Single brand retail OK, but not large format in India
Brands such as Gucci, Reebok, Armani, Louis Vuitton Nike, and Hugo Boss can now walk into India through joint ventures, and even call the shots. But the large-format global retail chains that offer multiple brands, including Wal-Mart, Tesco, Carrefour and JCPenney, will still have to wait a while for the ability to pump money in directly to tap India, Asia’s third-largest economy, although they can strike franchise deals to win more access.
According to Indrajit Basu, writing for [i]Asia Times Online[/i], India’s Manmohan Singh-led United Progressive Alliance government last week permitted foreign direct investment in retail businesses up to 51% through the Foreign Investment Promotion Board (FIPB). But easing the controversial retail FDI noose just slightly, by allowing only branded foreign retailers to invest in the country, is unlikely to trigger an investment frenzy. However, the move is expected to attract greater interest from global brands eager to make an entry into a market that is fast growing and full of nouveau riche Indians hungry for luxury goods.
But the question remains:how significant is this move? After all, the debate over opening the country’s retail sector to foreign investment has been raging for several years, during which it faced strong protests from domestic retail chains, political parties and even industry lobbies.
India has about 12 million retail outlets, of which only about 3.5 million are in urban areas. This is why it is one of the few sectors where FDI is not allowed. In fact before 1997 there were no regulations restricting the entry of foreign players but suddenly, in that year, a realization dawned upon India that if foreign retailers were allowed in for mere trading, they would trigger an outflow of foreign exchange and drive unorganized retailers out of business, increasing unemployment.
Meanwhile, industry sources say that a queue to enter India is already in formation, with such blockbuster global brands as Gap, Zara, Guess and Ikea formulating their entry strategies. And most important, even as FDI is still closed to general merchandise retailers, enthused by the decision, Wal-Mart has started window-shopping too. According to reports quoting company officials, Wal-Mart has just sought permission to set up an office for market research and business development in India.
There is no denying that India offers a huge retail opportunity. Its spending power is reflected by the fact the country’s 300 million middle-class spenders – about the size of the total population of the United States – spent more than $2.5 billion on luxury products in 2005, a number that could potentially grow by more than 50%. A report prepared by McKinsey and Co and the Confederation of Indian Industry has even predicted that the retail trade holds the potential of becoming a $300-billion-a-year market by 2010, provided the sector is opened significantly.
