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June 29, 2023
Dia Rekhi & Faizan Haidar, Economic Times
New Delhi, June 29, 2023
Fast Retailing, the parent company of Uniqlo, is looking to set up a significant manufacturing presence in India through about 20 ‘production partners’, multiple people aware of the development told ET.
One of the world’s most valuable clothing retailers, Uniqlo already has a cluster of production partners in India and is looking to expand this network through a significantly large investment, they said without sharing any estimated amount.
“The investment amount will be significant because Uniqlo is serious about India and views it as an important market,” one of the persons said. “Unlike the existing facilities in India, which cater more towards exports, the production partners that Uniqlo will bring to India will be specifically meant for the domestic market.”
One of the company’s production partners that ET spoke to confirmed that their current mandate is to produce only for exports.
Uniqlo, which is Asia’s biggest clothing brand, had said India is one of the top priority markets for them where consumers are increasingly shifting from ‘fast-fashion’ to long-lasting essentials and functional wear.
The company’s ambitions for India are considerable with its CEO Tadashi Yanai indicating that he wants Uniqlo to become the “best-selling retailer in India”.
The Japanese brand opened its first door in September 2019, but stringent lockdown measures announced to contain the outbreak of the pandemic in March 2020 delayed the expansion plan.
The brand is now planning to enter Mumbai and Bangalore. It has already opened stores in Lucknow and Chandigarh after Delhi.
Uniqlo does not own any factories. Instead, it outsources production of almost all its products to factories outside Japan.
As per a report titled ‘The Uniqlo case: fast retailing recipe for attaining market leadership position in casual clothing’, this model allows Uniqlo to keep its breakeven point low and improve return on investment.
“As we expand our global sales, we continue to grow our partner factory network in countries like Vietnam, Bangladesh, Indonesia, and India,” the company has stated on its website.
As per its list of garment factories, as on March 1, 2023, Uniqlo has 227 factories in China, 54 in Vietnam, 33 in Bangladesh, 13 in Indonesia, and 16 factories in India and Japan among several other locations.
As the world’s second most-populated country, India is an attractive market for apparel brands, especially with youngsters increasingly embracing western-style clothing.
Over the past decade, global brands Zara and H&M became market leaders in the fast fashion segment in India.
“For global brands, India should be one of the most logical sourcing hubs given its large vertically integrated manufacturing sector on the one hand and the large, growing domestic market driving demand on the other hand,” Devangshu Dutta, founder of retail consulting firm Third Eyesight, told ET. “However, its weight in the sourcing baskets has historically been low due to several reasons, in spite of China being visible for decades to the management teams of brands and retailers as a concentrated sourcing risk,” he said.
Uniqlo’s existing production partners in the country include Shahi Exports, Brandix Lanka, Tangerine Design, Maral Overseas, Shingora Textiles, Silver Spark Apparel, SM Lulla Industries Worldwide and Penguin Apparels.
As per Fast Retailing’s first-half results, the company said its revenue was 1.4672 trillion yen, or around $10.2 billion, and that its operating profit had risen to 220.2 billion yen ($1.53 billion), bolstered by strong performances from operations in several regions, including India where it said it generated significant increases in both revenue and profit.
With regard to Uniqlo International, in particular, it said revenue stood at 755.2 billion yen ($5.25 billion), while operating profit was 122.6 billion yen ($852.93 million).
The company said regions like India “reported significant revenue and profit gains as they enter a full-fledged growth phase”.
(Published in Economic Times)
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June 29, 2023
Raghavendra Kamath, Financial Express
June 29, 2023
Zara, touted as “Fast Fashion Queen”, has achieved a unique feat in India. The Spanish brand has been growing its revenues without opening any new stores.
The fashion brand, run by a joint venture between Tata-owned Trent and Spain’s retail group Inditex, posted a 40.7% growth in its revenues to Rs 2553.8 crore in FY23. The catch is that while many retailers/brands garner sales from opening new stores, Zara did not open any store but closed one during FY23.
In FY21 and FY22, its store count remained constant at 21 but its revenue grew 61.2% in FY22. Zara’s revenues grew at a 15.5 % CAGR in the last five years.
“Zara did not foray into any new city and closed one store. That said, it saw an exceptional performance on store productivity (83% higher than FY19). The increase in revenues lead to highest ever Ebitda margins at 16.3%,” said Nuvama Institutional Equities in a recent report.
The contribution in productivity includes contribution from online and also increase in store sizes, the brokerage said.
A mail sent to Inditex did not elicit any response. Trent executives could not be contacted.
Experts attribute Zara’s success to increase in customer spends and improved offerings by the brand.
“The customer base they are targeting has grown and their merchandise mix has become sharper,” said Devangshu Dutta, chief executive officer at Third Eyesight, a retail consultant.
Dutta said when a retailer opens stores, it would immediately boost sales, but to maintain sales momentum, one has to have “right merchandise at right price and have stores at right locations”.
Zara is known to churn its designs and styles very fast, and target young customers. In its Indian venture also, its parent Inditex controls merchandise mix and so on.
“The said entities (Zara and Massimo Dutti) are obliged to source merchandise only from the Inditex Group. Also, the choice of product & related specifications are at the latter’s discretion. Further, the entities are dependent on Inditex for permissions to use the said brands in India subject to its terms & specifications,” Trent said in its FY23 annual report.
Zara is also focusing on opening in select locations, a reason it could not open more stores in the country, experts said.
“The incremental store openings for Zara continue to be calibrated with focus on presence only in very high-quality retail spaces,” Trent said.
Susil Dungarwal, founder at Beyond Squarefeet, a mall management firm, said that propensity to spend has gone up among Indian shoppers after the pandemic and Zara being a renowned global brand with its stylish merchandise seems to be have been the beneficiary of the trend.
“They understand customers very well and brought products which are liked by Indian shoppers in terms of looks, styles and so on,” Dungarwal said.
Zara is a case study for Indian brands as to how to run a retail business successfully, he said.
(Published in Financial Express)
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June 16, 2023
Sharleen D’Souza & Shivani Shinde, Business Standard
June 8, 2023
Why are companies finding it difficult to sustain the supply-chain business?
Experts point out that gross margins in supplying fast-moving consumer goods (FMCGs) are very low.
While it does look attractive because it is the largest part of the consumption market, the last-mile supply chain and retailer are not making money.
“FMCG brands have ensured high margins for their businesses by streamlining and smoothing their supply chains over decades and making them cost-efficient,” said Anshuman Singh, founder and managing director, Stellar Value Chain Solutions.
Singh said in rural markets, the costs of supply chains were proportionately high due to lower volumes.
He added: “The low margins in the last leg of the FMCG rural supply chain make it difficult for new-age rural distribution players to offset the high costs.”
Devangshu Dutta, chief executive officer, Third Eyesight, a consultancy firm, said modern B2B (business-to-business) players had tried to step in to replace the traditional links in supply chains with price incentives and a large selection of products.
“Traditional distributors and wholesalers don’t just add costs but also add value, including aggregating demand for brands, disaggregating supplies for small retailers, providing market intelligence to both ends of the chain, and giving credit to retailers and a sort of financial guarantee for manufacturers,” Dutta said.
He said for their business models to work — online or offline — B2B businesses needed a significant concentration of demand, which had been tough to get in many locations.
On July 6, 2022, the Competition Commission of India (CCI), in the dispute between biscuit manufacturer Parle and B2B player Udaan, upheld the plea of the former, saying it did not violate competition laws. Parle had refused to sell its products directly to Udaan.
Udaan was the first B2B start-up to have a run-in with a well established brand, which was not interested in moving away from the traditional distribution model.
What has that meant for Udaan? It has meant tweaks to its business.
It further diversified its product portfolio so that its access to the market was not impacted.
It forayed into the mobile accessories segment as local brands tapped into its network of over 3 million retailers.
Earlier, this year it expanded its reach in the miller segment, which supplies staples like pulses, grains, wheat, rice, and oil.
Udaan aims to take on board about 100 miller partners per quarter.
It works with over 500 miller partners, supplying over 10,000 SKUs (stock-keeping units) to retailers and kirana owners, according to the company in an interaction with Business Standard.
The other company that recently had to tweak its business or go back to its focus on rural India is Pune-based ElasticRun.
B2B start-up ElasticRun has decided to focus on the core business and wind up its new expansion plans.
Backed by SoftBank and Prosus Venture, ElasticRun, which typically runs distribution for FMCGs in rural areas, decided to expand and also cater to retailers within city limits, i.e. tier 1 and tier 2 markets that had a strong distribution owing to companies having direct distribution in those areas.
“We initiated a pilot for urban markets. But through the year, as the macro changed, we decided not to pursue the urban pilot and focus on our core of rural business … we have to part ways with almost 2 per cent of our employees,” said Sandeep Deshmukh, co-founder and chief executive officer, ElasticRun, in an earlier interaction with Business Standard.
ElasticRun extends the reach of the brands’ direct distribution networks to deep rural markets. It enables access to a set of net new stores and customers, who were not accessible through traditional distribution networks.
The need to spend in order to get market share has caused well-entrenched players like Amazon to pull out of some of its distribution business.
Amazon India has decided to shut down Amazon Distribution, according to sources. This follows its recent decision to close down its food delivery and edtech offers. The moves are part of the annual operating planning review process amid global macroeconomic uncertainties. The e-commerce giant is looking to focus on its core businesses, sources said.
Amazon Distribution operates a platform where sellers sell FMCGs and apparel products from companies and distribute them among kiranas and small neighbourhood stores.
However, this unit operated in only three cities of Karnataka — Bengaluru, Mysuru, and Hubbali.
(Published in Business Standard)
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May 26, 2023
Chloe Cornish in Mumbai and Eleanor Olcott in Hong Kong, Financial Times
May 26 2023
India’s biggest company Reliance Industries is seeking to dominate the country’s $10bn online domestic fashion market, striking a deal with Shein that will allow the rapidly growing Chinese retailer to return to the world’s most populous nation.
The retail unit of billionaire Mukesh Ambani’s petrol-to-telecoms conglomerate will tie up with Shein three years after India banned the online retailer’s app in its attempt to freeze Chinese companies out of the local market in retaliation for border clashes that had left at least 20 Indian soldiers dead.
“We can confirm Shein’s partnership with Reliance Retail and have no additional comment at this time,” said Shein, declining to answer questions about the structure of the deal. Reliance did not respond to queries about the partnership, which was first reported by the Wall Street Journal.
The addition of a low-priced offering gives India’s biggest listed company by market capitalisation an important boost in its battle to dominate the country’s growing online fashion retail market, which was worth $10bn in 2022, according to analyst estimates.
As part of the licence agreement, which was recently approved by the government, Shein will receive a percentage of profits generated from its fast fashion sales in India, people familiar with the deal said, while Reliance will help Shein build a supply chain with India’s garment industry for global exports.
The move into Indian sourcing comes as Shein diversifies its supply chain outside the coastal province of Guangdong in southern China, where it has 8,000 suppliers, mostly located in the garment hub of Panyu. Pandemic-era supply chain bottlenecks, rising labour costs in China and geopolitical tensions between Beijing and Washington have propelled multinational companies, including Apple and clothing retailer Mango, to migrate parts of their supply chains out of the country.
Shein, which does not sell in China, has been seeking to distance itself from its home country. Last year, it made its Singapore arm the de facto holding company, rapidly expanding its workforce there and shifting some of its operations from its China headquarters in Nanjing.
Shein will seek to minimise delivery times by having more manufacturing centres around the world. India, meanwhile, hopes to benefit from multinationals’ “China plus one” movement, a strategy that seeks to avoid investing only in China and aims to diversify supply chains to other countries.
Reliance has signed agreements with international luxury brands ranging from Balenciaga to Burberry, catering to India’s small but growing demographic of super-rich consumers. In addition, it has nearly 13,000 bricks-and-mortar stores across the country selling affordable apparel.
“Reliance’s other international brand partnerships are more premium, being luxury or designer brands,” said Devangshu Dutta, chief executive of consultant Third Eyesight. “India is still a relatively low per capita income economy. The bigger opportunity is in brands which are euphemistically called value brands, and that’s where Shein is positioned.”
For Shein, access to the Indian market will allow the company to boost sales as the pace of its expansion in Europe and the US begins to lose steam, according to people briefed on its growth figures.
The Financial Times reported that in a recent presentation to investors, Shein forecast that gross merchandise value — the total value of merchandise sold on its platform — will almost triple by 2025 to $80.6bn compared with the figure last year.
The lofty revenue projections come ahead of a much anticipated initial public offering, which promises to be one of the largest listings of a Chinese-founded company in years.
In fashion ecommerce, Reliance lags behind Myntra, one of India’s oldest ecommerce players, which merged with Walmart-backed Flipkart in 2014. Myntra accounts for around half of the online fashion market in India, according to Satish Meena, an independent ecommerce analyst based in Gurgaon.
“Myntra is the nucleus” for online fashion, said Ankur Bisen, senior partner at retail consultancy Technopak Advisors, adding that its “cohort” of shoppers is primarily young and urban. “With the Reliance and Shein partnership, they would like to get into this cohort and break the monopoly of Myntra,” Bisen said.
Meena estimates that Reliance’s ecommerce fashion business Ajio has about 4 per cent of market share, while Bisen put Ajio among the “long tail” of ecommerce fashion ventures behind Myntra. Reliance’s JioMart online shop also sells clothes, alongside groceries and electronics.
“If you look at Reliance as a company, it’s about dominance and it’s about long term,” Dutta said.
(Published in the Financial Times)
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May 25, 2023
Rochelle Britto & Shabori Das, The Economic Times
May 25, 2023
“Taiyaar Hoke Aaiye”. It seems the tagline has worked for the company which has been able to attract investors who came prepared for its offer for sale (OFS).
In a bid to reduce promoters’ shareholding down to 75% as per SEBI norms, Vedant Fashions, known for its ethnic wear brand Manyavar, floated the OFS on May 19 which saw huge participation — oversubscribed 1.4 times with bids for 34 million shares as compared to 24 million shares on the offer. The non-retail segment was oversubscribed 2.24 times.
The shares were offered at a price of INR1,161. While the stock initially fell 1.5% on May 19 to INR1,230, it was trading at INR1,268 on May 24, up 4.59% in five days.
The promoters have offloaded 16.9 million shares, which works out to 7% of the total equity shares with an option to sell additional 6.9 million (2.88%) shares, taking the total to 9.88%.
Manyavar represents the premium wedding market of the country and boasts of some big names as its brand ambassador — Virat Kohli, Amitabh Bachchan, Ranveer Singh, and Kartik Aaryan. With strong fundamentals, the company has grown at 30% CAGR over the last one year and investors feel this is one classic growth stock with high valuations that cannot be ignored. Vedant Fashions trades at a PE multiple of 73x while Trent, a competitor, has a PE of 119x.
The great Indian wedding
The sales of Vedant Fashion are highly correlated to the wedding season. The Indian wedding market is massive at USD50 billion with around 3 million weddings or events taking place every year. According to news reports, the spending is growing and is likely to be around INR3.75 lakh crore this year.
According to Crisil, weddings are getting bigger, grander, and longer, fuelled by higher disposable incomes and a surge in discretionary spending. It expects the ethnic-apparel market to grow between 15% and 17% to nearly INR1.38 trillion by 2025, supported by a growing desire among Indians to wear traditional attire instead of western wear for big celebrations.
While a lavish spending is done on everything, from venue to food to even flower arrangement, clothes hog the limelight. The business has become high-margin, elite, and high-fashion. And the organised market is growing at a very fast pace.
In the organised market, Vedant Fashion has a 40% market share which might be difficult to maintain as competition increases. “In the upcoming quarter, while April experiences a slight lull in wedding dates, May and June present an abundance of excellent opportunities. Moreover, as we analyse the entire year ahead, we are highly confident in the favourable wedding dates during Q3 and Q4. These trends align closely with our historical data, reinforcing our optimism for the current new financial year,”says Vedant Modi, chief marketing officer, Vedant Fashions.
“Vedant Fashions has successfully tapped into and emerged as the market leader, head and shoulders above competitors, in a segment that has been extremely fragmented. Festive wear and occasion wear is not immune to downturns, but is better placed to ride them out, and this makes it a very attractive product segment. However, Vedant have exploited this opportunity and scaled up much more successfully than other companies, beginning with menswear and then in womenswear,” says Devangshu Dutta, CEO, Third Eyesight.
Expansion spree
Vedant Fashions is expanding its retail footprint by adding around 75,000 sq ft retail area in Q4FY23. It has a total retail presence of 1.47 million square feet as of March FY23, spanning across 649 stores in 257 cities. There is a direct correlation between the addition of stores and the growth in sales, but the full potential of a new store takes some time. Almost 40% of the expansion has happened in the fourth quarter, so the full revenue (of the expansion) would come in the following year. Thus, many times the store growth doesn’t match the revenue growth.
The company is also expanding in US, UAE, London, and Canada to cater to the growing Indian community in these markets. For FY23, it has had sales growth of 30% at INR1,355 crore with Ebitda margins at 50%.
However, the growth witnessed by the company in FY23 has slowed down despite an upswing in events and weddings.
Vedant Fashions reported revenue growth of 76% in FY22 over FY21 and profit growth of 136% during the same period. While the slowdown in the growth rate can be attributed to settling down of revenge shopping post-pandemic, the number of social events has definitely increased to not take notice.
“Market valuations are an indicator of not only present value of a business but also perceived future value, and market leaders usually are rewarded with richer valuations(Page Industries is another such example),” adds Dutta.
The company’s latest presentation states that it has achieved 95% ROCE for FY23. The company is still in an investment stage and its cash flow statement says that INR249 crore is blocked in investments for FY23.
Market outlook
In a market that is lacking growth, the wedding season almost looks like recession-proof. The market has returned to growth mode even at a time when inflation is high and the overall economy is subdued. But then, the Indian wedding market — especially the part that Vedant Fashion tracks — is on a high and the growth will continue for a long time.
While the number of players is increasing, not many have a picture-perfect balance sheet with high ROEs and even higher Ebitda margins. Vedant Fashions has become the classic growth stock with very high valuations. It has a price/book value of 28x but investors feel that for a company that generates a high ROE and a high growth, the valuation is not extreme.
Mutual funds and institutional investors are making a beeline for the stock because of the growth rate and the overall size of the market. According to BSE filings, mutual funds account for 8.90% of the total holding where SBI Mutual Fund has the biggest share at 3.80%. On the other hand, retail holds 1.43%. Post the OFS, these numbers will go up.
The company successfully launched its initial public offering (IPO) last year. The stock debuted at an 8.08% premium over the issue price of INR866. The share slipped more than 4% on May 18 as the promoters announced plans to sell stake in the company.
Since listing, the company has gained 36% and has had a great run with its stock being up by a significant 27% over the last one year as compared to its peer Aditya Birla, which is down by 30.95%, and Nifty 50, up by just 12%.
The Indian apparel market is amongst the top three consumer categories. The pandemic made a lot of consumers switch to the online channel — which was also enabled by easy returns. However, while western apparel in India is a lot more frequently purchased when it comes to the online channel, the offline channel continues to be the primary source of consumers and footfall for ethnic-wear brands. The organised ethnic wear market in India is still relatively small, as the unorganised apparel category, ethnic and otherwise, continues to dominate.
The primary market for the unorganised ethnic wear is mostly women, driven by everyday and wedding wear categories.
According to Euromonitor International, a UK-based market research firm, the Indian apparel market is expected to be at USD58,773.8 million by the end CY23 (excluding the footwear market). The market is expected to grow at a CAGR of 8.6% during CY2023-CY2027.
“The apparel and footwear market experienced significant recovery in 2022 with the easing of Covid-19 restrictions. The industry also benefited from the return of festivals and weddings to their pre-pandemic fervour, as these are periods when the demand for categories such as ethnic apparel and other occasion-based apparel spiked,” says Euromonitor International.
The peer play
Prominent players like Aditya Birla Fashion, Reliance Retail, and Tata-owned Trent are making strategic investments in the country’s thriving ethnic wear market, estimated at INR1.84 trillion.
The recent acquisition of TCNS Clothing by Aditya Birla Fashion further solidifies this ongoing trend. With a transaction value of INR1,650 crore for a controlling stake of 51%, this acquisition highlights the company’s commitment to capitalising on the prevailing market dynamics.
According to Ashish Dikshit, managing director of Aditya Birla Fashion, ethnic wear commands the largest market share in India’s apparel industry, comprising 30% (equivalent to INR1.84 trillion) of the total domestic apparel market valued at INR6.15 trillion, while 80%-85% of the ethnic wear market, according to experts, is dominated by the unorganised segment. The branded or organised end of the market at 15%-20% (around INR28,000 crore – INR37,000 crore in size) is growing at around 20% per annum.
Trent, owned by Tata, has launched a new ethnic wear brand Samoh to increase its market share, as consumers splurge on fresh attire for every event. The new brand will help Trent to compete with Manyavar, and Aditya Birla in the ethnic wear space. The company also has two other fashion retail formats. Its flagship concept, Westside, caters to discerning customers who are aspirational and yet seek value for money. The other format, Zudio, with much smaller stores, operates in a more mass-priced segment. Besides, Trent runs a relatively new concept store, Utsa, which sells its own ethnic and indie wear private labels like Utsa, Zuba, Vark, and Diza.
A growth stock?
The management’s disciplined approach to growth, exemplified by the gradual scale-up of brands like Mohey and Twamev, has been instrumental in mitigating the risks associated with inflated working capital and excessive write-downs. This prudent strategy has safeguarded Vedant Fashions’ profitability and allowed it to maintain sustainable growth without compromising on scalability.
The company’s strong design capabilities with data-driven decision making (leading to no discounted sales), tech-driven supply chain, and auto replenishment model, exclusive vendor ecosystem, and franchise-based EBO expansion have helped scale up its business and achieve superior margins. Most brokerage houses give the stock a “buy” rating.
Manyavar’s decision to team up with some of the country’s top names like Virat Kohli, Ranveer Singh, and Kiara Advani (for Mohey) demonstrates its ambition to capture new markets and connect with a diverse customer base. Continuing the brand’s vision to associate with the best, it reinforced #DulhanWaliFeeling by looping in actress Kiara Advani in January 2023 as the new brand ambassador. With all of them on board, Vedant Fashions hopes to have a joyful journey in style!
By capitalising on their influence, Manyavar solidifies its position as a leading ethnic wear brand in India. But will the company live up to the investors’ expectations? For a growth investor, the answer is yes.
(Published in Economic Times)
