Devangshu Dutta
August 26, 2011
Indian Terrain Fashions’ plans to launch a ‘Made in America’ jeans brand using denim from a US mill made into jeans in Guatemala, is a move that bucks trends for brands sold in India. The move is an interesting twist in the growth story of a 10-year-old brand that was, until recently, a business division of the Chennai-based apparel manufacturer Celebrity Fashions. Celebrity’s notable customers include Gap, Nautica, Armani Jeans, Timberland, Dockers and Ann Taylor.
About five years ago, Celebrity had invested in growing its capacity by acquiring another exporter’s manufacturing facilities. However, Celebrity’s manufacturing and export business has been under pressure due to the difficult environment in its main markets, and last year Indian Terrain was demerged from its parent.
It now seems Indian Terrain is striking out on an independent path, with plans to launch a ‘Made in America’ jeans brand. Managing director Venkatesh Rajgopal says the company proposes to source the denim from an American mill and have the jeans manufactured Denimatrix in Guatemala, which also produces for brands such as Abercrombie & Fitch. According to him, Indian Terrain will use the same raw material as Abercrombie & Fitch, and “will be able to track every pair of jeans to the same cotton fields in Texas.”
The company’s competitors, both domestic and international brands operating in India, mainly buy denim products from within the country.
Denim is currently a very small part of Indian Terrain’s casualwear product mix which is largely sourced from its parent, Celebrity Fashions. The company is looking at launching the “mid-premium” priced brand in September that will not be “just about quality, but about offering a lifestyle.” Rajgopal estimates that denim has the potential to grow to 30-35% of the company’s business in three years.
The demerger of Indian Terrain from its parent company was carried out in 2010 with a view to achieving better valuation for the branded business and to provide additional liquidity to its founders and private equity investors. The company is currently present at about 80 exclusive brand stores and through 400 multi-brand retail stores, in eight cities, as well as in Singapore’s Mustafa Mall. It closed the financial year ending 31 March 2011 with sales of INR1.21bn (US$27m), and expects to grow its top line by 25% this year.
Its retail customers wait to see whether Indian Terrain will be able to effectively integrate denim into its core brand philosophy and grow to a third of the product range. However, for investors the critical question is this: after the demerger from the manufacturing parent and with product being imported from the Americas, will the brand business be able to maintain gross margins at the current levels of about 40% to 45%? Only time will tell.
Devangshu Dutta
July 22, 2011
The apparel retail sector worldwide thrives on change, on account of fashion as well as season.
In India, for most of the country, weather changes are less extreme, so seasonal change is not a major driver of changeover of wardrobe. Also, more modest incomes reduce the customer’s willingness to buy new clothes frequently.
We believe pricing remains a critical challenge and a barrier to growth. About 5 years ago, Third Eyesight had evaluated the pricing of various brands in the context of the average incomes of their stated target customer group. For a like-to-like comparison with average pricing in Europe, we came to the conclusion that branded merchandise in India should be priced 30-50% lower than it was currently. And this is true not just of international brands that are present in India, but Indian-based companies as well. (In fact, most international brands end up targeting a customer segment in India that is more premium than they would in their home markets.)
Of course, with growing incomes and increasing exposure to fashion trends promoted through various media, larger numbers of Indian consumers are opting to buy more, and more frequently as well. But one only has to look at the share of marked-down product, promotions and end-of-season sales to know that the Indian consumer, by and large, believes that the in-season product is overpriced.
Brands that overestimate the growth possibilities add to the problem by over-ordering – these unjustified expectations are littered across the stores at the end of each season, with big red “Sale” and “Discounted” signs. When it comes to a game of nerves, the Indian consumer has a far stronger ability to hold on to her wallet, than a brand’s ability to hold on to the price line. Most consumers are quite prepared to wait a few extra weeks, rather than buying the product as soon as it hits the shelf.
Part of the problem, at the brands’ end, could be some inflexible costs. The three big productivity issues, in my mind, are: real estate, people and advertising.
Indian retail real estate is definitely among the most expensive in the world, when viewed in the context of sales that can be expected per square foot. Similarly, sales per employee rupee could also be vastly better than they are currently. And lastly, many Indian apparel brands could possibly do better to reallocate at least part of their advertising budget to developing better product and training their sales staff; no amount of loud celebrity endorsement can compensate for disinterested automatons showing bad products at the store.
Technology can certainly be leveraged better at every step of the operation, from design through supply chain, from planogram and merchandise planning to post-sale analytics.
Also, some of the more “modern” operations are, unfortunately, modelled on business processes and merchandise calendars that are more suited to the western retail environment of the 1980s than on best-practice as needed in the Indian retail environment of 2011! The “organised” apparel brands are weighed down by too many reviews, too many batch processes, too little merchant entrepreneurship. There is far too much time and resource wasted at each stage. Decisions are deliberately bottle-necked, under the label of “organisation” and “process-orientation”. The excitement is taken out of fashion; products become “normalised”, safe, boring which the consumer doesn’t really want! Shipments get delayed, missing the peaks of the season. And added cost ends in a price which the customer doesn’t want to pay.
The Indian apparel industry certainly needs a transformation.
Whether this will happen through a rapid shakedown or a more gradual process over the next 10-15 years, whether it will be driven by large international multi-brand retailers when they are allowed to invest directly in the country or by domestic companies, I do believe the industry will see significant shifts in the coming years.
Tarang Gautam Saxena
June 27, 2011
In most conversations we have had with international brands in the last 2-3 years, India consistently appears on list of the top-5 markets in which to expand into.
The second most populous country in the world, India has a young population that offers a vibrant population mix that will provide a workforce and consumers in decades to come. There is steady growth in per capita income and a greater availability of credit, as well as a significant change in the consumers’ outlook to life that has propelled consumption levels.
The United Nations Conference on Trade and Development ranked India as the second most attractive destination for global foreign direct investments in 2010. The lowest recorded GDP growth rate during the global slowdown was still a decent 6.7 per cent. This growth rate is expected to have returned around 9 per cent in 2011, and is driven by robust performance of the manufacturing sector, as well as government and consumer spending.
The ongoing opening up of the economy over two decades and its robust growth has steadily attracted brands and retailers into the country. Many of them have now been in the country since the early 1990s, and the numbers have grown exponentially during the last 8-10 years. Despite this, the market is far from saturation and many more international brands are actively scouting the market.
Many of them are value brands in their home markets and may, therefore, be more a logical fit into a “developing” market, but there are also plenty of premium and luxury names on the list. For instance while the growth has largely been led by soft goods product brands, as incomes have grown, the presence of more expensive consumer durable brands has also expanded.
While the journey to the Indian market has not been a smooth ride even for the well established and successful international brands in the market, brands that have invested in understanding the psyche of the Indian consumer, adopted flexibility in market approach and displayed persistence, have been paid off handsomely.
Some international brands have exceeded domestic brands in size and reach, while others have had to reconcile to being niche operators. Some have seen profits while others may have their senior management wondering what fit of madness brought them to tackle this market where they can only dream about making money sometime in the future.
Typically, when looking at a new market the very first question anyone would ask is: what is the market potential for brand?
However, you should also be prepared to ask yourself: what need is the brand addressing and what is the value being offered by the brand? How would it be able to effectively and efficiently deliver that value? In many cases, for those entering a non-existent product category a more basic question is: “Is there a need for my product offer?” Just because a brand is huge somewhere else in the world does not automatically make it desirable to the Indian consumer.
While most brands want to target the Indian middle-class millions, their sourcing structure and strategy places them out of the reach of most of the population. Brands that have succeeded in creating a significant presence, maintaining their brand image and having a sustainable operating model have, almost uniformly had a significant amount of local manufacturing. Notable examples from fashion include Bata, Benetton, Levi Strauss, Reebok, among others. In case of certain food brands such as Domino’s and McDonald’s, the companies have collaborated with and developed their vendors locally to bring down costs, and improve serviceability.
Apart from the costs and margins, another important issue is that of the adaptability of the product mix. Brands that are sourcing locally and have a significant product development capability in India are also able to respond to specific needs of the Indian market better, rather than being driven by what is appropriate for European or North American markets. This is an enormous advantage when you are trying to be “locally relevant” to the consumer in an increasingly cluttered marketplace.
Indeed the question is more to do with the brand’s willingness and capability to create a product mix that is most suitable for India through a blend of international and India-specific merchandise. The famous “Aloo-tikki” burger by McDonald’s is a great example of a product specifically developed for the Indian consumers. Not just that, India is probably McDonald’s only market in which its signature dish, the Big Mac, is not sold.
Of course, flexibility in tweaking the product to suit Indian market can become a concern when it amounts to losing control over the brand direction, and mutating away from the core proposition that defines the parent in the international market. Many brands wish to control every aspect of product development head office, but this also severely limits their ability to respond to local market needs and changes. A one-size fits all strategy obviously will limit the number of consumers that the brand can effectively address in a market such as India.
Another key question is: what is the degree of control that a brand wants to exercise on the brand, the product, the supply chain and the retail experience of the consumer? The corporate structure itself may be determined by the internal capabilities and strategies of the international brand in their home market or other overseas markets. A brand that has presence through a wholesale business in the home market may not have internal capability or experience in retail, and would look for an Indian partner who can fill in the gap.
Based on whether they want direct operational control over store operations, international companies can set up fully owned subsidiaries or joint ventures to manage the business in India. Many brands prefer to take a slow and steady approach as they do want to exert a significant amount of control over the business (including companies such as Inditex, the owner of Zara, and other retailers such as Wal-Mart and Tesco), entering only when they are fairly confident of being able to closely manage the business in India right up to the retail store.
During our work we have come across both extremes – companies that want to manage the minute details of the India business out of their own head offices, as well as companies that are so hands-off that they only want to hear from their franchisee or licensee when things are especially good or particularly bad. While a balanced, middle-of-the-road approach would be the logical one in each case, in reality individual styles of the top management have a huge influence on the approach actually taken. Also, the size of the potential market segment – relevant to the brand – has an important role to play in the strategy. If the brand is meaningful only to a small segment of the population, or priced at the top-most end of the market, one company may choose to establish an exploratory distribution relationship, while another might choose to set up an owned presence rather than look for an Indian partner to handle their small business.
While perfect partnerships seldom exist, companies could be a lot more careful we have found them to be, in questioning the criteria and motivations for choosing partners. In some cases, financial strengths, or past industrial glory were qualifying factors for picking franchisees, and the relationships have failed because the business culture was divergent from the Principal’s. In other cases, partners have been picked because they “have real estate strengths”, but no consideration has been paid to whether the partner has the operational skills to manage a fashion brand.
On several occasions, franchise relationships and joint ventures have split because one or both partners find that their expectations are not being fulfilled, or the water looks deeper than it did when they got into the business.
The opportunities in India are many. As the managing director of one international brand commented in a conversation with Third Eyesight, India is a market where a brand can enter and live out an entire lifetime of growth.
However, international brands do need to carefully identify what role they wish to play in the market, and what capability and capacity they need operationally to create the success that can truly root a brand into the rich Indian soil.
Devangshu Dutta
March 24, 2011
During its history, the Indian subcontinent has been known as the “Golden Bird” for its natural and manufactured riches. In fact, long before the United States of America, India was the Land of Promise. (The irony, of course, is that Columbus also set foot on North America when he was actually trying to discover an alternative route to India.)
However, in the more recent centuries, India became an exploited golden goose which not only stopped laying golden eggs, but also almost appeared starved at different points in time.
The government’s thrust on infrastructure and industrialisation in the 1950s would have been a great base for economic growth, but the country had to wait another 4 decades to see a true boom, which only happened after the government began stepping back from excessive controls. Similarly, while the Green Revolution took India to self-sufficiency in grain and White Revolution made India the largest producer of milk, we are very far from the place where we can celebrate a boom in agriculture.
If anything, the recent economic boom is much more an urban and upper-income phenomenon, and that is creating some serious socio-economic fault-lines, about which I have expressed concern earlier. The growth of income inequality looks slower in the case of India than in the case of China, but that is only because India still has far too many poor people weighing down the decile averages.
My concern today is of a different nature: about the need to secure food and nutrition supplies for the burgeoning economy.
Over the decades, farm-holdings have steadily fragmented. With shrinking parcels, a farming family finds it increasingly difficult to create enough surplus produce to trade effectively. As farming becomes unattractive, the family looks at alternative, primarily urban opportunities to generate income, reducing the hands available to farm.
At the same time, economic shifts are causing increasing urbanisation, as concrete and glass takes over what used to be active farming land. Large cities such as Delhi (Gurgaon) and Bengaluru are prime examples, but the phenomenon is affecting smaller cities as well.
The demographic dividend to which we should otherwise look forward could, therefore, turn out to be a triple time-bomb, with:
The employment issue needs to be addressed by placing adequate emphasis on manufacturing (especially labour intensive products) and entrepreneurship, but without addressing agriculture, even this growth would unsustainable.
Also, India is at the inflexion point similar to where China was in the 1990s. The increasing income is leading to changes in food consumption. Not only is the overall consumption growing, the diet is broader and more balanced, as people are able to afford a greater variety of food. There is a growing consumption of milk, meat and poultry products, as well as processed foods (per capita of processed foods quadrupled from the late 1980s to the early-2000s). All of these require more inputs (land, feed, water, and fertiliser) per unit of food produced.
We may be tired of hearing this, but Indian farm productivity continues to be among the lowest in the world. For instance, India as the largest milk producing country is still only at about half the level of milk production per head of cattle, when compared to the global best. Similar comparisons can be made across the food supply chain.
There are three legs to create a change: technology, dissemination of information, and market demand.
There is an urgent for technology infusion across the chain, from seed to shelf. Technology doesn’t only mean tinkering with the genetic code (about which there are significant sensitivities). Traditional technologies that are centuries-old can be as effective, sometimes even more so, as technologies that come out of modern labs. If we can avoid taking a “fundamentalist” approach between modern and traditional, we will probably achieve much more, and faster in cultivating and harvesting more efficiently.
Information dissemination is vastly superior today, and with the convergence of internet and mobile technologies, not only is it possible to compile ever more information, but also spread it in regional languages very cost-effectively.
But these two alone will not be quick enough. The last, but possibly the most important leg, is market demand.
For obvious reasons, manufacturers and retailers are focussed on growing their brands, sales and driving per capita consumption. I would argue they also need to look equally critically and perhaps more urgently at the supply chain.
Without seeing the farmer and the processors as true partners in the supply chain, and ensuring them a productive existence, any victory on the market or brand-side will only be hollow.
As customers, retailers and brand manufacturers not only have the weight, but the sophistication to encourage development. Retailers and brands have the power to drive change. They must also assume the responsibility. A few of them have begun showing the way, but need support from many more. Urgently.
admin
February 28, 2011
Business
Standard, Mumbai, February 28, 2011
Sayantani
Kar (with inputs from Preeti Khicha)
When some of India’s big retail chains banded together recently to substitute Reckitt Benckiser’s products with private labels to protest the latter’s decision to cut sales margins on its products, they were doing something many global retailers have done with great success. Part of their overall strategy, especially for large chains in the US and Europe, is to develop quality private label products that complement other pieces in their marketing mix. While this is one way retailers can differentiate their firms from competition, it also helps them flex their muscles in their relationships with brand manufacturers. Indeed, retail giants Tesco, Walmart and Carrefour have a significant portion of their sales coming from private labels — ranging from 10 per cent for Costco and 50 per cent for Tesco.
India is a back runner in the private label race, but it is
catching up. A Shoppers Trend Study by Nielsen found awareness
about private labels has gone up from 64 per cent in 2009 to 78
per cent in 2010 across 11 cities in India. Nielsen Director (retail
services) Siddharthan Sundaram says, “Over the last three
to four months, we found an increased awareness of private labels
in categories such as staples, household products, personal care
products such as soaps, biscuits and packaged groceries.”
Thanks partly to the recent economic downturn, there is greater
acceptance — and even loyalty — to such brands in India,
say marketers. Future Group Business Head (private brands) Devendra
Chawla reasons, “A label on the shelf becomes a brand by
covering the two feet distance from the shelf to the trolley.
After all it is the consumer’s choice.” Even in the
toughest segment for private labels to crack — fast moving
consumer goods including food and personal care — store labels
claim share of 19-25 per cent.
Low-involvement categories such as household cleaners were among the first to see the entry of private labels (17-44 per cent of sale in modern trade), bringing in huge margin-lifts for modern retailers. In categories such as food products — jams, biscuits and staples — private labels today contribute more than 25 per cent of modern trade sales. Little wonder, retailers are now mining shopper data to make private labels shed their ‘low’ly tag — low involvement and low cost. Store chains are segmenting their brands according to consumer needs, combining more than one brand according to consumer behaviour, besides launching high-involvement premium products and innovative packaging to give national brands a run for their money.
Innovate or die
Retail innovation has had a big role to play in speeding up the
process of consumer acceptance. Future Group’s retail arm,
which includes Big Bazaar and Food Bazaar, calls its in-house
products ‘private brands’ not labels. It has a separate
team, headed by Devendra Chawla, to research and test FMCG products
before launch. The team has a range of private brands — Tasty
Treat, Fresh and Pure, Cleanmate, Caremate, Sach, John Miller,
Premium Harvest and Ektaa. Look at how it is using shopper data
to improve its products. The insight that kids found ketchup bottles
cumbersome and had to be served — making it inconvenient
if an adult was not around — led it to change the packaging
that in turn gave the brand a margin advantage. By offering ketchup
in pouches, it saved on the price of the glass bottle and freight
(pouches take up less space in a truck, hence more can be fitted
in). While ketchup in glass bottles continue to be Rs 99 for a
kilo, its Tasty Treat ketchup pouches come in Rs 59 packs.
By working with vendors it has also come up with interesting combinations — for example, its Tasty Treat jam has three small tubs packed as one unit, each tub containing a different flavour to offer consumers larger variety.
Retailers have now donned the hats of “product selectors” and “product developers” at the same time, points out Third Eyesight CEO Devangshu Dutta. “So far, most of the retailers were just selecting products from vendors which are mostly lower-priced knock-offs of manufacturer brands,” he says. Not any more.
Ashutosh Chakradeo, head (buying, merchandising and supply chain), HyperCity Retail, explains the process his company follows: “To develop food products, we identify vendors, tie up with food laboratories, chefs and consumers to be part of the tasting panels. Before launching a private label we do at least a month of consumer testing. We identify customers from our loyalty programme called Discovery Club, which tells us who buys a certain category of product. We give the relevant consumers our private label products for trial for a month. We meet the customers at their homes, take their feedback and these changes are incorporated into the private label brand.”
“Our stores act as research labs and are a constant source of feedback,” points out Chawla of Future Group. Chawla estimates 3-4 per cent of the sales of private labels are ploughed back into packaging and design innovation. Reliance Retail CEO Bijou Kurien says, “The teams are our main investment in private labels. Our 100-strong designers across all the formats help in coming up with product designs that fill a need gap or offer a few more features at the same price as national brands.” Reliance Retail has recently launched its own brand of watches priced Rs 149-199 which “no national player can offer” points out Kurien.
The edge
Most vendors directly supply to retailers’ distribution centres,
cutting out cost leakage at the distributor’s and carrying
and forwarding centres. Direct access to store shelves and aisles
also cuts out the high mainstream advertising costs that brands
have to bear. By clever product arrangements and in-store promotions,
retailers can sway the shopper and draw attention to the price
advantage. Chakradeo says, “We display private labels in
heavy footfall areas in the store. We complement displays —
so we keep our private label ketchup near the bakery.”
To tackle the tricky personal care category of face creams and shampoos that Aditya Birla Retail’s More chain has entered, it plans to communicate promotional offers straight to its loyalty programme members. “It will help us induce trials,” says Thomas Varghese, More’s CEO.
Bundling products is another way to woo the value-conscious consumer. Six months back, Future Group started bundling its private brands. Chawla says, “Take home-cleaning, which requires a floor cleaner, glass cleaner, toilet cleaner and utensil cleaner which we combined as a shudhikaran solution of our Cleanmate brand.” The combi-pack costs Rs 125, which would come to around Rs 220-250 if shoppers bought a la carte. The margins are still high at 26 per cent. “Vendors are assured of volumes,” points out Chawla.
What it also does is convert the fence-sitter who has not yet bought into a category. For example, consumers who avail of the shudhikaran solution also get into the habit of using glass cleaners — a category which has a small base and gets most of its sales from modern trade. Similarly, Future Group saw a 25 per cent spurt in the sales of soups when it clubbed soup mugs with its Tasty Treat soup packets based on the insight that Indians preference to sip their soup out of a coffee mug.
Don’t be surprised if you see MNC brands coming out with combo-offers for their products, way bigger than the occasional bucket with a detergent!
Growing up
There are signs the industry is evolving. Private labels in FMCG
are shedding their low-cost tags. But retailers know better than
to vacate low price-points altogether. Instead, they are segmenting
their brands just as a manufacturer brand would do. Chakradeo
of Hypercity says, “Over a period, we hope to increase the
stickiness and the differentiation our brands bring to our stores.
Particularly, in staples where we have seen our private label
business grow rapidly. This is a very quality and price-sensitive
category. We started with basic products but now we have premium
daals (lentils) and basmati rice as part of our portfolio.”
Future Group too has its ‘good, better, best’ policy firmly in place. In staples, the stores offer some products ‘loose’, such as rice, wheat, lentils, which is at the bottom of the ladder. Its Food Bazaar version of the products straddle the middle category, and above the two is its brand, Premium Harvest, which retails at a price higher than some manufacturer brands.
Stickiness may also result from the manner in which retailers are positioning their brands. Future Group’s brand Ektaa will retail regional food and staples across its stores in the country so that migrants can buy supplies they are comfortable with. Be it Govindbhog rice and kasundi (a rice variety and mustard sauce preferred by Bengalis), khakra (Gujarati snack) or murukku (loved by Tamilians). Boston Consulting Group Partner & Director Abheek Singhi says, “Indian retailers are not cut-pasting private label products from other markets but adapting them.”
Are private labels a risk worth taking? Chakradeo says, “The entire product formulation for our cleaners was done in partnership with Dow Chemicals, USA. We did not make any investment and we gave them a percentage of sales as fee. Investments are not huge in making private labels as in most cases it is partnered with vendors. It is more of operating expenses than capital expenditure.”
Future Group brought down logistics costs further by 6-8 per cent by appointing vendors in more than one region for 10 of its product categories to fill its distribution centres. Chakradeo adds, “As the volumes go up, we will be able to put up for backend infrastructure facilities for development and R&D.”
Should national brands be worried? Devangshu Dutta says, “As long as retailers have access to the production and development and have customers for it, the private labels will remain profitable.” India Equity Partners Operating Partner V Sitaram sums up, “In modern trade, though the market leaders will face some slip in market share, the number 3 or 4 brands might have a bigger problem in certain categories thanks to private labels.”
As retailers leverage consumer insights to deploy private labels more effectively, national brands are aggressively fighting the challenge. From sprucing up supply chains to galvanising in-store promotions, they are covering all bases. KPMG Executive Director Ramesh Srinivas says, “Earlier brands had to adjust between a modern trade and a general trade supply chain. The former had to be serviced directly at the stores or had their own supply chain while the latter used the manufacturer’s supply chain. Now, some brands separate modern trade teams and even distributors.”
Britannia Category Director (delight and lifestyle) Shalini Degan says, “We have divided our portfolio into three categories, A,B,C, each having its benchmark fill-rate. We don’t allow fill-rates to drop below those levels. Why the segmentation? We need to focus on brands which have a higher traction in modern trade when servicing it, else we might end up focusing on brands that are not modern trade-led.”
Fill-rates denote how often and to what accuracy the retailer’s orders for a product are supplied by the manufacturer. Low fill-rates could mean lost opportunity since the shopper sees an empty shelf or a private label instead of the brand she might have thought of picking up.
Samsung Vice-President and Business Head (home appliances) Mahesh Krishnan says, “We have gone in for central billing system 4-5 months back with all large-format retailers. Orders are tracked on a daily basis giving retailers more control over the chain.”
In other words, private labels are here to stay and will evolve as more and more chains gain national footprint and the economies of scale kick in. Dutta of Third Eyesight says, “Gross margins for organised retailers are still low compared to global standards: So, margin fights will continue for some time till retailers gain a bigger share of the pie.”
(Also read: The Private Label Maturity Model.)
