Potential changes to foreign direct ownership rules in India represent a massive opportunity for apparel firms in terms of retailing in India, and apparel sourcing.

The $250 billion retail market in India, which remains vastly under penetrated by organised retailers, could be set for a huge transformation as the government looks at relaxing mles on direct foreign investment, and as firms such as Reliance Industries make mega-investments in the sector.

Reliance Industries, India's biggest conglomerate, last month revealed plans to invest a massive $5.6 billion in the country's retail sector to open stores in 1,500 towns and cities. The move comes as the Indian government discusses the possibility of allowing majority foreign direct ownership (FDI) for multi-channel retailers - a move eagerly awaited by the likes of WalMart and Carrefour.

At the moment, India's top five retailers together still account for less than 2% of its fragmented, disorganised retail market. 'Organised' retailing is estimated to represent just 3% of the sector in India, compared to 20% of the market in China. It's also estimated that the clothing and textiles sector of this market is worth about 9 - 10% of the total retail value which means somewhere between $22 - 25 billion.

Apparel is recognised as the largest organised part of India's retail sector, compared to other areas such as food and jewelry, for example. Organised apparel retailers already in this market include Westside, Pantaloons, Planet Fashion, Oswal, Lifestyle and Raymond.

Foreign multi-brand retailers such as Marks & Spencer currently operate through the franchise route, but since January 2006, foreign retailers selling single brands such as Nike, Mango and Adidas can own up to 51 % of a store or chain in India. Both WalMart Stores and Germany's Metro have been lobbying the Indian government to open its retail trade to foreign investment. Wal-Mart has applied to the government to open an office in Bangalore, and the company has suppliers in India, having bought $600 million in goods from the country last year. But opposition from communist coalition partners and domestic businesses ha forced the government to move slowly.

With overseas retailers, such as Wal-Mart lining up to enter India should the government relax trade restrictions, Reliance chairman and managing director Mukesh Ambani decided to strike first through a new 100%-owned subsidiary, Reliance Retail Ltd, which will handle its retail venture, and sell a vast range of products from food and clothes to consumer durables through a range of store formats. The proposed Reliance retail venture could even account for 5% of the country's overall retail market with revenues above $20 bil lion (about Rs. 90,000 crore) in 6-7 years, according to a report from consulting firn1 CLSA Asia-Pacific Markets.

Other large Indian retailers are also expanding their operations, in anticipation of an influx of Western competition from companies like Wal-Mart Stores. Tesco pIc and Carrefour. But foreign investment still remains unpopular due to the risk of job losses as 25 million Indians depend on the retail industry for employment.

Recent changes

These potential changes represent a massive opportunity for global apparel retailers, both in terms of retailing in the Indian market, and also with respect to sourcing apparel. India may be behind China in terms of infrastructure, production efficiency, and foreign direct investment, but as sourcing requirements evolve and become more complex, India is likely to become an increasingly attractive alternative to China.

Although bureaucracy and an antiquated infrastructure still hamper the country's progress to becoming the apparel partner of 'choice', recent heavy investment programmes. large-scale vertically integrated apparel plants - from cotton to garment coupled with the ability to take on short production runs makes it a good option for supplying domestic and overseas contracts. The country also has a larger number of English speakers than China, which is a huge plus when liaising back and forth with western buyers and designers.

India retained its position as the world's most attractive market for mass merchant and food retailers seeking overseas growth, according to management consulting firm A.T. Kearney's 2006 Global Retail Development Index (GRDI), an annual study of retail investment attractiveness among 30 emerging markets.

The study also found Asia has overtaken Eastern Europe as the dominant region for global retail expansion, with 40% of the top 20 markets, versus 35% for Eastern Europe. Interestingly, China declined one more place in this year's ranking, falling to fifth. While China remains very attractive, the market is becoming increasingly saturated as international retailers rush to establish a presence and build market share.

"The Indian retail market is gradually but surely opening up, while China's market becomes increasingly saturated," said Fadi Farra, of Kearney's. "Similarly, Asia has dislodged Eastern Europe as the most attractive region. The learning is that timing is the most important source of competitive advantage for global and regional retailers in the globalisation race. "Knowing when to enter emerging retail markets is the key to success."

The FDI conundrum

Despite strong opposition from left-wing politicians, India's government has approved major reforms, which now allow 51% foreign investment in single brand retail operations. This means that a whole list of top western apparel brand names will, for the first time, be allowed to have majority ownership in their Indian retail chains. But legislators say that store chains such as Carrefour, Wal-Mart and Tesco do not qualify as single-brand retailers.

However, India's foreign direct investment policy is now almost under constant review. The issue was even raised at the highest level during a recent visit to the country by US President George W. Bush in April 2006. For example, other Industry sectors such as coal mining, the diamond trade, and the power industry all allow enterprises to be 100% foreign owned.

More recently, the high-profile Investment Commission in India recommended large scale Increases in foreign investment caps for sectors like banking and insurance and for allowing foreign direct investment (FDI) in retail, which have been contentious in the past, as part of a strategy to attract $64 bi II ion FD I by 2009-10. This three-member panel has recently suggested that 49% FDI be permitted initially and there should not be any strings attached in the form of number of outlets or permission to open stores only in certain locations.

But the proposals face further serious hurdles amid opposition to trade liberalisation from politicians who fear further unemployment and perhaps even civil unrest among sections of its 1 billion plus citizens.

At the moment, foreign retailers and apparel brands still tend to enter the Indian market through manufacturing and local sourcing; franchising; test-marketing; wholesale cash-and-carry; distribution and through special permission. Franchising is the most preferred method through which foreign players enter the Indian retail market, even though brands such as Lacoste, Mango, Nike, etc can now own the majority share of single brand enterprises. Similarly, companies such as Hugo Boss have set up distribution offices in India and these offices supply products, which the company imports to local Indian retailers.

However, the implementation of FDI's for the big multi-channel retailers would bring badly needed best practices and other supply chain efficiencies to create a more robust apparel supply-chain network in India.

Perhaps the opportunity for India IS best exemplified by industries where the government has permitted FDI such as business process outsourcing where India has just over a 6% global market share in areas such as call centres and offshore administration.

Sourcing in India

A recent study of the Indian textile and apparel market earlier this year by Bernstein Research found that The Gap sourced an estimated US$850 million of garments through its Indian sourcing office in 2005, although this office also sources from nearby Pakistan, Bangladesh and Sri Lanka. "Other retailers like Wal-Mart, Tesco, JC Penney, H&M and Karstadt Quelle have also increased their sourcing from India by an average of 50 - 100% over the past two years (2004 - 2006)," said the report.

The study notes that some apparel retailers have moved away from using third party buying offices, instead establishing their own. Buying volume for many of these companies are estimated by Bernstein to be in the region of $200 - $400 million per year, "although $1 billion buys or greater are likely over the next several years."

There has been a noted increase in sourcing apparel from India since safeguards were applied on China, although Indian suppliers have also improved their compet�itiveness in general terms and have some raw material advantages over China. Cotton can account for between 25 - 30% of a gar�ment, and it's here that India has an advan�tage over China in being a surplus producer of cotton. This can help to drive prices to around I 0% lower than in China for a comparable quality garment, according to the study undertaken by Bernstein.

Retail challenges

Should FDI be allowed in India for mass merchandisers, there would be retail real estate development projects similar to China. However, apparel retailers will have to cater for consumers with very speci fic regional clothing tastes - sometimes within just a few miles of each other. There is also a penchant for low priced apparel in India. Another challenge will also be to manage currently fragmented supply chains and to identify quality real estate which is only available in large metropolitan areas.

If the Indian government does allow FDI for multi-brand and multi-sector apparel retailers there are likely to be certain restrictions (similar to the current restric�tions on single brand FDI). These may be the extent of local sourcing, regional distri�bution and the number of outlets.

At present existing 'organised' retailers face limited competition in the market, but this group is not well capitalized. The proposed entrance of India's biggest conglomerate (Reliance) into the retail sector means that the current crop of Indian retailers will need to raise further capital to compete effectively with Reliance and in doing so could herald a wave of partnerships with outside apparel retailers.

Source:

www.apparelanalyst.com

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