Retailing: Opening the doors of Internationalization

Retailers choose to expand into international markets for a variety of reasons. They intend to go across continents to expand their business because their domestic markets may be saturated and their expansion could be based only on their potential to expand into international markets. If restrictions are there to expand in ones own country, retailers may look at other markets to enter. When one thinks about legal restrictions in domestic markets, one is reminded of the situation of the French hypermarkets that cannot open new stores in France easily due to regulatory hurdles. Many emerging markets are moving ahead in the growth trajectory with increased consumption. Brazil, Russia, India and China are examples of the emerging markets and retailers have an opportunity to establish their presence in these countries. Consequent to changes in a country’s foreign direct investment policy allowing retailers from abroad to set up shop, the domestic retailers may be facing more competition to expand within their country. Such retailers may look at expanding internationally in other country markets.

Countries like China consistently increased the FDI cap allowing more foreign investment in the retail sector in phases. India too has opened its doors to allow FDI in the cash and carry business in addition to allowing 51% in single brand retailing. India is expected to open its doors to foreign retailers soon with the revision of its FDI policy. When retailers who are established in developed economies like UK and USA, move into countries like China and India, they bring with them their expertise to build good supply chain practices, right merchandising systems and robust operating processes. Many established retailers may have already built a global network of suppliers and vendors with a good deal of sourcing capability spanning across continents and they can leverage this strength when they go global with their operations. The retailer intending to spread into other countries may be having special skills and competencies developed over a period of time, which may be the exclusive strength of the organization. This may not only offer the company the first mover advantage in a new land of entry but such an exclusive strength (such as product exclusivity) may offer monopoly status to anchor its establishment soon. As the mid-segment consumer market developed in India adopting various international food habits, Domino’s Pizza set up shop in India with its special product and delivery competencies and with very limited competition, it continues to grow across India.

International retail entry strategies for organizations have been aligned solely to suit the legal framework available to operate within its boundaries and limits as retailers enter into different countries. In the days earlier to the opening up of the economy in many countries manufacturing was considered to attract foreign investments and hence many retailers moved into other countries initially as manufacturing and retailing companies with a mandate to export merchandise as well. Bata in India set up its manufacturing and retail operations way back in 1932 using this route where it had mandatory obligations to register the company in India and to outsource a fraction of the company’s merchandise requirements from local entrepreneurs to help develop local SME (Small and Medium Enterprises) in the manufacturing sector in the country. The other strategies explored to enter countries that have very stringent FDI norms center around offering operating rights through franchising and licensing arrangements so that the local organizations themselves run the retail operations following the franchise and licensing norms by paying an agreed franchise or license fee. Progressive international brands have done justice in India having entered through the available route and trying to grow over the last twenty years or more.

Wherever limited FDI is allowed, organizations have chosen to enter these markets by a joint venture arrangement where the retail organization entering the new market has stakes to the extent of the allowed investment participation and the balance stakes as per statutes are held by the local company. Such an arrangement often may come with the back-to-back option to increase the stakes of the foreign retailer as and when the law changes in favour of more investments on the part of the foreign retailer. Marks and Spencer is an example of a happy alliance with Reliance Retail to operate in India as a joint venture. Such organizations continue to work with the same stake holding arrangement even when FDI regulations have changed to allow 100% investment in single brand retail recently. Organizations will continue to partner with our domestic stakeholders such as domestic retailers, farmers and above all customers who are served well at the end of it all. Where there was a will, there has been a way so far.

We in India are fast developing our retail formats into big ones to compete with other global retailers and to soon enter the proximal markets of Dubai and other countries in the UAE and Far East. Those days when our retailers will look at various international markets to enter are not far off! We've got to learn to live and let live!!

Dr. Gibson G. Vedamani

Budget 2012: Will it embellish the Textiles & Garment sector?

In modern retailing, the textiles and apparel category holds the largest percentage share of participation. Estimates show that around 38% of modern retailing comprises textiles and apparel merchandise. So, it’s a no-brainer to say that if this category improves a great deal, modern retailing advances too proportionately.

Between 1991 and now, many inefficient textile companies have shut shop and have moved on to open doors for real estate development or for infrastructure development to house commercial complexes and malls. In Mumbai one can see the transformation of the old Phoenix Mills, Simplex Mills, Morarjee Mills, etc. into beautiful landscaped complexes or malls (promoting retail!). The downfall of this entire textile-manufacturing sector came when it became non-competitive incurring higher costs while facing the threats of highly competitive manufacturing sources like China. I always used to wonder how our textile manufacturers did not capitalize on their opportunities to integrate forward into garment manufacturing. While on the one hand Tirupur and Ludhiana in India were emerging as manufacturing hubs for hosiery and garments focusing on exports, on the other hand the downfall of the mills in Mumbai was seen at the same time. Why did our Mumbai mills not think about garment manufacturing and exports on a large scale? Strangely none of these units even thought about doing it from various other locations if they had large-scale manpower and industrial relations challenges, especially in Mumbai. The other wonder for me always centered on why the central and state governments could not interfere and revive those large dying units on a war footing, taking adequate care for sustenance by helping companies settle disputes and offer subsidies and tax holidays.

If one looks at China, the government has worked closely with every key sector since 1995, especially with the textiles and garment sector, which in the mid and late nineties was almost on the verge of bankruptcy. We know where the sector has reached today – 24% of the global textiles and garments trade is from China. The government helped organizations settle disputes and lay off workers if efficiencies were not met. The sector was rejuvenated by the infusion of public funds in the form of grants and tax forgiveness, under the directions of the government to facilitate its complete restructuring. The painful restructuring process has ultimately paid off for China.

I agree, there are subsidies for the sector in India too, often planned more when challenges in the global markets are faced. There has been no visible planning by way of introduction of any innovative programmes to build the sector for the next 20 to 30 years with the objective to take it to the ultimate level of competitiveness. Garmenting in India is still at a nascent stage. In spite of the fact that garment is a common essential consumption commodity within the country, there is a levy of 10% excise duty on branded apparel. The government should look at garment manufacturing as a critical area for growth for the future as such a supporting measure will go a long way to further establish the growth of apparel retailing in India. One would expect a roll back of the excise duty on apparel this year. For manufacturing and domestic retailing integrated organizations (with total income more than 10 million rupees in revenue) the government can also look at a subsidy in income tax, down to 25% rather than a common flat rate, as such subsidies are commonplace in progressive economies. If we have to ensure the growth of the textiles and garment sector to compete effectively globally and to increase consumption in India, the government has to think innovatively and out-of-the-box too!

- Dr. Gibson G. Vedamani