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April, 2015

Marks & Spencers India ambitions Marks & Spencer has an aspiration of making India its number one international market. The question was how should they go about establishing a foothold in India and growing from there. The executives were concerned given Walmarts recent failures in establishing itself in India. While the promise of India is great, it can be a potential minefield for Marks & Spencer. From a penny bazaar to an iconic retailer It was only Marks before Spencer joined him in 1894. Starting with the slogan dont ask the price, its a penny, Michael Marks opened his first Bazaar in Leeds in 1884. Bazaar is an also a Hindi word for a marketplace. Therefore, it is ironic that M&S were to open its first store in India more than a century after the Leeds store opened for business. M&Ss business was guided by five key principles: quality, value, service, innovation and trust. Business was brisk in the early twentieth century, when M&S helped customers mend their old clothes during the First World War by supplying buttons, needles and threads. The founders didnt survive long to see the growth of their business. Spencer died in 1905 followed by Marks two years later. Michael Markss son Simon became the chairman of the company in 1916 and went on to lead it till 1964. It was under the leadership of Simon Marks that M&S transformed into a retail behemoth. M&S also diversified into other product categories early on. It started selling canned foods as early as 1931. Business boomed in the 1980s. In 1986, M&S became the first British retailer to make a 1 billion pre-tax profit. Their success story would continue until 1998 when pre-tax profits peaked at 1.2 billion pounds. After that, M&S would never ever touch that profit figure again. Sales growth also slowed. For much of the next decade, growth came to a standstill. M&Ss sales in 2006 were lower than what it was in 1998. Things improved somewhat after 2006, with sales reaching 10 billion for the first time in 2013 (4 billion through general merchandise, 5 billion through food, and a billion through its international operations). A lot of this growth came from international expansion. M&S opened its biggest store outside of the UK in Dubai, and followed that with opening of its first store in mainland China in 2008. By early 2014, M&S had 455 stores around the world and had devised an aggressive plan to open more than 250 stores Doctoral Student Deepak Jena and Professor Arvind Malhotra, Strategy & Entrepreneurship Area, Kenan-Flagler Business School, University of North Carolina at Chapel Hill prepared this case for MBA862A Global Business Strategy course. This case was developed solely for the purpose of class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some situations have been modified to make them suitable for educational purposes. Copyright 2015 Kenan-Flagler Business School, University of North Carolina at Chapel Hill. To request permission to reproduce any part of this material please contact Professor Arvind Malhotra (malhotra@unc.edu).

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outside of the UK in the next three years. Marc Bolland, the companys CEO announced in 2014 an ambitious target of growing its international sales by 25% and profits by 40%. India figured big in Bollands plan. Bolland wanted to increase the store count in India from 36 to 100 by 2016. Meanwhile, the sales back home were disappointing. The food business was growing but the clothing division, a division that had an 11% market share in the UK, was declining. Bolland had pinned high hopes on India, the worlds second biggest potential market. By end of 2013, M&S executives had announced plans to make India their largest international market in three years. Marks & Spencer in India For M&S, India was not a love at first sight though. Even though M&S first store in India opened in 2001, Indian operation was low priority for M&S for much of the first decade. Till 2007, M&S operated in India through a franchisee mode. Its Indian franchisee partner, Planet Retail, would make the investment in stores, purchase merchandise from UK and sell it in India. M&S did not want to risk making capital expenditure during that time, so it allowed its Indian partner to have smaller stores (5000-8000 square feet compared to the international norm of 15,000 square feet). By 2007, M&S executives were not happy with how the operation was being run in India. Global growth was slowing, and M&S executives knew that a laid-back attitude towards international operations could no longer be afforded. In the next couple of years, M&S made several aggressive moves to resurrect business in India. First, it called off its partnership with Planet Retail. The primary disagreement was over the pace of expansion (M&S wanted to expand stores at a greater pace than what its partner was willing to commit to) and also over store sizes. Planet Retail believed that larger stores in smaller cities were unwarranted, given the sales from existing stores. M&S executives felt that having smaller stores would not give the intended experience of the brand. M&S was willing to take greater risks. The next biggest move happened in 2008, when M&S formed a joint-venture with the company owned by Indias richest man, Mukesh Ambani. M&S formed a 51-49 joint venture with Reliance Retail, one of Indias biggest retail chains. Tying up with Reliance was a coup of sorts for M&S. First, Reliance stood for scale it would not hesitate to make investments that were needed to meet M&Ss ambition in India. Second, Reliance is one of the biggest brand names in India. Third, M&S had the opportunity to navigate the institutional challenges in India by utilizing the skills and connections that Reliance provided. The company made an announcement to invest 29 million in opening 50 stores in the next 5 years. The third substantial move related to positioning. M&S products sold in India were perceived as being very expensive for its target audience. This perception restricted growth among the Indian middle-class consumers. The current head of the India business, Venu Nair, acknowledged this in a recent interview. We had got positioned, incorrectly, as a very expensive brand, said Nair This issue was easy to fix. Earlier M&S used to import products from the UK for which it had to pay a 50% duty. This resulted in increased prices at the stores. M&S India executed a plan to source its products from local suppliers. By end of 2013, 64% of M&S products sold in India were being locally sourced. M&S designs were considered boring by the Indian customers. The Indian consumer, both for menswear and womenswear, has a preference for

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more color than their European counterparts. M&S has started listening to its customers, adding new colors and bolstering its range of winterwear. M&S winter wear has been a surprise winner. Nair says We own winterwear in India We came with the initial belief that since the north of the country is cold, only customers there will buy winterwear. But we have learnt these assumptions are not truepeople travel, and they do wear knitwear in winter, even in markets like Mumbai, so we have made these available in all our stores. M&S opened a standalone lingerie and beauty store in Mumbai in 2014. M&S doesnt yet sell food at its Indian stores. M&S still faces substantial challenges in its Indian business. While revenue growth has been healthy, M&S is yet to make a profit from its Indian operations. Store additions have been slow. When it started in 2008, the joint venture had a target of adding 50 stores by 2013 but by the end of 2014, M&S had 45 stores. M&S faces challenges primarily on two fronts: competitive and regulatory. Competition The Indian apparel market has increased steadily to USD 38 billion (in 2012), thanks to increasing disposable income of the Indian middle class consumers. Analysts believe that the market will continue to grow in higher single digits over the next decade. Menswear, womenswear, and kidswear account for 42%, 38% and 20% of the market. Technopak, a leading retail advisory firm, expects the menswear and womenswear segments to grow at 8.5% and 9% respectively in the next decade. The Indian apparel market is highly fragmented with a number of domestic and foreign players competing against each other. Regulations (see the section on regulatory challenges below) had prevented foreign retail players from having direct operations in India for a long time. Foreign players were allowed to have franchisee operations, but were barred from making direct investments. As a result, the market is still dominated by numerous domestic players. However, the retail sector opened up gradually for foreign players starting 1997. As a result, several single-brand foreign retailers have started direct operations in India. Despite being a first mover in the Indian market, M&S has lagged behind its other foreign competitors (table below). For example, Inditex S.A, the parent company of Zara, opened its first store in India in 2010, almost a decade after M&S did, but is performing much better than M&S. Inditex entered India through a joint venture with another Indian business group, the Tata. Zara has been an instant success in India. Within three years of operations, not only has Zara clocked more sales than M&S, but has also earned a profit in its first year itself. This is a huge deal knowing that M&S has yet to make a profit after 13 years, and Levis made a profit for the first time after two decades. Zaras sales per store are the highest in the country, with just 4 stores accounting for more than 65% of its revenue. Ruchi Sally, a retail analyst sums up Zaras success, "Zara's merchandise is the main reason for its growth in India. The brand's pricing and inventory rotation according to latest fashion trends have attracted consumers initially and they have stayed with the brand". M&S needs to do much better if it hopes to meet its India ambitions. Arvind Singhal of Technopak, a retail consultancy, points out that M&S has been a bit conservative when growing its business in India...they need to be a little more daring and a little less boring,.

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Foreign brands have captured a miniscule portion of the overall market till now -the five retailers (in table above) have a little more than 1% share to show for. The opportunity ahead is unbounded, but only if M&S makes the right moves. Regulatory concerns A major reason why India remains a difficult place for foreign retailers to do business is because of regulatory concerns. India was closed for business for foreign retailers up until 1997. They could sell through franchisees, but were not allowed to invest their own capital in India. In 1997, India allowed FDI in cash and carry wholesale. Foreign retailers were allowed under the condition that they can only sell their products to smaller mom-and-pop stores, and not directly to consumers. This led to the entry of retailers such as Metro AG of Germany to enter the market. Walmart entered the cash-and-carry business in 2007 through a partnership with the Bharti group of India. Further liberalization followed in 2006. India allowed up to 51% FDI in single-brand retail. Single brand retail refers to selling of goods under a single brand name. This opened up doors for firms like M&S and Inditex to open up their own stores. However, the 51% restriction meant that they needed to get in an Indian partner. Multi-brand retail was still banned. This meant that large retailers such as Walmart and Tesco could not open their own store in India, even with a joint venture. The only route through which they could operate was the cash-and-carry one. Further liberalization followed in 2011. Despite strong opposition, the Indian government led by the Congress party opened up the retail sector further by allowing 51% FDI in multi-brand retail and a 100% FDI in single-brand retail. Things have not moved at all on the multi-brand retail front though. A united opposition disrupted the Indian Parliament on this issue for months. States run by the opposition parties vowed not to allow the likes of Walmart and Tesco to open stores in their territory at any cost. Worse, the Congress party lost elections in 2014 bringing the main opposition party, the BJP, to come to power. The BJP vehemently opposed FDI in multi-brand retail at the time it was introduced and continues to oppose that. Even though the policy has not been pulled down, but with the BJP Government still in power, none of the multi-brand retailers are willing to take any risk. The policy of having 100% FDI in single-brand, however, was largely unopposed. This means that retailers such as

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M&S can look beyond their Indian partner if need arises. The regulatory situation is still fluid; no one knows which direction the wind will blow. Walmarts Lessons? The ambiguity in regulations is not only holding back many international retailers from entering India, but is also making the current players rethink their plans. The difficulty in operating in a difficult market like India is probably exemplified by Walmart. The worlds biggest retailer entered India through a 50-50 joint venture with the Bharti group (owner of Indias biggest telecom operator) in 2007. At that time, foreign direct investment in multi-brand retail was not allowed in India. Bharti-Walmart venture therefore started out with a cash-and-carry (wholesale) business. Walmarts executives were waiting for a favorable regulation towards multi-brand retail and therefore saw this as an intermediate step. By 2013, the JV had built up 20 stores across major Indian cities. The two companies also collaborated to run a retail store chain called Easyday. Since, Walmart was not allowed to sell directly to customers, Easyday operated as a franchisee. Walmart provided logistical support while Bharti ran the frontend. Walmart provided Bharti an interest-free loan of $100 million that could later be converted into a controlling stake in the JV. However, the party didnt last long; in October of 2013, Walmart called off its JV with Bharti. Walmart decided to buyout the Indian partners stake in the wholesale venture, while Bharti took complete control of the retail arm. Walmarts pain came from multiple fronts. First, the Indian Government started investigating whether Walmart violated FDI rules by giving Bharti the $100 million loan. Second, another investigation focused on whether Walmart bribed Indian officials in order to influence foreign investment policy. Unlike in the US, lobbying is illegal in India. In another case, Walmart fired senior officials at its Indian arm following an internal bribery investigation. Even though investment in multi-brand retail was opened to foreign retailers in 2011, Walmart was unhappy with a contentious clause in the new law. The clause required multi-brand retailers to source at least 30% of their products from small Indian suppliers. This was unacceptable because Walmart sourced products across the globe with a keen eye on costs. Another problematic clause in the new law related to investment. The policy required the multi-brand retailer to allocate at least 50% of their investment in creating a back-end infrastructure. The clarifications issued by the Government further stated that this must be entirely for green-field assets, meaning Walmarts investments in India thus far did not count toward meeting that mandate. Walmart is still waiting for the regulatory ambiguity to clear up before it makes its next move. Meanwhile, M&S too faced an enquiry from government officials in 2013 concerning whether it violated rules by selling non-M&S branded products. The investigations were dropped after M&S clarified on the matter.

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How can Marks & Spencer accelerate its growth in India? Given the facts of the case, how do you think M&S should approach its business in India? How can M&S meet its aspirations of making India its number one international market? How can M&S compete with the likes of Zara? There are several options to consider. First, M&S could use its existing arrangement (the JV with Reliance) to aggressively expand stores in India. This option is not easy as the JV is currently not making a profit. Any new investment will have to come from outside the JV. Second, M&S could make use of recent policy changes (100% FDI in single-brand retail) by going it alone. This option will let M&S have complete control of its India strategy. The downside is the loss of partnership with Indias biggest company. Third, M&S could make use of recent policy changes (51% FDI in multi-brand retail) to offer multiple brands to its customers. This option looks risky at this moment given the uncertainty in policy. They can still go ahead because the law (allowing 51% in multi-brand retail) is still in force. Fourth, M&S could introduce food business in India. Which option(s) appeal most to you? You dont want M&S to miss the bus again what advice would you give to Bolland?