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Oct, 22 2009

Time right for foreign brands entry

The shadow of the Global Economic Crisis over India has almost reduced as market conditions have improved now. The influence of this has led to new innovative retail concepts and savvy local investors looking at partnering with foreign retailers and F&B f

The Global Economic Crisis (GEC) has left its mark on the Indian economy with Indian business and consumers experiencing its ripple effects. While India certainly was not immune to the effects of the GEC, it has not felt the impact as harshly as other large economies around the world. This is good news for foreign brands who wish to expand their global footprint by establishing a presence in India and likewise for their potential Indian master franchise partners who have remained mostly resilient and relatively unscathed by the global meltdown.

After the uncertainty in the last few quarters, Indian companies and high-net-worth individuals are now inspiring, willing and eager to undertake major investments to acquire the Indian rights for globally successful franchise concepts and realise the future success potential of being the Indian ‘brand owner’ for concepts loved around the world.

Seeing the big picture of the glowing future of the organised Indian retail sector, foreign companies are aggressively courting potential local investors to look for an ideal partner to capture early market shares with the long-term vision of realising true growth and potential in the coming years.

Best BRIC countries

Hardly touched by the GEC and also as a result of sharp drop in sales in the European and American markets following economic slowdown, many foreign players are preparing to make their presence felt in the Indian market. Many market commentators consider India to be the most secure of the BRIC (Brazil, Russia, India & China) countries presently, with a number of theories. Such as

  • India’s government is more stable and the second fastest growing economy.
  • The sound fundamentals of India’s financial system, which protect market integrity, have meant that most of the Indian banks had negligible exposure to sub-prime lending.
  • The nationalised banks and other controls on domestic finance protected India from the worst of the crisis. Additional factors which have contributed to its resilience are sustained investments and high savings rates.
  • A large percentage of Indian citizens are bilingual (if not trilingual) and speak English, which is another advantage over other BRIC countries.
  • Other factors boosting India's economy include credit growth, salary hike for skilled workers and record industrial capital utilisation rates.
  • India’s recent ranking as the most attractive market globally for retail investment, (according to the Global Retail Development Index (GRDI) by AT Kearney), reinforces a plethora of global brands eagerly eyeing India as the essential market having a potential to grow.

Foreign companies often cite the above factors as reasons why they have placed India on a pedestal above other developing markets.

Innovation in modern formats:

Despite the slowdown, significant pressure and turmoil, the retail sector in the past few months has experienced cash crunch, reluctant investors and high rental costs. But with the revival of the economy the sentiments appear to improve and new innovative business models are emerging.

Revenue sharing arrangements between retailers, mall owners and developers are expected to be the new model of organised retail in the future. Malls are transforming into multi-faceted ‘leisure centres’ that cater to every member of the extended Indian family. It is not uncommon now for one mall to feature cinema halls, restaurants, beauty parlours, hair salons, bowling alleys, nightclubs and other entertainment avenues. This highlights a gap of opportunity in the market which foreign brands are anxious to fill.

Another notable emerging format is the specialty malls in India. These theme-based malls have varying positioning structures that can be adopted depending on the development potential, catchment demographics and product penetration. This can be witnessed across India with the spurt in development of luxury specific and also discount specific malls.

Consumer’s changing behaviour

Changes in consumer preference have resulted in increasing demand and desire for foreign retail brands. This is because:

  • Increasing preference for branded apparel due to a rise in the disposable income of the middle class and the increasing influence of foreign culture.
  • Emerging of children as an independent buyer group as 30 per cent of India’s population is under the age of 14.  This group is increasingly influenced by mass media and peers besides being more informed and self-conscious. Thus, foreign brands are targeting this lucrative emerging segment.

Challenges still exist

Whilst India is on the radar of most global retailers and F&B brands, hesitation and doubts still exist. Representatives of international companies often cite the below reasons as the prime factors for the success of their brands in India:

  • Lack of infrastructure
  • Bureaucratic systems and government red tape
  • FDI restrictions
  • Cost of real estate
  • Mall location, zoning and tenancy mix
  • Lack of sophistication, distribution channels and logistics
  • IP protection
  • High import duties
  • Un-organised retail sector remains dominant

Advice for Indian master franchise Investors

Having a franchise partner is synonymous to marriage, as with a courtship period to ascertain potential synergies and fit, and then with the signing of the master franchise agreement signifying a full-time partnership. Similar to marriage, in the franchising business also you want to be sure that your belief in the vision, mission and values of the foreign brand to which you will be tied to potentially, for decades to come.

And for the Indian investors, the master franchise partners, this is a good news, as the options are many and foreign companies are gradually becoming more educated as to what they will need to adapt and change in their business plans in order to achieve success in India and become one of the countrys’ super brands. Be it pricing, customer service, operations, menu offerings, clothing designs, fabrics and colours, customer experience, sales promotions, sourcing or training, every aspect of the foreign business needs to be scrutinized for its suitability for the Indian consumer and retail environment.

As the major economies of North America, Europe and Asia have witnessed unprecedented decline in retail sales, plummeting consumption rates, price wars, reductions and business closures - brands from these markets are increasingly looking at India to expand- which continues on its stable and rapid growth trajectory - as the key to future growth potential.

With the assistance of expert professionals who possess the dual skill of intimate local market knowledge and understanding of the global retail scene, Indian investors (individuals and corporates) can transfer successful foreign retail models into modern day Indian success stories.

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