Devangshu Dutta
October 15, 2008
(Written in September 2008)
Over the last few years India has had one of the highest GDP growth rates, across the world, and consistently. In the last two years GDP growth is estimated to have been 9.6 per cent (2006-07) and 9 per cent (2007-08).
A combination of private and public investments in recent years, as well as steady liberalisation of regulations, has created a situation that is unique in India’s history as an independent country, where business growth has lead to individual prosperity which is, in turn, leading to explosive growth of further business opportunities. Although India’s per capita income still places it in the list of “developing countries”, a significant population has emerged that is truly middle-class.
Rising incomes have created visible shifts in consumption patterns. Certainly, more Indians regularly consume cereal flakes, processed cheese and fruit-based drinks for breakfast than did ten years ago. A generation has grown to adulthood wrapped in ready-to-wear clothing (with visits to the tailor mainly for wedding trousseaux). And, yes, Indian consumers are increasingly welcoming modern retail environments over the traditional
These economic developments have attracted the attention of both domestic and international consumer-goods companies and retailers, and several of these companies have seen annual growth rates 20-50 per cent in the current decade. Many of the new entrants into the retail sector are large business groups that have set up modern retail chains whose share, although still small, is growing year-upon-year.
This growth of modern retailing is also having an impact on the processes and the infrastructure deployed for the retail sector. These businesses are run as true chains which require processes and systems similar to any chain-store business anywhere else in the world including merchandising, sourcing, human resource management, logistics and store operations. These modern retail stores demand Grade-A buildings for shopping centres, with associated infrastructure and services within them.
Therefore this, in turn, has created a growing opportunity for companies that are manufacturers or vendors of consumer products, suppliers of other goods that are used within a retail business or companies providing services to the retail sector.
In the rush to grow, while challenges have been acknowledged, none of them have appeared seriously debilitating in the long term, until possibly now.
During the years 2003 through 2007, news headlines mainly focussed on joint-ventures or strategic alliances, new store openings, new format launches, and mega-investment plans. If human resources were mentioned, it was about the apparent domestic shortage, about the expatriate talent being pulled in, and about incredible salaries. If shopping centres and retail space was studied, it was the phenomenal growth in square footage and the increasing scale of the new malls that was the focus.
Suddenly, however, the tide in the press seems to have turned. There’s mention of “slow” growth plans of major retail joint ventures. There’s whisperings and denials about lay-offs, accompanied by some high-visibility exits.
It would be tempting to read the signs as evidence that the previous growth was based on hype, which has run out of steam. It would be tempting, and it would also be too simplistic.
The fact is that macroeconomic factors are also acting as dampeners in 2008, and the year may be marked in the recent history of India’s modern retail sector for the dawn of realism. Just as the growth of the retail sector was reaching into the not so profitable geographies and beginning to ride on not very efficient structures, economic growth has begun to slow down dramatically. From a 9 per cent-plus growth rate in previous years, a variety of agencies expect GDP to grow between 7.5 and 7.9 per cent in 2008-09. Further, the Prime Minister’s Economic Advisory Council forecasts a GDP growth rate of 6.8 per cent in 2009-10.
What’s more, 2006 and 2007 have brought about phenomenal increases in two critical cost heads: real estate and human resource.
So on the one hand, retailers are facing dramatically higher operating costs, and on the other hand demand seems to be weaker than they have expected. For businesses that have been launched in the last 5-7 years, such a situation is completely new.
Estimating the Demand – Still an Art?
Since the early years in the decade, most retail chains have grown quickly by identifying new sites and replicating existing successful business models and formats. Typically, the growth was limited in its geographic spread, and the underlying consumption pattern differences between the existing markets and the new locations were not stark enough to be immediately visible. Much of the growth, in fact, came from new stores in the larger cities, including the metros, mini-metros and the next tier markets.
This high replicability has allowed the businesses to rapidly scale up into becoming truly national chains, and the presence of modern retail formats has become visible among the larger cities and towns.
As the companies have begun to feel “saturated” in the larger cities, they have gradually moved towards the smaller towns, with their existing product-price-format offer tweaked slightly.
However, the ethnic, linguistic and cultural diversity of India’s 28 states and 7 Union Territories makes it less like any other single nation-state and more like a collection of countries such as the European Union. The result is sharp differences in income, tastes, habits, and culture, all of which present a challenge for consumer products and retail companies in terms of product and pricing mix.
Most European brands do not approach different markets within the EU with identical strategies. So why should we believe that the business formula that works in one part of India will work in exactly the same way in other parts?
A bigger issue is the realistic estimation of the target population. There are cases where the demand has been grossly overestimated, and the business infrastructure and investment plans are over-weighted by these expectations.
Estimates of 200-300 million middle class (50-60 million households) sound very attractive, but by what measure of income and spending standards?
Going by the pricing of many of the brands in the market today, it would be logical to use developed market income standards. If we use global income standards the middle class numbers are much smaller. The number of households earning truly middle class annual household incomes (not adjusted for Purchasing Power Parity), is less than 5 million.
Of course, the upside is that the growth rate in this income class is estimated to have been over 20% a year during the current decade and this group is forecast to comprise of over 3.7 million households or about 20 million individuals by the end of the decade. There are few other markets in the world where the target population displays a growth of over 20% a year! Moreover, the annual growth rate of the incomes earned among this population is also the highest in the country. Further, a large proportion of this population is concentrated among the metropolises, as mentioned earlier.
So it is a nice market to be in, if the business plan is sized appropriately. You can expect some homogeneity based on the socio-economic classification, and the geographical reach is also limited, allowing for organic growth.
A specific challenge for companies wishing to enter with a “western” business model or product mix is that, even through its most controlled years, India has been a market economy (unlike China’s decades of a completely centrally controlled economy). Therefore, in most consumer products there are several domestic brands and Indian avatars of foreign brands available, even if the choice is narrower than on the shelves of western supermarkets. Competing offers are available, whether from Indian companies or Indian subsidiaries of global consumer products companies. In that sense, India is not a virgin market. There is already some (or significant) amount of marketing noise and clutter, created by the existing competition.
It is vital, therefore, for any company to identify the true overlap between its offering and the most appropriate consumer segment(s) in India to assess the real short-term and mid-term potential for its retail business.
The Urban Retail Opportunity and Challenge
While we are on the subject of the cities, it is very pertinent to look at the spread of the urban population.
As India’s population moves increasingly into cities, it is the larger cities (Class 1, with a population of over 100,000) that are growing the most. From 308 Class 1 towns, the number of Class 1 towns and cities in India had grown to 643 in the 2001 census, and are estimated to hold about three-quarters of the urban population.
These cities are also economic magnets. No matter how attractive the new boomtowns may sound, the larger cities still pull in huge numbers of immigrants from the smaller cities, towns and villages, keeping the ecosystem vibrant.
Within these, in terms of economic potential for retail businesses, it is the Tier 1 cities (metros and mini-metros) that are the still unmatched. In 2001, the top-8 cities were estimated to have 40 per cent of the urban disposable income, and despite rising costs and rising competition these remain the most attractive market for a company looking to establish a new retail business. In socio-economic terms there is more homogeneity available to a brand wishing to tap into a critical mass of customers, discretionary incomes are higher (in absolute not just percentage terms), and the infrastructure available to service the consumer is better.
Of course, the side effects of the population overloading are now visible, ever more, on the cities’ infrastructure and governance. And some of the overloading is contributed by the development of shopping centre space.
The growth of modern retail has brought with it a rapid expansion in shopping centre space. This is both an opportunity and a challenge.
While the extraordinary growth of shopping centres has provided more space for brands and modern retailers to grow their business, much of the growth has been concentrated in the metropolises.
Almost half the shopping centre space by the end of 2007 is estimated to have come up in the conurbations of Mumbai and Delhi. This “over-shopping” could potentially lead to the failure of a significant number of these malls. The failure may not result in outright closure – the better sites may change ownership, while others might get repurposed as office blocks or other commercial projects – but it will be painful, nevertheless.
Paradoxically, despite the proliferation of malls, for retailers and brands high real estate rental costs are the possibly the biggest headache. In many instances, brands have signed-on high-rent shops with the aim of balancing their portfolio over time, and fully expect these shops not to make money in the foreseeable future.
Further, the intensive development of malls, without adequate zoning and planning of support infrastructure such as roads and public transportation is now stressing not just the city, but the malls themselves. Even if there is adequate parking space within the mall (as compared to a few years ago), what good is it if a two kilometre stretch of road before the mall is choked with traffic moving at 2-3 kilometres an hour? The convenience of shopping under one roof is totally outweighed by the inconvenience of spending thrice the amount of time on the road, and is a critical deterrent to a serious shopper who is being targeted by the tenants of the shopping mall.
Tier 2 and 3 Cities – A Work in Progress
A recent study by NCAER and Future Capital Research compared 20 cities, and classified them into the Megacities (metros and mini-metros), Boomtowns and Niche Cities. The naming of these groups is quite telling.
Megacities on this list include Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad and Pune, and have approximately 50% of their income as surplus after household expenses (other than Kolkata and Pune which show surpluses in the 30s). They have large populations, and combined with the surpluses, this up to a massive economic opportunity.
However, the smaller cities have been developing into economic hubs in their own right. If population is a key factor, then Surat would be classified as a metro. It has a high average household income, as well as a high surplus. Similarly, Nagpur, with its logistically important location is also developing into an important market. Along with Lucknow and Jaipur, households in these cities have seen double-digit booms in terms of income growth since 2005, a trend also seen in the Megacities.
This trend of income growth, infrastructure development, trickling of business hubs into the 2nd and 3rd tier cities, will continue to broaden the base of modern retail and distribution further outside of the major cities. On the other hand, while households in cities such as Chandigarh and Ludhiana have high surplus incomes comparable to the Megacities, the much smaller base of population would force marketers to treat them as niche markets until a critical mass develops over the next few years.
Thus, while much has been made about the boom in the smaller cities and towns, the formulaic approach of rolling out the same business model will certainly not work.
The signs of overestimation of demand in Tier-3 and Tier-4 cities is visible in instances of downsizing of store-space by prominent retailers, as well as relocation or closure of some of the new stores which have not performed to expectation.
The Tug of War to Modernise Retail
In my opinion retail is fundamentally an organic business.
Countries that have displayed inorganic growth of modern retail through large-scale corporatisation tend to be economies that have developed rapidly in the last 20-25 years. Among these are the East Asian economies and the former communist Eastern European countries. Three critical factors that have enabled the disproportionate and rapid growth of corporate retail in these countries are: financial muscle, a bank of real estate and strong political linkages. In other countries the high share of modern retail has grown over many more decades.
In other countries such as those in western Europe and North America, retail consolidation has happened over many more decades, boosted occasionally by phases of economic boom (such as the 1920s, the 1950s and 1960s, and then the 1980s).
Many observers have imagined that India’s retail growth would follow the East Asian and Eastern European countries’ pattern, and have projected that India will reach a state of significant consolidation through corporate retail businesses by 2015.
If that were to happen it would be a rather sad “monoculturisation” of the business. Fortunately, I believe, that it is not likely to happen easily.
Firstly, the modernisation of retail trade has typically moved in step with broader economic and infrastructural development. If we use per capita retail sales as a surrogate measure for the overall economic development of a country in conventional terms, the share of modern retail is closely correlated with that (see the accompanying table). Viewed through that lens, the Indian retail sector is still very far down on the list, and is likely to remain fairly fragmented for some time to come.
Secondly, India has a strong entrepreneurial and organic retail ecosystem (not just retailers, but also suppliers and support organisations). Given the diversity of the market, and the sustained fragmentation of consumer needs, I believe the growth of India’s retail sector will not be driven by large companies alone, although they are helping to accelerate the process of sophistication – indigenous, non-corporate retailers and their suppliers have a strong role to play in the ongoing development.
I believe the Indian retail sector will evolve along a path that may be a hybrid, and in fact, may be closer to the European and American model, with a significant amount of entrepreneurial competition dominating the landscape.
Therefore, it is important for the executives in corporate retail organisations to think innovatively, as an entrepreneur would – think truly like a “dukaandaar” (shopkeeper).
Would a dukaandaar open a store in a place where he has no hopes ever of making money? Would he consistently follow this strategy for years? Would he believe that he is building brand equity and goodwill by doing so, that will sustain him in the future? The honest answer to all those questions would be an unqualified “no”.
Any long-term strategy can only be built on the premise that the business will be sustained into that term. If the short-term cashflows are not available to keep the business alive, no amount of long-term thinking will help, as some retailers have recently acknowledged while shutting stores or entire businesses.
It is also important for the corporate dukaandaars to continue to evolve relationships with the fragmented supply base, and support the growth of indigenous national-scale suppliers.
Models for Inclusion
Inclusive growth has become a buzzword in recent years. However, I believe India is one of the few major economies where it is more than just a buzzword.
In 2006, at the National Retail Summit organised by the Confederation of Indian Industry I expressed the concern that we were getting too preoccupied with the western model of urban economic development and consumption and we were ignoring the gap that was creating in India (the text based on that presentation is available on Third Eyesight’s website). To my surprise, I had no fewer than 60 conversations during the day about the subject, many of them with senior managers in large consumer goods and retail companies.
Clearly, the thought of sharing the growth and prosperity more widely does strike a chord with many more Indian urbanites than one would realise. What’s more, quite a few companies are actually taking a direct approach into bridging the gap.
There is no one single model that is applicable to creating these bridges.
Some – large companies such as ITC and Mahindra or smaller ventures such as Drishtee – have created retail businesses that also act as local exchanges of services and goods in the villages. Many of them include villagers as co-entrepreneurs through franchise structures, thus helping to generate and retain wealth within the locality.
Others – such as Fabindia among the visible, or Khamir and Dastkaar – are channels for rural artisans to participate in the economic growth as suppliers to the burgeoning urban demand.
Food retailers have started co-opting farmers into supplying to them directly, where possible. The attempt is to bypass middlemen who act as aggregators, thus making more margins available to both retailer and farmer. Many farmers are indeed happy to put in some extra investment in minor equipment and some effort, to help grade, sort and clean the produce, so as to get a still better price.
Yet, certainly, more could be done. For instance, how about if the largest modern retailers in the country created a permanent display for regional crafts in all their stores, and took these along as they grow their chains in the coming years?
And how about retailers growing businesses through demand generated by economic growth in the much smaller towns? By encouraging regional suppliers and local buying (as opposed to the central purchase mindset), not only would retail chains be better merchandised for local needs, but also be plugged more into the local economy.
Let us not ignore the possibility of local retailers who are right now “flying under the radar” to become important factors in the growth of these smaller towns.
Demand generation in Tier III towns and semi-urban areas will accelerate as the logistical connectivity improves and shipping costs decline through multi-modal transport. There is significant investment happening in both road and rail connectivity, and the newly well-connected dots on India’s map are visibly more prosperous than earlier.
As these developments continue, we should fully expect strong retail chains to begin building up, first locally and then regionally.
When we speculate about who India’s Wal-Mart might be, we shouldn’t forget that the world’s largest company emerged from sleepy, semi-rural locations in the US, and similar developments might happen in India as well.
Facing the Challenges
The Indian retail sector also has some distinct environmental challenges that are bigger than the specific economic blip it is facing right now.
For instance, to my mind retail is an integral part of urban infrastructure, but in most cities retail is a sideshow for urban planners. Either the space provided is too little, or laid out in such a manner that no sensible retailer can expect to have a sustainable and profitable store in that location. Or, if a large space is provided for the private development of shopping centres, the public transportation connections are next to nil, while the car-carrying capacity of the connecting roads is usually poor.
Some of the other challenges are related to the Indian government regulations controlling the sector. As an example, in the area of fresh produce, some states still have regulations that restrict the wholesale trading of the commodities to the mandis, or controlled market yards. This means that the consolidation and processing of farm produce is more difficult and expensive.
Real estate costs are an ongoing challenge for retailers, especially those that wish to develop mall-based businesses. Some mall owners have begun evolving from being “builders” to mall managers with a long-term view on creating a business of shopping centre management, and have begun linking their rentals to the revenues actually generated by their retail tenants. However, in several cases, the real estate costs are still in the double digits.
Reacting to the high real estate costs, brands have begun looking at the possibility of generating higher gross margins to compensate. In most cases, this has meant that selling prices are pushed up, rather than sourcing costs being reduced. While the consumer has been largely transparent to these increases in the last couple of years, I don’t believe this to be a sustainable margin strategy. The cracks are already showing, in the steadily increasing volumes sold under discounts, and the emergence of discount retailers who sell off-season and surplus branded merchandise. The message, clearly, is: the real, sustainable, price is at least 25-40% lower than the MRP. The market looks ripe for the emergence of every-day-low-price business models.
If I were to list out my top priorities for retailers in India, these would be:
1. Realistic demand estimation
Many chains are grappling with too much square footage in a certain geography in the form of very large stores or too many stores. While allowing for the fact that the market is significantly different from what it was 10-20 years ago, let us not expect entire populations to have increased their consumption multi-fold. Sales expectations need to be realistic.
2. Store productivity
For an entrepreneurial business, each store needs to produce results. Sure, there will always be some superstar stores and other locations that are a drag on the bottom-line. The performance needs to be analysed on an ongoing basis, and fairly dispassionately. Store productivity is a function of merchandise availability, store operations, advertising to build customer traffic and a host of other factors. However, unless the store is a marquee location (which very few are), there is no excuse for sustained losses. Fortunately, Indian management teams are today less scared of damage to their reputations, and more business-like when it comes to taking hard decisions on resizing, relocating or simply shutting doors.
3. Pace your growth
Think of a teenager who gets into a growth spurt, and suddenly adds length to his legs. The gait becomes ungainly and he doesn’t really know what to do with the extra inches. Many Indian retailers have gone through a similar disproportionate growth spurt. While stores have grown, the sophistication of the business has not. Let’s remember, the race for retail market leadership is a marathon, not a sprint. The appropriate rate of growth should be determined by organisational capabilities, rather than what others are doing in the market.
4. People
There is no shortage of people in India, as one of the leaders of the industry pointed out a few months ago. Let’s stop creating an artificial scarcity. There are people around who have been in modern retail trade in India for decades and are committed to it – they have the experience. There are others who have only recently entered but need direction and training. The investment in these two sets of people will possibly provide longer lasting returns than artificially inflated compensations for round-robin resumes.
A major “macro” risk to my mind is that retail is seen through narrow lens both by itself as well by as the government and its various arms.
In most cases, the governments various departments continue to treat retail as an incidental trading activity, or as a milking cow through indirect and direct taxes. The outlook towards retailing needs to change beyond the few government luminaries who can be identified as the retail sector’s friends. Whether it is provided “industry status” or not, the fact is that retailing is an industry in India, and needs to be treated with more respect. Even the local kiranawala adds significantly to the community and even the fragmented the market association keeps a vital part of the local ecosystem alive and ticking.
The other side of the story, the retail sector’s perspective of itself also needs to change. Retailers need to look beyond promoting short term consumption. As they grow larger, they are beginning to have a disproportionate impact on society, lifestyles, income distribution and the broader economic fabric of the country. In most developed markets retailers realise how much change they can drive, and many are using this power to benefit themselves and their societies at large. As Indian retailers grow in scale, I think it would be wise to build the “corporate social responsibility” gene into the DNA at this very early stage.
Looking to the Future
Given recent developments, some people may feel that the retail boom is over and it may already be too late to enter the Indian market. I beg to differ: I believe there is still a lot of steam, a lot of energy in the Indian market.
In fact, it would be most appropriate to quote Shah Rukh Khan from Om Shanti Om, “Picture abhi baaki hai, mere dost!” (“The movie isn’t over yet, my friend!”)
The road to modernising the retail sector in India is long, and we have only taken the first few steps yet. Economically difficult times are wonderful opportunities for shedding flab, challenging existing business models and assumptions, and also provide great frameworks for building efficient and lasting companies.
In closing, I would like to borrow a theme from the two great growth sectors in Indian retail: food, and fashion. Both thrive on change. Both thrive on freshness. And that could be the winning theme across the Indian retail sector.
Here’s to a fresh start in 2009!
Devangshu Dutta
July 14, 2008
In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury’s. About 2-3 weeks later the two were reportedly back together. The alleged differences and the apparent solutions have been reported widely, as also the feeling that some issues remain unresolved.
If that reads like something you would find in a celebrity tabloid, you’re probably right. The relationship between brands and large retailers is truly one of the “love-hate” kind. And this case is no different from many other such relationships in various markets around the world. In fact, the Future Group itself is reported to have had similar run-ins with PepsiCo’s FritoLay and GlaxoSmithKline in the past.
I won’t dwell on the various allegations and clarifications about commercial structures and differential pricing in this particular case, since the view from outside isn’t really clear. But it is certainly worth noting that this case is not unique, and thinking about what the future (no pun intended) might hold for brands in markets such as India.
There is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. Brand generally rule fragmented retail environments such as India. Large retailers, on the other hand, squeeze out more margins in the form of bulk discounts, placement fees and the like. There’s more: special promotions, differential merchandising and delivery needs…the list of demands seems endless.
On the other side, retailers love brands for the footfall they bring. The brand typically creates a “need to buy” on the consumer’s part, and invests in creating a distinctive proposition which is valuable in a cluttered market. In many cases the brand would have also advertised where it is available. This is all good stuff for the retailer, who then essentially has to make sure that the brand is available and visible in-store to the customer to convert the walk-ins into sales. However, what retailers don’t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product’s price itself is multiples of a generic product’s price.
The retailer-brand partnership is a very powerful one, even from early days. Many consumer brands and branded companies have scaled up significantly with the growth of their retail customers. The US market due to its sheer size and its evolution offers numerous examples including companies such as Levi Strauss, Hanes, Fruit of the Loom and Proctor & Gamble that grew on the back of discounters such as Wal-Mart and K-Mart as well as retailers such as JC Penney, Macy’s and Sears. Similar examples appear from other countries where the modernisation and consolidation of retail have happened over decades along with economic development.
An established brand provides the new retailer credibility, even as the retailer provides the brand new shelf-space. Or the other way around: even a new brand provides value to an established retailer by identifying the market need, developing the product, managing sourcing & production, and establishing the consumer’s interest in the product, while it is the established retailer who provides the much-needed credibility and presence to the new brand.
For most, this remained a happy relationship for a long time even as the retail environment grew and evolved. Retailers focussed on creating shelf-space and managing it, while the brands focussed on creating products and desirability.
However, economic shocks various times and the rise of low-cost imports raised questions in retailers’ minds about the value added by the brand compared to the margin they supposedly made on the higher prices. At the same time, better communication and travel infrastructure as well as falling costs made it easier for retailers to consider approaching factories directly.
Enter private label, the “other” in the love-hate triangle.
Over the last couple of decades, department stores, hypermarkets, grocery stores and even discounters have worked seriously on private label. The opening premise was that you could entice the customer with a lower price (sharing some of the margin earned by direct sourcing), and as long as you gave a comparable product the consumer was happy. Many Indian retailers followed a similar route when they began exploring private label.
The strategy has had a varied degree of success, much of it to do with how the private label has been handled (indifferently in most cases). Recognising this flaw, many retailers around the world have attempted to improve their handling of their private label product development and also presenting it also in a manner (including advertising) similar to a national or an international brand. Some of these retailers’ own labels are now serious brands in their own right even though they are restricted to only one retail chain.
The difference between a “label” and a “brand” is the inherent promise that a brand has built into the name, the repeated experience that the customer has had with the brand that reinforces this promise, and the relationship that develops between the consumer and the brand. All of this requires structuring, nurturing and careful management, and it costs time, effort and money. When the economy and individual incomes are growing, consumers are willing to shell out a little extra for a brand and all that it stands for.
However, brands get into trouble if income and spending perceptions turn downwards, and comparable products are available. The 10+ per cent premium between branded and generic begins to look like an important saving to the customer. Or conversely, due to the growing market more suppliers for the same product appear that the retailer can use as a foil to the branded market leader. With falling import barriers, more diverse contract manufacturing becomes available for sourcing private label merchandise. The scenario becomes particularly grim if the relationship between the brand and the consumer is not old enough to have become lasting – in this case, replacement of the brand with an alternative or a retailer’s own label is truly feasible.
The Indian market, at this time, shows all of the above ingredients. Inflation is making consumers reconsider how and where they spend their money. The growth of the market over the last few years has attracted several companies with alternative products and brands e.g. ITC as a challenger to biscuit-cookie major Britannia as well as to Pepsi’s potato chip brand Lays. Retailers such as the Future Group, Shopper’s Stop and Reliance have actively incorporated imports into their sourcing strategy. In many cases, the brands that most want to be on the modern retailer’s shelves are new to the market, and don’t yet have a strong imprint on the consumer’s mind.
However, at the same time, retailers themselves are still developing the systems and disciplines to manage their relatively new businesses. They are more than fully occupied with rising real estate costs, and managing the front end. If a brand can handle the product and supply side for a reasonable margin, they are more than happy to ride with the brand.
There is place for the branded suppliers in the market, and for them even to lead the market. Even as retailers grow, branded suppliers won’t lie down or die quietly. Many of them (such as Hindustan Unilever) are also actively engaging with smaller retailers, to help them improve their business processes and competitiveness. On the other hand, they are also reconciled to the inevitable growth of modern retailers, and are developing “key account management” functions, parallel distribution processes etc. to cater to the large retailers differently from the rest of the market.
So will brands survive, or will it be the retailer with the muscle of the storefront relegate them to a small portion of the market?
As long as the competitive pressures and economic cycles remain, the relationship between retailers and their branded suppliers will inherently be a tug-of-war for margin.
In either case, whether individual brands or retailers win or lose in the short term, the consumer will hopefully be a beneficiary in terms of better product, more variety and some sanity in terms of prices.
Sharmila Katre
April 30, 2008
India has a rich tradition of textiles which dates back many centuries. The history of the Indian readymade garment industry, however, is very recent and can be traced back to the Second World War.
During the Second World War, as a contribution to the wartime needs of British rulers, clothing units for mass production were set up to manufacture military uniforms. With India’s independence in 1947, the industry stagnated as the policies of the Government were now diverted towards building a new nation. However, the industry began to expand after 1959 with the revision of the textile policy to allow the import of machinery for manufacturing.
The 1960s witnessed social shifts as a whole generation of young people questioned the very basis of their existence, and the hippie movement was born. Tired of their materialistic ‘man-made’ lifestyle, these young people began to seek answers in communing with all things natural, love and peace being the anthem. They began traveling, to explore, to seek the ancient philosophies of the East.
This voyage of discovery not only led to a change of lifestyle, but also the way they dressed. Natural fibres were rediscovered, and principally amongst them “Cotton”. India, with its natural abundance of this fibre, was an automatic choice of a supply source. Simultaneously, the growing settlement of Indian abroad led to a ready outlet for a variety of India merchandise and clothing textiles as an article of trade because of its growing demand.
This sudden demand for cotton garments resulted in the Indian industry growing by leaps and bounds in a very short period. Export of “High Fashion” garments from India started off with the cheap cotton kurtas and hand-block vegetable dye printed wrap-around skirts in cotton sheeting to meet the demands of the western youth.
Cashing in on the boom any and everybody got into the manufacture of clothing. The Government, realizing the potential of earning foreign exchange for the country, announced incentives and tax exemption for exporters. The fallout was an industry that grew in an unorganized manner and developed a reputation for producing low cost, low quality, volume merchandise.
The 1980s established that the industry was here to stay but, in terms of product profile, India still had not been able to move out of the lower end of the world market and continued to have an average unit value of under US$ 5.
The 1990s saw the industry make a conscious effort to shake off the image of being producers of cheap, low-quality merchandise with unreliable delivery schedules. The second generation had begun coming into the business, and contributed to reorganizing their firms for clearer structure and professionalism. Funds were ploughed back into the business with the emergence of large and modern production facilities. Even though most of the export houses were family-owned, trained professionals were inducted into the business for clear-cut departments and areas of functions. Consolidation and retention of business was the focus of the late nineties as the abolition of quotas planned for the new millennium became a reality.
The industry was euphoric but at the same time apprehensive of what the post quota era would bring. Many of the producers looking for a synergy in the business and also to sustain the large production facilities began tentative forays into domestic retail. The face of the Indian consumer was changing. Exposure to the western society via the electronic media helped in creating a ‘borderless’ world for lifestyle products, and contemporary fashion merchandise found a ready market in domestic retail.
The new global consumer over the years has evolved as a demanding and yet discerning individual. The novelty factor along with price and quality has become the watchword of the new millennium consumer. As consumers around the world change, so does the product strategy to keep consumer interests alive and ensure loyalty.
The new millennium has seen the emergence of the ‘Quick Response’ or ‘Real Time’ merchandising in fashion as a strategic solution to nurture, retain and grow the business. ‘Fast Fashion’ was born. Retailers could no longer work on the concept of two major retailing seasons with a couple of promotions thrown in. Product planning and the merchandise on the racks had to be constantly current and trendy.
Fast Fashion is not simply a solution to increase consumption by introducing greater product variety but a strategy to retain, consolidate and sustain the market through proactive product development and efficient product delivery to consumers, and thereby grow the market by increasing market share or developing new markets.
However, fast fashion has been tried and tested in different avatars through the years. In the 1960s and 1970s it was present in the quick reaction time of the unorganized sector to service the demand for block-printed ethnic clothing merchandise. In the 1980s and 1990s it was represented in the proactively researched product development at the source market level by wholesale importer/designer buyers (like Rene Dehry, Giorgio Kauten, Diff and Steilmann). Today it is technology-aided product research and development techniques (practiced by Anthropologie, Rampage, Zara and H&M), coupled with responsive buying processes.
In product design terms, India has moved on from producing and selling ‘fashion basics’ to ‘basic’ merchandise, and now back to ‘fashion basics’ once again. History says that this is where India’s inherent talents and strengths as a source market lie. Rather than reinventing the wheel or try to catch up with other competitors strengths, India should cash in on its strengths to practice and master fast fashion.
admin
April 6, 2008
In the business of fashion, time has always been important. However, speed and efficiency are now both a strategic imperative and a tactical necessity. With greater unpredictability in the market, it is critical to have the correct product at the correct time in the right quantity. Fast fashion requires completely different thinking in the way product is developed, how pre-production processes are undertaken and how production is organised. The Fast Fashion Seminar will draw upon the live experiences of leading practitioners from the area of product development and supply chain. It will be structured as an interactive session. This Third Eyesight Fast Fashion Seminar will provide you with a valuable insight into how to effect rapid changes in the market to your benefit.
Among other aspects, it will:
Describe in detail the concept of fast fashion
Identify key strategic actions to meet fashion consumer demand
Detail how leading brands such as Zara operationalise the concept
Discuss how to achieve less than 1% inefficiencies in their processes from design to delivery, including inventories and markdowns substantially below the industry average.
Understand the underlying principles of the fast fashion model and how these might be applied to retail and fashion business models in India
Attendance is strictly by pre-registration. Registration information is also available over phone (please contact on phone +91-124-4293478 or +91-124-4030162).
Devangshu Dutta
April 2, 2008
I had the privilege of bringing the Prime Source Forum in Hong Kong (April 1-2, 2008) to a close. As in the previous year, the Forum had senior executives from companies based in the Americas, Europe, and Asia, as well as government officials and highly respected academics. The discussions covered wide-ranging topics, and with the variety of people on the panels, there was also some amount of difference in opinion.
8 issues came to my mind as key themes for the global industry, as I was preparing my closing speech, and I thought that those who were not present at the event may also be interested in these. Some of these are views expressed in the panel discussions, others are just my musings. Hopefully thinking through these 8 things can improve the fortunes of the industry around the world (8 being a lucky number in China).
1. Costs vs Prices – Rising costs were a big theme, running through the various panels. Chinese labour costs, power costs, the increasing costs of fuel, new costs of doing business (compliance) – more cost heads were discussed than I can possibly remember.
Once upon a time prices used to go up when costs went up. But that has not been the case for at least the last couple of decades. Even as costs have climbed, retail prices and FOBs have remained steady or even declined. Clearly, the question is whether this is a sustainable situation – though consumers and retailers have been winners so far, how long can factories and labour be squeezed without impacting the very survival of the business?
The interesting contrast is luxury goods, where production costs have come down due to outsourcing and manufacturing in low labour cost countries. (So even in that area, prices and costs don’t show a correlation!)
2. Where next? – Dr. William Fung (Li & Fung) clearly struck a note with most of the audience in his opening keynote address, as he tackled the BIG question: with costs significantly rising in China, and the risks of a concentrated sourcing basket, which other countries could companies look to. According to him, “within the next 3 years, the follow-up country to China is…China”.
After all, which other country’s industry has poured billions of dollars in up-to-date manufacturing capacity and supply chain infrastructure? So even while the Chinese government’s move to push factories to the north and west of China may be producing results as quickly as they may have hoped, buyers clearly have limited options on the table.
Certainly, other countries such as India and its neighbours, as well as Indonesia, Vietnam etc. are an option, but a lot more needs to be pushed through. According to Dr. Fung, India shows higher product differentiation and development skills that make it a logical place for buyers to invest time and energy.
I believe that what buyers did in China 15-20 years ago, is probably what is needed in South Asia and other supply bases now. At that time, China had neither the production capacity nor the supply chain and other infrastructure that it has now. But intrepid buyers opened the Chinese frontier and created the demand pipeline which pulled the supply base up. Would retailers have a similar focus on the other supply bases today, to balance their exposure in China? This is not a new question – in fact, in the last few years it has come up several times when there has been a hurdle or barrier to cross with China (quotas, SARS etc.). But now, with the Chinese government also wanting to turn the industry’s focus away from low-value products such as clothing and textiles, could this be the opportunity for buyers to push their initiatives in other countries ahead?
3. Fashion is about change…but are we prepared for change? – Speed to market is not just about producing quickly and shipping fast, it is about responding to change in the market. The very nature of the fashion business is “change”.
Though benchmarks of 2-week turnaround and even 2-day turnaround exist, by and large the industry works over a lead time of months rather than weeks. We know that it is humanly impossible for even the best buyer to predict with 100% accuracy as to what will sell 6-12 months in the future.
So the answer, especially in these uncertain market conditions, is to take product decisions closer to the sell-date, rather than try and forecast accurately. The only way to reduce the risk is to respond to market needs, rather than to try and predict what the market will need in the future.
4. Neither free nor fair! – There was enormous debate (although mostly in polite terms), about whether free trade and fair trade meant anything.
What is very clear is that trade barriers continue to exist. Even as import tariffs fall, non-tariff barriers remain in place. While thousands and tens of thousands of people around the world are actively working to bring trade barriers down in all countries, within their own markets there are others who are actively lobbying to keep trade barriers up, or to erect new ones. A very interesting perspective shared by one of the panelists was that to a protectionist, “protectionism” isn’t a dirty word! Such a person will have a clear justification for keeping or putting up trade barriers.
So while the vision is that of free trade between nations, we are probably some way off from that.
5. CSR & compliance pressures – “Compliance pressures” are here to stay. Yet, even after years of debate and discussion, it is evident that there are wide gaps between the perceptions of the various players.
Ever since the industrial revolution in the 1800s, talk of more humane conditions in factories has been prevalent. It took European and American companies decades (at the very least) to move up health & safety and labour standards. However, the industries in the current supply countries do not have that luxury any more, since the pressure on prominent brands and the risk to their image is too high – whether you like it or not, compliance standards are being and will be pushed through aggressively.
The key is to understand how to do it most efficiently, and a critical element in getting there would be to have a set of common standards and database of audits and certifications.
However, let’s not underestimate the challenge in getting diverse interests and competitors to agree to sign on to common standards, and to share information about their suppliers.
6. Consolidation (?) – Consolidation may be a model among mature retailers and mature suppliers, but there is enough organic growth in the market to attract and sustain smaller companies, especially in the case of the “emerging economies”.
Developing markets are breeding grounds for new businesses, each of which feels that they can be the next big thing, and in such an environment, being acquired by another company is the farthest thought from the management’s mind.
Another factor against consolidation on the supply end, comes from the inherent development-oriented nature of fashion products – excellent and innovative product development is not the privilege of large companies, and the cost of entry remains low. So we should question the logic of viewing consolidation as an unstoppable juggernaut.
7. Vertical Integration / Control (between suppliers, brands and retailers) – When companies sit across the negotiating table, they are clearly vying to gain the most margin. Retailers are closest to the consumer, and they have the most margin. The downside is that they also bear the most risk or markdown. So when manufacturers look at becoming brands, and brands look at becoming retailers, they need to keep in mind, there is a cost to moving downstream, even with the extra margin being available.
Over the last few decades retailers have also tried to grow their private label to gain extra margin (in effect, to replace some of their suppliers) – but there is a cost to doing that as well. It is not as simple as just stripping out an intermediary’s cost, since the product development and sourcing operation still needs to be managed.
Vertical integration is the holy grail – perfect vertical integration is what people wish for, but it’s impossible to achieve. The best one can hope for is as much vertical control as possible over the chain from raw material to consumer.
8. Victims of our own success – We treat globalisation as a new phenomenon – the fact is that many thousands of years ago, the Egyptian civilization was trading with the Indus Valley civilization, the Chinese and the Romans had discovered each other way before US department store buyers landed in Hong Kong and Korea.
As Nayan Chanda describes in his excellent book – Bound Together – traders, preachers, adventurers and warriors have created bridges across continents for tens of thousands of years. So retailers and importers in the west, are only following in the footsteps of those pioneers, albeit helped by the communications and travel revolution in the last 30 years.
However, lately, companies’ business models are victims of their own success.
Too much has been outsourced too far. Where earlier, buyer and supplier were next to each other, today there is a physical and cultural distances between them, that sometimes seems impossible to bridge. Where earlier, a buyer and designer could pop around the corner to the pattern room to check the fit, and discuss the quality with the factory, today they sit at opposite ends of the earth, and work in a phase difference of day and night.
The costs related to bringing the skills back certainly are prohibitively high. But clearly bridges do need to be built.
Recreating or transferring the skills that have been lost, or are being lost in the US and Europe is absolutely vital for the industry to survive profitably.
Through training & education, through more frequent travel, through internships and gaining work experience in each other’s environment, or through technology, buyers and suppliers need to invest in reaching something of the sort of understanding and close collaboration that used to exist when buyers and suppliers lived in the same city.
A lot to chew on, and many unanswered questions, which I am sure will bring hundreds of industry executives together again next April at Prime Source Forum 2009 in Hong Kong.
