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Jul, 01 2007

India On Global Players Hit List

AS a potential market, India is the most promising country for international companies to expand their businesses. Many international brands in different sectors have already made India their home and many more are heading here to set up business.

AS a potential market, India is the most promising country for international companies to expand their businesses. Many international brands in different sectors have already made India their home and many more are heading here to set up business. Being the second fastest growing economy in the world with a GDP at 9.4 per cent (2006-2007), it is also the fourth largest economy in purchase power parity. With a young population that has taste for foreign brands, India has a lot to offer.

India's strength lies in IT and other significant areas such as auto components, chemicals, apparels, pharmaceuticals and jewellery which are already being eyed by a horde of international companies to enter India. For example, in the apparel segment, Gap has announced its entry; in the big retail format, Tesco and Ikea have been scouting for partners; in leisure and entertainment, Borders, Barnes, Noble and Virgin are known to be evaluating the ways and means of entering India. Since the list is very dynamic, it is difficult to numerate the companies that are eyeing India.

Lucrative sectors

India holds a lot of potential in almost all the sectors, be it food, apparel, luxury commodity or real estate. With its huge market and growing demands, India is an extremely attractive proposition for the growth of global brands.

Indians spend over 50 per cent of their earnings on food and grocery and it is in these categories that foreign players are highly active. This is closely followed by the apparel category where more and more international brands are available with each passing day. Lifestyle categories are also witnessing an increase in participation of foreign players.

Business entry formats

However, the routes to the Indian market place are not so smooth, there is a lot of red-tapism, restrictions and legal obstacles that hamper foreign brands entry. In spite of these hitches, international companies are opting for various formats to enter the Indian market. These are, brand licensing, joint venture, master franchisee and direct ownership. Each is discussed in details with certain supporting examples.

Brand Licensing

The concept of brand licensing is well-established, both in the area of patents and trademarks. Trademark or brand licensing initially originated with the rise of mass entertainment such as the movies, comics and television. A very good example in this context would be that of Mickey Mouse's popularity in the 1930s and 1940s that resulted in an upsurge of toys, books and consumer products with Mickey Mouse's resemblance on them, none of them were manufactured by the Walt Disney company.

Stating that brand licensing is a very nascent phenomenon in India, Gurpreet Randhawa, Senior Consultant, KSA Technopak, says, "Worldwide, Walt Disney has been the pioneer of this concept and in India too, Disney consumer products are at the forefront of this channel. Other players include Star Network, Mattel Toys etc."

Brand licensing gained more impetus as different companies realised that consumers would actually pay money for products with the logos of their favourite brands on them. For instance, mobile phone services under the brand name Orange was launched in Mumbai in 2000. The brand name is being used under licence by Hutchison Essar, while Orange India is not part of the Orange group of companies.

There are no clear legal proceedings in India as far as brand licensing is concerned. Brand licensing typically is an agreement between the licensee and the licensor wherein the licensor exercises his right to check quality at every stage and ensures that the licensee does not misuse the property. The licensing of the brand to manufacturers, distributors or retailers is one option for international companies to spread their presence in India.

Joint ventures

A joint venture (JV) is created when an MoU (Memorandum of Understanding) is signed by the franchisor and a local partner. This may be followed by a master franchise agreement with the franchisor which leads to the opening of franchise outlets. This kind of a deal has to be considered under the specific legislation on joint ventures along with all other legal formalities that are associated with it.

Since 100 per cent FDI is not allowed in the front-end retail in India, joint venture is eyed as a favourable option for the global brands that are planning to enter India. A JV is the only option wherein the Indian partner is required to manage the front end of the retail business. Randhawa states, "Since 100 per cent FDI is allowed in case of single brand retail and wholesale, we will see Wal-Mart opening wholesale stores where they have control over the management and operations."

Diesel Planet: The company has signed a JV agreement for the creation of a new company Diesel India Fashion Arvind Pvt. Ltd, representing the official arrival of Diesel brand in the Indian market. Diesel, being an established brand and an alternate to luxury fashion, is positioned to appeal fashion-conscious Indian consumers.

With offices set up in Bangalore, the company will start operations by opening two flagship stores, one in New Delhi and another in Mumbai before the end of the year. Diesel plans to open 15 stores within the next three years.

Raymond: The company has also signed a 50:50 JV with Grotto S.p.A to introduce Gas, the premium international youth fashion and lifestyle brand into India. The investment planned by both the companies is a total net equity of Rs 500 million. Gas has already launched two flagship stores in Delhi and Mumbai.

Speaking about the business strategy, Aniruddha Deshmukh, President, FMCG and Retail, Raymond, says, "Our distribution strategy includes having flagship stores, exclusive franchisee brand outlets along with significant presence in premium large format stores such as Shopper's Stop in Mumbai, Bangalore, Kolkata and Hyderabad and premium multi-brand outlets across the country with a target to reach a total of 600 points of sale by the end of 2010."

On plan for franchising, Deshmukh opines, "We will be present in metros and tier 1 cities such as Jaipur, Indore and Pune through different retail formats including exclusive brand franchisee outlets. Our objective will be to look for the franchisee in these markets who can carry forward our brand philosophy."

Master franchise

Widely implemented in the international scenario, the franchisor, in the master franchise agreement, gives authority to a person (sub-franchisor) in another country, within a certain territory, to open franchise outlets himself and/or give franchises to sub-franchisees. The master franchise agreement involves two types of agreements: an international agreement between the franchisor and the sub-franchisor; a national franchise agreement between the sub-franchisor and each of the sub-franchisees. The franchisor grants all rights and duties to the sub-franchisor, who will be in charge of the general development and working of the network in that country.

The brighter asset of this system is that the sub-franchisor is aware of the local habits, tastes, culture and laws of his country. However, the financial returns of the franchisor is reduced by the amount due to the sub-franchisor and also that the franchisor is dependant on the sub-franchisor for the performance of the franchise system.

Home Retail Group: The company is entering India through a master franchise agreement with a company jointly owned by Shopper's Stop and Hypercity. According to the company sources, the initial development will involve opening several 'Hypercity-Argos' outlets in Mumbai region and could involve several stores over a two year period. These will be a mix of small and large stores.

Speaking about their Indian business model, a company spokesman said, "We are working with Shopper's Stop and Hypercity. We will be working in line with most standard franchise arrangements and will provide our brand and know-how in return for a sales-related fee."

Debenhams International:

The company is entering the market through a franchise agreement signed with Planet Retail. Speaking about the business model adopted for India, Sarah Jackson, Business Development Controller, Debenhams International, says, "We have signed one franchisee for the whole country. This is quite important, as with most retail, real returns are achievable only when you have more than one store against which to offset your central overheads. Because of the size of Debenhams stores, a sensible number of stores can most easily be achieved by a nation-wide approach."

The first Debenhams store is being constructed at Ambi Mall in Gurgaon and the second store at DLF Courtyard Mall, Saket, Delhi. On the scope and opportunity in India, Jackson says, "We believe that the department stores in India are still relatively under-developed and we, therefore, have a fresh, new format with which to excite the customers." The company has stores that vary in size from 14,000 sq.ft to 2 lakh sq.ft.

Direct ownership

Previous foreign direct investment rules prohibited direct ownership by foreign retailers, forcing them to enter India via franchises.

Foreign Direct Investment (FDI)

Though India has always attracted global investors, its rigid FDI policies have caused hindrance in expansion of foreign brands into the country. However, as a result of a series of economic focus on stimulating foreign investment, India has evolved as one of the progressive economies of the Asia-Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population is 30 crore, which exceeds the population of both the US and the EU, and represents a powerful consumer market.

India's recently liberalised FDI policy allows for up to a 100 per cent FDI share in some categories. The industrial policy reforms have reduced industrial licensing requirements. Also, removal of restrictions on expansion has stimulated easy access to foreign technology and FDI. The rising growth curve of the real-estate sector is a result of the booming economy and liberalised FDI procedure. As a result, global retail giants like Carrefour, Tesco and Casino are actively seeking local partners. While Tesco is planning to enter the market through Home Care Retail Mart and expects to open 50 stores by 2010, companies like Marks & Spencer and the Benetton Group, which are currently operating through franchising, are likely to switch over to a hybrid model. Taking advantage of the changing demographics and growing interest in branded products, Levi's has laid out plans to build 300 stores in India by 2008.

Best suited route

"The best suited route, currently," suggested Randhawa, "is to enter the market as a JV partner or by appointing a master franchise. This not only reduces the investments required but also gives an opportunity to foreign players to learn about the environment and gear up for the future. The agreement today should also place a clause wherein the foreign partner is allowed to buy out the partner as and when FDI is allowed in retail."

Although foreign players pose a threat to traditional retail players, such an entry would turn into a boon for Indian consumers. Foreign players bring with them high standards of quality, processes and learning from their experiences. For the consumer it will be a win-win situation because with more and more foreign players setting up base in India, their Indian competitors will have to gear up sufficiently to counter this, thereby benefiting the consumer.

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