Seconds to success

Kavish Ahuja doesn’t look very different from other young men in Rudrapur, a small town in Uttarakhand, a few hundred km north of New Delhi. But this 30-something is different: he is literally one in 25. Less than six months ago, he shut down his Adidas franchise store:  the “elitist business” was popular with window-shoppers, but wasn’t exactly raking in the moolah.

Ahuja purposefully cleared his store of its multi-coloured sneakers and replaced them with rows of TVs, air-conditioners and music players. The Adidas sign outside the store has been changed to “Skydeelz” and Ahuja offers discounts of upto 50% on white goods in his store. He is part of a growing fraternity of Skydeelz franchisees — already, there are 25 like him in small towns across India.

The idea behind Skydeelz is simple — sell factory seconds electronics at deep discounts to customers in tier 2 and 3 towns, who aspire to buy branded goods but hold back at the thought of paying full price. Founder Beni Kinha typically launches into a monologue defining “seconds” within, well, seconds of meeting anyone new.

“Factory seconds means over-produced, over-imported, obsolete models; damaged packaging; light scratch or dent on outer body, but functionally ‘OK’ products certified by manufacturer,” he rattles off, emphasising that he’s not selling “used” goods. Skydeelz, set up under Dinghy Retails, buys such ‘seconds’ from companies at a discount, refurbishes (minor repairs without opening up the machine) stocks and supplies them to franchise retailers. The end-user pays 25-50% less than ‘fresh’ items, which even come with warranties and the promise of after-sales service by the manufacturer. 

Although Kinha started his business from Delhi, he’s clear that his growth will come from small towns and cities. “Over 70% of India lives outside the metros. These places will fuel growth and demand in the future,” he says. Kinha should know. For 20 years, he was a marketing executive with companies like Maharaja, Escotel, Archies and T-Series, criss-crossing the country, from Jaisalmer to Guwahati, Udhampur to Vellore. Skydeelz was conceived on one such cross-country adventure. His customers were enthusiastic about consumer electronics and, usually, the latest gizmos reached them via relatives and friends in bigger cities. “There was a market with aware customers,” he says. “They just needed to be offered the right products at the right price.”  The idea of factory seconds, then, came “almost naturally”. “The fresh electronics dealership space is too crowded and there isn’t much benefit to be passed on to cost-conscious customers. Seconds has no such problems,” says Kinha.

Crossing the wires

Investing Rs.50 lakh from his savings, Kinha opened his first store in Delhi in April 2011 and the first franchise opened three months. Another 15 followed within nine months and now Skydeelz boasts of 25 branded outlets. One such franchisee from Raipur, Rakesh Nawlakha, invested Rs.20 lakh in buying stock four months ago. “The returns are 8-10%, which is higher than regular electronics stores. If we keep rotating stock fast enough, we could breakeven in 18 months,” he says.

Such a format is relevant in India where people aspire to own almost every gadget and they like it cheap. But isn’t ‘defective’ frowned upon? “Who wouldn’t like a TV 25% cheaper?” asks Roopam Aggarwal, who bought an LCD TV with a market price of Rs.28,500 for Rs.21,000 from Nawlakha’s store. “And unlike the grey market, there is a bill and warranty from the  company,” he insists. “That really helps.”

It also helps that Skydeelz stores stock only popular brands: LG and Samsung products occupy 70% of the space in the showrooms. Other brands include Lenovo, Philips, Maharaja, Usha and the like. The product range goes all the way from LCDs, washing machines and air-conditioners, to laptops and mobile phones. Kinha has tie-ups with almost all the big brands. He operates on a “no credit” policy with the brands by paying upfront, and picks up stock from depots across the country, as and when they become available.

“I am a boon for them,” he claims. “I liquidate their stock, reduce warehousing costs, and ensure a non-grey channel since Skydeelz is the only organised channel for seconds.” The company’s two self-owned warehouses in Delhi and Bhiwandi (just outside Mumbai) serve its northern and western markets. All the refurbishment is done in Delhi. 

Kinha claims the various stores see average footfalls of 400 to 500 every month. In the first year of operation, the company had a sales turnover of Rs.6 crore and Kinha aims to close FY13 with income of Rs.20 crore. In the next two years, he plans to open 100 franchise stores in towns like Mysore, Asansol and Darbhanga, after which he will hit the metros. The business model won’t change too much: even in big cities, Skydeelz will stick to middle and lower income neighbourhoods.

There’s already growing interest from potential franchisees, but Kinha is picky. “I am not desperate,” he says. “I want the franchisee to be a full timer, not an electronics dealer, and I want only one for each city.” Kinha charges a one-time licence fee of Rs.2 lakh from franchises, who are expected to invest Rs.15 lakh in stock (paid upfront) — Skydeelz sources the stock and sells it at a margin to the franchisees.

The parent company chips in with marketing support when a new store opens. But rather than expensive advertising, the emphasis is on outdoor and below-the-line marketing, distributing leaflets and setting up billboards, etc. But Kinha admits the bulk of customers are either customer referrals or word of mouth.

Damaged goods?

Is the Skydeelz model sustainable? Granted, a formal retail channel for seconds works out well for the durables maker. “The seconds must not interfere with the normal channel. So we prefer a vendor who sells on his own counter,” says KH Khan, regional support head (north), Samsung India. At LG, employees get first dibs on seconds — at discounts of 20-40%, depending on the condition of the product. “But they can take only so much,” points out Deepak Gautam, DGM, supply chain management, LG Electronics India. “About 85% of volumes are sold at such discounts to vendors like Skydeelz.” But on the flip side, while companies don’t share numbers on their factory seconds inventory (although it’s believed to be in the range of 5% of total stock), it’s a given that every manufacturer is aiming for a zero-defect production line. That means the inventory of factory seconds may not be a growing one. 

Kinha accepts that and says in the next couple of years he will look at sources overseas, especially as the number of stores increase. Not a very realistic ambition, say analysts. Shipping and logistics costs will eat away almost all of the margin and there’s also a question mark on whether brands would want to sell seconds in overseas markets. “It may not be a good idea, given the costs involved,” concurs  Rajeev Karwal, founder of business consultancy Milagrow Knowledge & Business Solutions. Kinha remains undeterred, though, saying it’s doable by setting up a buying office overseas. “After-sales can be managed by improving buying quality and providing an exchange warranty.”

There are other soft spots. The customer gets only a limited choice at Skydeelz when compared with a ‘fresh’ store — he has to buy from what’s in stock. “During summer, there’s a month-long waiting period for ACs,” says Kinha. While that may be a sign of the store’s popularity right now, there’s always the risk that customers will tire of waiting indefinitely and prefer to pay extra for an instant solution.

Moreover, while Skydeelz is only among a handful of companies that deals in seconds, this is a model that’s been tried in the past, without much success. Issues like the manufacturer over-charging and accumulating stocks due to lack of constant demand have tripped dealers in the past. It is critical that in such a business, stock is rotated quickly.  And since the inventory cannot be sold in the open market, “It’s important for the vendor to get the buying and selling price right, especially if he’s picking up the stock outright,” Karwal explains.

Right now, Kinha is convinced he’s cracked the secret of selling seconds. And he’s looking for investors. “We have made a base. Now we can get funds.” Skydeelz is in discussions with several PE players, although nothing’s been finalised yet. Will investors share Kinha’s enthusiasm for seconds?