Sep 6, 2008

Business - India;Retail keen on evaluating biz structures with high end cos

MUMBAI: The slowdown in the economy and archaic rules on real estate may have affected the mainstream retail industry, but there is a flurry of activity on the high-end retail segment, as existing players actively explore business structures to tie up with global high-end retail majors. Mandates with consulting firms, including those from the Big Four, show that players such as Reliance Retail, Aditya Birla Retail, Shoppers Stop and others are keen on evaluating business structures with high-end firms such as Marks & Spencer or Armani or a Moschino to tap demand from the growing number of HNIs (high-networth individuals). According to sources, growth in demand for luxury items is pitched against a slowdown in mainstream retail as high inflation pushes back purchase decisions. The main driver is an increase in the number of individuals in India, who can afford to fly abroad to splurge on high-end accessories ranging from Rs 80,000 and above. Business structures being considered include a franchisee model to start with, which could later be converted into a joint venture if the two partners consider it worthwhile. Firms such as KPMG, PricewaterhouseCoopers and Ernst & Young are working on such structures and also advising on possible tax-efficient structures, as there are grey areas in levying value-added tax (VAT) on items such as a diamond-studded watch or a high-end leather jacket. For a diamond-studded watch, if the item is categorised as a watch then VAT levy is a high 12.5% compared to that on a gold or a diamond item where VAT could be just 1% or less. Recently, many UK retailers, including Marks & Spencer, have been looking to gain a presence in India. Consulting firm KPMG’s tax partner in India, Amarjeet Singh, is expected to advise such high-end retail clients who are planning to move to India, especially as there is a strong demand from European clients for advice on the tax and regulatory environment around investing in India. Speaking on the robust interest in high-end retail, KPMG manager strategic services C Ravishankar said: “The market for high-end luxury items in India is growing. Since it is difficult to build a luxury item from scratch, there are efforts to bring established global brands into India. In such cases you have to be clear on the type of business structures that can be formed,” he added. India’s fast-growing high-end retail market is expected to increase from the current $3.5 billion to $30 billion by 2015. According to sources in Reliance Retail, the key driver for luxury retail, apart from growing HNIs, is that the margins are also very high, as much as 70% to 80%. The luxury retail market is roughly estimated to be about Rs 2,000 crore and expected to grow at 20% in the next five years. Although the pace is slower than the mainstream retail, which had been growing at the rate of 30% to 40%, the value of the luxury market is much higher. According to KH Vishwanathan of Astute Consulting, firms are currently involved in doing a concept study to highlight the compliance part and tax efficiency of a proposed business structure. Nielsen Company director (retail consulting division) Asitava Sen says the move to prepare the business structures between Indian retailers and high-end global players is vital when there are strong brands. “Most foreign players are very protective about their brands and won’t allow their Indian partners access to these brands,” he said. The business model that such ventures would work on is in allowing the foreign company to own the back end in a retail venture while leaving the front end to the Indian company. In such a structure, the foreign company would have complete control over the price and packaging.

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