Shailaja Sharma, Daily News & Analysis
MUMBAI, 29 September 2011
High prices and economic uncertainty appear to be turning consumers stingy, if not altogether unwilling to spend.
Going by sector analysts and retail companies, spending on discretionary items is definitely shrinking and even items of daily consumption aren’t quite flying off the shelves as they used to. In fact, consumers are increasingly hunting for more value for the price they pay at retail stores.
All this gives reason to believe consumer spending is set to decline in the second half of this calendar year.
“Commodity-led categories like soaps, detergents and tea will see downtrading to cheaper brands. In some other categories, the frequency of purchase will come down or consumers will move towards smaller packs,” said Gautam Duggad, an analyst at Prabhudas Lilladher.
Saugata Gupta, chief executive officer, consumer products, Marico Ltd concurred. “Lack of feel-good factor will result in a cut in discretionary spending. In the past couple of months, inflation pressure has led to a certain softening of discretionary spending.”
Automotive and consumer durable sales have already taken a beating this year, while many organised retail formats are not performing well.
“The moderation in footfalls at retail stores is not as pronounced as during the slowdown of 2008-09, but the kind of upswing in sales that retailers had expected will not be met with as consumers are very careful about how they spend their money,” said Devangshu Dutta, CEO of retail consulting firm Third Eyesight.
Going by sector analysts, though most FMCG categories are still showing healthy volumes, a possible slowdown in consumption cannot be ruled out.
An official at a leading hypermarket chain, who did not wish to be named, said the sale of discretionary and expensive items across foods and personal care has remained sluggish over the last few months.
At the same time, he said, the level of deals and discounting by consumer companies in modern trade outlets is increasing so consumers prefer to buy items in bulk.
“While the middle-class, urban consumers are willing to buy more premium products, they are also restricting their purchases of late and this worried sentiment is capable of affecting consumption. But the trend of discounting and deals is going to continue to grow as modern trade grows.”
Though the trend is not as prominent in food and grocery at hypermarkets, it might just be the beginning, said the official.
Marico’s Gupta feels it will be six months before consumer spending will improve. “Consumer companies have been careful in taking price increases, and there will be less willingness to pass on prices further,” he said.
Consumer goods giant Hindustan Unilever Ltd recently cut prices of its detergent Surf Excel Blue on certain large stock-keeping units by 21%, indicating competitive action to gain market share and to increase off-take at retail shelves. Detergents is a highly penetrated category and analysts said this kind of pricing action is not accruing from lower raw material costs, but purely to avert consumers from downtrading to cheaper brands. Similarly, in categories that have low-penetration in consumer households that are primarily sold in modern trade stores like processed foods, for example, some companies are offering a ‘buy one get one free’ on their products.
Interestingly, the flourishing discount-led e-commerce business in the country has seen a growth of over 100% in the last one year, where most of these online retailers are themselves a year or two old in the business. This means that a huge number of purchases have been converted from offline to online medium.
In such a scenario, consumers are most likely to compare prices across general trade and modern retail outlets to evaluate where they get more (value) for less (money). They are also likely to compare prices on online retailing portals before making a purchase in discretionary categories, said analysts.
At a recent industry event last week, retailers and marketers were seen expressing concern over Indian consumers’ aspirations and expectations changing dramatically. According to them, while Indian consumers were willing to trade-up to expensive and luxurious products, they remain too value-conscious.
“The Indian consumers want value in anything they buy or experience, and they are not ashamed in repeatedly attempting to get discounts,” Rajiv Mehta, managing director, Puma Sports India said at the event.
Rama Bijapurkar, a leading market strategist and expert in consumer behaviour, couldn’t agree more. “Over the years, the Indian consumer has actually seen quality improving and prices coming down, of everything from air-conditioners to air-travel. As a result of that, you have an entire generation of monster-consumers who are shaped by what time and place they grew up in.”
The ABCD of Indian consumers has changed, said Rahul Singh, founder and managing director of indoor golf lounge Golfworx. Today, it’s “astrology, Bollywood, cricket and discount,” he said.
“The same consumer I’m trying to trade up will try to trade me down (by seeking discounts).”
When the global consumer confidence hit a six-quarter low in the second quarter of this calendar, a Nielsen online consumer confidence survey found that Indian consumers had suddenly turned jittery about spending on items of daily consumption and big-ticket purchases alike. Indian consumer confidence, as per the survey, slipped 5 points at 126 on the index despite Indians being most optimistic in their confidence about job prospects and financial stability.
The trend is seen persisting as long as inflation, fuel price hikes and an uncertain global economy remain a cause for concern.
The Nielsen consumer confidence estimates for the current quarter, to be released in October, will ascertain if the consumer sentiment has improved or slipped further. Results of consumer companies for this quarter, particularly in the FMCG space, will also be watched.
Businessworld,24 September 2011
Even as participants at the Indian Retail Forum in Mumbai, the industry’s annual jamboree, are being cautiously optimistic about the implications of expanded foreign direct investment (FDI) in retail, preliminary data from the first quarter of 2011-12 (FY12) reinforce the perception of a slowdown.
Compared to the fourth quarter of FY11, growth has been slower in the first quarter of FY12. Shoppers Stop had negative EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 26.3 per cent, while Trent declined 69 per cent; Pantaloon grew by just 6.5 per cent.
“Marking down of products will continue this year and retailers have to plan their purchases to get stable revenues,” says Devangshu Dutta, CEO of Third Eyesight.
Analysts say industry revenues will not grow as much as they did last year, though indicators for the second quarter seem to look better, thanks to summer and end-of-season discount sales. “We have had a good quarter so far,” says Govind Shrikhande, CEO of Shoppers Stop (SSL) in Mumbai.
But here’s the thing: slow growth has not meant no expansion. Store openings continue at a reasonable clip even if merchandise sales don’t. SSL has plans to open eight more stores by 2011 end; Reliance Trends will open five more stores in Bangalore alone this year, and Reliance Footprint is going to add 47 stores by next year. “We are growing by 100 per cent compared to last year,” says Sankar Gopalakrishnan, CEO, Reliance Footprint.
And let’s not forget Kishore Biyani’s Pantaloon Retail, which has over 15 million sq ft of space will add 9 million sq.ft over a couple of years. Its stores will number close to 1,500, up from the current 1,000 stores. Lifestyle will add four more this year to its current 34.
Knight Frank Research forecasts retail space in Delhi to grow 10 times from the existing 1.2 million sq. ft to 11.25 million sq. ft by 2012. Which is probably why the folks at the forum seemed happy to welcome the idea of allowing more FDI in retail.
The entrepreneurial-minded continue to take the risks of entry too. Abhishek Tibrewal, a first-time retail entrepreneur, and founder and chief marketing officer of Crusoe, just opened his first men’s inner wear store in Coimbatore’s Brookfield Mall and is happy enough to think of expanding to 100 stores in a couple of years; he has set aside Rs 15 crore for this. He has spent Rs 40 lakh for his flagship store and is already making Rs 3 lakh a month, which will allow him to break even in a couple of years. “It was nice to see women come in and shop for sons and husbands,” he says. “People are accepting branded stores.”
But will private labels in apparel be quite the success hoped for? A few, maybe. Sources say that Lifestyle’s Max store in Select Citywalk Delhi has revenues of Rs 1 crore (Max is the private label apparel store of Lifestyle).
In most others, there have been markdowns. “When you see a markdown in private labels then the brands are loss making,” says a retail analyst. Apparel retailers have been discounting and will rely on October’s discount sales for a rebound. Perhaps Diwali will light things up.
(This story was published in Businessworld Issue Dated 3 October, 2011)
Businessworld, 10 September 2011
We serve biryani and parathas at our highway outlets,” says Venu Madhva, chief operating officer at Café Coffee Day (CCD). At Barista, you can knock down a few glasses of beer or sip wines, while a mug of coffee is to clear your head. “This is for variety,” says R. Shivashankar, director of South-Asia region at Lavazza, the company that bought Barista from the Tatas. Costa Coffee will have more affordable food. “We want to increase our footprint in ‘non-Costa’ locations,” says Costa’s CEO, Santosh Unni. Existing coffee chains have woken up and smelt the coffee.
More Than Just Coffee
According to Euromonitor International’s report released in December 2010 on consumer lifestyle in India, urban Indians may hop into a coffee shop once a week to once a day, but “consumers still consider a visit to a café or a bar a special outing; they want to consume more than a drink”. Nor is coffee ‘on-the-go’; one has to sit down and savour it.
Cafés in India are being shaken and stirred as new players plan entrance strategies. Ajay Kaul, CEO of Jubilant Foodworks, will be ready to serve Dunkin’ Donuts by mid-2012. “The core team is almost ready. We are recruiting strategic (team) heads. Sourcing of beans will be done locally. We have identified partners for it,” says Kaul. But he knows that it will be no walkover. In the US, Dunkin’ Donuts has a beverage-to-food mix of 70:30; when it steps outside, it is typically 60:40. But says Kaul: “The initial focus will be on food. Once the coffee category explodes (in India), we will focus on coffee.”
Points out Deepak Laxmi, director of research at MAPE Securities: “Dunkin’ Donuts is not a highly known brand in India like Starbucks. This is a price-sensitive market. But they do have a master franchisee that understands the local consumer very well.” Laxmi is referring to Jubilant’s success with Domino’s Pizza.
Then, there is Starbucks and its range of gourmet coffee. It has teamed up with Tata Coffee for beans; more will be spilled if it decides to brew in retail with the Tatas.
But behind all this hectic activity lies the fact that coffee consumption in India is low — just 90 grams per capita versus 1-2 kg per capita globally. The retail café size is $185 million, and split between 1,500-odd cafés. “We are in grams and they are in kilograms,” quips Madhva, who has his finger on the pulse, since 78 per cent of the cafés in India are CCD outlets.
Consumption, however, has been increasing exponentially. The Coffee Board’s figures show coffee consumption has almost doubled to 108,000 tonnes from 55,000 tonnes in 2000. Sooner or later, absolute volumes will make up for the lower per capita spend on coffee.
According to a report by management consultants Technopak, India can absorb an additional 2,300-2,700 cafés over the next five years, with 70 per cent of these being in the top 24 cities. “Over the past few years, 3-4 chains have come in. But when global giants come in, it creates excitement,” says Madhva. “Starbucks will help the market grow faster. It will affect Gloria Jeans, Barista and Costa Coffee, which target the top 20 per cent of urban consumers. It (the fight) will come down to who gets what space,” notes MAPE Securities’ Laxmi. Aware of this, Indian café chains are marking their territories.
A Coffee Break
CCD, for instance, plans to increase the number of its highway outlets from the current 5 per cent. “There are hundreds of highways, and each can easily take six CCDs. The café culture is beyond just serving coffee and CCD has a flexible format,” says Jacob Kurien, partner at New Silk Route Partners, a private equity firm that invested $75 million in CCD three years ago.
With 75 cafés, Costa Coffee — master franchised in India by Devyani International RJ Corp — plans to add 60-100 outlets every year over the next four years. “I would just focus on airports; they are the most profitable. One airport outlet equals the business of four high-street outlets,” explains Unni. Costa Coffee has six airport cafés (three each in New Delhi’s T3 and T1 terminals). “But there aren’t too many airports coming up in India,” he admits, which means Costa has to look beyond airports. The company’s “non-Costa” strategy, too, will have to take into account that folks who walk in expect more than just coffee. “We maintain 4-5 pricing structures and it depends on the catchment areas,” says Unni.
A crossover entrant is Hindustan Unilever’s Bru. About four months ago, HUL extended its Bru brand to Bru World Café, as a pilot project. “We have opened six cafés in Mumbai. The plan is to open 10 this year in different formats. Out-of-home consumption is an important driver for coffee as a category,” says Arun Srinivas, general manager of beverages at HUL.
A part of Dunkin’ Donuts’ strategy is to cater to the middle- to upper-middle class. “We will be in high foot-fall areas. A part of some outlets will be takeaway,” says Kaul, who plans to set up 100-120 stores in the next five years.
The biggest entrant is likely to be Starbucks. In May, it announced it will acquire full ownership of its retail operations in some parts of China as a part of its plan to make China its biggest market after the US. Of the 800 new stores it plans to open this fiscal, 600 will be outside the US (a quarter of these will be in China).
Starbucks’ India retail plans will be clear after its discussion with Tata Coffee. But a Starbucks-Tata retail coffee foray would be formidable — it will have access to Indian Hotel’s Taj, Vivanta, and Gateway properties.
So where do recent entrants such as Gloria Jeans and Coffee Bean and Tea Leaf stand? Coffee Bean and Tea Leaf operates in large retail formats — typically 2,000 sq. ft — in malls, high-street centres and airports. “We are looking at corporate parks that can accommodate 500-10,000 people. Four such cafés are in the pipeline in Mumbai. There are similar plans for Delhi,” says a representative.
Out Of A Box
Coffee is consumed through three channels in the out-of-home (OOH) category — cafés, instant coffee mix or pre-mixed, and freshly brewed. “The café category has exploded. But the OOH hot coffee consumption is dominated by instant coffee vending machines,” says Shourav Mukherjee, director of commercial beverages at Georgia, which entered India in 2001 backed by Coke. It currently operates 3,000 vending machines, mostly through institutional businesses with McDonald’s, Subway and PVR. “We do not discount the possibility of entering the retail space in the future. This will primarily be beverage-focused retail spaces, and not full fledged cafés but kiosks,” he says.
But it is Lavazza that leads in vending machines. With a turnover of €1.1 billion in 2010, and a global market share of 48 per cent, Lavazza wants to be big in India too. It acquired Barista, and Fresh and Honest vending machine business in 2007. It also services top hotels, large corporates and even individuals (Mukesh Ambani and Vijay Mallya are its patrons). At present, 5,000 Lavazza vending machines dish out 300,000 cups of coffee daily. The company also has high-end personal use coffee machines — Lavazza Blue, launched in 2008, has sold 1,630 units.
For retail café leader CCD, 10 per cent of the business is from un-manned vending machines and cafés at corporate parks. “The institutional segment will be big as large corporate parks that have 5,000-25,000 people proliferate. The percentage profit margin is lesser in the vending business, but volumes are so huge that other overheads are lower,” explains CCD’s Venu.
Says Devangshu Dutta, CEO of consumer products consulting firm Third Eyesight: “With growth of cafés in the past 12 years, the scenario has changed. Coffee is now seen as a premium product with emphasis on how it is served and brewed. But the market is far from saturated.”
(This story was published in Businessworld Issue Dated 19-09-2011)
Sapna Agarwal, MINT (A Wall Street Journal Partner
9 September 2011, Mumbai
Tommy Hilfiger Group has bought out the Murjani Group’s 50% stake in the latter’s joint venture (JV) with clothes maker Arvind Ltd for an undisclosed sum, as part of a global strategy of consolidating its operations and having a more direct role in its various markets.
The US company has also bought the Murjani Group’s licence for Tommy Hilfiger trademarks in India, ending the Mumbai firm’s six-year association with the brand.
Mohan Murjani, chairman of the Murjani Group, launched Tommy Hilfiger in India in 2004, sub-licensing its clothes, footwear and handbags to the JV Arvind Murjani Brands Pvt. Ltd. It sub-licensed other products of the brand to other local retailers. The reconfigured JV, yet to be named, will now hold all Tommy Hilfiger sub-licenses for accessories and apparel.
“The transaction allows us to integrate India into our global platform for design and sourcing, ensuring consistency of the brand, while providing dedicated regional expertise where needed,” Fred Gehring, chief executive of Tommy Hilfiger Group, said in a statement on Thursday. The move is in line with actions the group, a subsidiary of PVH Corp. that owns the Calvin Klein, Van Heusen and Arrow brands, has implemented in other markets.
“We believe this will pave (the) way for a phase of accelerated growth for a brand that is really loved by Indian consumers,” said Jayesh Shah, chief financial officer at Arvind. “As far as specific plans of the JV are concerned, like management, it will be discussed over the next one week.”
Tommy Hilfiger products are distributed in India through a network of more than 80 outlets across 30 cities. The brand did an estimated retail business of Rs.250 crore, of which 50% was contributed from accessories, as of March, a Murjani Group executive said on condition of anonymity.
In 2009, the Murjani Group exited the luxury market when it parted ways with Gucci. It still holds licences for Calvin Klein and French Connection, which are premium brands, a rung lower than luxury brands. The company did not reply to an email sent on Thursday morning.
The new alignment with Tommy Hilfiger is Arvind’s second JV with a foreign company. It has a 40:60 JV with VF Corp., which owns the Wrangler and Lee brands.
It’s going to offer a far better situation for Arvind because now it will deal directly with the principal (Tommy Hilfiger); and with the kind of bandwidth the former (Arvind) enjoys, we may see more investment into the brand now for growth and expansion,said Harminder Sahni, managing director, Wazir Advisors, a management consultancy.
Brands such as Nike, United Colors of Benetton and Wrangler and Lee entered India through licensees in the late 1980s. Nike and Benetton are now subsidiaries of their respective parent companies, whereas VF Corp. is the majority partner in the JV with Arvind.
“Tommy Hilfiger could also follow a similar path in India,” said Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy.
Neelesh Hundekari, principal and head of the luxury and lifestyle practice at A.T. Kearney, said a move from being a licensee to a JV partner requiring large investments signals the companys commitment to the market and its confidence in it.
The premium ready-to-wear market in India was estimated at Rs.33,000 crore as of March 2010 and was growing at 22% a year, he added. Arvind’s stock on BSE ended up 2.96% at Rs.85.20 on Thursday, while the benchmark Sensex rose 0.59% to 17,165.
Now that direct investment into
India is on the verge of opening up, the country could hold
increased opportunities for clothing companies who want to source
and sell fashion there. Rebecca Danton reports from a recent
conference on ‘Sourcing And Selling Fashion In India,’
where speakers discussed the advantages and disadvantages of
setting up and trading within India.
In terms of its fashion and clothing opportunities, India is generally seen as a poor relation to China.
While the great red dragon of the Republic of China embraced the end of global clothing and textile quotas and furthered its domination of the world market, the Bengal tiger of India appeared to stumble and, as a consequence, lost ground in the race between these two developing economies.
Foreign investors certainly have India in their sights. At a recent conference on ‘Sourcing And Selling Fashion In India,’ organised by UK fashion business magazine Drapers, Devangshu Dutta, chief executive of advisory and business services firm Third Eyesight, noted that software and services companies have been already talking about what their ‘India strategy’ is.
Meanwhile, US retail giant Wal-Mart has admitted that it missed the China boat, but said it would not miss India. And this is seeping into the consciousness of some fashion companies.
But despite these predictions of growth, development has not occurred at a fast enough pace for many foreign players, from retailers to sourcers.
Indeed, India continues to be dogged by its reputation for its poor infrastructure, unreliability and outdated factories.
As Dutta pointed out, India not only lacks trading-bloc
partnerships and has a relatively lengthy transit lead-time,
but laws applying to the industry are erratic, energy is unreliable,
and a lack of government support and high cost issues continue
to put off potential investors.
Recruitment can also pose a problem. There is a general lack of expertise in the country’s fashion industry and a shortage of skilled workers. It is a problem retailers are working towards combating with schemes such as mini universities.
Risk and uncertainty
On top of all this, foreign companies may be put off by what, to them, may seem an alien work ethic and way of conducting business.
Andrew Levermore, chief operating officer of retail venture Hypercity Retail, cites a low tolerance of risk and uncertainty, a lack of direct communication, and avoidance of conflict as typically Indian business traits.
And yet, India is a market that many are beginning to view with genuine enthusiasm. Dutta cites the supply chain manager of an international brand who says: “We’ve been blind-sided and ignored India as a supply base, and need to take quick corrective action now.”
Another to be converted is a buying director of a multi-billion dollar European fashion retailer – also cited by Dutta – who remarks: “We can see India going from 2% of our sourcing to 10% in the next three years.”
The jewel in India’s crown is its sizeable and rapidly expanding consumer class. The country’s economy is one of the fastest growing globally and is expected to double by 2010.
“With growing urbanisation, we see a sustained growth in the consumer market,” Dutta says. “Credit and debit spending is rising by 30%-40% a year.”
As for Indian consumers, there is a definite predilection for better-end clothing, Levermore says. “We’re not talking about a Wal-Mart level. People are value conscious but also quality aware. It’s not purely about value.”
With increasing consolidation of the industry and up to 300 shopping centres planned for the next few years, Dutta says that there is “huge growth” for modern retail in India, which is perhaps demonstrated by the levels of foreign investment heading in that direction recently.
But, it is not just India’s economic outlook that is improving for those looking to do business in this market; the country’s legal and structural lay of the land has shifted positively too.
As of now, international companies can only sell their branded goods through franchise stores, or through wholesale operations. But this may change if the Indian cabinet accepts recent recommendations by a Group of Ministers that foreign investment of up to 51% should be allowed in operations that produce and sell a single brand.
Under this proposal, companies such as Tommy Hilfiger, Louis Vuitton and Mango could take control of their own stores in India – a significant step forward for global companies looking to strengthen their standing in the market.
In addition, existing factories are working to improve themselves. Technological upgrades and a newly found focus on ethical issues both go in India’s favour in the fight against its more developed competitors. Dutta says that more engineered planning, more compliance audits and expansion plans will all combine to help India’s factories come up to par with those in Eastern Europe, for example.
India is already the number two or three supplier to Europe in a handful of categories such as skirts, men’s nightwear and woven blouses. In addition, the production of basics is improving, helping shake off the country’s image of only being worthwhile for more detailed garments.
On top of this, India is strategically located, and could be viewed as the south Asian market’s hub – not just as a single country. The likes of Bangladesh, Sri Lanka, Pakistan and Dubai all offer prospects for apparel companies.
Mike Flanagan and Liz Leffman, co-founders of sourcing intelligence company Clothesource, agree and say companies should consider the whole of the south east Asian subcontinent as a sourcing destination.
Although India and its surrounding countries may not be the easiest place to do business, it should be considered a real alternative.
“There are phenomenal prospects if the product is right,” says Dutta, who concludes that companies should look at India in its own right instead of making comparisons with China.
(The Drapers Conference on “Sourcing and Selling
Fashion in India” was held in London on January 31, 2006.
This article was published in www.just-style.com,
February 24, 2006.)