In February, just before the mega-blitz of \u201cIndia Everywhere\u201d at the World Economic Forum, the Indian government took a step forward.\u00a0 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!<\/p>\n
About a month has passed since the cabinet announcement, the dust has settled, and it is a good time to consider what has happened.<\/p>\n
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\u2019s growth.<\/p>\n
The key questions being raised are:<\/p>\n
What Is Allowed, and Who Might Enter?<\/strong><\/p>\n Let\u2019s 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.\u00a0 All products in the store must also carry the same brand name, and this branding must have been applied during the process of manufacturing.<\/p>\n 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.\u00a0 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.<\/p>\n 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\u2019s), Wal-Mart cookies (not Britannia or Sunfeast), Wal-Mart T-shirts (not USI or Duke).\u00a0 You could have Tesco jeans (not Levi\u2019s or Numero Uno) or Carrefour luggage (not Samsonite or VIP).\u00a0 This obviously dilutes the consumer proposition of the store, which may then have to primarily focus on a single-point agenda \u2013 such as low prices \u2013 to draw consumer footfall.<\/p>\n 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) \u2013 thus, you may not be sold the famous \u201cTazo Tea\u201d in Starbucks, but get \u201cStarbucks Tea\u201d instead.<\/p>\n 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.\u00a0 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.<\/p>\n 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.\u00a0 This is true now of India as well, as The Body Shop announced its master franchise arrangement with Planet Sports in India.<\/p>\n A retailer such as Gap would need to set up separate retail operations for Gap, Old Navy, Banana Republic and Forth & Towne.\u00a0 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.<\/p>\n 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.<\/p>\n 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.\u00a0 All of them operate subsidiaries in which they have complete or majority ownership.\u00a0 Brands such as Tommy Hilfiger, Wrangler and Lee are also present through licence or franchise relationships, and unlikely to change their strategy.<\/p>\n \n Will Global Retailers Come?<\/strong><\/p>\n 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.<\/p>\n The answer to that is both \u201cNo\u201d and \u201cYes\u201d.\u00a0 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.<\/p>\n 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.<\/p>\n 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\u2019s own business strategy, all play a part in their decision-making process.<\/p>\n Thus, in one company\u2019s 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.<\/p>\n Opening single-brand retail to foreign direct investment, therefore, is at best an encouraging signal that the government has provided.\u00a0 It is unlikely to prompt international retailers to look at India any sooner than they might otherwise have.<\/p>\n The second key issue is whether FDI itself is of any consequence to whether the retailers enter India.\u00a0 This again is related to the individual retailer\u2019s own strategy and business context, as well as how they perceive the risk-return ratio.<\/p>\n 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.\u00a0 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.<\/p>\n 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.\u00a0 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.<\/p>\n Other companies, such as Mothercare, Debenhams and The Body Shop, have expanded their international presence through franchises.\u00a0 Their premise is proprietary product and an enormously powerful brand that translates well across cultures.\u00a0 These companies have taken the less intensive route of franchise.\u00a0 In India, too, they have signed master franchises. Mothercare has assigned master franchise rights to the Rahejas\u2019 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.<\/p>\n Thus, while allowing FDI may help some companies, it is unlikely to have investors beating down the door in a rush to enter.<\/p>\n \n What Does FDI in Retail Mean for India?<\/strong><\/p>\n Permission for foreigners to invest in retail businesses in India obviously mean different things to different stakeholders in India.<\/p>\n 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.<\/p>\n To existing retailers, it does mean potentially more clutter in the market, possible higher marketing expenditure for them to maintain their position.\u00a0 However, it also means that more players can encourage the growth of the market, which otherwise can end up looking stale and in-bred.\u00a0 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.<\/p>\n 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.\u00a0 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.<\/p>\n For suppliers, new brands bring in new avenues for business growth.\u00a0 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.\u00a0 Thus, especially for suppliers of fashion goods this is definitely a growth opportunity.\u00a0 Retailers might even prefer to work with the supply base from which they already source for their operations in other markets.\u00a0 Thus, the growth opportunity exists for exporters \u2013 the question is how many of them are willing and able to make the transition to begin supplying locally.<\/p>\n 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.\u00a0 This will certainly have a positive fall-out for exporters, since their business is likely to become overall more competitive globally, too.<\/p>\n Let\u2019s consider another stakeholder, who we tend to miss \u2013 the government itself.\u00a0 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.\u00a0 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.<\/p>\n On the other hand, do foreign retailers pose a threat at all?<\/p>\n 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.\u00a0 With the presence of global retailers with deeper pockets, these large Indian retailers will no longer be the big boys on the block.\u00a0 But the positive outcome for the many seems to outweigh the negative outcome for the few.<\/p>\n 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.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" Will the change in policy on foreign investment in the retail business bring a flood of global retailers to India?<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[25,27,212,215,33,60,222,36,235,62,37,315,131,270,43,44,46,47,48,1],"tags":[99,52,174,101,102,103,290,146,276,266,112,187,372,373,59,190,191,69,164,147,166,195,70,65,202,203,204,301],"class_list":["post-1844","post","type-post","status-publish","format-standard","hentry","category-apparel","category-branding","category-consumer","category-food-grocery","category-footwear","category-india","category-leadership","category-lifestyle-fashion","category-luxury","category-market-research","category-marketing","category-outsourcing","category-product-development-and-design","category-real-estate-2","category-retail","category-soft-goods","category-strategy","category-supply-chain","category-textiles","category-uncategorized","tag-brand","tag-branding","tag-consumer","tag-consumer-goods","tag-consumer-markets","tag-consumer-products","tag-consumption","tag-fdi","tag-foreign-investment","tag-gdp","tag-global-business","tag-global-fashion-brands","tag-governance","tag-government","tag-india","tag-india-entry-strategy","tag-indian-market","tag-indian-retail-sector","tag-international-brand","tag-international-brands","tag-modern-retail","tag-modern-retailing","tag-organised-retail","tag-retail","tag-retail-boom","tag-retail-productivity","tag-retail-revolution","tag-retailing"],"yoast_head":"\n