Taking the High Road


July 10, 2010

By Taneesha Kulshrestha

OUTLOOK BUSINESS , July 10, 2010

When Jesus saw the multitude, he was well pleased. And he hoped to sate the hunger in each one of those who milled around him. As he made his way around South Delhi’s City Walk mall, Jesus Echevarria, spokesperson for Inditex, the parent of apparel brand Zara, was all smiles. “Indian customers seem ready for Zara. Their choices of colours, the attitude, all makes me confident that we will do well here,” he says.

Not long after, Zara opened its first Indian store in the same mall on May 28, 2010. By 1.30 pm that day, nearly 500 women had visited the store. Three days on, the steady stream of people continued and there were long queues extending to the store’s doors. “I came on the first day and I cannot find the designs I saw then. I should have just bought them that day,” laments one lady. Jesus would have been well pleased to hear her. Zara, clearly, had arrived.

The Spanish brand’s entry symbolises a change that is quietly sweeping India’s high-end apparel segment. What began as a trickle in 2004-05 has now become a steady stream—foreign brands are lining up to enter the Indian market. In addition to Zara, others such as Diesel, Vero Moda and 7 For All Mankind have also set up shop in India this year. They join Tie Rack, Promod, S Oliver, FCUK, Guess, Next and Calvin Klein, among others, who have been in India for the last three or four years.

Indian shoppers, long starved of genuine international designs, have the country’s WTO membership to thank for the sudden spurt in choice. The sharp reduction in import duties on apparel (from around 100% in 1990 to around 30-35% across categories now) and the government’s decision to allow 51% FDI in single-brand stores in January 2006 have resulted in several foreign apparel companies making a beeline for India.

Although many have positioned themselves as premium brands, most have become prudent enough to ensure that the prices are not beyond the reach of the Indian consumer. And the timing of their entry has been perfect. Over the last few years, Indians have shown a willingness to spend more for value. “A customer who would quibble over parking charges a few years ago now pays Rs 50 for parking, Rs 300 for a movie ticket, Rs 20,000 for a mobile phone and Rs 1 lakh for an LCD TV. Why then can’t he pay Rs 2,000 for an international fashion brand? He surely can!” says Gaurav Sehgal, S Oliver, India COO.

In a sense, the premium segment is seeing a confluence of sorts, where brand price points, consumer incomes and the market ecosystem have dovetailed to create scenes such as the one in Zara’s Delhi store.

Consulting firm Technopak puts the worth of the premium fashion retail segment at around Rs 2,000 crore today. The segment’s value has doubled since 2005, when it was worth about Rs 1,000 crore, says the consultancy. Technopak expects it to grow 25-30% annually over the next five years to over Rs 6,000 crore.

The premium segment’s growth has been driven by the economic boom of the last decade, which has resulted in a surge in the country’s middle-class and upper middle-class numbers. The tremendous potential of the market has made foreign brands flock to India, giving consumers the benefit of greater choice.

Getting The Price Right

Ironically, although they are considered premium brands in India, many foreign labels, including Mango, Zara, Promod and FCUK, sell as mid-market brands in their home countries. According to Devangshu Dutta, CEO of Third Eyesight, a Gurgaon-based retail consulting firm, they have been forced to go premium in India for two reasons. One: import duty, which can be as high as 30-35%. Two, the market itself has lower price levels. For instance, a basic white shirt would cost Rs 500-1,500 in the mid-level segment and Rs 1,500 onwards in the premium segment. As a result, foreign brands, which retail closer to the Rs 1,500 mark, have no choice but to be in the premium segment. In a sense, the ‘premium’ is often because the products have a higher price tag.

Full Steam Ahead

High street fashion brands are looking at major expansion in the next few years.

In many cases though, foreign brands have also realised that the Indian retail consumer is extremely price sensitive. Marks & Spencer (M&S) is a case in point. In its earlier avatar, its products were way too expensive for Indian buyers. M&S positioned itself as a premium brand in India despite being a mid-market brand in the United Kingdom. The strategy did not work well. Premium segment buyers found the prices too high. Mark Ashman, former CEO of Marks & Spencer India, admitted as much. Result: M&S stores had barely any footfalls. Now, the British retailer is working to correct that and making efforts to woo mid-to-premium segment shoppers. In 2009, it formed a 50:50 joint venture (JV) with Reliance Retail to expand its network. It also cut prices by 20-30% across categories and repositioned itself as a mid-to-premium segment retailer.

Benetton, which entered India in 1991 through a 50:50 JV with the DCM Group, also struggled to find its footing. By 2004, its revenues had only reached a modest $9 million or so. A lack of focus and poor-quality merchandise had seen its fortunes suffer. The Italian company turned the corner in December 2004, when Chairman Luciano Benetton decided to convert the JV into a wholly owned subsidiary. The Indian unit went on a big expansion exercise, improved quality, increased local sourcing and optimised its supply chain. The efforts resulted in huge cost savings, better trend forecasting and, importantly, lower prices. By 2009, Benetton had expanded to 106 outlets in 45 cities. Its revenues had crossed $100 million.

Others learnt the same lesson. In 2001, Mumbai-based fashion distributor Major Brands brought Spanish women’s apparel brand Mango into India. The first store opened at the Crossroads Mall in Mumbai. Mango charged prices that were three to four times higher than local brands. The starting price of its T-shirts, tops, denims and other apparel was around Rs 1,400 and the upper limit could be as high as Rs 15,000. Not surprisingly, Mango was viewed as a luxury brand, although it isn’t actually one. Only Bollywood actresses, models or the social elite were seen sporting its threads. In 2007, in an effort to record more footfalls, the brand rationalised prices, cutting them by nearly 25%. Today, the starting price of a Mango T-shirt can be as low as Rs 500. At the same time, it also has expensive designs, priced at Rs 10,000 or more, for the patrician brigade.

The price cuts have helped Mango grow. “Our South Delhi sales are at par with international markets like Dubai and Singapore. In the last one year, we’ve seen a 20-25% increase in sales,” says Kamal Kotak, Country Head, Major Brands.

Heavier Wallets

While the brands have cut costs and are rationalising prices in line with the Indian market, the Indian consumer, too, has moved up to higher price points. “Prices in India have trebled over the last 20 years,” says Dutta of Third Eyesight.

“These higher price points are the new mid-price points as buying power and disposable income have increased many times over in the last decade,” says S Oliver’s Sehgal. His words ring true if one looks at the country’s premium jeanswear market. In 1999, Levi’s 501 jeans, an “international bestseller”, cost Rs 995. Today, they cost around Rs 3,000. The willingness to spend is also reflected in the increasing average bill value and average basket size figures. As per industry estimates, the average bill value has risen from around Rs 1,500 in 2007 to Rs 4,000 in 2010.

The average age of the premium buyer has also come down. Pradeep Hirani, owner of premium and luxury fashion stores Kimaya and Viva Kimaya, says that earlier, 30-plus women made up the premium and designerwear segment. “Now, it is the 20-plus age segment that drives growth,” he adds. The consumer’s profile has also undergone a change. “Earlier you expected only a certain set to visit a store like Kimaya. Today, a girl may come in a Maruti 800 and pick up a dress for Rs 5,000 or Rs 10,000,” says Hirani. A clear indication of how the customer base has expanded.

Spreading Out

Expansion is next on the anvil for most players. Tommy Hilfiger, for instance, plans to open 35 new stores this year, while Lerros plans to add 10 more to its current count (see: Full Steam Ahead). And, it’s not going to be restricted to the metros and large cities—tier-2 towns are also on the radar. Benetton says its sales in tier-2 towns are growing faster than in metros and Sec-A cities. Market experts say that small towns are coming of age. Income and awareness levels are rising and organised retail has come in. “There is a lot of money in tier-2 towns. And there is an aspiration to sport a lifestyle that is global,” says Tommy Hilfiger India CEO Shailesh Chaturvedi.

The brands are also more confident of the Indian market today, going by the change in their entry strategy. Earlier, franchising was the preferred mode of entry. In 2009, most of the brands entering India opted for wholly or partially owned subsidiaries or joint ventures. Now, even the brands already in the market are looking to take greater control over their retail operations.

And, each is going all out to build customer loyalty. Chaturvedi of Tommy Hilfiger says that his brand has decided to follow the 80:20 rule. It will aim to get 80% of sales from a loyal customer base of 20%. For this, the company has launched a customer loyalty programme that will offer customers personal privileges and services.

Focusing on the store as the brand builder is another strategy. “We do not advertise. We let our store work for us,” says Zara’s Echevarria, referring to its plush interiors. He says that the brand will also churn inventory twice a week. “Customers will find fresh styles every time they come to the Zara store,” he explains. Currently, most brands churn inventory twice a month.

Challenges Aplenty

Despite the optimism, new entrants will still face many challenges in the Indian market. With organised retail space in short supply, getting the ideal location for a store will be difficult. And while the downturn did correct rentals for existing players, the new ones may find themselves paying more as the real estate market has picked up.

Investment per store remains high. S Oliver spent Rs 3 crore for a 7,000 sq ft store in South Delhi’s Select City Walk mall. But a similar store in Pune cost Rs 80 lakh. There’s also room for improvement in sales. “Sales per store in India are still less than half of what one can expect to sell in, say, Dubai,” says Chaturvedi. And so, break-even will take longer. Most stores take at least two or three years to break even, if at all.

Product sourcing will also make a huge difference when it comes to profitability. Now, most international fashion brands do not source clothes locally but import them. But with an eye on cutting lead time and earning higher profits, brands like Marks & Spencer, Puma and Esprit have increased local sourcing. Puma sources close to 80% of its clothes locally while Benetton sources its entire range locally.

With so many brands coming in, competition will hot up and a shakeout could well be in the offing. But, for now, the market is ripe for the picking. And Jesus, for one, is hoping that the faithful will help him reap a rich harvest.

Find this article in Outlook Business of 10 July, 2010