Shop until you drop: A US Polo store in Delhi. PHOTO: Shekhar Ghosh
When Jan Heere, International Director of UK-based retail giant Marks & Spencer (M&S), was in India last November, he was asked if M&S had plans to set up a subsidiary in the country. Heere's answer was clear: the company would only use the joint-venture route in India. It has a tie-up with Reliance Retail with a majority 51 per cent stake. "The partnership has worked brilliantly for us. While we have brought international know-how and best-practices on to the table, our Indian partners understand the nuances of doing business in India better than we do," he said.
Marks & Spencer is not alone. Two years after the government allowed 100 per cent foreign direct investment in single-brand retail, there are few takers. Apart from Ikea, H&M, Furla, Tommy Hilfiger and Swarovski who have shown interest in investing on their own, most global single-brand retailers are in India through joint ventures (JVs) and franchises. Spanish retailer Zara has a JV with Tata Group's retail arm, Trent Ltd, US Polo has tied up with Arvind Brands while shoe major Clarks has teamed up with Future Group. Leading US apparel retailer GAP is set to kick off operations in India through a tie-up with Arvind Brands. "Our commercial presence in India is run by a joint venture, where Inditex has a 51 per cent stake, while Trent Ltd controls the remaining 49 per cent. We are delighted to be associating with Trent from the Tata Group," says an Inditex spokesperson.
So, why do foreign retailers prefer JVs to going it alone in India? One reason retailers are reluctant is the tough regulatory environment in the country. To begin with, foreign retailers have to pay multiple taxes to set up shop. To add to this, the diversity of the local market is often too complex for foreign players. "A JV partner who understands the market well helps the foreign retailer distribute his risks," says Anil Talreja, Partner, Deloitte. "A foreign retailer has to be around in this country for at least seven to eight years to understand India. Consumer tastes and preferences differ in each part of the country. To add to this, the challenge is to get the right kind of real estate. A local partner will be able to understand these intricacies better."
Another reason global retailers prefer to team up with a local partner is India's insistence on sourcing 30 per cent of their products locally. They feel local partners understand the market better. J. Suresh, CEO of Arvind Brands - which has joint venture deals with 14 international brands such as Arrow, Tommy Hilfiger, Debenhams and US Polo - says it helps its foreign partners with everything from sourcing to selecting real estate and pricing. "The expertise of a local partner who has a better understanding of the kind of pricing that would work comes in handy," says Pinaki Ranjan Mishra, Head, Retail, Ernst & Young.
PREFER TO TEAM UP WITH LOCAL PARTNERS BECAUSE OF THE TOUGH REGULATORY ENVIRONMENT IN THE COUNTRY
Most global companies are happy with the joint-venture route. David Cummings, President and CEO, USPA Properties Inc, says he is content with their association with Arvind Brands. "Arvind Brands was the ideal match for USPA Properties, as they follow the licensing structure which we have set in place and they understand American classic styling," he says. But some deals have unravelled within a year or two. The most high-profile split was the Bharti-Walmart tie-up. Similarly, Debenhams, which had tied up with Planet Retail, moved to Arvind Brands last year. "Joint ventures can be very difficult unless both the partners have a long-term united vision," says Utsav Seth, CEO and Managing Director of Pavers England India. Pavers is the only foreign retailer to set up shop in India with 100 per cent investment. Other industry experts agree. "Joint ventures with smaller companies with limited understanding of the retail dynamics are bound to fizzle out. International companies are comfortable working with us because of our long history in retailing," says Suresh of Arvind Brands.
US-based watches and accessories company Fossil Inc is set to enter India with its first store in Mumbai in February. The company - which plans to invest `25 crore in the first phase - has been sourcing watch components from India for the last five years. Fossil India Head Vasant Nangia says their five-year stint in the country has sensitised them to Indian conditions. "Our entire management here is 100 per cent Indian and we are hiring local talent who understand Indian retail," he says.
Investing on their own will definitely enable international retailers to have more control on their business in India, but analysts believe it won't be easy. "I expect more action through the joint-venture route," says Talreja of Deloitte.