Primark is one of the biggest names that comes in mind when thinking of budget fashion. Part of the Associated British Foods (ABF), it has over 200 stores across Europe and USA. Primark started in 1969 in Dublin. From then on, it has seen itself multiplying in numbers and countries. Without the help of online shopping, Primark draws in a large amount of shoppers into their stores. Earlier this year, the budget fashion retail store announced an 8% increase in sales year on year and a 6% jump in the adjusted operating profits to £341 million, as a result of increased selling retails space. Globalisation is spread across the globe and has made the term “global village” pretty relevant. Globalisation comes with interdependence of those engaged at all levels. Whether it may be, technology, wider market, labour etc. India being one of the biggest developing countries of the world has seen a large boom in retail in the recent years. With the recent relaxed rules for Foreign Direct Investment (FDI) for single brand retail in the year 2012, giving the firm an opportunity for a wholly-owned subsidiary than entering the Indian markets as a joint venture or franchising the brand. Also, the Indian government has relaxed the mandatory local sourcing requirement of 30% which have been long standing. With this, the large young adult consumer base, rising disposable income and growth in the middle income segment makes India one of the best places for Primark to enter. This report aims to critically evaluate the opportunities and challenges that Primark would face if it enters the Indian market. With that, it will also suggest the strategy mode to enter the market and its feasibility to the firm acknowledging various factors that may or may not be in favour of it.
General Business Context
Considering that India produces a part of Primark's clothing, penetrating into the market is not going to be a difficult task to achieve. This is due to being an employer in the country already, a platform is already created to an extent with employees which can build on. India is a favourable country for fashion retailers due to large young adult consumer base in the country, which is approximately a third of the total population. Also, the rising disposable income and growth seen in the middle-income segment make India an extremely favourable market for fashion retailers. Adding to this, consumer spending India is assured to grow 14% annually through 2020. Until recently, most Indians, particularly Indian women were loyal to traditional clothing styles. However, increased affordable fashion, higher disposable income and transformation in social and cultural lifestyles have infested in changes in their preferences. A new generation of consumers who have grown up in an era of economic liberalisation as well as social freedom is fundamentally changing the consumer market in India. Therefore, taking advantage of the situation along with economy of India doing well should be well noted by Primark in order to enter its market.
Growth in youth segment and working women population.
Increasing income and hence increasing purchasing power.
Higher brand consciousness.
Change in consumer preferences and rising urbanisation.
Increasing number of high net worth individuals (HNI's)
Increase in internet usage.
Looking at the situation politically, the relaxation of Foreign Direct Investment (FDI) in India is a major boost for Primark as a fashion retail company that wants to enter its market. The Indian government earlier this year 100% FDI in a single brand retail allowing foreign companies to set up own stores without government's prior approval. This means, where earlier the foreign players could own only upto 49% in a local single-brand retail chain and had to approach the Department of Industrial Policy and Promotion (DIPP) to go ahead and acquire the remaining 51%. Local sourcing of 30% has also been relaxed which has been long standing.
Various routes to enter the Indian market-
Licensing: Owner of a brand (licensor)leases the rights to use the brand name to the retailer (licensee), allowing the retailer to stock and sell branded items. For example, PVH Corporation (licensor) licenses Calvin Klein and Tommy Hilfiger to Arvind Brands (licensee) in India.
Franchising: Franchising is similar to licensing. However, franchising allows the retailer (franchisee) to use a brand's (franchisor's) intellectual property as well as its business model, marketing strategy and distribution model to sell the bran's goods. For example, an American fashion retail company Forever 21's rights to be sold online and offline is given to Arvind Brands through a franchise agreement.
Joint Venture: A joint Venture is an enterprise when two or more parties pool in their capital and resources. For example, Marks & Spencers entered the Indian market as a joint venture owning 51% of the stakes with Reliance Retails owning 49% of the stakes.
Limited Liability Partnership: In this form of partnership, the partners of the firm have limited liabilities. This means, a partner cannot be held responsible for the other partner's mismanagement of the company.
Wholly-Owned Subsidiary: In this method, an organisation (the parent company) can set up a new company that is incorporated as a local company in the country in question, in this case, India. H&M became the first company to enter India as a wholly-owned subsidiary after the cap on FDI in single branded companies was removed.
A joint venture is probably the most common way to enter the Indian market that comes in an MNC's mind. More or less due to the local partener giving a better navigation towards the local market's complexity and manage regulatory issues. There certainly is some truth in that, however, in practice, joint ventures often tend to emphasize on short-term performance over long-term goals, long-term commitments and an alignment between the interest of the global and the local partner. Without management role and clear path to ownership, global companies such as Primark, may have no alternative but to exit the market.
The safest yet rewarding mode of entry for Primark should be as a wholly-owned subsidiary. Multinationals that have entered India as a stand-alone have generally fared better than those that use Indian partners for joint ventures. For example, H&M being the first foreign retail company to come into the Indian market as a wholly-owned subsidiary is performing much better than British retailer Marks & Spencers, Levi Strauss as well as Benetton.
Also, some of the major points to consider going for a wholly-owned subsidy are:
Retaining operational control- In this case, the parent company usually has the full control over its wholly owned subsidy. In other words, the parent company often initiates management changes at its wholly-owned subsidiary, however, the degree of control varies but is implicit in the relationship.
Speedy strategic decision making: One of the main advantages of going for a wholly-owned subsidy is speedy execution of strategic priorities. The magic mantra to it is, faster execution which in turn leads to faster market penetration. For example, the parent company can ask it wholly-owned subsidy to dedicate all of its resources towards launching a new product. If this process was time consuming, it can lose its perfect time and hence, turn out to be a disaster than a success.
Dealing with institutional and cultural differences and other opportunities and challenges between the host and home countries.
The first potential threat to Primark while entering the Indian market will be the cultural difference between what mostly is the normal Primark markets and the lifestyle in the eastern part of the world. India is a bit culturally conservative country where in it will get difficult to penetrate into the market with “western trendy outfits”. This is due to the cultural traditions that women need to be decently dressed, ie. need not show a lot of skin. However, there still is a significant number of women and girls seen in “less traditional” attires in most of the big cities of the country. Lifestyle, variability in personality and social class form the basis of psychographic market segmentation. To overcome this, Primark can liaise with Indian suppliers which can be very useful. This will particularly be useful because they will have a better idea on the kinds of products which are in high demand in the market and the kind of clothes that are in sync with the cultural values of the society, more or less the kind of clothes Indian women would prefer. If such steps are taken by Primark, it will most definitely penetrate into the Indian market much more effectively and efficiently. Before stepping into the market, research needs to carried out on what will be good enough for a particular part of the country, which will therefore enhance building a proper product customer relationship and enhance market penetration.
Looking at the different parts of India-
North India: Home to nearly 370 million people and accounting to 30% of India's total population. The region includes the states of Jammu & Kashmir, Punjab, Haryana, Uttar Pradesh, Uttaranchal, Himachal Pradesh, Rajasthan, Chandigarh (Union Territory) and New Delhi (National Capital Region-NCR). The per capita incomes vary greatly, where New Delhi, Punjab and Haryana doing well above India's average GDP of $1539 and other states performing significantly lower. Outside the NCR including Gurgaon and Noida are the main business centres in North India. Punjab also has a good consumer culture and comes in as one of India's top markets for luxury goods. Therefore, entry into these areas of North India is advisable.
West India: States in Western India include Maharashtra, Madhya Pradesh, Gujarat, Chhatisgarh and Goa. This region is much more industrialized and is anchored by Mumbai, the financial, business and entertainment capital of the country. Other major cities include- Pune and Nagpur in Maharashtra; Ahmedabad, Surat and Vadodara in Gujarat; Indore and Bhopal in Madhya Pradesh and Panaji in Goa. The Western Region is an economic powerhouse in a wide range of sectors such as: textiles, petroleum, electrical machinery, engineering goods etc. Some of the foreign fashion retailers that had entered the Indian market before had started off with opening stores in Mumbai due to its development and evolved population which is a great advantage that Primark.
South India: The Southern part of the country includes- Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, Kerala and Odisha. This part of the country includes a few of big cities of India. The state of Tamil Nadu has 4 major and 44 minor ports which serves as an important gateway to Southeast Asia. Point to be noted here is that products that are manufactured in neighbouring countries of India (Bangladesh, Myanmar, Nepal and China) or even a little further (Vietnam, Cambodia) can be shipped into India with lower costs considering the distance. The capital of the state, Chennai, is home to many Indian companies engaged in automotive, healthcare, IT and financial service sector. Bengaluru, the capital of Karnataka is considered the high-tech hub of India and one of the principal commercial and industrial centres in Southern India. The city has a booming retail market and is the first destination of many global consumer brands.
East and Northeast India: This region include the states of West Bengal, Bihar, Jharkhand, Sikkim, Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Tripura and Manipur. West Bengal and Jharkhand are the most industrialized states in this part of India. What makes this area unique from a business point of view is that the region has got ample of natural resources, well-trained manpower and borders Bangladesh, Bhutan, Nepal, Myanmar and China.
Recommendations on how and whether the investment should go ahead
Indian as a market is a very lucrative one. The fast growing economy, large young consuming population and the entry of international brands have changed the preferences and have shaped and paved way for upcoming fashion retailers like Primark. As the country with the largest young population, it is gaining more fashion consciousness owing to mass media and social media penetration. The promising growth rate of 9.7% makes India a prominent in retail sector. With GDP growth rate of 7%, India has an edge over developed markets such as the US, Europe and Japan whose growth rate is 2-3%. Primark should take the opportunity to expand its market into India. India is a country which developing, the youth is progressing and moving further and increasingly opening up to new fashion trends. Even though, in the Western part of the world, incomes are on a higher side than in India, therefore the pricing policy of Primark which is low and affordable comes as something that the Indian market is awaiting. For example, H&M entered the Indian market with its standard prices. It strategized on lowering the merchandise prices which helped it gain double the sales by the end of November 2017. With respect to Primark, the prices of the merchandise is already significantly low, which is a win-win situation for the business and the consumers.
Demand varies across the country, however, the urban market that mainly comprises of metro cities such Delhi, Mumbai, Bengaluru, Chennai etc. Therefore, focus on entering the markets should be started through such cities. Considering that almost 70% of the population comprises of people living in smaller cities and villages, the major contribution of urban cities to apparel market indicates the higher purchasing power of the people in the urban cities.
Not only this, but the Indian government is also looking forward for international players like Primark to enter the market, hence relaxing some of it regulations. Talking about the manufacturing of merchandise, India along with the countries bordering and near it are doing the majority of the crux of it, which enables Primark to ship it's good into the country with reduced time and cost.
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