India’s retail market, one of the largest in the world, has become a key target for global apparel brands. With a youthful population, increasing incomes, and growing aspirations, India offers immense opportunities for foreign retailers. The country’s vibrant economy, which ranks among the top four globally, is expected to drive substantial growth in the retail sector. As the Indian apparel industry grows at a rapid pace, global brands are eager to tap into this market, despite some regulatory hurdles.
Megatrends Driving Apparel Industry Growth in India
India’s economy has been expanding rapidly, with the retail sector growing at an annual rate of 9-10%, outpacing overall economic growth. The apparel sector, accounting for 8-9% of retail demand, is growing at a compounded annual growth rate (CAGR) of 10-11%, a trend expected to continue. Several megatrends are contributing to this growth:
- Shift from Unbranded to Branded: There is an increasing preference for branded products as consumers become more discerning and willing to pay a premium for quality and style.
- Growth in Organized Retail: The organized retail sector is expanding, providing a more structured and professional environment for both domestic and international brands.
- Customer Shift from “Value” to “Aspirational”: Consumers are becoming more aspirational, demanding products that align with their lifestyle and status. This shift is pushing brands to cater to higher-end markets.
FDI Policies for Foreign Brands – Current Regulations: Pros & Cons
Foreign Direct Investment (FDI) policies are central to the expansion of global brands in India. The retailing models in India are classified into two categories: Single Brand Retail Trading (SBRT) and Multi Brand Retail Trading (MBRT).
- Single Brand Retail Trading (SBRT): This model allows retailers to sell products under one brand (e.g., Nike, Adidas). As of 2018, 100% FDI is allowed under the automatic route for SBRT, which means foreign brands can enter the Indian market without needing prior government approval.
- Multi Brand Retail Trading (MBRT): This model involves the sale of multiple brands under one roof (e.g., Shoppers Stop, Pantaloons). For MBRT, FDI is capped at 51%, and prior government approval is required.
The FDI regulations are different for the two-retailing model, which can be summarised as follows:
| Parameter | Single Brand Retail Trading (SBRT) | Multi Brand Retail Trading (MBRT) |
|---|---|---|
| Approval Route | As of January 2018, 100% FDI is allowed under the automatic route for SBRT, eliminating the need for prior government approval. | FDI is capped at 51%, and prior government approval is required. There is no automatic route available for MBRT |
| Sourcing Requirement | Foreign brands owning over 51% of a single-brand entity must source 30% of their product value locally from the 6th year. | At least 30% of goods must be procured from Indian small and medium enterprises (SMEs) and |
| Coverage and E-Commerce Restrictions | No restrictions on coverage, and SBRT entities are also permitted to sell through e-commerce platforms | Multi-brand retailers with 51% FDI can only operate in cities with >1 million population and must use brick-and-mortar stores, not online channels. |
| Pros | The 100% FDI automatic route eases market entry, while the 30% local sourcing boosts domestic textiles. | Under MBRT, Large investments boost economic growth, develop infrastructure, create jobs in the apparel industry. |
| Cons | Meeting the 30% local sourcing requirement is challenging for specialized brands, as it becomes difficult to source a few high-quality products domestically | The 51% FDI cap deters full control. The $100 million minimum investment, with 50% for back-end infrastructure, and the e-commerce ban complicate investments. |
Challenges and Strategic moves by Foreign Brands
Despite India’s growth potential, the apparel sector has seen relatively low FDI inflows, amounting to approximately $700 million over the past decade. Several challenges deter foreign brands from entering or expanding in India:
- Finding Local Partners: The need for local partnerships is crucial due to restrictions on foreign equity and sourcing requirements.
- E-commerce Restrictions: The inability to operate online stores for MBRT entities limits the growth potential for brands seeking to leverage digital channels.
- Regulatory Uncertainties: Changes in government policies and complex regulations can create an unpredictable business environment.
- Local Sourcing Challenges: The 30% local sourcing requirement for both SBRT and MBRT presents logistical and quality control issues.
Despite these challenges, brands such as Decathlon, H&M, and Zara have thrived in India by embracing local sourcing. Collaborating with Indian manufacturers allows foreign brands to meet sourcing requirements while benefiting from cost efficiency, quicker adaptation to market trends, and a lower carbon footprint.
Successful Examples:
- Decathlon: After transitioning to single-brand retail in 2013, Decathlon now operates 129 stores in India. The brand supports India’s ‘Make in India’ initiative by sourcing products locally.
- H&M: Entered India in 2015 and rapidly expanded by meeting the 30% local sourcing requirement through partnerships with local suppliers.
Proposed Changes to FDI Policies for Foreign Brands
India’s FDI policies are relatively stricter compared to countries like Vietnam, Singapore, and Bangladesh, which offer fewer restrictions and more incentives for foreign investors. For instance:
- Vietnam: Allows 100% foreign ownership and fewer local sourcing requirements.
- Singapore: Offers tax incentives, grants, and streamlined regulatory frameworks.
- Bangladesh: Provides tax holidays, duty-free machinery imports, and export incentives.
Easy Entry Route for Foreign Brands: The Advantage of Partnerships
Given the complexities of FDI regulations, many foreign brands opt for joint ventures, licensing agreements, or franchising rather than the SBRT route. These partnerships allow global brands to enter the Indian market while adhering to local laws. In joint ventures, foreign companies collaborate with Indian businesses, sharing equity and operational control. Licensing agreements provide a flexible entry method, where Indian firms manage the brand’s marketing, sales, and distribution.
Conclusion
India’s apparel retail sector presents a wealth of opportunities for international brands due to its large, young, and increasingly affluent consumer base. Despite challenges posed by FDI regulations, global brands can successfully navigate these hurdles through strategic partnerships, local sourcing, and compliance with India’s unique market conditions. Easing FDI policies could significantly enhance growth prospects, making India an even more attractive destination for global apparel brands. The shift towards sustainable fashion, digital retailing, and innovative technologies such as AI and AR further adds to the potential for success in India’s dynamic retail environment.
