NEW YORK — India’s retail market is going to get a lot hotter.
A change in government regulations now allows single brands to have majority ownership of their operations in the country. But the deal comes with a major hurdle: the companies looking to expand have to wait for improvements to the country’s shoddy infrastructure.
So far, it’s not a big enough hurdle for fashion firms, who are inking deals and launching expansion plans to get a piece of India’s $250 billion retail market. Many top firms said they will take a disciplined approach to India, which has a retail market that will grow at 36 percent over the next two years, according to India’s Associated Chambers of Commerce.
“As with every new market, it’s about entering in the right way,” said Robert Polet, president and chief executive officer of Gucci Group. “When we find the right opportunity, we will enter with the top ranges. How quick it will develop — who knows?”
So far, the pace of development is fast and it’s mainly via joint venture. Jimmy Choo last month signed a long-term agreement with the Murjani Group, which also distributes the Tommy Hilfiger brand in India, to open seven stores in the next five years. Valentino, Ferragamo and Versace Jeans Couture will open their first stores in India this year. The companies will be required to operate in the country with a local partner.
Other fashion companies have big plans for India: Gucci expects to open stores there in the next five years; Paul Smith is in talks with several companies about joint ventures, and hopes to open a store in India as early as the end of 2006, and Benetton, which has around 50 stores in India with a joint-venture partner, plans to double that number in the next three years.
But at this stage, India is no China — and it will take some time for the country to catch up. McKinsey & Co. deems India the eighth-largest retail economy in the world. But China is seen as a mother lode of growth for designer brands in the near and long term, India is considered a more long-term market.
Observers say India can develop as fast as the country’s politicos allow — and as quickly as the government can lay in the infrastructure necessary to develop efficient distribution networks and real estate. Despite resistance from labor leaders and politicians, who believe that too much direct foreign investment into India’s retail system will wipe out tens of thousands of mom-and-pop shop owners, the government passed new regulations in late January that gave foreign brands greater access to India’s billion-plus population and burgeoning middle class.
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The government’s new foreign investment policy allows foreign companies — from LVMH Moët Hennessy Louis Vuitton SA to Nike Inc. — to own 51 percent of their operations in India, as long as they sell exclusively their own merchandise. Previously, the country allowed foreign brands to sell their products only through wholesalers or retail shops that were franchised to local Indian owners.
“This decision means that things are going in the right direction,” said Yves Carcelle, chairman and ceo of Louis Vuitton. “A developing country like India couldn’t blockade its own growth, so it was inevitable. Luxury doesn’t put small commerce in danger. We are very pleased, and it certainly paves the way for expansion in the country.”
The potential for retail growth is massive. India’s middle class is estimated at roughly 300 million people and growing every day, while the economy has grown at 8 percent for the past three years and is expected to continue at that rate, according to the country’s annual economic survey, conducted by the finance ministry. As the consumer demands of the middle class grow, the credit industry has also boomed — the Reserve Bank of India noted bank loans grew 30 percent in the past year, while bank deposits grew more than 17 percent.
But the economic picture isn’t all rosy, and fashion companies are wisely exercising caution.
“We will advance our plans [to enter India], and in two years we will have a shop. For the moment, though, if you ask the firms that are already there, business isn’t that great,” said Patrick Thomas, ceo of Hermès International. “But the potential is there, and it will become an important market.”
Part of the challenge to retail expansion in India is the growing divide between the country’s wealthy, potential luxury spenders and the rural poor. The finance ministry warned of a spike in unemployment that will hamper the country’s overall economic growth, which has in general exacerbated the difference between rural and metropolitan Indians. An average worker in urban areas, for example, earned nearly 40 percent more than a worker in the countryside in 2005. The country’s unemployment rate is about 9 percent.
Basic infrastructure is also an issue. Frank Badillo, senior economist with Columbus, Ohio, trade group Retail Forward, said recently that he expects the retail environment in India to significantly open up in the next 12 to 24 months, but that the region will likely develop more slowly than China, in part because it is far behind in infrastructure.
India’s airports, road systems, power lines and ports are in disarray and don’t offer very good basic transportation, much less a distribution network. The finance ministry’s report to Parliament notes that the country will be the recipient of up to $150 billion of direct and foreign investment in the next five years in infrastructure improvements alone. The country is looking to the private sector to help: Private construction companies are building most of a new $38 billion network of roads, and French companies have taken over the development of sanitation and water supply systems.
It isn’t only a distribution issue — poor infrastructure is also an issue in brand upkeep, especially luxury brands.
“When you come out of [Mumbai’s Taj Mahal Palace & Tower] or a store in New Delhi, the streets are congested and filthy,” noted Michele Norsa, ceo of Valentino Fashion Group, who said many of India’s malls propose a mix of luxury and low-end brands in the same setting. That idea probably would be unattractive to most luxury brands, which are used to being clustered in high-end malls.
Still, there are anywhere between 100 and 200 new malls being built in the country right now, according to news reports, that have the potential to raise the bar for Indian retail. Fashion companies, overall, are more encouraged by recent legislative developments than deterred by logistical challenges.
“I strongly believe in India as a future market and I think the country is ready for brands,” said Gucci’s Polet. “This gesture by the government facilitating single brands will help enormously.”
— With contributions from Meredith Derby, New York; Robert Murphy, Paris; Samantha Conti, London, and Amanda Kaiser, Milan