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 business sectors. According to Forrester Research, India’s retail sector was valued at $883 billion in 2020 and 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 unorganized family-owned entities. The fast-moving consumer goods sector is expected to increase at a rate of 10 to 12 percent annually over the next 10 years, requiring a strong distribution network to cater to India’s rapidly expanding consumer demand.
India’s e-commerce revenue is expected to rise from $46.2 billion in 2020 to $136.47 billion by 2026. India is expected to become the world’s fastest-growing e-commerce market, supported by strong investment in technology and infrastructure, as well as a rapidly growing number of internet users. Most Indian manufacturers use a three-tier selling and distribution structure involving distributors, wholesalers, and retailers. To give some context, a fast-moving consumer goods company operating on an all-India basis could have between 40 and 80 distributors to service its wholesaler to retailer network.
Distribution and Logistics
A combination of the surge in demand for a range of goods in recent years and supply chain and logistics hurdles brought on by the COVID-19 pandemic have propelled Indian companies to focus on improving their distribution networks. Independent distribution and logistics firms across the country have sprung up to meet this need. Marketers are increasingly turning to courier and logistics businesses to handle essential distribution and logistics functions, as well as looking for more effective ways to reach consumers. As an example, India’s courier network has recently expanded to cover smaller cities with populations of less than 50,000.
Most Indian companies use clearing and forwarding agents for distribution due to the high cost of operating warehouses, but these clearing and forwarding agents handle inventories in limited geographic areas only. India has 12 large ports under authority of the Indian central government and 205 minor ports under state government 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 Indian government facilitates the utilization of free trade and warehousing zones (FTWZ) to encourage companies to enter the Indian market. FTWZs can improve the efficiency of the distribution channel in India as these are mostly located near seaports, airports, and inland ports. This makes it easier to import, export, and warehouse goods and utilize associated value-added services. FDI up to 100 percent is allowed in the development and establishment of these zones and infrastructure facilities. All goods for warehousing can be imported duty free to FTWZs, except prohibited items such as arms and ammunition, hazardous waste, special chemicals, organisms, materials, equipment, and certain technology items. Customs duties are only assessed once goods imported into the FTWZ are sold in the market. 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 advised to appoint an agent, representative, or distributor in the Indian market and may consider establishing a local presence through a branch office or subsidiary. Depending on the nature of the industry, more than one agent, representative, or distributor may be needed given the diversity of the Indian marketplace. Various regions and states within India can differ markedly in terms of demographics, purchasing power, education level, culture, and consumer behavior. India is a large country as well, and logistics of moving goods across the country can be challenging. While India’s diversity can present great opportunities for U.S. suppliers, in order to be successful, U.S. companies may need to customize products and alter marketing approaches to suit regional tastes and demands.
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 required for some products, like telecommunications 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 the likelihood 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 typically earns a commission on sales.
- A representative works directly for a foreign company and may be paid a salary and/or a commission on sales.
- A distributor imports, purchases, and stocks products. Due to increased inventory management costs, a distributor typically charges more than an agent or a representative.
Establishing Critical Business Relationships
The United States and India trade relationship is growing, and Indian businesses and consumers are eager to purchase U.S. goods and services. As a result, potential agents, representatives, and distributors are interested in working with U.S. exporters in a wide range of industries. 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 sector links to provide credit and the ability to effectively advertise a broad range of products and services in the market. It is critical that an agent, representative, or distributor maintain high quality facilities (warehouses, offices, service facilities, retail spaces, and/or showrooms) and employ qualified personnel.
U.S. companies should be wary of being swayed by a prospective partner’s eagerness or persistence. Indian companies often represent many businesses and may have limited time or capacity to expand into new markets. Even if a potential partner boasts a large international client list, U.S. companies should be cautious. These client lists may be outdated and the relationships may no longer exist.
Do not to assume that large, national distributors have a clear advantage in India. A small distributor with a localized presence and understanding of a specific region or niche market in India may outperform a large distributor. India is evolving toward more modern distribution channels, but most businesses have fragmented, multi-layered distribution networks. In some circumstances, selecting distributors based on experience with specific products is a viable option over those that claim broader geographic coverage.
Establishing an Office
When establishing an office in India, U.S. companies should consider physical infrastructure; central and state government support; incentives; power availability and costs; labor availability and costs; work culture differences across the country; regulatory stability; and proximity and access to resources, inputs, logistics hubs, and customers. Regarding staffing, 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.
Flexible workspace options are available in major cities across India. These facilities normally offer a complete start-up package of services and infrastructure, including meeting spaces and other amenities. Given the shortage of commercial office space that meets U.S. or similar standards, business centers are a viable option for foreign companies wanting to establish a physical presence in India. Billing is normally monthly, and discounts are generally available for long-term use. Many state governments are also creating special technology parks to bolster the development of select industry sectors such as software, biotechnology, and automotive manufacturing.
Types of Offices
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 RBI is required and can be obtained by submitting the Foreign National Contact Application for Establishment a Branch/Liaison Office in India form. Foreign companies must also register with the Registrar of Companies within 30 days of establishing 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. These offices 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 and 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 information technology services and software development in India; and
- Rendering technical support for products supplied by the parent company.
A branch office may repatriate profits generated from its Indian operations to the parent company and branch offices are subject to taxation. A branch office may not conduct manufacturing and processing activities, though it can subcontract such activities to an Indian manufacturer.
Foreign companies can 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 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.
Limited Liability Partnerships
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 and activities in which the Indian government has allowed 100 percent foreign direct investment without prior government approval.
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 and the Foreign Exchange Management Law. Under the current policy, all companies in India must be incorporated under the provisions of the Companies Act, 2013.
To learn more, access India’s ICS at the U.S. Department of State Investment Climate Statement website.
Franchising in India is growing rapidly. The growing Indian middle class seeks quality goods and services, thus creating opportunities for U.S. franchisors. U.S. franchisors in retail apparel and the food service sector have been particularly successful. Demand for U.S. brands is strong in the food and beverage, hospitality, retail, education, apparel, healthcare, fitness, and personal grooming sectors. According to a KPMG and Franchise Association of India report, the current market size of the Indian franchise industry is approximately $50.4 billion.
The country’s growing number of entrepreneurs are receptive to American franchises, paving the way for strong U.S. brands in India. Franchising has been the preferred method for starting operations in India for the hospitality and food service industries. Major U.S. restaurant brands that operate in India through franchisees include McDonald’s, Burger King, Kentucky Fried Chicken, Pizza Hut, Taco Bell, Domino’s Pizza, Subway, Krispy Kreme, Dunkin’ Donuts, Wendy’s, Chili’s, Johnny Rockets, Hard Rock Cafe, Cinnabon, and Baskin Robbins. U.S. hotel franchises include Marriott, Hilton, Westin, Hyatt, and Radisson.
Unlike the United States and other western countries, India does not have specific laws on franchising. Franchising is covered within the broad definition of technology transfer. 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.
Franchisors in India 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 also recommended to conduct a market feasibility study and perform thorough financial and legal due diligence on potential franchisees.
Linguistic and Cultural Differences
Understanding local cultures, tastes, and incorporating strategies such as the “Indianization” of products are vital to franchising success. For example, a large percentage of Indians are vegetarian and notable successes in the fast-food sector, including McDonald’s, Pizza Hut, and Domino’s, developed special menus to cater to the Indian palate.
Due to India’s large size and diverse population, companies often prefer to appoint master franchisees on a zonal basis. U.S. franchisors should also be prepared to face prospective Indian franchisees who may perceive franchise fees/royalty payments as being too high.
According to a 2021 report by World Federation of Direct Selling Associations, India’s direct marketing sector recorded sales of $2.4 billion. The Indian Direct Selling Association reported India’s direct selling industry as having an annual growth rate of 16 percent, putting the country among the top 20 direct selling markets in the world, with 7.9 million active direct sellers.
In 2021, the Indian Direct Selling Association 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 in India. Wellness and healthcare products accounted for over 57 percent of direct sales revenue, with cosmetics and personal care products contributing 27 percent, homecare products 11 percent, and consumer and household durables five percent. In recent years, foreign direct selling companies are importing fewer goods as they develop local sources of supply.
In December 2021, India’s Department of Consumer Affairs, which falls under the Ministry of Consumer Affairs, Food and Public Distribution, notified the Consumer Protection (Direct Selling) Rules with the intent to regulate the direct selling entity engaged in activities involving multi-level marketing, which had largely remained unregulated in India. A direct selling entity is a principal entity which sells or offers to sell goods or services through direct sellers, who undertake direct selling businesses on a principal-to-principal basis. This new policy requires direct selling entities to ensure that consumer grievances are appropriately rectified and highlighted in a prominent and evident manner on its platform. In recent years, some companies in the direct selling industry have faced challenges in India due to claims of operating as Ponzi schemes.
Traditional methods of validating a potential partner’s credentials can be unreliable in India, particularly with privately-owned companies, due to a lack of public access to databases and information. It is advisable to review a potential partner’s suitability by requesting bank documentation concerning the company’s financial resilience and length and nature of its banking relationships. Further assistance in the due diligence process can be obtained from accountants, lawyers, industry associations, and other businesses currently working with the potential partner. For technical products, U.S. companies should seek to verify the technical expertise of a potential partner’s staff and not rely solely on documentation provided by the company itself.
To identify potential agents, representatives, and distributors, U.S. companies can take advantage of the U.S. Commercial Service’s Initial Market Check, International Partner Search, Gold Key Service, and Single Company Promotion services offered through our seven offices in India. For due diligence and background checks on local agents and distributors, U.S. companies can utilize the International Company Profile service. Virtual matchmaking and other services are also available. For more details on our services, please visit the U.S. Commercial Service website.
For more information about export opportunities in this sector, contact Commercial Specialist Ruma Chatterjee.