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Foreign\nluxury, apparel, and accessories companies that can own their own\nretail chains in India—the government allowed foreign investment in\nso-called single-brand retail in 2012—still continue to operate through\nlocal franchises and distributors.Of the 28 apparel and\naccessories brands which have entered India since the country allowed\n100% foreign direct investment (FDI) in single-brand retail, 23 came in\nthrough a franchise or distribution partnership, according to data from\nThird Eyesight, a retail consulting firm.
Under a franchise or\ndistribution agreement, a global retailer partners with a local\ncompany. The latter pays a fee to the brandowner, and invests in\nmarketing and launching the brand in India. In the last year, Gap Inc,\nAeropostale Inc, Desigual, Rider and Ipanema have entered India through\nfranchise agreements.
“Most\ncompanies do not see India as a strategic market, and tend to take\nlower-risk export-oriented approach through franchise or distribution\nrelationships,” said Devangshu Dutta, chief executive officer, Third\nEyesight.<\/span>
Foreign\ninvestment into the business, regardless of the quantum, is an\nindicator that a company is making a serious long-term commitment to\nthe country, since it brings along with it investment of management\ntime and effort as well.<\/span>
One\nexception is H&M Hennes and Mauritz AB. The Swedish fast fashion\nretailer, which has come in through the FDI route, will have 12 stores\nin India by the end of the year.
“The government’s decision to\nallow single-brand retailers to open stores by themselves came at right\ntime,” Janne Einola, country manager, H&M India, said in an\ninterview in August while explaining that the timing matched the\ncompany’s internal research which showed that India was emerging as a\ngood retail market to set up shop.
India is the second-most\nattractive market for global retailers to expand after China, according\nto the 2016 Global Retail Development Index by consulting firm AT\nKearney. According to the firm, India has, in the past couple of years,\nimproved the ease of doing business. Clarity on foreign direct\ninvestment (FDI) regulations too have helped.
To be sure, the\nchallenges remain. India continues to be a complex market for foreign\nretailers, where understanding dynamics at the local level is important\nas the country’s 29 states have the power to opt in or out of FDI\nreforms. Infrastructure bottlenecks, including archaic labour laws,\ncomplex regulations, high attrition rates and limited high quality\nretail space, remain important areas of concern for retailers, said the\nAT Kearney report, adding that still, the potential is vast as the\ncountry presents a $1 trillion retail market.
Meanwhile, even\nthe firms entering the country through franchise and distribution\npartnerships have become a lot more sensitive to the challenges of\ndoing business in India.
Many are working with their local\npartners to ensure that the products are right for the market, and also\navailable at the right price. Products sold through franchisees may\nturn out to be costlier due to multiple margins (the brand owners, and\nthe distributor’s).
“We are collaborating with our partners at\nevery level— from store fit-outs to (product) assortment for India.\nAlso, they sell to us at manufacturing cost which then allows us to\nprice the goods at a globally competitive price in India,” said J.\nSuresh, MD and CEO, Arvind Brands Ltd, the franchise partner of Gap and\nAeropostale in India.
In March last year, Arvind exited a franchise agreement with UK retailer Debenhams citing the chain’s steep pricing.<\/p>