Single-brand retailers keen to mingle with the great Indian middle class

FIBP clears investment proposals adding up to Rs 12,000 crore over last one year, as global players look to tap great Indian middle class

India's retail sector needs no bigger testimony than the one it got from Marc Bolland, CEO of the UK’s largest clothing retailer Marks & Spencer (M&S). On a recent trip to India, Bolland said the company plans to make India its biggest international market, outside its home market. In fact, India tops its list of priority markets, even ahead of China. The British retail chain, which has a joint venture with Mukesh Ambani’s Reliance Industries, plans to double its stores in the country and open some of the world's first sections such as M&S Lingerie and Beauty Department, in its stores in India.

M&S is not alone in its optimism over India. The government has cleared single-brand retail proposals worth more than Rs 12,000 crore (nearly $2 billion) in the past year. The biggest among them is Swedish furniture retailer IKEA’s Rs 10,500-crore proposal. Others include Swedish apparel retail maker H&M and French company Decathlon (Rs 700 crore each). Since 2006, the government has cleared 60-70 proposals of single-brand retail after the segment was opened to foreign investors.

International brands such as Zara, Marks & Spencer, Benetton and Tommy Hilfiger reportedly grew at 20-50 per cent on a year-on-year basis in the last financial year, despite the slowdown in the economy. Clearly, shoppers are not cutting down spends on foreign brands.

This is perhaps why global retailers have forged ahead with their India plans, despite the alleged red-tapism in India. Ikea is so bullish on India that it has pursued its India plans for the past couple of years, despite Indian government’s pointed objections on its applications at various points. The furniture giant is expected to take three years before it opens its first store in the country. H&M, which has 3,000 stores globally, pursued its Rs 700-crore application to open stores religiously, despite the government raising queries on mandatory local sourcing norms and brand use here. H&M is yet to hear from the Foreign Investment Promotion Board.

According to consultants, global retailers are betting on the huge potential of Indian markets. According to AT Kearney’s Global Retail Development Index 2012, India is the fifth-most favourable destination for international retailers. Of the total Indian retail market, eight per cent constitutes the organised retail and this segment is estimated to grow at about 30 per cent by 2015, compared to the overall retail market which is forecast to grow by 16 per cent in the same period.

“There are very few countries in the world that offer market potential the way India does. Some international brands may say conditions are not right and require huge investments; there are equal number of players who say they are not worried about these things,” said Devangshu Dutta, chief executive of retail consultant Third Eyesight, which works with global retailers.

However, foreign direct investment (FDI) in multi brand retail is still stuck as none of the big retailers — Walmart, Tesco, Carrefour — has sought permission to open stores in India despite the government allowing 51 per cent FDI in multi-brand retail.

Although retailers such as the world’s largest retailer Walmart, UK’s Tesco and French retailer Carrefour lobbied hard with the Centre to open up the multi-brand retail sector, none of them seems to be comfortable with the stringent criteria to enter the retailing business here. A retail consultant said on condition of anonymity that these retailers entered the cash-and-carry segment to enter front-end retailing once India allows it; however, they haven’t done so.

While allowing 51 per cent FDI in multi-brand retailing, the government put up several conditions, including 30 per cent mandatory sourcing from small and medium enterprises. The Centre also played it safe by leaving the permission to allow the international retailers to the respective states.

Despite the slight tweaking by the government in August this year, global retailers have not shown any interest. The government said foreign retailers are allowed to open stores in cities with a population of less than one million. Foreign retailers can now source goods from small and medium firms, where the investment cap will be $2 million instead of the earlier ceiling of $1 million.

Says a senior executive from a global retail chain: “Three reasons have made us stay away from India — policy restrictions, political environment and the upcoming festival season globally.”

Many such as Rajat Wahi, partner at consulting firm KPMG, believe the uncertainty around multi-brand retail will continue till the next year (elections) owing to the challenges the segment faces on scale, supply chain, exorbitant real estate costs, state-wise permits required as well as the rule that 50 per cent of FDI be brought in the first tranche. On the other hand, single-brand retail faces no such issues and companies will continue to invest in India.