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Foreign retailers in no rush to India

Leading international chains are eyeing the growing spending power of India's 260-to-300 million strong middle class.

india Updated: Jan 31, 2006 12:27 IST
Reuters
Reuters
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India's move to ease restrictions on direct investment by foreign retailers is unlikely to trigger an investment frenzy, but will attract greater interest from global brands eager to make inroads in the fast growing sector, analysts and local retailers said.

"Everyone who hadn't thought of India before because the door was shut will now move India up from the back burner," said Darshan Mehta, president of Arvind Brands, a licensee for Tommy Hillfiger Corp.

"Wal-Mart and others must still be stepping up in anticipation of a gradual relaxation in other segments, too."

The Indian government last week allowed 51 per cent foreign direct investment in retailing by companies which sell only a single brand, like Reebok, Adidas and Nokia.

Such firms, which can now set up their own retailing networks, have depended on domestic franchises to sell their products in a market estimated at about Rs 280 billion ($6 billion).

That is only 3 per cent of the overall retail market, but is expected to grow by 25-30 per cent a year over the next four years as incomes rise and larger retailers set up shop, according to estimates by consultancy KSA-Technopak.

However, global retail chains which offer many brands, such as Wal-Mart Stores, Tesco, Carrefour and JC Penney, are still barred from making direct investments, though they can strike franchise deals to win more access to Asia's third largest economy.

Leading international chains are eyeing the growing spending power of India's 260-to-300 million strong middle class, roughly the same as the total population of the United States.

"Foreign brands have already been talking to Indian firms regardless of the rules, and while this (the government move) is a first in retail, it is more a symbolic gesture," Mehta said, referring to remaining government curbs on foreign investment in the long protected sector and other impediments to expansion.

Mehta, who has just opened the ninth Hillfiger store in India, said the US firm plans to open three more stores by March-end, and is unlikely to convert its two-year old licence agreement with Arvind Brands into a joint venture.

"A joint venture is complex: it is far easier for foreign brands to appoint a franchisee or a distributor, especially since India's retail market has not yet reached critical mass to justify big investments," Mehta said.

"So we're not going to see everyone rushing to set up joint ventures right away."

FOOD, GROCERY

Small shopowners and India's communist parties, which prop up the government, have slammed the move to liberalise investment limits in the retail market, saying it will lead to the closure of corner stores and leave thousands of people jobless.

But others have defended the limited market opening, saying it will bring in greater investment while still protecting local grocers and supermarkets from big foreign retailers with growing international clout.

"The move is not that significant, but it is a precursor to what can happen in the retail sector," said Kamlesh Ratadia, an analyst at Enam Securities.

"We will see more brands come in, and they will be encouraged to take equity positions."

It is easy to see why retailing giants such as Wal-Mart are keen on India: food and grocery make up two-thirds of the total retail market, but small, family-owned shops control more than 90 percent of it.

Apparel and accessories make up nearly 40 per cent of the organised retail market, according to KSA-Technopak estimates.

Meanwhile, Indian retailers are expanding quickly in a bid to take on competition when investment rules are relaxed further.

The Tata group's Trent Ltd recently bought 76 per cent in a book and music retailer, while department store chain Shopper's Stophas bought out ICICI Ventures' 49 per cent in the Crossword bookstores.

Pantaloon Retail (India) Ltd has set up a joint venture with Liberty Shoes Ltd and a separate one for kidswear, while also entering restaurants and food retail.

"The door is open now, but firms may prefer to wait and watch for a little while longer," Mehta said.

First Published: Jan 31, 2006 12:27 IST