Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
Retail is one of India’s fastest-growing industries. According to Forrester Research, India’s retail sector was valued at $883 billion in 2020, and the retail market is expected to grow to $1.3 trillion by 2024. There are approximately 12 million retail distribution outlets in the country, the majority of which are family owned. The fast-moving consumer goods (FMCG) sector is expected to increase at a rate of 10-12 percent annually over the next 10 years. According to Boston Consulting Group, India’s consumption will quadruple to $4 trillion by 2025 as rising wealth drives changes in consumer behavior and spending patterns.
India’s E-Commerce income is expected to rise from $46.2 billion in 2020 to $111.40 billion by 2025. India is expected to become the world’s fastest-growing E-Commerce market, supported by strong investment and a rapid increase in the number of internet users. The E-Commerce market is expected to generate $64 billion of India’s $2.6 trillion gross domestic product (GDP) in 2021, despite production and labor shortages, transportation disruptions, and other delays that have characterized one of the most difficult years for global supply chains.
Most Indian manufacturers use a three-tier selling and distribution structure that has evolved over years. This structure involves distributors, wholesalers, and retailers. As an example, an FMCG company operating on an all-India basis could have between 40 and 80 distributors.
Working with distribution logistics firms and clearing & forwarding agents
In recent years companies have become more focused on improving their distribution models to survive in a fiercely competitive market. Independent distribution and logistics firms have sprung up to meet this need. Marketers are increasingly turning to courier and logistics businesses to handle essential distribution and logistics duties, as well as looking for more effective ways to reach consumers. India’s courier network has expanded to include smaller cities with populations of less than 50,000.
Due to the high cost of operating warehouses, most Indian companies use clearing and forwarding (C&F) agents for distribution. C&F agencies typically handle inventories in a limited area (e.g., state). Taxes varied by state until 2017, when India’s nationwide value-added tax, known as the General Service Tax (GST), was implemented. As a result of the GST, retail pricing is now uniform throughout India.
India has 12 large ports under national government authority, and 205 minor ports under state and private control. In terms of yearly gross weight tonnage, the largest ports in India are Mumbai and Marmagao on the west coast, and Vishakhapatnam and Chennai on the east coast. Mumbai, the country’s financial capital, is the primary hub for international cargo.
Free Trade and Warehousing Zones
The government of India (GOI) utilizes free trade and warehousing zones (FTWZ), special economic zones focused on trading and warehousing, to encourage companies to enter the Indian market. FTWZs, which are located near seaports, airports, and dry ports, make it easier to import and export goods and associated value-added services (e.g., repackaging). Foreign Direct Investment (FDI) up to 100 percent is allowed in the development and establishment of the zones and their infrastructure facilities. All goods for warehousing can be imported duty free under the program (except prohibited items such as arms and ammunition, hazardous waste, special chemicals, organisms, materials, equipment, and technology items). The maximum amount of time products can be stored in an FTWZ is two years, after which goods must be re-exported or sold. Custom duties are charged and automatically become due once the two-year period expires, unless the items are re-exported within a three-month grace period.
Using an Agent or Distributor
U.S. companies are highly recommended to develop a local presence in India, whether through a branch office or a subsidiary or by appointing an agent, representative, or distributor. India is a diverse country, with over 30 regional languages and state-by-state differences in laws and regulations. A regional strategy ensures a wide market presence and greater flexibility in responding to regional demands and concerns. Income, purchasing power, educational attainment, and other socioeconomic factors vary greatly throughout India.
Furthermore, for products like pharmaceuticals, some medical devices, diagnostic kits, cosmetics, and food products, the Indian government may legally demand the appointment of an authorized agent or distributor. Quality assurance and standardization certificates are also required for some products (e.g., telecom equipment and home appliances). As a result, working with an agent, representative, or distributor who understands your target market and is familiar with local laws and policies, will help you expand your reach and increase your chances of success.
Defining the Terms
An agent is a person who has been appointed to represent a firm and has the authority to act on its behalf to the extent that the contract allows. An agent finds potential buyers, negotiates prices, and closes deals with customers. An agent can be self-employed and earns a commission on each sale.
A sales representative works directly for a foreign company and may be paid a salary and a commission on sales made.
A distributor imports, purchases, and stocks products. Due to increased inventory management costs, a distributor’s typically charges more than an agent or a representative.
Be cautious when establishing critical relationships
The United States and India have a strong relationship, and Indian companies are eager to purchase U.S. goods and services. As a result, potential agents and distributors are interested in working with U.S. exporters on a wide range of products. However, before considering a partnership, it is critical to perform proper due diligence. An Indian firm’s business reputation, financial resources, capacity to invest, marketing strength, regional coverage, industry experience, and credit worthiness should all be evaluated. An ideal distributor should have strong financial links to provide credit extensions and the ability to advertise a broad range of products and services. It is critical that an agent or distributor maintain high quality infrastructure and facilities (e.g., warehouses, service shops, and showrooms), and qualified personnel.
U.S. companies should be wary of being swayed by a distributor’s or his representative’s eagerness or persistence. Indian companies often represent many businesses and may have limited time or motivation to expand into new markets. An Indian company may lack the foresight to expand beyond its existing network of contacts. While this may bring favorable returns in the short term, finding new or under-developed markets is also important. Even if a potential partner boasts a large international client list, U.S. companies should be cautious. Such lists may be outdated, and the relationships may no longer exist. Even if these relationships exist, the distributor or agent may not be able to fulfill all obligations and commitments to promoting and selling your product.
A small distributor with a localized presence and understanding may be able to outperform larger distributors. In some areas, India is slowly evolving toward more modern distribution channels, but most businesses have fragmented and multi-layered distribution networks. In some circumstances, selecting distributors based on experience with specific products is a viable option.
Online marketplace and E-Commerce
E-Commerce activity is increasing in metropolitan areas, as is the use of digital payment systems in smaller towns. As a result, it is beneficial to have a distributor with an online presence via a dedicated website and/or placement in an online marketplace. E-Commerce is subject to Competition Acts issued by the Indian government to enforce pricing and distribution laws. To avoid competition law violations, U.S. companies should be aware of such provisions and include relevant clauses in distribution partner agreements.
India’s E-Commerce market is one of the fastest growing in the world, and according to NASSCOM, is expected to reach $100 billion by 2025. Although E-Commerce commerce initially witnessed a steep decline due to the COVID-19 lockdowns, it soon realized accelerated growth across segments including hyperlocal delivery, digital education, food delivery, digital health, digital media and entertainment, and online payments as people adopted digital solutions to meet their needs. India has emerged as a preferred destination for online marketplaces due to its large consumer base, diverse demography, low-cost digital infrastructure and services, and supply chain ecosystem. Consumer electronics goods and accessories are the largest electronic retail segments in the E-Commerce sector.
Traditional methods of validating a potential partner’s credentials are less reliable (especially with privately-owned companies) due to a lack of public access databases in India. It is advisable to review a potential partner’s suitability by requesting bank documentation concerning the company’s financial health and length of the banking relationship. Further details can be sought from accountants, lawyers, industrial associations, and other entities currently working with the firm. For technical products, U.S. companies should verify the technical expertise of a company’s staff and not rely solely on documentation.
To identify agents and distributors, U.S. companies can take advantage of the Initial Market Check (IMC), International Partner Search, Business Facilitation Service (BFS), Gold Key Service (GKS) and Single Company Promotion (SCP) services offered by the U.S. Commercial Service through its seven offices in India. For due diligence/background checks on local agents and distributors, U.S. companies can utilize our International Company Profile (ICP) service. Virtual services are now offered to address travel restrictions due to the pandemic. For more details, visit our website.
Establishing an Office
Some important factors in choosing a location in India are:
- Physical infrastructure
- State government support and flexibility
- Cost and availability of power
- Regulatory stability
Other factors include labor availability and cost, labor relations and work culture, and proximity to resources and/or markets. Under Indian labor law, an employer with more than 100 employees cannot terminate employment without permission from a government labor commissioner, which can be difficult to obtain.
Given the shortage of good commercial office space at reasonable prices in major Indian cities, business centers are a viable option for new companies wanting to establish a physical presence. Business centers are ready for move in, wired for communications, and air-conditioned. Billing is normally done monthly, and discounts are generally available for long term use. Many state governments are also creating special technology parks for selected industry sectors such as software, biotechnology, and automotive.
Type of Office
A foreign company planning to set up business operations in India but choosing not to establish a subsidiary or form a joint venture with an Indian partner can establish liaison, project, or branch offices. Approval from the Reserve Bank of India (RBI) is required and can be obtained by submitting form FNC Application for Establishment of Branch/Liaison Office in India. Such companies must also register with the Registrar of Companies (ROC) within 30 days of setting up a business in India.
Liaison or Representative Office
Many foreign companies initially establish a presence in India with a liaison or representative office that is not directly engaged in commercial transactions. The purpose of these offices is to oversee networking efforts, promote product awareness, and develop opportunities for business and investment. Because a liaison office cannot engage in commercial activity or generate revenue in India, there are no tax implications for such offices, and they are not allowed to charge commissions or receive income from Indian customers for their services. All expenses must be paid by inward remittances. A foreign company establishing a liaison office cannot repatriate money out of India.
A branch office is not an incorporated entity, but an extension of a foreign company in India. Branch offices are limited to the following activities by the RBI: representing the parent company and acting as its buying/selling agent; conducting research for the parent company; carrying out import and export trading activities; promoting technical and financial collaborations between Indian and foreign companies; rendering professional or consulting services; rendering services in information technology and development of software in India; and rendering technical support to the products supplied by the parent/group companies.
Branch offices are subject to taxation. A branch office may repatriate profits generated from its Indian operations to the parent company. However, a branch office may not conduct manufacturing and processing activities (though it can subcontract such activities to an Indian manufacturer).
Foreign companies sometimes set up a temporary project office to undertake projects in India awarded to the parent company. A project office is essentially a branch office set up for the limited purpose of executing a specific project. Approval for project offices is generally accorded for executing government-supported construction projects or projects financed by Indian and/or international financial institutions and multilateral organizations. In exceptional cases, approval may be given for private projects. Project offices may remit profits outside India after meeting tax liabilities.
Branch offices and project offices are not permitted to acquire real estate without prior RBI approval. However, project offices can lease property in India for a maximum period of five years.
Under India’s Foreign Direct Investment policy and Foreign Exchange Management Law, foreign investment into Indian partnership firms requires permission from the RBI. A partnership is an association of two or more persons who operate a business for profit.
A limited liability partnership (LLP) is a hybrid of an existing partnership and a full-fledged company. It is a separate legal entity, liable to the full extent of its assets, with the liability of the partners limited to their agreed contribution in the LLP. Foreign direct investment in LLPs is allowed in sectors/activities in which the government has allowed 100 percent foreign direct investment without prior approval from the government.
A limited company is an incorporated entity, which is a separate legal entity distinct from its members or shareholders. Foreign investment in India is governed by the FDI policy of the government as well as the Foreign Exchange Management Law. Per current policy, all companies in India must be incorporated under the provisions of the Companies Act, 2013.
Franchising in India is growing rapidly. U.S. franchisors, especially in retail apparel and food services, have contributed to this growth. Demand for U.S. brands is strong in food and beverage, hospitality, retail, education, apparel, healthcare, fitness, and personal grooming clinics. According to a KPMG and Franchise Association of India (FAI) report, the current estimated market size of the Indian franchise industry is $50.4 billion, an increase from $13.4 billion in 2012.
With a growing middle class, Indians look for quality goods and services, thus creating opportunities for U.S. franchisors. India is witnessing significant growth in entrepreneurship, and the country’s new entrepreneurs are very receptive to American franchises, paving the way for strong U.S. brands in India. This has been the preferred method for starting operations in India for the hospitality and food service industries. However, the hospitality and restaurant sector are facing extreme challenges due to the COVID-19 pandemic, limiting growth and profits.
Major U.S. restaurant brands that operate in India through franchisees include Krispy Kreme, Dunkin’ Donuts, Wendy’s, Chili’s, Burger King, Johnny Rockets, Hard Rock Cafe, Cinnabon, McDonalds, Kentucky Fried Chicken, Pizza Hut, Taco Bell, Domino’s Pizza, Subway, and Baskin Robbins. Hotels include Marriott, Hilton, Westin, Hyatt, and Radisson.
Lack of Legal Framework
Unlike the United States and other western countries, India does not have specific laws on franchising. Franchising is covered within the broad definition of transfer of technology. Thus, the legal framework for new franchisors interested in setting up master franchises in India exists in terms of brand protection and rules regarding payment of franchise fees.
When franchisors enter India, they are governed by national and regional statutes and codes rather than a single comprehensive statute. These regional variations must be understood before engaging in any franchising venture in India. In addition, hiring a local tax accountant is recommended. It is recommended to conduct a market feasibility study, and thorough financial and legal due diligence on potential franchisees.
Understanding local culture, tastes, and strategies (such as the “Indianization” of products) is vital to franchising success. For example, a large percentage of Indians are vegetarian, and as a result several American companies have developed special menus to cater to this preference. Due to India’s large size and diverse population, companies often prefer to appoint master franchisees on a zonal basis. Despite these challenges, numerous U.S franchisors have been successful in India. Most have adapted their products and services to local market preferences and have pursued effective market entry and expansion strategies. Notable successes in the fast-food sector include McDonald’s, Pizza Hut, and Dominos, which have all developed special menus to cater to the Indian palate. In addition, U.S. franchisors should also be prepared to face prospective Indian franchisees who may perceive franchise fees/royalty payments as too high.
According to a 2019 report by World Federation of Direct Selling Associations, India’s direct marketing sector recorded sales of $2.47 billion. A 2020 report by India Brand Equity Foundation found that the direct selling industry in India realized a compound annual growth rate of 16 percent, placing the country among the top 20 direct selling markets across the globe.
The growing Indian market has attracted many Indian and foreign direct selling companies. Globally, the direct selling industry is a labor-intensive industry that has positive socioeconomic impact in higher employment, women’s empowerment, skill development, financial independence, and flexible hours. These factors, combined with favorable demographics, are expected to lead the direct selling industry to unprecedented growth in the coming years.
In 2019, the Indian Direct Selling Association (IDSA) reported that the wellness industry, which includes weight management supplements, and meal replacement bars and drinks, contributed to more than half of the total volume of the industry. Wellness and healthcare products accounted for over 50 percent of direct sales revenue, with cosmetics and personal care products contributing 34 percent, homecare products 11 percent, and consumer and household durables five percent. In recent years, direct selling companies are importing fewer goods as they develop local sources of supply.
While India’s Ministry of Consumer Affairs, Food & Public Distribution issued its Model Framework for Guidelines on Direct Selling in 2016, Indian States have been slow to adopt these guidelines. The direct marketing industry faces challenges such as association with Ponzi schemes. The Federation of Indian Chambers of Commerce and Industry organizes an annual conference on the industry to focus on guidelines released by the Ministry of Consumer Affairs, and to highlight the benefits for state governments in adopting the guidelines.
For more information about export opportunities in this sector, contact the U.S. Commercial Service: Ruma Chatterjee