Mumbai: In the seven months since India relaxed norms for overseas investment in retail, proposals worth about Rs.855 crore have been cleared by the government for single-brand retail ventures such as those of Decathalon, Pavers, Fossil and Promod, according to information from various government sites and companies.
The government announced its policy on foreign direct investment (FDI) in single- and multi-brand retail on 20 September, overcoming resistance from various quarters that had prevented the relaxation from kicking in earlier. It eased norms for the first and allowed up to 51% FDI for the second, contingent on the approval of the respective state governments. Ten states, including Maharashtra, Delhi and Haryana, will allow overseas retailers to open stores. The rest of the states are yet to approve the policy.
The number is significant in relation to the Rs.196 crore or $42.7 million FDI that came in between April 2000 and January 2013 for single-brand retail ventures. That amounted to 0.02% of overall FDI in India, according to a Department of Industrial Policy and Promotion (DIPP) fact sheet submitted to the Reserve Bank of India. Moreover, some of this FDI, including the Rs.98.26 crore proposal of Pavers England (cleared on 2 November), is part of the Rs.855 crore that has come in as FDI in the seven months since the policy change. The number will increase this year, said a consultant.
The Rs.855 crore includes clearance given to wholesaler retailer Decathlon Sports India Pvt. Ltd’s investment proposal of Rs.700 crore for single-brand retail trading on 23 March.
“The single-brand retail is gaining a lot of traction and the investments are only set to increase and this is without even considering Ikea’s investment,” said Abheek Singhi, partner and director, Boston Consulting Group, India.
Swedish home and lifestyle retailer Ingka Holding Overseas BV, which operates Ikea, has proposed an investment of Rs.10,500 crore in India under single-brand retail, according to a 27 February press release on the Foreign Investment Promotion Board (FIPB) website. The proposal is under consideration by the Cabinet Committee on Economic Affairs.
Single-brand retailers are being “slow and cautious”, according to Shubhranshu Pani, managing director (retail) at Jones Lang LaSalle, a real estate consultancy firm. He said he was “not seeing much space bookings taking place”.
Still, there’s no denying the lure of the Indian market—at least on paper.
Brands are interested in India since it’s a growth market compared with Western Europe and other mature regions such as Japan, where growth is stagnant, according to Darshan Mehta, chief executive officer, Reliance Brands, a unit of India’s most valuable conglomerate Reliance Industries Ltd (RIL).
Reliance Brands markets 14 labels, including Steve Madden, Diesel and Zegna. According to Mehta, “virtually every meaningful brand wants to come to India and they would explore either coming on their own or through joint ventures or the franchise/licensee route”.
For instance, Fast Retailing Co. Ltd, which runs Uniqlo, is also looking at entering India, Mint reported on 4 December. In Japan, where it has 828 stores, Uniqlo’s first-half (six months to February) income contracted due to falling customer visits, according to a 12 April report by InsideRetail.Asia, a news source for the Asian organized retail industry.
About 54% of Uniqlo’s revenue comes from international markets and the retailer has raised sales forecasts for the year on the back of strong gains seen in China, Hong Kong, Taiwan, South Korea and other parts of Asia.
Zara is one of the foreign retailers that has succeeded beyond all expectations in India. The Spanish brand Zara, owned by the Inditex Group, entered India in partnership with the Tata group’s Trent Ltd.
Its performance encouraged overseas brands to venture into the country, said Pushpa Bector, senior vice president, DLF Ltd, a real estate and retail company. That’s despite constraints such as excessively priced real estate and lack of infrastructure.
“We expect at least 10 new brands and three-four big brands who can take up anchor, mini anchor positions to come in to India in 2013, 2014,” said Bector, who didn’t disclose names citing non-disclosure agreements.
Experts also expect to see a change in partnership models.
“Initially, a lot of brands came through the licensee, franchise route. Now, as they have been here for a few years, they would like to step up the investment and come in on their own,” said Ritesh Chandra, executive director and head (consumer group) at Avendus Capital Pvt. Ltd.
It has become easier for single-brand retail to enter due to the amendment in the single-brand retail policy in September, said Govind Shrikhande, managing director, Shoppers Stop Ltd.
Single-brand retailers with more than 51% FDI previously had to source 30% of the value of goods purchased from small and medium enterprises in India. This was modified to say that such sourcing was preferable but not mandatory.
In September, the government also allowed 51% FDI in multi-brand retail.
However, there aren’t too many takers for this with retailers awaiting more clarity. Also, the norms are more stringent, requiring a minimum $100 million investment in India. Moreover, of the total FDI brought into the country, 50% has to be in the back end (cold chain, logistics, distribution, warehousing or anything not related to the front end, i.e., the store).
Besides this, the Centre left it to the states to decide whether they wanted to allow FDI in their territories. Not all of them are backing the policy besides which multi-brand stores can’t be set up in cities with a population of less than 1 million according to the 2011 Census.
There’s also been a high amount of churn in the organized retail sector.
“For every five new brands that enter the country, there are one or two exits as the retail environment continues to remain tough,” said Shrikhande. Dockers, owned by Levi Strauss and Co., and French lingerie label Etam have exited India in the past.
Gianni Versace S.p.A, which entered India in 2005 through a partnership with Blues Clothing Co., snapped ties and closed three of its Versace stores in the country earlier this year. Versace now has a partnership with Infinite Luxury group that also represents Roberto Cavalli, Cavalli Cafe, Emilio Pucci and Missoni, according to a 10 April InsideRetail.Asia report.
Retailing in India remains a risky business with high rentals, limited real estate space, value conscious consumers and regulatory and tax rules that are difficult to understand and navigate, experts said.
“As many as 25% companies have not got their India operating model and strategy right the first time—these companies have either changed operating model or India partner or both, or have exited the market,” said a Booz and Co. October study.
Nevertheless, India also remains a long-term growth market.
“None of the big retailers have India on their radar for the immediate future. They are looking at the country as a potential market three to five years down the line,” said Mohit Bahl, partner at KPMG India. He added that even Ikea will only open its first store three to four years from now.
As such, said Mehta of Reliance Brands, “Brands who come here have to understand the payoff will happen in the next 10 years.”