Changing partners

Over 50 foreign fashion brands have split with their local partners in the past five years. What’s gone wrong?

When the first Debenhams outlet opened in India in October 2007, the British retailer was more than optimistic about the road ahead. Never mind that the store — opened in partnership with Planet Retail at Gurgaon’s Ambience Mall — was nearly 18 months behind schedule. Debenhams’ international director, Francis Mcauley, declared that he would be disappointed if the company did not have 30 stores in India over the next 10 years, by when the Indian operations could be the retailer’s biggest outside the UK, he predicted. Now, six years later, those forecasts are nowhere close to realisation — the department store has just three stores across India, two in the national capital region and one in Mumbai. The brand also has a new partner in Arvind Lifestyle Brands, which bought out Planet Retail’s interest in November 2012. Expectations are rising again, although they are considerably more muted than the last time. “I am confident that within the next five years, we will have around eight Debenhams stores in the five biggest cities,” says a company spokesperson. 

At the other end of the spectrum, several high-end brands, too, have switched partners or changed business models. In 2009, the Murjanis parted ways with Jimmy Choo and Bottega Veneta, both of which moved to Genesis Colors. Aigner, meanwhile, dumped Genesis Colors in 2010, while last year, Versace and Corneliani ended their franchise agreements with Delhi’s Blues Clothing. Again last year, Giorgio Armani quit its joint venture (JV) with DLF Brands and moved to Genesis Colors. DLF terms the termination a “strategic” one. “The luxury business cannot be scaled up in India as fast as we previously believed. So, for now, we will focus on the premium segment of the fashion and retail business,” says DLF Brands CEO Dipak Agarwal, adding that Armani, too, has scaled down its expectations. “The move to end a JV and enter a franchisee model shows that the brand has narrowed its business interests in India,” he adds. 

Despite the promise of a big consumer market — a growing middle class with rising disposable incomes, growing awareness of international brands and trends and an increasing willingness to spend on them — many international fashion brands have been forced to rethink their India ambitions. Research by Delhi-based retail consultancy Third Eyesight shows that since 2006-07, some 50-odd brands, including Next, Guess, Gas, Etam, Rifle, Morgan, Saville Row, Lerros, Corneliani and S.Olivers, among many others, have either exited India or have restructured their operations in the country.

And the trend continued in 2012, despite the government allowing 100% foreign ownership for single-brand retail outfits in January last year. Brands such as Versace and Alfred Dunhill are said to be eyeing the exit sign currently. How did so many brands get their India strategy so wrong?

Misreading the market

Since 2005, there has been a four-fold increase in the number of international fashion brands entering the Indian market, triggered by the government decision to allow 51% FDI in single-brand retail in January 2006. It didn’t hurt, either, that import duties on apparel came down sharply from about 100% in the 1990s to 35% currently. The result: the organised fashion retail market more than doubled from about ₹1,000 crore in 2005 to ₹2,500 crore currently and is expected to touch ₹6,000 crore by 2015, according to Technopak. 

At the same time, for many brands, finding the right business model and understanding the Indian consumer has been an uphill task. “Some find India too complex a market. Besides, partners also tend to have differences when it comes to dealing with the marketplace, the waiting time and investments required to make things work,” points out Devangshu Dutta, CEO, Third Eyesight.

Ankur Bisen, VP, retail and consumer products, Technopak, offers another reason. “The mistake many people make is they think of India as one big market, when it is actually many markets in one.” For instance, Delhi starts buying winter clothing when it is still hot in Chennai. And people in the north have different colour and style preferences than those in South India. “Add to that poor retail infrastructure — the lack of trained manpower, high rentals etc. — and you know why brands have been finding it tough.” 

Consider Marks & Spencer (M&S). The British retailer entered India in 2000 with a franchisee agreement with Planet Retail, positioning itself as a luxury brand although it was just a high-street label back in the UK. All merchandise was imported from the UK and, not surprisingly, was substantially overpriced. In 2009, M&S switched to an equal JV with Reliance Brands and has started sourcing and manufacturing 60% of its merchandise in India and South Asia, which has brought down its prices by almost 20-30%. The store has also repositioned itself as a mid-market retailer and is making clothes more suited to Indian preferences — longer lengths, higher necklines and more colour options. “We have a better understanding of local taste and style now and our range has been tailored to suit these,” says Venu Nair, MD, Marks & Spencer India.

Similarly, in October 2012, Esprit broke its seven-year licensing and distribution deal with Madura Fashion & Lifestyle after reportedly suffering losses of ₹20-25 crore every year. German brand Lerros, which had a JV with House of Pearl, too, met a similar fate in 2008 and switched to Numero
Uno instead. 

Like M&S, these brands also misread the market completely, charging way too much and trying to pass themselves off as premium offerings when their international positioning was more middle market. British brand Next, too, signed up with Arvind Lifestyle recently, breaking a seven-year relationship with Planet Retail.

As it is, most exits or change of Indian partner have some common threads — increasing cost pressures with aggressive expansion of the brands at expensive locations; high pricing due to costly merchandise imports and little or no local sourcing; and the inability to position and price a brand correctly and communicate it to the target customer group.

That’s what happened with Benetton. The iconic Italian fashion brand was one of the earliest entrants into India, with a 50:50 JV with the DCM group in 1991. In 2004, it split with DCM and began operating as a wholly-owned subsidiary. But by then, Benetton was already seen as a T-shirt company that was always on sale — the company advertised heavily during its two annual sales but did virtually nothing the rest of the year; it didn’t help that the ads showed products that weren’t available in India. The Italian parent brought in a new team, focused on increasing local sourcing and made the product offering more up to date. “Earlier, there was a view in the company that the Indian consumer did not have the same sensibilities for fashion as international customers. That was a mistake,” concedes Sanjeev Mohanty, Benetton’s MD in India.

Now, the Indian stores are on par with stores in London, Paris and Milan, with the same clothes and visual merchandise effects, although all manufacturing is done locally. There’s also been a change in how Benetton sells in India: the company is now a pure wholesale player in India, catering to over 500 stores across 110 cities, with reported sales upwards of ₹650 crore. “We own no stores and have instead appointed master franchisees that distribute our products,” says Mohanty. “We do have a complete grip on design, marketing and guidelines for selling our products, though.”  

The Local edge

Where Benetton and M&S have realised the need to source locally, many brands falter by insisting on importing merchandise. “This alone can push up costs by 30-35%,” says Third Eyesight’s Dutta. If the retailer can’t pass on the increased cost to the customer, margins are immediately hit. Several international brands have faced this problem and are now increasing their local sourcing or giving licences to Indian partners to manufacture on their behalf. At Lacoste, for instance, long-time partner Sports & Leisure Apparel has the licence to manufacture and retail the French company’s apparel in India. “Manufacturing in India has helped in cutting costs, allowing us to maintain a better bottomline. We are also able to get new designs and clothes to the market faster,” says Rajesh Jain, CEO, Lacoste India.

It’s not only about cost; importing apparel also means limited scope to adapt sizes and styles. “India has very local aesthetics and some brands don’t allow for that. They try to plug and play and that’s where the trouble starts,” says Max India executive director Vasanth Kumar. The Dubai-based Landmark Group’s value clothing brand has a design team of 20 people working in India to adapt Max’s global lines to local sensibilities. That hasn’t saved it from mistakes, though: over the past six years, the chain has grown to over 70 stores but has also closed outlets at places like Jalgaon and Nanded. “It takes time to understand the different tastes and needs of consumers across the country,” points out Kumar.

Trouble is, foreign brands can be rather impatient and their haste to expand can backfire. High-cost rentals were part of the reason Gas exited India the first time and it’s also a key reason why S.Oliver is yet to make a profit here. The German brand entered India in 2007 through a joint venture with Orient Craft and opened large stores — 5,500 sq ft on average — in prime locations; the brand reportedly signed a long lease for a 7,000 sq ft store in Delhi’s Select Citywalk mall for ₹3 crore. In May 2012, Orient Craft sold its 49% holding in the JV to Design Pod India. The new strategy includes halving the size of outlets to 1,200-2,400 sq ft. While clothes will still be imported, they will be procured directly from hubs like China, Bangladesh and Hong Kong instead of being routed through Germany. Prices are also being slashed by almost 30-40% to bring the brand in line with rivals like Zara, Benetton
and Mango.

Equally dissatisfied

It’s not only the foreign brands that are unhappy with how their Indian operations are being run. In May 2009, at a luxury conference in Delhi, Mohan Murjani, chairman, Murjani Group, took everyone by surprise when he declared the termination of the Murjani Group’s JVs with brands such as Gucci and Jimmy Choo, citing unfavourable terms of trade. Most foreign brands did not partner the Indian owner for losses, but wanted all profits to accrue to them in the form of royalty and profit share. “Sadly, brand owners have pursued one-sided and imbalanced agreements, which have now started to unravel,” Murjani noted at the conference. 

But some of that problem also stems from the fact that Indian partners oversold the India potential to their own peril. That’s the reason DLF Brands snapped its four-year-old ties with Ferragamo and Armani in 2012. “We found that we could only open five or six stores for these brands and there isn’t much potential for the luxury market over the next five or six years. So, we have decided to focus on mid-market and premium brands such as Mothercare, Alcott and Boggi,” says Agarwal. Incidentally, Mothercare is another foreign brand that’s switched partners in India — the British chain came into India through a franchisee agreement with Shoppers Stop but changed to a 30:70 JV with DLF in 2009, which has since been expanded to a 51:49 arrangement in favour of Mothercare. 

There’s also trouble when the Indian partner underestimates just how deep its pockets need to be to develop a fashion brand. Blues Clothing was started by Dinesh Sehgal in the mid-1990s to sell suiting material from premium international brands such as Cadini and Canali at the family’s stores in Delhi’s posh South Extension. Since 2005, the company signed on a number of brands such as Corneliani, John Smedley and Versace but has suffered heavy losses. While Versace has moved on to a partnership with Majgenta Fashions, Corneliani has formed a JV with OSL India, which also holds dealerships of BMW and Volkswagen. 

Unfortunately, the list of failed marriages is a long one when it comes to the luxury business. But the good news is that, despite the stumbling blocks, foreign brands are a long way from breaking ties with the Indian market. M&S plans to open 10 more stores by Summer 2013, its biggest expansion in a single year after having been in the country for over a decade. India is among the four biggest emerging markets for Lacoste globally — the Indian operations grew 33% last fiscal and Jain is confident of maintaining the pace this year as well. Benetton, Levi’s and Max have stuck on over the years and now have turnovers in excess of ₹650-800 crore. Market research firm Booz & Co expects organised apparel retail — which accounted for 17% of the $36 billion market in 2010 — to grow to 25% of the market by 2015 as the apparel retail industry, too, continues to grow by 5-10% in the same period. That means an opportunity of nearly $10 billion awaits apparel industry players who hang around for the next few years. Surely that’s reason enough to cultivate a little patience and tolerance.