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

Will it be a Glittering Budget for the Jewelry Sector this Year?

Making jewelry in India is no easy task. There is no simple continuous process solution where the raw materials could be churned and moulded into the final product as it happens in the case of manufacturing beauty soap! The jewelry product development begins from the mind and goes up to the market for every SKU. It's by no means anyone could be replicating and reproducing a successful formula in large numbers and distribute them too! Every piece of jewelry is a creation by itself, birthed in the mind of the designer crafted skillfully putting together and setting those many elements of the design to finally bring out the masterpiece in every product manufactured. The manufacturing process involves very skilled labour end to end – right from conceptualization of a design by a designer to the artisans who skillfully craft the product. One would realize that these skilled artisans cannot be outsourced every now and then like how labor is outsourced on contract in many industries. Even though multifarious technology applications are available today, most of the steps in the jewelry manufacturing process are carried out manually to get the artistic finesse. It takes a good deal of time, energy and the involvement of such skilled labour to craft a single piece of jewelry.

The jewelry retail sector in India has come a long way. For a long time the sector was unorganized and today many retailers are registered under VAT and they issue proper bills for every sales transaction. State governments took the initiative to help the sector with very low taxation so that the industry could enjoy the results of simplified tax regime. GJEPC is seeking the implementation of the presumptive tax as recommended by the Sivaraman Committee in 2006 appointed by the then Finance Minister, P. Chidambaram, which the government has not implemented. The sector now seeks a Presumptive Tax regime, which if implemented will put an end to many conflicts resulting in litigation and high cost of income tax collection too. According to GJEPC, countries like Belgium and Israel who faced such challenges of tax collections have benefitted by the implementation of the presumptive tax regime. It is strongly believed that if Sivaraman Committee’s recommendations are implemented by introducing the presumptive tax system, it would encourage more investment in the sector besides enabling voluntary compliance that would increase tax revenues to the exchequer. Further, GJEPC believes that the industry will be able to compete with global manufacturers and India can become a significant jewelry trading hub. The prospect for growth of diamond studded jewelry being high, the industry should be allowed to import diamonds on consignment trading terms from mining sources like De Beers.

Branded jewelry in India is becoming popular fast. The young and the working women in India have a fetish for branded jewelry and the category attracts 1% excise duty and this too needs to be rolled back. Most of the branded jewelry in India is sold through the modern retail sector. The withdrawal of the excise duty will go a long way to promote branded jewelry in retail.

One would like to see as many transparent organizations as possible in this burgeoning sector. We can see from the sales growth trajectory of a very few organized players in the precious jewelry retail sector in India what TRUST and TRANSPARENCY can do to their business! It's time for the government to help the sector grow and help consumers at large, too!

- Dr. Gibson G. Vedamani

Come February, Retailers in India Look Up to the Union Budget!

Year after year as February comes modern retailers in India eagerly look forward to the union budget. And they long to hear from the government fiscal decisions that would impact consumption a great deal. Tax exemptions and raising of income tax slabs result in releasing disposable income available for more consumption that would be spent in retail. The GDP growth in India is expected to surge more than 7.5% percent and growth in consumption also this year is expected to go up by more than 30% as compared to the financial year 2011-12.

We’ll remember, a few years ago, the UPA government slapped service tax on rent on immovable properties and the worst affected sector is retail. There is no way the sector can offset any service tax paid as the products sold in retail attract only VAT and no retailer receives any service tax. The retail sector is unique to the extent that a common inclusion of service tax on rent on all commercial properties levied by the UPA government has affected the sector a great deal. Further, the sector sells merchandise at a specified Maximum Retail Price (MRP) following regulations of the weights and measures act and packaged commodities rules and hence margins are unduly squeezed. Various Fast Moving Consumer Goods companies supply more than 70% of the merchandise sold in retail who dictate the MRP and the cost price for the retailer. The food sector is affected the most. So, retailers depend upon efficient merchandising practices and they aim at managing inventories properly to achieve the greatest number of stock turns and thus achieving good Gross Margin returns on Inventory (GMROI). Courts are not able to help the retail sector as it seeks relief from such mistakes committed by the government, because the levies are usually common ones applicable to all sectors made without paying any attention to the exclusive characteristics of retailing in India. Even when the authorities understand the problems of the retail sector, they are helpless too as reversals will not only cost the government and its exchequer an enormous amount but incur the wrath of other commercial sectors as well.

This year the Government of India summoned all its guts to announce changes in the FDI policy to allow 100% FDI in single brand retail, with a 30% domestic sourcing condition though. The government developed cold feet in allowing partial FDI in multi-brand retailing succumbing to the pressures of the allies supporting the coalition government. Whether the government is going to allow FDI in multi-brand retail now or not, it should consider bringing the sector under either the Ministry of Consumer Affairs or under the Ministry of Commerce and Industry immediately. Someone needs to take care of the sector so that retailers will know the authorities to approach for development. On the other hand, many have expressed their fear that if the sector comes under any ministry, it may lose its independence to function. It is necessary to bring retailing under a ministry so that such an institution of well-defined practices will ultimately benefit consumers and retailers at large.

Good infrastructure is required for retailing in India. Every state has to come forward to create special retailing zones so that farmers and retailers are able to set up stores directly. The APMC market is yet laden with a mix of middlemen and channel partners who are so innumerable that the margins get squeezed for the retailer and the end price for the consumer surges high. Spaces are available at vantage points in every city and the states have to tap the potential of retail and make use of the available spaces too. For example, in the city of Mumbai we have the BEST bus depots in every principal area of the mega metro. Just imagine if the whole space above every bus depot is developed with a mezzanine, which can be used to create a mall! It will rain profits everywhere for the municipal corporation and at the same time there will be enough space to establish retail stores for customers to shop in their own comforts as they alight or exit the bus!

Archaic labour laws also urgently need revision in India. Retailing is unique to the extent that footfalls happen only during holidays and during late evenings every day. More than 75% of the daily sales happen between 6.30 and 8.30 pm at retail and similarly in many retail stores 65% to 70% of the week’s sales happens only on Saturdays and Sundays. And the regulations do not allow part-time employment in the sector. It is indeed an irony that the lawmakers do not take cognizance of genuine needs! The GOI needs to pay attention to the real needs of the sector and come up with changes accordingly and we can see a really bright future for organized retailing in India.

Dr. Gibson G. Vedamani