An in depth look at the Indian Government recently revised policy on FDI in single brand retailing
A press release issued today, by India’s Ministry of Commerce & Industry, Department of Industrial Policy & Promotion, clarifies the review of the policy on Foreign Direct Investment- liberalization of the policy in Single-Brand Retail Trading.
Foreign Direct Investment (FDI), in retail trade, is prohibited except in single brand product
retail trading, in which FDI, up to 51% is permitted, subject to conditions specified under
paragraph (A) below
The Government of India has reviewed the extant policy on FDI and decided that FDI, up to
100%, under the government approval route, would be permitted in Single-Brand Product
Retail Trading, subject to specified conditions, as indicated in paragraph (B).
(1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices.
(2) FDI in Single Brand product retail trading would be subject to the following conditions:
(a) Products to be sold should be of a ‘Single Brand’ only.
(b) Products should be sold under the same brand internationally l.e. products should be sold under the same brand in one or more countries other than India.
(c) ‘Single Brand’ product-retail trading would cover only products which are branded during manufacturing.
(d) The foreign investor should be the owner of the brand.
(e) In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian ‘small industries/ Village and cottage industries, artisans and craftsmen’. ‘Small industries’ would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million.
Application seeking permission of the Government for FDI in retail trade of ‘Single Brand’ products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application would specifically indicate the product categories which are proposed to be sold under a ‘Single Brand’. Any addition to the product categories to be sold under ‘Single Brand’ would require a fresh approval of the Government.
As expressed previously Oliver Petcu of CPP Luxury Industry Management Consultancy Ltd, which has been actively covering India, believes the revised legislation change is absurd and impossible to apply in luxury retailing. Even if, there would have been items which could have been sourced locally, the mere throught of international luxury brands being forced into sourcing locally, just because they want to operate directly is going to be a major set back for the already dormant and under-performing Indian luxury market. It is a matter of principle for the leading international luxury brands the identity of which is deeply rooted in their heritage craftsmanship and sourcing of manpower and materials locally.
Petcu believes that the hesitations and inconsistency in economic policy by the Indian Government which used FDI legislation change as a political tool, are a harsh lesson major international luxury brands should learn and be warned, at the same time! In an already unstable economic environment and a heightened level of corruption, the most sensible decision by most international brands would be to take a cautious stance and, at least for the time being some of the brands seeking entry into India, would be safer with a local franchisee or distributor.
Despite the fact that everyone agrees that the stake of this much awaited change in FDI legislation is actually the mass market retailing sector, the FMCG retailers, such as Tesco, Carrefour, Walmart, it is odd that the luxury market wihich has a potential of at least US$ 3 billion annually in the mid term, would even be consulted and there was no public debate on these very important legislation changes.
Why would international luxury brands wish to operate directly in India?
- to be able to implement their strategic policies and bring valuable know how – create jobs and provide expert training
- optimized control of buying and stocks adapting fast to market trends and consumer preferences
- invest in real estate, especially street locations (building adjancent to Hermes Mumbai are becoming available) – Can a local franchisee sustain such an investment ?
- create product lines exclusively dedicated to India
- through professional buying, the stores would have an optimal representation of the collections of the respective reasons for the brands (in contrast with the financial limitations of the current franchisees which usually handle more than 4 or 5 major brands
- provide through extensive training and decoration of the stores according to their international flagships, thus creating a much needed customer experience which currently is incomparable to the experience in stores abroad such as Dubai, one of the closest major shopping destination for the wealthy Indians
- conduct extensive research and implement very targetted marketing communications and advertising strategies
These are all elements current franchisees orJV partners are unable to provide for the brands.
The benefits of the Indian economy:
- creation of jobs
- professional training of human resources
- considerable taxes and duties on all imported goods
- a boost of print media, especially glossy magazines, indirectly helping the publishing sector
- major investments in retail, some in historical buildings downtown major cities
CPP will organize In October 2012 in Delhi, its established annual luxury business concept (first organized in Eastern Europe in 2004), BUSINESS OF LUXURY FORUM which will address all issues related to the luxury market, featuring all major luxury sectors, from fashion, to watches, jewellery, cars, private banking, travel and hotels.
CPP is currently seeking a PR agency or an experienced independent PR to partner in organizing this event. With the occasion of the event, CPP will present the very first Luxury Market Report on India, the first such comprehensive report, covering ALL luxury sectors and an in depth analysis of the consumer profile. CPP aims to creat with BLF a platform which would bring together top executives of intl luxury brands present or seeking entry in India, local retailers and luxury players from other sectors, as well as private and institional investors such as developer. For details, please email us on email@example.com