It has been almost two decades since the government in India re-opened the economy to international investors and brands. During the first dozen years or so, apart from a single visible bump in 1995, every year had a steady dribble of fashion brands coming into the country. It was not until 2005 that this rate accelerated to over 20 international fashion brands entering the Indian market annually, even as the existing brands grew their own retail footprint in the market.

2008 and 2009 were both slightly damp by comparison, reflecting the global economic sentiment, but we were optimistic as we laid out our expectations for 2010. While writing the previous version of our research report released a year ago, we felt that 2010 was going to be promising and it could well be a “curtain-raiser for a new decade of growth for international fashion brands in India”.

The increased bustle in the market has endorsed our forecast. Though initially slow, the growth of new international brands entering the Indian market in 2010 bounced back with the same vigour as before the downturn. Some brands that had exited the Indian market earlier also made a comeback as in the earlier years.

The Entry Strategies In 2010

The most preferred entry route for the international fashion brands entering India in 2010 has been franchise or distribution, with more than half the brands selecting this strategy that allows high control over the product and the supply chain with less intensity of involvement at the front-end. There are two discernible categories of brands that are picking this route: firstly, brands that are usually distributed through department stores and multi-brand independent stores in their home market and other markets, but also those brands that are as yet unsure of their capability to engage intensively with the Indian market. Franchising remained a popular choice in 2010 particularly for the brands looking to test the market or operating in niche or luxury segments.

Some brands taking this route for entering the Indian market include Forever 21, Etro, Tom Ford, and Ladybird, amongst others. However, a number of brands that entered in 2010 (nearly 40% for the new entrants) also showed that they wanted a piece of the action through some degree of ownership (whether through a majority or minority stake in a joint venture or through a wholly owned subsidiary). Some – such as S. Oliver – also switched to joint-ventures from their earlier franchise structure.

Under the current regulations governing foreign investment into retail, several companies that typically want control operate either through 100% subsidiaries that sell to independent retail franchisees , or through 51:49 joint-ventures that operate the stores as well.

We are finding increasing signs among companies of a confidence in the market, a growing comfort with the operating environment, and a desire to own and control the direction their brand takes in a strategic market like India. it is likely that if the government decides to allow 100% FDI in single brand retail, several brands will opt to set up wholly-owned subsidiaries that control the entire chain of activities, source-to-store.

International brands opting for the ownership in the Indian venture included OVS (Italy’s Gruppo Coin), Yishion (China) and Chicco (Italy).

 

Fast Fashion for the Family

Amongst the new launches, a highlight of the year was the launch of the most awaited and discussed-about brand Zara. The first store was launched in Delhi with menswear, womenswear and childrenswear, followed by a store in Mumbai, and a third again in Delhi. While almost every other brand launches with an advertising blitz, Zara – in its usual fashion – needed none. The news buzz it generated created enough traffic to provide record sales during the first few weekends. It was also instrumental in generating 30-40% more footfall in the malls where it opened.

Inditex was certainly one of the brands looking for control, and has formed a 51:49 joint venture with the Tata Group’s retail business, Trent. For now the company has adopted its global supply chain for the Indian market as well which clearly adds cost and time to the supply chain. The merchandise is imported from the central distribution centre in Spain, and includes products manufactured in the Indian subcontinent. Competing brands in the industry have raised questions about Zara being able to build a successful and sustainable business in India just on the back of rapid fashion changes, at prices that are not quite “competitive”. However, the brand is reportedly aware of the struggle in building a successful business around import-led sourcing model and is seen to have planned growth conservatively.

Another southern European value fashion brand, OVS Industry, was launched last year by Oviesse through a joint-venture with Brandhouse Retail from the SKNL group. OVS Industry also offers a range for men, women and kids. While in the first year products have been imported from Italy, the company says it intends to bring in the merchandise directly from the supply source for speed and cost effectiveness, to achieve aggressive growth over the next five years.

Multi-Brand Platforms, Larger Stores

International brands have been drawn to India by its large “willing and able to spend” consumer base and the rapidly growing economy, but so also are Indian companies – manufacturers or retailers – who are ready to act as platforms for their launch.

Given the current restrictions on investment into retail operations, Indian companies are increasingly setting up large multi-brand outlets for an array of international brands under one roof. This allows the Indian franchisee to share overheads among many brands, and also negotiate harder for shopping centre space that is increasingly unaffordable. However, the idea is not only to gain from the operational efficiencies and cost efficiencies, but also to capture a higher share of the wallet of the consumers walking into the stores.

Even those Indian companies that are already retailing their own brands in a particular category are seeking franchise or distribution relationships with international brands, in order to capture a complementary segment of consumers or to offer a larger choice-set to their existing consumers.

For instance, Reliance Brands has partnered with some well known premium to luxury fashion and lifestyle brands. In 2010 alone, it brought Diesel, Paul & Shark and Timberland to the Indian market. On the other hand Maxwell Industries’ relationship with Eminence, a French innerwear brand, has allowed it to address the premium segment in which it was not present, and to compete with other international players such as Jockey, Triumph, Hanes, Fruit of the Loom and others.

RPG Group’s Spencer’s Retail, one of the pioneers of modern retail in the last two decades is looking at increasing the share of its apparel business. Apart from its private labels, Spencer’s is also actively seeking to grow its international brand portfolio quickly. Following up on its launch of Beverly Hills Polo Club in 2008, Spencer’s introduced Ecko Unltd (a youth fashion brand) in 2010. It has also become the platform for the British childrenswear brand Ladybird in its second coming to India.

While the emergence of large multi-brand franchise outlets is driven by Indian franchisees looking to optimise their businesses, the brands themselves are also looking at larger store sizes that are gradually becoming comparable to their stores elsewhere. For instance, the American brand Forever 21 launched with 10,000 square feet for only women’s western clothing and accessories. Similarly, Zara launched its business with a 14,000 square feet store. Larger stores are allowing brands to increase the efficiency of their operations, maximise the visual impact, and increase the speed at which they can achieve critical mass in the country.

Beyond Europe and the US

While European and American brands clearly dominate, 2010 also saw brands from China, Japan and Turkey making inroads to the Indian market.

China’s apparel retailer Yishion launched a 51:49 joint venture with a distribution company, Upmarket Group. Yishion is aiming at rapid growth in the mid price segment in India through own stores and multi-brand outlets (MBOs).

Turkish brands Tween, ADV and Damat from the Orka Group have been brought to the market by Blues Clothing Company, a mid-sized retailer of fashion apparel that also distributes brands such as Versace, Corneliani and Cadini.

The Strategy Shifts & Changing Structures

In the past the international brands have undergone changes in their strategy and operating structures to suit their current context and changing environment. Last year was not an exception to the correction and some brands did undergo a change in their approach and strategy for the Indian market.

Italian denim brand Energie exited the market and their partnership with Reliance Brands in 2007. However, in 2010, the Miss Sixty group entered into a licensing agreement with Arvind Limited which relaunched Energie as part of its portfolio of international denim brands. Arvind already had international brands catering to the mass and the middle segments of the denim market, and with the launch of Energie, it has achieved brand presence in the super-premium category as well.

Another notable denim brand that re-entered the market in 2010 was GAS, also from Italy. After it fell out with Raymond, the brand investigated other relationships, and finally decided to set up a fully-owned subsidiary. The brand was re-launched with one flagship store and through various shop-in-shop counters at Shoppers Stop, the department store chain.

The second attempt of the Germany-based casualwear apparel brand Lerros owned by the House of Pearl was ill-timed in 2008. With business coming up below expectations, the company decided exit the business in India. But instead of exiting the market, it granted the license to manufacture, retail and distribute Lerros to the maker of the Indian denim brand Numero Uno. With a complementary product mix, the principal and the licensee are looking to achieve greater success together.

Another brand that has undergone a shift in its strategy and the operating structure is the Italian brand Zegna, a world leader in luxury menswear. It was first introduced in the Indian market early on in the decade through a franchise arrangement. In 2005 with 51% FDI being allowed the Zegna Group invested in taking a majority stake in its Indian operations. Last year the brand entered into a joint venture with Reliance Brands Limited with the objective of ramping up its India operations and capturing a larger share in the Indian luxury market. For Reliance, it was a great addition to its international brand portfolio.

Compared to 2009, 2010 witnessed hardly any exits, Aigner being one.

Strategies for Growth and Prospects For 2011

Overall the year 2010 has been very positive and the pace of new brands entering the market is picking up. Those already present in the market, have been adapting their strategies to grow their India business. The growth strategy for international brands has revolved around lowering the prices and entering new segments.

The brands that have rationalised their pricing last year to attract more customers include Adams Kidswear. Previously priced significantly higher than the market leaders in that segment, Adams is looking to change its sourcing strategy and source a part of its product range locally. Similarly, having tasted success in the previous year, The Body Shop not only rationalised prices for more products in 2010, but also introduced new products at lower price points.

Another notable trend last year was the focus of international brands on Tier 2 and 3 cities. Marks & Spencer unveiled its plans to enter Tier 2 cities such as Jaipur and Chandigarh and grow its national footprint. Reebok, Adidas, Ed Hardy, Tommy Hilfiger, The Bodyshop and Puma are amongst those that have stated their intent to further expand to such cities. The success of adopting these strategies is bearing results already and the momentum is likely to build further as others follow.

For international brands, as for Indian brands, significant challenges remain in the path of growing their business.

At the base level is drumming up adequate demand. While India is often compared with China because of similar size of population, the fact is that urban discretionary incomes and the concentration of spend are far higher in China. This reflects in the speed with which brands have been able to ramp up in the two countries. For instance, Mango entered the two markets around the same time. However, a the end of 2010, the network of stores in India was only a tenth the size of the store network in China (100-plus), with over 200 more stores projected to open in 2011.

In scaling up, the lack of affordable good retail locations is one of the other biggest hurdles. With the slow growth in 2008 and 2009, brands are significantly more cautious in signing up space at high rentals.

Future challenges also remain more at the internal operational level. Retaining adequately trained front-line staff is an issue. Not only does the increasing number of international brands increase the competition for the employee pool, so also does growth in other segments of the economy and it is tough to sell retail as an employment option of first-choice.

We expect prices to become more realistic, but also operational efficiency to be a driver. Clustering of stores for efficient management, a concerted drive towards lower cost locations and variable (revenue-linked) payments to landlords are likely to be critical in driving better performance. We also expect many brands to seriously consider scaling up the network to provide critical mass to their business, which can also drive local sourcing of merchandise or direct shipments to the Indian business from Indian and other Asian sources.

If the Indian Government announces further relaxation in the foreign ownership norms, we would expect more brands to take equity stakes in the business in India, including the entry of those that wish to operate fully-owned subsidiaries. However, with many different signals from various arms of the government it is best not to try and read the crystal ball too closely on that issue.

Despite challenges and barriers, the market is far from being saturated right now as newer product segments and product lines create ever-newer needs. With India being one of the few large economies showing consistently strong performance, many more are considering the Indian market seriously. Among the ones reported to be interested in launching are GAP, Uniqlo and Polo by Ralph Lauren.

The market may become more segmented and even fragmented with a plethora of international brands being available.

The largest brands currently include Levi Strauss and Reebok which are both reportedly well past the US$ 100 million mark in India, but the race for market leadership is still well and truly on. No matter which brand comes out ahead the winner, without a doubt, will be the consumer.

(To know more about how Third Eyesight could help your business in exploring the Indian market please click here: India Entry)

Retailwire hosted an interesting discussion on ethical consumerism, based on Andrew Benett’s description of the decline of hyper-consumerism, and the emergence of a more conscious, frugal consumer in his new book, “Consumed: Rethinking Business in an Era of Mindful Spending”.

In a recent article Benett identified 10 public figures who also act as beacons for mindful consumption. The list includes people as diverse as US first lady Michelle Obama, talk show host & actress Ellen Degeneres, investor Warren Buffet, PepsiCo CEO Indra Nooyi  and rapper Ludacris.

Of course, Ellen, Ludacris or Oprah have a communication reach that most marketers would kill for. Walmart pushing sustainable technologies in its supply chain could possibly achieve more than many governments around the world would hope to, because its powerful carrot of buying budgets is far stronger for many vendors in Asia, than the sticks of legislation. Many of these are genuine, praiseworthy attempts.

However, much as I would like to believe that all celebrities and high profile businesses are evolving into mindful, careful consumers, that would be a gullible step too far. In the current economic climate, consuming too conspicuously is just “not done.” But that may change as markets improve, jobs expand and incomes rise again.

Having said that, if the current fashionable rash of mindfulness raises the profile of concerns around over-consumption and waste, if it actually drives us towards more sustainable behavior and be more gentle to the planet and our future generations then, well, the end justifies the means.

Andrew Benett’s list is here: Top 10 Public Figures Who Are Also Mindful Consumers.

And this is the discussion on Retailwire on this subject.

My first brush with Zara and Inditex (Zara’s parent company) was in the 1990s, when we were comparing product development and supply chain best practices for another European retailer.

In 2002, after writing a case study on the Zara business model, I was (and continue to be) surprised at the number of downloads from the website (referenced at the bottom of this article).

In 2004, the interest at the Images Fashion Forum was so intense that the Q&A after the presentation exceeded the allotted time, to the extent that I was almost declared persona non grata by the organising team!

I’m glad to say that we’re all still friends and, together, witness to the logical next phenomenon: the much anticipated Zara store launch in India in May 2010. And what a phenomenon! On a high-footfall day, at full price, the Delhi store looks as if the merchandise is being given away for free.

In 2006, India was the 8th highest source of traffic to the Inditex website (more than half a million, almost 2 per cent of the total); incredible, considering that the other Top-10 countries already had Inditex stores. Although Zara finally signed a joint-venture with the Tata Group, I’m pretty sure that those thousands of other rejected prospective Indian licensees and franchisees must be getting their Zara-fix now as customers.

What does the Zara launch mean for the Indian fashion and retail sector? Is this the beginning of a new era? Should we expect Zarafication of the market, where the customer is driven by fashion, and the supply chain will turn and churn products faster than ever before? Should other international brands and Indian fashion brands be worried?

A peek at history is useful here. It is said that when Spanish conquistadors landed on the shores of the Americas they managed to conquer the land and the people through a combination of guns, germs and steel. [Credits to Jared Diamond for that evocative phrase.] That is, the Spanish carried guns and fine steel swords but, most importantly, they also carried diseases that were alien to the local population. In many places, the weakened and leaderless indigenous people were simply too battered psychologically and physically by disease, to fight the colonisers.

Keeping that in mind I would say, Zara’s entry is a warning bell only if your business is suffering from recent financial and operational illnesses. It is only dangerous if your team are psychologically weak, and would be overwhelmed just by the thought of the supply chain wizardry that Zara has deployed in its business internationally. It may be fatal for sleepy marketing teams whose only strategy has been to spend lots of money on advertising in season and on mark-downs after the season.

But it’s not doom and gloom for brands and businesses that have a competitive spark of life. If you’re prepared to learn, Zara’s business can provide lessons on how to create a product mix that doesn’t stay on the shelf for months, and on how to create the buzz and excitement around the brand.

Zara’s business success in India is not a foregone conclusion. Let’s look at the facts.

Zara’s business model in its home market was built on getting up-to-date fashion into the market before anyone else, and at lower costs. Its prices encouraged fashion-conscious consumers to buy more frequently, and though its limited production quantities were a way of reducing risk, it added to the allure of the brand. In most overseas markets, however, Zara is a somewhat more premium brand. The “value-for-money” for the brand rests on fashionability rather than product quality.

The Indian consumer base, on the other hand, is less fashion-sensitive than the European consumer. This is not equivalent to being less sensitive aesthetically – Indian consumers can tell good design from bad; allowing, of course, for varying taste! However, value consciousness drives many consumers to buy during discount sales with delay of 2-3 months, rather than buying current fashions at full price. This can be a problem for a brand that thrives on change.

Zara will initially have a limited physical footprint. It is targeted at the premium to luxury end of the market, fitting a certain physical profile of customer. Its products that are imported are disadvantaged by a hefty import duty and shipping costs, as well as the shipment lead time. So, there is time available to Indian businesses that want to adapt their business model, and learn from this new competitor.

With the product development strengths and the agility that Indian apparel companies have displayed in the past, there is no reason why Indian brands cannot compete effectively with Zara on their home turf. When it comes down to it, I think Indian businesses (the small ones, with less “organisation” and “process” orientation) are fast on their feet in identifying design trends and are able to responding to the trends with products being available in the market very quickly. I would call them the Indian “baby Zaras”.

So the real question is this: can these Indian “baby Zaras” learn to be disciplined and structured, and learn to scale up their businesses?

Could we, perhaps, even see some people creating copies of Zara’s styles and bringing them to the market quickly at much lower prices (in effect doing a Zara on Zara)? Let’s not forget, what is today an 11-billion Euro business was once a contract manufacturer to other retailers, and Zara started with one shop carrying low-priced versions of products inspired by those of high-fashion designer brands.

The coming years promise to be interesting and I think we should watch out for an Indian version of an Inditex emerging in the next few years. It remains to be seen whether it will be from among the existing players in the domestic market, an exporter who is a contract manufacturer for western retailers (as Inditex once was), or someone totally new.

The people who should be really worried are those international brands whose product mix in India is weak, whose prices make you want to marry a rich banker, and whose brand ethos is totally unclear. To them I would say: Zara has you in its gun-sights.

Click here for “Retail @ The Speed of Fashion” , if you haven’t read it yet:
http://thirdeyesight.in/articles/ImagesFashion_Zara_Part_I.pdf

[If you are working for a company looking entering the Indian market, you may be interested in looking at our list of services > India Entry.]

Are you being carried, or are you carrying others?

To know the answer to that question, bear with me while I take you on a short mental journey through the emerging landscape of “ethical business” and to the stories at the end of this piece. (Okay, you can cheat and skip ahead, but I would really prefer you to read through the whole thing.)

For the most part sustainability and responsibility – or “corporate social responsibility” (CSR) to use the proper jargon – is seen as more relevant to the western economies, rather than the emerging economies like China, India and Brazil.

The pressure to do the ‘right thing’ is like a carpenter’s vice, whose one jaw is public opinion and the other is regulation, together squeezing ever tighter on corporate business. Clearly, there is a significant portion of customers in western markets who are vocal in expressing their opinions on business practices that are seen as wrong or unethical. On the other side, judicial implementation of regulations is also extremely stringent.

In fact, in the last 10-15 years CSR and sustainability have become far more important to top management in western economies since the real penalties in terms of negative impact on the brand and financial penalties through regulation and litigation are extremely high. Multi-billion dollar businesses certainly have much at risk, as demonstrated by well-documented PR disasters of large brands and retailers in the last decade or so. The variety of issues they have faced has covered sweatshop factories, child-labour, product safety, food adulteration and many others.

Since the mid-1990s there has been a steady increase in CSR initiatives, or at least an increase in initiatives that are labelled under the CSR umbrella. There is no doubt that there is good intent behind many CSR initiatives.

Some of these are focussed on improving the core business processes and practices of the company, and have measurable improvement goals that also have a positive impact beyond the company itself. These can truly be called socially-responsible corporate initiatives.

However, one can’t help but question many others which are fuzzy in their impact on both within the business and outside. The motivation of this type of initiative seems to be a two-pronged PR effort: firstly to get positive PR for “good work” mostly unrelated to the business and secondly, more importantly, to avoid negative PR for poor or questionable business practices in the company’s mainstream products or services.

Lest I sound too cynical about the corporate efforts, let me say this: there is also lack of clarity and agreement in non-corporate circles about what constitutes “corporate social responsibility” or “responsible business”. The label is relatively new to mainstream management thinking and very mutable. Social responsibility, ethical business, sustainability are all terms that are broad-based, used interchangeably, and are open to interpretation which can change with the context. (I wrote about this in an earlier column “Corporate Responsibility – Beyond Babel” about 18 months ago.)

And that brings me to four separate incidents that happened recently, which are (in hindsight) neatly threaded together with a common thought process. (Thank you for your patience so far!)

The first was a discussion recently initiated by an international organisation about what could motivate Indian brands and retailers to make moves in the area of corporate responsibility, whether regulations needed to be tighter or whether it would be consumer pressure that would bring about a change. The underlying assumption – right or wrong – was that, as corporate entities, Indian retailers and brands were not sufficiently motivated to take significant and visible steps towards making their businesses more sustainable and socially responsible than their current state. The discussion was inconclusive, with many different, all potentially valid, points of view on the subject.

Very soon thereafter, I had the opportunity to participate in a dialogue with Gurcharan Das, the philosopher-author who, in his last corporate role, was Managing Director – Strategic Planning for Procter & Gamble worldwide. The dialogue primarily centred on his latest book: “The Difficulty of Being Good”. There was much debate and discussion on the wider consequence of individual actions and especially of those in positions of authority, highlighting the importance of individual choices.

A few days later, in a totally different context and with an entirely different person, the third incident occurred, when I was told an updated version of an old story to demonstrate the power of “a few good men” (and women). The story was as follows:

“50 people were travelling in a bus. Part-way through the journey, the weather suddenly turned stormy, with massive thunder and lightning bolts cracking all over the place. At times it seemed as if lightning would strike the bus and kill everyone on board. Then, someone proclaimed that there was someone on the bus whose end had come, who the lightning was seeking, and that it would be better for everyone else to get that person off the bus. The driver stopped the bus, and each person was sent off by turn, to go and touch a tree at a distance. 49 people got off the bus and returned unharmed after touching the tree. Then, as the last person got off and walked away from the bus, the bus was struck by a massive bolt of lightning.”

I thought this was a gruesome but effective moral science tale! During the next few hours I went about my activities, but kept mulling over the lesson(s) in that little story.

Then, that very afternoon, I got an email containing the following thought: “…when it looks like the whole place is going to implode – with pollution, disease, and war; famine, fatigue, and fright – there are still those who see the beauty. Who act with kindness. And who live with hope and gratitude. Actually, they carry the entire planet. (Mike Dooley)”

In looking back to the article 18-months ago, I closed the loop: it is the individual manager, who is also a citizen in a community, a consumer, and as a parent a stakeholder in future generations, who has to make the choices. His or her choices – both right and wrong – do have an impact beyond his or her own life and business. The so-called triple bottom line – profit, people (community) and planet (environment) – are irrelevant unless the first question is answered: “what does this mean for me?”

So as we go about our day, launching and growing brands, opening new stores, creating new products, I offer you this thought to reflect upon: are we carrying, or being carried? Is the bus safe because of us, or are we the ones the lightning is seeking?

[Go to the earlier post: "Corporate Responsibility – Beyond Babel", December 2008]

India has been consistently rated amongst the top destinations for consumer businesses year after year. While international fashion brands had earlier entered India at a steady pace, there was a greater surge of the global brands in the Indian market since 2002.

Interestingly many international brands opted to choose the franchise route for their entry into India. There were changes in the market environment and government policies that made the business environment favourable for growth through franchising.

Firstly, as a signatory of the WTO, India reduced import duties consistently. Consequently products could be sourced from other countries at more competitive prices and international brands could create an internationally-consistent product offering, with greater control on the supply chain.

Secondly, with more international brands vying for a share of consumer’s wallet, there was a need for brands to create a distinctive brand identity. Exclusive branded outlets increasingly became a marketing tool through which the brands could not only showcase a complete product range but also create the full brand experience.

Simultaneously the real estate market grew significantly, bringing in many “investors” who did not have the capability or the desire to develop their own brand. The availability of potential master franchises ready to invest capital and real estate created an environment conducive for growth of franchising.

As per Third Eyesight’s report (“Global Fashion Brands: Tryst with India”), by the end of 2008, just under half of the brands were present through a franchise or distribution relationship.

Unlike more developed markets where brands have sizable networks of large-format store as a launch and growth platform, in India there are still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Also, having a local partner as a franchisee provides a closer understanding of the market and the ability to adapt to changing consumer needs.

For a successful relationship it is vital that a franchisee should have an entrepreneurial mind-set. The essence of the brand needs be well understood, and the franchisee must have operational involvement rather than a “passive investment” approach.

The question is whether franchising would continue to remain the preferred entry mode as a new decade starts. Liberalisation of foreign investment norms has already led to many brands transitioning into a joint venture or subsidiaries. (See the more recent version of the report on International brands in India.)

However, while for many international brands it would be ideal to have ownership and control over the operations in a strategic market like India, direct investment does also increase their risk and the investment is not financial alone.

Therefore, for many brands, franchising would still remain the more practical choice whether by using a national master franchisee or using site-specific franchise relationships in combination with a direct wholesale presence in India.

[If you are working for a company looking entering the Indian market, you may be interested in looking at our list of services > India Entry.]