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Retail in Critical Care – The Impact of COVID-2019

Oil shocks, financial market crashes, localised wars and even medical emergencies like SARS pale when compared to the speed and the scale of the mayhem created by SARS-CoV-2. In recent decades the world has become far more interconnected through travel and trade, so the viral disease – medical and economic – now spreads faster than ever. Airlines carrying business and leisure-travellers have also quickly carried the virus. Businesses benefitting from lower costs and global scale are today infected deeply due to the concentration of manufacturing and trade.

A common defensive action worldwide is the lock-down of cities to slow community transmission (something that, ironically, the World Health Organization was denying as late as mid-January). The Indian government implemented a full-scale 3-week national lockdown from March 25. The suddenness of this decision took most businesses by surprise, but quick action to ensure physical distancing was critical.

Clearly consumer businesses are hit hard. If we stay home, many “needs” disappear; among them entertainment, eating out, and buying products related to socializing. Even grocery shopping drops; when you’re not strolling through the supermarket, the attention is focussed on “needs”, not “wants”. A travel ban means no sales at airport and railway kiosks, but also no commute to the airport and station which, in turn means that the businesses that support taxi drivers’ daily needs are hit.

Responses vary, but cash is king! US retailers have wrangled aid and tax breaks of potentially hundreds of billions of dollars, as part of a US$2 trillion stimulus. A British retailer is filing for administration to avoid threats of legal action, and has asked landlords for a 5-month retail holiday. Several western apparel retailers are cancelling orders, even with plaintive appeals from supplier countries such as Bangladesh and India. In India, large corporate retailers are negotiating rental waivers for the lockdown period or longer. Many retailers are bloated with excess inventory and, with lost weeks of sales, have started cancelling orders with their suppliers citing “force majeure”. Marketing spends have been hit. (As an aside, will “viral marketing” ever be the same?)

On the upside are interesting collaborations and shifts emerging. In the USA, Jo-Ann Stores is supplying fabric and materials to be made up into masks and hospital gowns at retailer Nieman Marcus’ alteration facilities. LVMH is converting its French cosmetics factories into hand sanitizer production units for hospitals, and American distilleries are giving away their alcohol-based solutions. In India, hospitality groups are providing quarantine facilities at their empty hotels. Zomato and Swiggy are partnering to deliver orders booked by both online and offline retailers, who are also partnering between themselves, in an unprecedented wave of coopetition. Ecommerce and home delivery models are getting a totally unexpected boost due to quarantine conditions.

Life-after-lockdown won’t go back to “normal”. People will remain concerned about physical exposure and are unlikely to want to spend long periods of time in crowds, so entertainment venues and restaurants will suffer for several weeks or months even after restrictions are lifted, as will malls and large-format stores where families can spend long periods of time.

The second major concern will be income-insecurity for a large portion of the consuming population. The frequency and value of discretionary purchases – offline and online – will remain subdued for months including entertainment, eating-out and ordering-in, fashion, home and lifestyle products, electronics and durables.

The saving grace is that for a large portion of India, the Dusshera-Deepavali season and weddings provide a huge boost, and that could still float some boats in the second half of this year. Health and wellness related products and services would also benefit, at least in the short term. So 2020 may not be a complete washout.

So, what now?

Retailers and suppliers both need to start seriously questioning whether they are valuable to their customer or a replaceable commodity, and crystallise the value proposition: what is it that the customer values, and why? Business expansion, rationalised in 2009-10, had also started going haywire recently. It is again time to focus on product line viability and store productivity, and be clear-minded about the units to be retained.

Someone once said, never let a good crisis be wasted.

This is a historical turning point. It should be a time of reflection, reinvention, rejuvenation. It would be a shame if we fail to use it to create new life-patterns, social constructs, business models and economic paradigms.

(This article was published in the Financial Express under the headline “As Consumer businesses take a hard hit, time for retailers to reflect and reinvent”

Indian Terrain looks at sourcing from the Americas

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.

Delhi – A Growth Hub for India’s Apparel Exports

India’s traditional skills in textiles, intricate craftsmanship, and creativity in producing a range of design-intensive products have enticed buyers from all over the world. India retains a strong and sustainable position among the top five exporters of textiles and clothing in the world.

India’s textile exports are currently weighted in favour of raw materials and intermediate products leading to ‘value-leakage’, which is a major concern from the long-term competitiveness perspective.

Within India, Delhi holds a position of prominence and can play a significant role in capturing additional value within the country. As a sourcing destination and as a gateway to the rest of India’s textile and apparel sector, Delhi provides unique value in product development and design, and a tremendously flexible supply base.

This capability is especially critical in an unpredictable market where retailers and brands are looking to source ever-smaller quantities of product, increasingly closer to the season.

According to the Director (Merchandising) of one of the largest US retailers sourcing from India, “Delhi scores high on responsiveness, and is more enterprising. It has the capability to handle extraordinary fabrics and is strong in interpretations of artwork.”

The apparel cluster in Delhi-National Capital Region (Delhi NCR) includes locations across four states, and accounts for about twenty five percent share in the country’s current apparel exports. If Delhi’s apparel cluster were to be treated as a country, at US$ 2.6 billion (Rs. 12,000 crores) of apparel exports, it would fall within the Top-20 list, ahead of countries such as El Salvador, South Korea, Philippines, Peru and Egypt. Moreover, being a labour intensive industry, apparel cluster offers immense employment opportunities in NCR, already with current direct employment of over 1 million as per Third Eyesight’s estimate.

A study carried out by Third Eyesight has identified an additional growth opportunity of over US$ 5.5 billion (Rs. 25,000 crores) both in its current markets and products, as well as new product opportunities.

For many buyers, sourcing from Delhi NCR cluster is still restricted to beaded, sequined, and tie-dyed blouses, dresses and skirts. While Delhi remains strong in these products, it now also sells funky denim and jersey wear to young fashion brands, men’s tailored suits to American brands, and women’s undergarments to Europe.

Delhi now offers a base both to international buyers looking at buying finished products, and to Asian, European and American manufacturers looking at setting up alternative manufacturing locations that can tap international as well as the Indian market.

Going forward, the key stakeholders of the Delhi NCR apparel export cluster – individual companies, industry associations and the government need to urgently undertake adequate action steps as the competition is gearing up and the perceived strength of Delhi NCR cluster at the moment may not remain a USP of this cluster in the future.

The Delhi NCR apparel export cluster strategy report along with action steps and key implementation areas was presented at an industry seminar ‘Discovering Growth’ in New Delhi. The seminar was hosted by GTZ in partnership with Small Industries Development Bank of India (SIDBI) and Apparel Export Promotion Council (AEPC). The seminar was attended by the key stakeholders of the Delhi NCR apparel cluster including leading apparel exporters, buying agencies and retailers.

Indian exports in 2005: One of the seven missing wonders?

This is a brief note to share an impromptu impression (and some anguish) about our apparel exports that came up after reading a magazine article recently. But let me start by sharing quotes from that article:

Quote 1: India is an ideal sourcing base…Company A has a global purchasing process in place, which helps to source from any best “QSTP base” (that’s quality, service, technology and price) across the globe. “Some of the Indian suppliers are providing the best QSTP”, points out the vice-president of corporate affairs for Company A.

Quote 2: Exports today make up 12-15 per cent of Company B’s US $ 200 million (Rs 1,000 crores) turnover, and are expected to contribute 25 per cent of revenues in three years…”We recently won the bid for a specific product. This is a product that we do not make in India, yet our facility won the bid,” explains the director of exports in Company B which made US $ 1 million from the product and will start exporting it to Canada soon.

Quote 3: “The advantages of sourcing from India are assured quality to meet customer requirements, a wide product range, availability and competitive pricing. India is a perfect sourcing base.”

Quote 4: “I believe India should aspire for an export growth of 20 per cent per annum over the next decade – nearly double the current target of 12 per cent in our Tenth Plan.”

Do the above sound like anything you have recently heard from our customers? If so, congratulations! If not, you need to seriously ask yourselves. Why not! Would you believe it if I told you that the four quotes above are from industries where India had virtually no competitive advantage even five years ago (and I am not talking about software), and hardly any presence in the world market?

But that is actually the case. The industries and the companies are automobiles (General Motors), consumer durables (Whirlpool), speciality chemicals (Clariant) and fast-moving consumer goods (Unilever/Hindustan Lever). Cast your mind just 15 years ago to Premier Padmini and Ambassador. I still remember the ad launching the Ambassador Mark IV with its “sleek” looks (that was what the ad said!). And here we are in 2002, when two of the largest car companies in the world, Ford and General Motors are exporting cars and components to other markets. The very same country, the very same industry, and a much more competitive time. And yet, the India supply base is managing to shine! The same is true of the three other industries quoted above. And I haven’t even started talking about the software industry, let alone many other sectors.

So, in that context, let us talk about our traditional (centuries-old) strength, with over 30 lakh people under employment base — the textile and apparel industry. Once upon a time India used to have a market share of 25 per cent in the global trade. People within the industry can readily prepare a long list of problems to share with anyone willing to listen, explaining why we are no longer in that dominant situation. Most people think that the problems the industry is facing are very recent.

In the context of the (correct) view expressed in the government that future growth will be garment-led, let me quote another fact. Indian garment exports missed the target not just in 2001, but also in 1997, 1995, 1993 and 1991. In 1996, we barely scraped past. Does this mean that the apparel export growth target unrealistic? Or is it that the industry is slipping up in terms of taking enough action, and is only reacting to external events? Is there a way to take the industry successfully into the future?

It seems that every time there is some external adverse factor, the Indian industry seems to get badly hit, otherwise it seems to do just fine. Even global trade statistics and Indian export statistics suggest that India is riding piggy back on the growth in global trade. That means when the going is good, it rides the wave, and when the going gets tough, there is very little internal strength for it to sustain itself.

September 11, market recession. Maybe WTO quota-free environment in 2005 will, therefore, do the same thing? As individual companies, some firms (I won’t name them) have invested wisely and may be still around as a growing part of a diminishing base of companies. Others will have to think hard now, if they still want to be around and growing. My suggestion. Don’t think only about “price” or “cost”.

The thought process, and the actions that we take, need to reflect – Product, people, process and technology. Why? Because, if business trends are poor, buyers tend to first dump the worst suppliers. If the business trends are good, buying from the best suppliers increases the most. It’s really a very obvious choice. Only companies that take into account all the above factors, will migrate towards the better end of the scale and therefore survive.

H&M is one of the larger sourcing companies in India. Yet, I remember sharing the stage at a CII conference a few months ago with their global sourcing head, and he said (with some regret, I believe) that India’s share in their sourcing was going down. This is from a company whose own business has been growing rapidly. It is our misfortune that we are not able to capture the growth equally in our exports to this company.

The government also presents a mixed bag of actions and inaction, because there is no clear growth vision that is strongly lobbied by the entire industry (from fibre to apparel as a supply chain), or even from an entire sector (for example, all apparel exporters). A journalist, I was speaking to just about one year ago, quoted a prominent north Indian garment exporter who was extremely pessimistic about his company’s and the entire industry’s business prospects. If there is such “confidence” within the industry, what kind of a picture can we present to external parties? (A short story break: A poor man prayed for years and years to his family’s deity, asking for help in managing his household expenses. Finally he got sick and tired of the whole thing and started to throw the sacred idol out of his house, when the god appeared and asked him why he was so angry. The man vented his frustration about not getting any help from god, despite the years of prayers and meditation. The lord said, “My child, you also need to make some effort to give me the means to help you. The least you could do is to buy a lottery ticket!!”)

Substitute “government” for “god” and “industry” in the place of the man, and we find a similar situation in real life.

People actually sit up when I say that the Indian industry exports about Rs 30,000 crores of garments, and a total of almost Rs 60,000 crores in all textile products. People, even within the industry (surprised?) are not aware of the magnitude of the importance and the impact of the apparel industry. It is one of the best kept open secrets. There is very little hype, and very little interest. Therefore, there is very little support from anyone else that the industry needs support from. The only time the Indian fashion industry hits the news is when a “Fashion Week” comes to town, representing the interests of a segment that does a total of less than Rs 200 crores of business! So will the Indian apparel export industry be around in 2005, or will it be one of the seven missing wonders of the world?

A 6-year old quoted the following in his school assembly a few days ago, “The real difficulty lies within ourselves, not in our surroundings.” I think that is a very good introspection with which to end this note (although I have many more thoughts to share), and a good starting point for the rest of our thought process.