Move aside New York, Paris, and London. India may be quickly rising to fashion's front row.
This week, India opened its doors to foreign retailers in a move that is expected to open the floodgates to western brands entering the skyrocketing Indian market.
Unlike in the past, overseas retailers will now be allowed foreign ownership in India at a 51 percent rate for multi-brand retailers like Wal-Mart Stores and Tesco , and at 100 percent for retailers with a single brand. This is a first for the large retail chains like Wal-Mart and Tesco, who are welcoming the flexible business models.
Stores like Salvatore Ferragamo and LVMH’s Louis Vuitton have been inching into the vast Indian fashion market for some time. But until now, most of these stores have been found in five-star hotels or in one of the only two luxury malls DLF’s Emporio in New Delhi and Bangalore. In the past, these single-brand retailers have had partnerships with different joint ventures with 51 percent FDI limits, which means their Indian partners like Reliance Group, TATA Group and Adithya Birla received a cut of the profits.
But this new policy will be a "game changer" for the retail industry in India, says Michael Moriarty, vice president and partner at A.T. Kearney, a retail consulting firm.
“We've been waiting for this policy change for several years, and the major players have been developing their strategies in anticipation of this change.” That change he is referring to is the influx of new stores that will soon open their doors in cities like New Delhi and Mumbai.
India’s retail industry is a fast-growing one, at a rate of more than 20 percent each year, up from 8 to 10 percent four years ago. The size of sector is expected to rise to $833 billion by 2013 and to $1.3 trillion by 2018. The Indian retail business employs around 7 percent of world’s second most populated country.
Goldman Sachs Asset Management Chairman Jim O’Neill, the man who coined the term BRICs, recently wrote in a note that he could see India’s economy accelerate, while its counterparties may see more of a modest growth. He believes this policy change could be the catalyst that puts India in the same path to achieving “China-style GDP growth rates.”
“This is obviously huge news for the world’s biggest retailers given India’s fabulous demographic but it is probably even more important for Indian agriculture productivity and supply chains which is why policymakers have finally decided to take this step,” he said.
India’s retail structure is shifting. “We foresee the Indian consumer per capita income roughly doubling from $4,000 to $8,000. This is an important jump, as it includes increased expenditure on non-basic foods and non-food categories but also an increased use of organized rather than traditional retail formats,” Moriarty told CNBC.
Consumer predilection for higher-end goods and higher quality foods are increasing along with their increasing income. He says, since the new policy requires that 50 percent of any foreign direct investment go into bank-end infrastructure, it will improve the current structure and make the business more economical. It will also manage the growing demand for higher-quality products.
Foot traffic is gaining traction as well. Steve Madden and Kenneth Cole are the latest western brands that have agreed to expand in India through an agreement with Reliance Brands Limited, which also runs operations for Ermenegildo Zegna, Quiksilver and Paul & Shark in India. It was only last month that Hermes opened its first street-level, stand-alone store in Mumbai. The company has only three stores countrywide. But with the new policy that gives them 100 percent foreign ownership, India is expected to see a large flow of foreign designers, like Hermes, opening more doors.
India has not always been on the radar when it comes to fashion, but that could soon change. India’s influence in the fashion industry is growing and as western retail brands start flowing into the country, we will begin to see it become a growing influence and presence. Just ask Karl Lagerfeld, who will take his next Métiers d’Art collection for Chanel into the world of India.
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(Correction: An earlier version of this story misstated the percentage foreign direct ownership was allowed for multi-brand retailers. It is 51 percent, not 50 percent as previously stated.)