India's online grey market for U.S. clothing brands

Homegrown start-ups including fashionandyou.com, myntra.com, snapdeal.com, dealsandyou.com, yebhi.com and HomeShop 18 - which is eyeing a U.S. initial public offering - are introducing India's growing middle class to mid-market U.S. brands, at discounts of more than 50 percent.

Reuters interviewed nearly two dozen online retailers, distributors and officials from U.S. and Indian firms to try to determine how some of the hottest Western clothing brands, including Abercrombie, American Eagle Outfitters Inc (AEO.N) and Aeropostale Inc (ARO.N), ended up for sale on these websites.

None of these U.S. chains have opened stores in India, and they have no official licensees. Abercrombie and American Eagle said Indian websites were not authorised to sell their products.

"Our brands do not have any authorised third party websites anywhere in the world; all of our stores and official websites are owned and operated by A&F; directly - we do not license or franchise our front-line sales," Abercrombie said in a statement to Reuters.

A unit of online daily deal company Groupon Inc (GRPN.O) in India stopped offering some Abercrombie and American Eagle clothing in July following questions by Reuters.

Some of the clothing available on Indian websites found its way through distributors in Asia, the Middle East, Europe and the United States who buy off-season or overstocked merchandise and sell it in countries where they hope demand is higher.

In other instances, online retailers bought from local manufacturers who supply the global brands. Those manufacturers are not supposed to sell apparel with name-brand labels, two Indian lawyers said.

"What will happen is when these (foreign) brands eventually decide to come to India they will blacklist these sites," said Darshan Mehta, chief executive of Reliance Brands, one of India's biggest retailers of foreign brands and controlled by its richest man, Mukesh Ambani.

India's online retail market link.reuters.com/dec79s

For clothing companies waiting to get into India, where a complex set of rules limits foreign investment, the online retailers can provide a useful consumer testing ground.

But once foreign companies launch their own business in India, usually through joint ventures or licensing agreements, they typically become proactive in stopping unauthorized sales and are quick to take legal action to shut down those channels.

Harminder Sahani, managing director of retail consultancy Wazir Advisors in Gurgaon, India, said brands that have managed to navigate India's restrictions on foreign retailers and enter the market have been successful in stopping unlicensed sales.

"No one sells Tommy Hilfiger online at discounts any more, not Calvin Klein, not Zara," Sahani said. "All those brands already have a presence in India and they won't allow it."

TRUCKLOADS TO ASIA

The branded clothing that Reuters found for sale in India's fledgling $10 billion e-commerce market does not appear to be counterfeit. Some of it arrives in India through distributors who may be licensed to sell in their home country but not in India.

"There are goods that get procured from the Bangkok-Dubai grey market, also from regional consolidators who may not have the right to sell them here," said Arun Sirdeshmukh, founder of Fashionara.com, a new entrant into the online retail market.

Sirdeshmukh said his firm buys its merchandise directly from foreign companies that are present in India and that allow sales of their brands on these platforms.

"It's because everybody wants to run the cheapest sales online... It is a problem that impacts the credibility of the industry but not every website does it," he said.

Few online retailers contacted by Reuters acknowledged the practice of buying goods from unlicensed sellers, and most declined comment for this story. HomeShop 18, myntra.com and yebhi.com declined to comment while dealsandyou.com and snapdeal.com did not reply to requests for comment.

Jennifer Pritchard, a consultant at Alvarez & Marsal in Atlanta and a former executive with clothes retailer Chico's (CHS.N), said U.S. retailers often send unsold goods to Asia.

"When we've had too much inventory in the U.S., we have shipped it overseas to Asia in truckloads," she said.

What makes India's situation unusual is that the rules governing how foreign retailers can enter India are in flux.

Full ownership was allowed in January, but the government tacked on a rule requiring firms to source 30 percent of their products locally, which discouraged many chains. Only two retailers applied - Sweden's IKEA and UK-based footwear retailer Pavers. The provision is now under review as the government tries to entice more retailers to enter the market.

Several U.S. retail industry veterans said that having their merchandise sold online in India at slashed prices can harm the value of the brand. But they also said it was difficult to stop.

"If these products wind up in these online channels, that is not technically a counterfeit and there is nothing that a brand can do," said George Feldenkries, Chief Executive Of Perry Ellis International (PERY.O).

SILVER LINING

Some see a silver lining: India's consumers get to know the brands, even as the country's protectionist retail ownership laws keep the retailers themselves out of the country.

"Rules are being circumvented all around... not just by the online firms but even the foreign brands are aware of it and are letting it happen because it helps them understand the market" said Anil Talreja, a partner at Deloitte Haskins & Sells, an expert in retail regulations and taxing laws.

Indian online retailer fashionandyou.com, which recently ran deals for Abercrombie merchandise, said it was a mutually beneficial partnership.

"Currently online (shopping) in India is the way forward to test the waters for a lot of brands," said Rahul Narvekar, the co-founder of fashionandyou.com.

An executive at one U.S. teen apparel retailer agreed.

"I do think that in some odd way this practice is a precursor to understand demand," said the executive, who is in charge of international licensing and d e clined to be identified due to the sensitive nature of the matter.

Aeropostale said the fact that its merchandise was available on Indian websites indicates that there is consumer demand.

"We watch these products very, very carefully, understand each market and the dynamics in each international market," said Kenneth Osahi, vice president of investor and media relations.

As for investors in U.S. clothing companies, the prospect of hundreds of millions of potential Indian customers outweighs any risk of reputation damage, analysts said.

"Brands losing their cachet is a level of worry for investors, absolutely. However, the level of worry is heavily mitigated by the growth rate of India," said Roberto Ferranti, a vice president with U.S. venture capital and buyout firm Baird Private Equity. (Editing by Bradley Dorfman and Emily Kaiser)