rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » FDI in retail: Sourcing clause to deter foreign companies

FDI in retail: Sourcing clause to deter foreign companies

January 11, 2012 17:25 IST

The government's decision to completely open FDI in single brand retail is unlikely to have any significant change as foreign firms will be deterred by the 30 per cent sourcing clause, say industry players.

Moreover, existing partnerships of foreign companies with local partners in India may not be majorly impacted, as they would adopt a wait and watch policy as "the government has a record of announcing something and backtracking on it."

"Despite the change in law, foreign brands will not simply break off with their local partners. Partnerships will not suddenly change just because 100 per cent FDI is now allowed in single-brand retail," Reliance Brands President and CEO Darshan Mehta said.

Stating that India remains a complex market, he said the restriction to source 30 per cent from villages and cottage industries would make it impossible for those brands, which are looking to enter India on their own.

Reliance Brands, a subsidiary of Mukesh Ambani-led Reliance Retail, has joint ventures or license arrangements with seven fashion and lifestyle brands, including Marks & Spencer, Diesel, Zegna, Timberland and Paul & Shark.

Ikea, one of the major global furniture brands that has insisted on entering India only on its own, however said, "India is a very interesting potential retail market for the IKEA Group. We will now evaluate the guidelines of the FDI decision in India and we hope to be able to present more information shortly about our possibilities to establish retail operations in the country."

India is since long a strong and growing purchase market for IKEA, an IKEA spokesperson said.

UK-based apparel retail chain Marks & Spencer has already said it will continue its partnership with Reliance to expand in India even if 100 per cent FDI is allowed here.

Even Benetton India Managing Director Sanjeev Mohanty had said that the company will continue to operate like a wholesaler and follow the franchise route in India.

The government on Tuesday notified 100 per cent FDI in single-brand retail, paving way for global brands either to enter into India on their own or have full ownership of their existing India operations.

The proposal involves mandatory sourcing of at least 30 per cent to be done from domestic small and cottage industries in case of more than 51 per cent FDI.

Commenting on long term implications of the move, Blues Clothing Company (BCC) Executive Director Abhay Gupta said, "Foreign brands could gradually increase their stake from 51 per cent to 100 per cent in a partnership."

He, however, said most international firms would prefer to adopt a wait and watch policy as "the government has a record of announcing something and backtracking on Blues Clothing Company currently is the exclusive franchisee for a host of luxury brands, including Versace Collection, Corneliani, Cadini, VJC and Gianni Versace.

According to Gupta, the 30 per cent sourcing clause would act as a deterrent for the luxury retail market.

"The best Scotch comes from Scotland even if a lot of foreign liquors are made in India. So the USP of a particular brand would be impacted if local sourcing is forced," he said.

There is not much that can be sourced locally when it comes to luxury products. Like in case of garments, a little bit of embroidery kind of work can be done by cottage units, but there is not much scope, Gupta added.

Commenting on the potential of Indian market, Ethos Swiss Watch Studios' CEO Yashovardhan Saboo said: "A lot of luxury watch brands are interested in setting up mono-brand stores in India...Yet, multi-brand stores will continue to contribute around 80 per cent to total sales in any market."

Ethos Swiss Watch Studios, is a multi-brand retail chain for premium and luxury watches.

© Copyright 2014 PTI. All rights reserved. Republication or redistribution of PTI content, including by framing or similar means, is expressly prohibited without the prior written consent.