Pest Analysis of Retail Apprel Industry Essay

1. Political Factors: The proliferation of international trade and liberalization of the global trade regime has dawned in India with the implementation of several programs by the Government of India (termed as GOI from now onwards in the report) to help the textile and apparel industry adjust to the new trade environment. In 2000, the GOI unveiled its National Textile Policy (NTP) 2000, aimed at enhancing the competitiveness of the textile and apparel industry and expanding India’s share of world textile and apparel exports to 10 per cent by 2010 from the current 3 per cent level.

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Some of these measures taken by the GOI were substantial to facilitate the Brand Accessory Industry too – label and packaging industry, for brand value addition. Under the NTP 2000, the GOI removed ready-made apparel articles from the list of products reserved for the SSI sector. As a result, foreign firms may now invest up to 100 per cent in the apparel sector without any export obligation. This policy equally holds strong for the Branding Sector – Label & Tag industries.

The GOI grants automatic approval within 2 weeks of all proposals involving foreign equity up to 51 per cent in the manufacture of textile products or related branding items in the composite mills. Foreign investment up to 50, 51, 74 and 100 per cent in priority industries/activities, is eligible for automatic approval by the Reserve Bank of India (RBI). Automatic approval is also available for holding equity up to 51 per cent in trading companies engaged primarily in export activities.

In addition, 100 per cent Export Oriented Units (EOUs) and units set up in designated Export Processing Zones (EPZs) are eligible for automatic approval provided they satisfy stipulated criteria. Foreign technology agreements are also eligible for automatic approvals within certain limits. Tax Policies India has a well-developed tax structure, with the authority to levy taxes divided between the Central Government and the State Governments. The Central Government levies direct taxes such as personal income tax and corporate tax and indirect taxes such as customs duty, excise duty, central sales tax and service tax.

The states are empowered to levy professional tax and state sales tax apart from various other local taxes like entry tax, octroi, etc . Foreign collaboration and investment are subjected to direct and indirect taxation, though indirect taxes such as customs, excise and sales tax do not affect the income stream of the investment the impact of income-tax is a crucial area which determines the investment strategy of the investor. Tax policies are also important to be intervened in effect to the Branding Solution Industry. DIRECT TAXES Corporate Tax Liability

Resident Organizations incorporated in India or having its entire management and control in India is taxed on its worldwide income. However, a non-resident corporation (foreign company) is taxed only on income derived in India from Indian operations, income that is deemed to arise in India and income that is received in India at a rate that differs on the basis of category of the company like domestic and foreign. The foreign collaborators presume to stay as non-residents unless the control and management of its affairs is wholly situated in India. Minimum alternate tax (MAT)

MAT is levied currently at the rate of 7. 5 per cent of book profits of the companies where tax under normal provision is less than 7. 5 per cent of book profits. FOREIGN DIRECT INVESTMENT POLICY Excise Duty In case, foreign investors are interested to set up production or manufacturing facilities in India, excise duty is a tax levied on the manufacture of goods within the country, governed by the Central Excise Act, 1944, and the Central Excise Tariff Act, 1985. The term ‘manufactures ‘has been interpreted to mean bringing into existence new article having a distinct name, character, use and marketability.

Basic excise duty is levied at a uniform rate of 16 per cent with an additional special excise duty levied on a few products at 16 per cent. The Excise law ensures a CENVAT Credit Scheme, which limits the cascading effect of duty incident on number of excisable goods that are used as inputs/capital goods for manufacturing other excisable goods. The scheme suggests that CENVAT credit can be claimed on the excise duty, special excise duty and additional duty of customs imposed on raw materials and capital goods, whether purchased locally or imported. This credit can be utilized for the payment of excise duty on the finished product.

Customs Duty Customs duty is levied on import of goods into India. A downward trend in customs duty rates has been seen over the past few years. This ensures free import of raw materials required for the production of Labels & Tags. Other Taxes In addition to above, some other taxes imposed by central / state government are as follows: • Transfer of assets attracts stamp duty • Some states impose real estate taxes based on asset values • Municipalities levy tax on real estate in their jurisdiction and octroi on goods entering their jurisdiction. VALUE ADDED TAX

In case the tags are supplied to the garment manufacturing vendors outside India there is no charge of Central Excise and Value Added Tax (from now onwards termed as VAT in the report) besides the basic cost and the freight charges. In case the tags are to be supplied to vendors within India payments are done on the base of a Delivery Voucher (Form 515) with consolidated Invoice along-with. In such cases Central Excise and VAT can be avoided in the presence of Form H for Commercial Taxes (VAT) and Form CT3 (for Central Excise). It can be summarized that the Duties and Taxes for Tags and Stickers are as follows: For tags – Central Excise is 8. 4 % For Stickers – Central Excise is 16. 48 % VAT – 4 % CST – 3 % with Form C and without Form C – 10 % (However these can be avoided if the Garment manufacturer gives Form H which is for exports) Above duties and taxes can be avoided if invoice is sent directly in Euros and supply of the materials is done in India or Outside India. 2. Economic Factors: With the economic restructuring and liberalization of the Indian Economy since 1990, India anticipates the fastest period of growth with long-term sustainable market expansion, higher manufacturing output and investment opportunities.

Economic reforms brought by the GOI were initially centered on • liberalizing procedures for industrial licensing and investment • Reduced role of public sector in the nation’s economy • lowering of import duties • easing import licensing requirements • relaxing controls on foreign direct and portfolio investment, and • improving operations of capital markets Economic Growth potential in India is projected to be 10 per cent in the near future, just as it was successfully lifted from 4. 5 per cent in the 1980s to 6 per cent in the 1990s and 8 per cent levels by the end of the last century.

Growth rate in 2007 was averaged to be around 9. 2 percent and 9. 6 per cent in 2006 – supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both IT and real estate boom, and a flourishing capital market. Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22. 8 per cent in the fiscal year 2001, to 35. per cent in the fiscal year 2006 with the gross rate of savings as a proportion to GDP Registering solid growth from 23. 5 per cent to 34. 8 per cent for the same period. 3. Social Factors: In India wealth has been concentrated in a small percentage of the population, with positive demographics, buoyant economic growth coupled with the effects of wage inflation which have resulted in India registering one of the fastest increase in high net worth individuals(HNIs) in the world. It is estimated that in absolute numbers, by 2025, India’s wealthiest citizens will total 24 million.

HNIs or individuals with financial assets over US$1mn have risen to 83,000 with a growth rate of 19. 3 per cent. In India wealth has been concentrated in a small percentage of the population, with positive demographics, buoyant economic growth coupled with the effects of wage inflation which have resulted in India registering one of the fastest increase in high net worth individuals(HNIs) in the world. It is estimated that in absolute numbers, by 2025, India’s wealthiest citizens will total 24 million. HNIs or individuals with financial assets over US$1mn have risen to 83,000 with a growth rate of 19. per cent. Recent surveys have revealed that currently there are 1. 6 million households earning over INR4. 5 million (USD100, 000) per annum spend INR 0. 4 million (USD 9000) of their income each year on luxury products; thus resulting in a market size of about USD 14. 4 billion for such products. According to Mckinsey Reports, it is expected that over the next two decades, the country’s middle class will grow from about 5 per cent of the population to more than 40 percent, being the fifth largest consumer market with huge private consumption.

This characterizes the fact that the Apparel & Fashion Industry in India is diverse, concentrating on different target segments as the general rising middle class segment and also the elite class people. This accounts for the growing market for both International and Domestic Retailers and brands with different fashion portfolios encouraging the Branding Solution Industry. 4. Technological/Operational Factors: On April 1, 1999, the GOI implemented the Technology Up gradation Fund (TUF) to spur investment in new textile and apparel technologies.

The Label & Tag Industry being much dependent on the apparel and fashion sector is liable to receive coverage under this scheme for its production of labels – which requires much technological up gradation and textile machineries; especially those required for manufacturing woven labels, care labels and printing. Under the 5-year USD 6 billion program, eligible firms can receive loans for upgrading their technology at interest rates that are 5 per cent lower than the normal lending rates of specified financial institutions in India.

According to GOI officials, this interest rate incentive is intended to bring the cost of capital in India closer to international costs. The RBI has also given automatic permission for foreign technology agreements in all areas of electronics (related to RFID) provided the technology price does not exceed USD 2 million and royalty payments do not exceed 5 per cent of domestic sales and 8 per cent of exports. The FDI/foreign technology collaboration agreement proposals, which do not conform to the automatic-approval guidelines, require government approval through the Foreign Investment Promotion Board (FIPB).

The government has set up a special FIPB as a fast track mechanism to invite and facilitate foreign investment in large projects, considered beneficial for India, butare not covered by the automatic-approval process and norms under which SIA (Secretariat for Industrial Assistance) is authorized to grant investment approvals. FIVE FORCE ANALYSIS OF APPAREL INDUSTRY Bargaining Power of Suppliers: The bargaining power of supplier depends on the level of suppler concentration importance of volume and threats of forward integration supplies are power pull.

They are concentrated and there is a high treat of forward integration affection the buyer’s ability to achieve profitability. Textile and apparel manufacturing sector in India are highly fragmented and carectorised by a high density of suppliers mostly operating independently on a small scale. The fragmented structure of this sector diminishes the power of India. Suppliers due to lake of capability to achieve economy of scale however there are also a few large domestic suppliers operating in the Indian market.

For example the Raymond group incorporated in 1925 as a textile manufacturer has grown it’s operation to include several apparel retail companies. * Bargaining power of suppliers * Gaining supply side economies could be challenging for new entrance due to the high fragmented of small suppliers. * While foreign retailers may source from a few large domestic suppliers to achieve economies of scale. These suppliers are threatening for forward integration for retail sector becoming strong competitors. Bargaining Power of Customers: Bargaining power of suppliers is increasing now a day.

They are now becoming more aware about the varies brands and products in apparel industry. Now a day’s too much compition available and that is why various products are becoming cheaper then before and other brands. Many brands are giving huge discounts to attract the consumers. These customers are demanding for the brand when they go to purchase the product. the shifting of customers from one brand to another brand is increasing now a days. Private label brands, unbranded products and many local brands are available in the markets which give the customers more scope for the selection of product.

Intensity of Existing Rivalry: The intensity of rivalry is determined by industry growth, industry concentration, diversity of competitors and product differentiation. High revelry within an industry drives down the profitability of an industry by influencing prizes and costs of competition. While high intensity of rivalry makes an industry less attractive, a fast growing market creates opportunity for revenues. Since 2006 trade liberalization, the Indian apparel retail industry has led an influx of foreign retailers into the market.

Immense growth opportunities have led to the entry of large number of players in the market, increasing competition. Industry concentration refers to the number of companies completing in the same markets. Rivalry is intensified if these companies have similar market shares, thus destroying profitability. Unorganized retail sectors in India consist of a large number of mom and pop stores competing in similar markets. The presence of different of different types of retailers In India creates diversity in competition.

Foreign and domestic retailers In the organized sector are competing on large aside, broad assortment, service format and pleasant sore environment largely due to the current ban on multy brand retailers department stores and hyper market formats are dominated by domestic retailers. Foreign retailers mainly operating shopping malls all in specialty stores. The number of shopping malls and retail chains is rising as large retailers are improving the supply change and expanding their geographical spread to gain market access.

The presence of foreign retailers and increased competition creates product diversities, renovations in the market while foreign apparel retailers cater to young urban consumers by bringing innovativeness and product difference of western style, domestic retailers provide fusing wear and traditional apparel brand proliferation and adopting of western attire are higher for mans clothing and women’s clothing with branded ready to wear man’s clothing accounting for 40 % of their total purchase.

Although the deregulation of FDI offers better opportunities then ever the government is safe guarding the domestic industries by upending some restriction limiting in diversity competition and delaying further development of retail industry. Threat of New Competitors: New companies often bring new resources and can drive down product prices and reduce profitability of the industry. Therefore existing firm try to raise the threat for new entrance. The threat of new entrance increased when 1) Incumbent players have achieved economic of scale. ) Switching cost is high 3) There is a limited access to distribution channels. 4) There is a cost disadvantage and 5) Government policy is favorable to the domestic firms. Following is a discussion of these entry barriers for foreign retailers planning to enter the Indian apparel industry. When existing firms achieves significant scale economies, it becomes difficult for new entrants to be competitive. Two types of scale economies that can act as barrier to entry: supply side and demand side scale economies.

Supply side scale economies arise when firms with large production volumes enjoy lower cost production by spreading fixed cost over increasing the output units, using more technology or demanding better terms from suppliers. Although Indian retail sales are dominated by unorganized retailers, they are mostly small mom and pop stores which have little buying power or ability to achieve economy of scale. In contrast the size of organized domestic retailers’ operation is relatively large, offering a wide range of apparel products. shoes, home decor.

The large domestic retailers have achieved supply side scale economies through their large order volume and extensive market presence. Nevertheless, the structure of the supporting industries has deterred further scale benefits. Indian textile sectors specially wearing industry and apparel manufacture sectors are plagued by high fragmentation with small production units scattered across the country, leading to poor modernization and limited marketing capabilities to attract apparel retail chains who wish to achieve economies of scale.

Demand side scale benefits, also referred to as network effects; arise with increase in customers’ willingness to pay for company’s products. Buyers tend to trust larger firms due to their large customer base, preferring to be a part of a large network of customers. Many domestic retailers in India enjoy network effects due to their large presence in the market, established customer base, and depth of knowledge of the Indian customers. hese large domestic retailers have safe guarded their position in increasingly competitive market by aggressively expanding their geographical presence or by building relationship with foreign brands to identified niche segments for further expansion. Thus foreign retailers may enter in the market by marketing the uniqueness of western products and the emotional or symbolic of foreign brands. High switching cost deters new entrance from entering the market.

When buyers’ switches vendors, the change may require altering product specifications, processes or information systems, and retraining employees to be familiar with a new product, process or system, resulting in increased coasts for the buyer. However apparel manufacturing is labor intensive and usually does not require heavy investments in specialized equipment, leading to low switching costs. Moreover, foreign apparel retailers may be encouraged to switch to local suppliers because the Indian textile industry has vendors capable of carting to the sophisticated needs of foreign retailers.

Indian textile industry ranks seventh in the world production and trade of textiles and it is one of the most important sectors in the Indian economy with the growth of 20% per year. It is the world’s largest production of jute and the second largest producer of cotton, silk and cellulosic fiber. it also ranks fifth in the manmade fibers production and sixth in clean wool production. This impressive result largely results from the industry’s inheriting strengths, including availability of a competitive labor force and rich raw material.

Many foreign company choose India for the production like Nike , tommy, wal mart etc. The primary distribution channel for apparel retailers is retail space in the form of specially sores, department stores, shopping malls. While all of these formats are present in India, mall space has grown rapidly in big cities. To meet fast growing demand for global luxury brands amongst India consumers, many projects are in the pipeline to attract more foreign brands.

India’s first luxury mall. Threat of Substitutes: The proliferation of a gray market for domestic and foreign brands poses the threat of substitute products can be serious threat of substitutes for both existing evaluated in terms of the availability and players and new entrants. There is a high threat of substitutes in the environments. However, given that an Indian apparel sectors due to its unique significant portion of Indian women are market structure.

Indian apparel consumers inclined towards traditional clothing, foreign have an array of options to shop, including retailers may consider incorporating small unorganized retailers and large conservative designs and local tastes into organized retailers for domestic and foreign their product lines. Small domestic retailers brands, Homemade or custom-made are also taking steps to increase their clothing from local tailors is another competitiveness by embracing a elf-service substitute for Indian consumers due to the format to appeal to changing Indian availability of low cost fabrics consumers. The presence of large indicators also demonstrate the increased numbers of tailors in all Indian cities makes competition among existing players and a custom-made clothing an attractive need for new entrants to deliver better and alternative to readymade garments unique value to attract the Indian consumers.

Low priced merchandise reduces the switching cost incurred by the resulting from their tax exemption and low buyers. Indian consumers tend to be very value and performance in order to stimulate price- and value- driven, presenting a high Indian consumers’ propensity to substitute propensity to substitute the next door to their brands. Unorganized retailer due to the geographic Of this competitive force is summarized in location, cultural proximity of their offerings.

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