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Sep, 01 2008

GERMAN BRANDS A HOUSEHOLD NAME

A course of change in the strategies of Indo-German Joint Economic Commission in 1991 brought a steady and significant increase in the volume of trade between the two nations. However, the year 2003 saw Germany acquiring the fifth place among India`s trad

With liberalisation in the government rules and regulations in the 90s, the general scenario of doing business witnessed a sea change. Abhishek Chandra Saroj, Business Head, Kanz India finds it a great investment option to bring an international brand to the Indian shores when he says, “International brands with heritage make good business sense because they bring experience, heritage and international market`s learning with them. With the current consumer base being so widely traveled, international brand awareness is huge which further lends a significant international appeal.” Germany ranks fifth among exporters to India while India ranks 34th among exporters to Germany. Further, Germany ranks 7th in terms of direct investment. According to industry sources, some 2,522 German-Indian joint ventures have been set up since 1991. There were 144 new ones in 2003. However, these projects are concentrated in the fields of chemicals, pharmaceuticals, machine and plant construction, electrical engineering and software. German brands are witnessing constant increase in their retail presence in India with each succeeding year. While Adidas, Reebok are already household names, the craze is no less for new entrants like Volkswagen, Mar Cain, Escada or Lerros.

Inviting market

A burgeoning middle class of the second most populous country of the world, the young masses turning classy and an ever increasing rate in disposable income constitute some of the major reasons why the Indian market is so ripe for the international brands pouring in day by day. Moreover, the increase in foreign visits by Indians, fuelled by the decrease in air fare is paving the way for the growth of their love for foreign brands. A Mercedes or BMW running on Indian roads, every other guy wearing Adidas shoes or a lady clad in Mar Cain range are no longer rare sights rather these things have assumed such a routine stature that it never strikes us that these were once upon a time exclusively German brands. “With India hitting a purple patch of economic growth, personal incomes and corporate profits have risen sharply. Indians lead a global lifestyle and the cars they drive also reflect this aspect. Hence there is an increasing demands for high-end products and of our cars,” says Wilfried Aulbur, MD & CEO, Mercedes-Benz India.

Market analysis

Bringing an international label into a country is no child`s play. A lot of market research is required to be done before bringing any brand to India on the potential of the category and the target consumers for a particular brand. The most important factor to consider is the pricing and expansion strategy. Saroj says, “After extensive focus, group discussions and exploratory research the pricing, launch and expansion strategy was formulated. This research was done in the all major metros on a base of 100 families per metro.”

Mercedes too spent a considerable amount of time in market research before entering India. Consultation with business leaders and industry along with potential customers went into the decision making process. An assessment of several factors like overall growth and expectations of the economy, estimated market size and potential and growth projections, proactive policy and support from government towards industries as well as investment requirements were considered before actually stepping in the country. Aulbur reminiscences, “Mercedes-Benz was aware of India`s potential and pioneered the luxury car market in India.”

“A right mind set, financial standing, infrastructure available with them and market position of the partner are the key points to be considered to bring any international brand into India,” feels Thorsten Allenstein, GM & Country Head, India & Sri Lanka, Triumph International. An overall market research and survey was done by Triumph for two years before entering the Indian market in terms of the acceptance of the brand by the target consumer and the feasibility of entering the market.

It is very important to find out whether the market is ready for your brand or not. Harish Chandra, Country Head, Bin Hendi Fashions, feels, “We entered the market at the right time as most of our customers were already buying Hugo Boss products while traveling abroad. It is essential to ensure that you understand your customers. Your brand and the services in totality are able to add value to their shopping even if it`s the smallest purchase that they make at your store.”

Varied entry routes

Different German brands adopt different entry routes to spread their wings in the Indian market. They may seek a master franchisee, enter into a joint venture with an Indian partner, establish their own subsidiary or form licensing agreements.

A foreign brand has to go through Foreign Direct Investment (FDI) regulations in India for trading in India. FDI in India is allowed in wholesale cash and carry model as follows the German cash & carry major Metro. In the single brand format, it is allowed to 51 per cent whereas in the multi brand retailing the foreign retailers can choose an Indian partner to go for the franchise route.

Hurdles to overcome

Prateek Lifestyle faced no constraints while bringing Kanz to India owing to its past association with international brands such as Levi`s, Benetton and Kanz etc. “The biggest obstacle was the FDI route, since this is only open to 51 per cent, one has to have a local partner in India, apart from this there have been no obstacles which a brand would not face in any other country,” counts Vinayak Mahatani, CEO, Vi-Ga. He further says that for franchising to develop maturely rentals need to come down. It is the only way for the brand to be profitable and the franchisor to be successful.

Allenstein too speaks of the hurdles, “Yes, we did face difficulties while bringing the brand to the Indian market, like red tapism and stringent FDI regulations, no test marketing, no own stores allowed and high import duties.” He further adds that the German Trade Commission provides full support to find the local business partners and establish network and provides all the necessary information.

The ever evolving FDI regulations at times pose an obstruction in the way of brand entry. Also the high-pricing of European brands gets further increased by the taxes and custom duties. Punit Agarwal, CEO, VEMB Lifestyle explains, “We bear the taxes and custom duties ourselves while keeping the prices lowered and hence our customer is not burdened.”

India specific

A large customer base in India compels the various brands to take cautions while introducing specific ranges in the Indian market. “The range offered in India is the same as what is offered in any other country. But care is taken not to order weather specific ranges and a tropical weather range is typically picked. There is no tailoring done as such specifically for the Indian market,” says Saroj.

A proper market study made Vi-Ga launch several sub brands exclusively for the Indian market such as `Maharani`. The price range is kept within the paying capacity of the Indian consumers. Agarwal too feels that although Mar Cain is a women`s luxury brand, it is an affordable luxury for the Indian consumers, with its pricing being between Rs 2,500 to 25,000. German automaker Volkswagen will also launch Polo which is meant for the compact car segment in India. The small car, currently under development in Germany, is expected to be launched from VW`s greenfield facility at Chakan, near Pune, by 2009.

German franchise initiative

In order to facilitate the German franchise systems to spread internationally the German franchise association `Franchise Pool International` was established in 2004. The Pool offers German franchise expertise primarily focussing on conveying and transmitting franchise expertise along with the focus on product and services offered by the systems. Some of the major contributions of the pool comprise:

  • Presents German franchise companies to potential international parties on international markets
  • Acts as a mediator of foreign investor, franchise companies or prospective customers
  • Offers expertise in the form of licences for specific regions and is also open to joint ventures or other forms of cooperation

German brands franchising in India

According to Deutsche Bank research franchising in Germany has nearly tripled its nominal turnover over the last ten years. German franchise concepts with their long standing in their homeland are here to stay in India too. Rolph Gerhard Kirst, Franchise Expert, Franchise Pool International says, “German concepts usually start their business with direct franchise only in neighbour countries in Europe. If they go far abroad only master franchising is the common structure for expansion. The franchisors search for master partners either to establish the system in their country with sub-franchisees or with company owned multi-unit stores.”

Many German brands present in India either adopted franchise route to enter the Indian shores as did Mar Cain and Hugo Boss or took up the franchise route to further expand in India. Adidas, Reebok, Puma and Triumph International formed their own subsidiaries in India while Kanz came through licensing agreement but when it came to expansion they all took up franchising.

Flourishing brands

“Franchising in India is in a turbulent state today. With the advent of Minimum Guarantees where some brands cover the total expenses of the store, franchisees don`t need to work at all towards increasing the sales of the brand,” says Saroj. Owing to the fervour people have for German brands, the brands are rather keen to further expand in India. As franchising reduces the risk factor to a minimum, even the franchisees remain equally interested in grabbing the opportunity.

German sportswear and apparel major Adidas is on an expansion spree with its plan of setting up around 160 new stores and setting foot in 140 cities by 2008-end, thereby taking the count of its franchise stores to 450. Kanz which presently has 12 outlets one of which being franchised, plans to open 25 more stores primarily taking the franchise route by the end of this year. Another premium German brand to have made an impact in India is Hugo Boss. Over the past two years, Boss has opened five franchise stores in India – two in Mumbai, two in Delhi and one in Bangalore. The brand`s menswear collections Boss Black and Boss Orange have tasted huge success in India. Hugo Boss is now eyeing Hyderabad, Chennai, Kolkata and Ahmedabad.

The footwear brand Vi-Ga plans to open 250 outlets by the year end with a major focus on franchisee mode. Triumph International is looking at opening 70 outlets by 2009. VEMB plans to open two franchise outlets for Mar Cain in the near future for which the company may seek individual franchisee too.

Another German luxury brand bullish on India is ESCADA. Targeting to launch and position ESCADA in the Indian market, the brand opened a flagship store in Mumbai in 2007. Soon, another store was opened in the capital city, New Delhi. By 2009, ESCADA plans to open seven stores in India.

Expected entries

The success of the existing brands in India has allured more German brands to eye India through the franchise route. Forever 18, Baby One, Mustang Jeans, Cup&Cino and Reisswolf include a few German brands which are looking for master franchisee to set foot in India. Humana Milchunion, one of Germany`s biggest milk and multivitamin food producers, is expected to set up 200 stores in the next three years in India. Another German based enterprise Oetker is expected to enter India by the end of 2008 with its entire range of products.

Competition

Competition is certainly huge in India for the German brands in each category, not only from the branded but also from the large unbranded segment besides the other international players present in India. With the market being so price conscious it is difficult to exist if the product range in not right.

“So far it`s been good for KANZ and on the basis of quality and pricing it is faring well vis-à-vis other international brands. The current Indian brands have a wide reach and it will take KANZ some time to reach that level. In level playing fields like Shoppers, Lifestyle and Central Malls the brand competes very well with them,” says Saroj.

“We have a strong traction with the market and our customers appreciate the core values of the brand. Hence despite competition coming in over the last few years, our growth has been unprecedented. In 2007 we sold approximately 2500 cars, marking a growth of almost 18 per cent. This year we have already sold almost 2200 cars in Jan – July period which is a growth of 50 per cent over the same period in 2007,” says Aulbur.

Bright future

India is at a high economic growth stage, even now when the world economies are struggling to keep up. India still shows a shining path because of its sheer consumer base. “With further economic growth, India will be ranked in the top five economies of the world with salaries rising and overall well being improved. This is the time for international long term investors to put money in India and that`s why we see the bullish trend,” says Saroj.

Satisfied with the consumer response in India, Allenstein feels that Triumph has always been growing more than the expected targets set by it. As far as the market scenario is concerned, in the coming years he expects a huge shift from non-organized retailing to organized retail sector that is only 4 to 5 per cent of the over all market at present but is expected to become three fold in the next five years and Triumph expects to grow exponentially higher with it.

The changing scenario of the Indian economy, change in per capita income and also the changing trends of consumer buying preferences besides consumer awareness of the quality and international brands has led to the tremendous scope for the international brands eyeing India. The quality conscious consumer and the size of the market are some of the key factors to be bullish on the Indian market. The present German gems are sure to glitter in the Indian market and the advent of more German brands through the franchise route is further going to boost the Indian franchise industry too.

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