Balm for the soul

By Aanand Pandey & Pradipta Mukherjee
From the Business Standard > Strategist
New Delhi December 30, 2008

Emami’s old-school promoters were nimble enough to acquire Zandu. They need many more manoeuvres to become a major FMCG player.

Radhey Shyam Goenka, 61, the joint chairman of the Emami group, loves to take an occasional dig at the group chairman and his friend of over 40 years, Radhey Shyam Agarwal. Like most old-school entrepreneurs, Agarwal has a habit of scribbling down numbers on a piece of paper during meetings. When Goenka and Agarwal sit with the next-generation directors from the two families, at times Goenka snatches the scribbled note from Agarwal’s hand, gives it to one of the directors and asks him to check the final figure. Surprisingly, every time Goenka has done this, Agarwal’s final figure has turned out to be incorrect. “Our children laugh at this,” says Agarwal.

Goenka is the cool one, known for his meticulous planning, while Agarwal is the galloping warhorse, whose business instincts appear incredible at times, but, according to Goenka, “turn out, amazingly, to be prophetic”. Sure enough, most of the promoters’ decisions bear the stamp of Goenka’s diligence and Agrawal’s foresight.

They characterised their first life-altering decision. In 1974, the duo left cushy jobs at one of the Birla companies to sell “beauty and cosmetic products priced 30 per cent higher than the competing brands, piled on the back of a hand-pulled rikshaw”, according to Agarwal’s younger son and Emami’s executive-director, Harsh Vardhan. One could hardly predict that the duo will take the business, started with a seed capital of Rs 20,000, to where it is today: Rs 1,700 crore flowing in from fast-moving consumer goods, newsprint, edible oil, real estate and health care. It again came into play four years later when they took over a sick unit named Himani Ltd and pressed on to make it work for eight years.

In 1984, Himani gave them Boroplus, a blockbuster product that rejuvenated their FMCG business.

As Emami acquired Zandu Pharmaceutical Works recently — the culmination of a six-month battle — it fought with precision and planning. The mark of foresight, however, is yet to be seen.

To seal a deal

To acquire an Indian listed company, one needs a Teflon exterior, which would prevent things from sticking. Mumbai-based Rs 140-crore Zandu is a 100-year-old company that manufactures more than 300 herbal and ayurvedic products. A zero-debt company with a strong brand name, Zandu has always been an attractive target for both Indian as well as multinational FMCG companies.

In May this year, when Emami picked up 23.6 per cent stake in an off-market deal from the Vaidyas, one of the two promoter groups of Zandu, it looked a smart, albeit expensive, move. According to reports, Emami paid Rs 130 crore to the Vaidyas at an offer price of Rs 6,900 a share (including Rs 100 a share as non-compete fee).

Immediately after Emami’s announcement of the mandatory open offer of 20 per cent to Zandu shareholders at Rs 7,135 a share, Zandu sought to stave off what it saw as a hostile takeover bid by taking recourse to a popular and effective tactic known in M&A parlance as the Shark Repellent manoeuvre. It sent a notice to Bombay Stock Exchange saying the company intended to issue preference shares to the company’s promoters and directors. This was aimed at fortifying Zandu’s second promoter group, the Parikh family. Emami got wind of the note and sent a legal notice to Zandu the next day, which forced the Parikhs to withdraw the plan. “The independent directors on the Zandu board were kind enough to understand our point of view,” says Harsh Agarwal.

Meanwhile, Zandu’s shares at BSE stayed around Rs 10,000 a share in anticipation that Emami will raise the offer price. Emami’s promoters remained unfazed. “We think we have done a fair evaluation keeping in mind the industry standards,” said a press statement issued shortly afterwards. Meanwhile, the stock market soared in July, when Emami’s open offer opened.

By that time, the expected had happened. The Parikhs, anticipating Emami’s next step, had raised their stake in Zandu from 18 per cent to 22 per cent. They owned another 20 per cent, said industry sources, through family members and associates. At the same time, the Parikhs had gone about knocking on all possible doors — Securities & Exchange Board of India, the Company Law Board (CLB) and the Bombay High Court — but by the end of August, it was clear that as far as the Parikhs were concerned, Zandu was a lost cause.

By mid-September, Zandu’s shares had fallen below Rs 16,700 and that was when Emami doubled its offer to Rs 15,000 a share. Zandu ran out of options when CLB asked the two companies to try and settle out of court.
On October 3, Emami revised the offer to Rs 16,500 a share and, according to sources, this was when some of the Parikh family members evinced interest in quitting the company, saying they would not get a better price. Trade reports were released soon after, stating that Emami had entered into a share-purchase agreement with Zandu. Looking at the price that Emami paid for the deal — Rs 800 crore for a Rs-160 crore entity — it appears that diligence may have given way to adventure.

Experts say the deal holds lessons for future buyers. KPMG’s corporate finance director, Nandini Chopra, who also heads the firm’s valuations practice, says: “Acquirers in future would possibly seek to be more in control of their pursuits by ensuring that they are negotiating, from the outset, with majority blocks of shareholders.” This would help mitigate the risk of another shareholder block perceiving it as a potentially hostile situation. “This will also prevent the target company’s remaining shareholders from putting up bid defence strategies, which would ultimately increase the cost of acquisition, or, worse still, thwart it,” she adds.

Emami’s persistence with the deal says something about what it expects from the acquired company. “At almost 5.5 times the sales multiple and almost 30 times EBIDTA (earning before interest, depreciation, tax and amortization) multiple, Emami is expecting stupendous growth from the Zandu franchise,” says C Ravishankar, manager-strategic and commercial intelligence, transaction services, KPMG India.

Speaking to the strategist after the acquisition, R S Agarwal indicated that he expected Emami’s FMCG business to touch Rs 1,100 crore by 2009-10. Harsh Agarwal, who has been overseeing the post-acquisition brand consolidation, sounded even more optimistic. “We expect our sales and profitability to grow by two to three times in the next couple of years,” he said.

According to Associated Chambers of Commerce and Industry, FMCG sales have not been affected by the current slowdown and the sector is expected to touch $25 billion by the end of 2008, as against $20 billion in 2007.
A positive industry outlook and Emami’s compounded annual growth rate at an impressive 25 per cent for the last three years, the anticipation is soaring in the region of 34-35 per cent. However, the steep takeover price and historically low growth of the Zandu franchise (10 per cent CAGR) indicate that there is more to Emami’s enthusiasm than meets the eye.

Analysts say the intent is not only to unleash the untapped potential of the strong Zandu brand — deploying a mix of marketing, distribution and operational strategies — but also to prepare the ground for Emami to play a bigger role in the consumer goods market. Earlier this month, R S Agarwal and R S Goenka issued a statement saying that the company plans to position itself as a “food products and personal care major”. Food products and personal care comprise the biggest slices of India’s Rs 96,000 crore FMCG pie, accounting for 43 per cent and 22 per cent, respectively.
Marked markets

Emami has not yet announced the final product strategy but careful analysis seen in the light of recent announcements shows that its product portfolio is changing in terms of the market size of each product category. Before Zandu came into the fold, Emami was the market leader in two niche categories: Boroplus cream, with 70 per cent, led the Rs 190 crore antiseptic creams market, and Navratna, with over 50 per cent, headed the Rs 397 crore cooling oil category. “Now, with the Rs 120 crore Zandu Balm in its fold,” says Harsh Agarwal, “Emami leads the ‘rubificient’ (local pain ointment) category with a combined market share of more than 25 per cent… Zandu balm is the market leader and Menthoplus the strong third player, so both can continue without competing with each other. They can play complementary roles.”

Similarly, the Rs 170 crore Cyawanprash category, dominated by Dabur Chyawanprash with 61 per cent share of the market, will see a bigger Emami footprint paved with Zandu Special, Sona Chandi and Kesari Jeevan. ayurvedic medicine, antiseptic creams Harsh Agrawal sees Emami’s consolidation in the classical ayurvedic medicine category as the biggest advantage of the deal. Indian over-the-counter herbal and ayurvedic medicine segment is estimated at Rs 7,500 crore. Dabur leads this segment with 10 per cent market share.

Emami and Zandu’s combined product portfolio does not give Emami enough to stand up to the might of the Rs 2,360 crore Dabur, Rs 2,290 crore Marico or Rs 1,267 crore Glaxo Smithkline Consumer Healthcare India — much bigger FMCG players. Experts say Emami will take its first big step to becoming a serious player in the FMCG segment when it comes up with defined product architecture. AT Kearney India principal Debashish Mukherjee says an evolved product architecture, displaying a much bigger scope than its present “ayurvedic proxy” positioning will be the first critical step if Emami aspires to be an FMCG major. “Merely changing or rearranging the existing product categories will not put Emami into the big league,” he adds.

Mukherjee adds that unless herbal or ayurvedic consumer goods players hit mass retailing, they can’t hope to challenge serious FMCG players such as Hindustan Uniliver or Proctor and Gamble. Smaller players, such as, Emami will have to think of ways to gain access to product categories they can’t reach. Product improvisation, customisation, even price variations can help. Emami’s Chyawanprash product range, for instance, could see price variations with the inclusion of Kesari Jeevan, which is in the premium consumer segment. Similarly, the rubificient range can see price differentiations.
The market is in the villages

Categories such as health supplements and cooling oil have a huge untapped potential in the urban and rural markets. The Rs 600 crore health supplement market has a surprisingly low penetration level of 0.2 per cent in rural and 1 per cent in the urban markets. Similarly, cooling oil has a huge potential in the rural market. With the increased media reach, Emami has a big market waiting to be explored, and it can only be reached through a wide and efficient distribution network.

The cooling oil category has few rivals, all of them local players (Dabur Super Thanda, Himange, Himtaj). Emami’s substantial advertising and promotions spending — more than 20 per cent of sales every year, much higher than the FMCG industry average of 11-12 per cent — can provide the beachhead.

Emami has a strong sales network of 2,800 distributors with direct supply to 400,000 retail outlets and a product reach of 2.6 million outlets across India. Urban distribution channels cover modern format outlets and retail stores and rural sales channels include Emami mobile traders and Emami small village shops.

Emami has also tied up with ITC e-Chaupals, Indian Oil Corporation petrol pumps and the India Post network. Moreover, it has five sales channels divided into rural and urban areas. Unlike Zandu’s distribution channels, which were strong in the West and South, Emami’s network is evenly spread out in all regions of the country.

Third Eyesight chief executive Devangshu Dutta says growth in the smaller towns and rural markets can still be driven by penetration and improved availability levels of stock-keeping units. There are still vast swathes of consumers in India whose consumption of packaged skin and personal care products is negligible. The main causes of optimism about continued growth would stem from this aspect of untapped markets and unfulfilled demand.”

An AC Nielsen report for April-September 2008 showed that value and volume growth across a range of products, such as, skin creams, lotions and hair oils, was much higher in the rural markets than in urban markets.

Corporate Responsibility – Beyond Babel

At the outset let me mention the fact that in the title of this post lies a Freudian slip. The intended title was “Corporate Responsibility – Beyond Labels”. But the new – unintended – title captures the thought perfectly. (And I’ll come back to that in closing.)

Third Eyesight was recently asked by a multi-billion dollar global consumer brand to facilitate a round-table discussion focussing on the issue of how to drive ethical behaviour and sustainable business models into their sector. This company has a well documented strategy and action plan until 2020, and their team was travelling together in India visiting other corporate and non-corporate initiatives, to learn from them.

For the round table, we brought together brands, retailers, manufacturers, compliance audit and certification agencies, craft and community oriented organisations and non-government organisations (NGOs working on environment stewardship. Some were intrinsically linked to the consumer goods / retail sector, others were not. Among those present was Ramon Magsaysay award winner Mr. Rajendra Singh of the Tarun Bharat Sangh, an organisation that has, over the last several years, worked in recharging thousands of water reservoirs leading to the rebirth of several rivers.

The diversity (and sometimes total divergence) in views among the participants was a powerful driver for the debate during the day, which was the main intention behind having a really mixed group.

(Try this experiment yourself. Get a bunch of people together who define their work as being in the “corporate responsibility” stream. Then ask them the meaning of that phrase, and watch the entirely different tracks people move on. You might be left wondering, whether they are really working towards a common goal.)

At the end, though, the result was productive, since the divergent perspectives opened avenues that may have previously not been visible.

In the case of our discussion, the topics that were covered included labour standards and compliance, reduction of the product development footprint, closed-loop supply chains, water management, organic raw materials, energy conservation and community involvement in business. Some of the issues raised were:

  • How are learnings from green factories consolidated and disseminated to other suppliers?
  • How do companies plan to continue to support sustainability and corporate responsibility initiatives considering the drastic economic changes and the dire retail scenario?
  • What does fair trade have to do with sustainability?
  • Minimum wage Vs living wage
  • Trade barriers and the need for government support for green products
  • Why labour laws are not being followed? Are the laws outdated and impossible to follow? Are there any other reasons, which could be dealt with by companies themselves?
  • Can consumer consciousness and pressures be brought to bear? Does the question “Is the product I am buying ethically produced” come in the mind of an Indian consumer? Or even to the mind of the Indian retailer?
  • The need to address the core issue of unbalanced demand and supply of workforce in cities.
  • What should responsible and aware companies do to stop other companies from polluting rivers and water systems?
  • The role of village craft in providing learnings on efficient and responsible use of resources

My view is that these diverse areas and views can be aligned most effectively if we look at responsibility and sustainability in all its dimensions. These dimensions, to my mind, are:

– The Environment

– The Community

– The Organisation

– The Individual

Most corporate responsibility / sustainability initatives end up addressing only one of the dimensions to focus and simplify the action-points. However, the reality is that there are many areas where the Environment, the Community and the Organisation overlap with each other – many a time, when you ignore the interaction between these dimensions, you get totally divergent opinions. And the point of view related to your own history, geography and experiences, further colour the opinion. The individual – “I” – as a citizen, as a corporate manager, as a parent of future generations, or in any other role, is at the overlap of all three external dimensions. That should tell us something about where the action needs to be initiated.
(The post continues under the graphic below…)

The Individual and the External Dimensions of Corporate Responsibility, Community, CSR, fairtrade, labour

(Post continuing from above.)

Here is a suggested list to start with, which we can use to try out thought-experiments, viewing each issue in different dimensions and from different points of view (for example, buyer based in a developed market, supplier based in a developing country, an individual working in the supply chain, his family and broader community):

  • child / family labour
  • fair pricing and fair compensation across the supply chain, including consumer, retailer, supplier, workers
  • replacement of cottage scale production with large-scale industrial production of goods
  • setting up production in cities versus in villages
  • organic versus inorganic
  • synthetic / genetically modified versus natural raw materials

In closing, let me come back to “Babel”. According to the Book of Genesis, a huge tower was built “to the heavens” to demonstrate the achievement of the people of Babylon who all spoke a single language, and to bind them together into a common identity. God apparently was not particularly happy with this self-glorifying attitude, and gave the people different languages and scattered them across the earth. 

Whatever your religious (or non-religious) affiliation, this story holds a gem of a lesson.

No matter how noble the cause of the corporate responsibility warrior, it is good to be humble and allow diversity rather than trying to capture everyone under one monolith with an apparently common goal. The diversity may be a lot more productive and help to spread the benefits wider than one single initiative.

The day that we spent on the sustainability round-table certainly demonstrated that very well.

Loyalty – Scheme or Sham?

A keystone of a retailer’s business is the loyalty that customers show in shopping at his or her store.

Loyal customers help to sustain a basic level of sales and reduce the need for expensive broadcast-style marketing spending that the store may otherwise have to do in order to keep the traffic and business flowing. This is as true for chain-stores as it is for independent mom-and-pop stores.

Therefore, as competition increases along with the number of stores selling the same products within a common catchment, retaining the loyalty of the customer becomes crucial, both in terms of strength of relationship (which is reflected in how much of the total spend the customer spends at the specific store) as well as the duration of the relationship.

In some parts of the more developed markets regulation may prevent the overcrowding of grocery stores and supermarkets. However, in markets such as India, one can see as many as four or five mini-supermarkets coming up on barely a kilometre along a busy street, before you even count the numerous kiranawalas. How can a store ensure a continued loyal custom from a certain share of that catchment?

Managers at modern chain stores may draw some comfort from studies which suggest that customers with higher incomes tend to be more “loyal” than customers with lower incomes. Since Indian chain stores tend to be targeted on high-income customers when compared to the traditional kiranawala, they may benefit from an intrinsically more loyal base of customers.

The variety of factors behind this “loyalty” may essentially boil down to the fact that with rising incomes the perceived benefit – lower prices, potentially better products or service – from comparing alternative stores may be outweighed by the perceived cost (time) of seeking these options and the personal adjustment involved in shopping in an unfamiliar environment. (Or, perhaps, to put it more bluntly: “rich customers couldn’t be bothered”?)

However, as the number of competing offers increases, promotional noise draws the consumer’s attention to benefits they might be missing out on, whether this is through flyers in the mailbox, kiosks set up near the consumer’s primary store, or even a full-blown ad campaign across multiple media. With every new offer or promotion, there is a temptation to try out an unfamiliar retailer.

This is more acute during recessionary times, when just about every competitor is shouting out deals to lure the customer to at least step into their store. And don’t think that high income customers are immune from the “toothpaste-discount” bait. During such times, whether they acknowledge it or not, everyone is down-shifting. It is at such times that loyalty is truly called upon. And it is also at such times when retailers start to think of loyalty schemes.

Most loyalty schemes are focussed on the objective of retaining existing customers through the use of incentives that are available only to loyalty programme members. They will ask a customer to provide some personal and contact information, and will provide some reference – a set of coupons to be redeemed during future purchases, or a card (index, swipe or smart) – that must be presented during subsequent transactions. In almost all cases, there is an attempt at getting the customer to return to the store because, as we all know, when we step into a store to redeem anything, almost without exception we end up shelling out more money than the redemption is worth. Since the value of the cash-back equivalent can be anywhere between 1 and 10 per cent (sometimes higher) customers are happy with the bribe, while the store is happy to ring up the additional sales.

However, it is surprising – or perhaps not – how many loyalty schemes turn into shams. In many such cases, the true benefits and the liabilities during the life cycle of the loyalty programme or of the customer’s relationship with the store have not been considered deeply enough. We all have multiple examples from our personal lives, which offer valuable lessons on such shambolic “loyalty schemes”. For instance:

  • An oil company’s “membership card” that you pay for, whose points can never be redeemed because you never get the points statement nor a list of rewards, and the last time you see the card is when the petrol pump attendant takes it with the promise to check the status with the company.
  • “Reward points” which offer a customer a second-rate bag or an uncertain brand of electrical gadget for points PLUS a cash amount that would be the equivalent of what you might spend with a pavement retailer buying a similar item.
  • A credit card that looks attractive with discounts at certain merchant establishments, until you discover that someone who doesn’t hold that card is getting the same benefit even on cash payment.

Very often we find that a loyalty scheme has been conceived by an executive in charge of advertising to get the message out more cheaply (?) and focussed on a set of frequent customers. There is little link with the other parts of the operation, such as merchandising, store planning, or even promotion management, and certainly no influence. Thus, a second and potentially more powerful objective – using customer shopping data to tighten merchandising and improve the targeting of promotions – is virtually ignored.

Some companies have decided that managing a loyalty programme would offer lower benefits than the cost of maintaining the scheme, and decide to pass on the amount to the consumer directly in the form of lower prices. However, given the times, and the prospective goldmine of consumer purchase information that consumers willingly provide through such transactions (despite all vocal concerns about privacy) I would expect loyalty schemes to mushroom in the next few years.

The fact is, whatever our income levels, evolution has deemed that we become creatures of habit. Once a certain path has been followed successfully, a berry has been eaten safely, a transaction has been made satisfactorily, we are inclined to return to it again and again.

Trust, predictability and precedence are huge factors in developing loyalty, and when translated into the modern life of shopping (especially for food and groceries), this translates into the phenomenon that has been called first store (or primary store) loyalty. This can lead to as much as almost 70 per cent of grocery shopping being carried out at one store. Typically consumers will have a strong secondary store, and the balance grocery shopping would be split between multiple stores based on product availability, convenience and opportunity, deals and other factors.

But just because customers are genetically wired for loyalty to the familiar, the retailer should not treat this loyalty with contempt. Or even laziness. Because that can tip over the loyalty scheme into being a loyalty sham. And that is it only one letter away from “scam” – a dangerous label in these times of the consumer-activist.

Retail Kiosk – Plug and Profit

By Sangita Ghosh

Images Retail

December 2008


The concept of ‘Kiosk Retailing’ in the Indian retail scenario was virtually unknown until a few years-ago. Over the past few years, however, retail kiosks or mall kiosks have become an increasingly ubiquitous component of the retail and real estate landscape. The kiosk concept started gaining broad-based acceptance and success among the international retailers in the 90s; the model is now gradually getting a foothold in India.

Certainly, there are reasons for a kiosk scoring over a full size store – in terms of presenting a cozy yet convenient and eye-catching venue to attract the impulse buyers that pass through a mall aisle or a shopping centre space. According to Devangshu Dutta, CEO, Third Eyesight, "Kiosk retail can be defined by the presence of outlets with a small physical space in an open format with ‘temporary’ or even mobile fit-outs, but may be stationed at a place for a long time. The structure of a kiosk could be designed as a standalone structure like a terminal, or a semi-enclosed booth."

In general terms, kiosk retailing programmes are specified as ‘speciality leasing programmes’ and the retailers are called ‘speciality retailers’. Dutta says that any product that does not require a large amount of storage, can be sold without any preparation and served with minimal staff, is an ideal to be traded through the limited and open format of a kiosk. These can include physical products such as snacks, jewellery, holiday merchandise, novelties, or services such as financial products, simple medical check-ups, grooming and services etc.

The benefits of a kiosk format include:

• Avoiding unnecessary in-store product inventory and associated warehouse costs
• They offer promotional opportunities for the retailer
• Help increase active footfalls for mall owners
• Reduce input costs by lowering employee headcount through self-service and multi-use models
• Offer extremely lean and mean communication
• Facilitate interaction with the service retailers and ease the way of availing their services
• Thus, result in incremental sales even at off-site locations with more compelling revenue returns

In India, retail kiosks can be seen in shopping plazas and malls as small retail outlets to sell products or to facilitate services. A few examples of the retailers leveraging the kiosk opportunity include fruit juice brand Mr. Orange from MX Foods, Candico India, Boost, wellness retailers such as Kaya Skin Clinic and Lakme, financial companies such as ICICI Bank, Citi Financial and Reliance Money, holiday package providers such as Club Mahindra or insurance firms such as Max New York Life Insurance etc. In each case, the mall allots a space either on rental or revenue sharing basis to the retailer depending on merchandise. A relatively advanced form of kiosk retailing can be seen in Europe and US. In Europe, kiosk retailing has evolved as a special, advantageous and cost-effective category in retailing and is strategically located in the malls at frequent stops. In the US, kiosk retailing has emerged as one of the effective platforms of low-cost, low-risk entrepreneurship. These retail kiosks are also known as ‘creative entrepreneurship’ showcasing product categories such as handicrafts or other essential low-budget home improvement essentials or personal usage products. One of the leading global kiosk consultants and trade magazine publisher Patricia Norins quoted that in the US about 25 percent of the 50,000 -plus kiosks in shopping malls are owned or operated by recent immigrants – thereby giving them a low-risk option to establish themselves.

For a greenhorn, kiosk retailing provides easy but effective branding with a much smaller space leading to lower rents but with satisfactory sales that can establish a brand much faster in high-end malls. Candico forayed into the Indian retail scenario with its innovative kiosks designed in Dubai. Mr. Orange sells fresh fruit juice from its orange shaped kiosks that were innovatively designed in Spain. If the concept is applied correctly and effectively in mall spaces, the format of kiosk retailing would prove to be an extremely effective profiting model, turning a large amount of under-utilised floor-space in a mall’s common area into an innovative revenue stream.

As the face of Indian retail changes, the structure, design, functionality and application of retail kiosk is also evolving. Generally ‘kiosk’ refers to a booth-like structure where simple and inexpensive merchandise in isolation is sold. But of late", the retail kiosk has evolve&" from this typically four-sided, square structure to a limitless array of colours, shapes and designs selling ice cream to jewellery to service messages from concepts financial giants and real estate companies. Then, there are technically evolved electronic kiosks, also known as ‘interactive kiosks’, where a customised software enables the user to access the system flawlessly for a specific purpose. This structure could simply be a standalone computer terminal with a keyboard or the latest touchscreen facility, financial services or simply a tool to disseminate free public service information. As outlined by Technopak, retail kiosks in India have evolved in two formats. The first variant is in the form of a small-sized shop, having a semi-permanent fixture and is generally present within a larger establishment such as a mall, department store, etc. In India, there are quite a good number of F&B retailers across categories who have explored the idea of retailing through kiosks – Candy Treats, Cookie Man, Domino’s, Yo! China, Cafe Coffee Day, Corn Man, Baskin Robbins, Mr. Orange, Nestle etc.

The second variant is the much advanced and technically inclined e-kiosks, which are largely services oriented and generally unmanned. One of the pioneers in this is Reliance Money, which began its operations since its very inception through kiosk retailing to reach out to as many customers as possible. Sudip Bandyopadhyay, CEO and director, Reliance Money, sees a lot of promise in this format, saying, "Kiosks are going to prove like ATMs, which revolutionised the banking industry. We hope our kiosks will change the way people avail financial services over a period of time." Reliance Money, at present, has a vast network of 2,500 retail kiosks at different places across the country based on target customer availability and accessibility.

While kiosks can be very profitable for the owner of the real estate considering the high rent, some developers also use kiosks to make the retail environment more dynamic and fluid. This, according to experts, shows the trend of a positive future for the retail kiosks in India.

Rakesh Pandey, CEO for Kaya Skin Clinic, clarifies, "Be it brand building or business generation, the clarity of the parameter itself guides the financial implications of the kiosk model. Through kiosks, are you being able to capitalise on the short window of opportunity with a potential client at the venue? It’s important to remember that a potential client’s live experiences at a kiosk can either positively pre-dispose or completely turn off the client from the brand." Spencer’s Hyper, where Kaya has opened its retail kiosks, is of the opinion that the main retailer should be careful about the kiosk retail partner; the products retailed at the kiosks should have business synergies and target the same market segment. Samar Singh Sheikhawat, VP-marketing, Spencer’s Retail Ltd, elaborates, "Since modern retailing is all about the shopping experience, the partners in kiosk retailing should ensure that they conform to the quality standards and service level agreements as does the main retailer. This is to ensure that consumers have the same experience whenever they avail of any product from a particular retail outlet."

According to industry experts, innovatively positioned kiosks can become the centre of attraction in a mall and create a vibrant environment ensuring higher footfalls and revenue for the shopping centre owner. To create freshness or for a change in the shopping floor environment, one kiosk can be inter-changed with another temporarily, otherwise impossible with a full size retail store. Analysts point out that with the strategic point of sales coupled with the catchy placements in the shopping centres, the kiosk is becoming the new pull for both realtors and shoppers. When the retail kiosks offer services to the customers, it also increases consumer awareness and proposes new strategies for the retail brands to further diversify their business in multiple directions.

The Kaya Skin Clinic, for instance, has prototyped the kiosk model to make expert skin-care easily accessible. Pandey shares, "With the kiosk model, the idea for Kaya was to ‘go where are clients are’, thereby saving their time and also aiding them to make accurate decisions about their skin-care needs." For Kaya, cosmetics account for the majority of sales from these kiosk counters. ‘According to the chain, skin-care product sales contribute to 30-35 per cent of the total sales for the brands that sell both cosmetics and skin-care products through this format.
Bandyopadhyay at Reliance Money says, "Our kiosks are additional touch points for our customers to avail services and it would not be possible to measure revenues separately. Our customers can go online, use call and trade, visit our branches or avail services through kiosks. The same customer may use different modes at different points of time based on his or her convenience."

Coffee Day Xpress, from Amalgamated Bean Coffee Trading Company Ltd, serves food at kiosks called ‘Xpress’ for those who need a quick bite on the move. The growth of Coffee Day Xpress also comes from its innovative franchising model. The low-investment, high-return business model has proved popular with entrepreneurs who are eager to cash in on the brand’s ‘plug-and-play’ kiosk concept that can get started within 10 days of the franchise agreement.

The format of the kiosk, its position and its usability demand a specialized merchandising strategy. As observed by Technopak, the low value and impulse purchase appeal facilitate the usage of kiosks for product categories that consume less space – eateries, banking solutions, telecom services, flowers, tobacco, books and music and fashion accessories. Besides these, innovative e-kiosks, which provide multiple services such as ticketing, payment of bills etc. and self-service -kiosks for photo development, are also in vogue. Also, companies are increasingly using kiosks for information dissemination and promotional activities. Punit Khanna, principal consultant, Technopak Advisors, says, "Products that consume less space and are as tentative as impulse purchase items, are best suited for kiosks." Based on the nature and format of the kiosks, the merchandising strategy is crafted. Kaya Skin Clinic – with focus on creating awareness among health-conscious consumers and future clients – has a typical merchandising strategy whereas Reliance Money, which operates self-service kiosks, has no merchandising and depends on software for communication and backend operation. Kaya kiosks have following features:

• Focus on POP material to communicate message
• Take-away skin-care literature to draw the visitor to their clinics
• Arranging skin-care camps along with skin counsellors, doctors for individual consultation
• Skin-care camps arranged usually on weekend, at a high-footfall area in a mall or department store

Coffee Day Xpress is a modular kiosk of 60 sq.ft that can easily be set up in short notice. For that, they maintain a specific merchandising strategy with an ease and less complicated and ready-to-eat food on their menu. Other characteristics include:

• Each kiosks comes fully equipped with a hot coffee – bean-to-cup machine, a cold coffee and a thick shake machine, a blender, pastry cooler, microwave oven, griller, and a refrigerator, to serve quickly
• Easy to maintain and clean
• Available in both indoor and outdoor modules

Kiosks retailing is driven by impulse shopping and is clearly targeted towards consumers ‘on-the-move’. The customers increasingly see a mall as a leisure zone; stopping by a kiosk and trying out a relatively low value item such as a glass of orange juice or a pack of candy or something higher up in the value chain such as sunglasses or watches is a natural activity in that environment.

“The target customers for a kiosk are the passers-by – often impulse buyers. Therefore, the merchandising and display has to be ‘alive’ and should be able to reach out to grab the customer’s attention in the busy environment,” Dutta points out.

Retail kiosks also have the USP of setting up interesting point of sales, catchy positions and attractive product lines resulting in satisfactory sales figures in comparison to the retail space they occupy, which can be replaced at times for variations.

Most analysts agree that the ideal criteria for location selection that a kiosk model looks for should be focused on high traffic, high visibility areas at mall atriums, inside department stores, hypermarkets or supermarkets, and places with higher footfalls such as airports, railway stations and a metro stations. However, meeting these criteria demand high investments from the retailers. Says Dutta, “Kiosks work well in areas with high footfall and high off-take, where the rentals per square foot would also be high. Therefore, the financials of a kiosks generally require high gross margins.”

According to Ali Mir, GM – retail, NCR Corporation, a technology company for Retail Kiosk solutions, “The strategic locations for a kiosk should be at the store entry, entrance of a department in a store, mall entrance, at each floor of a mall closer to the elevators, food courts etc. that give the kiosk higher visibility and footfall.” Kaya Skin Clinic, which banks on its retail kiosk network critically, considers the following factors before finalising a kiosk location:

• Footfall in the mall and that particular location, and the average ticket size of the mall to measure the trend of the weekend skew
• Direction of footfall and also shopper’s mood when visiting their kiosk
• The visibility of the location
• TG of the particular mall or store
• Demographic and psychographic profile of the residential catchments

While the chain is quite enthused by the kiosk format, the extremely high rentals for kiosks, and the point of furthering the ‘no-escalation clause’ of the lease that usually expires after 11 months, can hinder the spread of a kiosk network.

Spencer’s, which has kiosks in its 70 stores, is certainly banking on the point of high rental but at the same time they entertain hopes of ensured returns. According to Sheikhawat, “Kiosk retailers need to be judicious with respect to the financial model they agree to. It can either be revenue sharing or a flat rental, but that of course depends on what is more profitable to the retailer.” High rental payout is definitely something that is currently queering the pitch for this mini-store format. Bandyopadhyay of Reliance Money says, “The rent for the location and the space required to put up the kiosk is very high, sometimes unrealistic and extremely critical. High-footfall retail space is very expensive and the cost-benefit ratio needs to be carefully analysed. The retailer and the mall owner need to understand the same and fine tune the strategy accordingly.”

According to the experts, not just start-ups or speciality retailers but major retail chains and established brands are also looking for kiosk solutions to enhance their retail presence. Even big-box retailers are looking for an easy, convenient and cost-effective solution though network of retail kiosks. According to Khanna of Technopak Advisors, “Given that locations favourable to the kiosk format, such as mall atriums, railway stations, metro stations, airports etc, are being rapidly developed in India, we shall witness a larger proliferation of this format.” Khanna also states that retail kiosk is increasingly spreading beyond the F&B sector to include other products/services as well. Going forward, retailers will increasingly invest in this format for the multiple benefits of:

• Flexibility in moving or transporting to a different location whenever required
• Easy utilization in a format of low investment and of low overheads
• Swift roll-out
• Convenience of 24X7 retail with e-kiosks

Experts say the pace at which Indian retail transactions are increasing, it clearly highlights the need for a more technically developed solution that is designed to constantly evolve with changing needs. The trend shows the need for 24X7 self-service kiosks that mimic the ecommerce model. Demanding customers and best practices adopted by global retail giants are driving Indian retailers to harness the benefits of self-service technology of retail kiosks in bringing efficiencies and retaining consumers. Starting from ordering the products to delivering the same at customer’s doorsteps, cash transaction and checkout self-service kiosks are making an impression. The concept has taken off well and is now being considered as a mode to spread awareness and promote the products across categories.

However, experts caution that too many kiosks in a mall can create disruption in terms of the prospective footfalls and common area of the mall. Balancing factors need to be designed between the mall owners, retail tenants and the kiosk retailers for a truly win-win solution.

Does offshore mean bad service?

News items seem to be ringing the death-toll for offshoring (Here’s one from the Washington Post:

Job transitions across borders are an emotive issue at any time, certainly even more so during times of economic upheaval such as now.

But should the debate be about “offshore vs onshore” or about management competence?

A management team whose effort isn’t structured well enough to deliver on their customer’s expectation of a good product (service included) could also find many things on which to pin the blame for poor service, including the geographical location of the support engineers, their native language or what they had for breakfast.

(Or, maybe we should reword the old saying: success has many fathers, but failure is the neighbour’s baby.)

My experiences of phone support around the world range from the superlative to the abysmal, sometimes within the same day in the same country. Painting in broad brush strokes and generalizations (“onshore is high quality and prompt, offshore is low quality and frustrating”) totally miss the point.

The best illustration is when you walk into two brick-and-mortar retail stores on the same high street, and receive dramatically different levels of service. In any country.

To my mind, it is senior management that drives service – vision, culture and the processes. Senior management is responsible for creating the environment, and for creating the hiring and training standards. If you are encultured for fantastic service, your location or origin on the globe is immaterial.

Remote servicing is challenging even without differences in time zones, languages, cultures. The lack of technical or any other sort of individual competence shouldn’t be added to the mix. And that goes for both (onshore) management and (offshore) support staff.

Lastly – followers of BBC sitcoms may be the only ones with whom this might ring a bell – Fawlty Towers should be on the must-watch list for anyone who has anything to do with customer service. Especially if they are part of the management.

Textile parks scheme hit by slow execution

By Sapna Dogra Singh

Business Standard

New Delhi December 07, 2008

Lack of an apex body, along with the absence of time-bound deadlines, are being cited as reasons behind the poor implementation of the scheme for integrated textile parks (SITPs), which is the textile ministry’s flagship scheme, according to industry experts.

The objective of this scheme launched in 2005 was to create jobs and world-class infrastructure. However, so far, out of the 40 sanctioned parks, just four have become operational.

"It is a grand plan but actual execution is very slow," said Devangshu Dutta, chief executive officer of Third Eyesight, a consultancy firm which has worked with some of India’s leading textile companies. There are multiple stakeholders, including the central government, state governments, district authorities and several companies. "Bringing them together is a difficult job," said Dutta.

Under the SITPs, the government provides up to 40 per cent of the cost of setting up a textile park with a ceiling of Rs 40 crore. Till now the ministry has contributed Rs 450 crore. The industry has pitched in with nearly double this amount. The combined investment is expected to touch Rs 2,000 crore by 2009-end.

The Parliamentary Standing Committee on labour has also made similar observations in September. While ruing the slow pace in the progress of SITPs, it has recommended that a time-bound action plan should be drawn up to ensure that the sanctioned textile parks become fully operational as any delay in this regard may not only involve the cost overrun but could also result in weaning the entrepreneurs away from scheme.

According to a senior textile ministry official, the reasons for delays are local issues which involve land deals, pollution and environment clearances in case of processing parks and sometimes there’s conflict amongst the entrepreneurs, which could result in the cancellation of the park.

The four parks, which have become operational are — Palladam HiTech Weaving Park at Palladam in Tamil Nadu, Brandix India Apparel City at Vishakhapatnam in Andhra Pradesh, Pochampally Handloom Park at Pochampally in Andhra Pradesh and Gujarat Eco Textile Park, Surat, Gujarat.

Most of the parks are progressing smoothly and by year end about five to seven more parks would become operational, informed the ministry official and added that the progress has also slowed down now because of the financial constraints that people are facing in view of the current economic slowdown, added the official.

Incidentally, an inter-ministerial Project Approval Committee (PAC) for SITPs is meeting in the third week of December to review the progress of the textile parks and also to take a call on cancellation of some of the parks. At least three projects are likely to be cancelled and be given to other interested parties, said the official.
The committee meets on a quarterly basis.

Catalogue Retail in India – Work in Progress

By Zainab Morbiwala
Images Retail
December 2008


As the name suggests, Catalogue retailing is a non-store retail format where the retail offering is communicated through a catalogue to the consumers. Mail-order catalogues debuted in 1856 when Orvis began selling fishing gear in USA. In 1872, Aaron Montgomery Ward made an arrangement with the National Grange, America’s largest farming organisation, to offer 163 items of merchandise under ‘The Original Wholesale Grange Supply House’. Ward’s catalogue was followed by one published by Richard Waren Sears, who started selling watches in 1886 through mail-order business. Elaborates Devangshu Dutta, CEO, Third Eyesight, “Catalogue retailing evolved in the west to meet the needs of far-flung towns and rural settlements since regular retail stores could not be established or profitably run in each area.

Since then, catalogues and other forms of non-store retailing including television and the internet marketing have evolved in different markets.

Adds Dutta, “Very often, retailers use catalogues as a complementary channel to store retailing. UK’s Argos, now also in India, evolved its unique catalogue-stores, that turned the model upside-down, making physical stores a walk-in opportunity for the much bigger catalogue from which customers could place orders.” Sharing the success of Argos UK, Andrew Levermore, CEO, HyperCity, says, “Argos UK has annual sales of close to 2.6 billion Pounds annually and the catalogue is present in over 70 per cent of UK homes.”

It has been only about 10 months since the launch of Argos in Mumbai. HyperCity Retail India Ltd, along with Shopper’s Stop Ltd, entered into a franchise agreement with Home Retail Group, UK, to offer a unique multi-channel shopping experience under HyperCity Argos. Currently operational only in Mumbai, the concept will be introduced across India when HyperCity debuts in other parts of the country. Talking about the HyperCity Argos operation, Levermore says, “For us it is the retailing of products through the medium of a book with more than 300 pages, listing over 4,000 products. Catalogue retailing is ‘not’ a promotional leaflet of a few pages that is inserted in the newspaper. It still requires the customer to visit a physical store to purchase the product.” Apart from HyperCity Argos, there is Lovy Khoslfs Elvy, which offers high-end home decor and interior products through a catalogue. An offshoot of export major, Stalwart Creations, Elvy introduced a mail-order catalogue in India three years ago. While HyperCity Argos’ catalogue is currently restricted to the customers in Mumbai, Elvy facilitates customers across India to place orders through their catalogue. Kh9sla says, “Catalogue retailing in India did not really exist when Elvy started out. It was very demanding’ and a very challenging task. We had to be thorough with our processes to meet the high expectations of our customers. “Prior to Argos and Elvy, Otto Burlington was operational in the Indian market (about 15-17 years ago) with Catalogue Burlington. Despite being a pioneer in India and popular in UK, it was phased out very soon. Explaining the reasons for Burlington’s failure, Khosla says, “The three infrastructural properties required to support catalogue retailing – effective telecommunication, easy mode of payments (e.g. credit cards) and a structured distribution set-up – were not in place.” Dutta observes, “Catalogue management sciences are probably not being applied effectively. The shopping dynamics and the operational success factors differ in home shopping and physical stores.”

It is interesting to observe that both HyperCity Argos and Elvy have their standalone stores as well. Shares Levermore, “Having store presence cements the brand in the consumer’s eye and allows the customer to feel the product. When starting out, store presence ensures credibility and safety in the consumer mind.” The catalogue stores of HyperCity Argos offer customers the facility to browse through the catalogue and view the products before making the purchase. High involvement and high investment products across categories such as furniture, technology, jewellery etc. are available on display. Customers also get to see other products at the special viewing and demonstration areas in the store. Sharing whether catalogue retailing can survive without a physical store, Khosla feels, “Yes, it possibly can. However, it might take longer to penetrate the larger database present in the country. For us, a combination of both works.” Commenting on the catalogue design, Levermore says, “There is much science around this and can be learned only with years of experimentation.” As for Elvy, Khosla has made sure to bring out a catalogue based on international standards. Both Elvy and HyperCity Argos launch their catalogues every six months.

According to Khosla, the resistance to catalogue shopping is much higher in India than in any other country. “We need to work much harder to build a comfort level for our customers.” Adds Levermore, “For the Indian consumer, going out for shopping is still very much a leisure activity as there is little competition for leisure in the form of sports clubs or parks. In the West, shopping is often seen as a necessary but somewhat painful experience. This will evolve to be the case in India, but only eventually.”

According to Dutta, the primary challenge to successful catalogue retailing is logistics. “Merchandising, space management, frequency of mailings, offers and promotions need to be managed differently. But possibly the biggest challenge is logistics. Most modern retailers in India are still establishing their logistics framework around the country; and their entry into catalogue retail would take the complexity to a whole new level. Not to underestimate the issue of handling returns. In fashion merchandise, for instance, catalogues can run a return rate of as high as 40 per cent in some products,” he points out. Pumendu Kumar, associate VP, Technopak Advisors, says, “Any kind of non-store retailing, of which catalogue is also a part, is based on the credibility of the seller. The second thing is the range of products being offered and its prices vis-à-vis the market operating price. Unless the retailers are established as strong retail brands, customers will not be very experimental with catalogue retailing. And since prices change constantly in India, printing of catalogues at regular frequency is also a challenge.” Samar Singh Sheikhawat, VP-marketing, Spencer’s Retail Ltd, underlines the two key challenges, “Lack of domestic expertise to run catalogue retailing as a function, and the right merchandise – stock needs to be available to run catalogue retailing as a profitable business proposition and the right category of product needs to be chosen for this format.”

Levermore feels that furniture and large-ticket appliances are the strongest categories for this type of retail. Khosla, on the other hand, believes that as long as the customers have confidence in the brand, the movement of a specific product category is of no relevance. “For a brand to be a part of a catalogue, it must fit the target consumer profile, offer products that fit the assortment and should be able to deliver sufficient margin for the retailer to be profitable,” Levermore states. Dutta observes, “Brands internationally consider catalogues as a retail environment, which is in someone else’s control – so while the additional market footprint is welcome, the margins could be lower and the brand’s image is impacted by other brands in the catalogue.” Giving a brand’s perspective on being a part of HyperCity Argos’s catalogue, Nilotpal Mrinal, brand manager, Remington, says, “Argos is Remington’s largest catalogue retail partner in the UK. We are happy to work with them in India too. However, the concept of catalogue retailing is yet to take shape in India to the levels where it can contribute a considerable share to Remington.”

Technopak Advisors’ Kumat asserts that the catalogue business in India will have higher potential in the years to come. “The key enabling factors will include: customers having less time for shopping, established retail brands, better customer service etc. As the Indian market is spread over a large geography, brands can target thousands of consumers through a catalogue.“

Dutta adds, “Product integrity, predictability, and customer service are key success factors at the ‘frontend’. Customer service needs to be process and systems-driven. And with so many BPOs today, India is probably better geared for back-end customer service infrastructure and management practices to support catalogue retailing. From the point of view of standardisation, products such as mobile phones or durables meet the criterion of standardisation but price dynamics vary hugely – a catalogue can become non-competitive as soon as it is launched.” Levermore feels that India is still very much in the experimental stage and it will not be not possible to clearly predict the model’s full potential for some time.

Sharing suggestions for those in the business of catalogue retailing, Dutta says, “Most Indian retail catalogues have the look-feel of a business-to-business order guide, with a limited grid layout and no excitement! If retailers want to succeed with a catalogue, they should consider it as much a living environment as a physical retail store. In fact, it is a bigger challenge to create a catalogue that is as dynamic and alive as the store itself, considering that the customer’s only interaction with the brand are the pages.” Kumar’s checklist of do’s and don’ts for retailers reads as: “Do’s – price benchmarking with the market, good product range, dynamic catalogue, delivery on time and after-sales service; Don’ts – focus only on building the catalogue without proper attention to fulfilment.”

Textile firms battle global slump despite rupee fall

By Aniruddha Basu

MUMBAI (Reuters)

Friday December 5, 2008

Textile companies may not benefit much from the rupee’s weakness as a slump in global demand and prior currency hedges trim bottomlines in an industry dominated by exports, officials said.

The partially convertible rupee has fallen almost 21 percent in 2008 and hit a record low of 50.65 rupee against the U.S. dollar on Tuesday. But demand from some large retailers overseas has slowed, company executives added.

"Because of the recession, what is happening is that demand for products are going down," said Jayesh Shah, chief financial officer, at apparel maker Arvind Ltd, which gets half its revenue from exports to the United States and Europe.

Export growth "this year is going to be flat year, its too early to predict," he said, adding he will wait for a clearer picture on demand trends from the West to emerge after Christmas, but is not expecting any growth in exports for FY09.

Others like Bangalore-based apparel exporter Gokaldas Exports have hedged currency risk till early 2009, leaving them with little gains from the rupee’s recent drop.

"Most of the exporters have done forex hedging forward covers, so we are not being able to encash on present rupee levels," said Gokaldas’ Managing Director Rajendra Hinduja.

"In a month or two when people finish their exposures a rupee at this level will definitely help. We will finish our exposure by Feb-March," he added.

Mumbai-based textiles maker Alok Industries which has not "hedged substantially" before is looking to hedge at the rupee’s current levels, said its Chief Financial Officer Sunil Khandelwal.


However, the global credit crisis, which triggered the rupee’s fall in the first place, is also leading to slump in global textile demand.

"The weak rupee hasn’t really given us any advantage, when the rupee became weak, came the subprime crisis," Gokaldas’ Hinduja said, adding that the industry’s exports could drop 15-20 percent this year.

India’s total textile exports for the fiscal year ended March 2008 stood at $22 billion, below the government’s stated target of $25.06 billion.

"The general prediction is that orders would slow down because retail market is not doing too well," Arvind’s Shah said.

The worldwide slowdown has prompted buyers at retail chains to tighten inventory management and slow buying, said Devangshu Dutta, Chief Executive Officer of Third Eyesight, a consultant to textile and retail firms.

"The main fall-outs of this are that they cut back on quantities or delay order placement to closer to the season," he added.

Alok Industries’ Khandelwal said some players may benefit from the recession as US retailers would seek to consolidate their sourcing by choosing fewer vendors.

But Indian firms would have to make products more price competitive as the product mix in the US and European markets have shifted towards cheaper ones, he said.

To cut down their procurement costs the retailers would want to negotiate bulk orders at bulk prices, Arvind’s Shah said

"We may be able to reduce prices…but that may not necessarily result in increased exports," he added.

Sorry, didn’t mean to wish you well!

Whatever you might say about “customer relationship management”, you can’t fault some companies for trying.

Only, sometimes they just try too hard.

For instance, one bank (that shall remain unnamed) sent an email with birthday wishes WEEKS after the event. You could laugh at the mistake, blame it on a fault with the IT system, whatever.

But what do you do when the very next day they follow it up with an emailed apology that says:

“Dear Customer

We apologize for inadvertently e-mailing a Birthday wish to you. Kindly accept our sincere apology for the inconvenience caused to you.

We look forward to your continued patronage and wish you the best at all times.

With Warm Regards

XYZ Bank”

Sometimes customer relationships should remain managed in an understated and old-fashioned way. Otherwise the “WOW Factor” can turn into the “WHA…?! Factor”.

Speed, Connectivity and Value-Creating Intangibles: the New Rules of the International Apparel Sourcing

In 1998, Stan Davis and Christopher Meyer, two collaborators of the Ernst & Young Centre for Business Innovation, wrote a groundbreaking book under the title: ‘BLUR. The speed of change in the connected economy.’ The authors defined blur as ‘the accelerating pace of change of our post-modern economy’. They wrote: “Because we are so newly caught up in the whirlwind of this transition, we are experiencing it as a blur.” In the meantime, in some business circles, ‘BLUR’ has acquired the status of a cult book. Raving about this book may be exaggerated, but its main message is certainly worth to be pondered on: three forces, also called the ‘trinity’ of the blur -speed, connectivity and intangibles- are setting the new rules of doing business!

What could ‘speed, connectivity and intangibles’ mean for the garment sector and especially for the sourcing activity?

In their book, Davis and Meyer refer to Benetton, which gained fame for engineering a sourcing system so seamless it cut months out of the traditional supply chain. Speed was the driver. And because the company could tie its production to retail activity, it kept the hottest items in stock and was left with little to unload in end-of-season sales. Not mentioned in BLUR, but presently even more successful ‘speed performers’ than Benetton are the champions of ‘lean retailing’, such as Zara/Inditex and Hennes & Mauritz.

However, ‘lean retailing’, a business model that centres on quick response, low inventory costs, rapid-moving stock and transferring responsibility for inventory management to suppliers, is not only a question of speed, it’s as well a question of connectivity. In the broader sense of the word, connectivity is putting everybody and everything in connection in one way or another. (In a more narrow sense, connectivity is the ability to make products that link electronically to information bases, an ability that might be displayed at the next Avantex fair in Frankfurt).

Be connected
A company with a great record in terms of ‘connectivity’ is the Sri-Lanka based company MAS Holdings, whose ambition it is to become world leader in the intimate apparel sector. MAS is engaged in a number of enterprises in several countries, all of which are joint ventures with at least one other party. Over the years the company has devoted itself to a thoughtful supply chain architecture.

In the field of fabric and clothing sourcing, many sourcing operators (manufacturers, retailers, agents) are increasingly eager to be connected globally. Sourcing fairs which continue frustrating their visitors’ desire for global connection (e.g. by excluding the offer of non-European suppliers) are understandably losing interest. Not surprisingly, Texworld in Paris and Intertex in Milan, international sourcing events aimed at textile manufacturers from non-European countries, have grown rapidly. These fairs are complementing respectively Première Vision in Paris and Moda In Tessuto in Milan, thus creating temporarily in both cities the ‘global search machines’ the outsourcing companies want.

Another sourcing event that has grown rapidly by becoming global is Fatex in Paris. A few years ago, this annual clothing manufacture and sourcing trade fair was an exclusively French affair (with French exhibitors only). Then the organisers decided to open up onto the international area. In 2000, 103 foreign exhibitors moved in. In November 2001, foreign presence doubled to 207, or 42% of the total number of exhibitors (not even included the 47 French companies with delocalised units). From 2002 on, Fatex will adopt a seasonal rhythm, organising a spring and an autumn edition, simultaneously with the private label fashion fair Intersélection.

That especially the leading Western clothing companies want to be connected globally doesn’t mean they are playing around on the globe like young kittens. Devangshu Dutta, ex-KSA-consultant and co-founder and director of the supply chains solutions company Creatnet Services Ltd recently pointed out that in the 1990s a scientific sourcing principle began to be applied. It was good to cut down supplier numbers, since this reduced the management effort on the part of the buyer to constantly look for new suppliers and maintain current relationships. Devangshu Dutta thinks that the supply base consolidation has gone a step too far. He’s pleading a new deal. Outsourcing companies should acknowledge that the business of clothing retailing needs a healthy balance between predictability and innovation. Buyers should make a mental division between ‘largely predictable products’ and ‘fashion products’. For ‘largely predictable products’, supply base hopping is almost certainly the wrong strategy to follow. On the other hand, putting a long-term commitment on any significant proportion of the fashion segment to specific suppliers can be counter-productive. The competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. Therefore, buyers should keep their doors open for new suppliers to walk in and display their capability.

Focus on value-creating ‘intangibles’
The Ernst & Young fellows Davis and Meyer admit that ‘intangibles’, the third component of ‘blur’ is not a brand new element of the economy. The intangibles have, in fact, grown quietly as part of the economy, without calling too much attention to themselves. The authors mention four types of intangibles: services, information, the service component of products and emotions. They pretend that every offer has both tangible and intangible economic value. However, the intangible is growing faster. The outsourcing of the clothing manufacturing activities can be seen as an effort to move away from the tangibles in order to concentrate on the intangibles.

In 1997, Sara Lee Corporation (Wonderbra, Champion Sportswear, Hanes underwear,…) announced it was embarking on a massive ‘de-verticalisation’ program. Chairman and CEO John H. Bryan explained the decision this way: “Our de-verticalisation program is designed to enable us to focus our energies and talents on the greatest value-creating activities in our business, which is building and managing leadership brands.” The first de-verticalisation transaction to be completed by Sara Lee was the divestiture of nine yarn and textile operations related to its United States products business to newly-formed National Textiles, LLC.

About Nike, Davis and Meyer wrote: “Nike became the leader in its industry by keeping all kinds of traditional capital off its balance sheet, putting it in the hands of the suppliers instead. Nike’s own value-producing capacity is its design capabilities, marketing acumen, positioning, and distribution channels. Together, these accumulate into intangible strengths that yield much higher returns than would traditional capital investments.”

Also Naomi Klein, the author of ‘No Logo: Taking Aim at the Brand Bullies’ and her likes assert that in the new global economy, brands represent a huge portion of the value of a company and, increasingly, its biggest source of profits. Therefore, they say, companies are eager to switch from producing products to marketing aspirations, images and lifestyles. They are trying to become weightless, shedding physical assets by shifting production from their own factories in the first world to other people’s in the third. However, Naomi Klein’s outraged claim that consumers are being manipulated by big corporations and their brands appears to be a one-sided opinion. Surely, brands have influence on the behaviour of the consumer, but the contrary is also true. Often, consumers dictate to companies and ultimately decide their fate. As an example, Nike has had to revamp its whole supply chain after being accused of running sweatshops. Managing ‘intangibles’ such as brands is becoming increasingly difficult. Annual tables of the world’s top brands, which used to change little from year to year, now show that many brands are falling from grace and that newer, nimbler ones are replacing them. Not only companies, also countries have to carefully administer their ‘intangibles’. Outsourcing clothing retailers and manufacturers tend to favour sourcing from countries that they are already familiar with. However, if they fall out of love with a country, it’s extremely difficult to coax them again into new business. This has been the fate of Yugoslavia under president Milosevic. Though Yugoslavia can presently offer the former European customers of its once flourishing CMT-industry a pretty low salary level, a well educated workforce, rapid land and air connection, an improved human rights situation and a sufficient level of political and economic stability, very few traditional customers did yet return.