Clothing well-to-do India


October 31, 2014

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

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

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

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

Swadeshi origins

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

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

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

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

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

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

Dressed to succeed

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

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

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

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

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

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

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

Bespoke in business

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

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

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

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

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

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

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

Riding the brand wagon

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

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

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

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

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

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

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

The selling point

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

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

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

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

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

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

(Published in BLink, The Hindu Businessline)