Month: October 2014

Clothing well-to-do India

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October 31, 2014

Rashmi Pratap, BLink (The Hindu Businessline)
Mumbai, 31 October 2014

In the late ’70s, when power looms began to expand rapidly in Ahmedabad, the worried owners of 74 composite textile mills met a young man who had just completed his MBA from Mumbai’s Jamnalal Bajaj Institute. The idea was to craft a survival strategy as power looms were on a better footing — they did not have unions and didn’t even need a licence to expand capacity. The young man saw clearly that the answer lay in a new product category that not only had global appeal but also resonated with the new India.
And that’s how Sanjay Lalbhai, the scion of textile major Arvind Ltd, entered the denim space. By 1987, Arvind had transformed from a maker of dhotis, kurta-pyjamas and sarees to a denim manufacturer supplying to the best of global brands. By the mid-’90s, the company had become the world’s third largest denim-maker with a capacity of 120 million metres.
Lalbhai, third generation in the business and currently its chairman and managing director, has been constantly re-inventing the company. This alone ensured that Arvind Ltd survived even as the rest of the over 80 textile mills that existed in Ahmedabad 35 years ago folded up.
“It is about constantly reimagining the company and looking at the possible threats and the competitive framework. One has to come up with newer strategies… An eye for those kinds of details has kept the company going for so many years,” says Lalbhai.

Terming the company’s decision to become a denim-maker a “bold move”, Devangshu Dutta, chief executive at consultancy firm Third Eyesight, says it led to both ups and downs as denim is a very cyclical business.

“But they have been able to look ahead and not be held back by the past,” he says. That a small player in the fabric sector thought of becoming a global leader in denim shows a readiness to break from the past, adds Dutta.

Swadeshi origins

Arvind started out as Arvind Mills, founded in 1931 by three brothers (including Lalbhai’s grandfather Kasturbhai Lalbhai) just as Indians had begun burning foreign clothes inspired by Mahatma Gandhi’s Swadeshi and Civil Disobedience movement. Indigenous clothes were in demand and the company was poised to cash in on the opportunity.

More than six decades later, in 1992, Arvind brought to India Arrow, among the earliest global apparel brands arriving in the country.

The first outlet in Mumbai’s Girgaon Chowpatty area is a landmark of sorts even today. And 22 years on, Arvind has 16 global brands in its kitty, its relationship with each staying strong.

Contrast this with several other Indian joint ventures with global brands that routinely end in divorces.

“My grandfather taught me that absolute transparency and trust are most important in all relationships. Fairness in dealings and putting yourself in their shoes is a must. We have not had a single instance of misunderstanding with any of our partners,” Lalbhai says.

Even as it continuously signs up foreign players (GAP and Children’s Place being the latest), Arvind is assiduously growing its own 14 brands too, including Excalibur, Flying Machine, Colt and Ruggers. Lalbhai is preparing the company for yet another emerging opportunity: when per capita income in India crosses $2,000 and Indians start spending disproportionately on clothing. He estimates this to be true by the year 2020.

Dressed to succeed

World over the apparel category does well once per capita income crosses $1,500. India is nearing that mark and Arvind is “ well-poised to capture this emerging opportunity”.

The company also wants a foothold across categories and price points — men, women, children and undergarments, as also value, premium and bridge-to-luxury prices. This way it aims to cover most of the market. “We aim to be a $2-billion brand in retail in the next 10 years. We have growth plans for everything — from international and own brands to retail formats,” Lalbhai says.

To expand its retail footprint, Arvind is converting its Megamart stores (3,000-4,000 sqft) into Power Megamarts — 10,000-plus sqft outlets with international brands and no discounts.

“We have evolved from a discount brand (Megamarts were factory outlets) to a branded value player. So we are not discounting at all.”

As many as 38 Power Megamarts are up and running already, and Lalbhai is pleased with their profitability — 18 per cent earnings before interest and taxes. “As the old formats go down and new formats open, Megamart will start giving even better returns,” he says.

Projecting itself as a one-stop fashion house, Arvind is reaching out to customers through all possible means, including the online market, which it sees as essential to future growth. It now has a subsidiary, Arvind Internet Ltd, focused on e-commerce and led by Lalbhai’s younger son, Kulin.

“In e-commerce, we will come up with our own marketplace, where we will sell our entire collection besides a number of private labels and new brands. It is going to be a huge initiative,” he says.

Bespoke in business

Arvind’s online brand Creyate already offers customised styling solutions for shirting, suiting and jeans. The customer can personalise his clothes with a fabric, design and style of his choice. This includes fabric flown in from Paris and Milan. Customers can walk into a company outlet to give their measurements. If needed, a stylist will arrive at the customer’s doorstep for the measurements, armed with an iPad loaded with details of the products and fabrics available.

“The world is moving towards co-creating; you get involved in designing your own wardrobe, seated at a computer. It is a brick-and-click model where we have an e-commerce site as well as stores where one can feel the fabric and give measurements,” he says.

Launched in August, Creyate has had a fantastic response, says Lalbhai. “The sales are beyond budgeted numbers. We want to debug the whole thing and then scale up,” he adds.

Once a fabric is selected, it is flown in and the garment is custom-made at a factory set up in Bangalore under a joint venture with Japan’s Goodhill Corp.

Positioned in the premium category, Creyate shirts start at ?2,699 and suits at ?15,000. Industry analysts peg the margins beyond a profitable 15 per cent.

Arvind’s e-commerce team is a young one, with 26 as the average age, and they are busy setting up the back end for their online marketplace.

“We hope to launch it by August next year,” says Lalbhai.

Riding the brand wagon

Unlike most other Indian e-commerce players, he doesn’t want to rely simply on discounts.

“We are not looking at profitless topline growth. We are looking at a model that is profitable and satisfies the requirements of consumers. We will try and position this through service and differentiation.”

Branded garments typically have a profit margin of 15-20 per cent, and online selling further cuts costs such as real estate, sales staff and electricity among others. Arvind can easily attract online buyers as it retails a wide selection of brands, including Tommy Hilfiger, US Polo, Arrow, Lee, Wrangler, Calvin Klein and GAP besides its own brands, such as Flying Machine, Colt, Ruggers and many more.

The company’s fabric business and supply chain expertise will be added advantages. Arvind Singhal, chairman of Technopak Advisors, sees Arvind’s online effort as “a sensible move” owing to the demand for branded apparels.

“Already there is a massive growth in online apparel retailers like Myntra and Jabong. Going online will enhance the reach of Arvind brands, which are not readily available,” he says.

But Dutta of Third Eyesight cautions that in the rapidly evolving e-commerce space there is no guarantee of success. Currently, price-led e-commerce players are spending heavily on customer acquisition, losing money on almost every transaction.

“But I don’t think Arvind will follow that strategy. E-commerce has to be a value-added business, and for that pricing has to be sensible,” he says. Any successful strategy would involve foreseeing where the Indian customer is headed and what needs to be done to fulfil his or her needs.

The selling point

Currently, nearly two-thirds of Arvind’s revenues (expected to be over ?8,000 crore this fiscal) comes from its textiles business, which is growing at 10-15 per cent. Its brands and retail segment, however, is witnessing a higher growth of 35-40 per cent annually. “Moreover, we will be launching new brands. So our business volumes will grow multifold.

GAP itself could be a billion-dollar business in the next 10 years. It is a large opportunity,” says Lalbhai.

If its textile business grows at 10 per cent and brands and retail at 35 per cent, the latter could equal or outgrow textiles in the next 10 years, he predicts.

Alongside the growth, the company also has nearly ?2,800 crore debt on its balance sheet. Lalbhai is in no hurry to reduce it. The company’s growth is currently funded through internal accruals.

“What we are looking at is not reducing debt, but to constantly bring down the gearing ratio (debt to EBITDA).” Last year, the company’s operating profit was ?987 crore, while debt stood at around ?3,000 crore — a gearing ratio of nearly three. “We will try to bring it down to two,” he says.

This would involve increasing revenues as well as entering high-margin businesses. To that extent, Lalbhai’s retail strategy should help Arvind lower its debt in the next few years. If its past is anything to go by, Arvind will be busy reimagining its future success.

(Published in BLink, The Hindu Businessline)

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The Season of Opportunism

Devangshu Dutta

October 29, 2014

(The Hindu Businessline – cat.a.lyst got marketing experts from diverse industries to analyse consumer behaviour during the last one month and pick out valuable nuggets on how this could impact marketing and brands in the years to come. This piece was a contribution to this Deepavali special supplement.)

Secular demand

Once, sales of some products in 3-6 weeks of the year could exceed the demand for the rest of the year. However, as the number of higher income consumers has grown since the 1990s, consumers have started buying more round the year. While wardrobes may have been refreshed once a year around a significant festival earlier, now the consumer buys new clothing any time he or she feels the specific need for an upcoming social or professional occasion. Eating out or ordering in has a far greater share of meals than ever before. Gadgets are being launched and lapped up throughout the year. Alongside, expanding retail businesses are creating demand at off-peak times, whether it is by inventing new shopping occasions such as Republic Day and Independence Day sales, or by creating promotions linked to entertainment events such as movie launches.

While demand is being created more “secularly” through the year, over the last few years intensified competition has also led to discounting emerging as a primary competitive strategy. The Indian consumer is understood by marketers to be a “value seeker”, and the lazy ones translate this into a strategy to deliver the “lowest price”. This has been stretched to the extent that, for some brands, merchandise sold under discount one way or the other can account for as much as 70-80 per cent of their annual sales.

Hyper-opportunity

This Diwali has brought the fusion of these two trends. Traditional retailers on one side, venture-steroid funded e-tailers on the other, brands looking at maximising the sales opportunity in an otherwise slow market, and in the centre stands created the new consumer who is driven by hyper-opportunism rather than by need or by festive spirit. A consumer who is learning that there is always a better deal available, whether you need to negotiate or simply wait awhile.

This Diwali, this hyper-opportunistic customer did not just walk into the neighbourhood durables store to haggle and buy the flat-screen TV, but compared costs with the online marketplaces that were splashing zillions worth of advertising everywhere. And then bought the TV from the “lowest bidder”. Or didn’t – and is still waiting for a better offer. The hyper-opportunistic customer was not shy in negotiating discounts with the retailer when buying fashion – so what if the store had “fixed” prices displayed!

This Diwali’s hyper-opportunism may well have scarred the Indian consumer market now for the near future. A discount-driven race to the bottom in which there is no winner, eventually not even the consumer. It is driven only by one factor – who has the most money to sacrifice on discounts. It is destroys choice – true choice – that should be based on product and service attributes that offer a variety of customers an even larger variety of benefits. It remains to be seen whether there will be marketers who can take the less trodden, less opportunistic path. I hope there will be marketers who will dare to look beyond discounts, and help to create a truly vibrant marketplace that is not defined by opportunistic deals alone.

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Biyani’s Brand Factory unfazed by online sales

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October 27, 2014

Raghavendra Kamath, Business Standard
Mumbai,27 October 2014

Kishore Biyani, following the online discount fest that marked the season, has alternated between criticising an e-commerce portal (Flipkart) for undercutting and tying up with another (Amazon) to sell some of Future Group’s private labels.

But Biyani’s discount chain, Brand Factory, is putting up an unaffected front. While e-commerce portals spread an unease among offline retailer of all colours and stripes, Brand Factory’s business head, Suresh Sadhwani, says that an all-year discount chain is better placed than portals to win at the discounting game. "The market is too big (for us) to be affected by online sales. Besides, Indian customer still wants to come and experience the product, that’s where we matter," Sadhwani says. He says that Brand Factory, wuld not, in fact, look to sell online.

Sadhwani, however, adds that e-commerce players buy merchandise in bulk from brands, creating supply issues for brick and mortar discount formats, though he labels it as a temporary challenge.

Competing with the likes of Arvind’s Megamart and Loot, it follows the model of selling branded apparel and accessories that find their way to these formats after the biannual sales in regular multi-brand and single-brand stores. Besides discounting brands between 20 and 50 per cent, it also sells its own private labels.

In 2012, Biyani mentioned his intention to double, in three years, the business of the remaining multi-brand formats that he was left with after selling off Pantaloons to Aditya Birla Group, namely Central and Brand Factory. Company sources claim that Brand Factory is growing at around 15 per cent. Sadhwani affirms, "We are opening new stores and doubling topline will not be a problem."

The chain is now spreading its wings. Having consolidated its presence in the south with its acquisition of a regional discount chain, Coupon, which added 10 more stores taking its count to 39 stores in the south. "So far, we have built a strong presence in the south. Now we are looking to expand in the east and west. Coupon helped up scale u quickly instead of waiting for six-eight months for a store to gain traction," says Sadhwani. Planning about 10 stores in a year, it would open shop in places such as Kozhikode, Patna and Surat.

On the other hand, Brand Factory’s offline rival, Megamart is changing its business model from discount-led stores to value stores. "With the new Megamart stores, we are not dependent on brands. The cash conversion cycle is better," says a senior official with the chain.

It seems that rather than discounting in othe channels, the supply chain issues in the existing offline discount chain are a bigger problem for players like Brand Factory. For a discounting chain, having more of third-party brands don’t make for a profitable model. "How will you make money? Brands are not giving discounts and if you offer high discounts, you have to take a hit on margins. Having more of own brands makes sense," says a CEO of another retail chain, who declined to go on record.

Susil Dungarwal, former CEO of discount chain Loot, which has battled challenges of its own, says that Brand Factory resisting going online would work in the short to mid term. It needs to upgrade its brand mix and come up with new brands of its own to cater to a wider audience and reduce dependence on external brands.

Thirty-seven per cent of Brand Factory’s merchandise is made up of its own labels and it wants to take the share to 45 per cent, that would more of the margins that range from 40 to 45 per cent. Sadhwani says, "See, shoppers walk in to buy big brands and not only private brands, so we can’t completely go with private labels alone." Brand Factory is also coming up with seasonal lines. For instance, for the next season, it is coming up with an entire line of Daniel Hechter, a French brand retailed by Future Lifestyle Fashions.

Devangshu Dutta, chief executive of Third Eyesight, says if offline retailers provide discounting similar to online retailers, shoppers will buy from the former. "With online sellers, there is always a chance of inconsistency with the products as seen online. What is shown is not what you get many times. E-commerce is still a small segment of the market. The e-commerce players are spending a lot of money in acquiring customers but the percentage of sales in physical stores is still larger," says Dutta.

(Published in Business Standard )

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New perspectives needed for food and agricultural growth

Devangshu Dutta

October 25, 2014

These are thoughts shared in an emailed interview with the AgriBusiness and Food Industry magazine (published in the November 2014 issue.)

A Perspective on the Indian market:

Our first word of advice to companies that are looking at India as an evolving and large market, is to acknowledge the fact that that it has very diverse cuisines and food cultures.

Both Indian and international companies wishing to enter this market for the first time need to understand and acknowledge that one-size certainly does not fit everyone.

The variety of finished products needed requires food companies to address smaller quantities and to have flexible production.

Therefore, suppliers of capital equipment and technology also need to be able to think about how they can make their solutions more flexible to adapt to changing market needs, and also to price them appropriately for the Indian market. Simply extending solutions that work in large, developed markets such as Western Europe and North America is not the best approach.

I would use the example of one of our clients, a manufacturer of bakery automation equipment, who have approached the market with an open mind. After initial investigations they have gone back to the drawing board and created production lines that have smaller capacity, can produce multiple products including Indian specialities, and which are techno-commercially more feasible for an Indian customer to adopt.

There is no reason to think that India’s food industry should follow exactly the same development curve as the west. The population is much larger, with significantly lower income, and needs that are far more diverse and changing far more rapidly than in most other economies. The technical and technological models for India need to be strongly focussed on four major attributes:

• Water efficiency
• Energy efficiency
• Flexibility
• Cost efficiency

Agricultural, horticultural and animal husbandry practices and technologies, as well as those in the downstream sectors such as food processing, need to perhaps even look at setting new benchmarks for accessibility and long-term sustainability.

Food processing and the Indian consumer market:

Food processing has been part of human history since we learned to transform hunted, gathered and farmed raw products into new foods through curing, cooking, culturing etc. This processing has been driven by mainly two major factors: to make the raw material into a product that is more palatable and easily consumed (for example, from raw grains to bread), or to extend the storage life of the raw material (for example, in the form of cheese, pickles, or sweets, or using cooling and freezing).

However, during the last century, processing has been driven mostly by “convenience” by providing partly or fully cooked options, to reduce the time spent by individuals in cooking and to instead apply that time to activities outside home. Social structures in India are changing, as individuals are migrating out of their home-towns to other locations within the country. The number of households is increasing dramatically, while cooking time and cooking skills are both declining. With this, out-of-home consumption as well as partially or fully-cooked packaged foods are bound to rise, leading to greater need of food processing capacities.

Also, with increasing industrialisation of food manufacturing, standards have become important both for efficiency and for safety. We’re seeing signs of such development happening in recent years in India as well – expectations of both consumers as well as regulatory authorities are higher with each passing year. The industry needs to invest proactively in better technology and processes in all areas – cultivation, handling, processing, packaging, storage and transportation – to raise the standards of hygiene, safety, traceability etc.

Food productivity needs urgent attention:

India is among the largest producers of many agricultural products. However, our yields per head of workforce, per animal, per hectare, or per litre of water consumed can be improved significantly. Not only is the population growing, but per capita consumption of most products will rise as the economic situation of each family unit changes. Better practices, technologies and know-how need to be acquired and applied to dramatically improve Indian agricultural productivity.

An interesting model of development to look at is the “golden triangle” approach followed by the Netherlands – active and intensive cooperation between the government, academic institutions and the private sector.

So far, by and large, academic institutions in India have limited themselves to “teaching” and have stayed away from actively collaborating with industry. Academic institutions and the industry typically connect only for the occasional “lecture” by senior individual from industry, or during the time of recruitment of fresh talent. Government largely limits itself to creating macro-level policies. More effective communication and coordination between these three legs could help to dramatically improve the standards in the agricultural and food sector in India and make the nation not just self-sufficient but significantly more competitive in both cost and quality of the final products.

Similarly, active collaboration within the industry itself is important to achieve combined growth, which can only happen if companies step beyond the usual industry association framework.

Local production and service of food processing equipment is an important factor:

In cases where the market is large enough, local production of the equipment should certainly be investigated because it can help to bring down the initial capital cost for customers, and also provide a quicker service and support base.

A first step that a company takes is to create a local presence, either through a distributor or agent, or by directly opening a sales and service office of its own. However, most international companies need to gain a certain degree of confidence in the market, both in terms of sustained demand and in terms of operating conditions, before they would invest in manufacturing in India, since it takes a whole different level of management commitment as well as financial involvement.

With the announcement of the government’s “Make in India” initiative, hopefully more international companies will come forward to take advantage of the changing operating environment in the country.

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Flipkart to buy into Jeeves in home appliances push

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October 22, 2014

Mihir Dalal, MINT
Bangalore, 22 October 2014

Flipkart, India’s biggest online retailer, is close to buying a large stake in Jeeves Consumer Services Pvt. Ltd, which provides after-sales services on large home appliances and electronics, two people familiar with the matter said.

Flipkart is buying into Jeeves partly because the company plans to launch its private brands in home appliances such as televisions and refrigerators as well as electronics, said one of the people.

Flipkart has already launched a range of tablets under the Digiflip brand in June and is planning to launch private brands in the large appliances category, one of the persons said. Both of them requested anonymity.

Jeeves, which provides maintenance, repairs, product guarantees and other services, could also help Flipkart deal with pressure or possible moves by offline retailers and brands that have threatened to stop offering guarantees on products sold online. Jeeves has signed up with a network of brands including Samsung, Toshiba, Dell and others to provide after-sales services.

Mint couldn’t ascertain the value of the transaction. Flipkart did not respond to an e-mail seeking comment. Jeeves declined to comment.

Flipkart and other e-commerce firms such as Snapdeal and Amazon are confronting resistance from consumer goods makers and distributors to offline retailers as they try and grab a larger share of the consumer’s wallet by dangling attractive discounts.
Offline retailers are fighting for survival and are lobbying hard with the state governments and Centre to curtail e-commerce companies’ operations while brands complain that the artificially low prices online hurt their image. This hasn’t stopped online retailers from pursuing discount-heavy, high-cash-burn strategy of attracting customers.

India’s e-commerce market, excluding travel, is expected to surge sevenfold to $22 billion in five years from $3.1 billion, according to a November 2013 report by brokerage firm CLSA.

Flipkart, which has raised nearly $1.8 billion from investors since starting out in 2007, including $1.2 billion this year, is looking to aggressively push sales of high-value large appliances such as TVs, refrigerators and air-conditioners.

Having an after-sales service provider such as Jeeves Consumer, especially an efficient one, would help Flipkart build credibility on these products with customers, said analysts.

“There are two factors at work when consumers decide to buy large appliances online. One is price and the other is service support,” said Devangshu Dutta, chief executive at consultancy Third Eyesight.

“After-sales services are crucial to gain customer trust in buying large appliances and electronics, especially as people in the past have bought these kind of products online only to realize that the after-sales support was poor.”

Jeeves Consumer was started by former BPL executives Alok Sen and R.N. Balasubramanya in 2007. The company was financed by Sen, Balasubramanya, some of their employees and relatives until 2012. In May 2012, early stage investor Seedfund agreed to put in about `12 crore in tranches for a stake that could have risen to 30% over time, documents with the Registrar of Companies show.

Few online retailers in India offer large appliances due to difficulties in delivering them to buyers. In April, Flipkart said it started selling television sets on its website, re-entering the large appliances category nearly a year after it was forced to withdraw because of delivery problems.

Rival Amazon Seller Services Pvt. Ltd, the Indian unit of the world’s largest online retailer, said earlier this month it will offer appliances from brands including LG, Samsung, IFB, Panasonic, Voltas and Godrej as well as from retailers such as Viveks and Next.

(Published in MINT)