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December 30, 2008
By Aanand Pandey & Pradipta Mukherjee
From the Business Standard Strategist
New Delhi December 30, 2008
Emami’s old-school promoters were nimble enough to acquire Zandu. They need many more manoeuvres to become a major FMCG player.
Radhey Shyam Goenka, 61, the joint chairman of the Emami group, loves to take an occasional dig at the group chairman and his friend of over 40 years, Radhey Shyam Agarwal. Like most old-school entrepreneurs, Agarwal has a habit of scribbling down numbers on a piece of paper during meetings. When Goenka and Agarwal sit with the next-generation directors from the two families, at times Goenka snatches the scribbled note from Agarwal’s hand, gives it to one of the directors and asks him to check the final figure. Surprisingly, every time Goenka has done this, Agarwal’s final figure has turned out to be incorrect. “Our children laugh at this,” says Agarwal.
Goenka is the cool one, known for his meticulous planning, while Agarwal is the galloping warhorse, whose business instincts appear incredible at times, but, according to Goenka, “turn out, amazingly, to be prophetic”. Sure enough, most of the promoters’ decisions bear the stamp of Goenka’s diligence and Agrawal’s foresight.
They characterised their first life-altering decision. In 1974, the duo left cushy jobs at one of the Birla companies to sell “beauty and cosmetic products priced 30 per cent higher than the competing brands, piled on the back of a hand-pulled rikshaw”, according to Agarwal’s younger son and Emami’s executive-director, Harsh Vardhan. One could hardly predict that the duo will take the business, started with a seed capital of Rs 20,000, to where it is today: Rs 1,700 crore flowing in from fast-moving consumer goods, newsprint, edible oil, real estate and health care. It again came into play four years later when they took over a sick unit named Himani Ltd and pressed on to make it work for eight years.
In 1984, Himani gave them Boroplus, a blockbuster product that rejuvenated their FMCG business.
As Emami acquired Zandu Pharmaceutical Works recently — the culmination of a six-month battle — it fought with precision and planning. The mark of foresight, however, is yet to be seen.
To seal a deal
To acquire an Indian listed company, one needs a Teflon exterior, which would prevent things from sticking. Mumbai-based Rs 140-crore Zandu is a 100-year-old company that manufactures more than 300 herbal and ayurvedic products. A zero-debt company with a strong brand name, Zandu has always been an attractive target for both Indian as well as multinational FMCG companies.
In May this year, when Emami picked up 23.6 per cent stake in an off-market deal from the Vaidyas, one of the two promoter groups of Zandu, it looked a smart, albeit expensive, move. According to reports, Emami paid Rs 130 crore to the Vaidyas at an offer price of Rs 6,900 a share (including Rs 100 a share as non-compete fee).
Immediately after Emami’s announcement of the mandatory open offer of 20 per cent to Zandu shareholders at Rs 7,135 a share, Zandu sought to stave off what it saw as a hostile takeover bid by taking recourse to a popular and effective tactic known in M&A parlance as the Shark Repellent manoeuvre. It sent a notice to Bombay Stock Exchange saying the company intended to issue preference shares to the company’s promoters and directors. This was aimed at fortifying Zandu’s second promoter group, the Parikh family. Emami got wind of the note and sent a legal notice to Zandu the next day, which forced the Parikhs to withdraw the plan. “The independent directors on the Zandu board were kind enough to understand our point of view,” says Harsh Agarwal.
Meanwhile, Zandu’s shares at BSE stayed around Rs 10,000 a share in anticipation that Emami will raise the offer price. Emami’s promoters remained unfazed. “We think we have done a fair evaluation keeping in mind the industry standards,” said a press statement issued shortly afterwards. Meanwhile, the stock market soared in July, when Emami’s open offer opened.
By that time, the expected had happened. The Parikhs, anticipating Emami’s next step, had raised their stake in Zandu from 18 per cent to 22 per cent. They owned another 20 per cent, said industry sources, through family members and associates. At the same time, the Parikhs had gone about knocking on all possible doors — Securities & Exchange Board of India, the Company Law Board (CLB) and the Bombay High Court — but by the end of August, it was clear that as far as the Parikhs were concerned, Zandu was a lost cause.
By mid-September, Zandu’s shares had fallen below
Rs 16,700 and that was when Emami doubled its offer to Rs
15,000 a share. Zandu ran out of options when CLB asked the
two companies to try and settle out of court.
On October 3, Emami revised the offer to Rs 16,500 a share
and, according to sources, this was when some of the Parikh
family members evinced interest in quitting the company, saying
they would not get a better price. Trade reports were released
soon after, stating that Emami had entered into a share-purchase
agreement with Zandu. Looking at the price that Emami paid
for the deal — Rs 800 crore for a Rs-160 crore entity
— it appears that diligence may have given way to adventure.
Experts say the deal holds lessons for future buyers. KPMG’s corporate finance director, Nandini Chopra, who also heads the firm’s valuations practice, says: “Acquirers in future would possibly seek to be more in control of their pursuits by ensuring that they are negotiating, from the outset, with majority blocks of shareholders.” This would help mitigate the risk of another shareholder block perceiving it as a potentially hostile situation. “This will also prevent the target company’s remaining shareholders from putting up bid defence strategies, which would ultimately increase the cost of acquisition, or, worse still, thwart it,” she adds.
Emami’s persistence with the deal says something about what it expects from the acquired company. “At almost 5.5 times the sales multiple and almost 30 times EBIDTA (earning before interest, depreciation, tax and amortization) multiple, Emami is expecting stupendous growth from the Zandu franchise,” says C Ravishankar, manager-strategic and commercial intelligence, transaction services, KPMG India.
Speaking to the strategist after the acquisition, R S Agarwal indicated that he expected Emami’s FMCG business to touch Rs 1,100 crore by 2009-10. Harsh Agarwal, who has been overseeing the post-acquisition brand consolidation, sounded even more optimistic. “We expect our sales and profitability to grow by two to three times in the next couple of years,” he said.
According to Associated Chambers of Commerce and Industry,
FMCG sales have not been affected by the current slowdown
and the sector is expected to touch $25 billion by the end
of 2008, as against $20 billion in 2007.
A positive industry outlook and Emami’s compounded annual
growth rate at an impressive 25 per cent for the last three
years, the anticipation is soaring in the region of 34-35
per cent. However, the steep takeover price and historically
low growth of the Zandu franchise (10 per cent CAGR) indicate
that there is more to Emami’s enthusiasm than meets
the eye.
Analysts say the intent is not only to unleash the untapped
potential of the strong Zandu brand — deploying a mix
of marketing, distribution and operational strategies —
but also to prepare the ground for Emami to play a bigger
role in the consumer goods market. Earlier this month, R S
Agarwal and R S Goenka issued a statement saying that the
company plans to position itself as a “food products
and personal care major”. Food products and personal
care comprise the biggest slices of India’s Rs 96,000
crore FMCG pie, accounting for 43 per cent and 22 per cent,
respectively.
Marked markets
Emami has not yet announced the final product strategy but careful analysis seen in the light of recent announcements shows that its product portfolio is changing in terms of the market size of each product category. Before Zandu came into the fold, Emami was the market leader in two niche categories: Boroplus cream, with 70 per cent, led the Rs 190 crore antiseptic creams market, and Navratna, with over 50 per cent, headed the Rs 397 crore cooling oil category. “Now, with the Rs 120 crore Zandu Balm in its fold,” says Harsh Agarwal, “Emami leads the ‘rubificient’ (local pain ointment) category with a combined market share of more than 25 per cent… Zandu balm is the market leader and Menthoplus the strong third player, so both can continue without competing with each other. They can play complementary roles.”
Similarly, the Rs 170 crore Cyawanprash category, dominated by Dabur Chyawanprash with 61 per cent share of the market, will see a bigger Emami footprint paved with Zandu Special, Sona Chandi and Kesari Jeevan. ayurvedic medicine, antiseptic creams Harsh Agrawal sees Emami’s consolidation in the classical ayurvedic medicine category as the biggest advantage of the deal. Indian over-the-counter herbal and ayurvedic medicine segment is estimated at Rs 7,500 crore. Dabur leads this segment with 10 per cent market share.
Emami and Zandu’s combined product portfolio does not give Emami enough to stand up to the might of the Rs 2,360 crore Dabur, Rs 2,290 crore Marico or Rs 1,267 crore Glaxo Smithkline Consumer Healthcare India — much bigger FMCG players. Experts say Emami will take its first big step to becoming a serious player in the FMCG segment when it comes up with defined product architecture. AT Kearney India principal Debashish Mukherjee says an evolved product architecture, displaying a much bigger scope than its present “ayurvedic proxy” positioning will be the first critical step if Emami aspires to be an FMCG major. “Merely changing or rearranging the existing product categories will not put Emami into the big league,” he adds.
Mukherjee adds that unless herbal or ayurvedic consumer
goods players hit mass retailing, they can’t hope to
challenge serious FMCG players such as Hindustan Uniliver
or Proctor and Gamble. Smaller players, such as, Emami will
have to think of ways to gain access to product categories
they can’t reach. Product improvisation, customisation,
even price variations can help. Emami’s Chyawanprash
product range, for instance, could see price variations with
the inclusion of Kesari Jeevan, which is in the premium consumer
segment. Similarly, the rubificient range can see price differentiations.
The market is in the villages
Categories such as health supplements and cooling oil have a huge untapped potential in the urban and rural markets. The Rs 600 crore health supplement market has a surprisingly low penetration level of 0.2 per cent in rural and 1 per cent in the urban markets. Similarly, cooling oil has a huge potential in the rural market. With the increased media reach, Emami has a big market waiting to be explored, and it can only be reached through a wide and efficient distribution network.
The cooling oil category has few rivals, all of them local players (Dabur Super Thanda, Himange, Himtaj). Emami’s substantial advertising and promotions spending — more than 20 per cent of sales every year, much higher than the FMCG industry average of 11-12 per cent — can provide the beachhead.
Emami has a strong sales network of 2,800 distributors with direct supply to 400,000 retail outlets and a product reach of 2.6 million outlets across India. Urban distribution channels cover modern format outlets and retail stores and rural sales channels include Emami mobile traders and Emami small village shops.
Emami has also tied up with ITC e-Chaupals, Indian Oil Corporation petrol pumps and the India Post network. Moreover, it has five sales channels divided into rural and urban areas. Unlike Zandu’s distribution channels, which were strong in the West and South, Emami’s network is evenly spread out in all regions of the country.
Third Eyesight chief executive Devangshu Dutta says growth in the smaller towns and rural markets can still be driven by penetration and improved availability levels of stock-keeping units. There are still vast swathes of consumers in India whose consumption of packaged skin and personal care products is negligible. The main causes of optimism about continued growth would stem from this aspect of untapped markets and unfulfilled demand.”
An AC Nielsen report for April-September 2008 showed that value and volume growth across a range of products, such as, skin creams, lotions and hair oils, was much higher in the rural markets than in urban markets.
admin
December 7, 2008
By Sapna Dogra Singh
Business Standard
New Delhi December 07, 2008
Lack of an apex body, along with the absence of time-bound deadlines, are being cited as reasons behind the poor implementation of the scheme for integrated textile parks (SITPs), which is the textile ministry’s flagship scheme, according to industry experts.
The objective of this scheme launched in 2005 was to create jobs and world-class infrastructure. However, so far, out of the 40 sanctioned parks, just four have become operational.
"It is a grand plan but actual execution is very slow," said Devangshu Dutta, chief executive officer of Third Eyesight, a consultancy firm which has worked with some of India’s leading textile companies. There are multiple stakeholders, including the central government, state governments, district authorities and several companies. "Bringing them together is a difficult job," said Dutta.
Under the SITPs, the government provides up to 40 per cent of the cost of setting up a textile park with a ceiling of Rs 40 crore. Till now the ministry has contributed Rs 450 crore. The industry has pitched in with nearly double this amount. The combined investment is expected to touch Rs 2,000 crore by 2009-end.
The Parliamentary Standing Committee on labour has also made similar observations in September. While ruing the slow pace in the progress of SITPs, it has recommended that a time-bound action plan should be drawn up to ensure that the sanctioned textile parks become fully operational as any delay in this regard may not only involve the cost overrun but could also result in weaning the entrepreneurs away from scheme.
According to a senior textile ministry official, the reasons for delays are local issues which involve land deals, pollution and environment clearances in case of processing parks and sometimes there’s conflict amongst the entrepreneurs, which could result in the cancellation of the park.
The four parks, which have become operational are — Palladam HiTech Weaving Park at Palladam in Tamil Nadu, Brandix India Apparel City at Vishakhapatnam in Andhra Pradesh, Pochampally Handloom Park at Pochampally in Andhra Pradesh and Gujarat Eco Textile Park, Surat, Gujarat.
Most of the parks are progressing smoothly and by year end about five to seven more parks would become operational, informed the ministry official and added that the progress has also slowed down now because of the financial constraints that people are facing in view of the current economic slowdown, added the official.
Incidentally, an inter-ministerial Project Approval Committee
(PAC) for SITPs is meeting in the third week of December to
review the progress of the textile parks and also to take
a call on cancellation of some of the parks. At least three
projects are likely to be cancelled and be given to other
interested parties, said the official.
The committee meets on a quarterly basis.
admin
December 6, 2008
By Zainab Morbiwala
Images Retail
December 2008
THE HISTORY OF CATALOGUE RETAILING IS INTERESTING. WHAT BEGAN OUT OF NECESSITY, SOON DEVELOPED INTO A CHANNEL OFFERING CONVENIENCE OF SHOPPING FROM HOME. WITH THE TREND OF CATALOGUE RETAILING YET TO GAIN MOMENTUM IN INDIA, MOST RETAILERS – STILL FOCUSSED ON THE BRICK AND MORTAR FORMAT- ARE YET TO FULLY EXPLOIT THE TRUE POTENTIAL OF THE MEDIUM.
THE ROOTS
As the name suggests, Catalogue retailing is a non-store retail
format where the retail offering is communicated through a
catalogue to the consumers. Mail-order catalogues debuted
in 1856 when Orvis began selling fishing gear in USA. In 1872,
Aaron Montgomery Ward made an arrangement with the National
Grange, America’s largest farming organisation, to offer 163
items of merchandise under ‘The Original Wholesale Grange
Supply House’. Ward’s catalogue was followed by one published
by Richard Waren Sears, who started selling watches in 1886
through mail-order business. Elaborates Devangshu
Dutta, CEO, Third Eyesight, “Catalogue retailing evolved
in the west to meet the needs of far-flung towns and rural
settlements since regular retail stores could not be established
or profitably run in each area.
Since then, catalogues and other forms of non-store retailing including television and the internet marketing have evolved in different markets.
Adds Dutta, “Very often, retailers use catalogues as a complementary channel to store retailing. UK’s Argos, now also in India, evolved its unique catalogue-stores, that turned the model upside-down, making physical stores a walk-in opportunity for the much bigger catalogue from which customers could place orders.” Sharing the success of Argos UK, Andrew Levermore, CEO, HyperCity, says, “Argos UK has annual sales of close to 2.6 billion Pounds annually and the catalogue is present in over 70 per cent of UK homes.”
INDIA STORY
It has been only about 10 months since the launch of Argos
in Mumbai. HyperCity Retail India Ltd, along with Shopper’s
Stop Ltd, entered into a franchise agreement with Home Retail
Group, UK, to offer a unique multi-channel shopping experience
under HyperCity Argos. Currently operational only in Mumbai,
the concept will be introduced across India when HyperCity
debuts in other parts of the country. Talking about the HyperCity
Argos operation, Levermore says, “For us it is the retailing
of products through the medium of a book with more than 300
pages, listing over 4,000 products. Catalogue retailing is
‘not’ a promotional leaflet of a few pages that is inserted
in the newspaper. It still requires the customer to visit
a physical store to purchase the product.” Apart from
HyperCity Argos, there is Lovy Khoslfs Elvy, which offers
high-end home decor and interior products through a catalogue.
An offshoot of export major, Stalwart Creations, Elvy introduced
a mail-order catalogue in India three years ago. While HyperCity
Argos’ catalogue is currently restricted to the customers
in Mumbai, Elvy facilitates customers across India to place
orders through their catalogue. Kh9sla says, “Catalogue
retailing in India did not really exist when Elvy started
out. It was very demanding’ and a very challenging task. We
had to be thorough with our processes to meet the high expectations
of our customers. “Prior to Argos and Elvy, Otto Burlington
was operational in the Indian market (about 15-17 years ago)
with Catalogue Burlington. Despite being a pioneer in India
and popular in UK, it was phased out very soon. Explaining
the reasons for Burlington’s failure, Khosla says, “The
three infrastructural properties required to support catalogue
retailing – effective telecommunication, easy mode of payments
(e.g. credit cards) and a structured distribution set-up –
were not in place.” Dutta observes, “Catalogue management
sciences are probably not being applied effectively. The shopping
dynamics and the operational success factors differ in home
shopping and physical stores.”
PHYSICAL PRESENCE
It is interesting to observe that both HyperCity Argos and
Elvy have their standalone stores as well. Shares Levermore,
“Having store presence cements the brand in the consumer’s
eye and allows the customer to feel the product. When starting
out, store presence ensures credibility and safety in the
consumer mind.” The catalogue stores of HyperCity Argos
offer customers the facility to browse through the catalogue
and view the products before making the purchase. High involvement
and high investment products across categories such as furniture,
technology, jewellery etc. are available on display. Customers
also get to see other products at the special viewing and
demonstration areas in the store. Sharing whether catalogue
retailing can survive without a physical store, Khosla feels,
“Yes, it possibly can. However, it might take longer
to penetrate the larger database present in the country. For
us, a combination of both works.” Commenting on the catalogue
design, Levermore says, “There is much science around
this and can be learned only with years of experimentation.”
As for Elvy, Khosla has made sure to bring out a catalogue
based on international standards. Both Elvy and HyperCity
Argos launch their catalogues every six months.
INTERNATIONAL PERSPECTIVE
According to Khosla, the resistance to catalogue shopping
is much higher in India than in any other country. “We
need to work much harder to build a comfort level for our
customers.” Adds Levermore, “For the Indian consumer,
going out for shopping is still very much a leisure activity
as there is little competition for leisure in the form of
sports clubs or parks. In the West, shopping is often seen
as a necessary but somewhat painful experience. This will
evolve to be the case in India, but only eventually.”
CHALLENGES
According to Dutta, the primary challenge to successful
catalogue retailing is logistics. “Merchandising, space
management, frequency of mailings, offers and promotions need
to be managed differently. But possibly the biggest challenge
is logistics. Most modern retailers in India are still establishing
their logistics framework around the country; and their entry
into catalogue retail would take the complexity to a whole
new level. Not to underestimate the issue of handling returns.
In fashion merchandise, for instance, catalogues can run a
return rate of as high as 40 per cent in some products,”
he points out. Pumendu Kumar, associate VP, Technopak
Advisors, says, “Any kind of non-store retailing, of
which catalogue is also a part, is based on the credibility
of the seller. The second thing is the range of products being
offered and its prices vis-à-vis the market operating
price. Unless the retailers are established as strong retail
brands, customers will not be very experimental with catalogue
retailing. And since prices change constantly in India, printing
of catalogues at regular frequency is also a challenge.”
Samar Singh Sheikhawat, VP-marketing, Spencer’s Retail Ltd,
underlines the two key challenges, “Lack of domestic
expertise to run catalogue retailing as a function, and the
right merchandise – stock needs to be available to run catalogue
retailing as a profitable business proposition and the right
category of product needs to be chosen for this format.”
GETTING IT RIGHT
Levermore feels that furniture and large-ticket appliances
are the strongest categories for this type of retail. Khosla,
on the other hand, believes that as long as the customers
have confidence in the brand, the movement of a specific product
category is of no relevance. “For a brand to be a part
of a catalogue, it must fit the target consumer profile, offer
products that fit the assortment and should be able to deliver
sufficient margin for the retailer to be profitable,”
Levermore states. Dutta observes, “Brands internationally
consider catalogues as a retail environment, which is in someone
else’s control – so while the additional market footprint
is welcome, the margins could be lower and the brand’s image
is impacted by other brands in the catalogue.” Giving
a brand’s perspective on being a part of HyperCity Argos’s
catalogue, Nilotpal Mrinal, brand manager, Remington, says,
“Argos is Remington’s largest catalogue retail partner
in the UK. We are happy to work with them in India too. However,
the concept of catalogue retailing is yet to take shape in
India to the levels where it can contribute a considerable
share to Remington.”
FUTURE EDITIONS
Technopak Advisors’ Kumat asserts that the catalogue business
in India will have higher potential in the years to come.
“The key enabling factors will include: customers having
less time for shopping, established retail brands, better
customer service etc. As the Indian market is spread over
a large geography, brands can target thousands of consumers
through a catalogue.“
Dutta adds, “Product integrity, predictability, and customer service are key success factors at the ‘frontend’. Customer service needs to be process and systems-driven. And with so many BPOs today, India is probably better geared for back-end customer service infrastructure and management practices to support catalogue retailing. From the point of view of standardisation, products such as mobile phones or durables meet the criterion of standardisation but price dynamics vary hugely – a catalogue can become non-competitive as soon as it is launched.” Levermore feels that India is still very much in the experimental stage and it will not be not possible to clearly predict the model’s full potential for some time.
Sharing suggestions for those in the business of catalogue retailing, Dutta says, “Most Indian retail catalogues have the look-feel of a business-to-business order guide, with a limited grid layout and no excitement! If retailers want to succeed with a catalogue, they should consider it as much a living environment as a physical retail store. In fact, it is a bigger challenge to create a catalogue that is as dynamic and alive as the store itself, considering that the customer’s only interaction with the brand are the pages.” Kumar’s checklist of do’s and don’ts for retailers reads as: “Do’s – price benchmarking with the market, good product range, dynamic catalogue, delivery on time and after-sales service; Don’ts – focus only on building the catalogue without proper attention to fulfilment.”
admin
December 5, 2008
By Aniruddha Basu
MUMBAI (Reuters)
Friday December 5, 2008
Textile companies may not benefit much from the rupee’s weakness as a slump in global demand and prior currency hedges trim bottomlines in an industry dominated by exports, officials said.
The partially convertible rupee has fallen almost 21 percent in 2008 and hit a record low of 50.65 rupee against the U.S. dollar on Tuesday. But demand from some large retailers overseas has slowed, company executives added.
"Because of the recession, what is happening is that demand for products are going down," said Jayesh Shah, chief financial officer, at apparel maker Arvind Ltd, which gets half its revenue from exports to the United States and Europe.
Export growth "this year is going to be flat ..next year, its too early to predict," he said, adding he will wait for a clearer picture on demand trends from the West to emerge after Christmas, but is not expecting any growth in exports for FY09.
Others like Bangalore-based apparel exporter Gokaldas Exports have hedged currency risk till early 2009, leaving them with little gains from the rupee’s recent drop.
"Most of the exporters have done forex hedging forward covers, so we are not being able to encash on present rupee levels," said Gokaldas’ Managing Director Rajendra Hinduja.
"In a month or two when people finish their exposures a rupee at this level will definitely help. We will finish our exposure by Feb-March," he added.
Mumbai-based textiles maker Alok Industries which has not "hedged substantially" before is looking to hedge at the rupee’s current levels, said its Chief Financial Officer Sunil Khandelwal.
CREDIT WOES
However, the global credit crisis, which triggered the rupee’s fall in the first place, is also leading to slump in global textile demand.
"The weak rupee hasn’t really given us any advantage, when the rupee became weak, came the subprime crisis," Gokaldas’ Hinduja said, adding that the industry’s exports could drop 15-20 percent this year.
India’s total textile exports for the fiscal year ended March 2008 stood at $22 billion, below the government’s stated target of $25.06 billion.
"The general prediction is that orders would slow down because retail market is not doing too well," Arvind’s Shah said.
The worldwide slowdown has prompted buyers at retail chains to tighten inventory management and slow buying, said Devangshu Dutta, Chief Executive Officer of Third Eyesight, a consultant to textile and retail firms.
"The main fall-outs of this are that they cut back on quantities or delay order placement to closer to the season," he added.
Alok Industries’ Khandelwal said some players may benefit from the recession as US retailers would seek to consolidate their sourcing by choosing fewer vendors.
But Indian firms would have to make products more price competitive as the product mix in the US and European markets have shifted towards cheaper ones, he said.
To cut down their procurement costs the retailers would want to negotiate bulk orders at bulk prices, Arvind’s Shah said
"We may be able to reduce prices…but that may not necessarily result in increased exports," he added.
admin
November 16, 2008
In 1998, Stan Davis and Christopher Meyer, two collaborators of the Ernst & Young Centre for Business Innovation, wrote a groundbreaking book under the title: ‘BLUR. The speed of change in the connected economy.’ The authors defined blur as ‘the accelerating pace of change of our post-modern economy’. They wrote: “Because we are so newly caught up in the whirlwind of this transition, we are experiencing it as a blur.” In the meantime, in some business circles, ‘BLUR’ has acquired the status of a cult book. Raving about this book may be exaggerated, but its main message is certainly worth to be pondered on: three forces, also called the ‘trinity’ of the blur -speed, connectivity and intangibles- are setting the new rules of doing business!
What could ‘speed, connectivity and intangibles’ mean for the garment sector and especially for the sourcing activity?
Speed!
In their book, Davis and Meyer refer to Benetton, which gained
fame for engineering a sourcing system so seamless it cut
months out of the traditional supply chain. Speed was the
driver. And because the company could tie its production to
retail activity, it kept the hottest items in stock and was
left with little to unload in end-of-season sales. Not mentioned
in BLUR, but presently even more successful ‘speed performers’
than Benetton are the champions of ‘lean retailing’, such
as Zara/Inditex and Hennes & Mauritz.
However, ‘lean retailing’, a business model that centres on quick response, low inventory costs, rapid-moving stock and transferring responsibility for inventory management to suppliers, is not only a question of speed, it’s as well a question of connectivity. In the broader sense of the word, connectivity is putting everybody and everything in connection in one way or another. (In a more narrow sense, connectivity is the ability to make products that link electronically to information bases, an ability that might be displayed at the next Avantex fair in Frankfurt).
Be connected
A company with a great record in terms of ‘connectivity’ is
the Sri-Lanka based company MAS Holdings, whose ambition it
is to become world leader in the intimate apparel sector.
MAS is engaged in a number of enterprises in several countries,
all of which are joint ventures with at least one other party.
Over the years the company has devoted itself to a thoughtful
supply chain architecture.
In the field of fabric and clothing sourcing, many sourcing operators (manufacturers, retailers, agents) are increasingly eager to be connected globally. Sourcing fairs which continue frustrating their visitors’ desire for global connection (e.g. by excluding the offer of non-European suppliers) are understandably losing interest. Not surprisingly, Texworld in Paris and Intertex in Milan, international sourcing events aimed at textile manufacturers from non-European countries, have grown rapidly. These fairs are complementing respectively Première Vision in Paris and Moda In Tessuto in Milan, thus creating temporarily in both cities the ‘global search machines’ the outsourcing companies want.
Another sourcing event that has grown rapidly by becoming global is Fatex in Paris. A few years ago, this annual clothing manufacture and sourcing trade fair was an exclusively French affair (with French exhibitors only). Then the organisers decided to open up onto the international area. In 2000, 103 foreign exhibitors moved in. In November 2001, foreign presence doubled to 207, or 42% of the total number of exhibitors (not even included the 47 French companies with delocalised units). From 2002 on, Fatex will adopt a seasonal rhythm, organising a spring and an autumn edition, simultaneously with the private label fashion fair Intersélection.
That especially the leading Western clothing companies want to be connected globally doesn’t mean they are playing around on the globe like young kittens. Devangshu Dutta, ex-KSA-consultant and co-founder and director of the supply chains solutions company Creatnet Services Ltd recently pointed out that in the 1990s a scientific sourcing principle began to be applied. It was good to cut down supplier numbers, since this reduced the management effort on the part of the buyer to constantly look for new suppliers and maintain current relationships. Devangshu Dutta thinks that the supply base consolidation has gone a step too far. He’s pleading a new deal. Outsourcing companies should acknowledge that the business of clothing retailing needs a healthy balance between predictability and innovation. Buyers should make a mental division between ‘largely predictable products’ and ‘fashion products’. For ‘largely predictable products’, supply base hopping is almost certainly the wrong strategy to follow. On the other hand, putting a long-term commitment on any significant proportion of the fashion segment to specific suppliers can be counter-productive. The competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. Therefore, buyers should keep their doors open for new suppliers to walk in and display their capability.
Focus on value-creating ‘intangibles’
The Ernst & Young fellows Davis and Meyer admit that ‘intangibles’,
the third component of ‘blur’ is not a brand new element of
the economy. The intangibles have, in fact, grown quietly
as part of the economy, without calling too much attention
to themselves. The authors mention four types of intangibles:
services, information, the service component of products and
emotions. They pretend that every offer has both tangible
and intangible economic value. However, the intangible is
growing faster. The outsourcing of the clothing manufacturing
activities can be seen as an effort to move away from the
tangibles in order to concentrate on the intangibles.
In 1997, Sara Lee Corporation (Wonderbra, Champion Sportswear, Hanes underwear,…) announced it was embarking on a massive ‘de-verticalisation’ program. Chairman and CEO John H. Bryan explained the decision this way: “Our de-verticalisation program is designed to enable us to focus our energies and talents on the greatest value-creating activities in our business, which is building and managing leadership brands.” The first de-verticalisation transaction to be completed by Sara Lee was the divestiture of nine yarn and textile operations related to its United States products business to newly-formed National Textiles, LLC.
About Nike, Davis and Meyer wrote: “Nike became the leader in its industry by keeping all kinds of traditional capital off its balance sheet, putting it in the hands of the suppliers instead. Nike’s own value-producing capacity is its design capabilities, marketing acumen, positioning, and distribution channels. Together, these accumulate into intangible strengths that yield much higher returns than would traditional capital investments.”
Also Naomi Klein, the author of ‘No Logo: Taking Aim at the Brand Bullies’ and her likes assert that in the new global economy, brands represent a huge portion of the value of a company and, increasingly, its biggest source of profits. Therefore, they say, companies are eager to switch from producing products to marketing aspirations, images and lifestyles. They are trying to become weightless, shedding physical assets by shifting production from their own factories in the first world to other people’s in the third. However, Naomi Klein’s outraged claim that consumers are being manipulated by big corporations and their brands appears to be a one-sided opinion. Surely, brands have influence on the behaviour of the consumer, but the contrary is also true. Often, consumers dictate to companies and ultimately decide their fate. As an example, Nike has had to revamp its whole supply chain after being accused of running sweatshops. Managing ‘intangibles’ such as brands is becoming increasingly difficult. Annual tables of the world’s top brands, which used to change little from year to year, now show that many brands are falling from grace and that newer, nimbler ones are replacing them. Not only companies, also countries have to carefully administer their ‘intangibles’. Outsourcing clothing retailers and manufacturers tend to favour sourcing from countries that they are already familiar with. However, if they fall out of love with a country, it’s extremely difficult to coax them again into new business. This has been the fate of Yugoslavia under president Milosevic. Though Yugoslavia can presently offer the former European customers of its once flourishing CMT-industry a pretty low salary level, a well educated workforce, rapid land and air connection, an improved human rights situation and a sufficient level of political and economic stability, very few traditional customers did yet return.
