While shopping at Viviana Mall, Thane, I got a chance to visit the Bata showroom housed in Mumbai’s biggest mall. To my surprise, it was an extremely large showroom for a footwear brand and housed a lot of variety for men, women and kids at different price points; this wasn’t the case some years ago. The brand was largely known for its quality and sturdiness — shoes that would last long but weren’t stylish. It was perceived as a mass-market product that lacked innovation. There was little effort towards brand- and portfolio-building, with the focus directed towards labour issues and cost management. So, rubber and plastic footwear comprised a chunk of Bata’s sales. The swanky 20,000 sq ft showroom is thus an indication of how things have changed.
The management has embarked on a strategy to reduce the ‘Bata-only’ perception. Over the past five years, the company has taken several steps to compete in more segments and launch new product lines. Innovation came into focus while the company widened its portfolio. Although Bata continues to leverage its homegrown brand, it has strengthened lines such as Hush Puppies, Marie Claire, Bubblegummers and North Star. Today, its bouquet comprises low-range products to high-end leather items for men, women and kids.
The focus is now on increasing the share of high-value products. The leather segment has higher margins compared with rubber, canvas and plastic. Within the segment, the thrust is on Hush Puppies, which, in turn, has improved the revenue mix towards value-added products by 70% in CY14. Before the beginning of the current fiscal, Bata launched a 360-degree integrated marketing campaign ‘Where life meets style’, along with an innovative TV commercial that appealed to consumers across all age groups and demographic profiles. It has enhanced product offerings and its new range is contemporary, stylish and targeted to appeal to the younger generation. Apart from footwear, Bata also houses a wide selection of accessories such as bags, belts, scarves, sunglasses and wallets.
Of course, it helps that Bata enjoys strong brand equity and is the market leader, with a 20% share in the organised footwear segment. In the retail business, apart from having a strong and extensive portfolio, distribution is its key competitive advantage. We think this is where Bata stands out in comparison with the competition. In addition, of the 1,400 stores that Bata has in India, 65% are outside the top 10 cities, giving it a significant advantage, as a large part of the unorganised market is outside this geography. Currently, these smaller towns are not catered to by many of the larger players, either domestic or foreign.
Bata India has continued to expand its retail presence by opening 127 stores in 2014 and plans to add 100 stores every year. The new stores are bigger in size (average store size, 3,000 sq ft), and based on global design, with adequate space to display the products. Recognising the needs of young customers, the company created a new retail concept called Footin, with 23 exclusive stores opened in 2014. It is a new business model catering to young, style-conscious and trend-savvy customers.
Bata is also focusing on scaling up and opening new exclusive brand outlets (EBOs) of its flagship premium brands such as Hush Puppies, Naturalizer and Marie Claire. The total number of Hush Puppies stores as of Q1FY16 was 103, of which 63 were exclusive stores. To augment its reach, Bata plans to launch EBOs of its brand Power, which sells economical sports footwear. By FY17, Bata plans to open 20 Power EBOs with an average size of 1,000 sq ft. In Q1FY16, it tied up with US footwear brand Caterpillar to market its range of footwear in India. Although the company lost market share in recent years due to business restructuring, with Bata on a strong footing and focused on aggressive growth, we believe that it is poised to gain significant market share, going forward.
Over the past seven years (CY06-CY13), Bata’s revenue has shown a CAGR of 17.6% on the back of an improving product mix, which aided the company in reporting realisation growth of 10% over the same period. Bata faced supply chain problems in FY15 owing to teething problems related to its new SAP system, which has been installed at around 1,274 stores. The company also faced connectivity issues at many stores, due to which the outlets couldn’t receive the required quantum of supplies, thereby negatively impacting revenue growth. The issue, however, has been addressed.
As we all know, consumer product sales through the e-commerce channel are rising rapidly, forcing many consumer companies to change their sales strategy, especially in metros. Bata is no exception and its revenue has been affected in the past few quarters. Online shoe shopping currently accounts for 8% of overall industry sales and is expected to grow. To leverage this sales channel, Bata has developed an online digital multi-channel business that has helped the company reach 1,400 cities across India with its shipments. In order to attract more online customers, new partnerships have been entered into through tie-ups with leading online marketplaces such as Amazon, Myntra and Flipkart.
Bata India’s product mix is less susceptible to the e-commerce threat because Bata’s leather and formal footwear is the dominant category. It is its sport footwear and casual shoes brands Power and North Star, respectively, which contribute just 20% to Bata’s turnover, that face competition from online retail, as sports shoes are what is predominantly sold online. But with the company looking to create EBOs for Power and creating its own online portal, the risk of competition seems too over-exaggerated.
We believe that with its strong positioning in the market, Bata will emerge as a winner. Its business model is asset-light, with rising premiumisation of products and increased outsourced production of low-end products. This has kept the free cash flow of the company healthy even during the challenging quarters, with a healthy 20%-plus return on capital employed. With all these initiatives, we expect the company’s sales growth and operating margins to recover in the coming years. The stock price has underperformed the benchmark significantly in the past 12 months, reflecting the aforementioned challenges. However, we don’t see e-commerce trade completely destroying the Indian retail footwear market, as people still prefer to buy footwear offline. Hence, the stock correction offers an opportunity to invest with a long-term perspective.
The writer and his clients hold the stock in their portfolios