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Why Kamal Nath cannot afford not to allow FDI in sporting goods retail in India!

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Why Kamal Nath cannot afford not to allow FDI in sporting goods retail in India!

Andreas Gellner, MD adidas India talks to R S Roy, Editorial Director,

The issue of Foreign Direct Investment (FDI) has been debated time and again as the Indian Government has been under pressure to open up further. The policy makers continue to explore areas where FDI can be invited without hurting the interest of local retail community. Addressing the high powered industry and media meet at the release of India Retail Report 2007 and launching of Mr. Kamal Nath, Commerce & Industry Minister Government of India, gave firm indication on opening up of certain retail sectors for foreign direct investment (FDI).

The four sectors are electronic goods, Office equipments & stationery, sports goods, and building equipment.

While most of the segments have been well researched in terms of size and scope with performance of key players and their expansion plans and the findings have been adequately presented in the India Retail Report 2007, the need was felt to delve deeper into the subject to understand the reasoning and implications of opening these sectors to global players.

From his series of meetings and discussions, R S Roy presents excerpts of his interview with Andreas Gellner, MD adidas India to gather his view on FDI in the Sports Goods Retail Sector in India and its potential benefits.

Intro of the industry expert

Andreas Gellner, MD adidas India, has been with adidas for 12 years. His career gave him the opportunity to see retail markets from the European Heartland to Asia, where in his regional role based in HK he saw the most Asia/Pacific market in their respective stage of development. During his time as the MD for adidas in Malaysia, he was exposed in-depth to an evolving market where Retail FDI in his industry and in general was allowed.

Give us a short glance on the history of the Sports Goods Industry and the international players in India!

The international sporting goods industry has been one of the early arrivers in the Indian market with the main players establishing their presence from 1995 onwards. At that time there was no organized retail format that could support us in reaching our consumers. Thus most of the players had chosen a strategy to build up their own channels in form of mono-branded franchisee shops. This has allowed us to gain relevant insights into the needs of the Indian consumer.

Knowing that it is still a relatively young industry in an evolving retail sector, I’m sure that there are still misconceptions on how to define Sports Goods. Right?

I guess the very pragmatic approach for us on defining it would be: all products being used by athletes either for the purpose of practicing sports/physical exercises or for appearing “sporty”. Thus the category includes a wide variety of products such as:
• Footwear
• Apparel
• Accessories (like water bottles, caps, weights, yoga mats etc)
• Equipment (like treadmills, cricket bats, rackets, balls etc)

When you think of such products, the question also arises where the source of these products are. Are there sufficient capabilities within India for you to produce locally?

Most products we sell in India are also procured from India. As such, to take adidas as an example, we source around 80% of all products sourced from Indian sources.
Very specialized products that are not available in India currently still have to be imported. Examples would be high end technical footwear, gym equipment like treadmills etc. With scale even those could be produced in India over time.

And of course I would also like to understand how competitive these sources are in a global context? In other words, are you planning to export same products from India to your global markets?

Independently from FDI in retail, companies have started using India as a competitive sourcing hub for global markets. Here again I want to quote the example of adidas:
In 2007 we plan to export
• 10 mio pieces of apparel at a substantial billing value ( FOB)
• 12 mio pairs of sports shoe at a substantial billing value ( FOB)

These products will go to global markets and will have same quality specification like any other sourcing base we use. So, to answer your question: yes definitely! However, it is also important to say that the investment into a state-of-the-art footwear export factory has been done by one of our foreign partner, thus bringing in substantial FDI but more importantly, the technical know-how on how to produce quality for the world market. It also triggers tier 2 suppliers to set up business and develop local capabilities. Something than can be a pointer for the retail sector as well! In conclusion, besides FDI inflows and know-how transfer that of course has substantial employment dynamics as well.

That’s interesting! Tell us a bit more about the employment effects of your industry! This is always a hot topic, especially looking at the prevailing opinion in some political quarters that the FDI in retail will destroy jobs.

Well, it is difficult for me to judge the employment net balance on whole economy. And certainly there might be a shift from one category of employment to another. But let’s look at our example again:
In production
• For domestic sales we indirectly employ 3200 staff in all subcontracted factories
• For exports that number will be close to 30.000 at full capacity, thereby generating a whole new scale of development and prosperity in relatively underdeveloped areas.
In retail
• We can assume that there is a fixed staff requirement per sqf in retail.
• At the end of 2006 this meant 1100 staff being employed in adidas exclusive stores
• This number will be beyond 5000 in 2010

As there is insufficient educational facilities for retail training, companies have started to conduct either their own training or co-operate with existing institutes to partner in joint programs.

Example adidas: we will be launching a “adidas Retail University” in 2007 which will cater for all retail staff which are involved in adidas branded retail and which will instill a well rounded skill-set on retailing, customer service, IT, processes, Visual Merchandising, In-store communication etc. This will be imparted on a pan India basis. So, at the end it is not only employment, but also investment in education.

And not to forget about the fact that organized retail created commercial entities with are compliant tax payers, from VAT to payroll related taxes. That means, the higher the share of organized retail, the higher the tax collection for the government.

Beside employment, knowledge transfer and tax payments, do you see any other contribution that the Sporting Goods Industry can have on the Nation as such?

One of the ways for companies in our industry to grow the business is to support educational measures on healthy lifestyle and the benefits of appropriate equipments to either performance or health. Therefore, I see a substantial education mission where we can contribute.
Then of course as mention before we will be
• Generator of employment in retail
• Generator of employment in production

But besides that, FDI in retail would allow knowledge transfer on best practices in retail processes and supply chain management. By the way, that is what is happening on the manufacturing side of our business already! That means there is proof of it happening and it is not only empty phrases.

In many discussions on the topic of FDI in India Retail we hear that import restrictions have to be relaxed in order for retailers to commit to invest directly. What is your view?

As far as our industry in concerned, there is no direct correlation in-between the two. Means we would see significant FDI in retail even if all import regulations stay the same.
We would very much welcome a 100% FDI in the sporting goods retail sector as it would allow us:
• To grow faster and reach out to more consumers by using our capital to acquire retail environments in a more aggressive manner
• To more effectively disseminate best practice in retail across all stores and cities
• To deal with more foreign retailers who have share expertise with us on modern retail formats and know-how

This in turn would allow us to invest more in consumer education and also generate more employment.

With more international retailers coming into India, the retail landscape would benefit in the following ways:
• Faster roll-out in more cities
• Differentiated environments (different product categories, different price ranges for different consumer groups)
• More value added shopping experiences

Lower levies imposed on imports would allow us to offer top end product at more competitive prices to Indian consumers than currently possible. This would allow us spread the benefit of such product to a much wider customer base in India.

Currently, same pair of high end footwear in India is significantly more expensive than in Europe or the US due to all the charges on imports.

Example adidas: Supernova Running Shoe: recommended retail price in US: 120 USD; price in Indian market: 6600 Rs (equivalent of 146 USD or a premium of 30%). Does this sound fair? As an example, most of the high end football shoes worn in the East India are bought in Thailand and brought as carry-on luggage on daily flights to Kolkata because it is still cheaper than buying in India. Does this make sense?

What kind of investment would a foreign retail bring to the table?

Well, that depends how many stores are being targeted. Again taking adidas as an example: typically a franchisee would spend 1800 Rs per square foot on renovation of the latest adidas Sports Performance Concept. For an average 1500 sqf shop this would be 27lakhs. Additional investment is into stocks and security deposit which would make the total investment 55-60lakhs. So you multiply that with the number of stores and you would arrive at a ball-park investment needed.

So can you confirm that foreign retailers are actually making a bee-line to invest into the Sporting Goods Retail here in India?

We had a variety of European and Asian retailers discussing with us over the last 12 months. Established players as well as new entrants. Due to confidentiality issues names cannot be mentioned. However, most of them are in a waiting position as they only would like to invest if they can own and control 100%.

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