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Trent in talks with Inditex for one more brand

Raghavendra Kamath, Business Standard

Mumbai June 28, 2011

Trent, the flagship retail arm of Tatas, is in talks with Spanish retailer Inditex group to bring another fashion brand, Massimo Dutti, to India, according to a person close to the development.

However, it is not known whether both parties would enter a joint venture (JV) or go for a franchise agreement. Trent has a JV with Inditex for Zara, wherein the Spanish company owns 51 per cent. The JV runs five stores in India.

If the talks succeed, Trent may set up a couple of stores in metros in the initial years, said the source on condition of anonymity. Massimo Dutti has 542 stores in 50 countries and offers a variety of collections, from high-end fashion to easy-going casual wear.

None of the companies replied to emails on the subject. In a recent interaction, Trent management did mention expanding the scope of its alliance with the marquee Spanish brand house. “We are exploring the possibility of bringing another retail format of the Inditex group to India,” Trent Vice-Chairman Noel N Tata had told Business Standard recently.

The Inditex group, which clocked revenues of ¤12.53 billion (Rs 80,192 crore) in 2010, is made up of more than 100 companies, operating in textile, design, manufacturing and distribution. The group runs over 5,000 stores in 78 countries.

It is one of the world’s largest fashion retailers, which operates different formats such as Zara, Pull & Bear, Massimo Dutti, Bershka, Oysho, Stradivarius, Oysho, Zara Home and Uterque.

Retail consultants say it is logical to bring in more brands from the same partner.

“It is a logical thing to do. If anyone has a joint venture with a particular group, it makes sense to build a portfolio of brands. If you bring in more brands, you can spread your costs. Then cost per brand will be lower and you can reduce risks associated with it,” said Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy.

According to retail consultants, Zara has been a huge hit in India since its launch in May-June last year. Industry sources say Zara stores in Select City Walk and DLF Promenade in Delhi are clocking revenues of Rs 5-6 crore and Rs 4 crore, respectively, per month.

Trent’s plans to open Benetton’s Sisley stores, with which it has a franchise agreement, have not worked out as planned, as it had difficulties in matching Sisley supply chain to customer demand.

Apparel sale slump after imposition of excise duty on branded garments

Pradeep Pandey & Pramugdha Mamgain, The Economic Times
Mumbai/New Delhi, June 28, 2011

Apparel sales in the country have slumped about 20% since March, forcing many brands to start end-of-season discount sales two weeks earlier than usual.

Companies blamed high apparel prices-increased due to the mandatory 10% excise duty on branded garments introduced in the Union budget and soaring cotton prices-for the fall in demand.

"The present trend indicates that the industry will hardly be able to sustain a growth of 10-15% as margins are under tremendous pressure," said Rahul Mehta, president of Clothing Manufacturers Association of India ( CMAI).

Most manufacturers and retailers have reported a 10-20% increase in their inventory levels, the association said in a report submitted to the textile ministry last week, and sought removal of the tax to cut prices and boost demand.

Or, the excise duty be cut to 1%, said the association, which represents 200 garment makers and 60 retailers including Arvind Brands, Aditya Birla, Madura Garments and Pantaloon Retail.

The organised apparel industry, which booked sales of around 40,000 crore last year, is hit by shrinking profit margins because the rise in cost of production-raw material, labour and borrowing costs-have outweighed increase in prices.

The rise in raw material prices was passed on to consumers in tranches earlier, but now it has become difficult to carry forward, Mehta said.Any more increase in prices will impact demand. Already, many consumers, hit by rising food and fuel prices, have already started buying lower-priced brands than their usual favourites.

Reliance Trends Chief Executive Arun Sirdeshmukh said consumers are downtrading to more comfortable price points within national brands. "As a result, volumes of private brands have grown even though prices have increased for that segment too," he said.

"But the real impact on sales will be known in the festive season as cotton price increase will start reflecting then," Sirdeshmukh added.

Retailers are wary about business growth in the coming months. Some have cut their winter garments bookings. "We may see sluggish demand for high-priced garments in the coming months," Pantaloon Retail CEO Kailash Bhatia said.

Although cotton prices have corrected, the component of raw material cost will be high in the stock that will be sold during autumn and winter. So prices will be up for those products, Bhatia said.

Meanwhile, rising inventory costs have forced many brands to advance summer season-ending clearance discount sales two weeks ahead of the normal July first week schedule.

Brands that have already started season discount sales include Reebok, Adidas and Mango.

Organised retail sector’s inventory cost in the last three months stood at around 2,500 crore, while total sales were around 10,000 crore, industry insiders estimated. Arvind Brands-which manages the country’s largest denim manufacturer Arvind Mills’ brands such as Arrow, Lee and Flying Machine-has reported sluggish sales in June. "We need to wait and watch whether this continues in July and August," said J Suresh, MD and CEO of Arvind Lifestyle Brands and Arvind Retail.

He said the company’s sales have grown in the first quarter ended June.

Devangshu Dutta, chief executive of retail and consumer products consultancy firm Third Eyesight, said demand from lower-income group will fall the most because this section will spend most of its income on food, which is getting costlier with continuing inflation. "It is still positive for the middle class and above salaried consumers as increments have grown along with inflation and confidence remain high," he said.

Succeeding In The Indian Market

In most conversations we have had with international brands in the last 2-3 years, India consistently appears on list of the top-5 markets in which to expand into.

The second most populous country in the world, India has a young population that offers a vibrant population mix that will provide a workforce and consumers in decades to come. There is steady growth in per capita income and a greater availability of credit, as well as a significant change in the consumers’ outlook to life that has propelled consumption levels.

 

The United Nations Conference on Trade and Development ranked India as the second most attractive destination for global foreign direct investments in 2010. The lowest recorded GDP growth rate during the global slowdown was still a decent 6.7 per cent. This growth rate is expected to have returned around 9 per cent in 2011, and is driven by robust performance of the manufacturing sector, as well as government and consumer spending.

The ongoing opening up of the economy over two decades and its robust growth has steadily attracted brands and retailers into the country. Many of them have now been in the country since the early 1990s, and the numbers have grown exponentially during the last 8-10 years. Despite this, the market is far from saturation and many more international brands are actively scouting the market.

Many of them are value brands in their home markets and may, therefore, be more a logical fit into a “developing” market, but there are also plenty of premium and luxury names on the list. For instance while the growth has largely been led by soft goods product brands, as incomes have grown, the presence of more expensive consumer durable brands has also expanded.

While the journey to the Indian market has not been a smooth ride even for the well established and successful international brands in the market, brands that have invested in understanding the psyche of the Indian consumer, adopted flexibility in market approach and displayed persistence, have been paid off handsomely.

Some international brands have exceeded domestic brands in size and reach, while others have had to reconcile to being niche operators. Some have seen profits while others may have their senior management wondering what fit of madness brought them to tackle this market where they can only dream about making money sometime in the future.

Typically, when looking at a new market the very first question anyone would ask is: what is the market potential for brand?

However, you should also be prepared to ask yourself: what need is the brand addressing and what is the value being offered by the brand? How would it be able to effectively and efficiently deliver that value? In many cases, for those entering a non-existent product category a more basic question is: “Is there a need for my product offer?” Just because a brand is huge somewhere else in the world does not automatically make it desirable to the Indian consumer.

While most brands want to target the Indian middle-class millions, their sourcing structure and strategy places them out of the reach of most of the population. Brands that have succeeded in creating a significant presence, maintaining their brand image and having a sustainable operating model have, almost uniformly had a significant amount of local manufacturing. Notable examples from fashion include Bata, Benetton, Levi Strauss, Reebok, among others. In case of certain food brands such as Domino’s and McDonald’s, the companies have collaborated with and developed their vendors locally to bring down costs, and improve serviceability.

Apart from the costs and margins, another important issue is that of the adaptability of the product mix. Brands that are sourcing locally and have a significant product development capability in India are also able to respond to specific needs of the Indian market better, rather than being driven by what is appropriate for European or North American markets. This is an enormous advantage when you are trying to be “locally relevant” to the consumer in an increasingly cluttered marketplace.

Indeed the question is more to do with the brand’s willingness and capability to create a product mix that is most suitable for India through a blend of international and India-specific merchandise. The famous “Aloo-tikki” burger by McDonald’s is a great example of a product specifically developed for the Indian consumers. Not just that, India is probably McDonald’s only market in which its signature dish, the Big Mac, is not sold.

Of course, flexibility in tweaking the product to suit Indian market can become a concern when it amounts to losing control over the brand direction, and mutating away from the core proposition that defines the parent in the international market. Many brands wish to control every aspect of product development head office, but this also severely limits their ability to respond to local market needs and changes. A one-size fits all strategy obviously will limit the number of consumers that the brand can effectively address in a market such as India.

Another key question is: what is the degree of control that a brand wants to exercise on the brand, the product, the supply chain and the retail experience of the consumer? The corporate structure itself may be determined by the internal capabilities and strategies of the international brand in their home market or other overseas markets. A brand that has presence through a wholesale business in the home market may not have internal capability or experience in retail, and would look for an Indian partner who can fill in the gap.

Based on whether they want direct operational control over store operations, international companies can set up fully owned subsidiaries or joint ventures to manage the business in India. Many brands prefer to take a slow and steady approach as they do want to exert a significant amount of control over the business (including companies such as Inditex, the owner of Zara, and other retailers such as Wal-Mart and Tesco), entering only when they are fairly confident of being able to closely manage the business in India right up to the retail store.

During our work we have come across both extremes – companies that want to manage the minute details of the India business out of their own head offices, as well as companies that are so hands-off that they only want to hear from their franchisee or licensee when things are especially good or particularly bad. While a balanced, middle-of-the-road approach would be the logical one in each case, in reality individual styles of the top management have a huge influence on the approach actually taken. Also, the size of the potential market segment – relevant to the brand – has an important role to play in the strategy. If the brand is meaningful only to a small segment of the population, or priced at the top-most end of the market, one company may choose to establish an exploratory distribution relationship, while another might choose to set up an owned presence rather than look for an Indian partner to handle their small business.

While perfect partnerships seldom exist, companies could be a lot more careful we have found them to be, in questioning the criteria and motivations for choosing partners. In some cases, financial strengths, or past industrial glory were qualifying factors for picking franchisees, and the relationships have failed because the business culture was divergent from the Principal’s. In other cases, partners have been picked because they “have real estate strengths”, but no consideration has been paid to whether the partner has the operational skills to manage a fashion brand.

On several occasions, franchise relationships and joint ventures have split because one or both partners find that their expectations are not being fulfilled, or the water looks deeper than it did when they got into the business.

The opportunities in India are many. As the managing director of one international brand commented in a conversation with Third Eyesight, India is a market where a brand can enter and live out an entire lifetime of growth.

However, international brands do need to carefully identify what role they wish to play in the market, and what capability and capacity they need operationally to create the success that can truly root a brand into the rich Indian soil.

Reliance Retail Refreshed

Priyanka Pani, Businessworld

June 11, 2011

Anyone remember Ranger Farms? In 2007, Reliance Industries’ subsidiary Reliance Retail launched its cash-and-carry retail format by that name. A year later, RIL ‘merged’ Ranger Farms into Reliance Fresh, its food and grocery business. Readers may also recall that in 2009, RIL put together a team of top officials it had hired from several wholesale players, including Gwyn Sundhagul, the chief marketing officer and director at Tesco Lotus, Thailand, to spearhead its cash-and-carry plans. But it appears that after a year and a half, that team has been disbanded.

On 3 June, at the 37th annual general meeting of RIL, chairman Mukesh Ambani announced that Reliance Retail would launch its cash-and-carry stores this year. RIL’s past experience in the retail business has not quite had the same success that its other businesses – oil exploration, refining and petrochemicals – have had (see ‘Downturn’).

Reliance Retail's revenue has fallen in FY 2011, and losses have mounted. (Source: Company)

Reliance’s re-entry into the business assumes significance even as global retailers such as Walmart, Tesco, Metro and Carrefour are expanding their presence in India, and amid anticipation that the government is likely to ease foreign direct investment (FDI) norms in retail. Currently, FDI is allowed only in the cash-and-carry business.

But others think the rationale is different. "Cash-and-carry is, as yet, at a nascent stage in India," says Devangshu Dutta, chief executive at Third Eyesight, a retail consulting firm. "It’s a modernisation and organisation of the wholesale business, and an intermediate step needed in modernising the fragmented retail business." Something that Ambani has said he always believed in, which he called ‘farm-to-fork’.

Most cash and carry operations are targeted at hotels, restaurants and cafeterias – the so-called Horeca market, which accounts for close to 60 per cent of sales. "Package sizes of goods are larger (meaning more per sq. ft sales and greater volume growth); margins are also better," says Anand Ramnathan, manager at KPMG, the global consultancy. Compared to industry standards, Reliance Retail’s per sq. ft revenues have been lower, say industry analysts.

Reliance Retail officials say that the Horeca segment will not be the primary focus of their cash-and-carry business. Rather, their target audience – apart from their own chain of Reliance Fresh stores – will be other retailers, or the kirana stores.

"The cash-and-carry business is an integral part of a retail supply chain in a country like India, where distribution and logistics are major problems," says a Reliance Retail spokesman. "Reliance’s entry into the segment will help improve its other retail formats. Typically, retailers attempt to own the supply chain to give them control and better prices that benefits the end consumer."

The majority of Reliance Retail’s more than 1,000 retail outlets are located in Tier 2 cities, and the company is working to spruce up logistics and transport to better serve those cities. But the officials gave no details on the scale of investment.

At the AGM, Ambani set up an ambitious target of Rs 10,000 crore in revenues from the retail business in three years (of which cash-and-carry is part), or the end of FY14. On current revenues, that translates into a compound annual growth rate of just over 25 per cent. Making that kind of cash will carry Reliance Retail a long way.

(This story was published in the Businessworld Issue dated 20 June 2011.)

Levi Strauss Denizen: A New Avatar

Pallavi Srivastava
New Delhi, June 2011

The jeanswear brand, Levi’s had been losing its premium image with the launch of Signature, which was launched in 2006. Making ammendments, Signature has morphed into Denizen. Is it a mere name change or are there any cosmetic changes as well? And more so, will the new branding pull the brand back into the premium league?

While Denizen carries the price tag of Signature (between Rs. 799 and Rs. 1,499), Denizen is being positioned as a youth brand targeting the 18-28 male and female. Signature, meanwhile, was positioned as a mass brand.

Also, Denizen claims to be giving a more customised offering to the Asian consumers. Sanjay Purohit, Managing Director, Levi Strauss India, says, "Denizen is the next evolution of Signature, be it in terms of product, retail or marketing. It aims to deliver to growing consumer aspirations, which are increasingly reflecting global trends and also strengthen the position of Levi’s."

Can the phase out be smooth? Devangshu Dutta, Chief Executive, Third Eyesight is optimistic. "The phasing out of Signature may cause short-term pain operationally, but Levi’s has phased out other brands earlier – even Dockers, which was a much more iconic brand."

The challenge for Denizen, however, will come from the growing number of international brands making headway into the mid-segment in India. K J Singh, CEO & Co-founder, Evolve Brands, says, "The challenges for Denizen are huge especially when all the foremost – large and local brands are vying for the same target audience and it’s very difficult to identify any specific differentiation – branding, awareness and information on the customisation."

However, Tarang Gautam Saxena, Senior Consultant, Third Eyesight expects Denizen "to strengthen Levi’s position in the affordable segment."

In the global scheme, Denizen is a brand focused at emerging markets like India, China and Brazil. In fact, it’s first time in the history of Levi’s that a brand has not been launched in the US.

Ajay Naqvi, EVP and Head of Mudra North & East, stresses that Denizen would need a sharper positioning than just the youth or the designs. "Ultimately, the success or otherwise of Denizen will depend not only on cuts, style and the pricing; but what the brand stands for in the consumers’ mind," he says.

Purnendu Kumar, Vice President- Retail & Consumer Goods, Technopak Advisors agrees. "The key for Denizen to be a success will depend on the brand’s ability to keep the product fresh and happening as this set of consumers is much more trendier and fashion forward," he says. Otherwise, Denizen may start on the same path as Signature.

And to strengthen its association with the youth, Denizen has roped in actor Imran Khan, as its brand ambassador. The company will be relying heavily on television advertising to get a fair share of consumers’ mind.

Apart from that in-store advertising, digital and outdoor too are key elements of Denizen’s marketing plans.

(This article appeared in the June 2011 edition of Pitch magazine.)

RIL looks to re-enter cash-&-carry

Raghavendra Kamath & Nivedita Mookerji, Business Standard

Mumbai, June 4, 2011

Three years after its experimentation with cash-and-carry retail fizzled out, Reliance Industries Ltd (RIL) plans a strong comeback. At its annual general meeting today, Chairman Mukesh Ambani said Reliance Retail would soon relaunch this format, so far dominated by companies such as US major Walmart in joint venture with Bharti Enterprises, German giant Metro and French heavyweight Carrefour.

With its re-entry into the cash-and-carry segment, Reliance Retail aims to bargain harder with producers and vendors and, in turn, improve margins of its chains, pointed out a company executive.

According to RIL’s annual report for the financial year 2010-11, the retail units of the company such as Reliance Fresh, Reliance Hypermart, Reliance Digital Retail, among others, posted losses in excess of Rs 350 crore. RIL did not invest new funds in the retail arms during the last financial year.

“It is a volume play. When a cash-and-carry venture buys 5,000 pieces from a manufacturer, 1,000 can go to the Reliance Fresh, which was earlier ordering the same from the same manufacturer at higher costs. Now it can leverage on higher volumes and get better margins,” the RIL executive said. He added that “having B2C (business to consumer) and B2B (business to business) makes sense”. “The more we expand the more we will gain from cash and carry. We can also develop and sell brands in those stores,” he said.

International majors which operate cash-and-carry outlets in India, did not comment on the development. Walmart was not available for comment, as its senior officials are travelling for a shareholders’ meeting in the US.

When contacted, a Metro Cash & Carry spokesperson said “We do not comment on the activities/strategies of other companies.”

Carrefour did not comment either.

As far as competition goes, Bharti Walmart, which had opened the first cash-and-carry store in India in 2009, operates six outlets and plans to open 20 more in two years. Metro Cash & Carry, which opened its first outlet in 2003, has six stores and is looking at a total of 50 in another five years. Carrefour began its cash-and-carry operation in India late-2010, and has not unraveled its expansion plans yet.

Gwyn Sundhagul, former chief marketing officer and director of Tesco Lotus, is CEO of value formats such as Reliance Super and Reliance Hyper. Sundhagul is from Thailand.

An analyst said RIL’s re-entry into the cash-and-carry format was a positive for the industry.

“Organised retail is the need of the hour, and organised players are required in the supply chain side,” he pointed out.

He, however, argued that cash-and-carry business was extremely cutting edge in terms of margins. In terms of timing, he said RIL was perhaps ready to start cash-and-carry right now as it is operating limited formats, as against too many earlier.

Naimish Dave, director at Strategy Consultants, a global consulting firm, said, “My feeling is that it is one more cash-and-carry player in the market. Cash-and-carry is a level playing field. Being an Indian player does not bring any major advantage.” If RIL has deep pockets, most others have that too, he said.

Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy, said, “All the cash-and-carry players such as Walmart and Metro have decided to expand in a particular way. RIL’s (re-)entry into this segment will not change the cash-and-carry space.”

Aditya Birla Retail CEO Thomas Varghese said, “Cash-and-carry is not a profitable business. It’s a low margin and high sales business.”

(This article appeared in Business Standard on 4 June 2011.)