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Corporate Oct 31, 2012

Global retailers wary of India, defunct local cos rush to revive

By Firstbiz Staff

Global retailers are still in a wait-and-watch mode when it comes to India play as the FDI policy has divided the country into two zones- first with state that have welcomed the move and termed it as a bold reform necessary for growth and second those which have opposed it on grounds that it will kill the local kirana shops.

It is now only a matter of time before global retail giants such as Wal-Mart, Tesco, Safeway, Auchan and Target set up stores in India and become household names. The government has already cleared three FDI proposals worth Rs 106 crore in single-brand retail, including that of America's oldest clothing retailer Brooks Brothers and UK's footwear chain Pavers England.

It has also allowed foreign retailers to set up majority-owned (with more than 51% shareholding) single-brand stores in India, but on the condition they would have to source 30% of their products from Indian vendors.

Foreign retailers continue to seek clarifications from the government even after the country eased 30 percent mandatory local sourcing norm.Reuters

Yet foreign retailers continue to seek clarifications from the government even after the country eased 30 percent mandatory local sourcing norm. One reason for this could be a perception that countries such as India are not quite ready to make a truly world-class product. Secondly, many local suppliers to big global brands have strict non-disclosure pacts, which forbid them from revealing names of clients as western consumers are wary about buying products made in Asia due to poor perception about the quality of products, and labour-related issues.

In its Global Retail Development Index (GRDI), AT Kearney had ranked India fifth in terms of its attractiveness to foreign retailers looking to enter the market. Challenges in entering this market were adherence to local sourcing norms, discretion to state governments, and the need for consistent support from the Centre so that "India can give confidence to global retailers."

As per the current FDI policy, state governments can decide if they want such a retailer in their states. According to a report in the Economic Times, France's second-largest retailer, Groupe Auchan SA, which signed up a franchisee agreement with Landmark Group in August, is exploring possibilities of investing in India but is waiting to see how states respond to the policy since majority of Auchan's stores are in those states that do not permit FDI in supermarkets.

According to the ET report, law firm Clasis Law that is facilitating the entry of many single-brand retailers including Massimo Dutti and Promod in the country, has also written to the Department of Industrial Policy and Promotion to spell out sourcing conditions. "Does the term 'preferably' imply that while sourcing its purchases from India, based on the viability and feasibility of such sourcing, the Indian company which is the recipient of FDI is free to decide between Indian suppliers which are not MSMEs, village and cottage industries, artisans and craftsmen?'' Clasis Law has asked DIPP.

But even while global players and investors are busy considering India entry, on the domestic front at least players are getting ready to face the new saga of organised retailing.

Defunct and struggling local retailers such as Subhiksha and Vishal Retail are ready to ramp up in the hope of attracting FDI. Subhiksha's nationwide network of 1,600 store collapsed when the company ran out of cash to service its debt. Since then, it has reopened nine stores under the franchise route but is now planning a big-scale expansion with the hopes of attracting foreign money. Even Vishal Retail is on an expansion drive under its new owners-an alliance of TPG Capital and Shriram Group.

by Firstbiz Staff

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