India opens its arms to
single-brand retail By Indrajit
Basu
KOLKATA - Gucci, Reebok, Armani,
Louis Vuitton and Canali can now walk into India
through joint ventures, and even call the shots.
So can Nike, Hugo Boss, Chanel and Rolex. But the
large-format global retail chains that offer
multiple brands, including Wal-Mart, Tesco,
Carrefour and JCPenney, will still have to wait a
while for the ability to pump money in directly to
tap India, Asia's third-largest economy, although
they can strike franchise deals to win more
access.
In a move that has drawn extreme
reactions, such as "bold" from experts and "farce"
from critics, India's Manmohan Singh-led
United Progressive Alliance
government last week permitted foreign direct
investment in retail businesses up to 51% through
the Foreign Investment Promotion Board (FIPB). But
easing the controversial retail FDI noose just
slightly, by allowing only branded foreign
retailers to invest in the country, is unlikely to
trigger an investment frenzy. However, the move is
expected to attract greater interest from global
brands eager to make an entry into a market that
is fast growing and full of nouveau riche Indians
hungry for luxury goods.
"It is not really
creating a ground for additional foreign
investments," said Arvind Singhal, chief executive
officer of retail consultancy firm KSP Technopak.
But "everyone who hadn't thought of India
before because the door was shut will now move
India up from the back burner", said Darshan
Mehta, the Indian partner of Tommy Hilfiger.
Nevertheless, the question remains: how
significant is this move? After all, the debate
over opening the country's retail sector to
foreign investment has been raging for several
years, during which it faced strong protests from
domestic retail chains, political parties and even
industry lobbies.
The retailing sector in
India still represents a typical
developing-country market in the sense that it is
characterized by the presence of a large number of
small, unorganized retailers, popularly referred
to as mom-and-pop stores. These stores dominate
the sector. For instance, India has about 12
million retail outlets, of which only about 3.5
million are in urban areas. This is why it is one
of the few sectors where FDI is not allowed. In
fact before 1997 there were no regulations
restricting the entry of foreign players but
suddenly, in that year, a realization dawned upon
India that if foreign retailers were allowed in
for mere trading, they would trigger an outflow of
foreign exchange and drive unorganized retailers
out of business, increasing unemployment.
Traders' lobbies and political parties -
particularly the leftists, who have formed an
alliance with the present government - argued that
millions of small grocery shops would go out of
business, including the middlemen who are
considered links in the retail supply chain.
Critics were and still are apprehensive about the
hire-and-fire labor policies that most foreign
retail chains follow. But as major international
chains such as Wal-Mart increased their
procurements from India and realized that the
retail sector was also emerging as an attractive
market for them, the chains started lobbying for
permission to open retail malls.
Finally,
as S Narayan, a former finance bureaucrat and
economic adviser to the prime minister, said, "to
catch the attention of the participants of the
World Economic Forum at Davos, where India was
represented by a very high-powered delegation,
India announced FDI liberalizations [in
single-brand retailing and in a few other sectors]
to signal that reforms and liberalization were on
track".
"This [allowing FDI in
single-brand] is to attract investment in an area
which is already happening," said Commerce and
Industry Minister Kamal Nath while announcing the
liberalization, adding that the government opened
FDI in single-brand first "because it does not
displace the small retailers".
"Even then
it is a small step," said Arvind Singhal. "The
government needs to show more boldness in its
policy initiatives on retail." According to
Singhal and his ilk, this sort of liberalization
is unlikely to bring any substantial change in the
sector unless the ceiling is increased to 100%,
because the biggest issue is with the selection of
the 49% local partner in the joint venture. "It
will be difficult to find a minority partner for a
single brand," said Singhal, adding: "Nowhere in
the world do you have a single brand
classification."
Other critics have termed
the move a farce. This is because, although
technically India does not allow FDI in retail, in
practice whoever is desperate to operate retail
outlets in India is already here in one form or
another.
"Only, on paper, the retail
outlets that sell the foreign brand must be owned
by an Indian," said one critic, Rajeev Dubey. "On
paper because, except for that, such
chains/outlets in India are largely run by the
foreign firms. They buy their stocks from the same
source, their shop-layout designers are the same,
their advertisers are the same and they share the
same agencies for most other functions too."
Nonetheless, besides the fact that this
liberalization signals a "forward movement" of the
country's reforms process, there is an important
upside. "The biggest beneficiaries of this
decision will be the Indian customer," said
Aradhana Agarwal, a business-economics professor
at the University of Delhi.
Agarwal said
that to offer inexpensive, quality products,
retailers will cut the number of intermediaries,
which will ultimately lead to lower prices for
consumers. "Finally, allowing foreign investment
in retail would lead to [an] inflow of technical
know-how, encourage large-scale production and
investments, and strengthen India's position as a
sourcing hub."
Meanwhile, industry sources
say that a queue to enter India is already in
formation, with such blockbuster global brands as
Gap, Zara, Guess and Ikea formulating their entry
strategies. And most important, even as FDI is
still closed to general merchandise retailers,
enthused by the decision, Wal-Mart has started
window-shopping too. According to reports quoting
company officials, Wal-Mart has just sought
permission to set up an office for market research
and business development in India.
There
is no denying that India offers a huge retail
opportunity. Its spending power is reflected by
the fact the country's 300 million middle-class
spenders - about the size of the total population
of the United States - spent more than $2.5
billion on luxury products in 2005, a number that
could potentially grow by more than 50%. A report
prepared by McKinsey and Co and the Confederation
of Indian Industry has even predicted that the
retail trade holds the potential of becoming a
$300-billion-a-year market by 2010, provided the
sector is opened significantly.
Indrajit Basu is a Kolkata-based
equity analyst turned journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
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