Creative Destruction

Sanjay Lalbhai is effortlessly stylish. The dapper 63-year-old is dressed for this meeting in trendy nylon trousers he picked up in Japan, an ultra-lightweight black blazer and white linen shirt. “I shop both at home and overseas. I like checking out new brands, apart from wearing my own,” he says. Shopping for clothes can be a bit of a busman’s holiday, though, given the Arvind Group chairman’s line of business – at last count, it had a portfolio of around 30 apparel brands, many of them global high street icons on licence to the Ahmedabad-based apparel and retail major. But Lalbhai’s not complaining; Arvind has come a long way from when he took over in the 1980s. Lalbhai transformed the family- owned cotton textiles company into one of the world’s largest denim manufacturers and then, a few years later, steered it out of humongous debt and oversupply into the apparel and retail business. The strategy is working: in FY17, Arvind Lifestyle Brands clocked revenue of Rs.2,900 crore, 26% more than the previous year. Profit, too, has doubled from Rs.29 crore to Rs.58 crore during the same period. Not bad at all for a company, which at a group level, had a debt of Rs.2,270 crore and a loss of Rs.70 crore in 2002.

Precisely why eyebrows are being raised over Arvind changing its strategy yet again. Industry estimates suggest the lion’s share of revenue (Rs.2,300 crore of last year’s Rs.2,900 crore) comes from the branded apparel business. Of this, although it has a portfolio of over 30 brands, just three “power brands” – US Polo, Arrow and Flying Machine – bring in about Rs.1,700 crore. Lalbhai categorically denies the overdependence on these brands being a cause of worry. “The power brands are growing each year and many of the others are pulling their weight. That will lead to better growth rates and margins as well,” he says firmly. 

Still, Arvind is hedging its bets. Going forward, it wants to add to its list of power brands by expanding the width of offerings. At the same time, it plans to cash in on sunrise sectors such as beauty and kids fashion and, in the process, increase its presence in specialty retail. Of Arvind’s revenue, 92% comes from apparels, with the rest from beauty and innerwear. In the next four years Arvind aims to earn as much as 70% from apparels and the other 30% from beauty (10%), footwear (8%) and innerwear (12%). Expanding its brand portfolio is fine, but why would it push for retail again, having burnt its fingers with the Megamart venture? 

Far away from Ahmedabad in bustling Bengaluru, J Suresh, the 59-year-old CEO of Arvind Lifestyle Brands, explains why. Simply put, fashion trends and consumer profiles are changing; there’s no room for business as usual in a market where more consumers are willing to spend larger sums on clothes, accessories and beauty products. The idea now is for Arvind to have a presence in every part of the $8 billion organised retail business. Currently, the three power brands are housed in the $6-billion mass premium segment; Arvind’s retail venture Megamart (which is being phased out) is in the $1.5 billion mass market; and licensed brands such as Gant, Nautica, Calvin Klein and Tommy Hilfiger are in the $0.5 billion bridge-to-luxury segment. “Our strategy now is to be relevant to all key parts of India,” says Suresh.

That’s where the focus on specialty retail — defined by Arvind as catering to a specific audience, rather than by price point — comes in. Arvind will now be focusing its energies on expanding four different formats in specialty retail – Unlimited (value fashion chain), Sephora (beauty), Gap (premium apparel) and The Children’s Place (kidswear). Although at the gross margin level, beauty brings in 45% compared to about 50% for apparels, the productivity of the beauty stores is more than that of apparels. Hence, Sephora has 12 outlets today and plans to roll out five each year. While Arvind already has a presence in kids wear, its tie-up with The Children’s Place gives it a larger presence by filling the gap in the Rs.500-600 price range. “With four different formats in this space, we can reach out to a very large base. Specialty retail will be a key growth driver in the coming years,” says Lalbhai. 

Second time’s the charm
Unsurprisingly, the biggest opportunity will be in the mass market space that is expected to grow the fastest, even as the overall organised retail business expands to $25 billion by 2022. Suresh estimates the mass market opportunity will be as large as $10 billion in the next five years, while mass premium will double from its current size to $12 billion. “There will be an explosion with the shift from the unorganised to organised,” he explains. 

However, Arvind’s track record in this space, isn’t encouraging. Its first foray into mass retail was back in 1995 with discount store chain, Megamart - started to liquidate old stocks of company brands (mainly menswear). But, it was challenged by several factors – unreliable supply of brands, the government decision to levy excise on MRP and not selling price (which was lower) and customer perception. From a peak of 225 stores, Megamart is currently down to 35 stores, which are also being phased out. According to Suresh, Megamart was killed by the excise duty problem. 

Now, Arvind is banking on Megamart’s new avatar as Unlimited, a chain of value department stores — this time, with offerings for the entire family, not just in menswear. Since September 2015, some 54 Megamart outlets have been converted into Unlimited stores. Another 30 Unlimited stores will be opened this year. Suresh says the decision to shut down Megamart was taken because profitability was hit, not that they were loss-making at a company level. The discount store tag has been cast aside for good and Arvind has ambitious plans for this new format. Lalbhai is confident that over the next five years Unlimited can grow to become a $1 billion business, more than 10x its current size. 

That’s a tall ask, considering the group’s lack of experience in women’s apparel and the fact that Unlimited is playing catch up with experienced, established players. Unlimited is up against some very feisty competitors who have cut their teeth in the value fashion business, chief among them being Landmark Group’s Max and Future Group’s FBB. Lalbhai concedes the point but remains confident of Unlimited’s prospects. “There is a handful of organised players and the market is much larger. Unlimited as a format will target the middle class and be relevant across India,” he explains. 

Kishore Biyani, founder, Future Group, points out that value fashion, like any other retail format, calls for high levels of consistency and an efficient supply chain. “The big difference is that it needs to open more stores.Only that can help in deriving benefits of scale,” he says. FBB, opened its first outlet in 2008; currently, there are 300 FBB outlets across 100 cities, with plans to open another 100 this year. To drive home the scale benefit, 60% of these outlets are housed in Big Bazaar, with the rest being stand-alone stores.

Value fashion has some inherent limitations, adds Vasanth Kumar, executive director, Max Retail. “You can’t say you’re using the finest yarn nor can you boast of being the cheapest around. That makes it difficult for value fashion to get noticed and to build customer loyalty,” he says. Max is the earliest entrant in this business in India, opening its first store in Indore in 2006; currently, Max’s 200 stores bring in revenue of Rs.2,400 crore. What’s worked at Max, Kumar explains, is a relentless focus on a single segment and keeping costs under control — Max never takes the more expensive ground floor store in a mall, for instance, opting for the cheaper basement or first level. 

Arvind has one more issue to tackle in its value fashion venture – contending with margins that are lower than what it is used to on any of its power brands. Where branded apparel can fetch gross margins of 65%, value fashion averages margins of 45-55%. So, how does Arvind plan to play this game?

Playing the value card
By turning the positioning around, for starters. “You will get more for the same amount spent, strengthening the value fashion story,” says Suresh. For instance, he explains, a Rs.799 shirt from the homegrown Excalibur brand is certainly pricier than what competitors sell for Rs.699 but, “it will be as good as a shirt that is substantially more expensive”. According to Suresh since the product goes directly from the factory to the store without any distributor or retailer margin, it will shift margin power to Unlimited. Also there is no additional effort to promote any of the brands sold at Unlimited which should rein in overall costs and lead to better margins. 

Max’s Kumar attributes part of his chain’s success to its mono-brand approach, which he says was the result of extensive consumer research in the early days. “When you have just one brand, it becomes very important to get the range right. There is no fallback for us: everything is around the Max brand,” he adds. In contrast, Arvind has 12 brands at Unlimited such as Ruggers, Excalibur, Cherokee and Donuts, which will call for individual attention; and 60% of the range will be women and kidswear. Arvind is banking on its learning of having run a multi-brand portfolio for well over a decade now. A key component of any retail strategy is around sourcing, and Suresh is quick to point to Arvind’s achievement in this area: the group does not own a single garment manufacturing unit and still sources 30 million garments each year. “We shouldn’t have any issues in sourcing for this new format either,” he says confidently. 

Comparisons with the Megamart format are inevitable, although Suresh is quick to dismiss any such talk. “Unlimited is a new brand with a new positioning; there is no baggage from Megamart,” he says. Indeed, Unlimited differs from the earlier discount chain in significant ways. First, there will be no discounted products on offer. As Suresh says, the objective is to be one notch above mass and offer more value for money than competitors. Then, unlike Megamart’s bias for menswear (75% of the product mix at the peak), Unlimited will restrict menswear to 40% of the range, with kidswear and womenswear making up the rest. The store size will be standardised to around 10,000 sq ft (Megamart had stores as large as 50,000 sq ft). The company plans to spend Rs.150 crore annually to open 200 stores across all its formats including Unlimited. Operational break-even is at six months now, while capex break-even is around three years. 

For their part, industry trackers think Arvind’s Megamart experience will come in handy with the new retail venture. Nihal Jham, research analyst, Edelweiss Securities, points out that though the positioning of Unlimited will be different from that of Megamart, the sourcing and operations will be very similar. “That will work to Arvind’s advantage. Looking ahead, there is plenty of space in the market for all value retailers to grow. Even today, we do not have more than three or four value retailers,” he says.

Even an old hand in the business like Biyani believes Arvind can become a player of consequence in value fashion. He points to the group’s efficiency on key parameters such as size and supply chain management. “Besides, nobody understands fabric, yarn and brands better than them. That makes them a highly integrated player and gives them a clear strategic advantage,” he says. Besides, the market potential is nowhere close to even being scratched. “The big opportunity lies in clothing 1.2 billion people. There is something to be done in every format,” he adds. 

Looking ahead
How Arvind manages to derive success beyond menswear (its key strength) will be interesting. Historically, it has been known for its success in this segment with licensed brands such as Arrow, US Polo and Tommy Hilfiger. Suresh admits that the company may have been a little late to the womenswear game – even within the Rs.600-crore Arrow business, just Rs.20 crore comes from womenswear. “We invested in bridge-to-luxury ahead of time and should have done that with womenswear as well,” he says. One reason for not entering this segment aggressively may have been the lower margins. Now, to make up for lost time, the company may consider acquisitions, although it’s too soon to name potential targets, Suresh adds.

Meanwhile, the idea is to sweat the power brands, which are expected to grow 20-25% over the next three years, by extending them into new categories such as kidswear, innerwear and accessories. That should help them hold their own in the increasingly crowded mass premium segment, Suresh believes. US Polo, for instance, has already made a serious foray into kidswear in 2014. That business alone now has a Rs.100-crore turnover, accounting for a third of Arvind’s overall kidswear business (which includes Unlimited, The Children’s Place and Gap).

Footwear offers a similar opportunity. Currently, this segment brings in just Rs.30 crore but Suresh is predicting business of Rs.200 crore in two years, a 7x rise in revenue. What makes him so confident? Online sales. Already, 30% of all footwear sales occur online. Arvind is planning to launch footwear offerings in all three power brands, and Aeropostale in the coming months, aimed at different consumer segments – Aeropostale, for instance, will target college students. In addition to the power brands, Arvind has two international footwear brands – Cole Haan and Johnston & Murphy. “We will build on the brand equity of our power brands to grow the footwear business. It is exactly like how we grew US Polo kids and innerwear,” says Suresh.

Edelweiss’ Jham says, “Arvind has a proven track record in successfully launching and building brands across all formats. It remains one of the best bets to ride the growth in the branded apparel segment.” Still, it is worrying that only three of some 30-odd brands are doing well. Indeed, Suresh admits that the profit of the three power brands is more than the profit of the overall business – other brands pull it down. Add to this the 5% royalty the company pays for the brands and it’s a further drag on profitability. But, the large portfolio exists for a reason insists Suresh, “Arvind is building a portfolio for the future”. After the teething troubles of the launch period, different brands will start making profits at different points in time, ensuring a steady revenue stream for the group. “For instance, Gant, iZod and Nautica are getting into the growth phase now; iZod will make a profit this year while Gap and The Children’s Place will be in the black once they go local in terms of sourcing next year,” he adds. Competitor Biyani thinks, “A right portfolio is important since you will always need something that sells across seasons. It is a question of how well a portfolio is managed and not about how large or small it is,” he says. Still, Lalbhai makes it clear that Arvind will not be adding more brands anytime soon – unless something unique comes by. “There is no point in having a portfolio that does not have the potential to grow at 20-25% each year,” he explains.