Tarang Gautam Saxena
February 7, 2011
It has been almost two decades since the government in India re-opened the economy to international investors and brands. During the first dozen years or so, apart from a single visible bump in 1995, every year had a steady dribble of fashion brands coming into the country. It was not until 2005 that this rate accelerated to over 20 international fashion brands entering the Indian market annually, even as the existing brands grew their own retail footprint in the market.
2008 and 2009 were both slightly damp by comparison, reflecting the global economic sentiment, but we were optimistic as we laid out our expectations for 2010. While writing the previous version of our research report released a year ago, we felt that 2010 was going to be promising and it could well be a “curtain-raiser for a new decade of growth for international fashion brands in India”.
The increased bustle in the market has endorsed our forecast. Though initially slow, the growth of new international brands entering the Indian market in 2010 bounced back with the same vigour as before the downturn. Some brands that had exited the Indian market earlier also made a comeback as in the earlier years.
The Entry Strategies In 2010
The most preferred entry route for the international fashion brands entering India in 2010 has been franchise or distribution, with more than half the brands selecting this strategy that allows high control over the product and the supply chain with less intensity of involvement at the front-end. There are two discernible categories of brands that are picking this route: firstly, brands that are usually distributed through department stores and multi-brand independent stores in their home market and other markets, but also those brands that are as yet unsure of their capability to engage intensively with the Indian market. Franchising remained a popular choice in 2010 particularly for the brands looking to test the market or operating in niche or luxury segments.
Some brands taking this route for entering the Indian market include Forever 21, Etro, Tom Ford, and Ladybird, amongst others. However, a number of brands that entered in 2010 (nearly 40% for the new entrants) also showed that they wanted a piece of the action through some degree of ownership (whether through a majority or minority stake in a joint venture or through a wholly owned subsidiary). Some – such as S. Oliver – also switched to joint-ventures from their earlier franchise structure.
Under the current regulations governing foreign investment into retail, several companies that typically want control operate either through 100% subsidiaries that sell to independent retail franchisees , or through 51:49 joint-ventures that operate the stores as well.
We are finding increasing signs among companies of a confidence in the market, a growing comfort with the operating environment, and a desire to own and control the direction their brand takes in a strategic market like India. it is likely that if the government decides to allow 100% FDI in single brand retail, several brands will opt to set up wholly-owned subsidiaries that control the entire chain of activities, source-to-store.
International brands opting for the ownership in the Indian venture included OVS (Italy’s Gruppo Coin), Yishion (China) and Chicco (Italy).
Fast Fashion for the Family
Amongst the new launches, a highlight of the year was the launch of the most awaited and discussed-about brand Zara. The first store was launched in Delhi with menswear, womenswear and childrenswear, followed by a store in Mumbai, and a third again in Delhi. While almost every other brand launches with an advertising blitz, Zara – in its usual fashion – needed none. The news buzz it generated created enough traffic to provide record sales during the first few weekends. It was also instrumental in generating 30-40% more footfall in the malls where it opened.
Inditex was certainly one of the brands looking for control, and has formed a 51:49 joint venture with the Tata Group’s retail business, Trent. For now the company has adopted its global supply chain for the Indian market as well which clearly adds cost and time to the supply chain. The merchandise is imported from the central distribution centre in Spain, and includes products manufactured in the Indian subcontinent. Competing brands in the industry have raised questions about Zara being able to build a successful and sustainable business in India just on the back of rapid fashion changes, at prices that are not quite “competitive”. However, the brand is reportedly aware of the struggle in building a successful business around import-led sourcing model and is seen to have planned growth conservatively.
Another southern European value fashion brand, OVS Industry, was launched last year by Oviesse through a joint-venture with Brandhouse Retail from the SKNL group. OVS Industry also offers a range for men, women and kids. While in the first year products have been imported from Italy, the company says it intends to bring in the merchandise directly from the supply source for speed and cost effectiveness, to achieve aggressive growth over the next five years.
Multi-Brand Platforms, Larger Stores
International brands have been drawn to India by its large “willing and able to spend” consumer base and the rapidly growing economy, but so also are Indian companies – manufacturers or retailers – who are ready to act as platforms for their launch.
Given the current restrictions on investment into retail operations, Indian companies are increasingly setting up large multi-brand outlets for an array of international brands under one roof. This allows the Indian franchisee to share overheads among many brands, and also negotiate harder for shopping centre space that is increasingly unaffordable. However, the idea is not only to gain from the operational efficiencies and cost efficiencies, but also to capture a higher share of the wallet of the consumers walking into the stores.
Even those Indian companies that are already retailing their own brands in a particular category are seeking franchise or distribution relationships with international brands, in order to capture a complementary segment of consumers or to offer a larger choice-set to their existing consumers.
For instance, Reliance Brands has partnered with some well known premium to luxury fashion and lifestyle brands. In 2010 alone, it brought Diesel, Paul & Shark and Timberland to the Indian market. On the other hand Maxwell Industries’ relationship with Eminence, a French innerwear brand, has allowed it to address the premium segment in which it was not present, and to compete with other international players such as Jockey, Triumph, Hanes, Fruit of the Loom and others.
RPG Group’s Spencer’s Retail, one of the pioneers of modern retail in the last two decades is looking at increasing the share of its apparel business. Apart from its private labels, Spencer’s is also actively seeking to grow its international brand portfolio quickly. Following up on its launch of Beverly Hills Polo Club in 2008, Spencer’s introduced Ecko Unltd (a youth fashion brand) in 2010. It has also become the platform for the British childrenswear brand Ladybird in its second coming to India.
While the emergence of large multi-brand franchise outlets is driven by Indian franchisees looking to optimise their businesses, the brands themselves are also looking at larger store sizes that are gradually becoming comparable to their stores elsewhere. For instance, the American brand Forever 21 launched with 10,000 square feet for only women’s western clothing and accessories. Similarly, Zara launched its business with a 14,000 square feet store. Larger stores are allowing brands to increase the efficiency of their operations, maximise the visual impact, and increase the speed at which they can achieve critical mass in the country.
Beyond Europe and the US
While European and American brands clearly dominate, 2010 also saw brands from China, Japan and Turkey making inroads to the Indian market.
China’s apparel retailer Yishion launched a 51:49 joint venture with a distribution company, Upmarket Group. Yishion is aiming at rapid growth in the mid price segment in India through own stores and multi-brand outlets (MBOs).
Turkish brands Tween, ADV and Damat from the Orka Group have been brought to the market by Blues Clothing Company, a mid-sized retailer of fashion apparel that also distributes brands such as Versace, Corneliani and Cadini.
The Strategy Shifts & Changing Structures
In the past the international brands have undergone changes in their strategy and operating structures to suit their current context and changing environment. Last year was not an exception to the correction and some brands did undergo a change in their approach and strategy for the Indian market.
Italian denim brand Energie exited the market and their partnership with Reliance Brands in 2007. However, in 2010, the Miss Sixty group entered into a licensing agreement with Arvind Limited which relaunched Energie as part of its portfolio of international denim brands. Arvind already had international brands catering to the mass and the middle segments of the denim market, and with the launch of Energie, it has achieved brand presence in the super-premium category as well.
Another notable denim brand that re-entered the market in 2010 was GAS, also from Italy. After it fell out with Raymond, the brand investigated other relationships, and finally decided to set up a fully-owned subsidiary. The brand was re-launched with one flagship store and through various shop-in-shop counters at Shoppers Stop, the department store chain.
The second attempt of the Germany-based casualwear apparel brand Lerros owned by the House of Pearl was ill-timed in 2008. With business coming up below expectations, the company decided exit the business in India. But instead of exiting the market, it granted the license to manufacture, retail and distribute Lerros to the maker of the Indian denim brand Numero Uno. With a complementary product mix, the principal and the licensee are looking to achieve greater success together.
Another brand that has undergone a shift in its strategy and the operating structure is the Italian brand Zegna, a world leader in luxury menswear. It was first introduced in the Indian market early on in the decade through a franchise arrangement. In 2005 with 51% FDI being allowed the Zegna Group invested in taking a majority stake in its Indian operations. Last year the brand entered into a joint venture with Reliance Brands Limited with the objective of ramping up its India operations and capturing a larger share in the Indian luxury market. For Reliance, it was a great addition to its international brand portfolio.
Compared to 2009, 2010 witnessed hardly any exits, Aigner being one.
Strategies for Growth and Prospects For 2011
Overall the year 2010 has been very positive and the pace of new brands entering the market is picking up. Those already present in the market, have been adapting their strategies to grow their India business. The growth strategy for international brands has revolved around lowering the prices and entering new segments.
The brands that have rationalised their pricing last year to attract more customers include Adams Kidswear. Previously priced significantly higher than the market leaders in that segment, Adams is looking to change its sourcing strategy and source a part of its product range locally. Similarly, having tasted success in the previous year, The Body Shop not only rationalised prices for more products in 2010, but also introduced new products at lower price points.
Another notable trend last year was the focus of international brands on Tier 2 and 3 cities. Marks & Spencer unveiled its plans to enter Tier 2 cities such as Jaipur and Chandigarh and grow its national footprint. Reebok, Adidas, Ed Hardy, Tommy Hilfiger, The Bodyshop and Puma are amongst those that have stated their intent to further expand to such cities. The success of adopting these strategies is bearing results already and the momentum is likely to build further as others follow.
For international brands, as for Indian brands, significant challenges remain in the path of growing their business.
At the base level is drumming up adequate demand. While India is often compared with China because of similar size of population, the fact is that urban discretionary incomes and the concentration of spend are far higher in China. This reflects in the speed with which brands have been able to ramp up in the two countries. For instance, Mango entered the two markets around the same time. However, a the end of 2010, the network of stores in India was only a tenth the size of the store network in China (100-plus), with over 200 more stores projected to open in 2011.
In scaling up, the lack of affordable good retail locations is one of the other biggest hurdles. With the slow growth in 2008 and 2009, brands are significantly more cautious in signing up space at high rentals.
Future challenges also remain more at the internal operational level. Retaining adequately trained front-line staff is an issue. Not only does the increasing number of international brands increase the competition for the employee pool, so also does growth in other segments of the economy and it is tough to sell retail as an employment option of first-choice.
We expect prices to become more realistic, but also operational efficiency to be a driver. Clustering of stores for efficient management, a concerted drive towards lower cost locations and variable (revenue-linked) payments to landlords are likely to be critical in driving better performance. We also expect many brands to seriously consider scaling up the network to provide critical mass to their business, which can also drive local sourcing of merchandise or direct shipments to the Indian business from Indian and other Asian sources.
If the Indian Government announces further relaxation in the foreign ownership norms, we would expect more brands to take equity stakes in the business in India, including the entry of those that wish to operate fully-owned subsidiaries. However, with many different signals from various arms of the government it is best not to try and read the crystal ball too closely on that issue.
Despite challenges and barriers, the market is far from being saturated right now as newer product segments and product lines create ever-newer needs. With India being one of the few large economies showing consistently strong performance, many more are considering the Indian market seriously. Among the ones reported to be interested in launching are GAP, Uniqlo and Polo by Ralph Lauren.
The market may become more segmented and even fragmented with a plethora of international brands being available.
The largest brands currently include Levi Strauss and Reebok which are both reportedly well past the US$ 100 million mark in India, but the race for market leadership is still well and truly on. No matter which brand comes out ahead the winner, without a doubt, will be the consumer.
Devangshu Dutta
March 30, 2010
Last week, Starbucks unveiled its strategy for profitable global growth, having taken approximately US$ 600 million out of costs in since January 2008.
About 3 years ago in a leaked memo, chairman Howard Schultz had raised concern about how, in the race to scale and to become consistent, Starbucks was losing sight of all critical things that had made it successful in the first place. (“The Commoditization of the Starbucks Experience – Soul Searching by Howard Schultz“).
In January 2008, Schultz took on an active role as CEO in a bid to stem the rot (“Leadership Change at Starbucks – The Barista Returns“).
These two years have been eventful. Shortly after Schultz stepped in, Starbucks announced that it would close 600 under-performing stores in the US. That was well before the “financial tsunami”. In 2009, another 200 in the US and 100 globally were identified for closure, and the company also scaled back on its 2009 expansion plan for 200 new stores.
At its shareholders’ meeting last week, Starbucks presented a more confident face, and outlined a return to growth with plans to expand its presence and “accelerate profitable growth in both the U.S. retail business and in key international markets”. (This profitable growth mantra was also recited in last year’s shareholder meeting.)
However, while the business is looking better, it is far from fixed.
The environment is different. Globally, consumer wallets are leaner, competitors are meaner, and Starbucks may yet need to shrink further; the fat ain’t all in the latte.
Yet, there must be much good in the business if, for all its faults, it still gets imitated around the world.
According to Starbucks, it currently has less than 4 percent of the U.S. coffee market with its 6,800 own and 4,400 licensed stores, and less than 1 percent of the global coffee market even with 2,000+ company stores and 3,500 licensed stores. The company sees that as enough headroom to grow.
Schultz has promised to put the tough lessons learned in the last two years to good use. The company currently has approximately 200 fewer stores than it did at the beginning of 2009 even after new store openings during the year. (To put the current number of 16,700+ stores in perspective, the company had a total of “only” 2,600 stores in Q1-2000.)
But there’s something to think about. If the entrepreneur needs to step back in to fix things gone horribly corporate (bland) and wrong, maybe it’s time to acknowledge that there’s a logical limit to the size and scaling-up capability of personalized experience businesses.
Or, as a friend says, scale can be a logical outcome of excellence but excellence is never the logical outcome of scale.
It remains to be seen whether this round of growth will come from the company’s natural strengths or whether Starbucks will return to growth-by-steroids as Schultz eases on the controls.
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.]
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
