Fashion is, by definition, perishable. Like bread, eggs and milk. Or is it?

When bread turns stale, eggs turn rotten or milk turns rancid, you do have to throw it away. Fashion is different, because its perishability is artificial, driven by popular perception that something is “out-of-date” or that something else is “the look of the day”. You don’t really have to throw that blue peasant skirt out in the garbage or in the Salvation Army bin…but you do anyway, because it is so yesterday…or that’s what everyone else is saying.

Earlier, perceptions took time to spread, today they can be spread instantaneously through the web, TV and cell phones, and pretty quickly, even through slow media like print magazines.

So ‘Fast Fashion’ is really a product of fast media and communications technologies.

Having said that, it is here to stay, and regular (mainstream) slow-coaches do need to be worried about customers being seduced away by the ever-fresh look of a Chico’s or a Zara.

I can’t even begin to estimate the millions of dollars that must have been spent on “studying the Zara model”. However, while Zara’s model seems to scream “best practice” and everyone wants to emulate it – is it really for everyone?

Inditex (Zara’s parent company) has grown over 40+ years of evolution, in a specific market and business context. It may have “exploded” on the global scene when it floated its IPO in 2001, but the business model has been brewing a long time.

It has such significant investments in production that Inditex is as much a manufacturer as a retailer.

Its people and process model are almost diametrically opposite the command and control, “buying director – driven” model of other retailers. Its technology investments are focused better than most of its peers.

Would your company’s DNA allow you to invest in and manage fabric and apparel manufacturing? Would it allow young people to be sent out to take bigger-ticket purchase decisions with fewer approvals than they do now? Would your design team really trust your frontline store staff with feeding them relevant trend information every day?

And yet, and yet…As labour costs rise in Europe, Zara is also being forced to rethink its model of local or regional production. As it does move more production to places like India and China, the big question is whether it can maintain the sanctity of its business model.

I won’t advise other retailers to breathe easy, but they don’t need to roll over and die just yet.

Other articles on Zara (all in Acrobat PDF format):

• Retail @ The Speed of Fashion – Case Study on Zara – Part I and Part II
• Lifecycle-Led Strategies – picking the appropriate business strategy for your business
• Brand-Watch: Zara – A presentation at the images Fashion Forum 2004

( A Request: These articles have been placed for open access on our website due to the overwhelming interest in Zara around the globe. If you wish to use any of these articles for distribution in your company or in industry workshops, or wish to quote from the articles, please provide full credit to the source. Thanks!)

Do You See Yourself Fitting In?

The Indian retail market is set to be worth anything between US$ 270-300 bn, as per global consultants AT Kearney. The projected growth rate for the organised sector is 35-40% per annum for the next five years at least. “Overall retail is growing at 8-9% but the organised sector is growing much faster,” says Principal, AT Kearney, Debashish Mukerjee. Further, organised retailing is growing at 50-55% in small towns compared to 30% in large cities. Finance Minister P Chidambaram also recently put the figure on the government’s estimated figures for retail in the country at a staggering $ 300 bn.

The apparel retail market is about 6 % of the overall market – valued at $ 16-17 bn and growing at around 10-12% per annum. Also, apparel has among the highest percentage of organised retail at nearly 14%, which is second only to footwear, which has around 35% of organised retail. The question whether retail is a good option for garment exporters at this juncture is not as simple as it seems and many would nod in the affirmative, but the road is long and tedious, and requires among other things, the right product, a good location and more importantly, deep pockets, to make even a dent into the retail market. In the last issue, some of the exporters we spoke to, shared their experiences about the efforts they had made while venturing into retail. In this issue, we offer a few key directions from retail consultants and sector experts.

With a huge talent pool and a potentially large domestic market, the prospects for retail’s expansion seem buoyant. India has a population of 1.2 billion of which over 50% are said to be under the age of 25 and constitute 29% of the country’s urban populace. “The number of people who are going to have an income of Rs 2 lakh + per annum in India may double in the next two years, and these are potential apparel buyers. So, it would be right to presume that the expenditure on apparel will increase,” affirms Mukherjee. 

Ernst & Young estimates that retail’s expansion in India is being driven by greater economic growth in the    country and its changing demographics; the upsurge in urbanisation and greater credit availability in terms of retail loans for investments in new projects and ventures. “Investor interest in the country is on the rise, and that is a sign of things to come,” observes Manager, Retail and Consumer Products Sector, Ernst & Young, India, Soumya Pal Choudhuri.

These investments have translated into hectic activity for setting up retail outlets and businesses in recent times. “The commercial property market has been growing at 30% since 2000 and there is a demand for 200 million sq ft of commercial space by the year 2010. Retail rentals have gone up by 70% in the last one year and the opening up of retail for FDI has further pushed up prices,” says an industry watcher. He adds that nearly 340 new shopping malls are expected to come into operation by 2008 against 105 now, in Mumbai, Delhi, Bangalore and their suburbs, and that nearly 725 malls are being planned all over India. These figures further accentuate the potential for a retail blitzkrieg in the country. 

Existing indigenous retail giants, Pantaloon and Shoppers’ Stop are focusing on re-formatting their business. International players are also looking to capitalise and leave their imprints on the Indian landscape. US-based company Wal-Mart has already tied up with the Bharti Group and is establishing its position in the country. The Bharti Group is expected to invest $ 2.5 bn by the year 2015 to open a chain of hypermarkets, supermarkets and convenience stores across the country. And, the Dubai-based Landmark Group is revitalizing and expanding its operations with its Max Retail Lifestyle stores, which are targeted to touch 100 in number by 2011. 

“Activity is high in the top 12-15 cities in the country and in some of the mini metros but the market is stirring in smaller cities as well,” says Devangshu Dutta, CEO, Third Eyesight, a consultancy firm focused on retail and the consumer products sectors. Dutta notes that mid-to-high level brands are focusing on value and in big cities while smaller entrants have experimented with volumes in smaller cities, where they have tried to convert the rural buyer to shift from local tailored clothing to ready-to-wear. “Demand is growing substantially in these small cities and towns for apparel and particularly, in the ready-to-wear segment,” he points out.  

Dutta believes that the many segments of apparel retail are growing at different rates altogether. “Some segments are growing at 25-30%. Yet others like ladies western wear could be growing at 50-70% per annum and innerwear could be   growing at 4-5%,” he says. “But if we take the size of the apparel retail market at $ 25 bn today and say that it is growing at 10-15%, I see it touching $ 28 bn by 2008,” he adds. 

To him, the growth of retail is very organic – adding one customer and one store at a time. “Retail is not only driven by financial power; the venture has to be continuously relevant to the customer. There really is no one template that you can follow as a retail business model or strategy,” he asserts. 

Dutta is quick to point out that to enter the retail hemisphere, exporters must maintain a holistic approach to the venture. “They must take operational lessons to make a successful foray into retail rather than go for strategic ones,” he says. “I may even compare retail to the hospitality sector where the quality of service and the product offered is the discerning factor for success,” he adds. This could mean  taking a close look at product segments, zeroing-in on the targeted clientele, selecting a network of perfect locations and deciding their marketing techniques.

The idea, therefore, is to find your niche and then make a well-heeled entry into that area. “There are primarily 3-4 core layers where you can fit in,” says Choudhuri. The super premium segment is limited to stores in the top 3-4 metros. It has a select loyal clientele and Choudhuri believes that there is tremendous growth in this segment as it has a skilled work force, and high-level brand recognition and protection. And, with luxury malls coming up, one will see players having ‘top class’ products roll out some really high-end offerings. 

Then, there is the premium segment, which currently has international brands like Levi’s and Tommy Hilfiger. “This segment will grow as it is already witnessing a growth in organised retail with the number of malls growing by the day and the ever-increasing footfalls, which are healthy indicators. Players in this segment will partner aggressively with their Indian collaborators as a part of their strategies,” he adds.  

“The trends as I see them,” says Mukherjee, “are large retailers launching private labels and their own brands and selling high-end stuff.” For example, Shopper’s Stop selling an Arrow shirt where its margin could be 10% vis-à-vis selling its own shirt at a margin of 25%. Therefore, a good retail strategy would be for a player to launch a private label of good quality, offering a value-for-money proposition in terms of the product. “A private label being sold instead of a branded shirt for a little less may do even better,” he suggests.  Garment exporters could see retail growth in this segment, as large retailers will be looking out for quality manufacturers. 

Consultants also have some suggestions for the sector and a note of caution to new entrants. “The Indian textile and apparel industry is the cornerstone of the Indian economy,” says Choudhuri. “But it has to re-organise itself, achieve the desired levels of scale, become competitive on cost, reach higher production levels, become technology savvy,   create big companies and become exclusive suppliers to its clients. Apparel players should anticipate the pressures and challenges and prepare measures. Production and design systems, and   integration and corporate governance are also needed to attract big investments. It is  only when all these factors converge will the results start showing,” he concludes.

By RASUL BAILAY
MINT (Exclusive Partner The Wall Street Journal)
DELHI, 26 August 2008

Since India bars overseas investments in a retail venture selling multi-branded products to consumers, the two foreign funds have invested in MedPlus’ wholesale arm

Two venture capital firms have invested $25 million (Rs109 crore) in Hyderabad-based pharmaceutical retailer MedPlus Health Services Pvt. Ltd in the first publicly known foreign investment in a medical store chain.

NEA-IndoUS Ventures, a Santa Clara, California-based venture fund, and an unnamed fund from West Asia have jointly invested the amount in MedPlus for an undisclosed stake, a person close to the transaction said, asking not to be identified ahead of a formal announcement.

A top MedPlus executive, too, declined details. “It’s confidential,” said Madhukar Gangadi, chief executive of MedPlus. “At this point of time I am unable to tell you anything.”

Since India bars overseas investments in a retail venture selling multi-branded products to consumers, the two foreign funds have invested in MedPlus’ wholesale arm. India allows up to 100% foreign investments in so-called wholesale cash-and-carry retail ventures that sell only to other retailers and businesses. Such ventures are not allowed to sell to end consumers. NEA IndoUS has, in the past, funded Microqual Techno Pvt. Ltd, a firm that makes telecom components and chips, and mortgage solutions provider ISGN Technologies Ltd.

In a bid to gain access to India’s more than $300 billion retail market that is growing annually by 7%, the world’s top three retailers Wal-Mart Stores Inc., Carrefour SA and Tesco Plc. have announced wholesale ventures in the country and let local firms manage the front-end stores that sells to consumers. Such branded retail businesses account for just 3% of the market today, but are expanding at about 35% annually.

Pharmaceutical products are retailed in India through 800,000 mom-and-pop stores and less than 1% is operated through organized ventures. In recent years, hundreds of branded pharma outlets have mushroomed nationwide operated by Apollo Pharmacy, Medicine Shoppe, Guardian Lifecare Pvt. Ltd, Subhiksha Trading Services Ltd and MedPlus among others. Guardian Lifecare is also looking for private equity (PE) investment, according to Ashutosh Garg, the company’s chairman and managing director.

MedPlus operates more than 500 drug stores in Andhra Pradesh, Maharashtra, Karnataka, Tamil Nadu, Gujarat and Rajasthan and plans to double that number by March 2009. Last year, MedPlus received $5.2 million funding from Mauritius’ iLabs Management Llc. (currently called Peepul Capital Llc.), a PE fund co-founded by Satyam Computer Services Ltd’s former chief operating officer Srini Raju.

Though the MedPlus funding is the first of its kind in drug retailing, foreign PE funds have backed retail ventures in other businesses in the past.

In 2006, for instance, UK-based Actis Capital Llp. invested about $65 million for a controlling stake in the back-end operation of Nilgiris Dairy Farm that through a different company operates a chain of supermarkets.

A retail expert predicted the MedPlus model may be copied in other retail niches. “That’s the kind of strategy everyone seems to be getting onto unless someone wants to retain control,” said Devengshu Dutta, chief executive of retail consultancy firm Third Eyesight. “That’s what has happened with Bharti-Wal-Mart, that’s what happened with Tesco and Tata.” Wal-Mart owns 50% in a cash-and-carry venture with Bharti Enterprises Ltd, the company that controls phone firm Bharti Airtel Ltd. Tesco, on the other hand, plans a wholly-owned unit in the back-end business that will supply to a Tata-owned supermarket chain, Star Bazaar.

Oswal Group is a premier textile group of northern India having its corporate office at Ludhiana,Punjab. The organisation has been for the last 40 years with spinning as its core competency. Earlier, they were part of the Vardhman Group but, after family settlement between two brothers in 2003, they named themselves as Oswal Group. The group is mainly into spinning and dyeing of all types of yarn in different blends and manufacturing of garments. In 2004, Oswal group forayed into innerwear business under the brand of ‘Sensa’ with a view to cater to the growing ready-to-wear fashion apparel market. Thereafter, the company renamed its retail innerwear business as ‘Straps’, offering lingerie, nightwear and maternity wear in 2006. And finally in 2008; Oswal Retail decided to wind up its innerwear business and close down its 22 exclusive outlets of ‘Straps’.

Market still in nascent stage

As per reports of study conducted by leading retail consultants, Oswal group had pegged the intimate wear retail market in India at a whopping Rs 2,200 crore and it was expected that it would touch Rs 4,000 crore mark by 2009. The company had planned to capture five per cent share of this market by 2010. Commenting on the market scenario, Pradeep Seth, CMD, Stadia Group, says, "The main reason for suddenly deciding to shut down all stores could be the financial losses in the business and not seeing the growth potential as was envisioned. The markets chosen for Indian Lingerie were probably right but there could be a reason that the more elite class still prefers to wear foreign brands which they purchase from abroad. The other population may still be having cheaper options. However, the reasons for closure could also be mismanagement."

Too many stores too fast

Oswal group had ambitious plans to open ‘Straps’ stores across the country. They opened 22 stores across Delhi, Gurgaon and Ludhiana and had committed investment of Rs 60 crore in this venture and planned to open 120 exclusive stores by 2009. It even tied up with several premium foreign intimate wear brands including Italian ‘Parah’, Rene Rofe, Wonder Bra and Women Secret of USA, Body Line and Moon Dance, which were sold through Oswal retail outlets.

Re-branding did not work

Re-branding is an exercise requiring meticulous plans and execution in order to retain its brand identity in the market. A company generally goes into re-branding after 10 years or more, when they feel that, with changing times, their brand too needs to be upgraded and consumer too needs the fresh look. Commenting on re-branding as a solution, Devangshu Dutta, Chief Executive, Third Eyesight, says, "The particular reasons behind Oswal’s decision to close down the chain will be best given by the company itself. Normally, if a company wishes to sustain the retail business, specific store-related decisions (changing the design, closing some stores, re-branding etc.) can certainly help. On the other hand, if the management wishes to exit the entire business for some strategic, operational or personal reasons, then there are essentially two options: either to sell the business or to close it down and book the losses."”

Lack of consumer interest

With everything being right in order, one very important thing the company skipped on was tile customer behavior commenting on consumer preferences, Mr Seth says “one reason is that more elite classes still prefer to wear foreign brands, which they purchase from abroad. Another reason lies in the possibility that people are still having cheaper options. However, reasons for closure could also be mismanagement. "

Possible solution

Is there a possibility that the company can be saved from such sudden closures of outlets? Can closing down of non- performing outlets or re-branding the brand be an option for survival? Or, is shutting down all the stores the only possible option? Talking about feasible solutions to this problem, Shubranshu Pani, President Retail Advisory Services, Jones Lang LaSalle Meghraj, says, "Normally the solution for such cases is a merger possibility with a known chain that is either into similar business in India or merger/acquisition by a foreign brand that may be looking for a foothold in India. Re-branding and shutting down of non-performing stores are solutions sometimes exercised by retailers to boost performance and cut losses. But many a time, retailers resort to sales and discounting. Some retailers abroad also resort to rationalization of format-size.and merchandising. For example, many ‘mom & pop stores’ and medical stores have started keeping other products like CDs, stationery and FMCG products. Getting a store chain out of trouble needs introspection and’ innovation. While reworking on space strategy is definitely required, it also calls for an overhaul in operations and client interaction." Giving his opinion, Mr. Seth says, "Normally, the solution to such cases is a merger possibility with a known chain that is either into similar business in India or merger-acquisition by a foreign brand that may be looking for a foothold in India."

By Rasul Bailay

MINT (Exclusive Partner The Wall Street Journal)

NEW DELHI, 11 August 2008

As costs rise and economic growth slows, Indian retailers are looking at ways to trim expenses and protect their profits.
Pantaloon India Ltd, the country’s largest listed retailer, has begun integrating the management, marketing, human resources, or HR, and information technology, or IT, departments of its units into one. The company says this one step will help it save around Rs. 165 crore (Rs. 1.65 billion) a year.

“It is only cost and efficiency that we are focusing on now,” said Kishore Biyani, managing director of Pantaloon. “Instead of having separate management, administration, HR and IT teams for different business units, we are merging them. So all the smaller businesses are getting managerially integrated into the larger ones.”

This essentially means the company will have a common HR team, one IT team and one management for all its business units. Pantaloon is also planning to prune its advertising budget, reduce electricity bills and cut packaging costs.

The company recorded a revenue of Rs. 3,236 crore (Rs. 32.36 billion) and net profit of Rs. 120 crore (Rs. 1.2 billion) in the business year ended June 2007.

Inflation, which has jumped to a more than a 13-year high of 12.01%, on the back of a surge in food and fuel prices, increasing interest rates and concerns of a slowdown in consumer spending, are for the first time casting a shadow on the ambitious expansion plans of organized retail companies.

Rapid economic growth in the past three years had prompted retailers to step up spending on opening new outlets, hike marketing and advertising budgets and spurred a frenzied hiring spree.

“Unlike mom-and-pop stores, large retail formats have much higher cost obligations,” said Devangshu Dutta, chief executive of retail consultancy firm Third Eyesight, based in Gurgaon. “Organizations with larger cost heads will be first to get hit in case of a slowdown.”

Shoppers Stop Ltd, the country’s No. 2 listed retailer, said it was studying options for cost rationalization and will take steps to prune overheads. “If the company fails to achieve its sales target, then there is a possibility of reducing costs to that the company’s revenue target is protected,” said C.B. Navalkar, chief financial officer at Shoppers Stop.

A recent study by Mumbai-based Edelweiss Securities Ltd said Pantaloon’s “same store”—stores that have existed for more than a year—grew between 11% and 12% during July 2007 and May 2008, compared with 16-17% a year ago.

Though Shoppers Stop maintained the same stores growth was 20% in fiscal year ended March 2008, Edelweiss says it came mainly from price increases rather than growth in volumes.

Subhiksha Trading Services Ltd, which operates the country’s largest chain of discount stores, said it had no special plans to prune costs. “We are a low-cost (retailer) and cost- cutting is a perpetual part of our life,” said R. Subramanian, its managing director.

Reliance Retail Ltd said the company is still in investment mode and has no plans to launch any cost-cutting drive. “For us, it’s business as usual,” said a top Reliance official, asking not to be identified.

Some retailers are even seeing a silver lining in the economic slowdown. Sky-rocketing real estate rentals, which had doubled in the last three years, have stabilized. “There is a perception among the retailers that there might be a slowdown and (rental) prices might cool off,” says Shubhranshu Pani, president for retail services at real estate consultancy TrammellCrow Megharaj. “Some of them are optimistic and feel that in some pockets the prices will fall.”