India beckons foreign brands

The move has paved way for single brand foreign retailers to own 100 per cent of their operations in the country, possessing

fully-owned stores here. The new policy is advantageous for international players like Gap, Starbucks, Adidas, Nike, etc, as

it allows them to buy out domestic partners and fully own Indian operations. The move is set to enable greater control on

part of the international retailer.

 

Dhiren Desai, Business Head–International Brands, Wadhawan Lifestyle Retail Private Limited, opines that the move will

not have a major effect, given the 30 per cent local sourcing or small industries rider. “However, brands that have local

sourcing and facing difficulty with Indian partners may opt to come through this route," he says.

 

The shares of retail firms like Pantaloons Retail, Koutons, Provogue India and Shoppers Stop rallied sharply, following the

Cabinet’s Foreign Direct Investment (FDI) announcement. A positive expectation from the decision is that a bolder initiative

shall soon follow for FDI in multi-brand retail, too. “With 100 per cent FDI in single brand retail, good Indian brands will

start getting private equity funding and will be able to compete against international brands with respect to merchandise,

operations and experience the international brands have to offer. It will help them boost their business and help provide

world class experience to its customers," he adds.

 

THE EFFECT

It is a proven fact that the entry by foreign brands aids in the improvement of service, quality and overall experience offered

by the Indian brands. The same has been evident since the liberalisation process initiated way back in the mid 1990s.

Abhay Gupta, Founder Promoter & CEO, Luxury Connect shares his take on the same and cites the example of the entry of

international food chains, which has only helped improve our local experience with Indian chains like Haldirams, etc. The

scenario is put in different light by Nitin Bahl, Country Manager - India of Natuzzi, the Italian furniture brand. “The international brand owner knows best – the intrinsic as well as the extrinsic values of the brand and thereby operational control will for sure improve the chances of success. I think this move will make the Indian market a more lucrative investment opportunity and thereby attract higher Foreign Direct Investment," he says.

 

Also, according to sources, it is learnt that foreign brands still prefer the JV mode or franchise model of doing business in the country. The reasons for the same can be many, the immediate ones being a nascent luxury market, shooting real estate costs and also, most importantly, the knowledge possessed by a local partner. However, Bahl shares his take in a different tone and comments, “I believe that a lot of JVs have not been successful in the past due to the lack of operational knowledge on part of the domestic partner."

 

Gupta states, “The current situation of opening of the FDI will help a faster pace of brands coming into the country and further going to make the market competitive and offer varied choices to the customers. Automobile and mobile telephones are perfect examples of the success and benefits of this kind of movement to the consumer."

 

Sourcing clause: Well thought out

The decision comes accompanied with a rider that 30 per cent of the value of products sold would have to be mandatorily sourced from small Indian industries,village and cottage industries, artisans and craftsmen, (collectively referred to as ‘suppliers'). The move will help in facilitating the decision making process of the foreign brands, who are keen to enter the country. Needless to say, these brands shall wait for total clarity before jumping into foray. The government recently ruled out revisiting the condition. The rapid movement on the 100% FDI retail has brought cheer not only to global players, but also to

the consumers who are now anxiously waiting for the high-end brands to begin their operations in India. The policy of mandatory sourcing from the domestic players is an initiative taken by the government to transform India’s rural economy, where retailers have to source 30% of their goods from the local small and medium enterprises. However, this clause may not be the ideal way forward for luxury brands, considering that the patrons of luxury choose the brand and the products for the exquisite craftsmanship, for the assurance that the brand products are produced and created at the original establishment city of the brand.

 

India is a very interesting potential retail market for the Ikea Group but we need to understand what the requirements in the FDI decision will mean for us. We have found that the conditions applied to sourcing 30% from SMEs might be difficult for us to live up to. However, we are optimistic and hope to be able to sourcing in 100 per cent FDI in single-brand retail, stating

that the decision on 30 per cent mandatory procurement from the domestic small enterprises is well thought out. Why such

a rider in the first place?

 

This rider is certainly a cause of concern for certain type of businesses. Bahl says, “In order to source from India, a category must be well developed in the country. For example, apparel or footwear is a well developed category in India as compared to modern leather furniture. This is the very reason why organisations such as Ikea are yet to venture into the market as they are weary of being able to fulfill this requirement."

 

Desai comments, “The rider is to protect the domestic industries and promote Indian manufacturing facilities, though it would make no sense for brands that do not have any Indian product connect from small cottage industries. However, the government should have a phase-wise plan, for example, 1st year – 10 per cent; 2nd year – 20 per cent and 3rd year onwards – 30 per cent for Indian sourcing. This would help make it far more acceptable and India would attract better

investments.”

 

Gupta also shares his viewpoint on the 30 per cent rider and says that it is very valid for large consumption products like food, clothing at mass prices, etc, but is a difficult clause for the luxury industry. In the luxury space, the recent case has been the coming together of Canali, the Italian luxury brand and Genesis Luxury Fashion. The two inked 51:49 joint venture, which will see an investment of `7.65 crore.

 

“Every luxury brand has its own signature DNA and a major point of attraction is the ‘made in the country of origin’ USP. Besides, very few items could be actually thought of in terms of the possible sourcing from this category, keeping in mind the cap at `5 crore investment,” Gupta adds. On the same lines, Abhijit Das, Head, Marketing, Delhi Duty Free, shares a positive note and says, “Though this clause looks like a bottleneck as of now, this would go away once proper licensing

rules are made. These rules will only allow working of the SMEs that can produce quality goods.”

 

More and more brands will enter the Indian market with heavy investments, but the need of the hour is to have right real estate and infrastructure for these brands to cater to their customers in a right manner. Obviously, when investments are higher, the brands would Changes foreseen expect higher returns as well. The right selling environment is needed.

It is expected that while the Indian retail industry will definitely see major changes in the times to come, India shall also

witness the entry of a lot of brands, now taking the direct route. “This will certainly create a greater opportunity in the

retail environment, be it employment opportunities, business for domestic manufacturing/service industry or better value

for consumers considering greater competition,” Bahl says.

 

Desai says that to begin with, customer experience will change for better and efficient supply chain practices will be

applied. He further says “Relevant points like encouragement for inflows from foreign institutional investors into the

country; healthy competition ensuring that pricing is realistic and customers will have more choices and on the real estate

front, in the years to come – one will also see specialty malls, where high streets will be developed to cater to the new and

existing brands.”

 

According to sources, in the coming future, we are likely to see brands including Gap, Banana Republic, Nike, Reebok,

Calvin Klein, Estée Lauder, DKNY, Chanel, Lancome, Armani, Gucci, H2O Cue, Harry Winston, Hugo Boss, Marc, Paul

Smith, IWC Schaffhausen, Jaeger-LeCoultre, Janavi, Jimmy Choo and Judith Leiber entering the Indian market via FDI.

 

While the retail market will continue to grow with respect to additional incoming brands, a further stimulus in the form of

an initiative for FDI in multi-brand retail will perhaps accelerate the growth process to a more desired level.

 

Additional inputs by Gunjan Piplani and S Aadeetya