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Lifestyle retail chains post weak same-store sales in January-March quarter

Sarah Jacob & Sagar Malviya, The Economic Times

Bangalore/New Delhi, 30 May 2012

Sluggish demand has led lifestyle retail chains to post weak same-store sales in January-March 2012 and lower growth estimates for this fiscal.

Driven by new stores, most retailers clocked 20-30% sales growth in January-March. But same-store sales, or sales from stores that were operational last year, grew in single digits. Samestore sales are an important indicator of consumer demand and the health of the retail industry. Retailers don’t expect things to improve this fiscal as demand is subdued. The downturn began after Diwali, and the increase in the prices of essential commodities, lower salary increments, adverse macro-economic conditions and government inaction dented consumer confidence.

"We would have targeted double-digit like-to-like growth if the year looked better," said Govind Shrikhande, MD of department store Shoppers Stop. Shoppers Stop’s revenues grew 27% to Rs 621.35 crore in the January-March quarter, but samestore sales grew 10%. Volume growth contributed just 1% to the increase in same-store sales while price hikes made up the rest. "Prices have risen and imports are getting costlier. These developments start impacting consumer demand after a point," said Shrikhande.

Rival Lifestyle International, which operates stores under the Lifestyle and Max brands, said it clocked sales of over Rs 2,500 crore last fiscal and has targeted revenues of Rs 4,500 crore by 2013-14.

Demand Subdued in April-May

"The second half of last year was not good and it’s apparent in our bottom line," said Lifestyle International MD Kabir Lumba. He refused to divulge figures as the company is unlisted. "Given the current market conditions, we have lowered our growth estimates by around 10%," Lumba added.

Pantaloon Retail posted an increase of 7.6% in sales for the three-month period ended March 2012, but same-store sales rose just 3.6% – the lowest in 13 quarters. Retailers say demand is subdued in the first two months of the current fiscal as well. "The overall sentiment has been poor and it is reflecting even in May," said J Suresh, CEO of Arvind Lifestyle Brands and Retail. The 10% excise duty on branded garments last fiscal has impacted Arvind’s value format Megamart, which posted a growth of 11% in same-store sales during the quarter against an 18% increase in the year-ago period. However, its lifestyle brands business – which includes Arrow, US Polo and Flying Machine brands – grew 27% in the fourth quarter in terms of same-store sales.

Same-store sales have slowed down despite retail chains extending end-of-season discounts and advancing them by up to three weeks to liquidate inventory. "This helped them post higher sales on a sequential basis. However, margins of most retailers took a hit," said Sangeeta Tripathi, a senior analyst with Sharekhan. Margins were further squeezed by higher interest rates, fuel and real estate costs.

The slowdown in like-to-like sales has forced retailers to explore new strategies to drive sales. Shoppers Stop, for instance, is focusing on store events as well as new loyalty card schemes and has recently lowered prices of private label brands by 5%.

Experts say stores can boost sales by improving shelf displays and promoting private labels. "Significant work can be done to make the product on the shelf more compelling for the buyer, both in terms of merchandising and placement. Retailers can also differentiate by looking at their private labels not just as additional margins but as brands that fill a gap," said Devangshu Dutta, chief executive of retail consultancy Third Eyesight.

Pantaloons Sell Out: Season’s First Sale

Puneesh Garg, Outlook Money

30 May 2012

Following the emergence of modern trade norms in the 1990s, India’s $550 billion to $600 billion retail sector, has been growing at 15 per cent annually. However, in the organised retail sector, which makes up for 8 per cent of overall retail space, the last 6-9 months witnessed a decline in growth.

The recent decision by market leader Pantaloon Retail India (PRIL) to sell its controlling stake in the “Pantaloons store” business to a bigger and deep-pocketed Aditya Birla group—which also runs its own fashion stores like Madura Garments—to reduce its ballooning debt of around Rs. 8,000 crore is only a reflection of the overall retail space. And, this may just be the beginning.

Says Devangshu Dutta, CEO, Third Eyesight, a retail consultancy: "As the margins are thin and operating costs continue to rise, I would expect more retailers looking to sell completely or partly to other business groups and, as and when they are allowed, also to foreign investors.”

Like Dutta, many experts have already started talking about mergers & acquisitions in the post foreign direct investment in retail scenario. A Pricewaterhouse-Coopers’ report, on winning in India’s retail sector, says consolidation is expected as the market dynamics take over to create a more competitive marketplace following the entry of multinational companies. However, it seems that consolidation has started even before foreign companies were allowed to make inroads.

Says Dutta: “The Indian consumer market is in a curious state of mixed development. It is far from being “mature”. The bulk of the market is still addressed by traditional and fragmented retail operations. Yet, there are M&A activities among larger groups, something that is usually seen in highly consolidated and developed markets.”

Ankur Bisen, associate vice-president, Technopak Advisors, a consulting firm, adds: “Many retailers have realised that the strategies of the West can’t be adopted in the Indian context. As organised retail grows there can be more surprising outcomes.” But, what does the Pantaloon-Aditya Birla Group deal mean for listed players? Let’s explore.

PANTALOON INDIA

Soon to be renamed as Future Retail India, PRIL has come a long way since it launched its fi rst “Pantaloons format” in Kolkata in 1997. Over the years, it had become the leading fashion retail format in India with 65 stores, a combined retail space of around 2 million sqft and a turnover of around Rs. 1,700 crore, Pantaloons is set to hand this fl agship format division to India’s prominent conglomerate, Aditya Birla Nuvo (ABNL). On the face of it, the deal looks positive as the Biyani’s will be able to reduce around Rs. 1,600 crore debt by demerging 2 million sqft of the total 16.3 million retail space. Says Ankur: “Though PRIL started as the fashion retailer, over the years it added another format and now Pantaloons is just a small part of it”.

However, Pantaloons was the most profi table division in terms of margins. While retaining part ownership and management of Pantaloons, the Biyanis will focus on the food & grocery and value-apparel formats — Fashion at Big Bazaar and Brand Factory. Incidentally, ABNL’s More competes with Biyani’s Big Bazaar. PRIL also wants to sell stakes in Future Capital Holdings and insurance business to raise funds and pare down its debt further. While retail consultants feel that by reducing debt, PRIL’s focus on the FMCG space can take it to higher trajectories in the medium term.

Speaking on the condition of anonymity, an analyst tracking the company, says: “Though the company has managed to reduce around Rs. 1,600 crore of debt, and may further pare it down by selling stakes in its non-core businesses, it will be left with low-margin business. Besides, it is facing slowdown on operational fronts too, the same store sales growth has not been encouraging for the last 6-9 months”. Therefore, the stock may be de-rated once the deal goes through.

ADITYA BIRLA NUVO

Biyanis selling out to Birlas may not be cheered by Pantaloons’ investors, but participants say, it will give ABNL the much-needed opportunity to expand its own brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England from Madura Fashion & Lifestyle. This will also catapult ABNL to the pole position in the branded fashion space. With a pan-India presence, ABNL is a $4 billion conglomerate with interests across sectors—from financial services and telecom to fashion and lifestyle. Since fashion and lifestyle forms 12 per cent of the group (before the Pantaloons buy), valuing the company based on its retail presence is a difficult task. So, investing in its retail business is ill advised for now.

OTHER RETAIL STOCKS

With around 3.1 million sqft of retail space, Shoppers Stop is yet another pioneer in the organised retail space in India. It is predominantly present in tier 1 and tier 2 cities. It has presence in value retailing through the Hypercity chain of stores. The company’s consolidated revenues and profits were Rs. 2,505 crore and Rs. 43 crore, respectively, in FY12. At this price, the stock trades at 1.12 times its sales.

Similarly, Trent, a Tata enterprise, is also a fashion-cum-food and merchandise retailer. The company has 61 Westside stores. The latest annual results said the company earned a meagre Rs. 7 crore on sales of Rs. 1,700 crore, resulting in a price-to-sales ratio of 1.40. This is pretty high compared to PRIL and US major Walmart which trades at 0.28 times and 0.45 times, respectively.

Then there are other retail chains forming a small part of bigger group companies—Reliance Trends owned by Reliance Industries and Spencer’s by RP-Sanjeev Goenka Group—that have also failed to make profits from their retail businesses.

One would have made huge money in Pantaloons 10 years ago, as the Indian economy was connecting with the world and organised retail was making inroads. Says Charles Munger: “When you’re an early bird, there’s a model that I call "surfing"—when a surfer catches the wave and stays there, he can go a long, long way.”

Pantaloons was the surfer in the great retail wave and has been rewarded well. However, since 2006 a Pantaloons investor have not gained much at a time the markets rose around 57 per cent. The Shopper Stop and Trent stocks also moved along the same way. Apart from low margins, the retail sector is also facing a number of bottlenecks on the policy front. The goods and services tax (GST), which was to be implemented in April 2012, remains in suspension and the ector has not been given industry status. Says Ankur: “Organised retail, despite limitations, will grow leaps and bounds in the next decade. There will be many surprises along the way as companies discover the right Indian model of retailing”

So, investors must wait till the retail sector gets its turn. Invest only if you find deep discount on these stocks, similar to the discounted merchandise at retail stores.

American doughnut makers Krispy Kreme and Dunkin’ Donuts now play out rivalry in India

Sarah Jacob , The Economic Times
Bangalore, 23 May 2012

American doughnut maker Krispy Kreme has flagged off its India plans barely a week after rival Dunkin’ Donuts opened shop in the country, setting the stage for a doughnut onslaught in a country that loves pizzas and burgers as much as dosas and pav bhajis.

Krispy Kreme Doughnuts, which operates around 700 stores worldwide, signed its first franchisee deal in India with Bedrock Food Company to open 35 Krispy Kreme outlets in North India in five years, the US firm announced last week.

New Delhi-based Bedrock also holds franchisee rights for American sandwich chain Subway, operating about 185 Subway restaurants in north, west and south India.

Doughnut — a fried, ring-shaped snack often glazed with sugar or filled with cream, which is widely consumed on the go with coffee across the US — may well be the next big-ticket western food item that Indians will tuck into, going by the hectic activities in this nascent industry.

"It does not matter who entered first. It is not a 100-metre race but more of a marathon," Dev Amritesh, President& COO-Dunkin’ Donuts India, Jubilant FoodWorks, says.

Dunkin’ Donuts, which has partnered with Jubilant Foodworks in India, will open its third store in Delhi this month. It is targeting 80-100 stores in five years.

Existing players such as Mad Over Donuts, Donut Baker and SH Donut Empire too have drawn up aggressive expansion, while Donut Factory plans a relaunch.

Mad Over Donuts plans to open 50 outlets across cities such as Chennai, Hyderabad, Ahmedabad and Chandigarh this fiscal.

Donut Baker, owned by Global Franchise Architects that also owns of Pizza Corner, and Mumbai-based SH Donut say they will venture out of Bangalore and Mumbai, respectively.

YOUTH FACTOR

Most western restaurant chains are turning to India as sales slow in mature markets and the higher-spending Indians willingly experiments with new cuisines.

Perhaps these entrants are also enthused by the success of pizza chains that have invested large amounts into marketing and clockwork home delivery to find loyalists for a product that once was alien to Indian tastes as doughnuts are today.

"Earlier people said India was a country for tea, but coffee has seen huge growth in demand," Devangshu Dutta, chief executive of retail consultancy Third Eyesight, says. "There is latent demand for doughnuts too both because Indians have a palate for sweet products and because our exposure to western snacks is increasing through films and travel."

India’s increasing young population is the key to these chains.

Priced Rs 30-50 for a doughnut, some chains are targeting young professionals and college students, while others are reaching out to children.

FOOD CAFE

Most doughnut chains model themselves as all-day outlets and serve coffee, sandwich and other products.

"Quick service restaurants are transactional, offering a standardised, limited menu and positioned as value for money. Cafes offer an experience but are mostly focused on beverages. We are a food cafe, addressing the segment between the two," Amritesh of Dunkin’ Donuts says.

Branded as Dunkin’ Donuts & More in India, the chain will retail sandwiches, bagels, milkshakes and coffee along with doughnuts.

Companies say it’s also important to serve other products because doughnuts may take time to grow in the market.

"Doughnuts will grow over a period of time. But we have to look at other product categories too," Tarak Bhattacharya, COO of Mad Over Donuts, says.

The Singapore-headquartered firm is adding a range of coffee, bubble teas and cupcakes to its menu.

Amit Tacker, founder of Donut Factory, a homegrown brand that shut stores across malls last year, says finding the right location is the key to success. "Location is a big factor in new product food retail," says Taker who will open a Donut Factory at New Delhi’s Khan Market in July-August.

Joseph Cherian, global chief executive of Donut Baker owner Global Franchise Architects, says entry of global biggies such as Dunkin’ Donuts and Krispy Kreme will help grow the category with their deep pockets and brand recall.

But not everybody is convinced about doughnuts’ success in India.

"Doughnuts and coffee are breakfast concept globally and Indians are ready for that only in certain pockets," says Gaurav Marya, president of Franchise India Holdings, which helps brands find franchisees in India.

Dutch Retailer Spar International to end ties with Max Supermarkets

ET Bureau, The Economic Times

Bangalore, 10 May, 2012

Dutch retailer Spar International and Dubai-based Landmark Group’s Max Hypermarkets have decided to part ways in India by the end of this year after the two developed differences over expansion strategy.

While Spar was keen on partnering multiple national and regional retailers to expand in the country, Max Hypermarkets wanted a strategic investor for the business, Dr Gordon Campbell, managing director of the 31-billion euro (approx 2 lakh crore) Spar International, said.

The companies will now pursue separate growth plans in the country, they said in a joint statement.

Max Hypermarkets operates 13 Spar Hypermarkets across Karnataka, Maharashtra, Andhra Pradesh, New Delhi and the national capital region under a licence agreement signed in 2007.

The two have decided not to renew the licence after it expires in December.

Viney Singh, MD of Max Hypermarkets India, said the company will rebrand its hypermarkets-or, large-format food & grocery stores that also stock general merchandise, electronics and apparel-once it decides on its future course. "We believe that it is good to have in the long term, strategic investor partners to run the hypermarket business in India," he said.

Spar, which has 12,000 stores across 35 countries, does not financially invest in any market, but signs license agreements with independent retailers in different markets to use the Spar brand name.

It also provides technical know-how and expertise for the front-end and supply chain for its partners. In fact, it had first entered the Indian market with Mumbai-based Radhakrishna Foodland in 2004.

Spar is now looking for multiple partners in India. "Given our experience now, we believe we have the opportunity for other partners to develop it (stores) at a quicker speed. We would be interested in tying up with 4-5 partners for different regions," Campbell said, on a call from Amsterdam.

He said Spar has established contact with a few partners across regions, but refused to clarify whether they were corporates or standalone chains.

Campbell said Spar is willing to open supermarkets in India. The size of its supermarkets are around 1,000-2,000 square metres, while hypermarkets are above 4,000 sqm.

Spar aims to finalise new relationships quickly so that its brand does not have to wind down. Campbell said this would be possible if new partners have operational stores that can be converted into Spar.

Analysts say there is limited risk to brand Spar if it is absent from the Indian market for a few months because its footprint is limited.

"Food and grocery is bought within a limited radius. As long as the brand’s reappearance is handled well, there is no real damage expected," Devangshu Dutta, chief executive of retail and consumer goods consultancy Third Eyesight, said.

He also said that it would not be difficult for Max Hypermarket to find a foreign partner, given Landmark Group’s presence in India and international retailer interest in the market. Landmark Group operates department store Lifestyle International in India.

"They could also come up with their own brand and partner a financial investor as they would have the operational expertise now," Dutta says.

The $12-billion organized food and grocery retail market that is projected to grow at a compounded rate of 30% over next five years, according to estimates by Technopak Advisors.

Pantaloon-Birla Deal: Consolidation – Key to Organized Retail

Fashion United

Mumbai, 9 May 2012

Last week, Kishore Biyani, through a landmark deal sold a controlling stake in Pantaloon Retail to Kumar Mangalam Birla. The move has showed an innovative path of consolidation as the way forward for India’s staggering organized retail sector. Instead of endlessly waiting for political parties to reach a consensus over FDI in multi-brand retail, Future Group and A V Birla went a step ahead by inking a fundamentally viable businesses strategy, focused on sales and profits.

While the deal gives Birla access to the most profitable chunk of the fashion retail business, the debt ridden Future Group can now get rid its burden over an expectedly short period. For Biyani, weighed down by Rs 5,800 crores debt, and with limited avenues to raise fresh equity from foreign investors, the deal brings immediate cash of Rs 800 crores in the BSE-listed flagship Pantaloon Retail (PRIL). It will also be able to transfer an equivalent Rs 800 crores of debt to the demerged entity, helping PRIL to cut debt to Rs 4,200 crores.

Explaining that Pantaloons and Aditya Birla have different reasons to get into the deal, Ankur Bisen, Associate Director-Retail, Technopak Advisors says, “It is a great deleveraging opportunity for evolution of Future Group. Though it started with Pantaloons, over the last 15 to 20 years, it has actually evolved as a retailer operating in various retail formats. Even though Pantaloons was probably the jewel in the crown, but it is to some extent a non-core activity for the Future Group. Realizing that they would like to grow as a retailer and not as an apparel brand owner, the Group must have gone ahead with this deal.” And goes on to add “If you look at the kind of debt pressure the Future Group has, it stands to gain in the short term with this deal.”

But experts feel, the deal goes more in favor of the AV Birla Group, since Biyani loses a large chunk of the high-margin, fast- growing fashion retail business. Aditya Birla Nuvo, which through its subsidiary Madura Fashion & Lifestyle, controls apparel brands such as Allen Solly, Louis Philippe, Van Heusen and Peter England, and the acquisition of majority stake in Pantaloon, will enable it to cater to customers at the lower segment in the value chain. With its bouquet of brands, Madura can not only attract the young it also gets to more than double the Group’s retail space from 1.6 million sq. ft. to 3.65 million sq. ft. And the combined entity’s turnover will go up by almost 80 per cent. Pantaloons’ Rs 1,700 crores turnover will add to Madura’s Rs 2,145 crores top line.

“The Aditya Birla group gains significant control over one of the largest modern large-format chains in the country. Since Madura Garments is also one of the largest branded suppliers in the market, a better integrated value-chain may provide it some margin advantage. However, it is likely to be also careful not to sour its position as a supplier to the other large format retailers through anti-competitive practices,” opines Devangshu Dutta, Chief Executive, Third Eyesight, a consulting organization for retail and consumer goods sector.

However, it would be interesting to see how competitors Shoppers Stop and Lifestyle react to this move. Further it would be also interesting to see whether the $35 billion (over Rs 180,000 crores) Aditya Birla Group, which has yet to stop losses in its food and grocery chain ‘More’, now sell it off to a potentially more viable food and grocery chain, in the same manner as Biyani.

(This story was published in Fashion United.)

‘Flawed’ Sales Model Stops Reebok Run

Roudra Bhattacharya, Priyanka Pani, The Hindu Businessline

Mumbai, 9 May, 2012

What really went wrong with the way Reebok was run? According to a top North India-based distributor, the franchisee model running for the last few years was flawed.

“Some stores were picked on very high rental, so the sales were lower than the cost of running the outlet,” says a distributor, who preferred anonymity.

Reebok’s contract with the franchisees worked on a minimum guarantee (MG) basis, which meant that to encourage network expansion, a certain income was guaranteed to each outlet, regardless of sales.

However, this model had the sorry effect of the franchisees getting lazy as they knew that a certain revenue was guaranteed, sources in the distribution chain say.

The more profitable stores ended up cross-subsidising the larger number of loss-making outlets.

As a result of the minimum guarantee deal, the company still has to pay these franchisees dues in crores of rupees nationwide, which Reebok was holding back due to under performance. “Since the last year, the management was trying to change this business model by taking back the MG deal from loss-making outlets, or asking them to close for inability to meet targets. Unfortunately, the accumulated losses of the outlets had become too large, and the European HQ had to take note,” the distributor said.

Last week, Adidas AG had said that commercial irregularities at Reebok brand in India had led to a pre-tax hit of Rs 870 crore, while a restructuring would cost a further Rs 488 crore this year.

The Group had said that a third of the 1,000 Reebok outlets in India would likely be shut, while reports have additionally claimed that a further 200 Adidas outlets may also face the same fate.

EXPANSION SPREE

A franchisee owner invests anywhere between Rs 40 lakh and Rs 1 crore, depending on the value of the real estate. Noida itself has five Reebok outlets, apart from stores in two malls. In comparison, a shopping area such as New Delhi’s Connaught Place has three outlets within a distance of half a kilometre from each other.

Mr Devangshu Dutta, CEO, Third Eyesight, a retail consultant firm, says most global brands went on an expansion spree during 2004-08.

Several brands were quite optimistic of the Indian growth story and went on to open stores at places they shouldn’t have, he adds.

However, from 2009 onwards several of the stores had started either resizing, closing down or stalling expansion. “Most of the expansion was done keeping in mind the competition in the Indian market and not the demand,” Mr Dutta said.

The Indian market for sports footwear is still largely dominated by unorganised players.

“Franchisees in India are not retailers and know little about retail strategies; they want immediate return on investments and when they don’t get it, they try to cut costs, inventory, working capital and also don’t invest in manpower. This impacts the brand,” he said.

NOTHING OFFICIAL

Five Reebok store owners Business Line spoke to around the NCR said that the company is yet to communicate to them officially.

However, the understanding is that the stores operating as ‘factory outlets’ and offering year-long discounts are expected to be closed first.

These stores, which generally sell older stock (from previous seasons), are believed to be leading to a “brand dilution” of Reebok.

“Reebok is positioned as a premium brand, and these stores are affecting the business of the bigger stores which pay high rentals for operating out of the top shopping arcades.

As per our contract, the company is expected to take care of any losses we suffer if our stores close,” said a Reebok store owner in Noida.

Future Perfect

Vishal Krishna, Businessworld

Bangalore, 5 May, 2012

It is not just a marriage of convenience; there could be love involved, too. Aditya Birla Nuvo (ABN), with annual revenues of $4 billion, a mini-conglomerate within the $35-billion Aditya Birla Group, has acquired a portion of Pantaloon Retail India’s (PRIL) lifestyle business.

Eighty-six Pantaloon fashion retail stores will form part of a new entity, controlled by ABN, which will be automatically listed on the BSE and the NSE. A Future Group official says that ABN has acquired a minority stake by subscribing to Rs 800 crore worth of convertible debentures, which will be converted into equity when the new entity is formed. ABN will make an open offer to PRIL’s shareholders; ABN will eventually have 50.1 per cent stake in the new firm.

ABN has also paid another Rs 800 crore to service the debt of PRIL. Both groups have yet to decide the swap ratio (JM Financial acted as advisors to the deal) that will determine the shareholding pattern in the new entity. The word on the street is that PRIL will own 25 per cent in the new entity and will manage the operations of the 86 stores whose revenue is expected to reach Rs 1,700 crore for the financial year ending 30 June 2012.

For the Future Group, the happy marriage means that Rs 1,600 crore out of the Rs 5,256-crore debt will be wiped off PRIL’s balance sheet, giving Future Group chairman Kishore Biyani a breather. “This is the first of the many steps to reduce the debt of the Future Group,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy.

But is the union good for ABN, too? ABN’s business generates $4 billion in revenue, but its lifestyle business makes only $400 million. The new entity should change that for the better. ABN’s Madura Fashion is the largest premium-branded apparel player in India, with brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England as part of its stable, and retails through 1,082 exclusive brand outlets, apart from being sold in more than 1,250 departmental stores and multi-brand outlets.

ABN has a distributorship tie-up with leading brand Esprit and it retails international brands under ‘The Collective’, a luxury store. Access to PRIL’s network will double ABN’s revenues and make it the single largest chain in India. The combined revenue of rivals Shoppers Stop (50 stores) and Lifestyle (40 stores) will be about that of the new ABN/Pantaloon entity.

The buyout will give ABN access to markets where it has no presence: tier-II and tier-III towns, where the future exponential growth of the retail sector is expected to come from. So why did PRIL sell a stake in a venture that was highly profitable for the Future Group? “The rising debt levels of Pantaloon have been affecting the growth of the group,” says D.K. Aggarwal, CMD of SMC Investments and Advisors. “They have been paying about 60 per cent of their revenues as interest costs.”

Other analysts call this a clever move by ‘Mr Retail’. PRIL’s Rakesh Biyani and Kailash Bhatia will continue to run operations; a “Fashion Council” with the best talent from Madura Fashion and Future Group will advise the new firm on leveraging its strengths. And with the financial muscle of Aditya Birla Group behind him, Kishore Biyani’s legacy remains intact.

(This story was published in Businessworld Issue Dated 14-05-2012)

Walmart Declares War On Amazon

Vishal Krishna, Businessworld

Bangalore, May 3, 2012

Walmart may be the largest company in the world in terms of revenues, but its global e-commerce websites are lagging far behind. Walmart e-commerce is facing tough competition from local e-commerce firms as well as Amazon, the largest e-commerce website in the world. Walmart’s websites in China, UK, Brazil, Mexico, Canada and the USA are all sitting isolated and need a focused strategy to deliver a global view for Walmart. Consolidating all that data of shoppers is becoming more complicated and is not giving Walmart a full view of what its customers want on an e-commerce site. “We are creating a global platform so that these e-commerce websites can be integrated, there will be one world view for all our shoppers and we will cater to local needs too,” says Anand Rajaraman, Senior Vice President Walmart Global E-commerce. He says that this strategy was to enable better consumer experience and ensure real time knowledge sharing with different countries.

This platform is going to be built from scratch in Bangalore and is going to have over 200 people working on it by the end of the financial year 2012-13. This will also be the first time that Walmart is ramping up its R&D operations through Walmart Labs. This is a clear signal to take on Amazon because not only has Amazon entered Indian operations in the form of a market place called junglee.com, but its R&D centre in India has over 500 employees. “This should not be a problem for Walmart because they have all the experience for the last three years by working with Bharti,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy.

Coincidentally, Anand Rajaraman sold junglee.com to Amazon in the late 1990s for $250 million and is now involved with Walmart after it acquired his analytics company called Kosmix for $300 million.

Why a global platform? “The global platform is going to be created because we can easily ramp up in emerging markets as part of our new strategy,” says Jeremy King,” Chief Technology officer of global e- commerce.

Analysts say that Walmart’s e-commerce revenues are small because the numbers add up to less than 3 per cent for a $425-billion company. This new strategy is being created for taking on the likes of Amazon which is the largest online retailer with revenues of $34 billion, and other home grown e-commerce retailers in emerging economies. Walmart’s e-commerce revenues are $10 billion, which is larger than any retail business in India. FDI rules do not permit Walmart’s e-commerce unit to come in to the Indian market, but its global platform can be ready because Walmart’s back-end work of tying up with suppliers is already on through the cash and carry business. It has a 50:50 JV with Bharti retail, although 100 per cent FDI is allowed in B2B operations.

Walmart has created a business unit called Global.com to study and understand how its products could be bought online globally like Amazon. “We will focus on mobile apps because shopping is becoming social and people are collaborating real time. Our apps are in the top twenty lifestyle app downloads on the Apple store,” says King. He adds that new platform will help Walmart analyze inventory, in shop research and allow shoppers to access Walmart anywhere, anytime. Cloud computing to scale up operations is being implemented at Walmart’s own private cloud; it runs its own data centre.

“In any e-commerce business it is important to offer a large assortment of products at the right price and deliver it efficiently,” says Pinakiranjan Mishra, Partner at Ernst and Young. He says that e-commerce was becoming firmly rooted in India as a big business and when FDI opened up, big global brands will be eager to set shop in India. Today Indiaplaza.com and junglee.com are market places that have tied up with 1000s of vendors. “India has so many vendors that one can tie up with for the e-commerce business, global brands will wait for FDI to open up while they develop their local sourcing arms,” says K Vaitheeswaran, CEO of indiaplaza.com.

Analysts estimate the e-commerce business in India to be around $7 billion and growing at 50 per cent year on year, but markets like the USA and Europe have an e-commerce market of over $200 billion each. Therefore for a Walmart with only $10 billion revenues from its online business, it is important to scale up, as brick and mortar retail is showing only single digit growth. “India is going to be helping the global R&D business for e-commerce,” says King of Walmart.com. While Walmart closely watches emerging markets and the way local businesses function, they would be treading carefully.

The homegrown online businesses in China have given American brands such as Amazon a run for their money. Similarly, India seems to have the likes of flipkart.com use the Amazon model to become big in India. But Walmart has the cash in an age when countries struggle to repay foreign debt. It would certainly take on the likes of Amazon, may be the battle for India could be the one to watch out for.

International Shoes & Accessories Brands in India – The March Ahead in 2012

India’s economic growth may seem to have taken a dip last year with India’s GDP growth falling to 6.9% for 2011-12 from 8.4% the previous year. But that has not translated into a slower entry of international brands entering the market. There already exist over 200 international fashion brands in India with more than a quarter of these operating predominantly in the footwear and accessories category. Bata may be an exception, having been present in India for over eighty years, but since the 1980s international brands have been trickling in, and the numbers really picked up in the 2000s.

Since 2006, the number of international shoes and accessories brands entering the market has increased 4-fold. The year 2012 has already ushered in international brands such as Claire’s (jewellery), Christian Louboutin (shoes) and Kelme (sports shoes and apparel) within the first three months, while more brands are there on the anvil. While India is expected to grow at 7.6% this year, the pace of growth of international brands may just as well surpass this relatively slow growth rate.

Business Environment & Choice of Operating Structure at Entry

The choice of entry strategy is a key decision for brands entering new markets. This decision hinges on internal and external business factors including the degree of control that a brand wants to exercise on the brand, the product and the supply chain, the market potential, the internal capabilities and strategies of the international brand in their home market or other overseas markets and the government policy pertaining to foreign investment in that particular market.

In the late 1980s and 1990s the Indian retail market was largely unorganized with few national Indian brands and an under developed modern retail network. Import duties were high and there were many investment barriers for foreign brands. The early players entering the market in the shoes and accessories segment were primarily sports footwear and equipment brands targeting the Indian men.  Bata was perhaps a lone brand that offered footwear for the entire family.

The international brands that entered the Indian market at that time largely opted to license the brand to an Indian partner that allowed the international brands to gain quick access to the Indian market with a minimal investment. Brands such as Lotto, Hush Puppies and Puma chose to license the brand to a partner based in India. The Indian partner invested in sourcing or manufacturing, merchandising, branding, marketing, distribution, and even retail while the international brand received royalties and other fees for lending its brand to the market. However, this left the brands with very little control on their growth path in the market. A few formed joint ventures (Reebok, Adidas) or entered into licensing and distribution tie-ups (Nike, Umbro) with Indian partners to leverage the partners’ manufacturing or distribution strengths.

Over time, certain brands decided to move their existing entities (licensed, franchised or joint venture) into wholly owned subsidiaries. These brands may have invested a disproportionate amount of management time and effort initially but the investment has paid off well. Reebok is today the largest international sports goods brand in India with a reported turnover of Rs 600 crores last year, followed by Adidas, Puma and Nike.

The 2000s saw a rising interest of women’s footwear and accessories brands in the Indian market as the market further evolved. Many of these players operated in the luxury segment appealing to a limited few. There was a distinct shift in the choice of entry strategy and franchising emerged as the preferred entry route for the brands stepping afoot in the Indian market testing the waters. The successive lowering of import duties for fashion products resulted in imports being a less expensive sourcing option and the realty boom brought investors in retail real estate that were ideal franchisees for the international brands.

At the same time the count of sports footwear and accessories brands also continued to grow. This product category was primarily distributed through agents, regional distributors and through a combination of exclusive branded outlets, multi-branded outlets and large department chains at the retail end. By 2003, franchising became the preferred launch vehicle for an increasing number of international companies, including Accessorize, Aldo, New Balance and Nine West, while only a few chose to enter through licensing.

In 2006 the Government of India reopened retail to foreign investment (allowing up to 51 per cent foreign direct investment in “Single Brand” retail). Later the Indian government also announced the possibility of gradually increasing the FDI limit in single brand retail from 51% to 100%. The possibility of having part or an eventual complete ownership encouraged brands, seeking a more controlled business in India, to use joint venture as the launch vehicle. International footwear and accessories brands such as Clarks, Fendi, Kipling, Pavers England either entered India by forming joint ventures or shifted their existing structures to joint ventures.

Thus the last decade saw the international brands largely using the franchising route or forming joint ventures to create a presence in the Indian market. While franchising became the choice for risk-averse brands, those that were convinced about the longer-term value of India took the more committed ownership route.

While the government has recently allowed 100% foreign direct investment in single brand retail, it has placed the rider that 30% of the sourcing would happen from small and medium enterprises in India. The lack of clarity as to what this actually means, as well as the need to set up an adequate sourcing presence in India has meant that most brands have not pushed their Indian presence into a 100 per cent ownership structure.

Of course, for a few brands India may be the key source for their entire range and given our government’s manufacturing policy they may already have an existing small and medium enterprise vendor base. These brands may go for complete ownership if India is a strategic and important enough market and sourcing base in their global portfolio.

One such international company is Pavers England, a premium leather footwear brand from UK, which has recently approached the Indian government to allow the retailer 100% foreign direct investment in single brand retail. The group has been present in India since 2008 through a joint venture and currently sells the brands, Pavers England and Staccato in India.

At the moment, 35% of the international brands are present through an ownership business model, either through a wholly owned subsidiary or a joint venture with majority stake which reflects the growth of confidence level of international brands in the Indian market.

Changeovers, Exits & Re-launches

The road to success in the Indian market has not been an entirely smooth ride even for the large brands that are successful globally. 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 and some of these have even exceeded domestic brands in size and reach. Some others have had to reconcile to being niche operators.

Some brands have shifted their strategy and changed their operating structures and even partners in response to the dynamic market conditions and the increasing importance of India’s contribution in their global business. Some brands that may not have achieved success in their initial stint and have exited the market, only to return with renewed strategy, energy and rigour and more suitable business models and or partners. There are plenty of examples of international brands that have changed over their operating structure, partners, exited the market and yet re-launched again.

Puma, for instance, had first entered the Indian market through a licensing arrangement with Carona in the early 90s to sell sports footwear, but the agreement was revoked in 1998. The brand entered the market again in 2002, this time with a licensing / distribution tie up with Planet Sports. The company positioned itself as a lifestyle brand this time with a wider product range. While the Indian partner was responsible for sourcing of apparel and accessories, distribution and retail, Puma ensured that the quality of footwear being sourced from India was upto mark and also ensured brand consistency throughout all marketing, product and retail efforts. To the international company, India occupied an important position in Puma’s global as well as Asian business. With an aim to strengthen the brand’s position further in the country through greater control over its India operations, Puma set up a wholly owned subsidiary in 2006 subsequent to the end of its licensing tie-up.

Another early entrant, Lotto Italia, re-entered the market in 2005 through a license deal after a gap of ten years. More recently, in an effort to move to the higher growth trajectory, the brand has changed its partner last year and the brand is looking for aggressive growth by planning to grow its network of exclusive stores across India from 50 at the moment to 200 in the next three years. The brand is also undertaking various marketing activities to gain high visibility and connect with the consumers. Recently, the brand has been reported to be working on launching cricket equipment in India in the next six months, which will be a pilot run for the global launch of the product as well.

The renowned Italian brand Gucci was brought into India through a franchise agreement with Murjani Retail in 2006. However, the global economic crisis and its resultant impact on the Indian market, led a shift in the Indian partner’s focus from luxury to premium brands. The franchise agreement with Murjani Retail was terminated and replaced with a new franchisee, Luxury Goods Retail, in 2009. Simultaneously, the international brand Gucci, converted this new franchise agreement into a majority owned joint venture for more control over the Indian operations.

Clarks, a British footwear brand, first entered India in 2005 through a distribution agreement with an India partner and also set up a few exclusive stores across India. It withdrew from the market due to below-par performance. However, after researching and understanding the Indian consumer further it re-entered the market 2011 through a joint venture with Future Group. Now Clarks is offering differentiated products across segments (men, women and kids) with lower price points and is focusing on high brand visibility through exclusive branded stores to break through the clutter. India is an important sourcing base for this company and it is also drawing synergy for its global product range from the products being developed as per the tastes and preferences of Indian consumers. From the new partner the brand hopes to leverage their experience in real estate and their understanding of the Indian consumer.

The Italian fashion brand Miss Sixty exited the market and their partnership with Reliance Brands in 2007. The brand re-launched shoes and accessories in 2009 through another franchise agreement and currently the brand has three stores across Delhi, Mumbai and Chennai.

The German lifestyle brand, Aigner that entered India in 2004 is perhaps a lone brand that has not yet re-entered the market since its exit in 2010, but it will be no surprise if it returns to India again at an appropriate time.

The strategies of international brands have changed due to various factors. Many of the changes in strategy and structure have been due to the actual performance in the market falling well short of expectations and projections. Perhaps, the changes in partnership could have been moderated had the companies been more careful in questioning the criteria and motivations for choosing partners. (This is discussed further in detail in our earlier articles, relating to the International Fashion Brands in India). In choosing their partners, the international brands 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.

International Brands: Here to Stay

India is at the early stage of consumer growth and is emerging to be a strategic market to many international brands with a promising market potential. The market conditions are much better and the barriers to entry much lower for the international brands as compared to even the last decade. The overall confidence of the international brands in the potential of the Indian market is highly positive.

So far, the shoes and accessories market has been led by international sports and outdoors brands. Though there are already over a dozen international brands present in this category, we can expect to see more entering this category. The recently announced joint venture between Wolverine and Tata International to strengthen the presence of CAT and Merrell brands in the Indian market and to possibly introduce other brands from the portfolio shows that this segment is far from saturation.

Indian women are emerging as another important segment, drawing more footwear and accessories brands into the market and expansion of the existing brands through stand alone stores for women. There is still open ground available in the premium and value segment of women’s accessories for the growth of both international and national brands.

Over the last decade, the pace of growth of a brand has accelerated; the time needed for a brand to scale up has shortened.  The modern retail network has expanded and there are an increasing number of distribution channels today, even as existing players such as Bata and new ones such as Reliance Footprint offer growing platforms for international accessory brands to plug into.

The online channel is further emerging as an important route to reaching the consumers especially in the tier II and III cities where demand exists but there is low accessibility due to inadequate distribution network. Vans Shoes, an international footwear brand from USA, has tied with online portal myntra.com to widen its consumer reach having entered India last year through a joint venture with Arvind Brands. The online channel also offers the possibility of “pilot runs” and test marketing for brands at the early stage.

Going further, not only do we see more brands customizing their product range for Indian tastes, but India also becoming the testing ground and an inspirational source for global product range.

International brands clearly are here to stay. The more successful brands will be the ones that take pragmatic view of what is achievable and make course-corrections to their India business model as often as required.