely they can tune their response to customer demands, because they will need all the learnings they can get to effectively tackle markets that are even more different around the world.
Of course, many retailers and marketers in a market such as India would be puzzled by all this fuss. After all, if a Chennai-based company opened stores in Maharashtra, it wouldn’t put up signs in Tamil, neither would a Punjab-based retailer expect its customers in Imphal to understand promotions in Punjabi. Fragmentation and customization is a fact of life to the Indian retailer.
Or is it really that clear?
In fact, India has its share of marketers who seem to think and plan mainly in upper income metropolitan-English, and this bias creeps in not only in the content and structure of promotions but also, unfortunately, influences the merchandise mix. Even while PowerPoint presentations are made about how diverse the country is, and how it is possibly more like many countries rolled into one, we often make use of cookie-cutters for designing our product plan, our marketing strategy and everything else that defines the retail store and the customer experience.
Now, before I am labelled unfair for making sweeping generalizations, let me also say that other than any such urban English bias, there are also another couple of reasons why a retailer may take a template-based or cookie-cutter approach to the market.
Firstly, if you’re launching a new retail chain, there is a need to derive efficiency by driving scale as quickly as possible. Repeating the product formula across locations allows a retailer to increase the impact of merchandising efforts in terms of additional margins due to volume margin terms and better negotiating power with the supplier. Also, the management effort is used in a much more focussed manner, lowering effective management costs.
Secondly, there is the need to demonstrate a consistent image across the entire footprint of the chain, and to appear to be a chain. Repeating the product and presentation formula reinforces the common image and branding.
However, the pertinent question is whether there is any point in following a consistent identity if it appears alien and irrelevant to most of your target customers? In a category such as grocery, where the customer don’t really shop across multiple stores in a chain, is it better to be locally relevant rather than consistent across the country or even a region? Clearly, if you have a national or international template that is locally irrelevant, you don’t have any chance of succeeding with the consumer.
On the other hand, is it really organisationally possible for a chain-store to be local, and if so how can it best strike the balance between chain-wide consistency and tweaking the offer to provide local focus?
To my mind the starting point is the definition of an identity based on a clear value proposition and operating principles. This includes a range of factors from the visual elements of branding to how the staff stack shelves or interact with the customer.
The next step is to make the merchandise locally relevant, because that is what creates the transaction. The answer to “how much local” would also provide the answer to “how the locally-relevant merchandise should be managed”. Organisational models could range from entirely centrally-managed local merchandise and data-driven decisions, to central management of range architecture and purchases but local pull-based replenishment, to outright purchase from local vendors by the specific store’s management to create a truly local store.
Of course, devolving range and purchase decisions to local management raises issues about maintaining control as well. To a certain extent processes and system can help to mitigate the risk of fragmentation of the identity or potential mismanagement.
But the strongest glue is culture, as the manifestation of the organisational identity. Culture defines most strongly “the way” the organisation works.
Imagine the business as an individual with a well-defined personality. In different cities that individual might speak different languages and dress in different clothes, but still express the same values.
With a well defined and well expressed organisational personality, localisation can occur without fear of corruption of the brand identity, consistency and controls. Then the chain-store can truly become a local store and part of the consumer’s life as it is.
The other choice, of course, is to wait for a significant part of the local consumer to adapt to your international or national template. Would you be prepared for that?
admin
May 9, 2009
By Devangshu Dutta, Tarang Gautam Saxena
While the Indian consumers have aspired to own international fashion brands, India’s large population base in turn has been an aspirational market for the international companies.
To remote observers, the Indian market may appear to be a virgin territory as far as international apparel and footwear brands are concerned. But India has seen the presence of international brands for almost a century, including mass brands such as Bata and luxury brands such as Louis Vuitton. However, as the colonial government systematically repressed local textile production, the local resistance to foreign products grew as well. Therefore, until the 1980s, the presence of international fashion brands was negligible.
In the early 1990s, as the Indian economy opened up again, a few international fashion brands entered the Indian market. The pioneering companies during this stage were Benetton, Coats Viyella and VF Corporation.
At this 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 which was thus a target for many international fashion brands (such as Louis Philippe, Arrow, Allen Solly, Lacoste, Adidas and Nike).
In the midst of this the media industry was also witnessing a high growth which aided the international brands in gaining visibility and establishing brand equity in the Indian market.
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. A growing supply of good-quality retail real estate in the form of shopping centers and large format department stores also allowed companies to create a more complete brand experience through exclusive brand stores and shops-in-shop.
The number of international brands continued to grow each year at a steady pace until the early 2000s, and took off exponentially thereafter. By 2005 the number of international fashion brands present in India was over three times compared to that in the mid 1990s. The last few years (since 2005) have continued the significant growth of international fashion brands, including luxury brands such as LVMH, Aigner, Tommy Hilfiger and Chanel.
The Popular Entry Strategies
Many of the international companies entering India in the late 1980s and 1990s chose licensing as the entry route to India to gain a quick access to the Indian market at a minimal investment.
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 investors in retail real estate that were ideal 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 transitioned their existing franchise arrangements into a joint venture structure.
The Entry Structure for Some International Brands
| Entry Strategy | Time Period | ||
| 1980s or Earlier | 1990s | Post-1999 | |
| Licensed | Louis Philippe, United Colors of Benetton and 012, Wrangler | Allen Solly, Arrow, Jockey, Lacoste, Lee, Nike, Van Heusen, Vanity Fair | Puma |
| Wholly Owned Subsidiary | Bata, Pepe Jeans | Levi’s® | Hanes, Triumph |
| Joint Venture (Majority) | Adidas, Reebok | Diesel, Nautica, Sixty Group | |
| Franchise or Distribution | Aldo, Burberry, Canali, Versace, Debenhams, Esprit, Gucci, Guess, Hugo Boss, Mango, Marks & Spencer, Mothercare, Tommy Hilfiger | ||
| Joint Venture (incl. Minority Stake) | Celio, Etam, Giordano | ||
Source: “Global Fashion Brands: Tryst with India” (A Report by Third Eyesight) © Third Eyesight, 2009
Note: The above table shows the structure used during entry, and not the structure that exists currently.
By the end of 2008, just under half of the brands were present through a franchise or distribution relationship, while over a quarter had either a wholly-owned or majority-owned subsidiary. These structures allowed the brands to have greater control of operations, particularly of product.
Shifting Strategies
Many international companies have evolved their presence in India into structures different from those at the time they entered the market.
A good example depicting the shift in business strategy is that of VF Corporation which entered India in 1980s by assigning the Wrangler license to Dupont Sportswear. Since then it has launched a variety of brands in different product categories with number of Indian partners and finally formed a joint venture, VF Arvind Brands Pvt. Ltd., with Arvind Brands.
Another example of a company that has evolved its presence is Benetton, which first entered India through a licensee (Dalmia). Benetton then transitioned in 1991 into 50:50 joint-venture and finally in 2004 took over the Indian business completely. However, it adopted the franchising route in 2006 for its premium fashion brand, Sisley, appointing Trent (a Tata Group company) as the national retail franchisee.
Many other companies such as Nike, Tommy Hilfiger, Marks & Spencer and Pierre Cardin (as described in our report “Global Fashion Brands: Tryst with India”) have changed their approach as the original structures did not perform as well as they had expected.
Obviously, each such change has cost the brands time, management effort, money and, sometimes, market share.
We believe that these shifts and the pain related to it could have been reduced, had the brands ruthlessly questioned the motivation for considering this market and their expectations from the market in determining an appropriate strategy.
What’s Ahead?
In the midst of economic upheaval around the world, how does India look as a market for international fashion brands?
Well, it is difficult to generalize even in the best of times. In the current global turmoil there is certainly a lot more unpredictability about international expansion for most companies.
Although India’s position as a target market for international brands has been improving, as is evident from the number of launches in the last 6-7 years, some companies considering international expansion may prefer entering other markets that may seem more “familiar”, developed and safe (such as Europe, Japan, South Korea or Taiwan). Against such comparisons, India’s growing but fragmented market can seem chaotic and difficult to deal with.
However, the fact remains that there are very few markets globally that can provide the sustained size of mid-term and long-term opportunity that India does. We are already seeing the more far-sighted and committed brands consolidating their position and presence in the market by continuing to look at expansion, even while examining how they can make their existing points of sale perform better. We also constantly come across new companies carrying out investigations into the market.
In the current environment we expect to see a shift in the nature of launch vehicle. While franchising seems to be a safe option for risk-averse brands in the current times, we will probably see more brands with a long term strategy, who would establish a controlled presence either through joint-ventures or through wholly-owned subsidiaries, since they can lay the foundation of the business today at much lower costs today than in the past few years.
India’s foreign direct investment (FDI) policy, allowing FDI only up to 51% in retail trading of “Single Brand” may have held back some fashion brands as they are still managed by owner founder with a conservative outlook on “control”. However, in the last couple of years, we have found companies not being deterred by the barriers to FDI.
As their comfort and familiarity with India has grown, international companies are more willing today to create corporate structures that allow them a presence in the market today and a step-through to a more controlling stake as and when government regulations allow.
All in all, we feel that international brands are in India not only to stay, but also to expand. There is yet a lot of potential untapped in the market, and as the integration of the Indian consumer with global trends continues, international brands can expect to find India an increasingly fertile ground for growth.
(c) 2009, Third Eyesight
