Talk of trade wars became a reality this last week but many still hold out to the view that these ar...
Global Retail Names Headed to India
08/22/2012 11:15 am EST
Many of the world's top fashion brands and retailers are buying controlling interests in operations in India after a change in laws governing foreign direct investment have been changed, which has huge implications, reports Rebecca Bundhun of The National.
Six retailers—the fashion brand Tommy Hilfiger, the clothing company Brooks Brothers, the Italian jewelry company Damiani International (Paris: 4D1), the French brand Promod, Fapa, and Na Pali Europe, part of Quiksilver Europe—have applied to own up to 51% of their operations in India, the ministry of commerce and industry revealed last week, local press reports stated.
Nevertheless, reform announced in January by the government removes a cap at 51% for foreign investment from retailers that sell only one brand to allow 100% investment, on the condition that they source 30% of the value of their products locally.
This has lured the Swedish furniture chain Ikea, which plans to invest close to $2 billion to set up 25 stores in India. The government last November revealed plans to open up India's retail industry to allow 51% foreign direct investment in multi-brand retail.
But soon after, those plans were put on hold, as they were met with opposition from many who were concerned that giants such as Wal-Mart (WMT) would wipe out many of India's small businesses and result in job losses.
Analysts argue that foreign investment would boost and modernize India's economy. "Overall, if we see the past experience [foreign direct investment (FDI) in retail] will only be beneficial to the country in the long run," said Vidya Mahambare, the principal economist at Crisil, a ratings and research firm.
"It is portrayed as a lot of job losses, but if we see the welfare impact and the jobs that will be created and the jobs that will be lost, on an overall basis it should be positive for the welfare of the country. In any process there will some beneficiaries and some losers.
"How you take care of the people who are losing their jobs of their business—whether you retrain them—that is what is critical. All the countries have gone through this."
Only eight states and two union territories in India have expressed their support so far for allowing 51% FDI in multi-brand retail, after the government wrote to all of the states in June requesting support on the issue, said Jyotiraditya Scindia, India's minister of state for commerce and industry.
"Liberalization of the multi-brand segment could provide easier access to foreign direct investment, and would have a positive impact on the capital structure and liquidity profile of companies in this sector," according to analysts at Fitch Ratings, which recently downgraded its outlook for the sector, citing deteriorating consumer spending power amid slower economic growth and high inflation.
Mahambare points out that consumers would only benefit from foreign investment. "All the consumers are going to get most of the goods at a lower price than what they're getting right now."
Meanwhile, the French retailer Auchan announced last week that it had signed a franchise agreement with the Max Hypermarket India division of Dubai's Landmark Group to develop the hypermarket business in India. They plan to open up to 15 new stores within a year across the country, while existing Max Hypermarket stores are to be rebranded as Auchan.
"The Landmark Group has aggressive growth plans for India," said Ramanathan Hariharan, the chief executive of Max.
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