Financial Times - Retail ride in India for Sri Lankan ready-mades

Sri Lankan ready-mades are looking at India’s impending retail boom to enter the market. Sri Lankan ready-made garments get a special mention under the Indo-Lanka Free Trade Agreement (FTA) but the tariff concessions have not helped win over the Indian market.

The lack of headway in India is mostly due to India’s low production costs and conditions attached to garment exports under the FTA. However, an Indian market expert says Sri Lanka can still tap the Indian opportunity – through an approaching retail boom.

“As many as 200 shopping malls are planned to come up in the next couple of years. This dramatic increase in retail space is supporting rapid retail growth,” says Simran Singh, a consultant from the International Trade Centre, speaking at a recent Joint Apparel Association Forum (JAAF) workshop, on marketing apparel to India. The programme is part of the EU-Sri Lanka Trade Development project.

Singh explains that the Indian retail sector is revving up its engines to cater to economic and lifestyle changes of Indian consumers. India is already the fourth largest economy in purchasing power of parity terms after the US, China and Japan.

It is the fastest growing economy in the world after China, at over 8 percent growth for the last three years. India also has a very large population of young people – over half the population is under the age of 25. India’s urban youth populations are also earning hard cash in the Business Process Outsourcing boom and are more open to western cultural influences. The increasing city populations are fuelling retail shopping.

A. T. Kearney in its annual survey of investment attractiveness lists India as the world’s most attractive destination for mass merchant and food retailers. Already India’s organised retail sector is expanding and Indian retailers have also gone to the stock market to raise capital to expand. Singh points out that the increasing shop space means more room to sell clothing.

Most Sri Lankan exporters are well aware of the Indian potential but the difficulty is in getting a foothold in the Indian market. Given Sri Lanka’s higher production costs of ready-made garments, made-in-Sri Lanka labels can’t compete against made-in-India counterparts, on price.

Limited options
“To interest large format retailers in India Sri Lanka will need to offer either a product advantage or a price advantage,” says Singh. India’s expanding retail space however, will generate more room for variation in products and pricing and Singh says the right product could compete successfully. To survive in the Indian clothing market Sri Lanka needs to identify types of clothing that can sidestep Indian competition and also meet Indian demand.

Some Sri Lankan products that have been earmarked for the Indian market are lingerie, satin nightwear, western women’s wear, children’s wear and private label clothing.

Singh says western women’s wear in particular has future potential that Sri Lankan apparel manufacturers can capitalise on. “Children in India are being brought up in western wear.

So there is going to be a western wear boom in India and there are very few brands in the area of western women’s wear in India right now,” explains Singh. Men’s wear, on the other hand, is well catered to, in India and is seen as a fairly crowded market with little space for new entrants like Sri Lanka.

However, Singh says Sri Lanka can target Indian women as Indian clothing manufacturers catering to the Indian domestic market often lack specialisation when it comes to western style women’s clothing. The retail sector for children’s clothing is also noted for possibilities.

Retail rules
Whatever the selected clothing item, the Indian market expert warns that to survive in Indian retail, financial capacity is vitally important. As India does not allow foreign investment in the retail sector, foreign producers must access India through existing Indian retailers. This means being able to meet Indian retailer margins and payment terms.

Major players in Indian retail are Pantaloon Retail India Ltd (PRIL) – a public limited liability company that recorded a turnover of Indian rupees 1,073 crore ($242 million) for the financial year June 2005 – Trent, from the TATA Group that saw total group revenues of $17.8 billion in 2004-05, Shoppers Stop Ltd, from the Raheja Group and Lifestyle International Pvt Ltd.

Indian corporate giant, Reliance Industries, is also on the verge of jumping the retail bandwagon. The total group revenue of the Fortune 500 company adds up to $20 billion making it India’s largest private sector enterprise.

“Reliance never does anything on a small scale. It is a big player with deep pockets, so we in India are expecting the entire retail landscape to change when Reliance enters the sector,” says Singh.

These retailers and many others provide access to India’s large consumer base but qualifying, as a supplier, is tough. When selecting their suppliers Indian retailers look to number and quality of machines, monthly capacity, financial strength and working capital, lead times, other clients and integrated facilities.

Sri Lankan exporters can also consider entry into the Indian market through commission agents and wholesalers.

Commission agents represent a number of brands and manufacturers. They book orders and collect payments for a commission of 5-7 percent of wholesale price, and are convenient for brands looking at only a limited distribution.

Wholesalers buy goods and re-sell to retailers and take a margin of over 10 percent on the wholesale price. Wholesalers are a good option for wider distribution. On top of these entry costs and market structures Sri Lankan exporters looking to India must also look out for taxes.

“India is in the process of adopting the VAT regime. Under this regime the tax rates for apparel products is 4 percent. Besides VAT, other taxes that operate are the Central State Tax and the Octroi,” says Singh. The Central State Tax is a 4 percent levy on inter-state movement of goods and the Octroi is an entry tax levied by some states. These taxes are scheduled for phasing out with the introduction of the VAT.

These difficult entry conditions in to India could be offset by the sheer size of the clothing and textile market.

The retail share of clothing and textile is nearly half the total organised retail sector in India, at 41 percent of all organised retail.

Other developments at national policy level are also considered promising for new foreign entrants into the Indian market.

For instance India, as of recent, allows 51 percent foreign direct investment in single brand retail. “What this means is that for example, Nike, can set up there own stores and own 51 percent of the retail chain,” explained Singh.

Sri Lankan manufacturers that can meet these market requirements have a good chance in the Indian market.

Under its market development programme, JAAF is already in the process of signing up local companies that are targeting India. “The programme is going on for two years so that companies have some support over a period of time,” said Assistant Secretary General of JAAF, Manel Rodrigo.