September 16, 2005

Over the last couple of years India has been highlighted as the next hot retail destination and one of the most promising markets of the future.

With many battle-scars earned over many brands and several years, and around $40m in annual sales, American apparel giant VF Corporation seems like a veteran in the Indian market. Its story so far – including a newly announced joint venture with Arvind_brands – gives credence to the Indian philosophy of reincarnation.

VF’s first step into India came when it granted the license for Wrangler denimwear to DuPont Sportswear (no relation to DuPont, the chemicals to fibres company) in the late-1980s. At that time, VF took an aggressive approach to the market, and initiated several other dialogues with Indian companies of all shapes and sizes. Within a short time it also appointed Arvind_Mills, the world’s third largest denim fabric manufacturer, as a licensee for Lee.

Arvind had its own mid-market brand, Flying Machine, and was looking at selling international brands in the premium segment in India. Lee became Arvind’s first pitch at the upper end of the market.

One could argue about the pros and cons of VF’s pitching two of its own brands head-to-head in the premium segment. The fact was that, while the sister brands were fighting for the small space at the top, the market itself was evolving with several mid-market Indian brands coming into their own.

Therefore, despite initial successes, the relationship with DuPont Sportswear delivered less than VF expected. Despite the head-start, by the mid-1990s Wrangler already seemed like an “also-ran.”

Where Arvind had invested in creating exclusive Lee franchise stores in addition to the distribution through multi-brand outlets, backed by large amounts of advertising and significant trade credit, DuPont Sportswear’s small size meant that it could match Arvind’s strategy only partially.

Eventually, by the end of the decade, VF decided to transfer the licence to Arvind Mills. Arvind re-launched Wrangler in 2000, and invested in revitalising the brand.

Nevertheless, at present in terms of sales Lee’s lead remains, evident in the fact that exclusive Lee stores will number 74 compared to 55 exclusive stores for Wrangler by the end of this financial year. Together, Lee and Wrangler are estimated to account for about 80% of all sales of VF brands in India, and 10-12% of the total denim market.

Licensee constraints
VF’s other launches in the early-1990s also fared poorly due to the choice of the licensee. It first launched Healthtex children’s wear with Ocean Knits and then Vanity Fair intimate wear in 1995 through Very Fine Apparels, both companies being largely held by the same owners.

Both brands were constrained by the lack of capital available to create an impact in price-sensitive and fragmented market segments for each.

Healthtex was launched first through ‘Little Kingdom’ stores (also owned by the common owners) which was the leading retail chain for children’s wear at the time. Its wholesale foray was less than successful – with indifferent quality, an uphill struggle in marketing the product, poor financial backing and the demise of the parent chain, Healthtex had died a quiet death by the mid-1990s.

Upon the expiry of the term of the first licence, VF expressed confidence in Arvind again by transferring the Healthtex licence to it, for a soft-launch in 2002. However, the brand was allowed to fade away in India, as VF subsequently sold the brand globally to Lolly Togs Inc.

Vanity Fair’s launch story was an even briefer flash-in-the-pan. It entered the market in 1995 as a totally imported product at very high retail prices, and died-out for much the same reasons as Healthtex.

However, as with its other brands, VF has been persistent with Vanity Fair in the Indian market, and re-launched it in 2003 through La Reine Fashions, a group company of Maxwell, the leading undergarment group in India.

This time, the product range has been a mix of domestically manufactured and imported styles, and available from one-third the price of the initial launch a decade ago. Although it is still pitched at the premium end, the market around it has grown further with brands such as Triumph, Marks & Spencer and others, and is expected to perform better than it did in its first incarnation.

Having established a fairly wide and deep distribution network through its licences of VF and other brands, as well as its own, Arvind Fashions also launched Jansport and Kipling accessories. By 2005 its relationship with VF covered four leading brands.

With this clutch of brands under the same licensee, it was logical for VF to place confidence in Arvind again for its most recent major brand acquisition, Nautica.

At its launch in 2006, Denise Seegal, Nautica president and chief executive, said: “Arvind’s reputation for successfully launching and maintaining international brands make them an ideal partner for us.”

Arvind opened the first free standing Nautica stores in India in Bangalore (a 6,800 sq ft exclusive store) and in New Delhi in May 2006, with plans to operate the first 12 stores and to franchise the subsequent stores.

Joint venture vehicle
As the involvement with India has intensified, VF’s desire to take control of its presence in a strategic market such as this has come to the fore. Since 2004, Arvind Brands’ president, Darshan Mehta, has spent significant amounts of time in the USA, negotiating the details of a deal that culminated into VF’s very first joint-venture in the world.

The 60:40 joint venture, VF Arvind Brands Pvt Ltd, between VFC and Arvind Brands, brings in-house activities related to the VF brands handled by Arvind. The team of about 180 people from Arvind Fashions, the main licensee, have been transferred to the joint venture, along with assets and the existing licences. On its part, VF is paying US$33m for its 60% stake in the business.

The joint-venture is now expected to be the vehicle for further launches of VF brands in India, and also of any potential acquisitions of Indian brands in the future.

The current retail infrastructure will be retained by Arvind, and is expected to expand to 300 stores by March 2007 from around 270 currently. Discussions are also reported to be on with the new retail business of the US$20bn Reliance Industries, to launch Hero (by Wrangler) and Riders (by Lee) in the mid-market segment.

Darshan Mehta takes over as the CEO of the joint-venture, reporting to Eric Wiseman, president and chief operating officer of VF Corporation, who will be chairman of the new company.

Thus, VF’s involvement with India has gone from tentative entry in the 1980s with one brand, to multiple licences and multiple brands. Its consolidation now into a majority-holding in a joint venture reflects VF’s desire for control of a growing business in a strategic market.

Underlining this, Mackey J McDonald, chairman and chief executive officer of VF Corporation said upon the formation of the joint-venture: “With its rapidly expanding economy, growing retail base and favourable demographic characteristics, India presents a source of enormous future growth for our brands.

“This move underscores our commitment to leveraging VF’s powerful portfolio of brands to capture new growth opportunities in expanding markets.”

This report is based on industry research and inputs gathered by Third Eyesight ( www.thirdeyesight.in ), a consulting firm focused on retail and consumer products sectors.