Contact

If we get the money, will spend

Meghna Maiti, Financial Chronicle

Mumbai, December 31, 2012

In the year gone by, high inflation left consumers with lower disposable incomes. Analysts said in 2012, consumers were worried about their jobs, volatility in the stock market and soaring real estate prices.

More importantly, the grim outlook on fresh hiring, muted forecasts on wage hikes and lack of any spectacular bonuses created a sentiment of caution. Consumers are now awaiting the finalisation of budgets in the New Year to decide whether they should live it up or save for the rainy day.

While recent reports on the economy have been mixed, several indicators suggest the turnaround in the economy is yet to come. A recent research report by Crisil said as the current industrial slowdown is both well entrenched and broadbased, it will take a while for industrial growth to recover.

Retail giant Reliance Retail hopes the spurt in reforms in the last quarter along with the renewed resolve of the government to drive growth and the possible change in the bleak European macroeconomic climate will steer the Indian economy. “While not much is expected in this first quarter of 2013, hopefully after the Union budget 2013, we should see a spurt in economic growth and an improvement in domestic consumption. Consumers will come back to the stores and footfalls will increase,” said Bijou Kurien, president and chief executive for lifestyle at Reliance Retail.

Kurien said 2012 belied the expectations that retailers and FMCG companies had. “Obviously, the global economic headwinds coupled with lack of any domestic stimulus, failed to catalyse consumption. Growth was lacklustre and profit performance of companies was muted. The impact was bigger in discretionary spend categories, while categories driven by basic needs such as food appeared unaffected,” he added.

P Ganesh, executive vice-president (finance & commercial) and company secretary of Godrej Consumer Products (GCPL), said: “We have not seen any downturn in 2012. In the New Year, nothing will radically change in terms of consumer behaviour. Having said that, we can still expect renewed optimism and confidence in the market with the government turning focus on reforms,” said Ganesh.

Over the next year, the success and failure for consumer goods and retail companies will be determined by the speed and thoroughness with which they are able to adapt to changes at all levels, said industry experts. Given the dynamic developments, global as well as local, affecting sentiments, this will separate successful firms from also-rans. Consumer companies will have to constantly innovate, optimise supply chains, and drive brand value and sales through greater engagement with the consumer, added industry experts.

Chaitanya Deshpande, executive vice-president & head of investor relations and M&A at Marico, said on an overall basis, 2012 was a good year for the FMCG sector. “Although there has been a slowdown in the GDP growth, yet there was no significant impact on items of daily consumption. We have continued our investment on brand building and expanding our distribution reach. Having said that, a deceleration in growth was seen for items of discretionary spends and packaged foods,” said Deshpande.

While lower order flow through the CSD channel affected most companies, a sustained lower macroeconomic growth could ultimately have an adverse impact on the items of daily consumption as well, he added.

Devangshu Dutta, chief executive of Third Eyesight, a consulting firm based in New Delhi, said the previous year was challenging both on cost and demand side. “While cost inflation has happened for most players, real estate prices also went up. There was loss of confidence on the part of consumers. Now the challenge is for firms to survive in the short term to remain a player for the long term,” added Dutta. However, he said retail and FMCG players are more aggressive than ever and young consumers are entering the market.

Amitabh Mall, partner and director at Boston Consulting Group, said the growth rate has definitely come down for most consumer goods companies. “While consumer sentiment is clearly down compared with the previous years, it is not really a concern for retailers. Flat sales indicate things have stopped getting worse,” added Mall.

T D Mohan, joint managing director of CavinKare, said demand has slowed down and the volatile dollar and rupee are affecting production costs. There are concerns over rural consumption. “On the macroeconomic front, interest rates and higher financial costs are matters of concern. FMCG companies will not be able to maintain the 15-18 per cent growth rate they were seeing earlier. When the raw material costs go up it has to be passed on to the consumer at some point. For manufacturers, it will further reduce demand and volume growth. Price hike will also contribute to higher inflation. The government has to work on its monetary policy to bring back demand, create investment climate and fuel employment opportunities,” added Mohan.

(With inputs from Sangeetha G)

Levi’s struggles to be a regular fit for GeNext

Sagar Malviya, The Economic Times

Mumbai, December 25, 2012

Teenager Aniruddha Aggarwal keeps nearly a dozen pairs of jeans stacked up in his cupboard. The brands range from international labels such as Wrangler and Lee to local ones like Killer and Flying Machine.

But one brand that is barely visible in Aniruddha’s closest is Levi Strauss. Reason? Aniruddha’s father swears by the denim brand that sports the leather tag with the iconic two-horse design – virtually every denim in his wardrobe has the Levi’s stamp on it. "Levi’s is a good brand, but it’s what my father and his generation wears. I like to wear jeans that are fashionable and trendy rather than going purely by brand value of the past," says Aniruddha, who owns just one pair of Levi’s jeans.

The divergence in the father-son’s sartorial preferences succinctly portrays the 160-year-old denim maker’s predicament in India. After dominating the organised denim market – estimated to be worth about Rs 2,200 crore – over the past decade, courtesy its historical leadership status worldwide, competition from other global brands as well as a rash of local labels have resulted in its disconnect with the youth.

After being in India for 18 years, Levi’s is the country’s largest denim brand with revenues of Rs 741 crore in fiscal year 2012, as per recent filings with the Registrar of Companies. Sales grew 23% in the last fiscal year through its network of over 400 stores, adding over Rs 250 crore to its top line since 2010.

That’s the good news. The not-so-good part is that the Indian operation is losing money, with accumulated losses of some Rs 127 crore.

What is more, rival jeans brands seem to be on a faster growth track. US Polo, which opened its first store just last year with India partner Arvind Brands, has already reached the Rs 200-crore sales mark. "We will cross Rs 250 crore by end of this fiscal year, making US Polo the fastest-growing retail brand in the country," claims J Suresh, managing director & CEO, Arvind Lifestyle Brands, which has over 100 US Polo stores and plans to add 40 shops each year. A year ago, Arvind sold off its entire stake in the joint venture that sells Lee and Wrangler apparel brands to partner VF Mauritius.

Then there’s Italian fashion brand Benetton, which almost two years ago changed its India strategy and became a pure-play wholesale trading entity; franchisee owners have taken the store count to over 600 now. The gambit has worked nicely: Benetton, which entered the country around the time Levi’s did, has doubled sales from two years ago by adding Rs 300 crore since then. "Like a true Italian fashion brand, Benetton always appealed to the younger lot by having hip and trendy styles. This, along with faster store expansion, added to the revenues," said a senior official at Benetton India who didn’t wish to be quoted.

More agile competitors are just one half of the problem. Levi’s has also suffered because of shift in strategy at the San Francisco headquarters – from chasing market share till a few years ago, Levi’s has now chosen to boost profit margins across global markets.

In India, this meant cutting brands such as Dockers, Sykes, Signature and, two months ago, mass brand Denizen, which had been adding substantially to the company’s top line. "Levi’s globally is acting more like an FMCG company than a fashion or retail firm. Even their top management comprises veterans from the consumer goods space with very little experience in retail," said a senior official of a rival firm who did not wish to be quoted.

He is referring to Levi’s global president & CEO Chip Bergh, who spent over 28 years with Procter & Gamble, as well as its India head Sanjay Purohit, who spent more than a decade with Cadbury. "That’s why you see the company shedding non-profitable brands, a move which generally an FMCG company would make," he added.

The rationalisation, however, has done little to contribute to the Indian operation’s profitability. The Indian company attributes the piled-up loss partly to a higher royalty payment to its parent company. "India is a very important market for Levi Strauss & Co and we believe in the long-term potential of the Indian market," said a Levi Strauss spokesperson for Asia-Pacific. "We are focused on growing the Levi’s brand in India by driving innovation, service and the brand experience. We are working to elevate the consumer’s experience through a globally designed line of clothing that has the right amount of localisation for the Indian consumer."

The problem, though, is Levi’s may not be the only denim marketer doing all this. "What has changed in the last two years is that many international brands have entered or become aggressive in the market. While Levi’s has been maintaining a price differential compared to its local rivals till now, global brands have come with a similar positioning," Devangshu Dutta, chief executive of retail consultancy Third Eyesight, said. "There is also a novelty factor for the newer brands."

Levi’s plays on premium positioning and sells at an average price of Rs 2,200 a pair. That may help boost its margins, but doesn’t help in the market place when rivals US Polo and Benetton have priced their wares Rs 300-500 cheaper, making them more accessible to the youth. At the premium end, labels from Calvin Klein and Tommy Hilfiger have been able to establish a sense of fashion excitement in the past two years, justifying their higher average price tag of Rs 4,000.

Meantime, local brands such as Flying Machine from Arvind Brands and Kewal Kiran’s Killer jeans could benefit from Denizen going off the shelves. "The biggest challenge for any jeans maker in the country is at what price to sell. We have been primarily focusing on smaller towns, which has helped us get volume and economies of scale," said Kewalchand Jain, chairman, Kewal Kiran Clothing.

Rentals go through the roof on high street

Raghavendra Kamath & Sharleen D’Souza, Business Standard

Mumbai, December 22, 2012

Quality space and high street seem to sell even in a slow economy.

While many malls in the country are going vacant and space supply surpassing demand in many cities, shortage of quality space and heavy demand from retailers for high-footfall areas have pushed up high-street rents by 58 per cent this year.

Vittal Mallya Road in Bangalore, Colaba Causeway in Mumbai and Camac Street in Kolkata have seen a rise in rents of 58 per cent, 56 per cent and 33 per cent respectively, said a study from global property consultant Cushman & Wakefield.

“There are no good malls that are expected to come up in the next one or two years and hence demand for high street has gone up,” said Rajesh Jain, director and chief executive of fashion brand Lacoste, which has a store in Colaba Causeway. “Also, mall rentals are already very high and there is no room for rents to go up further.”

Sohel Kamdar, vice-president of Metro Shoes, said: “Footfalls are very high at high streets and productivity of our store in Colaba is twice as that of our other stores. Also, high streets have a ready customer base”

Retailers are opting for standalone stores on high streets rather than malls due to high maintenance charges, consultants said. Lower space-efficiency has also led to high demand for high-street spaces.

An executive with Tata-owned Trent said common area maintenance charges in malls have risen to Rs 40 a sq ft, against the Rs 10-12 a sq ft considered viable for department stores such as Westside. “Malls in cities such as Mumbai are now asking for a rent of Rs 400 per sq ft a month. A couple of years earlier, this stood at Rs 120 per sq ft. Office rents have moved in the reverse direction. Nothing explains the increase in mall rents,” the executive said.

Of the two dozen outlets Tata-run Trent planned for Westside this financial year, about two thirds would be standalone properties in high-footfall areas. Croma, Tata-owned chain of electronics and durables stores, planned to open a dozen of the 18 stores this year in standalone properties.

According to the Cushman report, over 58 per cent of the mall supply — around 4.8 million sq ft — had been deferred to 2013 by real estate developers due to low demand, poor liquidity conditions and hopes that they will get lot more brands next year as the government has allowed foreign direct investment in retail.

Khan Market in Delhi remained the most expensive retail location with rental values at Rs 1,250 per sq ft. It registered a rent rise of approximately four per cent over last year.

However, some high-streets saw rents stabilising or dropping in 2012. Brigade Road, Sampige Road, Kamanahalli Main Road and Commercial Street in Bangalore and North Usman Road, Anna Nagar Second Avenue in Chennai witnessed year-on-year drop in rentals, the report added.

According to Devangshu Dutta, chief executive of retail consultancy Third Eyesight, high-street stores also help brands establish their identity and build brands.

“Many retailers are finding it better to not be in a mall if they want to be a destination store. In a mall, you are among many other brands and do not have control over look and feel and customer experience,” he said.

McDonald’s to go in for makeover

Yassir A Pitalwalla, Meghna Maiti, Financial Chronicle

Mumbai, December 10, 2012

Amit Jatia, Hardcastle Restaurants, Westlife Development, McDonald'sMcDonald’s outlets in south and west India are going for a changeover as Hardcastle Restaurants (HRPL), the master franchisee for west and south India operations is preparing for a reverse merger with its parent Westlife Development (WDL). With the changeover, HRPL aims to connect better with older customers and increase sales.

“Fashions too change over time. To keep ourselves relevant we are reimaging the look of our restaurants by going in for softer lighting, more use of wood and more apt graphics. This whole new design has already been implemented in some of our newer outlets in Navi Mumbai and at a few locations in Mumbai city itself,” Amit Jatia, vice chairman of HRPL, told Financial Chronicle.

The re-imaging is part of a billion dollar plus worldwide drive by the maker of Happy Meals to revitalise the look and feel of its stores to make it a cool place to hang out, marking the biggest makeover in its 56-year-old history. Hardcastle Restaurants hopes that the makeover will help it increase same store sales and sell more of its higher priced items replicating the experience in US post makeover. McDonald’s had earlier this year said that by the end if 2012 it hopes to have completed the interior renovations at about half of its worldwide restaurants.

Harish Bijoor, CEO of Harish Bijoor Consults, said it is important for McDonald’s to perk up their image to stay relevant and competitive. “The company has to compete with players such as, Subway, Starbucks among others.”

“We have got good feedback from customers. Some of our customers are now much older than when we first started out in India over a decade ago. The re-imaging ensures that we will not lose our connection with our older customers and we stay relevant to our current consumers,” said Jatia.

In the US, the fast food chain is moving to seating zones, slow zones for coffee sippers enjoying the wifi, fast zones at high bar tables for single diners wolfing down a sandwich, and family zones with booths for parents to lock their children on the inside to prevent them from wandering. “We plan to upgrade all our old restaurants to the new look in the course of the next two to three years while all new outlets will sport the new look from day one itself,” said Jatia.

McDonald’s has been trying to capture a larger share of sales by extending its offerings via home delivery and also by setting up dessert kiosks within the vicinity of its existing outlets. “Our ice-creams are very popular so we try to set up dessert kiosks selling our Sundaes and McFlurry’s among others in high street areas or the atrium of a mall where footfalls are very heavy,” said Jatia.

Devangshu Dutta, chief executive of consultancy Third Eyesight, said most players in the quick service restaurant space are trying to attract more profitable customers and focusing on outlet profitability. “The consumers would come more frequently. Also, people who come there could feel better about the product,” said Dutta.

Jatia hopes that the remodelling and the menu changes such as the extra value meal, spicy range and breakfast menu will help the quick service restaurant, reposition itself in the minds of consumers from a snacking occasion to a meal occasion. “We want people to consume meals in the lunch and dinner day parts. It’s about scale and volumes for our supply chain as we are in a high volume, low margin business. As our volumes increase operating leverage will continue to grow,” added Jatia.

Hardcastle, which is in the midst of Rs 500 crore capex to double its network to 250 restaurants, is following the principle of setting up where the customer wants them to be. “The marketplace has tremendous opportunities and we want customers of all levels of society such as section B and C too not just section A to frequent our stores,” said Jatia.

Alpana Parida, president of DMA Works, said, “In India, McDonalds is symbolic of America.”