Devangshu Dutta
November 13, 2008
For all those who have admired the consistency and presentability of produce in western supermarkets, here’s proof that tough times really focus us on substance and force us to look beyond skin-deep beauty.
Even in fruits and vegetables.
British supermarket Sainsbury has challenged European Union guidelines that restrict the sales of fruits by certain physical standards. Sainsbury’s is questioning EU regulations that prevent selling “ugly” fruit and vegetables. Due to EU regulations such as size of cauliflower (minimum 11 cm diameter) and the shape of carrots (requirement that there should be a single root, not multiple), Sainsbury estimates that up to one-fifth of what is produced in British farms cannot be sold in the supermarket. According to Sainsbury’s estimate, not following these regulations can help to reduce prices by up to 40%, and reduce wastage by up to 20%. The retailer is also trying to drum up customer support by running an online poll (94% responses were in favour of Sainsbury’s move, at the time this column was being written).
So less beauty could mean more veggies in the supermarket, and more money in everyone’s pocket including, hopefully, the farmer.
And this may also vindicate anyone who has complained that the beautiful veggies and fruits in western supermarkets taste inferior to their “ugly” counterparts sold on Asian hand-carts. Give us more substance and less style, any day.
Let’s look at some other substantial issues that merchants should consider.
Remember “I can’t get no satisfaction”? That’s what Mick Jagger and his mates in the Rolling Stones hit the world in the face with in 1965, allegedly in response to the rampant commercialism they had seen in the US.
After 43 years – at least judging by the modern supermarket shelves – apparently we still ain’t getting no satisfaction. In fact, the array of choice tends towards “overload”.
A typical developed country supermarket is estimated to carry over 40,000 SKU’s. Can you think of 40,000 types of items (or even 10,000) that you would need from the supermarket for your home?
So here’s the result. During my travels, if I’m in a store that is unfamiliar I could spend over an hour wheeling a trolley around before reaching the checkout. The first 5-10 minutes are focussed on figuring out the aisles based on my list. The next 10 minutes are spent picking what is actually on my list. And the rest of the time before the checkout is usually spent browsing through the thousands of SKU’s and picking stuff that we never knew we needed when the family made the shopping list.
Now, the guys who run the supermarkets are generally a smart bunch – they’ve figured that the more options you put in front of consumers, the more they buy. My cash receipts are proof of that. But, as American professor and author Barry Schwartz (“The Paradox of Choice”) says, the point where the choice becomes counter-productive is already well-past in developed markets.
With such overwhelming choice, consumers get into analysis-paralysis. And even after they finally purchase something out of the enormous range, you get shades of post-purchase dissonance. Only, in this case the dissonance, the dissatisfaction is not related to a bad product, but: “What if there I had made another choice? What if there was a better product than this? What if there was something available for less?”
During these times, it is pertinent to also put this in the context of business costs. There is surely a cost of providing that humongous choice in supermarkets. Have we considered what the saving could be, if the variety was reduced, if the product range was consolidated?
Consider the time (and therefore cost) spent on product mix and pricing decisions – surely merchandising teams have to be larger if you have a larger product mix, since each person can only handle a finite workload. Consider the cost of logistics of handling a widely diversified range. Consider the efficiencies lost in diverse production mix. So, does the consumer really need, really even want all that choice?
Retailers like the German chain Aldi raise precisely those questions. Aldi sells about 1,100 SKUs compared to the usual 40,000. And it claims that the typical shopping basket in Aldi’s UK stores is 25% less than competing supermarkets.
Indian retailers, of course, are possibly yet to reach that pain threshold of choice. There are possibly some potentially useful choices that are still missing. But even here, it is well worth taking a hard look at the product offering. With availability levels that can dip as low as 50-60%, it is probably worth asking – what if we dropped XYZ product from our range? Would it really hurt our sales or even our image; or would it help us to focus better on the products that really matter?
If we took our attention away from building such false choices, could the business become more profitable and therefore more sustainable?
The US and European markets are often the source of many a management thought and business model related to consumer products and retail, and of “best practices”.
So, in closing, I should share this question someone asked me recently: “when do you think consumer spending will bounce back in the US?” My first response was, “If only I had a crystal ball”. But the next thought in my mind was what if US consumers actually came to a decision that they had “enough”? What if their excessive consumption was no longer the role model for consumers in emerging economies? What if, instead, the frugal consumers of India and China became the global role model?
What would your business model look like then? Would your corporate be more socially responsible? And would it have a better chance of lasting longer?
For those who are interested in taking this inquiry even further, I can recommend John Naish (“Enough: Breaking Free from the World of More”, 2008), John Lane, Satish Kumar, M. K. Gandhi, Alan Durning (“How Much is Enough?”), or any number of ancient Indian, Chinese, Greek or Roman schools of thought, many of them pigeonholed into “religious” or spiritual categories.
You might also like this video of a talk by Barry Schwartz on Ted.com (below).
Do please share the results of your inquiry with us, too.
Sharmila Katre
April 30, 2008
India has a rich tradition of textiles which dates back many centuries. The history of the Indian readymade garment industry, however, is very recent and can be traced back to the Second World War.
During the Second World War, as a contribution to the wartime needs of British rulers, clothing units for mass production were set up to manufacture military uniforms. With India’s independence in 1947, the industry stagnated as the policies of the Government were now diverted towards building a new nation. However, the industry began to expand after 1959 with the revision of the textile policy to allow the import of machinery for manufacturing.
The 1960s witnessed social shifts as a whole generation of young people questioned the very basis of their existence, and the hippie movement was born. Tired of their materialistic ‘man-made’ lifestyle, these young people began to seek answers in communing with all things natural, love and peace being the anthem. They began traveling, to explore, to seek the ancient philosophies of the East.
This voyage of discovery not only led to a change of lifestyle, but also the way they dressed. Natural fibres were rediscovered, and principally amongst them “Cotton”. India, with its natural abundance of this fibre, was an automatic choice of a supply source. Simultaneously, the growing settlement of Indian abroad led to a ready outlet for a variety of India merchandise and clothing textiles as an article of trade because of its growing demand.
This sudden demand for cotton garments resulted in the Indian industry growing by leaps and bounds in a very short period. Export of “High Fashion” garments from India started off with the cheap cotton kurtas and hand-block vegetable dye printed wrap-around skirts in cotton sheeting to meet the demands of the western youth.
Cashing in on the boom any and everybody got into the manufacture of clothing. The Government, realizing the potential of earning foreign exchange for the country, announced incentives and tax exemption for exporters. The fallout was an industry that grew in an unorganized manner and developed a reputation for producing low cost, low quality, volume merchandise.
The 1980s established that the industry was here to stay but, in terms of product profile, India still had not been able to move out of the lower end of the world market and continued to have an average unit value of under US$ 5.
The 1990s saw the industry make a conscious effort to shake off the image of being producers of cheap, low-quality merchandise with unreliable delivery schedules. The second generation had begun coming into the business, and contributed to reorganizing their firms for clearer structure and professionalism. Funds were ploughed back into the business with the emergence of large and modern production facilities. Even though most of the export houses were family-owned, trained professionals were inducted into the business for clear-cut departments and areas of functions. Consolidation and retention of business was the focus of the late nineties as the abolition of quotas planned for the new millennium became a reality.
The industry was euphoric but at the same time apprehensive of what the post quota era would bring. Many of the producers looking for a synergy in the business and also to sustain the large production facilities began tentative forays into domestic retail. The face of the Indian consumer was changing. Exposure to the western society via the electronic media helped in creating a ‘borderless’ world for lifestyle products, and contemporary fashion merchandise found a ready market in domestic retail.
The new global consumer over the years has evolved as a demanding and yet discerning individual. The novelty factor along with price and quality has become the watchword of the new millennium consumer. As consumers around the world change, so does the product strategy to keep consumer interests alive and ensure loyalty.
The new millennium has seen the emergence of the ‘Quick Response’ or ‘Real Time’ merchandising in fashion as a strategic solution to nurture, retain and grow the business. ‘Fast Fashion’ was born. Retailers could no longer work on the concept of two major retailing seasons with a couple of promotions thrown in. Product planning and the merchandise on the racks had to be constantly current and trendy.
Fast Fashion is not simply a solution to increase consumption by introducing greater product variety but a strategy to retain, consolidate and sustain the market through proactive product development and efficient product delivery to consumers, and thereby grow the market by increasing market share or developing new markets.
However, fast fashion has been tried and tested in different avatars through the years. In the 1960s and 1970s it was present in the quick reaction time of the unorganized sector to service the demand for block-printed ethnic clothing merchandise. In the 1980s and 1990s it was represented in the proactively researched product development at the source market level by wholesale importer/designer buyers (like Rene Dehry, Giorgio Kauten, Diff and Steilmann). Today it is technology-aided product research and development techniques (practiced by Anthropologie, Rampage, Zara and H&M), coupled with responsive buying processes.
In product design terms, India has moved on from producing and selling ‘fashion basics’ to ‘basic’ merchandise, and now back to ‘fashion basics’ once again. History says that this is where India’s inherent talents and strengths as a source market lie. Rather than reinventing the wheel or try to catch up with other competitors strengths, India should cash in on its strengths to practice and master fast fashion.
Devangshu Dutta
March 13, 2008
Many people I know treat shopping centres or malls as a new phenomenon, a progressive development of recent times or a modern blot on the traditional cityscape (depending on your point of view).
However, Grand Bazaar (Istanbul, Turkey) is the earliest known mall, with the original structures built in 1464, with additions and embellishments later.
In India, if one were to include open arcades, Chandni Chowk in Delhi is reported to have opened around 1650, with its speciality shopping streets. (Of course, more traditional bazaars have been around many thousands of years around the world.)
But even if one were to get more “traditional” about the definition of a mall, possibly India’s first mall was founded in the hottest city in the country then, Kolkata (New Market) in 1874.
In more recent history, Delhi’s municipal pride, the air-conditioned underground Palika Bazar was a novelty in the mid-1980s, while Bangalore’s Brigade Road saw several early pioneers with their shopping arcades in the late 1980s.
Then came the mall-mania beginning with Ansal Plaza in Delhi and Crossroads in Mumbai. Everyone started looking at malls as the new goldmine, being pushed ahead by a “retail boom”.
The early stage of any such gold rush usually has several experiments missing their mark, which is what has happened with the hundreds of mall-experiments that have been launched in the last 7-8 years.
Some of the significant and common issues are starting to be addressed, but many others remain.
Catchment-Based Planning is Needed
The top-most issue in my mind is “oversupply”. While this may sound absurd to many people, given the low figures quoted for modern retail, I am referring to the over-concentration of malls in a small geography. If 8-10 malls open 4-5 million sq. ft. of shopping in a catchment that can only support 1 million sq. ft., everyone knows that some of the malls will fail. But everyone also believes that their mall will succeed (otherwise, they would obviously not have invested in the mall).
What happens to the malls that fail? Depending on the design of the building, many of them can be repurposed into office space – another area where a lot of investment is still needed. So in the end, actually, most people win, one way or the other. Yet, there will be some losers. Does anyone “plan” on being one?
The second key issue in my mind has been that mall developers have been thinking as “property developers” rather than retail space managers. The successful shopping centre operators worldwide (now also in India), are actually as concerned about what and who is occupying that space as a retailer would be. They are concerned about the composition of the catchment, the shopping patterns, the volume of sales, the shopping experience. Therefore, the tenant mixes as well as adjacencies are factored into the earliest stages of planning the shopping centres.
In fact, if I were to identify the most critical operational problem for many of the malls, it is the lack of relevance to catchment and, therefore, the low conversion of footfall into sales for the tenants other than the food-courts. Customer flow planning within the mall is another factor that can make a tremendous impact on the success and failure of the tenant stores.
Once you start looking at these factors during the planning of a mall, another obvious aspect that jumps out is “differentiation”. Currently, there is little to choose from between malls (other than possibly the anchor store). However, with more clarity in terms of the target audience, the potential strategies for differentiation also become clearer. The visitors also become segmented accordingly, and there is a natural benefit to the tenants occupying the mall.
If, as a mall operator, you want to be in business for long, and also develop other properties in the future, the success of your tenants is probably the most critical driving factor for your business.
Integration into the Urbanscape
When we gauge malls from the perspective of integrating within the urban landscape, there are obviously some glaring errors being made. Instead of aesthetic design that reflects the heritage and culture of the location and its surroundings, or some other inspirational source for the architect, most malls that have come up are concrete and glass boxes.
Beyond the looks, some of the malls are a victim of their own success. They attract more crowds during the peak than they have planned for. Not only does the parking prove to be inadequate, there is no holding capacity for cars entering or exiting the mall. The result is a traffic nightmare – not just for general public, but even for the visitors to the mall. Someone who has spent 45 minutes stuck in a jam waiting to get into the parking of a mall will certainly not be in the best frame of mind to buy merchandise at the stores occupying the mall.
Some of the problems lie outside the mall-developer’s control – for instance land costs are a major driver of the cost of the project (and, therefore, the lease costs to the tenants), and land is a commodity which is independent. Real estate is available within the cities as brown-field sites (former industrial locations), but the regulations are convoluted and the strings are in the hands of too many different departments of the government (city, state and central). This needs joint creative thinking on the part of developers, the government and the public, if our cities are to develop in a more sane fashion than they have in the past.
Similarly, land deals are still not clean enough for foreign investors to be comfortable participating in many developments. This obviously is holding back a tremendous source of capital and domain expertise that could contribute to the growth of this sector.
Many other operational issues exist – manpower, systems, health & safety – some of them can be managed or controlled by the mall developers, and it is a question of time (and of their gaining experience). Other issues are more in the domain of the government, and need a visionary push to make “urban renewal” a true mission.
New Life for the Cities
In my opinion, one of the most interesting areas which would be in the joint interest of almost all parties (that I can think of) is the possibility of revitalizing the high streets and community markets, and reinventing them as the true centres of shopping.
Many of our markets are rotting (a strong word, but let me say it anyway). The individual stores are owned by individual owners who are not all equally capable of maintaining the same look and feel throughout. The infrastructure in and around the markets are owned or managed by several different agencies. To make matters worse, there is often no cohesiveness and no synergy in the interests of most of the members of the market association. None of these individually have the power or the mandate to recreate the shopping centre. But what if they could get together and take the help of a re-developer?
If an example is needed, New Delhi’s Connaught Place provides the example of one stage of redevelopment. Connaught Place had lost its pre-eminent position as a shopping centre, due to the spread of Delhi’s population and the new local markets that had come up. Further disruption was caused by the construction by Delhi Metro. But DMRC has reconstructed an “improved” centre, and the Metro connectivity has made the customers come back into CP, as it is affectionately known in Delhi.
There are clearly many such opportunities around India’s cities. These need to be looked at as a commercial opportunity for all concerned (revenue for the redeveloper, better sales for the store owners / tenants, more tax revenue for the government from additional sales and consumption). But it is also a broader social opportunity to breathe a new life into our cities, and to make them proud beacons of a growing India.
It would be a mission that would truly prove the worth of shopping centre developers, urban planners, regulators and the retailers themselves.
Any takers?
Devangshu Dutta
January 18, 2008
The entertainment business suggests that nostalgia is a very powerful driver of profit.
It is quite clear that retro is “in”. The movie business worldwide is full of sequels, prequels, re-releases and remakes. The music business is ringing up the cash registers with remixes and jukebox compilations. Star Wars and Sholay still have a fan following. ABBA has leaped across three decades, Hindi film songs from 30-60 years ago have been given a skin-uplift by American hip-hop artists, while Pink Floyd is hot with Indian teens along with Akon and Rihanna.
As copyright restrictions are removed from the works of authors long-gone, the market gets flooded with several reprints of their most popular writings. Of course, we know that classic literature survives not just a few years but even thousands of years. Examples include the still widely-read 2,500-year-old Indian epic Ramayana by Valmiki, the Greek philosophers’ works that continue to be popular after two millennia and the Norse legends that have been told and re-told for over a thousand years. Spiritual and religious leaders’ writings are also recycled into the guaranteed market of their followers and possible converts for a long time after their passing away.
On the other hand, the basic premise of today’s fashion and lifestyle businesses is that silhouettes, colours and design-cues will become (or be made) obsolete within a few weeks or a few months, and will be replaced with new ones. This principle is true not just of clothing and footwear, but is applied to home furnishings, furniture, white goods, electronics, mobile phones and even cars. In fact, the fashion business (as it exists) would find it impossible to survive if customers around the world chose only classics which could be used for as long as the product lasted in usable form.
What Fashionability Means for Brands
Other than individual styles or products falling out of favour, as fashions move and as the market changes, it is evident that some brands also become less acceptable, are seen as “outdated” and may also die out as they lose their customer base.
Of course, that some brands become classics is quite apparent, especially in the luxury segment where brands such as Bulgari have survived several generations of consumers, and continue to thrive.
However, the past is of relevance to the fashion sector because, other than planned or forced obsolescence, the fashion business has also long worked on another principle – that trends are cyclical.
Skirts go up and down, ties change their width, and the colour palette moves through evolution across the years. A style formula that was popular in the summer of a year in the 1970s might be just right in another summer in the first decade of the 21st century.
So, the question that comes up is whether the same logic that is applicable to individual products, styles and trends, could also be applied to brands.
The answer to whether apparently weak, dead or dying brands could be brought back to life is provided by brands such as Burberry’s, Lee Cooper and Hush Puppies. Sometimes innovative consumers create the opportunity – as with Hush Puppies in the 1980s – while in other cases (such as Burberry’s, Volkswagen’s Beetle, or Harley Davidson), vision, concerted effort and resources can make the brand attractive again.
The question then is not whether brands can be relaunched – they can. The more important question for brand owners is: should a brand be relaunched. And using the logic of the fashion business, rather than being left to linger and then dying a painful death, could brands be consciously phased-out and later brought back into the market as the trends change?
The Brand Portfolio – Diversifying Opportunities and Risks
These questions are particularly important for large companies, or in times when market growth rates are slow, or when the market is fragmented. Organic growth can be difficult in all these scenarios, and companies begin to look at developing “portfolios” by acquiring other businesses and brands, or by launching multiple brands of their own.
The car industry worldwide has lived with brand portfolio management for long. Even as companies have merged with and acquired each other, the various marques have been retained and sometimes even dead ones have been revived. The companies generally focus the brands in their portfolio on distinct customer segments and needs (such as Ford’s ownership of “Ford”, “Volvo” and “Jaguar”, or General Motors with its multiple brands), and then further play with models and product variants within those. When things go right portfolio strategies can be quite profitable, but the mistakes are especially expensive. Sensible and sensitive management of the portfolio is absolutely critical.
In the fashion and lifestyle sector, the players who already follow a portfolio strategy are as diverse as the luxury group LVMH, mainstream fashion groups like Liz Claiborne (with brands in its portfolio including Liz Claiborne, Mexx, Juicy Couture, Lucky Brand Jeans) and LimitedBrands (Limited, Victoria’s Secret, La Senza etc.), retailers such as Marks & Spencer (with its original St. Michael’s brand having given way to “Your M&S”, and also Per Una) and Chico’s (Chico’s, White House | Black Market, and Soma Intimates) who wish to capture new customer segments or re-capture lost customers. Some of these companies have launched new brands, some have relaunched their own brands, and some have even acquired competing brands.
The issue is also relevant to the Indian market, whether we consider Reliance’s revival of Vimal, the new brand ambassador for Mayur Suitings, or the PE-funded take over of Weekender. As the market begins evolving into significantly large differentiated segments, branding opportunities grow, and so will activity related to existing or old brands being resurrected and refreshed. An additional twist is provided by Indian corporate groups such as Reliance, Future (Pantaloons) and Arvind that are looking to partner international and Indian brands, or grow private labels to gain additional sales and margin.
The issue also concerns those companies whose management is attached to one or more brands owned by them which may not have been performing well in the recent past, but due to historical or sentimental reasons the management may not like to close down or sell them.
It is equally critical for potential buyers who would like to take over and turn brands around into sustainable profits. This is a real possibility in this era of private-equity funds and leveraged buyouts, where a company or a financial investor might find it cheaper and more profitable to take over an existing brand and turn it around, rather than building a new brand. This is already happening in the Indian market. More interestingly, Indian companies have also already acquired businesses in the USA and Europe, and the potential revival or relaunch of brands is certainly relevant for these companies as well.
When to Recycle and Reuse
Relaunch or acquisition of an existing active or dormant brand can be an attractive option when building a portfolio, or when a company is getting into a new market.
For the company, acquiring an existing brand is often a lower cost way to reach the customers, and also faster to roll-out the business. The company may assess that the brand already has an existing share of positive customer awareness that is active or dormant, and that the effort and resources (including money) needed to build a business from that awareness will be much less than that to create a new brand.
The risk of failure may also be lower for a relaunched brand than for a new brand.
This is because the softer aspects, the hidden psychological and emotional hooks, are already pre-designed. This provides a ready platform from which to re-launch and grow the brand.
From the customer’s point of view, there is the confidence from previous experience and usage, and possibly also nostalgia and comfort of the ‘known’.
‘Age’ or vintage is respectable and trustworthy. This is especially powerful during volatile times or in rapidly changing environments when there is uncertainty about what lies in the future, and makes an existing brand a powerful vehicle for sustaining and growing the business.
On the Downside
However, when handling brands it is also wise to keep in mind the cautionary note that mutual funds issue: “past performance is no indicator of the future”.
In re-launching active or dormant brands, there is also a downside risk. While the brand may have been strong and relevant in its last avatar, it may be totally out of place in the current market scenario. The competitive landscape would have shifted, consumers would have changed – new consumers entering the market, old consumers evolving or moving out – and the economic scenario itself may now be unfriendly to the brand.
Also, the “awareness” or “share of mind” may only be a perception in the mind of the person who is looking to re-launch the brand, and the consumer may actually not care about the brand at all. There are instances where the management of the company has been so caught up in their own perception of the brand that they have not bothered to carry out first-hand research with the target segment to check whether there is actually an unaided recall, or at worst, aided-recall of the brand. They are imagining potential strengths, when the brand has none.
It is also possible that, during its last stint in the market, the brand may have gathered negative connotations – consumers may remember it for poor products or wrong pricing, the trade may remember it for late deliveries, vendors may remember it for delayed payments…the list goes on. In such a scenario, it may be a relaunch may be a disaster.
So how does one know whether to resurrect a brand, or to reincarnate it in another form, and when to just let it die? The answers to that lie in answering the question: what is a brand? And then, what is this brand?
A Critical Question: What is a Brand?
Even in these enlightened marketing times, many people believe that the brand is the name. They believe that once you advertise a name widely and loudly enough, a brand can be created. Nothing could be further from the truth. High-decibel advertising only informs customers of the name, it cannot create a brand.
If we put ourselves in the customer’s shoes, a brand is an image, comprising of a bundle of promises on the company’s part and expectations on the customer’s part, which have been met. When promises are delivered, when expectations are met, the brand develops an attribute that it is defined by.
The promise may be of edgy design (think Apple), and the customer expects that – when the brand delivers on the promise and meets the expectation the brand image gets re-affirmed and strengthened. However, these attributes are not always necessarily all “positive” in the traditional sense. For instance, a company’s promise may be to be low-cost and low-service (think Ikea, or “low-cost airlines”), and the customer may expect that and be happy with that when the company delivers on that promise. The promise may be products with a conscience (think The Body Shop), which may strike a chord with the consumer.
What that brand actually stands for can only be created experientially. Creating this image, creation of the brand, is a complex and step-by-step process that takes place over time and over many transactions. Repetition of the same kind of experience strengthens the brand.
The brand touches everything that defines the customer’s experience – the product design and packaging, the retail store it is sold in, the service it is sold with, the after-sales interaction – all have a role to play in the creation of the brand.
For instance, to some it may sound silly that market research or how supply chain practices can help define a brand, but that is exactly how the state of affairs is for Zara. Changeovers and new fashions being quickly available are what that brand is about, and it would be impossible for Zara to deliver on that promise without leading edge supply chains, or a wide variety of trend research.
Similarly, it may sound clichéd that your salesperson defines the brand to the consumer, but even with the best products, extensive advertising, and swanky stores, for service-oriented retailers everything would fall apart if the salesperson is not up to the mark. This is indeed a sad reality faced by so many of the so-called premium and luxury brands.
Of course, brand images can be changed or updated, but the new image also needs to be reinforced through repeated action, a process just like the first time the brand was created.
Reviving a Brand: the New-Old Seesaw
Given that a brand is created over multiple interactions and repetitive delivery of certain attributes, it is only natural that the older the brand, the more potential advantage it would have over a new brand. Just the sheer time it would have spent in the market would give an old brand an edge.
An old brand can appear to be proven, experienced and secure, while a new brand could be seen as untested, raw and risky. An old brand may have had a positive relationship with the consumer, but may have been dormant due to strategic or operational reasons. In this case, reviving the brand is clearly a good idea. There is already an existing awareness of an older brand, which can act as a ready platform for launching the same or a new set of products or services. Often, there may be a connection with the consumer’s past positive experience of the brand.
On the other hand, a new brand may appear to be fresh, more up-to-date and relevant, and vigorous, compared to an old one that may be seen as outdated and tired. Certainly, if nostalgia had been all that brands needed to thrive, then old brands would never die and it would be difficult to create new brands.
Clearly, there is no single answer to whether it is a good idea to re-launch an existing or old brand. If you are considering whether it would be a good idea to revive an old brand, or to acquire and turn an existing brand around, ask yourself this:
If the answer is “No” to any of these questions, then one needs to think again. However, if the answers are all “Yes”, then a resuscitation is just what the doctor might have ordered.
Devangshu Dutta
March 3, 2006
In February, just before the mega-blitz of “India Everywhere” at the World Economic Forum, the Indian government took a step forward. Amidst shrill outcries from its coalition partners and domestic anti-FDI lobbies, it finally decided to bell the cat, and let foreigners invest in retail again!
About a month has passed since the cabinet announcement, the dust has settled, and it is a good time to consider what has happened.
Since the initial euphoria of the early-to-mid 1990s when international retailers entered the market including companies such as Benetton (50% JV) and Littlewoods (100% subsidiary), this revised policy provides the first opportunity for large global companies to participate in the Indian market’s growth.
The key questions being raised are:
What Is Allowed, and Who Might Enter?
Let’s first deal with what the government has actually allowed. In a nutshell, a foreign retailer can set up a company in India in which it holds 51% equity, the balance being held by an Indian partner. This subsidiary can operate retail stores in India under one brand name. All products in the store must also carry the same brand name, and this branding must have been applied during the process of manufacturing.
This means that, as yet, a foreign department store selling multiple national and international brands cannot set up its own 51% owned operation in India. Nor can a supermarket or hypermarket chain like Wal-Mart, Carrefour or Tesco, sell their wide range of products under any name but their own, if they decided to take a majority stake in a retail operation.
In theory, you could have a Wal-Mart store selling Wal-Mart cola (not Pepsi), Wal-Mart butter (not Amul or Mother Dairy), Wal-Mart chocolates (not Cadbury’s), Wal-Mart cookies (not Britannia or Sunfeast), Wal-Mart T-shirts (not USI or Duke). You could have Tesco jeans (not Levi’s or Numero Uno) or Carrefour luggage (not Samsonite or VIP). This obviously dilutes the consumer proposition of the store, which may then have to primarily focus on a single-point agenda – such as low prices – to draw consumer footfall.
On the one hand, the cabinet decision clearly allows companies such as Starbucks and The Body Shop to step in with a majority stake, provided the branding is clearly by the primary name (store name) – thus, you may not be sold the famous “Tazo Tea” in Starbucks, but get “Starbucks Tea” instead.
However, to a brand such as Starbucks, this policy change is significant as its international expansion is largely through owned operations, especially in potentially large and strategic markets such as India. Starbucks would now have the option of not only controlling the retail operation through a 51% ownership, but also the raw material sourcing, storage and wholesale operation.
On the one hand, this may mean nothing to a retailer such as The Body Shop, whose international strategy in Asia has been largely driven through franchise relationships. This is true now of India as well, as The Body Shop announced its master franchise arrangement with Planet Sports in India.
A retailer such as Gap would need to set up separate retail operations for Gap, Old Navy, Banana Republic and Forth & Towne. There obviously are ways to consolidate operations even with the diverse retail corporate structure, but it does mean that the foreign retailer will be operating several corporate entities in India.
An existing company such as Benetton does not benefit from this change in regulation. In 2005 Benetton actually increased its stake in its joint-venture to 100%, but in the bargain had to forego the stores it was running. Its current network comprises entirely of franchise stores, and will have to remain so, unless Benetton reduces its stake to 51% in order to be able to run stores in India, which is highly unlikely.
Other existing international brands such as Levi Strauss, Adidas and Nike are not retailers in themselves, and are not dramatically affected by the change in policy at all. All of them operate subsidiaries in which they have complete or majority ownership. Brands such as Tommy Hilfiger, Wrangler and Lee are also present through licence or franchise relationships, and unlikely to change their strategy.
Will Global Retailers Come?
All of this obviously raises the question whether government regulations preventing foreign investment in retail were or are actually keeping foreign companies out of the Indian retail market.
The answer to that is both “No” and “Yes”. The reason is that companies that are looking at international expansion apply criteria that are specific to their own business needs which can lead to very different evaluations by each company.
Laws allowing or preventing FDI in retail are only one of the several factors that any global retailer would look at, when considering a market.
Other factors, such as various market options possible at the time, the state of development in the market, existing sourcing and other relationships, scale and scope of investment required vs. the rate of return expected, the risk factors involved, and the retailer’s own business strategy, all play a part in their decision-making process.
Thus, in one company’s case India may be the hottest market in which it would like to open a store at the earliest possible date this year, while for another company India may be of interest only after 5-7 years.
Opening single-brand retail to foreign direct investment, therefore, is at best an encouraging signal that the government has provided. It is unlikely to prompt international retailers to look at India any sooner than they might otherwise have.
The second key issue is whether FDI itself is of any consequence to whether the retailers enter India. This again is related to the individual retailer’s own strategy and business context, as well as how they perceive the risk-return ratio.
Thus, while China may not have any restrictions on foreign investment in retail, western retailers may still prefer to go with a local partner due to the differences in cultural and market nuances. Even in other unrestricted markets international retailers may prefer to enter through licensees or franchisees because the effort and investment in setting up their own company may not be compensated by the size of the opportunity, or their own investment strategy may not be in line with setting up international subsidiaries.
Some companies such as Wal-Mart, Tesco, Gap and Starbucks prefer to invest in international operations themselves, as ownership gives them a higher degree of control over the business. Of course, both Tesco and Wal-Mart have set up joint ventures in markets that are starkly different in cultural and business norms from their home markets but, by and large, where feasible these companies prefer majority or 100% stake in the business.
Other companies, such as Mothercare, Debenhams and The Body Shop, have expanded their international presence through franchises. Their premise is proprietary product and an enormously powerful brand that translates well across cultures. These companies have taken the less intensive route of franchise. In India, too, they have signed master franchises. Mothercare has assigned master franchise rights to the Rahejas’ Shoppers Stop. Debenhams and The Body Shop have both signed up with Planet Sports (soon to be renamed Plant Retail), which is also the franchisee for Marks & Spencer.
Thus, while allowing FDI may help some companies, it is unlikely to have investors beating down the door in a rush to enter.
What Does FDI in Retail Mean for India?
Permission for foreigners to invest in retail businesses in India obviously mean different things to different stakeholders in India.
For real estate owners, especially shopping centre developers, new entrants are always welcome, since it provides a wider basket of brands to present to the consumer, and the opportunity to differentiate one shopping centre from another.
To existing retailers, it does mean potentially more clutter in the market, possible higher marketing expenditure for them to maintain their position. However, it also means that more players can encourage the growth of the market, which otherwise can end up looking stale and in-bred. Brands that are entering the market for the first time can also bring fresh ideas in terms of merchandise, store planning and display, advertising etc.
To the question of whether Indian retailers are prepared to handle the competition, I would say that, while global best practices help, retail is a uniquely local business. Indian retailers who bother to listen to the consumer and constantly upgrade their own business are possibly in a stronger competitive position than a foreign brand that wants to impose its own alien sensibility on the market.
For suppliers, new brands bring in new avenues for business growth. Many of the international brands will look to increasing their sourcing from India, to take advantage of local labour costs and skills, or to down-play the disadvantage of duties on imported merchandise. Thus, especially for suppliers of fashion goods this is definitely a growth opportunity. Retailers might even prefer to work with the supply base from which they already source for their operations in other markets. Thus, the growth opportunity exists for exporters – the question is how many of them are willing and able to make the transition to begin supplying locally.
Not only do new retailers bring the prospect of increased business, but also the possibility of better systems and skills, improved product development, and in all, an opportunity for the supply base to upgrade itself. This will certainly have a positive fall-out for exporters, since their business is likely to become overall more competitive globally, too.
Let’s consider another stakeholder, who we tend to miss – the government itself. Organised retailers, including global companies, tend to be more constrained by law than a retailer from the unorganised segment. Based on that assumption, a large international retailer (and his Indian counterpart) will set up a local company that will carry out business by the book, recording all sales and purchase transactions. All local sales and purchases will be subject to VAT and sales taxes, while all imports would be documented and therefore subjected to import duties. All of this means more revenue for the government.
On the other hand, do foreign retailers pose a threat at all?
Well, there is certainly a threat to those retailers who insist that the market needs to remain structured the same way that it has been for years, and who refuse to upgrade their own business. There may even be a threat to the large Indian corporate retailers who are competing on the basis of their scale relative to the rest of the market. With the presence of global retailers with deeper pockets, these large Indian retailers will no longer be the big boys on the block. But the positive outcome for the many seems to outweigh the negative outcome for the few.
What I would certainly like to see is how quickly the government translates the promise of opening into a concrete plan that can benefit the Indian consumer, the Indian supplier, the Indian real estate market and the government itself.
