High rents, supply chain issues, local disruptors challenge global fashion brands in India

With changing market scenario global fashion brands operating in India are dealing with numerous challenges. Once symbols of prestige, flagship stores are now shuttering due to exorbitant rents, while the dynamic e-commerce and quick-commerce sectors are reshaping consumer behavior. Can these international giants adapt to survive in this fiercely competitive market, or will they succumb to the forces reshaping India's retail reality?

The crushing weight of prime real estate

The closure of iconic stores, burdened by unsustainable rental costs, highlights the growing financial pressures. Prime retail spaces in major cities command sky-high prices, squeezing profits and forcing brands to reconsider their physical footprint. As per a Knight Frank ‘India Retail Real Estate Report 2023’ report, "Prime retail rents in key Indian cities witnessed an average annual growth of 15 per cent in 2023, with some micro-markets experiencing surges of up to 20 per cent." This rental trap, coupled with rising operational costs, is compelling many to downsize or exit altogether.

Table: Prime retail rent growth in major Indian cities (2023)

Supply chain disruptions, a global domino effect

What’s more, supply chain disruptions, intensified by global events, are adding to the woes. Increased shipping costs and delays are impacting product availability and pricing, forcing brands to rethink their sourcing and distribution strategies. The Red Sea crisis, for example, significantly impacted shipping costs. As per Drewry World Container Index, January 2024, freight rates on key Asia-Europe routes rose over 150 per cent in January 2024 due to rerouting around the Cape of Good Hope. Therefore, the need to reduce import dependence is driving some towards local sourcing, but this presents its own set of challenges regarding cost and efficiency.

For example, Zara, the global fashion giant, has begun to increase local sourcing in India. Reporsts say, Inditex, Zara’s parent company has set a goal of sourcing at least 25 per cent of its products for the Indian market by 2025. This move aims to mitigate supply chain risks and reduce import costs, demonstrating a strategic shift towards localized production.

Regulatory hurdles and tax complexities

Adding to the complexity are India's regulatory hurdles. High taxes and intricate compliance requirements further strain profitability, demanding strategic partnerships and a deep understanding of local market dynamics. A Deloitte India report said, India's complex GST structure and varying state-level regulations create significant compliance challenges for international retailers.

The rise of domestic disruptors

Meanwhile, local competition is intensifying. Domestic brands and direct-to-consumer (D2C) labels are rapidly gaining market share, offering stylish and affordable alternatives tailored to Indian consumers. These agile players leverage digital platforms and influencer marketing to build strong brand loyalty, often outpacing their global counterparts.  Avendus Capital D2C Report of 2023 says, Indian D2C market is expected to reach $100 billion by 2025.

The rise of e-commerce and quick-commerce platforms too is altering shopping habits. While these platforms offer a lifeline for brands struggling with physical retail, they also introduce new competitive pressures, with marketplaces promoting their own private labels. As Arvind Singhal, Chairman, Technopak Advisors points out, more and more Indian consumer are demanding value, convenience, and a personalized shopping experience. Local brands and e-commerce platforms are delivering on these expectations.

Adapting to survive

Therefore, in this fast-evolving market, simply being a global brand is no longer a guarantee of success. Brands must demonstrate agility and adaptability to thrive. This includes:

Optimizing retail footprint: Reevaluating store sizes and locations to manage rental costs.

Strengthening supply chains: Diversifying sourcing and exploring local manufacturing to mitigate disruptions.

Embracing digital transformation: Building a robust online presence across e-commerce platforms and D2C channels.

Adapting local preferences: Tailoring products and marketing strategies to resonate with Indian consumers.

Navigating regulatory challenges: Building strong relationships with local partners and staying abreast of policy changes.

The fact is Indian retail market is dynamic and demanding and those who can effectively navigate these challenges, embrace innovation and change as per the evolving consumer landscape, will have the best chance of survival.