Foreign brands stick to franchise model in India

Of the 28 foreign brands that entered India after implementation of 100% FDI in single-brand retail, 23 came in through a franchise

Sapna Agarwal
Updated15 Sep 2016
H&amp;M is an exception among the foreign brands as it entered India through the FDI route. It aims to open 12 stores in India by the end of the year. Photo: Pradeep Gaur/Mint<br />
H&M is an exception among the foreign brands as it entered India through the FDI route. It aims to open 12 stores in India by the end of the year. Photo: Pradeep Gaur/Mint

Mumbai: Foreign luxury, apparel, and accessories companies that can own their own retail chains in India—the government allowed foreign investment in so-called single-brand retail in 2012—still continue to operate through local franchises and distributors.

Of the 28 apparel and accessories brands which have entered India since the country allowed 100% foreign direct investment (FDI) in single-brand retail, 23 came in through a franchise or distribution partnership, according to data from Third Eyesight, a retail consulting firm.

Under a franchise or distribution agreement, a global retailer partners with a local company. The latter pays a fee to the brandowner, and invests in marketing and launching the brand in India. In the last year, Gap Inc, Aeropostale Inc, Desigual, Rider and Ipanema have entered India through franchise agreements.

“Most companies do not see India as a strategic market, and tend to take lower-risk export-oriented approach through franchise or distribution relationships,” said Devangshu Dutta, chief executive officer, Third Eyesight.

Foreign investment into the business, regardless of the quantum, is an indicator that a company is making a serious long-term commitment to the country, since it brings along with it investment of management time and effort as well.

One exception is H&M Hennes and Mauritz AB. The Swedish fast fashion retailer, which has come in through the FDI route, will have 12 stores in India by the end of the year.

“The government’s decision to allow single-brand retailers to open stores by themselves came at right time,” Janne Einola, country manager, H&M India, said in an interview in August while explaining that the timing matched the company’s internal research which showed that India was emerging as a good retail market to set up shop.

India is the second-most attractive market for global retailers to expand after China, according to the 2016 Global Retail Development Index by consulting firm AT Kearney. According to the firm, India has, in the past couple of years, improved the ease of doing business. Clarity on foreign direct investment (FDI) regulations too have helped.

To be sure, the challenges remain. India continues to be a complex market for foreign retailers, where understanding dynamics at the local level is important as the country’s 29 states have the power to opt in or out of FDI reforms. Infrastructure bottlenecks, including archaic labour laws, complex regulations, high attrition rates and limited high quality retail space, remain important areas of concern for retailers, said the AT Kearney report, adding that still, the potential is vast as the country presents a $1 trillion retail market.

Meanwhile, even the firms entering the country through franchise and distribution partnerships have become a lot more sensitive to the challenges of doing business in India.

Many are working with their local partners to ensure that the products are right for the market, and also available at the right price. Products sold through franchisees may turn out to be costlier due to multiple margins (the brand owners, and the distributor’s)

“We are collaborating with our partners at every level— from store fit-outs to (product) assortment for India. Also, they sell to us at manufacturing cost which then allows us to price the goods at a globally competitive price in India,” said J. Suresh, MD and CEO, Arvind Brands Ltd, the franchise partner of Gap and Aeropostale in India.

In March last year, Arvind exited a franchise agreement with UK retailer Debenhams citing the chain’s steep pricing.

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