Reliance dresses Gap in more optimistic India garb

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A basket of flowers hangs near Gap Inc's flagship retail store at the Powell Street cable car turn in San Francisco, California August 20, 2009. REUTERS/Robert Galbraith/

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MUMBAI, July 7 (Reuters Breakingviews) - Global retail can hope to wear a new look in India. Gap Inc (GPS.N), the American purveyor of jeans and t-shirts, is returning to the giant emerging market with a bigger, stronger partner in $205 billion Reliance Industries (RELI.NS). The two companies have struck a franchise agreement that supports Mukesh Ambani’s bid to expand his empire by acting as custodian for iconic brands from Diesel to Tod’s (TOD.MI) read more . It’s a low-margin business, but the country’s retail king can stitch together better returns than most from selling the U.S. outfit’s clobber. The endeavour, though, may be more rewarding for his new partner than Reliance’s investors.

Gap could use help delivering American optimism, its ad campaign motto. It is not doing well for shareholders. Since early 2019 when the company dabbled with the idea of spinning out Old Navy from its eponymous brand and others including Banana Republic, total returns have been negative and much worse than those produced by top global peers including H&M (HMb.ST), American Eagle Outfitters (AEO.N) and Zara-owner Inditex (ITX.MC). The Gap brand lost money, too, for its previous Indian partner of six years: Gap and Mumbai-listed Arvind Fashions (ARVF.NS) parted ways in early 2020.

Reliance’s vastly superior scale gives it a better chance to push brands beyond top cities like Mumbai where high rents make turning a profit hard work. The Indian giant’s own mass-market fast-fashion brand, Trends, already has over 1,000 stores, including in smaller cities and towns, as well as an online shop. An added benefit may lie in sourcing, where Reliance has already won the trust of $3 billion Marks and Spencer (MKS.L) through a roughly 14-year-old joint venture that continues to expand. Higher volumes help to reduce costs too.

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Big brands are increasingly ready to tie up with powerful partners rather than brave India’s harsh business environment alone. Elsewhere, Zara partners with Tata’s Trent. But such franchise deals also take Ambani’s oil-to-telecoms conglomerate further into a low-margin part of retail. Even Arvind’s premium brands don’t yield much, selling Calvin Klein and Tommy Hilfiger gear, among others, will at best generate a net profit margin of 3% for the next couple of years, analyst forecasts on Refinitiv show. Ambani’s shopping preferences might not do much for his retail bottom line.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Reliance Industries on July 6 announced a long-term franchise agreement in India with Gap Inc. Under the agreement, Reliance will sell the U.S. clothing retailer's Gap-branded goods through a mix of exclusive brand stores, multi-brand outlets and e-commerce platforms, the company said in a statement. Gap Inc’s Banana Republic and Old Navy brands were not named as part of the arrangement.

"The partnership is aimed at leveraging Gap’s position as a leading casual lifestyle brand," according to a press release from Reliance Retail, which is part of billionaire Mukesh Ambani's conglomerate spanning oil to telecoms.

Financials terms of the deal were not disclosed.

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Editing by Antony Currie and Pranav Kiran

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