Retail is such a pervasive and dynamic a sector of the economy, that it is impossible to identify a single point at which modernisation began. I’ve met countless people who perhaps entered the retail sector during the last 15 years, and who mark the beginnings of modern retail around then. There is no doubt that there has been an explosion of investment in retail chains in the last 2 decades, but we need to acknowledge the foundation on which this development is built. The current titans of the sector are standing on the shoulders of previous giants who have created successes and failures from which we are still learning.
This piece is not an exhaustive history of the evolution of the retail business in India, nor a census of all the brands operating in this sector, but the aim is to capture the flavours of the phases of development. (PDF available here to download.)
If we were to trace back the growth of “organised” retail (mind you, I dislike that word!) or modern retail to the first retail chains, we will have to cast our mind back more than a hundred years. While many businesses of that time have disappeared, a few pioneers continue to survive, straddling three eras: the British Raj, the Socialist Raj and the Liberalised Lion economy. The businesses that continue to stand, having been through multiple transformations, include:
Fifty Years of Independence
The 1950s and 1960s remained fertile times, post-Independence and before the heavy-handed Socialist Raj truly began squeezing the life out of Indian businesses. Leading textile companies such as DCM, Bombay Dyeing and Raymond, and footwear companies such as Bata and Carona established chains of retail stores including company-operated stores as well as authorised dealers operating under the companies’ banners.
The 1980s brought the Asian Games, colour television, and a new up-to-date car model to India, all marks of a new vibrancy. Over the 1980s, a new retail wave was led by indigenous ventures such as Intershoppe (launched by a fashion exporter), Little Kingdom and The Baby Shop (children’s products), Nirula’s (fast food) and Computer Point (home computers, PCs and accessories). Many of these were certainly ahead of their time: the critical mass of consumers had yet to develop, the business infrastructure was inadequate, and funding norms were unsuitable to the capital-hungry business of retail. Unlike the textile companies that had large manufacturing and trading businesses, these new retailers were like shooting stars, glorious but visible for only a short period of time. This period, unfortunately, also witnessed the degeneration and disappearance of some of the older stalwarts such as DCM and Carona that were beset by labour disputes, management issues and disconnection from the transforming market.
Numero Uno, an indigenous denim brand, was launched in 1987 soon after VF’s American denim brands were launched, and it took nearly a decade for Numero Uno to reach other geographies in India. Nirula’s, one of the oldest fast food restaurant chains based in North India, expanded across the Delhi NCR in the 1980s and 1990s, and also explored other cities, albeit with mixed success.
Future Group, which today has a large retail and consumer brand portfolio, launched trousers under the name Pantaloons in 1987, initially as a distributed brand, and then denimwear under the brand name Bare. Within a few years the company also launched exclusive stores by the same names, to provide focussed visibility to the brands. About a decade of growth later, the group launched its first large format store under the Pantaloons name, but by now covering a much wider range of products, which became its launch pad for achieving scale.
The RPG group that had acquired Spencer & Co. relaunched it in 1991 in a spanking, new format as Spencer’s in Bangalore, and a short few years later rebadged it again as Foodworld in a joint-venture with a foreign partner. It subsequently went on to launch other formats such as Musicworld and Health & Glow.
Also in 1991, the Rahejas converted an old cinema into a department store, Shoppers Stop, aiming to provide an international shopping experience, although initially focussed on menswear. The store added women’s and children’s sections in subsequent years and the second store was launched four years later after the first one. Subsequent large scale retail expansion only came about towards the end of 1990s.
Little Kingdom is a notable example that I would like to dwell on briefly (partly for the purely personal reason that it was my first retail job!). The business was launched in 1987, headed by alumni of the illustrious IIMs around the country, built on processes and IT systems that could have been the envy of many retailers even 25 years later. The company – Mothercare India Limited – was the first purely retail company to start up and launch a public issue in 1991. During the early 1990s, it was the largest retail chain present across the country, in its categories. In 1991, it also attempted to bring the first home computer, Spectrum, to forward-thinking parents through a mix of in-store sales and door-to-door direct-selling. It was admittedly one of the first to expand internationally, opening a franchise store in Dubai in 1992. During its short life, the team launched multiple brands and formats, including Little Kingdom, Ms (a womenswear brand), The Baby Shop, and became a partner to the international giant VF Corporation’s Healthtex children’s brand and Vanity Fair lingerie brand in India. But, by the mid-1990s – financially overstretched between multiple brands and formats, and backward integration into manufacturing – it was gone.
Physical retail was not the only avenue being explored for growth during these decades. An Indian company imagined replicating the success of western catalogue companies, and launched the Burlington’s mail order catalogue retail venture and even became a joint-venture partner of one of the world’s largest catalogue retailers, Otto Versand (Germany). Other models included direct sales business, such as the Eureka Forbes introducing vacuum cleaners through demonstration parties (which was emulated for the Spectrum home computers mentioned above). With the growth of private television channels, products also began being promoted during non-peak hours through infomercials, though serious TV shopping was still a few years away, coming up in the mid-2000s with dedicated teleshopping channels.
The Foreign Hand and Corporate Retailing
The 1980s and 1990s also saw the launch of international brands from global giants such as VF Corporation (Lee, Wrangler, Vanity Fair, Healthtex), Coats Viyella (Louis Phillippe, Van Heusen, Allen Solly), Benetton (UCB and 012), Levi Strauss, Lacoste, Reebok, adidas, Pepe and Nike, grocery retailers such as Nanz (a three-way German-US-Indian partnership) and Dairy Farm International (with RPG Group’s Spencer’s Retail) and Quick Service formats such as Domino’s, McDonald’s, Pizza Hut, Baskin Robbins and KFC.
India was reopening to business, global management consultants were writing glowing reports about the untapped potential of the (mythical) 200 million middle-class customers and global retailers wanted to own part of the action.
Due to the lack of large-format stores and suitable environments, international brands that entered the Indian market during this phase needed to create exclusive stores to ensure that the brand could be communicated holistically to the consumer, in an environment that was more in the brand’s control, and many of them were, in a sense, “forced” to become retailers in India.
However, around 1996, a very senior member of the cabinet is reported to have said, “Do we need foreigners to teach us how to run shops?” It was an unexpected condemnation, coming as it was from a person and a party otherwise seen as champions of an open economy. It slammed the doors shut to foreign investment and, to my mind, the sector is still yet to fully recover from that ban and the policy contortions that have come over the years to allow international brands and retailers to play a more active role in the market.
Internal weaknesses compounded the decline or exit of some of the businesses. Nanz folded due to various operational challenges and lack of adequate experience. British retailer Littlewoods’ wholly-owned subsidiary pulled out of the market due to problems back home, and in 1998 sold the sole store to the Tata Group, which eventually renamed it Westside.
Despite the early hiccups, India continued to attract international players on account of the high growth and changing social norms. Not only was there greater purchasing power available amongst more Indian consumers, there was a shift in consumer attitude from saving to spending. Several brands, including fashion, luxury and quick service formats, entered the market through licensing, franchising, and joint ventures.
During this period the domestic retail market also drew in more corporate houses, attracted by the apparently abundant market opportunity for them to mine alone or to act as a gateway for foreign companies interested in India. Most were significant diversifications from their existing businesses.
Tobacco, paperboards, agri-commodities and hospitality conglomerate ITC ventured into retailing through Wills Lifestyle and as well as its rural initiative e-Choupal in 2000, followed by John Players and Choupal Sagar respectively. Pantaloon Retail launched a partial hypermarket format Big Bazaar in 2001 and went on to Food Bazaar in 2002, Central in 2004, Home Town and Ezone in 2006. Reliance entered in 2006 with multiple stores of Reliance Fresh being opened simultaneously and over the next few years the company expanded through multiple formats such as Reliance Mart, Reliance Digital, Reliance Trendz, Reliance Footprint, Reliance Wellness, Reliance Jewels to name a few. Telecom major Bharti set up a joint-venture with Wal-Mart at the back end, while the Tata group tied the knot with Woolworths and Tesco in two separate businesses supplying its retail stores, even as it expanded its successful watches and jewellery businesses, as well as Westside.
Even a retail operation like Fabindia, born as an export surplus outlet of a handicraft product business found investors to back a rapid expansion spree, becoming more of a corporate retailer than a front-end for producer organisations and craftspeople.
Through the 1990s and beyond, the market remained in ferment. In 1997 Subhiksha, a small modern retail format for food and grocery was launched. Venture-funded Subhiksha expanded rapidly and over the next decade grew to 1,600 outlets. However, in 2009 the business closed down owing to a severe cash crunch, amidst accusations of criminal mismanagement and fraud.
New product areas emerged highlighting the pace of change of lifestyles, cafes prominent among them. Café Coffee Day opened its first store in 1998 in Bangalore and became the largest organised coffee chain in India by far, though it is now living under the shadow of the recent death of its founder. Barista was also launched in 1999 as India’s Starbucks-wannabe, found its footing, scaled up and lost its way, going on to be sold to Tata Coffee and the Sterling Group, who turned it over to the Italian coffee company Lavazza in 2007, who also exited seven years later. Its current owner, the Amtex Group, is itself going through financial troubles in some of its key businesses.
In the last two decades, while some retailers have gone out of business due to unrealistic business plans, mismanagement or lack of funds, most have taken opportunities to rationalise their operations by shutting down unviable or underperforming locations, aligning businesses to market needs, assessing their brand consistency across various touch points, improving organizational capabilities right down to front-line staff, and focusing on unit productivity.
It’s not just Indian retailers that have faced trouble. Foreign brands have had their own share of problems – some have overestimated the market, or their own relevance to the Indian consumer, while others have had misalignment with their Indian franchisees or joint-venture partners. A number of foreign brands and retailers have also churned partners, or exited the market outright, but most remain committed and invested in the market for the long-haul. The last few years have also seen the successful launch and humongous growth of global leaders such as Zara and H&M, even mass-market Chinese retailers like Miniso, as well as the largest investment commitment made by Ikea (about US$2 billion).
Showing on a Screen Near You
The late-1990s also witnessed a dotcom frenzy that led to a plethora of travel sites, and a few product sales businesses such as Fabmall, Rediff and Indiamart.
However, the online market lacked critical mass in the 1990s and early-2000s. Despite apparent advantages of the online business model, success depended on internet penetration (low!), the appearance of value-propositions that were meaningful to Indian consumers (questionable), investments in fulfilment infrastructure (lacking) and the development of payment infrastructure (regulation-bound). Malls and shopping centres – the new temples of retail – seemed to be sucking up all of the consumer traffic, in any case.
By the mid-2000s the business had reached just about Rs 8-9 billion (US$ 180-200 million), despite 25 million Indians being online. Dotcoms became labelled dot-cons, with an estimated 1,000 companies closing down. However, multiple changes took place in the mid-2000s, among them being the price disruption of the telecom market and explosion of mobile connectivity, as well as a renewed funding appetite among venture funds.
This laid the path for growing the second crop of ecommerce in India. Billions of dollars of investment was poured into creating India’s Amazon wannabes, the high streets ran red by ecommerce-fuelled discounts, aggressive advertising budgets (most promoting discounts) and mergers/acquisitions pushed through by venture investors.
After more than a decade of the second coming, India’s ecommerce business accounts for a market share of total retail in the low single digits. India’s Amazon – if one can call it that – is the Flipkart group, now owned by Walmart, bought at an eyepopping $21 billion valuation and still bleeding cash, and the runner-up is relentless Amazon that continues its aggressive push to own what could be one of the three largest markets in years to come. The Chinese internet giants Tencent and Alibaba are also trying to hack piece off the market, having fulfilled their aim of kicking out Western competitors from their home market.
However, the wild card has just been played by the Reliance Group – having moved from textiles to fibre to oil, the group has made its move into telecom and data (didn’t someone say, “data is the new oil”?). It has strategically pushed handsets and cheap data plans into the hands of the consumers and, according to the latest announcement on Jio Fiber, will soon offer High Definition or 4K LED television and a 4K set-top-box for free. The play is to grab as much of the customer’s share of spend on products and services (including entertainment) as possible.
Possibly the biggest driver of modern retail in the coming years will be the shift in the demographic structure of the country. The young consumers who are joining the workforce now are a distinctly different set from previous generations. This is a generation that has grown up in the liberalised economy and has been exposed to innumerable choices since their childhood. The most important factor is that these consumers are increasingly located outside the top 10 or 20 cities in the country, and are becoming more accessible as both physical and virtual access improves for them.
A large number of them may have only occasionally, or perhaps never, experienced modern retail first hand while they were growing up, but they have seen this upmarket environment emerge before them and are not shy of spending within it, even if it is only on select special occasions. Most of them are handling mobile phones (even if it is their parents’) while still in school and being socially active online even on the go. Certainly most of them have hardly ever visited tailors, growing from one set of ready-to-wear clothes to another. It is this set of young consumers whose outlook and habits will drive retailing very differently in terms of product categories and services in the future.
There is another significant set of consumers whose number is swelling annually: that of working women. As they add to the discretionary household income available to spend, they gain influence in purchase decisions, and with them the entire household’s lifestyle also undergoes a shift. There is a greater demand of time-saving solutions and convenience products to make their lives easier. Modern retail environments where their various needs can be taken care of under one roof, and convenience pre-packaged products are natural winners in this shift. Ready-to-wear products for women, grooming, beauty and personal care, women-oriented media products, processed foods and eating out get a boost. Another important shift is that, due to busier lifestyles, they are time-crunched and more likely to rely on branded products and services that they can trust. However, given the nascent stage of the market, these brands could just as well be retailers’ own labels, if they are managed well.
In terms of business, significantly greater efficiency needs to be achieved, both at the front-end and in head office and supply chain operations. Process and system-led planning and execution needs to become the norm. With India’s burgeoning population, people are treated as a cheap resource: on the contrary, each extra person can be expensive beyond just their salary cost to the organisation. Each extra person adds some friction to decision making, reducing the responsiveness of the business. Smart business will begin to realise this, and look closely at employee efficiency and effectiveness in the context of the overall business, rather than just in terms of individual costs.
Even as the retail business in India is far from saturation, and fragmented growth continues, the business will also undergo consolidation simultaneously, as large scale retail operations are enormously capital intensive. Mergers will be a strategy that will be explored to improve the viability of many businesses in this sector.
Should you be tempted to think that, squeezed between large corporates, international retailers and ecommerce giants, it’s “Game Over” for smaller domestic retailers and brands, let me say that the India retail story is not only not over yet, but continues to be written and rewritten. As the market grows and matures, retail businesses also need to differentiate themselves, investing more in product selection or even product development through private label growth to help them stand out in the market. A one-size-fits-all strategy doesn’t work in a country as diverse as India. For the size of the market, we have surprisingly few brands, many of them virtually indistinguishable from their competitors. Development on this front, of indigenous brands and product development capabilities, is an absolute must.
The good news is that already there is more talent available than ever before. Most importantly this management pool has experience of the retail sector not just in good times but during (many) downturns as well.
Eventually, what is needed is a mix that will be healthy for India’s ecosystem at large for a long time to come. This will not be delivered by a blind transplantation of international templates or a rapid-fire expansion across the country, nor by fearful protectionism or regional parochialism. It will only be achieved by the evolution of market-appropriate business models and a mature approach that can be make the Indian retailers robust enough to grow not just domestically, but possibly even globally over time.
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.
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.
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For many decades from the early 1900s onwards, retailers followed a ‘trader’ or ‘merchant’ model, largely buying from those suppliers who could provide the best prices. Of course other parameters were considered as well, such as desirability of the product, but price was the major driver. It was also rare for retailers to go out to look for suppliers – suppliers normally turned up at the merchant’s doors to sell their wares.
There was little, if any, strategy to selecting the ‘supply base’. Retailers were much too busy building their presence in the market, opening new stores, acquiring new markets, growing their product offer; in short, concentrating on the business of selling to consumers. International trade existed, as it has since the dawn of history, but was led by traders. Retailers, by and large, followed the domestic sourcing route.
The retailer goes abroad
The 1950s were driven by the need to rebuild war-shattered economies through trade and economic cooperation. Bi-lateral, and later multi-lateral, trade agreements were brought into force. An awareness of other countries around the world was also brought into sharp focus through two successive world wars, particularly the second. Retailers began to explore supply bases outside their home countries, and from the 1960s to the 1990s this international trade grew by leaps and bounds. Naturally, as the pioneers went overseas, so did their competitors – it is very hard to compete profitably, when your rivals are buying comparable merchandise at much cheaper prices.
As a result, by the early 90s the supply base of any large retailer in the major consuming markets would take in more than 30-35 countries from which products might be sourced. And as the number of supply countries grew, so too did the number of suppliers. It would not be unusual for 500-1000 suppliers to be dealing with a single retailer.
Consolidation, conservation and conservatism
Retailers such as Wal-Mart in the USA, M&S in the UK, Carrefour in France and many others have had preferred suppliers who grew along with them. These suppliers were typically based in the home country of the retailer, and set up production units or sourcing organisations overseas from where they could supply goods to their customer at a competitive price. In some cases, their sourcing strategies were driven by their own analyses; in others the retailer led the way (such as M&S or Wal-Mart identifying the next preferred supply country).
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. Terms such as ‘key’, ‘preferred’ or ‘strategic’ supplier came into vogue.
As an example, witness the dramatic supply base reduction undertaken by most large retailers in the UK. Some organisations even looked to supermarkets to understand and apply their supply base management principles, where product categories were dominated by, or completely split up between, less than four suppliers. In a few cases, it reached such extremes that one supplier virtually controlled a retailer’s entire product lines.
Some organisations even quantified the cost of moving into new supply countries in an attempt to understand whether it was worthwhile and how best to shape their sourcing strategy.
At the end of the 90s and into 2000, however, there seem to be rumblings among retailers about the need for some more diversity in their supply bases. Statements such as “we are uncomfortable with our overexposure to country X”, or “I wish I could manage to meet some more suppliers to get a feel for what is happening out there in the marketplace – otherwise our range ends up looking like everyone else’s”, or even, “sometimes we feel we miss out on innovative factories because we are so deeply bound with our existing supply base”, reflect the general consensus.
So, the question is, has supply base consolidation been taken too far?
Time for a new deal
The first step should be to acknowledge that the business of retailing needs a healthy balance between predictability and innovation. Predictability, as much as is possible in sourcing, could be represented by relationships with known and trusted suppliers. It would take a very strong individual, and a very large safety net, to work every season with large numbers of unknown, new suppliers. It would also require a lot of management time and effort to keep educating new suppliers about the business and its needs.
However, equally, it must be acknowledged that the fashion business is not like automobile or aircraft businesses where practically the entire market and supply base is known.
Nor is it as expensive to develop new products or product components. In the automotive industry new models cost hundreds of millions of dollars to develop – and with such high stakes, buyers tend to select their suppliers carefully and, once the relationship is established, stick to the relationship for a fairly long period of time, with both parties investing resources in it for mutual long-term gain.
In the fashion industry, on the other hand, most product development investment does not exceed a few thousand dollars. This is well within the capability of not only the largest preferred suppliers of the large retailers, but most of the supply base around the world. Whether design-led or technology-led, new products and new looks are constantly being created. Similarly, innovative business practices that generate more responsive factories, improve quality or reduce costs, are not the sole domain of large, old and established companies.
The two critical areas that need to be addressed by any retailer are:
There are many answers to these questions. One of them, which provides a structure or framework in which to work, is the link between product-type and sourcing strategy.
In this, as a first step, a buyer must make a mental division between ‘largely predictable’ products and ‘fashion’ products. Largely predictable products include not only basic or staple items, such as the three-pack of underwear or a $150 suit, but also seasonal items (such as swimwear) for which sales vary dramatically from summer to winter but follow a rhythmic pattern, with some variation, over the same season from year-to-year. For one company such predictable products might be 80 per cent of the business, while for another it might be no more than 20-40 per cent of the entire range.
For such products, supply base hopping is almost certainly the wrong strategy to follow. The sensible strategy would be to concentrate energy on developing relationships with certain key supply bases and suppliers who provide a long-term sustainability or constant improvement in terms of cost, quality and other performance parameters.
On the other hand, there are other products that follow the dictates of changing fashion moods more closely. For these products, putting a long-term commitment on any significant proportion of this segment to specific suppliers can be counter-productive. It can create a sense of security in the supplier, or even the buyer, possibly reduce the drive towards product and service innovation, and maybe even make the overall sourcing-supply relationship relatively inefficient over a period of time.
There is a sense of ‘supply dependence’ associated with supply consolidation, in comparison to the sense of ‘interdependence’ that comes from a flexible (even though not fully open) network of buyer and supplier relationships. A cosy ‘strategic’ relationship that assumes a two-way exclusivity also creates a relatively narrow channel of ideas and developments, and becomes largely process-driven at the cost of creativity. This is fine if you are selling the same product year-in, year-out; but certain suicide (or slow poison, at best) if you are in any part of the fashion market.
This is not to imply that strategic relationships can’t work in the ‘fashion’ arena. But make sure that in such a relationship the suppliers who are worried, nay paranoid, about their own survival. In the best organisations, uncertainty brings about creativity – pick a strategic supplier like that, and you’ve picked a winner!
Achieving the golden mean
Of course, a perfect balance between long-term strategic suppliers and new relationships is as elusive as the perfect business strategy. If one set of rules governed sourcing in the apparel and textile industries, the sector would have been consolidated around this many decades ago.
Previous experience is certainly a worthwhile guide to selecting suppliers and supply countries. But the competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. As someone once said, in business relying only on past experience is like driving a rally sports car blindfolded, while the navigator guides you looking through the rear windshield!
By using the tools to discover, build and maintain new relationships efficiently, most buyers should keep their doors open for new suppliers to walk in and display their capability. Closed doors mean closing the possibly to innovative products, significant margin improvement, and even new methods of doing business that might bring about tremendous improvements in ‘sourcing profitability’.
In a different context, a presentation at the National Retail Federation (NRF) seminar in the USA in 1999 by consultant Kurt Salmon Associates mentioned the potential need to move away from the ‘super-specialised’ and ‘super-analytical’ role of today’s retail buyer to bring in shades of the ‘merchant’ of the past.
The truth is that successful retailers have never really abandoned the merchant principle. This degree of freedom is essential to maintaining the healthy influx of new ideas that keep a retailer’s brand alive with the customer and keep it moving ahead in the market. During the selection process, smart buyers even look at the customer list of their suppliers with a conscious effort to imbibe product trends, technical knowledge and best practices from other companies in their own or other markets.
The key factor that needs to be managed is the effort on the buyer’s part. If a buyer could manage more relationships with the same amount of time and effort, he would probably make more effective use of his own and his supplier’s capabilities to create a more dynamic product and service offer.
Two primary tools come to mind for creating and managing a more diversified supply base: collaboration and technology.
In ‘collaborating’ with the supplier, the idea is to see both buyer and supplier as part of the same demand-supply chain. In fact, take it right back to the supplier’s supplier. Understand that the processes run across organisations, rather than residing in any one – the buyer has as much responsibility and accountability in the sourcing process as the supplier. Information must be shared more transparently, and the overall sourcing process must be managed together, beginning from the product conceptualisation to final delivery. Brainstorming helps, ‘blame-storming’ doesn’t. This approach is as equally valid with a new supplier as with an old, trusted supplier. Good buyers already follow this approach, and it shows in their company’s market performance and financial results. And it does not even add lead-time; in fact, in many cases, it cuts down time.
Secondly, make use of emerging technologies. Don’t just depend on a company’s database or EDI systems. There are a number of tools available today which are relatively inexpensive and easy to use – from the basic supplier profiles available on the numerous marketplaces and exchanges around the world, to more advanced technologies that enable collaborative management of product development and sourcing process management.
There are even well developed systems that can act like virtual assistants, helping buyers and suppliers to keep track of order-specific tasks, and updating each other automatically of the status of these tasks. If you did not have to spend effort on fighting the fire caused by the task that you forgot yesterday, would you have a little more time available to speak to that new supplier whose profile you liked but just could not make the time to meet?
There is no quick fix, and each situation will be different. But I believe that for many buyers, the choices are becoming rather stark. Innovative or staid product? Market leadership, or complete loss of the pole position? Survival or decline? The choices that you make today have a habit of showing up in the profit and loss statements of tomorrow.
[This article is based on a presentation to the Textile Institute’s London and South East England Chapter and draws on experiences with developing global sourcing strategies of a number of retailers and manufacturer-suppliers.]
In recent years, sourcing and supply management has emerged as one of the greatest opportunity areas for retail business as well as for suppliers to leading retailers. At the same time, it is possibly also the one most prone to risk. This set of activities holds the key to improving service, product offer and overall profitability, and yet also provides some of the most difficult challenges of doing business globally. Certainly, you need to have winning products. Of course, you need to pick the best supply countries to source from and the best suppliers. Certainly negotiation and cost management are an important part. But the only way to achieve these many “bests” is by ensuring that sourcing is well and truly integrated within your overall business strategy, and that sourcing activities closely follow the direction set by overall business strategy.
Setting the Scene
Let us cast a quick glance over the major changes taking place in the textile and apparel trade globally. The of the most important questions in sourcing are “From where/whom?” and “How?”. They also provide most of the unpredictability and the risk that so characterises sourcing.
For this heavily protected trade, one of the most important developments is the transition from the General Agreement on Tariffs and Trade (GATT) to the World Trade Organisation (WTO). Put simply, the WTO is driving towards increasing mutual market access for producers in countries that are a part of the WTO. The major aim is to remove quantitative restrictions, including quotas, and to reduce import duties, which act as a barrier to cross-border trade. If all goes as planned, 1 January 2005 will see a textile and clothing world trade free from quota restrictions. That one element, which possibly guides apparel and textile sourcing more than anything else, will cease to exist. However, to minimise the “cliff effect”, quotas are being phased out in four stages, rather than abolished at one stroke. So, the WTO agreement should lead to greater supply and lower prices due to lower import duties and no quota premium, and make our lives simpler overall.
However, while quotas are still in place, some countries that are relatively smaller exporters of apparel (such as India, Pakistan, Turkey, Indonesia etc.) are being allowed to grow their quotas faster than larger exporting countries (such as South Korea, Taiwan, Hong Kong and China). Also, regional trade agreements are allowing countries close to the major developed markets to export apparel and textile products free of duty and quota already – such agreements include NAFTA (USA, Canada and Mexico) and the European Union’s agreements with former Communist countries, as well as Turkey and North African countries. Annual growth rates of such regional trade are over 20%, compared to the 2-5% growth rate of imports from Asia into the EU and the USA.
Due to these factors, many more cost effective supply bases are developing quickly, adding to the complexity of choice. Many of these are low cost supply countries that now exist not only in Asia, but in Europe and the Americas as well. So which countries should you pick? Is Hungary better than the Hong Kong, the Caribbean better than Cambodia? Should you still be sourcing from the high-cost countries such as Italy, the UK etc. when there are so many low cost bases from which to choose?
Then there is the question of the sourcing method. Virtually every kind of relationship and business structure possible is included in the textile and apparel supply chain:
Some of these methods are declining, some are increasing in popularity, while others are stable. Should you apply more than one? Should you differentiate depending on the supply country or should you adopt one as “the way” for your business?
Taking the Gamble Out of Sourcing
The problem, clearly, lies in the unpredictability about the benefits from each country and method of sourcing. And, simplistically, the solution lies in taking as much of the uncertainty out. The way to do that successfully is to ensure that your sourcing strategy, organisation and processes are led by your overall business strategy. Many organisations, retailers as well as suppliers, have built up highly successful businesses in the last few years by ensuring that sourcing is one of the core management areas of their business rather than an afterthought. But in many more, sourcing is relegated to the “back-room”, as something that happens mostly outside the company’s boundaries. How can you bring sourcing within the mainstream of your business?
Imagine the sourcing process. Some people might imagine conceiving a product, a style, putting together the fabric and trims, creating a sample, getting it produced within a given time and cost. Others would visualise it beginning with next season’s business plan, a plan to sell certain numbers of a product at a particular price, bought in at a certain cost with a planned profit and mark-down allowance. Still others might remember exchanging endless overseas telephone calls and faxes with their suppliers, the dreaded messages from the shipping company about late deliveries. All of those unpredictables that make sourcing a gamble.
Stop! If you are a retailer, I would ask you to now visualise your retail store, your catalogue, your website. If you are a manufacturer, I would ask you to visualise your customer and their consumers. That is where the sourcing process truly begins. Your business is defined by your consumer or customer, who has certain expectations – a product, a particular price, a time limit, a certain quality. Naturally these demands and expectations are what you are trying best to understand and fulfil. So should your associates who support the process.
No matter what you are, a retailer or a manufacturer, you need to focus on the consumer. The “push” system of supply is outdated – customers have greater, easier access to a much wider choice of goods and services, and expect ever-greater standards of quality, service and customisation. The sourcing and supply process must change too. Previously one end of the supply chain understood consumer demand, and translated that understanding into a product concept that was manufactured, shipped and sold to the consumer through retail stores. Increasingly now, the functions of Design, Development (production), Distribution and Display (retail) must link together to share skills, knowledge and capabilities that allow joint market analysis, product development, common measurement and accurate forecasting, and create a delighted rather than merely “satisfied” customer.
Too often sourcing decisions are made as a reaction to the immediate present and the recent past. Factors such as past relationships, past experience of individual buyers, gut feel and immediate price comparisons are commonly the driving forces. These are all internally focussed; the decisions based on what is available within the business (and its supply base), rather than what the consumer or customer wants.
Let us take business strategy first. Generally, three major areas define and differentiate one business from another: Product, Price and Service. A study by global management consultants, Kurt Salmon Associates in 1998-99, showed that successful businesses had a clear positioning in being focussed on a single or a combination of two aspects. On the other hand, business that were not successful financially, were generally fuzzy in their positioning, in their definition of what the business stood for. Are you clear about where your business stands and what is your platform, on which you sell to your customers? If you are, you have taken the first step to sourcing successfully.
What are the obvious links with sourcing? If you are price-oriented, surely your sourcing must be driven very much by sourcing cost. But not the FOB cost alone – you need to factor in import duties, transport costs, costs of rejections, costs of maintaining a supplier relationship, and many other factors that are often invisible. If, on the other hand, you are oriented towards Product and Service, surely you need infrastructure within your business or in your supply base to create innovative products, turn sampling around quickly, and ensuring that quality, accuracy and timeliness are the benchmarks used to measure success or failure.
So you now understand what your business is all about, and what your sourcing needs to be. Let us ask a third question, do your buyers, merchandisers, technologists, suppliers and logistics providers have the same understanding as you about the defining factors and the objectives? Unless you draw these links, and make sure that everyone around the business shares a common understanding, you will have to resign yourself to live with unpredictability.
A final point: there is a wide variety of suppliers and supply bases out there. While defining your business, you also should clearly define how much capability exists within your business to handle the sourcing process from concept to delivery. Define your competencies: can you conceive the product, can you design it, prototype it, define technical specifications, produce (or manage the production) and ship it? What are the things you absolutely wish to control, and what are the activities that you want your suppliers to carry out? Once you have done that, choices become simpler. The future direction for selecting supply countries becomes clearer and identifying the winning suppliers becomes a more rational process.
Yogi Berra is quoted as saying, “It’s tough to make predictions, especially about the future.” Certainly, sourcing is a lot about getting your predictions right – the right product, the right quantities and the right timing, the right supply base for future growth. But it helps to make sure that sourcing activity is led as much as possible by targets and business objectives, rather than only by short-term reactions to changes in the environment. Define your business and the business requirements, and let those define your sourcing – that’s the only way to get some of the unpredictability out of sourcing.
© Devangshu Dutta, 1998