Call of India

Though it still restricts foreign investment and ownership, the country also has a strong economy, a progressive government and a massive middle class.
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Posted August 24, 2009
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Mysterious India: an economy booming on the strength of its technological sophistication, and an infrastructure that can’t produce a reliable glass of drinking water.

But boom it does. The Asian sub-continent of 1.1 billion people continues to be the favorite of international companies outsourcing their IT, call-center and back-office functions. It has a huge and emerging consumer class; a stable banking system; a rising credit card industry; a pro-growth government; and a taste for Western goods. And it seems to be riding out the current worldwide recession. After all, the Indian outsourcing industry grows most when the rest of the world tries to save money.

So it could be the land of expansion for U.S. retailers and brands. The Indian retail market, the fifth-largest retail destination globally, was ranked “the most attractive emerging market for investment in the retail sector,” by A. T. Kearney’s annual Global Retail Development Index (GRDI), in 2009.

“Many other factors make India a better opportunity for expansion-minded U.S. companies than other foreign markets,” says Dawn Clark, principal at NBBJ (Seattle). “It’s a democracy; its media are open and uncensored; and its citizens speak English.” But it’s also a country with a strong 62-year history of protectionism and laws that forbid direct foreign investment of local businesses. Those laws include – in fact, emphasize – the inability of Western retailers to own and operate stores in India.

“India was born into independence in 1947 with the pledge that ‘no foreigners will ever control us again,’ ” says Mortimer Singer, senior vp of international retail consulting firm Marvin Traub Associates (New York).
But Singer notes that some U.S. brands, such as Levi’s, Samsonite and Tommy Hilfiger, have developed licensed partnerships to produce their goods locally, while creating franchises to open branded stores. And he sees a particularly strong market for Gap and other moderate-priced American chains if they’re able to do the same.

Walmart has entered into a joint venture with the giant Indian conglomerate Bharti Enterprises to roll out a chain of Best Price Modern stores, with plans to open at least 15 outlets across the country in the next three years. But those are wholesale stores that will sell to restaurants and owners of small shops, a restriction imposed by the Indian government.

Restrictions aren’t the only thing impeding American involvement in Indian retailing. Any U.S. interest in the Indian retail market must start with a knowledge of the local culture and habits. The Indian consumer experience is far different than the American one. “Most Indian consumers don’t get in their cars and drive 15 miles to fill up on goods for the next week or two,” says Ken Nisch, chairman of JGA Inc. (Southfield, Mich.), who just returned from a recent trip to India. “Many don’t have cars or refrigerators. So they shop daily and buy what they need immediately.”

NBBJ’s Clark points out that Indians love entertainment, art and design. And with a multi-million person diaspora, they travel, call, surf, e-mail, text and tweet around the world, and are connected to Western brands. “They want their designer labels just like everybody else does,” she says.

But tastes vary in different parts of this huge country. The local saying, says Singer, is: Mumbai money whispers (frugal, conservative), Delhi money shouts (flashy and colorful). In fact, notes Nisch, there are a great many cultural divides in India: North and South, Hindu and Muslim and 29 different languages. There’s also a stubborn, age-old caste system.

However, says Singer, what all Indians have in common is love of a bargain. That’s been the problem with American brands. “Unless they have a joint venture with an Indian company,” Singer says, “the cost to manufacture, import and pay the duties on their goods drives the retail price too high for Indian consumers.”

American brands that get to India may also find a built-in gray market of knock-off competition awaiting them. For instance, Timberland will encounter a local brand called Woodland, which even has a similar tree logo. Woodland also has 230 stores nationwide and 50 more on the way, and is a staple in India’s urban shopping malls, which could cramp Timberland’s planned expansion in India.

As U.S. commerce secretary Gary Locke told a group of Indian executives visiting Washington this year, “U.S. businesses need assurances that when they come to India, they’ll be operating in a secure and reliable environment for intellectual property.”

Another difference is the lack of chain stores. Only 3 percent of Indian retail is what Indians call “organized” – that is, chain operations. The rest are still tiny operations run by local artisans in densely crowded urban marketplaces and dusty rural bazaars. However, “organized retail is growing at 20 percent annually and encouraging mall building, which would ultimately amount to the creation of hypermarket chains,” according to a study by global auditor/advisory service KPMG and the Associated Chambers of Commerce and Industry of India.

And here is where American retail design has an opportunity. “About 400 malls have been built around the country in the last six years,” says Singer, “but most of those have been poorly planned and developed and many of them will fail.” He notes, for example, that one mall was opened recently in New Delhi with only luxury brand stores as tenants. “There was no sense of balance or mix,” he says. “There’s a lack of U.S. design and merchandising know-how.”

Indian retailers also have a still-developing sense of visual merchandising. Most of the programs are print-based and provided by the brands. “Indian retailers are still learning about good brand presentations,” says Clark, “and that offers a big opportunity for U.S. retail consultants.”

Some architectural firms, like NBBJ, got their foot in the door by building relationships with those developers creating mixed-use projects all over India. “The commercial and residential developments also include retail,” says Clark. “That’s where American knowledge and expertise can come into play. It’s an early, but emerging, opportunity.”

SIDEBAR: India: Growth and Change

While Indian laws are still restrictive to foreign concerns, this seems the right time to begin examining opportunities.

One of the Lucky Few
India is the second-fastest-growing economy in the world, with an annual GDP growth rate of 5.8 percent as of March 31, 2009, causing The Wall Street Journal to remark, “India has withstood the global downturn better than many nations with export-driven economies that are mired in recession or forecast to post scant growth for the year.”

Steady Growth
The Indian retail market, already at more than $500 billion as of 2008, is expected to rise at the rate of 8.5 percent a year.

Upwardly Mobile
The retail consulting firmTechnopak Advisors (Gurgaon, India) released a study, called “India: Changing Consumer & Retail Trends,” stating that young Indians have moved from self-denial to indulgence; from saving to living off credit cards; from taking religious pilgrimages to going on international vacations; from basics to luxury. To meet those needs, says Technopak, retailing has emerged from holes in the wall to large-format retail chains and from street markets to malls.

This is Part 3 of VMSD’s special report, “Deconstructing BRIC.” To read more on Brazil, click here; for more on Russia, click here. Up next month: China.