BackSourcing norms force brands to evaluate entry
Sourcing norms force brands to evaluate entry
PremiumFlagging issues: Ikea chief executive Mikael Ohlsson. AP
New Delhi: Ikea, the Swedish homeware company, is holding back its plans to enter India, according to a Financial Times report quoting Mikael Ohlsson, the chief executive of the company. According to the report, the clause related to 30% sourcing from India for brands seeking 100% foreign direct investment (FDI) in single-brand retail was an obstacle to Ikea’s investments in the country. Ohlsson told Financial Times the conditions applied to local sourcing were “concerning".
“We doubt if foreign brands are queuing up at our doorstep on the back of the revised norms," said Arvind Singhal, managing director at retail consultancy Technopak Advisors.
Earlier this month, the department of industrial policy and promotion (DIPP) allowed up to 100% in single-brand product retail trading, subject to specified conditions. For proposals involving FDI beyond 51%, a mandatory sourcing of at least 30% of the value of products sold would have to be from Indian “small industries/village and cottage industries, artisans and craftsmen". The circular defined “small industries" as those that have a total investment in plant and machinery that does not exceed $1 million.
The local sourcing condition defeats the purpose of the revised retail policy, said Darshan Mehta, president and chief executive of Reliance Brands, the Mukesh Ambani company that has brought a clutch of international high-street labels to India.
“There is no fine print in the circular. It says clearly that 30% of the value of goods sold must be sourced from India—and not just from anybody, but from its cottage industry," he said. “I cannot speak for other categories, but in my sector, that is, apparel, accessories and footwear, I don’t see how things will work with the new clause. The whole move is self-defeating."
Reliance Brands holds a portfolio of single brands in apparel and footwear such as Diesel, Paul and Shark, Timberland and Roxy among others. Mehta said the company has four joint ventures and four distribution and licence agreements, and the government has left little choice for brands that wish to come into the country on their own.
For a start, global retailers may have to contend with the issue of quality, especially those operating in the premium and luxury categories.
Luxury brands may not opt for 100% FDI in retail as they will not be able to meet the sourcing norms, said Gaurav Marya, president of Franchise India.
“Their volumes are small and they are usually small-format retailers," he said. “However, I don’t see why the big-box retailers cannot source from India."
The 100% ownership norm for single-brand retail does not affect the duty structure and import duties will remain high, he said.
“So it would not make sense to import goods. The companies will have to procure stuff locally," Marya said.
Mehta does not agree. Scalability will be critical for big-box retailers and sourcing from the small industry could be a major drawback as it cannot deliver volumes, Mehta said.
“That’s not all. A brand may have to dump a vendor the moment he scales up (beyond $1 million)," said Singhal of Technopak Advisors. “The clause restricting sourcing to cottage industry is absurd."
Besides this, units that are a part of the cottage industry would still have to meet international norms on social compliance strictly followed by most major global brands.
“They have to be child labour-free and maybe, for example, required to have effluent treatment plants if they make clothes that need washing," Mehta said.
According to Singhal, the government has strangely asked the foreign brands to first source volumes and then set up the front end, rather than allow them to first test the market and measure their sourcing requirements.
Italian fashion label Canali, for instance, has acquired 51% stake in Genesis Luxury promoted by Sanjay Kapoor rather than going it alone in India.
“Canali as a brand does not source any part of its product from anywhere in the world. The product is 100% made in Italy in Canali-owned seven factories located around Milan. Hence, they would not want to change this basic brand character, which is its USP, for any one market," Kapoor said.
He said that Genesis has been in a marketing and distribution arrangement with Canali for India since November 2007. “It is only logical that the brand would want to align further with us in the form of a proposed JV to expand the brand’s presence in India."
Although Canali opted for 51% investment in its joint venture with Genesis, Kapoor feels that allowing 100% FDI in single-brand retail is a positive step for the industry. “This will encourage some marquee brands that have not yet come to the country. These brands have policies of going into a market with sole ownership."
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