Lessons for foreign retailers in India

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Firms looking to come to India should be sure of their business model, partner selection and partner goals

The recent opening up of multi-brand retail for foreign direct investment (FDI) and clarity on sourcing norms in single brand retail has generated significant discussion on its impact among stakeholders. It is expected that FDI will accelerate the growth of organized retail and will bring many more foreign retailers to India. While a positive impact on consumers, farmers and infrastructure is expected, debate rages on the potential adverse impact on small retailers and manufacturers. A key element for foreign retailers coming to India and Indian retailers intending to tie up with them is the partnership model itself. In multi-brand retail, with 51% FDI allowed, partnership with an Indian firm is essential. In single brand, partnership is no longer mandatory as 100% FDI is allowed. However, this requires sourcing 30% merchandise from Indian suppliers. Foreign retailers who cannot meet this can hold 51% equity and would need to partner with an Indian firm. Our analysis of partnership models of more than 160 multinational retailers that have come to India since 1991 shows some interesting results.

Of these retailers, specialists in apparel, food services and footwear make up 74% of the entrants. Of these, multi-brand retailers account for only 4% of the entrants. A strong step-up in retailers coming to India took place in 2005, driven by a strong economy and rapidly growing middle class. Between 2006 and 2010, 106 retailers entered India (an average of 21 per year). However, over the last two years only 16 companies have come in (an average of eight per year) slow growth, poor governance and stop-start efforts on retail FDI have clearly had adverse impact on India’s attractiveness to foreign investments.

Foreign retailers have used six models to come to India—100% owned India operations, India subsidiary, joint ventures, master franchisee, distribution and licensing. At the time of India entry, 71% of the companies chose a low commitment model—franchisee, licensing or distribution. These models typically require lower capital investment and need fewer operational controls. However, they also result in lower returns and require handing over of controls of the brand to the local partner. Over time and enabled by regulatory changes, companies have shown more commitment to India and have moved from the low commitment models to 100% owned operations, India subsidiary or joint ventures.

Data shows that as many as 25% of the retailers did not get their India operating model and partnership right at the first time: these companies either changed the operating model or India partner or both, or exited the market. Key reasons for this state of affairs are: 1) underestimating the potential and complexity of the market, 2) developing an operating and partnership model not fit for the purpose and 3) selecting a partner without fully defining roles and business goals, and building cultural alignment.

A leading European footwear retailer we studied is currently in its second attempt at getting its India business right. The first time it underestimated market potential and chose to come in with a distribution model. The local partner could not understand the brand value proposition and service promise and ended up diluting the foreign retailer’s equity in the market. The retailer withdrew, came back with a refreshed plan and created a joint venture with a new partner. Initial results look promising. Similarly, a well-known foreign department store chain we studied languished in India for the first 6-7 years; stores were small, merchandise over-priced and the collection dated. It followed a franchisee model during this time. About four years ago, it replaced the franchisee with a new joint venture partner. Stores were made larger, refreshed and merchandise priced down by 25-50%. Roles between the foreign chain and the local partner were clearly spelt out. Results have been strong.

Learnings for retailers looking to come to India and Indian firms keen on partnering with them are fairly clear. Among other elements of the India strategy, business model, partner selection and partner goals need to be defined carefully and in detail at the start. Success of these partnerships is key to delivering the promise of FDI in retail to India’s consumers, farmers and the retail industry overall.

Source LiveMint

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