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Indian Retail Opens To The World

As a new Indian law creates opportunities for global retailers,
Indian advisory firm Auriga Logic weighs in on its effects

In September 2012, the Indian government granted unprecedented access to global retailers looking to open stores in India. While earlier guidelines allowed foreign companies to open single-brand stores via Foreign Direct Investment (FDI), a new law extended the welcome mat to multi-brand stores—meaning that for the first time, international retailers will be able to sell a complete range of m.i. and pro audio brands in India. For analysis of the new law and how global music sellers can best prepare to enter the market, The Music Trades turned to Rajesh Joshi of Auriga Logic, an Indian business advisory firm. With a fast-developing market and pent-up demand for music products, says Rajesh, India is primed for new players. “Global retailers have been waiting to come to India, and now they can explore this opportunity to grow exponentially,” he says. “The Indian music industry has done a super job of developing and cultivating a market here in the past decade. What we need now is ‘glocalization’—global and local companies working together.”

According to Rajesh’s analysis, Indian demographics favor ample growth of music products sales. Besides having the world’s second-largest population—more than 1.3 billion—India’s single largest age group is the 12-25 segment, generally a hotbed of music customers. Rising disposable income, increased standards of living, and growing interest in music and entertainment all lend themselves to the growth of the industry. Understandably, this comes as an attractive prospect to North American and European retailers faced with slow growth in their own markets. “The huge market potential of India for a global m.i. retailer is the next big thing,” says Rajesh. He adds that with a foothold in India retailers may find a path into the entire Indian subcontinent including Burma, Bhutan, Nepal, Sri Lanka, Bangladesh, and Pakistan.

While official figures peg Indian music products sales at less than 1% of the global market, Rajesh believes that greatly underestimates the actual purchasing taking place. “Gray market” sales, or those made through unofficial, unauthorized channels, are rampant but difficult to quantify. Many customers buy online from foreign retailers—although this is illegal under Indian law—or have overseas friends and relatives ship the products to them. All told, says Rajesh, “We believe the actual figures are twice the reported numbers. This holds great significance for brands and retailers to start looking at India in a different light.”

At present, numbers suggest the Indian retail field is wide open to newcomers. According to Auriga Logic’s figures, 90% of India’s current music retail stores are run directly or indirectly by importers and distributors who stock only the brands they represent. As a result, the firm estimates, more than 50% of major m.i. and pro audio brands are not represented in India at all. Moreover, Auriga Logic counts only 300 music retail locations operating in all of India, about one per 4.3 million people, and many of those are small and limited in their selection. “The industry is fragmented and disorganized,” says Rajesh.

The upshot, he says, is that customers have had very little opportunity to develop brand loyalty. This suggests retailers who bring new brands to the Indian market, while laying down new channels for existing brands, could immediately make their presence felt. New entrants will also have the opportunity to set up crucial services—such as music schools and camps, rentals, artist programs, and financing—that are rare in India now. “Retailers stand to gain a big first-mover advantage and significant market a share,” says Rajesh, “if they can overcome the challenges.”

The structural difficulties of the Indian market include its heavy laws, regulatory provisions, and red tape. However, says Rajesh, the Indian government has been exceptionally committed to welcoming international retailers under the new law. (He notes that in the policy battle to pass the law, steadfast supporters risked their political offices to get it through Parliament.) In the first three months after its passage, 15 company applications were accepted under the new retail policy. “FDI policy in multi-brand retail has been the favorite of the present government, and they are giving a red carpet welcome to the global retailers,” says Rajesh. He went on to suggest that an experienced Indian partner company and guidance from professional consultants can help in navigating the system.

On a city street in India, global brands command the attention of shoppers.

India’s new FDI law poses its own hurdles, although Rajesh says savvy retailers will be able to turn its provisions to their advantage. The minimum investment required to open retail operations in India via FDI is $100 million (USD), effectively limiting the retail field to serious players with deep pockets. This amount is to be invested over a period of three years in setting up retail shops, back-end infrastructure, inventory, manpower, training, and promotion. Rajesh notes, however, that the retailer can use part of this sum to buy inventory from its own global retail operations for sale in the Indian market, reducing the burden of carrying inventory elsewhere by distributing it to India.

Among the other terms posed by the new law is that for any multi-brand retail business set up in India, 49% of the company must be held by an Indian entity. Rajesh suggests, though, that retailers will find this to be a blessing in disguise. By granting a minority stake to the right local entity, he says, the foreign retailer can gain valuable insights and connections within the local market. The law allows for retailers to partner with private limited companies, partnership firms, family concerns, or public limited companies, allowing retailers to choose the partner that best fits its business model.

The new law also lays out minimum sourcing requirements from local industries, among them small-scale manufacturers of local Indian instruments. On this point, Rajesh notes that demand for Indian instruments exists around the world. While most retailers outside India purchase these products from a distributor at considerable added cost, retailers with an Indian presence will be positioned to buy them direct from the manufacturers. Those instruments, says Rajesh, can then be sold through the retailer's stores in foreign markets such as Europe and North America, where they can retail for a 1000% markup.

“India holds a great potential and is an untapped market for the m.i. and pro audio industries,” he says. “This market could emerge as one of the top ten destinations for m.i. and pro audio in the next two to three years. However, it is also clear that only select global retailers will be able to seize this opportunity. By playing the strategy right, and supported by the right Indian partner, retailers will ride the Indian consumption growth story. They will be credited with taking their brand and retail operations to a new and exciting horizon.”

Rajesh Joshi can be reached at rj@aurigalogic.com.


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