Are foreign retailers in India due their moment in the sun?

Last year, India knocked China off the top spot as the most desirable retail market in the world. A more favourable foreign investment environment, strong economic growth and a consumption boom were all factors cited by management consultancy AT Kearney in its Global Retail Development Index. But there is a sense of déjà vu around this revelation. In 2007, India saw unprecedented retail investment and analysts talked about the country overtaking China’s runaway growth. But after the 2008 financial crash, the market slumped. In the years that followed, many brands explored the market without making a successful entry. Some, such as Forever 21, have entered and exited several times within the past decade. Others have abandoned the country completely, including French supermarket Carrefour. Will it be a different story this time around? Changes to foreign investment regulations mean brands can invest directly into the retail market, while a growing number of professional mall developers and investors are bringing quality real estate space to market. GDP is forecast to grow by 7.4% this year – and by 7.6% in 2018 – and the retail market is expected to almost double in size by 2020, growing to $983bn, up from $553bn in 2016. “India’s retail sector offers unparalleled promise,” says Nielsen India director Peeyush Bajpai, adding that there are 400m urban consumers across 8,000 towns and cities – most vastly undersupplied in retail. Along with a stable government, new tax regulations are expected to drive consumption. And there is a long list of retailers coming into or expanding in the market hoping to take advantage of that. H&M was one of the first to make the move, entering the market in 2015 with 100% direct foreign ownership. The fashion retailer now has 21 stores in 11 cities, and helped contribute to a 69% year-on-year growth in branded apparel sales across India in 2016. International investment Other international brands that have entered India in the past two years include Muji, Under Armour, Ikea, Kate Spade, Banana Republic and Coach. According to CBRE, there were 70 new entries or expansions by global and domestic brands during the first six months of 2017. British retailers have been steadily expanding their store networks, mostly in partnerships in India too. UK footwear store Pavers England has expanded across India since launching in 2008, and now has 40 stores in a joint venture with conglomerate Foresight Group. Marks & Spencer, which made a high-profile withdrawal from China in 2017, has 56 stores in India and five lingerie-only stores. Through a partnership with Reliance Retail, the brand developed a domestic supply chain and saw sales increase 21% in the first half of 2017. Iconic British toy chain Hamleys also entered India with Reliance, and now has more than 30 stores, making India its biggest market in terms of store portfolio. And it plans to double its store portfolio within two years. Japanese retailer Uniqlo is understood to have plans to launch independently in India, while Chinese retailer Xiaomi intends to open a series of stores, and sportswear company Puma is looking for government approval to operate wholly owned stores in the country. Meanwhile, UK retail stalwart Topshop has been rumoured to be looking to open in the Indian market for several years. In 2015, the high street retailer launched online sales with India’s largest e-tailer, Jabong.com, taking a similar approach to China, where it launched a digital store on Shangpin.com. But to date, the brand has not opened physical stores in either market. “Each arrangement – direct entry, partnership, franchising – has its own benefits and disadvantages, so it depends on the brand’s individual strategy and what it is aiming for,” says Rajneesh Mahajan, chief executive of Inorbit Malls. “Direct investment gives you an opportunity to scale up operations very quickly. What Zara has opened in six years, H&M has been able to open in less than two by operating directly.” Brands already in the market have been consolidating since the new FDI rules. Sportswear brand Adidas has been given state approval to open its own stores directly in the country, and has reduced its franchise partners from 500 to around 70. Earlier this year, fast food chain McDonald’s terminated franchise agreements for 169 stores. Other retailers are in similar negotiations. Amid consolidation by international brands, there is also growing investment from international institutions. In August, Singaporean sovereign wealth fund GIC announced it was investing $1.4bn in its second joint venture with Indian developer DLF to create a portfolio of office and retail assets. This followed an April announcement by the Canadian Pension Plan Investment Board, with plans for a $454m joint venture with Phoenix Mills to develop and operate retail-led developments across India. Blackstone’s Indian retail fund, Nexus Malls, has 4.5m sq ft of retail space, purchasing the Elante Mall in Chandigarh in July for an undisclosed sum. Constrained supply But there is still a significant lack of top-grade space. Organised retail in India currently accounts for only 8% of the market, meaning there is severely constrained supply. According to JLL, there was a net negative supply of retail space for the first time in 2016: while 13 malls were completed, 15 were closed or withdrawn. Industry experts say the delay in Topshop opening is largely a result of difficulty in finding suitable space, while Uniqlo has reportedly already delayed its Indian entry because of the unavailability of quality retail space. “The biggest obstacle to growth is the huge imbalance between supply and demand in retail real estate,” says Rohit George, managing director at Virtuous Retail South Asia, the retail investment arm of Xander Group, which formed a $450m joint venture with APG Asset Management in 2016. “There just hasn’t been a big enough supply of new real estate projects over the past four years, and we have seen some places where rents have risen as high as the very top retail locations across the world because of this.” PwC study The Promise of Indian Retail found 90% of retailers surveyed did not meet their intended growth plans in India, largely because of infrastructure challenges, limited access to capital and a shortage of talent. The report warns the retailers met “myriad challenges of execution in an environment where quality of real estate, talent and infrastructure were not keeping pace with the expansion plans of the retailers”. “I started making a list of international brands that have come to India and then exited again, and it reached more than 100,” says Inorbit Mall’s Mahajan. “Brands that come to India and try to replicate what they have done elsewhere will fail; those that evolve and develop with India succeed. “If you have a 21,000 sq ft store in Europe and want to come straight into India with a 21,000 sq ft store, it doesn’t work. Marks & Spencer started at 5,000 sq ft and grew upwards. There are two issues that brands in India have to face. One is the pricing issue – it has to be 20% or 30% cheaper than in Europe – and second is the store size.” To understand the complexities, many brands still choose to work with a partner. The differences in religion, taste, wealth and culture across India’s vast geography make expert knowledge invaluable. “There are certain values that really resonate with your consumers, and the retail business needs to be connected to those values,” says Arvind Varchaswi, managing director at analyst Sriveda Sattva Private. But regardless of the challenges, the opportunities in India’s retail industry are immense. The UK has been the largest G20 investor in India over the past decade, and initial talks this year suggested the post-Brexit situation could bring larger engagement on trade, plus discussions over a free trade agreement between the two countries (India is also the third-largest investor in the UK). For now, those moving into the market need to remember the opportunities while keeping a long-term perspective. The goal is global Marie Hickey, director of research, Savills India offers significant growth opportunities for luxury brands but will the real winners be the global “destination” cities? From a luxury retail perspective, India has often been touted as the next China. Both countries have large populations and rapidly expanding middle classes with ever more discerning tastes and rising consumption levels. Chinese consumers are now the biggest single buyer group for luxury products globally, accounting for 32% of luxury sales in 2017, according to Bain & Co. The Indian luxury market and its broader economy is at a different stage of development, with Indian luxury spend only 7% of that of Chinese nationals. Yet the propensity for growth is significant and is luring a number of luxury brands to establish a presence in India. The number of new stand-alone luxury store openings* in India nearly doubled in 2017, increasing from six to 11 – with Delhi leading with eight new openings, followed by Mumbai with two. In the case of Delhi, key new openings have included Coach, Hermes and Longines. While India offers huge potential, there remains a number of challenges related to infrastructure, lack of quality retail space and access to talent that are set to constrain store expansion over the short to medium term. As a result, new store acquisitions that help improve brand awareness and allow for greater engagement with customers, meaning a move towards directly operated stores, will be seen as key to capturing domestic spend and, perhaps more importantly, outbound spend. Approximately half of all Chinese luxury spend takes place outside its domestic market – in response, in part, to higher domestic prices and authenticity concerns. Likewise, the majority of India’s high-net-worth individuals prefer to shop while travelling overseas as the prices are often 10-20% lower than at home. While Indian outbound travel was estimated to total 25m trips in 2017 – one-sixth of that recorded for Chinese nationals (145m trips in 2017), the World Tourism Organization forecasts this will double by 2020. In light of current preferences, and Chinese traveller trends, we expect this will translate into increased overseas luxury spend by Indian nationals, albeit not to the same scale witnessed among Chinese travellers. Perhaps the immediate winners of the growth in Indian luxury spend will be those markets that attract significant numbers of Indian tourists. *Note: excludes relocations, reopenings as a result of refurbishments and store-in-store openings in department stores Click here to read all of EG’s global content.