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.
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.
The Textile and apparel industry is of particular importance to India. It not only provides employment to a broad base of semi-skilled and unskilled labour but also helps to extend the economic bounty to urban and semi urban areas. Though India has a history of thousands of years in global trading of textile, it contributes only 3% to the global exports of textile and clothing.
While the urge to grow exists, there is a huge difference between the current exports of about Rs. 864 billion (US$ 20 billion) and the target of Rs. 2,500 billion (US$ 55 billion) by 2012. To achieve this vision, exports must grow at around 25-35 per cent a year for the next 4 years, depending on how weak or stable the current year is. This growth rate seems difficult considering the fact India has actually grown its exports of textiles and apparel at an annualized growth of a little over 14 per cent from 2003-04 to 2007-08.
Even if the industry looks at increasing the volume of exports to achieve the vision, the ports do not have the handling capacity considering that they currently operate at 91 to 92 % of available capacity.
Hence, incremental thinking will not help to achieve the vision.
Our key concern is the value “lost” by the industry. Being the low cost supplier does not necessarily translate into greater market share. The Indian Industry must look at enhancing the value delivered rather than competing on the cost platform. Indeed, India compares poorly to other countries on the value captured per employee. (For instance, if the export value captured per employee in India was as much as Turkey, India’s exports would be close to China’s exports of US$ 161 billion.)
One major concern that needs to be addressed is that India’s exports are still weighted in favour of raw materials and intermediate products, rather than finished products. Apparel exports account for only 41% of India’s textile exports in 2007-08. India’s product mix also needs to be aligned to global market needs, rather than only focussing on “traditional strengths” – this includes enhancing the share of non-cotton products in the basket.
Another area that is neglected is the inherent competitive capability of developing new products. The industry needs to develop and nurture these skill sets to create a sustained competitive advantage in the global scenario. India already provides buyers with value in terms of product development and design, which needs focus and further strengthening.
Further, India’s domestic industry, and its skill at understanding market needs, creating and merchandising product, can also play a valuable role in the industry’s growth.
The competitive advantage offered by being able to influence the development of a product is immense. And given that sourcing lead times are shorter in unpredictable times, a supply base that has been involved with the buyer right from the development stage of the product is most likely to get the final order. Third Eyesight proposes a four dimensional model: Define, Design, Develop and Deliver so as to achieve the industry-wide development, of projecting India as a valuable supplier, and sustaining its value needs.
By creating an ecosystem focused on design and product development, India can create and capture the billions of dollars worth of value that is being lost to other countries.
This is an extract from Third Eyesight’s report presented at the FICCI 3rd Annual Textile And Garment conference in Mumbai. The report was released by the Minister of Textiles, Government of India. To download the full report prepared by Third Eyesight, please click here.
To discuss how we can help you with your specific business needs, please get in touch with us via email (please send it to services [at] thirdeyesight [dot] in) or via this form: CONNECT.
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.
[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