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The Supply Chain Side of Foreign Retailers Operating in India

Analyst Insight: The issue of foreign direct investment (FDI) in Indian retail has been in the headline news over the past few years. However, little media attention has been paid to the supply chain aspects of foreign retailers setting up shop in the country. The entrance of new foreign retailers into India will have a positive impact on domestic retail supply chains, bringing in global best practices, technological know-how and strengthening the position of local small suppliers. - Viktoria Sadlovska, Managing Director, Prameya Research, & Lead Author of the Pragmatic Value Chains Blog

The Supply Chain Side of Foreign Retailers Operating in India

Today, Indian government regulations allow 100-percent foreign ownership in single-brand retail and 51 percent ownership in multi-brand retail, provided that companies meet a number of conditions for entering the market. These conditions include the requirements to source a minimum of 30 percent of produce sold in India locally, and - for multi-brand retailers -  to invest minimum $50m in back-end supply chain infrastructure. A number of global single-brand retailers, such as Zara and Swarovski, have already entered the market, while multi-brand retailers are still weighing their options.

With most of the discussion focused on foreign retailers' impact on consumer choice, prices and the viability of local kirana stores, it is easy to overlook the supply chain side of this story. The legislative aspects mentioned above aim to ensure that foreign entrants into the retail industry will have a positive impact on domestic supply chains. While difficult to fulfill for multi-brand retailers, the 30 percent domestic sourcing requirement has not stopped single-brand retailers from entering the market. In fact, some of them, such as Swedish furniture and home products giant IKEA, are able to leverage their Indian supply chains as strategic components of their global supply chain networks.

IKEA - a global firm that designs and sells ready-to-assemble furniture, home appliances and accessories - is a good example of a single-brand retailer with big plans for the Indian market.

In May 2013, IKEA received final approval from the Indian government to invest Rupees 105bn ($1.7bn at current exchange rate) in India over a period of 15 to 20 years. This will be the largest investment by a single-brand foreign retailer in India to date. Today, IKEA is already sourcing more than 30 percent of its entire textile range of its global operations from India, making the company an important part of the company's global supply chain network. IKEA is now well positioned to increase both its sourcing volumes from this market feeding its global supply chain, as well as expanding inside the Indian market.

Foreign retailers entering India need to be mindful of supply chain challenges lying ahead. Fragmented supply chain networks, poor infrastructure, lack of supply chain management services and other problems make it difficult to establish a seamless integrated supply chain. To succeed, companies will need to adopt innovative sourcing and inventory management strategies. The retailers will also need to invest in training and skill development both of their own organizations and their supply chain partners.

                                                      The Outlook

The Indian retail market will continue to attract foreign investors for the years to come. The entry of foreign retailers is likely to have a positive impact on Indian retail supply chains as new investment pours into the back-end supply chain infrastructure and higher demands are placed on the supply chain services provider market. Foreign retailers will need to prioritize supply chain management in order to compete effectively with the local industry leaders.

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