India is a market in transition, where organised retail has only recently made inroads. But how can retailers tap this burgeoning market and what are the pitfalls? John Ryan reports from Mumbai
Spend time in Mumbai and, if you’ve got a lot of money to spare, you might find yourself shopping in Bungalow Eight. The store is around the corner from the iconic Taj Hotel, which made headlines worldwide when it was attacked and set on fire by terrorists in 2008, but which today bears few signs of the incident.
Bungalow Eight attracts foreign shoppers seeking to pick up a few designer garments or homewares during their stay in the country’s commercial capital. Tucked away on the first, second and third floors of the Grants Building on Arthur Bunder Road, it would actually be quite easy to miss if you didn’t know about it.
For those who do make it, however, this is a shop that would shame most style-conscious emporia in the West. Representing a new wave of retailing in India, it is the kind of place that makes Mumbai’s reputation as the capital for luxury in India. The prices are eye-watering and besides the many locally-sourced products on offer there is a wide range of goods imported from around the globe.
It is all very impressive; but it is hardly a typical store in a country where organised retail still takes a back seat to market trading and where bargaining is second nature to shoppers.
The size of India’s population (1.15 billion) and the rapid growth of the country’s economy have caught the eye of Western retailers. But many that have tried the market have had their fingers burnt, having underestimated the cultural and logistical challenges of operating here - and the strength of the local operators.
A drive north on the main road out of Mumbai early in the day brings you face to face with the sheer chaos that is Indian retail. It may be the first thing in the morning, but the roads are blocked, not so much by cars, although there are plenty of these, but by shoppers and restaurateurs, all buying flowers from a market that sets up here every day, starting in the small hours. By about 8am it’s pretty well all over.
The same road takes you past large billboards advertising the many retailers that have decided that Mumbai is the best place to ply their trade and a series of shopping malls.
Among these is the Milan Mall. By the standards of Western shopping centres, this is hardly a giant, having two floors and only a handful of shops. But it is fairly typical of the kind of schemes found in many larger Indian cities - a local, organised retail centre, where the newly emerged middle classes will frequently come in family groups to enjoy a little modern shopping action.
In the Milan Mall they will find, for instance, home-grown retail outfits such as Ezone, on the upper floor. Owned by the Mumbai-headquartered Future Group, Ezone is not unlike the sort of format visitors to German electronics retailers such as Saturn or Media Markt might be familiar with. The difference here, and in many stores like it, is that the on-door security is of an altogether more zealous order than you might expect to find in Western Europe, although otherwise it feels remarkably similar.
The promotions, too, have a familiar ring. Messages such as “Beat the heat” tempt shoppers to buy a refrigerator or air conditioning unit; a poster invites customers to “Save with us”, advertising the store’s Liberation Zone, where laptop computers and their accessories are on sale.
This is mainstream, mid-market retailing, of a kind you would expect to see on any high street in the UK. But what is different about this one is that this has all been generated locally, and not imported, as might have been the case a few years ago.
On the Milan Mall’s lower level a familiar face is waiting to greet you in the form of a Reebok store. The brand has made a nod in the direction of localisation with a standee in the window featuring a backpacker and a range of training shoes, over which is the message: “My name is Khan”.
Nevertheless, it looks like standard, branded stuff. It is a measure of how far things have come in India in a short space of time, that, if you took away the reference to Khan, you could be absolutely anywhere.
But this is still a small part of India’s retail panorama and it is worth noting that the ‘Tier One’ cities in the Indian government’s ranking system - Mumbai, Delhi, Calcutta, Chennai, Bangalore and Hyderabad, in effect the cities where the cost of living is highest - may all be very large, but still only account for a relatively small proportion of India’s total population and, therefore, of its retailing activity.
But it is in the Tier One cities that the bulk of India’s organised retailing action is located and where most retailers, foreign or local, opt to concentrate their activities.
Marks & Spencer is typical in this respect. It operates 17 stores across India, but is present in just seven cities, with only one of them, Pune, being a non-Tier One location.
There are exceptions - retailers with a wider distribution - but for the most part they are home-grown. Fashion retailer Pantaloon, for example, which, like Ezone, is part of the Future Group, is present in almost every city in India, owing to its greater understanding of the market and to having set up in business considerably earlier than many foreign retail arrivals.
The question retailers must ask themselves is: Is this a market in which retailers can make money and is it worth the substantial start-up costs? According to this year’s Global Retail Development Index from consultancy AT Kearney, India’s retail sector presently accounts for about 10% of its gross domestic product and employs 8% of the workforce. The report highlights the continuing pace of development in this vast market, noting that 300 new malls, 1,500 supermarkets and 325 department stores are currently under construction. This bears out the view from a spokeswoman at M&S, which has a joint venture with local retail giant Reliance, that the major stumbling block to any kind of store roll-out is the scant availability of suitable property.
To sum up, India is probably rather like many other markets: good if you know it. This is the kind of place in which many are likely to fail and where the percentage of the population outside the big cities with the means to support organised retail is growing, but remains modest in relative terms.
And, just like other markets, having the means to set up shop is unlikely to guarantee success. The distances between many of the economically significant cities are great, as are the cultural divides. So while the requirement under Indian law for foreign businesses operating in the country to have a local joint venture partner might seem irksome, it could prove a blessing in disguise when the pitfalls are considered.
It should also be borne in mind that India is a country where the retail market is polarised, with luxury and middle-market operators at one extreme and street trading at the other.
There have been many comments on the way in which some of the largest retailers in the US, in particular, have been slow off the mark to establish themselves in this market. There are good reasons why this is the case, especially at a time when retailing everywhere is dogged by uncertainty.
Make haste slowly might be the best way to go about setting up shop in India. The country’s economic boom may well be continuing, and India has been less affected by the global recession than many other parts of the world, but knowing what is required is the key to making things work.
Bringing Western Retail to India: a case history
Perhaps the best strategy for tackling the Indian retail opportunity is that being adopted by Alok Industries, the gargantuan textile company that also owns Store Twenty One, the former QS chain in the UK. Mumbai-based Alok is run by its founder and managing director, Dilip Jiwrajka. Jiwrajka is an entrepreneur with a finger in many pies and has a clear sense of the need to spread his risk beyond Alok’s massive textile manufacturing plants in and around Silvassa, a small city about three hours’ drive north of Mumbai.
Jiwrajka is cautious about the prospects for organised retail in the country. He says: “I don’t actually think there are great opportunities for retailers in India. There are better opportunities in manufacturing, but I do need a diversified basket of opportunities and companies.”
Practically, this means that he plans to take the Store Twenty One value fashion format, developed in the UK from the ashes of the QS chain, following its acquisition by Alok in 2007, and open a 1,000-store retail outfit in India over the next five years.
Jiwrajka may feel that opportunity in India is currently limited, but he sees a chance to make money through the tax regime.
He points out that, as there are no import duties on the products that will appear in the first Indian Store Twenty Ones and VAT is only levied at 4%, the cost price can be the same, but the Indian product can be cheaper, without compromising margins.
Store Twenty One is part of a business with annual sales this year of about $1bn (£665.1m), planned to rise to $2.5bn (£1.66bn) by 2014. In total, retail accounts for 20% of this figure. “If I can move it from $200m to $500m (£133m to £332.5m) by 2014 and keep it at 20% of the business, then I’ll be happy,” says Jiwrajka.
Alok actually already has a foothold in India’s organised retail market. Originally conceived as, in effect, factory outlets, Home & Apparel has close to 200 branches and is now known as H&A (pictured). The interesting point about the decision to bring Store Twenty One to the subcontinent is why Alok hasn’t pressed ahead with more H&A stores.
It may be to do with the fact that importing a UK fashion format, albeit a value one, may have more cachet with consumers than a locally grown product. Jiwrajka says that the road to making Store Twenty One a viable possibility for the Indian middle classes has not been straightforward. Having bought the QS group, his work was cut out.
“In the first year after we bought it, I visited the UK 19 times and spent 72 days there,” he says. “The due diligence said we shouldn’t have bought it.”
Yet, almost four years on, and with disastrous losses now converted into break-even in the UK, the format is ready for India. If his calculations are correct, Store Twenty One will be the first non-Indian retail fascia to appear in India and make more money there than in its country of origin.
It shows that, despite Jiwrajka’s misgivings, India is a market full of opportunity - provided you have a clear understanding of what is involved.