Relaxing local sourcing norms will encourage more retailers, while local producers will be forced to be competitive in the global marketplace of sourcing
Single brand retailers have for long been asking for a more relaxed policy environment. The government has accepted their view. On Wednesday, it decided to relax sourcing norms for single-brand retailers. Such companies can now operate online-only model waiving the clause of having mandatory brick-and-mortar stores first. However, these brands will have to open brick-and-mortar outlets within the first two years of starting online stores. What this does is allow them to build a viable online business and then invest in a brick and mortar setup, than the other way around.
For long, independent brands, and companies with just one brand have refrained from entering India because of the mandatory brick-and-mortar rule. The main reason is the high cost of commercial real estate in high streets or shopping malls. The decision to allow them to operate online-only model will open the doors for almost all global retailers who have been upbeat about India’s consumption story despite the slowdown.
The two-year window is good enough to test waters first and then open brick-and-mortar outlets on their own or with a local partner depending on the consumer response to a particular brand and its scope of business. The change in regulations has opened up the market for everyone to test the waters before making large-scale investments.
Having a local partner may no longer be a key to retail in India anymore. Brands like Zara, H&M, and GAP have entered the market in the past few years in partnerships with local retailers for understanding of the Indian market dynamics as they were bound to open physical stores. To operate online-only model, they will not need that. But, when they open brick-and-mortar outlets, they may opt for a local partner to deal with local issues efficiently.
As the government statement mentioned the restriction was out of sync with the current market practices. And, it believes that online sales will “lead to creation of jobs in logistics, digital payments, customer care, training and product skilling”.
That is bound to happen. Examples from the recent past show what marketplace operators like Amazon’s can achieve. Amazon has reportedly created 200,000 jobs in India since entered India in 2013, besides the fact that it works with 500,000 sellers who also have added more employees as they grew.
When the country’s unemployment is recording a 45-year high (2017-18), the government will make all out attempts to take steps to create jobs.
On the sourcing front, single brand retailers can now meet the norms of 30 percent as an average during the first five years, and annually thereafter. Also, any sourcing made by the company that owns the brand, its group companies and even third-party vendors will now be accounted to meet the local-sourcing requirements. So, this could mean that if Apple’s vendor Foxconn sources materials locally that could also be considered as meeting Apple’s local sourcing requirement. Or, if H&M’s vendor sources stitching materials or the fabric that will also be counted as part of H&M’s local sourcing requirement.
This changes dynamics overnight.
Stringent local-sourcing norms have so far discouraged companies like Apple that cited quality concerns. Even Swedish retailer Ikea deferred its India store plans multiple times before finally opening its first outlet last year. This is despite Ikea sourcing certain products, such as carpets, from India for many years.
If local sourcing norms are stringent, companies like Apple will not be able to make all models of its products in India as the company practices a global sourcing model to maintain its quality across product segments. While Ikea opened a store last year, its Hyderabad store does not sell all products that it sells globally. That could change now due to the relaxed sourcing norms.
The 30 percent local sourcing rules were imposed aiming to boost home-grown small and medium companies, village and cottage industries, local artisans and craftsmen. But the response to this route has not been enthusiastic so far.
Foreign direct investment (FDI) in single-brand retail has not improved much from the days when India permitted up to 51 percent FDI. During 2000-18, India received a total of $1.4 billion of foreign investments in retail (all retail), just 0.36 percent of the total FDI inflow, according to data available with the Department of Industrial Policy and Promotion.
It is obvious that the government will look for options. And, finance minister Nirmala Sitharaman has proposed this in her maiden Budget for 2019-20.
Will local producers be hurt? It won’t if they manage to maintain the quality and pricing. Companies like H&M and GAP have been sourcing from local apparel makers, and Made-in-India H&M or GAP products are not very uncommon in other parts of the world. Truth is, Indian producers will have to be competitive enough in the global marketplace of sourcing.
When one good news comes, people expect another. The point here is, will the government explore relaxing FDI norms for multi-brand retail as well?
Considering the fact that ruling Bharatiya Janata Party (BJP) election manifesto for the general elections 2019 was silent on the issue of FDI in multi-brand retail, unlike its 2014 manifesto that clearly mentioned that the BJP will not support FDI in multi-brand retail, the possibilities of some relaxation on FDI in multi-brand retail cannot be ruled out. But, it did mention that the party will bring in a national Policy for Retail Trade to protect interests of local traders, which may imply that the FDI norms in multi-brand retail will remain unchanged.
For now, it’s a booster dose for single-brand retailers who have long been eyeing the nation's retail potential with a population of 1.3 billion.