FASHION AND BEAUTY SECTOR INDIA: Market Entry Opportunities


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2014
FASHION AND BEAUTY SECTOR INDIA: Market Entry Opportunities for UK Companies

FASHION AND BEAUTY SECTOR INDIA: Market Entry Opportunities for UK Companies

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2014
FASHION AND BEAUTY SECTOR INDIA: Market Entry Opportunities for UK Companies
Tara Panjwani
Manager – Retail Sector and Next Generation Network UK India Business Council Email: [email protected] Phone: +44 (0) 207 592 3040

FASHION AND BEAUTY SECTOR INDIA: Market Entry Opportunities for UK Companies

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FOREWORD

India is currently experiencing a revolution in how consumer goods are marketed, sold and used.

At the cutting edge of these changes is India’s Fashion and Beauty Sector, which is currently growing at around 15 per cent per annum, with personal care products such as deodorants achieving exceptional growth of over 40 per cent per annum and demand for western outfits and readymade garments growing at 40-45 per cent annually. What’s more a large proportion of this growth is in high value goods, with luxury retail growing it at 20 per cent last year putting it on track to reach GBP 9.5 billion by 2015.

This surge in India’s Fashion and Beauty Sector is driven by a burgeoning middle class – particularly from a young aspirational professional urban class with a growing disposable incomes. In fact, over the next two decades India’s middle-class will grow to over 40% of population, creating the world’s fifth largest consumer market.

In general, retail is one of the largest and most dynamic sectors in India, and encouraging reforms to India’s single and multi-brand retail sectors, the accelerating growth in e-commerce, and a shift from small and localised street markets to modern shopping centres and malls Indian’s are spending more on fashion and beauty than ever before.

As a result India’s organised retail sector presents immense opportunities for UK Fashion and Beauty companies, which benefit from India’s continuing love affair with British brands and belief. In the minds of Indians, UK brands represent style and quality. As such, UK companies have a unique window of opportunity across India. So, to help UK companies make sense of this transition, the UK India Business Council, together with Cluttons, have produced this report on the opportunities and challenges in India’s Fashion and Beauty sector, and how companies such as Burberry, Lush, Pavers England and the Body Shop have accessed the emerging Indian opportunities securing rewards along the way.

Richard Heald Chief Operating Officer UK India Business Council

We hope you will find this report both interesting and useful whilst developing your Indian investment plans, and if you require more assistance understanding or accessing the India, please do not hesitate to get in touch.

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FOREWORD

The Indian retail market has attracted great attention over the past decade and continues to do so as its economy matures through phases of regulatory liberalisation and as the country’s demographics prove to be a macro competitive strength.

Few commentators will or can argue against the opportunity that exists in your sector for established UK brands that have the aspirational power to attract the Indian consumer, however, a balanced view must equally highlight the difficulties that understandably partner this emerging opportunity. To discount the complexities of the sheer scale of the task in hand as India’s political mechanism adapts to change and attempts to reach the expectations of the nation’s aspirational population would be fool hardy. Cluttons would always advise an agile risk management strategy with strong in-country advice to reduce the fragility of the market entry process.

The operational risks and challenges that exist in the India market can seem inhibiting to a new market entrant and the real estate sector holds equal risk and opacity. Anchored in key geographical locations and well networked within the Indian market Cluttons is tactically placed to provide quality advice to the UK retail sector on all aspects of real estate for market entry strategies, lease advisory, developer due diligence and development.

Cluttons have purposely positioned our India business as boutique, discrete and more importantly independent. We believe this enables us to understand the local context without jeopardizing our ability to provide you the benefit of our professional experience in an unbiased manner.

We are also experienced in the dynamics of the retail brand franchise model in emerging markets and are able to tailor advice according to the pitch and appeal of a retail offer. In effect, we are able to secure solid, well reasoned retail real estate solutions in the sub markets of India by combining brand knowledge with appropriate local application.

Ian Gladwin Cluttons India

Cluttons is pleased to partner with the UK India Business Council on this report for the benefit of UK businesses and also having successfully used the UKIBC Launchpad service in Delhi.

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EXECUTIVE SUMMARY
The retail sector in India is delicately poised. On the one hand the socio-economic indicators show enormous growth potential. On the other hand, the convoluted regulatory environment, complex taxation system, and ambiguous political climate have deterred foreign entrants. This whitepaper highlights the growth potential of the Fashion and Beauty sectors and informs potential entrants about options to tackle regulatory and operational challenges. Key findings include:
• There is a change in consumer preference especially for foreign brands, spurred by greater disposable incomes
• Organised retail will capture a greater share of the overall market. Its current share of eight per cent is expected to rise to 24 per cent in the next decade, adding up to GBP 131 billion to the retail sector
• The organized Fashion and Beauty and Personal Care products markets are expected to experience dynamic growth. These sectors are forecast to grow at a CAGR of 16 per cent and 15 per cent over the next decade to reach GBP 36 billion and GBP three billion respectively
• As companies seek new avenues of growth Tier II and Tier III cities are expected to be the new engines of growth, both in terms of mall development as well as new consumers
• E tailing will grow in importance with deeper Internet penetration and faster smart phones sales. Such ‘asset light’ business models will expand consumer reach
• The rationalization of the tax regime and relaxing of FDI norms will allow foreign brands to calibrate their business models to exert greater control over their operations
• The business environment for Fashion and Beauty and Personal Care products in India is fairly mature. The variety of stakeholders, including JV partners, contract manufacturers, and real estate developers have considerable experience working with local and global brands. They are equipped to help new entrants set up operations in the country
• Lastly, the recipe for success in India is to have a clearly formulated strategy, adequate funding, a strong distribution model, and a customised product portfolio that strikes the right balance between global standards and local trends.
India has great opportunity but is by no means an easy market to crack. Foreign brands that have succeeded have shown tremendous patience and determination to tailor their strategies to the changing business dynamics in the country.
The market has tremendous growth potential and the sheer scale of demand offsets the potential obstacles and challenges. In this retail sector in India, in the long run, perseverance pays.

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CONTENTS

1.0 Changing Face of Retail

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1.1 Key Drivers of Growth in Retail

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1.2 Key Challenges

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2.1 Market Sizes – Present and Projected

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2.2 Existing Landscape in Organised Retail

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2.2.1 Overview:

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2.2.2 Geographic Distribution:

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2.2.3 Store Formats and Channels:

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3.0 Fashion Sector in India

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3.1 Overview of Fashion Retail in India

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3.2 Competitive Landscape in the Fashion Sector

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3.3 Key Trends in the Fashion Sector

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3.4 Legislative Framework for Apparel Industry

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3.5 Key Stakeholders for Fashion

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3.6 Fashion Sector - Case Studies

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4.0 Beauty Sector in India

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4.1 Overview of Beauty and Personal Care Sector

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4.2 Competitive Landscape in Beauty and Personal Care Sector 23

4.3 Key Trends in the Beauty and Personal Care Sector

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4.4 Legislative Framework for Beauty Products Industry

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4.5 Key Stakeholders for Beauty Products

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4.6 Beauty and Personal Care - Case Studies

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5.0. Overall Regulatory Environment

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6.0 Route to Market – India as a Destination for UK Companies

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6.1 Evolution of Route to Market Strategies for India

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6.2 Identifying and Managing Key Stakeholders

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6.3 Potential Partners

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6.4 Key Steps to Success

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7.0 Appendix

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7.1 Tax Structure in India (High level):

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7.2 Regulatory changes in the Indian Retail Sector

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1.0 CHANGING FACE OF RETAIL
Currently valued at GBP309 billion, India’s retail industry is poised to grow at a CAGR of more than six per cent. The sector is expected to be worth GBP545 billion by 2023. Increasing disposable incomes, a buoyant and fashion-conscious middle class, and the rise of alternative retail channels such as direct selling, home shopping, and e-commerce are expected to drive growth. Regulatory reforms will also be a critical impetus.
According to estimates, organised retail currently accounts for eight per cent of the total market. By 2023 it is expected to outperform traditional channels accounting for 24 per cent or GBP131 billion of the retail market. The overall retail market, both organised and un-organised, is dominated by the Food and Grocery segment; It accounts for 60 per cent of the market. The Apparel segment follows with eight per cent.

900

800

700

600

39

500

400

300

200

451

100

0 2013

208 657 2023E

Market Size (USD billion)
Organised Un-organised

11 3 3 4
5 60
6
8

Total Retail Market (% Share)
Food and Grocery Apparel Mobile & Telecom Food Service Jewellery Consumer Electronics Footwear Others

Source: Technopak, Ibef

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1.1 Key Drivers of Growth in Retail
• Macroeconomic Factors: Economic headwinds have slowed down India’s growth rate to a decade low of 4.5 per cent for FY 2012-13, down from a high of 9.3 per cent in FY 2007-08. Notwithstanding this, foreign retailers remain bullish especially as growth in developed economies slows down. Having a stable, pro-industry federal government in New Delhi has fuelled optimism prompting an upward revision in GDP growth estimates. India’s GDP is now expected to grow at 5.4 per cent in 2014 and 6.4 per cent the following year.
• Demographics: Favourable socio-economic indicators continue to highlight India as a key retail market.

700 500 350

Rural Indian consumers

Young Indian consumers

Middle-Class consumers

Almost half the size of the Chinese
population (1,300 million)

Greater than combined population of Brazil,
Russia, Germany and the UK (464 million)

Comparable to the size of the US population (312 million)

Demographic groups in India (figures in million)

Rich > GBP 15,212
Middle Class GBP 3,042 - 15,212
Aspirers GBP 1,363 - 3,042
Deprived GBP < 1,363
Annual Household Income (GBP) at 2001-02 prices (1 GBP = INR 69.227)

2010-11
3.2m (0.4%)
31.4m (5.7%)
70.7m (21.9%)
134.7m (71.9%)

2015-16
6.6m (1.7%)
53.3m (12.8%)
89.4m (33.9%)
113.3m (51.6%)

CAGR 12.8% 9.2%
4% -2.8%

Source: PwC, NCAER-CMCR Analysis

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• Younger Population: By 2020 India is estimated to become the world’s youngest emerging economy with around 64 per cent of its population of working age. This offers significant opportunities for companies to target these new savvy and connected consumers. Consequently, consumption patterns have also undergone a paradigm shift: India has shifted from a need-based economy to an aspiration-based one. The country has 500 million people under the age of 25 joining the workforce, driving growth with their increasing disposable incomes.
• Rise of Semi-Urban Centres: The growing number of Tier II and Tier III cities will fuel consumer demand and continue to present opportunities for the organised retail sector, especially supermarkets. India is expected to have around 8,500 supermarkets by 2016, up from 500 in 2006.
• Regulatory Changes and Liberalisation in FDI Norms: The recent regulatory reforms augur well for the retail sector. Under the updated FDI policy, the federal government will allow up to 51 per cent FDI in multi-brand retail and up to 100 per cent in singlebrand retail.
• Rise of Alternative Sales Channels: Increased access to the Internet and widespread mobile phone penetration has spurred the growth of online retail channels, and telesales. Online retail revenues have been growing at a staggering ~50 per cent year on year adding up to GBP 10 billion in 2013. This is estimated to reach GBP 35 billion by 2023.
• Access to Credit: Increasing access to credit cards (CC) and debit cards (DC) with higher spending limits is expected to boost retail revenues. The number of credit and debit cards increased from 4.2 million and 0.3 million respectively in 1999 to 18 million and 228 million in 2011. By FY 2015 there will be an estimated 73 million credit cards and 350 million debit cards in circulation.

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1.2 Key Challenges
• Infrastructure Issues: Inadequate infrastructure, especially in the supply chain, transport, and logistics may have a negative impact on growth. This inadequacy will be particularly pronounced in the rural and non-metropolitan areas. Though tipped to be the real engines of growth in the next decade, these areas face multiple challenges: procedural delays, lack of supply chain integrity, and the resulting difficulties in meeting tough deadlines for goods transfer. In addition to poor road and rail infrastructure, there’s the lack of backward integration and fragmented supply chains to contend with. All this results in under-developed logistics capabilities and increasing costs. Whereas the cost of logistics is about 2-5 per cent globally, it is as high as 7-12 per cent in India.
• Regulatory Environment: Despite the recent reforms in FDI regulations, there is a real need for the laws to be simplified and made easier to implement. Policy conditions such as 50 per cent investment in back-end operations and 30 per cent sourcing from small industries have opened the retail market to some extent. However, there remain barriers to entry in multi-brand retail in categories such as Food and Drink, Fashion, Consumer Electronics, Beauty, and Wellness.
• Complicated Tax/Compliance Structure: A complicated tax regime, both at the federal and state-level poses a challenge, especially for new entrants to the market. However, simplification of the tax regime through the implementation of the proposed Goods and Services Tax (GST) is expected to alleviate the problem. The government has committed to rolling out a new version of GST by July 2015.
• Political Uncertainty: The on-going political uncertainty, with key national and regional parties opposing multi-brand FDI has caused foreign players to adopt a waitand-watch policy.
• Shortage of Skilled Labour: Proliferation of organised retail has highlighted the acute shortage of skilled labour, especially in front-end retail staff. Experienced supply chain executives are also in short supply. There are fewer initiatives for structured skills development and a lack of incentives and benefits for new recruits.
• Domestic Competition: Large Indian retailers such as Shoppers Stop, Pantaloons, and Reliance Retail are well entrenched in the domestic market. E-commerce sellers and discount retailers have also made significant inroads into the retail market making the sector very competitive.
• High Rental Costs: Escalating property rentals, especially in prime locations, have eroded retailers’ profitability. In the top seven cities, the average rental rate in prime grade malls was GBP 54per sq ft per year for Q12013 compared to GBP 35 per sq ft for Q42011.

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