India is one of retail’s most attractive developing markets, but it’s also one of the most difficult to enter. Liz Morrell reports on how the doors are beginning to open.
India has long been an attractive target for international expansion thanks to its size and a young, increasingly affluent population.
Retailers have been extolling its merits for some time, but it’s a market where UK retailers have been hampered by everything from regulatory restrictions to cultural challenges.
India closed off foreign direct investment (FDI) into retail operations in the second half of the 1990s, and although it began reopening the sector to FDI in 2006, it has taken until this year for the country to announce changes that may finally make a difference to UK retailers.
In November last year, the Indian cabinet passed a bill to allow, for the first time, the opportunity for single brand retailers to enter the market alone rather than with a partner.
While retailers that sell more than one brand – such as Tesco – cannot own more than 51% of their Indian operations, single brand outfits such as luxury fashion retailer Mulberry –which already has a presence in the country – could now own 100% of its business.
Within weeks, however, the bill was on hold after several political parties opposed the decision. Planet Retail retail analyst Manu Ghai says that politicians are trying to protect traditional retailers in the country.
PricewaterhouseCoopers chief retail adviser Christine Cross agrees, saying: “There is a paranoia in the local market.” Many smaller Indian retailers are worried about being put out of business by their Western counterparts. The Indian government has been nothing if not indecisive on the issue. In January, it reverted to its November decision, meaning single brand retailers are now able to enter the market by themselves. “The recent announcements have led to an expectation that a lot of the luxury brands will announce their entry or accelerate their growth plans for India,” says PricewaterhouseCoopers director of corporate finance mergers and acquisitions Alex Priestley.
Luxury houses that have been reluctant to partner with domestic players in the past now have more options, and brands already in India through joint ventures or partnerships may look to gain more control over their operations.
A number of retailers are already in the Indian market by virtue of working with franchise partners. But the policy change is likely to prompt brands such as Ikea – the largest single brand retailer in the world – to accelerate plans. “As of now, India is a very interesting potential retail market for the Ikea Group,” says an Ikea spokeswoman. “We are currently evaluating the requirements of the FDI decision and hope to be able to present more information shortly about our possibilities to establish retail operations in the country once the conditions are right.”
But other experts believe retailers will still prefer to use partners. “From the retailers we speak and work with, the majority will probably still think about doing it with a partner because it’s not just the regulations – it’s about life on the ground too,” says Julie Carlyle, head of the UK retail team at Ernst & Young.
And that provides its own challenges – good partners are hard to find. “There aren’t that many of them and they are being wooed,” says Ernst & Young head of fraud investigation and dispute services group John Smart.
A decision on multibrand FDI, which would open up the market to yet more retailers, is likely to be another couple of years at least. This is further holding up the expansion plans of retailers such as Tesco which currently operates 15 Star Bazaar hypermarket stores under a franchise agreement with Trent – part of the Tata Group conglomerate – but had talked of about 50 at its launch in 2008.
Walmart, Carrefour and Metro have all also made in-roads into India, setting up wholesale operations, dedicated supply bases and other back-office functions, according to Priestley. But most of this activity so far is in preparation for future growth. “While of some benefit to their global operations, this is likely to be all in readiness for when or if the multibrand retail environment is opened up,” he says.
But FDI restrictions aren’t the only challenges retailers face. Understanding the regulatory framework, including tax laws, is essential and by no means easy.
Many retailers also underestimate the bureaucracy involved, with regional as well as central authority permissions required for simple processes such as opening stores.
There can also be a tendency to simply underestimate the challenges the sheer size of the country brings, which is reflected most acutely in a poor supply chain infrastructure. “The distribution infrastructure is pretty torturous – especially for chilled and frozen food which further north is practically non-existent,” says Cross.
There is also an increased risk of shrinkage according to Smart. “There are always shrinkage risks in the supply chain, but there are slightly more risks around intellectual property protection in India because there are lots of small outlets where your product can be diverted to,” he says.
The scale of the country also brings the challenge of different tastes, which vary widely across India. “Its continental scale, as well as the mix of languages and cultures, makes it as complex as the EU, or even more so,” says Devangshu Dutta, chief executive of Third Eyesight, which has helped a number of UK brands enter the market. “Retailers that have been prepared for this reality have done better in the country than those that have taken a cookie-cutter approach,” he says.
In contrast, those that performed the worst tried to impose their global standards for everything onto the Indian business.
There is a concern that retailers could grow bored of the difficulties of the market and turn their attentions and investment elsewhere – something Ikea has previously hinted at – but Ghai says that would be a foolish move. “It’s a vast, growing market with a high spend. It’s going to take another couple of years to get to where developed countries were in the 1970s or 1980s, but it’s growing quickly and retailers really can’t ignore it,” she says.
Dutta says India’s track record speaks for itself. A few retailers may have exited the market over the past two decades, but they are a tiny fraction of the number that have entered.
“If a retailer approaches India as a market with low-hanging fruits, they will be disappointed. India needs to be approached with a long-term view on sales and investment,” Dutta says.
India’s size alone makes it worth the effort – it may not be an easy market to break into, but for those that manage it, there are some big prizes to be won.
India in numbers (2012)
Inhabitants 1.2 billion
GDP $1.9 trillion
GDP per capita $1,532
GDP real growth 7.5%
Consumer price inflation 8.6%
Consumer spending $1.16 trillion
Consumer spending per capita $952
UK retailers in India
- Marks & Spencer Has 25 stores with its partner Reliance Retail, opening around a store a month
- Mothercare Boasts 74 stores in 17 cities, around half of which are franchise and half with its joint venture partner DLF brands. Has plans for 200 stores by 2015
- Next Has a wholly owned call centre in India and began trading online last year
- Debenhams Has a franchise store in Delhi and has pledged further expansion
- French Connection Has more than 25 stores through its licensee Brand Marketing India. More are planned
- Hamleys Has stores in Mumbai and Chennai
- Accessorize Has nearly 20 stores in India including six in Mumbai
- Austin Reed Is present in 17 Shoppers Stop stores.
- Clarks Has opened its first exclusive store in India in New Delhi last April, having first entered the market in 2005