Cracking open the jewel

Major Western retailers and brand owners are champing at the bit to gain a foothold in India, but a combination of political opposition, lack of infrastructure and strong cultural influences mean the country is not quite as welcoming to these interests as China. By David Benady

After a decade of heavy investment in China, western brand owners are turning their attention to another rapidly growing Asian economy with an expanding middle class. India’s 7- 8% economic growth rate in recent years has flowed largely from its knowledge-based economy, based on offshore call centres and back-office outsourcing to western companies.

A skilled IT workforce, fluent English speakers, and links – through population movements – with Europe and the US, make India a tempting prospect for foreign investors. However, India’s left-leaning government is allowing only gradual liberalisation in some of its markets, as it seeks to defend local interests from the onslaught of global corporations. The tensions between western pressure for free trade and India’s protectionist instincts came to a head last month, when the country’s government declared it would forbid investment by western retailers such as Tesco, Wal-Mart and B&Q.

These chains have been looking longingly at the country, which has a population of 1.1 billion and a burgeoning middle class of 90 million people. Its fragmented retail scene, made up of 9 million family-run corner stores and street outlets, boasts few shopping centres or large chain stores.

Modernisation is essential

There are huge opportunities for large-scale retailing interests to enter and dominate the market. Some argue that for western brands to extend their presence in India, modernisation of the retail infrastructure is essential.

Retailers have been wondering if India – a virgin retail territory, ripe for rapid store expansion – could become the next China. Tesco, Carrefour and B&Q have developed extensive retail joint ventures in China, and own hundreds of stores between them. Spanish-owned fashion chain Zara is also entering the country, and US company The Gap is considering a move.

But a lobbying campaign during 2005 spearheaded by Prime Minister Tony Blair, with the Confederation of British Industry (CBI) and the Department of Trade & Industry (DTI) in tow, failed to persuade the Indian government to allow western store groups to move in.

Instead, it announced in January that only “retailers which sell goods internationally under a single brand” would be allowed to buy up a 51% share in retail operations in the country. This is open to interpretation – it would seem to include McDonald’s and Pizza Hut. But the DTI believes that the cap on foreign-partner equity could prevent bigger players such as Next and Ikea from finding partners with sufficient capital. They might even be deterred from entering the market unless they have full equity rights.

The ruling is interpreted as giving the go-ahead for luxury-goods stores, such as those run by Burberry, Gucci and Louis Vuitton, to be majority joint-venture partners. This is a significant development in itself since, at present, overseas retailers are only permitted to run franchises in the country, and chains such as Marks & Spencer and Mothercare owe their presence to franchise agreements.

Western lobbyists are putting a brave face on the limited concession wrung from the Indian government, claiming it is a first step in opening up the market to the global giants. The CBI denies the move goes against its lobbying efforts of the past year. CBI director of international operations Andy Scott says: “This is a small step in the right direction, but more needs to be done. It is hoped that India will realise the benefits of further opening to foreign investors.”

This week, the City of London’s chairman of policy and resources Michael Snyder was due to meet Indian officials, armed with plans to open an office in Mumbai to develop business links between India and the UK, and help Indian firms to gain a listing on the London Stock Exchange. City bosses already occupy offices in Beijing.

Tesco denies it took part in lobbying the Indian government, though a spokesman concedes: “It is a market we watch with interest.” A fortnight after it was barred from entering India, Tesco announced plans to open convenience stores in the US.

Meanwhile, a B&Q spokesman says the rule change means the chain will still be excluded from investing in India because it sells multiple brands internationally. “India is a very interesting market, but the move recently made to open it up to foreign direct investment was a relatively cautious, limited one. We hope this is a first step to wider collaboration,” he says.

Before they fling the doors open

India’s ruling Congress party, in coalition with the Communist Party of India (Marxist), is under pressure from millions of small retailers to keep the giants out, although one source describes this group as a “not very well organised” force. At the same time, the country’s government wants to give Indian multiple retailers opportunities to build their own businesses before flinging the doors open to western interests. India has suffered from the effects of foreign domination before. In the 19th century, British monopolies in textile manufacture and other sectors stunted the development of India’s business class, a weakness that some believe has undermined the country’s economy ever since.

However, in the newly confident India, an era of unprecedented development is dawning for indigenous retailers. Pyramid Retail is to launch 35 Megastores and Trumarts this year, doubling its coverage to 800,000 sq ft. RPG Group’s Spencer Retail plans a $100m (&£57.3m) expansion, while Pantaloon plans to launch 51 shopping malls, developing nearly 15 million sq ft of retail space with an investment of $550m (&£315.2m).

Investment would benefit locals

Western multiples could easily wipe out the indigenous competition if allowed in before local retailers develop their strength. On the other hand, western lobbyists argue that India needs to rapidly improve its infrastructure and build better roads, which their investments would help to fund.

Nirmalya Kumar, director of The Aditya Birla India Centre at the London Business School, says it is “only a matter of time” before India opens up to foreign multiple retailers. But he warns of structural problems that could restrict operations. India’s 28 states impose tariffs on merchandise transfers, which is a disincentive for retailers to establish nationwide distribution systems.

Meanwhile, other sectors of India’s economy are attracting foreign interest. The $1bn marketing services sector is growing strongly, at about 12% a year, and global giant Publicis recently bought Solutions Integrated Marketing Services in order to boost its Indian presence. Publicis Groupe president Maurice Lévy has said “India will be an increasingly critical area of the world for us”.

But Simon Sherwood, worldwide chief operating officer of Bartle Bogle Hegarty, says it is still mulling over the possibilities of opening an office there. “It is an odd market. It is not very big, the 22nd largest advertising market in the world. The interest is in the potential, because it is talked of as the new China. I don’t think it is going to explode like China, I don’t get a sense of a great leap forward,” he says. Hindustan Unilever dominates the market, which Sherwood believes makes ad agencies overly reliant on one client.

While China has come to be seen as the low-cost “workshop of the world”, India positions itself as a centre for hi-tech skills and creative industries such as design, media production and film. It will be interesting to see whether India’s comparatively restrictive approach to foreign investment gives its local entrepreneurs the space they need to build powerful global brands of the future.â¢

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