Indian market holds multinationals at bay

In India, Marks and Spencer has learned that small and easily overlooked details can determine whether sales are made. Take, for example, men’s shirts. In the UK, only a third of M&S shirts have pockets. But in sweltering India, where jackets are required only on formal occasions, most men want a pocket on their shirt for handy storage.

For its first eight years in India, M&S, the mainstay of the British high street, paid little heed to this. Operating through an Indian franchisee, Planet Retail, M&S stocked its 16 Indian stores with apparel reflecting UK consumer tastes.
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That is changing, along with the retailer’s business model for the country. M&S ended its franchise deal in 2008 and took 51 per cent of a joint venture company which it set up with Reliance Retail, part of one of India’s largest conglomerates. It has started tailoring its local offerings for Indian tastes – from more brightly coloured men’s polo shirts to higher necklines and lower sleeves for women’s garments.

“Until you put people on the ground in a country, you are never going to understand it,” says Mark Ashman, chief executive of Marks & Spencer Reliance India. “And when you start putting your money in, you start making different decisions. It brings a different clarity, and clout.”

Most international retailers would follow that advice – if only they could. India severely restricts foreign investment in retail businesses, frustrating global companies that see vast potential in a market where modern retailing is still in its infancy.

Only about 8 per cent of urban Indian retail spending takes place in the “organised” sector, while in rural areas it’s almost none, according to New Delhi-based Technopak Advisors. But spending in modern retail stores has grown 20 per cent a year over the past four years, a pace expected to accelerate.

So far, though, global retailers like Tesco, Walmart and Carrefour have been relegated to the sidelines. India prohibits any foreign direct investment in multibrand retailing, which is the preserve of Indian players including 12m mom-and-pop shops, retail chains such as Pantaloon’s and Shoppers Stop, and conglomerates like Reliance, Bharti Enterprises and Tata, with the Reliance Fresh, Easy Day and Star Bazaar stores respectively.

Walmart and Tesco have found a way into the market with wholesale businesses, which can be up to 100 per cent foreign-owned, to supply both mom-and-pop stores and Indian corporate partners while awaiting what they hope will be further opening.

“People who see India as a good market are coming in with the expectation that regulation will change,” says Raghav Gupta, president of Technopak.

New Delhi permits foreign ownership of single-brand retailing, where all goods sold in a store belong to a single brand. Even then, foreign equity is capped at 51 per cent. That restriction irked Ikea, which last year abandoned efforts to set up shop in India, saying New Delhi had backtracked on pledges to allow 100 per cent foreign ownership.

But M&S, through its joint venture, is aiming for 1m sq ft of retail space across 50 stores in India within the next five years. It is also making fundamental changes to its business.

Most goods sold at M&S in India have been imported, as the retailer usually sources globally. But with Indian duties on imported apparel averaging 40 per cent, Indians complained that they could buy M&S products more cheaply in the UK than at home. That pushed M&S to find more local goods for its Indian stores. “Local sourcing is a critical part of our strategy to lower prices,” says Mr Ashman.

This year, 39 per cent of goods sold at M&S in India were made in India, up from 20 per cent during the franchise days, and the target is 70 per cent.

While lowering prices, the shift has also facilitated the modification of western apparel for local tastes.

“If you’ve got a market you think is going to be really big, it’s worth thinking about what the consumer in that market really wants within the parameters of the brand,” says Mr Ashman.

But M&S does face constraints. At its Indian stores, food – which accounts for half its global sales – is conspicuously absent. Even if the goods are all of a single brand, New Delhi is not ready to let foreigners sell groceries directly to its citizens.