The Hindu Business Line : Together we play…

Does it make sense to forge joint ventures in lifestyle retail during an economic downturn? Of late, several big corporate houses have been announcing joint ventures hoping the demand slowdown will pass by the time they launch their brands and stores in the country by the end of the year and that the slump is just ‘incidental’.

While players such as Tatas (Trent), Reliance Brands and S Kumars’ Brandhouse Retails have already jumped into the fray, there are couple of other ventures on the anvil that are on the verge of a break-up..

Today, sharing risks through joint ventures is considered a safer option in times of a downturn. According to Nitin Kasliwal, Chairman, Brandhouse Retails, “There is definitely more commitment as the risks in the business are shared between the two parties who are now equal partners, compared to a standalone franchise. In fact, today foreign retailers prefer joint ventures as they perceive the franchisee relationship be too weak.”

Brandhouse Retails recently announced a joint venture with Italy’s ‘fast fashion affordable’ brand Oviesse. It plans to set up 190 stores in the next five years. “We would be setting up our stores by the end of 2009 by which time India should be out of the downturn,” says Kasliwal, who believes lifestyle retailing too should pick up by then.

The Tatas (through Trent) announced a 49:51 venture with the Inditex Group of Spain to launch the Zara stores in India. After entering a franchise agreement with the Sisley brand last year, Trent decided to go the joint venture route. It intends opening the first few Zara stores in New Delhi and Mumbai by the beginning of 2010.

An optimistic Noel N. Tata, Managing Director of Trent, during the signing ceremony in Spain, said: “We see great opportunities for Zara in a country which is becoming increasingly fashion-conscious. Zara has proven itself capable of quickly adapting to changing consumer tastes across geographies. It will satisfy the discerning Indian consumer’s demand for the latest fashion trends very well.”

Late last year, Reliance Brands also signed a 51:49 venture with Italy’s iconic brand Diesel. “It is a tough world we are living in, but for international brands India is the last of the remaining markets. A joint venture is always deeper than a franchise and there is more commitment from both the partners,” says Darshan Mehta, President & CEO, Reliance Brands. Marks & Spencer decided to change its status from a franchise arrangement (with Planet Retail) to a joint venture with Reliance Retail to enhance its business in the country. According to industry sources, Marks & Spencer wanted control of its operations through a joint venture and bring down its pricing for the Indian market which it was unable to do through its franchisee.

Joint ventures are on the rise, mostly at the high end of the retail market. Being established lifestyle brands, players believe they stand a better chance in the Indian market in spite of the difficult days ahead. However, analysts say the announcements and subsequent store roll-out will not happen on schedule and that the lifestyle segment will possibly be more affected than the value segment.

According to Asitava Sen, Director, Client Solutions, Retail Consulting Division, AC Nielsen ORG_Marg, “This is an opportune time for foreign retailers to consider an Indian market entry through joint ventures with Indian partners. It’s a win-win as North American and European markets are in recession and India offers far greater growth opportunity in the near future. Rental and manpower costs are down. The much needed liquidity that Indian companies need could come through FDI.”

Sen says that while the regulatory regime has its constraints, for large and serious players looking at India the preferred choice will be to be 100 per cent-owned, a venture with strong local players and entering into a franchise agreement, in that order. For a multi-brand retailer, options 1 and 2 do not exist under the present regulatory regime, hence the use of “innovative” investment structuring under wholesale (back-end) and franchise (front end) route. “For single-brand retailers, like the large ones such as Zara and Marks & Spencer, which are allowed to own 51 per cent of the business, the preferred option is a venture with a strong Indian partner, who brings in significant value in the business, either through understanding of Indian consumers or business dynamics or real estate or supply chain. A joint venture ensures both parties invest money and resources; hence there is greater commitment from either side to make it successful.”

In fact, it is at the super premium and luxury end of the retail market where the franchisee route may be the preferred option. “It is the smaller and ‘niche’ players who typically do not want to invest too much of their own money in a new market (given the lack of local market knowledge and other risks involved) who will go for the franchise route,” says Sen.

At the same time, price value deliveries have become an issue with international retailers and while FDI in multibrand retailing is still awaited, a couple of ventures forged before the slump set in which are now on the block.

Etam’s venture with Future Group and the Gas Raymond venture are two such high-profile tie-ups on the verge of being dissolved. Retail analysts say foreign brands are feeling the heat and as gestation periods get extended, it will depend on how they will face this period of turbulence. It depends on how long they want to hold on to their profit and loss figures getting a beating. An official who was part of the Gas Raymond venture says, “More than pricing, the targets for sale deliveries were not being met. The partners had differences on investments. It is only after forming the joint venture that the international partner gets acquainted with the realities of the marketplace.”

In the case of Gas, its main competitor Diesel had already found a partner (Reliance Brands) and in all probability it too would look for another partner after its break-up with Raymond. Most brands will look for partners till such time that FDI is allowed.

Meanwhile cost cutting measures have forced the Paris-based French fashion retailer, Etam, to withdraw its 50:50 venture with the Future Group (through Pantaloon Industries). “We have decided to part ways as Etam’s product profile did not fit into our customer profile,” says a Future Group official. Other reasons being cited are the appreciation of the Euro and steep import duties. “Etam was not willing to scale down its prices for the Indian market and wanted to have a super premium positioning in India. It wanted to follow a parity level pricing in the Indian market,” explains the official. Steep real estate costs and high rentals have been eating into the sales and profits of most international retailers including Etam.

According to Sen of AC Nielsen ORG_Marg, “As for joint ventures breaking apart, statistics across industries prove that not too many succeed. Reasons could vary, but usually it’s a mismatch between vision and culture. In India, the common cause of dispute is the nature and scale of roll-out, and whether each party is committed to infusing funds to expand the business as per plan.” But for the moment some new joint ventures announced in lifestyle retailing seem to be ready to beat the economic blues.

As Mehta of Reliance Brands says, “The recession is incidental, the joint ventures are more permanent, like a marriage, but can turn sour.”

Related Stories:
Brandhouse Retails ties up with Italian apparel firm
Cushman & Wakefield, Technopak in retail tie-up
Reliance Retail ties up with UK toy retailer Hamleys

More Stories on : Retailing | Alliances & Joint Ventures

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