This report is aimed at analyzing the Indian market for retail clothing in terms of being a favorable a destination for setting up operations by a UK based clothing retail business Rainforest-UK (RUK) .To facilitate this aim, the report provides an in-depth understanding and examination of the local management culture of India and hopes to identify the key legal, financial and regulatory aspects to enable a deeper understanding of the implications and considerations which would serve to guide RUK.
India is currently one of the more promising emerging economies of the world today and has been aptly labeled as a population ‘powerhouse’. As well a analyzing the key factors in terms of the national business system and prevailing cultural factors, the report also analyses the legal, political and regulatory risks inherent in investing in an Indian venture. The report concludes that India may be a favorable destination for RUK’s clothing retail business but the inherent legal and political risks must not be conveniently overlooked.
In the sections below, the report will comment upon the Indian apparel retail market in terms of its macro environment, which pertains mostly to the country’s demographic characteristics as well as its economic and socio-political tendencies in facilitating the foreign investors. This will mandate a commentary upon its business regulations, infrastructure and technology. In terms of expediting things at the micro level within the Indian clothing retail market, there will be a cultural analysis of the targeted Indian consumer base in terms of the strong and distinct Indian culture and competition from local retailing companies. This will be followed by a commentary upon the possible financial and regulatory risks this retail chain could encounter while setting up business in India.
“Rainforest-UK (RUK)” is a retail-clothing firm specializing in formal, semi-formal and party dress. It has chains throughout the United Kingdom and recently a store was opened in Paris to sell its affordable line of party wear. Most of these dresses are heavily embroidered and are known for their popularity as the ideal wedding dresses with in the South-Asian community in United Kingdom. After several surveys and meetings with several interested parties from India, the management of Rainforest has reason to believe that by creating a fusion of Eastern and Western designs it will be able to conduct successful business in the clothing retail business in terms of wedding and party dresses in India.
The Indian retail market has come a long way in the past four decades (Biswas, 2006). From the most basic ‘karyana’ stores and bazaars, ration centres and utility stores as well successful street vending small enterprises, modern India has seen a consumer boom in terms of the booming self service retail outlets and organized retailing cloth chains which have occupied, and do occupy, most of the business space in its metropolitan cities (Biswas, 2006). Most of the traditional ceremonial clothes like Saris and Lehengas are however still sold by specialized small shops known exclusively for their unique and specialized designs (Biswas, 2006). However, today even the Sari, the popular Indian national dress, is mass manufactured by large factories and sold at retail outlets. In addition to this, India has faced a large wave of westernization and the local dresses being manufactured by Indian designers are beginning to reflect this trend. In fact, many of these designs display a fusion of local and western designs (Biswas, 2006) to an affluent, aspirational and rapidly growing middle class.
Rainforest-UK, (hereafter referred to as RUK), although well aware of the changing retail scene in India, needs to understand that it will need to adopt the ‘Bollywood effect’ to ensure success in the Indian clothing retail industry (Gopal and Srinivasan, 2006). This is necessary because India is not only a country of colours and ceremonies, but it has a large consumer base very much attached to its local cinema. The local Indian population looks towards its local cinema idols for the latest trends in fashion. While it is true that the current movie culture is also very much anglicized, traditional Indian dresses still feature prominently in the Indian movies, particularly in the South Indian (Tamil) cinema (Khanna and Palepu, 2006).
The national business system and cultural conditions in the Indian retail market
Modern India has been a good example of a successfully emerging economy for almost two decades and has survived the financial havoc wreaked by the recent subprime crisis (Halepete.J and Iyer, 2008). The country’s rich cultural and historical heritage has made it a favourable destination for the tourism and hospitality industry (Gopal and Srinivasan, 2006). It addition to this, the large population of the country offers many advantages to foreign investors seeking to invest in labour intensive ventures. Thanks to its British heritage, he country is one of the largest democracies in Asia – (though even the British could not cleanse India of its vile caste system) – and boasts of one of the fastest growing GDP’s in the world: rate 8% per annum (The Economist, 2006) was recorded at US$690 billion in the year 2005.The increasing standard of living and the rapid Westernization of the local population has led to an increased purchasing power parity along with heightened consumerism amongst the younger generation of Indians (The Economist, 2006), despite the fact that 300 million live in dire and inescapable poverty.
Based on the above it would not be wrong to say that the local Indian clothing retail sector has gone through a revolution due to increased urbanization and the increase in multinational shopping malls (Halepete and Iyar, 2008). The emerging consumer in the retail market is not only brand conscious but also pays close attention to fashion trends locally and in Western countries. The Economist magazine predicted in 2006 that by 2012 the Indian clothing retail industry is expected to grow to a formidable US$4 billion (The Economist, 2006).
In the context of RUK, it should be remembered that India has a large consumer base as well as a large worker base. While considering setting up operations in the place as either a partner in a local business or as a full fledged foreign investor, the company cannot only benefit from low operational costs due to the vast exchange rate difference (Pellegrini, 1991). This seems like a profitable situation but there has always been an issue of a rather biased protectionist aspect of the Indian trade policy, which is a trade barrier RUK will have to pay attention to. This is because small and medium retailers (The Economist, 2006) dominate its clothing retail business sector to a large extent (almost 95%). Things have changed recently via steps by the state to provide for deregulation of rigid trade policies. The new incoming FDI laws are specifically aimed at attracting foreign direct investment (FDI) to allow for privatization on a large scale in a bid to attract western retail firms to establish bases there. The current trade law and policy as it stands now allows a foreign firm like RUK, which is essentially a UK based single brand retailer, to conduct joint ventures of 51% partnerships (Halepete and Iyer, 2008).
As mentioned before a consideration of culture is the very basis of RUK’s success and clothing is closely affiliated with the culture of a jurisdiction (Schiffman et al, 1983). In equating the importance of culture in the business organization Cooke (2005, p. 4) states:
“…in practice, culture incompetence in business can easily jeopardize millions of dollars (or its equivalent) of resources in wasted negotiations or lead to fewer contracts, less sales and impaired customer relations”.
Speaking of clothing culture specifically, it would be interesting to note that clothing amounts to almost a third of the current Indian retail industry. Traditionally, Indian women preferred tailor-made saris which would be carefully sized, designed and custom stitched by the local shop. However, the modern Indian aspirant-middle-class woman has less time on her hands due to work and education (Biswas, 2006). This, along with Western influence has prompted them more than ever to prefer ready-made dresses whether for weddings or for party wear. As mentioned before, this influence has also been heightened through the cinema in terms of formal clothing, footwear and accessories. Overall there has been a marked fusion of ethnic designs with Western chic designs (Halepete.J and Iyer, 2006). This means that even the local dresses, which traditionally covered more body, are skimpier with Saris and Lehengas (traditional long skirt) sporting spaghetti strapped tops. There is already a trend of skimpy models and the clothing is more suited to favour the ‘thin is in’ trend (Biswas, 2006).
Understanding the target female Indian consumer base for retail clothing
Since India has a large segment of its population falling within the economic parameters of ‘middle class’, RUK will have to understand the psychology of the Indian consumer before designing a market strategy for retail investment (Hawkins et al, 2001). The products RUK is offering are mainly party and bridal dresses, which will firstly have to be adjusted in term of costs and profits for affordability by the local base. The middle class Indian’s priority is saving, as in most non-Western societies, but marriage figures prominently in the culture as well and the culture is extremely conservative and not as sexualised as in the West. The slightly higher middle class consumer also prefers to enjoy a good social life, which means that party dresses will be very much in demand (Halepete.J and Iyer, 2008). However, RUK might have to go through intense changes in its design strategies to add a more authentic ethnic touch.
Furthermore, proper advertising and contacts with the ‘who’s who’ of the fashion industry might allow RUK to be able to afford a premium price from the elite consumer base which prefers westernized Indian wear and whose spending habits are more conducive to charging a premium price (Dunning, 1981). The target consumer base for RUK should focus mainly upon the young population, mainly in their twenties, and mainly working for multinationals in urban parts of India (Dunning, 1981). This is because the culture in the cities is modern and the demand of Westernised formal wear is always high; the village-based countryside is poorer and populated by millions living in poverty. Many urban individuals have a higher disposable income, which means they are more likely to prefer well-designed and ready-made Western clothing. Another economic factor making the consumer base a good target is the increased availability of credit cards, which has increased the purchasing parity of the young Indian consumer, particularly working women who are more social and liberal than ever (Gopal and Srinivasan, 2006).
Trade Patterns and matters of competitive advantage in the context of Indian retail clothing
As mentioned above, the recipe for success is largely engulfed in recognizing the cultural dimension of the matters at hand. This is a premise, which has been recognized in academic literature as well. According to Louie (1986, p. 42):
“Every culture … has three fundamental aspects: the technological, the sociological, and the ideological. … The technological is concerned with tools, materials, techniques and machines. The sociological aspect involves the relationships into which men enter. The ideological aspect comprises beliefs, rituals, art, ethics, religious practices, and myths.”
In the context of RUK all three aspects are of fundamental importance. There is the first dimension of setting up a base, if possible, in a culturally complex jurisdiction in terms of the legal and regulatory nuances involved (Palmer and Hartley, 1999). Then there is the problem of dealing with the possibly hostile local business retailers who might have the advantage of low cost operations and a better understanding of the intricacies and psychologies of local tastes and fashions going in their favour (Palmer and Hartley, 1999).
Based on the above and from a more cultural perspective, RUK will have to face its share of the invisible offensive launched by local retail chains (Rao, 2006). Such opposition and competition are factors, which operate regardless of the host country’s trade policies towards foreign investors, which might at first sight seem very conducive to FDI hopefuls abroad. Many local Indian brands have entered the clothing retail scene now and “Westside”,” Pantaloon” and “Globus” are only a few names in these success stories (Rao, 2006). Foreign clothing retailers will face tough competition from successful clothing chains by local fashion designers. A more blatant offensive has also been launched in terms of intensive lobbying by local designers and retailers to drive away foreign clothing retailers by offering cheap prices and conducting aggressive advertising strategies (Rao, 2006). Protectionist, not to mention xenophobic and racist, attitudes may be expected – as may considerable obstructive bureaucracy, nepotism, croneyism and the consequent corruption and ‘bribe culture’.
Therefore, the author would advise RUK to consider the option of exporting its products to India or to consider going into partnership with a local retailer to reduce the negative protectionist repercussions amongst the local competition base. Going into a partnership or joint venture with a local retailing firm may have considerable advantages of its own (Palmer and Hartley, 1999). This is because it should be understood that India does not have a uniform culture or language, apart from that imposed by the British who, actually, created the country called ‘India’ in the first place. It boosts of great cultural diversity with over 23 different cultures, many of which are extremely strong in terms of their values and clothing preferences (Biswas, 2006). While RUK may be able to perform extremely well in the major metropolitan cities like Bangalore and Bombay (Mumbai), it is unlikely it will be able to establish roots in the Southern parts of India without proper marketing strategies and input from local retailers. Another aspect mentioned before is the “Bollywood” effect. Clearly if RUK is able to make inroads into the Bollywood fashion industry it has better chances of being recognized on the local catwalks and to establish itself as a premium brand of clothing (Halepete.J and Iyer, 2008).
Possible Political, Financial and Regulatory Risks for Rainforest UK and Corporate Social Responsibility
In the technological context, while definitely at the front India is experiencing growth and the middle class consumer segment is growing indeed, another face of India is its poverty and illiteracy which makes the technological dimension and options for design implementation very limited. Moreover, relentless and arguably unstoppable population growth mean that no matter what is done, India will always have hundreds of millions of its citizens living in dreadful poverty. Many parts of India, which might offer cheap labour, are subject to regular power cuts, damage from monsoons and unemployment (Rao, 2006). At the same time some parts of India have extremist groups, which are prone to violent racial disputes (Biswas, 2006), and religion and caste are points of tension which may lead to future instability; there is indeed a very real and ever-present risk of war – and even nuclear war – with Pakistan. While insurance setups and regulations have, to some extent, minimized the risk arising from most problems caused by this political dimension, there is a marked hostility towards multinationals due to pockets of communist sentiment in Indian society. To date, the clothing retail sector has been one of the few industries that have been liberalized by local laws to attract FDI, especially as previous nationalist governments showed a marked distrust of the West (The Economist, 2006). This was made more complex by protests from the local business community towards the foreign investors – protectionism pure and simple, despite the loss of British jobs to India and British manufacturing business to India too. The law is still not very FDI friendly though, as foreign companies such as RUK are not allowed to sell directly to the consumer base. (Biswas, 2006) This cements the author’s suggestion that RUK will benefit more from going into partnership with local retail business than struggling to conduct business on its own: it needs a partner who ‘knows the ropes’ and who can negotiate India’s labyrinthine and corrupt bureaucracy, and also win the ‘hearts and minds’ of the local population by identifying themselves as an Indian company.
From the perspective of local labour legislation, India has often been accused of being archaic and anti-FDI. The same view goes for the property laws, and the local law and order situation. In many areas of the country, corruption and red tape is rampant which can pose a major financial and regulatory risk for RUK (Biswas, 2006). India has been, however, a WTO signatory since 1995 which has speeded up its market liberalization, particularly in the textile sector. Currently it has no import restrictions upon textiles under the former Multi-Fibre Arrangement on December 31, 1994, which means that RUK will be able to import textiles while conducting operations from India. Since the UK is also a WTO signatory, any disputes pertaining to unfair treatment of RUK by the Indian government will be arbitrated under the WTO legislation as an Investor-State dispute (Khanna and Palepu, 2006). This would mean that RUK would have sufficient protection from unfair expropriation, or investments and discrimination. While this is an encouraging prospect for considering a clothing business venture in India, the real challenge is an understanding of local land law which has been considerably flouted by the local businessmen through clever networking with the bureaucracy and local government agencies, which would potentially give them an edge over RUK (Halepete.J and Iyer, 2008). Local knowledge here is essential, reiterating the need for RUK to seek a partner ‘on the gorund’.
Employment law in India is very ‘pro-employee’ and inflexible, which means that RUK will have to draft its employment agreements very carefully indeed. However, this is unlikely to be a problem for RUK as the UK law is much more stringent in certain areas: i.e. it stresses heavily on health and safety concerns (Biswas, 2006). In the matter of corporate social responsibility, India has only recently woken up to this concept but in many parts of India plastic bags and harmful industrial chemicals have been banned. Environmental awareness and nationalist pockets in the political regime have brought them complex retail licensing regimes as well as a complex value added (VAT) taxation system, factors which will bring RUK considerable fixed costs before their operations can bring in economically favourable results (Halepete.J and Iyer, 2008). Other issues worthy of consideration before RUK decides to initiate and expand its clothing retail operations in India include the overall consideration of the available transportation and commercial infrastructure (Halepete.J and Iyer, 2008). On the other hand, due to increased consumerism, the Indian retail system has experienced an immense technological uplift, which means that RUK will have to worry less about technological and operational efficiency due to the availability of mechanized sales, storage and inventory systems (Halepete.J and Iyer, 2008).
Conclusions and Recommendations
The author has come to the following conclusions after a detailed analysis of India’s demographic, economic, political, cultural and regulatory analysis:
- In tapping India’s potential as a favourable FDI destination for a clothing retail business, the cultural aspect remains the foremost consideration. This is mainly because clothing is a cultural phenomenon. At the same time, in terms of its management and operations, RUK will have to focus on localization in terms of design and business considerations.
- The demographic and economic analysis of India has revealed that the target base for RUK’s party and formal wear clothing is the female population from the middle and higher middle class. This segment of the consumer base is comprised mainly of female students and working women who prefer to wear westernized dresses fused with local designs and do not have time to get their clothes bespoke and custom made.
- RUK, if it chooses to set up base in India for its clothing retail outlets, will have a comparative advantage if it elects to start a joint venture with a local retail or distribution firm. This will not only help it to abide with the FDI laws which do not allow foreign companies to sell directly to the Indian consumer base, but also to better deal with the local nuances in terms of securing insurance and dealing the maddening miles of Indian red tape. Again it is a matter of culture, and a local firm in partnership will know better how to deal with the local legal and regulatory set up. Also, setting up base with a local retailer will help RUK build customer loyalty more rapidly and this would translate into a subsequent locational advantage.
- Focusing specifically on the timing of the venture, the author does feel that the market for retail clothing is already amost saturated, especially for female western and formal wear. Unless RUK has something significantly new and innovative to offer to the local Indian female consumer base, its chances of success amongst local rivals like “Pantaloon” etc are very slim. However, the author would also suggest that exporting these dresses to India would not be a good option either, because then RUK will not be able to compete with the prices of the local Indian retailers. If these dresses are UK-made, it would simply mean more costs for RUK as labour and cost of production is significantly cheaper in India than in the UK. Localisation and ownership would allow RUK to compete with local businesses after incurring the same costs of labour and operations, on a ‘level playing field’ as it were.
- A large part of the Indian population still prefers tailor and boutique made ceremonial, formal and bridal dresses: India is essentially a traditional, village-based peasant society in large part and in its mentality. Offering mass produced dresses for these categories of dresses might pose a challenge to RUK unless they can offer a competitive price and convenience in comparison to custom made dresses.
- It has been seen that a lack of a coherent and liberalized regulatory land law and taxation system in India may pose a threat to the stability of running an FDI business like RUK in India. At the same time, India is a WTO signatory which can guarantee RUK protection and compensation in the event of discriminatory investor treatment. Once again a joint venture option might help it avoid the nuances of a cumbersome retail-licensing regime.
- Success in the Indian clothing retail industry is more about marketing, networking and effective advertising than anything else. The Indian clothing retail industry and its consumer base is heavily influenced by the local Indian Cinema (Bollywood). If RUK can introduce its clothing on the local catwalks it will be able to charge a premium price for its products much sooner and with much more success, especially with the endorsement of famous actresses. At the same time, since the majority target base is the middle class working woman, it will have to struggle to keep its costs lower than successful local retail rivals. This will also mean resisting clever marketing tactics of the local Indian retailers as well as protectionist measures by the local business lobbies aimed at sabotaging foreign businesses.
- Finally and in conclusion, RUK should be well aware of the fact that in India labour is cheap and usually custom-made, bespoke bridal, ceremonial and formal clothing is cheaper and more easily available than ‘off the peg’ outfits. India might just be the right destination for the operations of a creative formal designer label like RUK, but internalization of management and operations there would take a long time. RUK has everything going for it for an FDI set up in India if it can manage to take advantage of the rapid Westernisation of the Indian clothing retail industry.
Therefore, based on all the considerations taken in this report it is important for RUK to strongly consider setting up base for its retail clothing business in the United Kingdom or, at the very least, going into partnership with an Indian company to trade in India. However, all the legal, financial, political and regulatory risks – and there are many – have been pointed out in the sections above. If RUK is able to deal with these risks as recommended there is a strong chance that it may look forward to a well-established and profitable commercial base in India, but it is always important to remember that, despite its British heritage, India is most certainly not Britain, and no company should expect the country or its inhabitants to behave like Western consumers or Western businesses in a flexible and generally fair, free market.
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