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NEW YORK — Tommy Hilfiger is heading East — and will beat even Wal-Mart in the process.

As noted, the American designer has signed a deal to open freestanding Tommy Hilfiger stores in India in a major expansion drive to the subcontinent. The country has long been a potential target for major global brands eager to tap into its population of more than 1 billion people and a retail market that could grow to $500 billion within the next six years. But so far, companies have held back because of restrictive government investment policies, a relatively small middle class, a complicated tax regime and supply chain issues.

This story first appeared in the March 3, 2004 issue of WWD. Subscribe Today.

Hilfiger is in the vanguard of Western companies, including Wal-Mart, out to change that. In a speech to the National Retail Federation in January, Wal-Mart Stores Inc. chief executive officer Lee Scott said India, with a middle class of 50 to 60 million, is ripe for retail expansion.

“Tommy has always wanted to go to India, but the timing wasn’t right. Being Indian, it was special to me to launch the brand in India,” said Mohan Murjani, chairman of Murjani Group, which has linked up with Tommy Hilfiger Corp.

In a telephone interview, Murjani said the strategy is to open at least six freestanding Tommy Hilfiger stores in such Indian cities as New Delhi and Bombay, beginning in April. The stores will carry Hilfiger’s junior jeanswear, men’s sportswear and men’s jeanswear.

“I’ve been watching the [Indian] market over 20 years and made the decision two years ago. The timing was right because there’s a growing middle class,” said Murjani, who was Hilfiger’s original financial backer from 1985 to 1989. He noted each of the [Hilfiger] stores will be at least 5,000 square feet. “For Indian standards, it’s very substantial,” said Murjani, adding that no other U.S. designer is there and he believes there’s not a single store that size in the country.

He said there are no brands such as Ralph Lauren, Donna Karan, Giorgio Armani, Guess or Diesel in India, but there are such footwear brands as Adidas and Nike, as well as local licenses for companies like Levi’s, Lee and Arrow.

Tommy Hilfiger will enter the Indian market this spring through Arvind Murjani Brands Private Ltd., a joint venture between the Murjani Group and Arvind Brands Ltd., the apparel division of Lalbhai Group, which entered into a sub-licensing agreement with GVM International for the marketing and distribution of the products in India. Hilfiger’s financial stake in the deal remains undisclosed.

As reported, Hilfiger, who made his first visit to India in 1979, said he has admired the culture of India, the warmth of its people and the expansion of its economy. “This agreement is part of our commitment toward offering the complete Tommy Hilfiger lifestyle to the Indian consumer,” he said in a statement.

According to Murjani, the products are expected to hit the stores at the same time they arrive in other markets. Murjani believes Indians have been exposed to fashion via TV, magazines and the Web, and “they’re totally aware of what’s going on, but they’ve had no access to merchandise.

“The Indian culture and lifestyle are very colorful and they’re into dance and music, and they have the largest film industry in the world,” added Murjani.

Generally speaking, the potential is huge. Pradipto Roy, associate director at the Indian retail consultancy firm KSA-Technopak, estimated in an interview last year that the size of the domestic clothing industry is $10 billion. Over the last decade there has been a major shift in clothing preferences, with people moving from local tailors to ready-made apparel. Apparel branding is coming in a big way and, with organized retailing also developing, spending on clothes will increase, Roy predicted.

Because of roadblocks, investment by Western designers and retailers has been negligible at best so far, but things may be moving in their favor. Since 1991, India has undertaken wide-ranging economic reforms, but one of the few sectors still closed to foreign direct investment is direct retail. India has an estimated 12 million retail stores, most of them small. The government fears that allowing giant foreign retailers will threaten small stores’ existence and result in the loss of jobs.

However, a debate is currently on among government departments over the subject. Some departments are in favor of allowing up to 26 percent foreign equity in certain retail activities, with management control in the hands of the Indian partner. India will hold general elections sometime in April or May, and any decision on allowing FDI in retail before that is unlikely. A decision could come after June.

Retailing is the least evolved of the Indian industry sectors and therefore has huge potential, given the country’s population. The Confederation of Indian Industry — a leading industry group — has been pressing the government to allow 100 percent FDI in retail. According to a study done in May 2001 by the organization in partnership with McKinsey and Co., the retail industry in India is expected to have a market size of $300 billion by 2010, if it matches economic growth of 6 to 7 percent a year. If supply chain constraints are eased, real estate markets made more organized and the tax structure rationalized, retailing in India has the potential to grow to $450 billion to $500 billion by 2010, according to the CII-McKinsey report, “Retailing in India.”

The report states that the absence of value-added tax, complex sales tax rates, entry tax and excise duty structures are major deterrents to organized retailing. Other impediments include high supply chain costs; inadequate supply chain infrastructure; inflexible labor laws, especially relating to part-time staff so important to retailing; multiple licensing requirements in different Indian states, and inadequate investment in education and training to build retail talent including managerial and skilled retail staff. Real estate in India also is not geared to facilitate organized retailing, but that is changing with huge Western-style malls coming up.

According to other industry studies, organized retail business accounts for only around 2 percent of the $180 billion retail market in India. Of this, the share of apparel retailing is 7 to 8 percent of the total retailing pie in the country.

Because of restrictive government policy, no overseas apparel giant has set up retail stores in India. The only such company to enter India so far is the U.K.’s Marks & Spencer, which began operations in India in December 2001 by signing a franchisee agreement with Planet Sports. It currently has two stores, one in Delhi and the other in Bombay. According to Ashok Kaul, ceo of Marks & Spencer India, the company has done well so far, although he wouldn’t supply figures, and plans to expand its stores to other cities.

Kaul told a local magazine that the lack of good-quality retailing space and higher import duty costs were hindering aggressive expansion plans. Retailing of fashion products is still not a priority for the government, but he hoped that in the next two to three years, the duty structure will be rationalized, making imports more competitive in the Indian market. M&S outlets in India are tiny compared with its stores in Europe and Hong Kong, and offer a limited apparel selection for women and men.

U.K. department store Debenhams also plans to come to India through a partnership arrangement with an Indian company, according to recent news reports.

To be sure, Indians are receptive and aware of American brands. Apparel brands such as Levis, Lee and Arrow — to name a few — are reportedly doing well. Government policy does permit overseas companies to take the franchisee or licensing route, which has been adopted by those and other brands.

Foreign apparel companies and designers won’t find India an easy market to crack, though, as the domestic textile industry is very well developed and huge. The Indian textile industry accounts for more than one-fifth of total industrial production. The domestic apparel industry is also large, ranging from small to big manufacturers that cater to all price segments. India has a restrictive textile import policy, with high customs duty on finished apparel. These restrictions are being gradually relaxed under a bilateral agreement with the U.S.

And with a quota-free textile world less than a year away, Indian companies are lining up a growing number of deals intended to boost their production — with such companies as Wal-Mart, J.C. Penney, and Wellman Inc. — to source more of their production in India. After China, India is seen as one of the nations most likely to gain significant market share in apparel production after the members of the World Trade Organization drop their quotas on textile and apparel on Jan. 1.

In addition, Indians, while becoming more fashion and brand conscious, are extremely price- conscious, which will be a major impediment for any foreign company wanting to expand sales. Many local brands have a strong countrywide presence and are doing very well addressing the mass market.

“The common man in India is poor,” said Rojit Bal, one of the designers best known by Western audiences for his trunk shows at major specialty stores in the U.S., in a WWD interview in 2002. “But when you look at the upper-middle class, the numbers are mind-boggling. A government survey showed that if you designed a branded petticoat, it would be a 17 billion rupee [$350 million at current exchange] business. Everyone who wears a sari wears a petticoat underneath. But fashion in India is still a fantasy. It will always take the back seat because we’ve got far too many other problems.”

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