The journey of a private-label retailer is inherently more complex than that of a multi-brand retailer,” says Noel Tata contemplatively, as he sips some coffee. “But,” he continues, “we believe we have created a very efficient organisation that is capable of supporting a fast growth rate.” We are seated in a conference room at Trent House in Mumbai’s Bandra Kurla Complex. Dressed in a blue pin-striped shirt and black trousers, the reclusive Tata, 61, has made time for an exclusive chat with Outlook Business.
His observation perhaps best encapsulates retail major Trent’s two-decade journey in India. A two-pronged strategy — of creating an enviable list of private labels and adopting a measured store expansion plan — has done well for the company, which operates the departmental store Westside, bookstore chain Landmark and hypermarket chain Star Bazaar in a 50:50 joint venture with British retailer Tesco. It also has 49:51 joint venture with Spanish retail firm Inditex to run Zara and Massimo Dutti stores in the country (See: Branding it right).
Chaired by Tata, the company today is a key business vertical in the Tata group. Its FY18 net profit grew by 16.78% to 1.09 billion while sales jumped by 19.04% to 21.57 billion. Net sales grew at CAGR of 16.51% in the past three years and net profit increased at a CAGR of 52.85% (See: Selling out fast). Over the past year, Trent’s stock has outperformed the Nifty Consumption Index by 6%.
Having perfected its business with a limited number of stores, the company has now traded its conservative growth model for a rapid expansion route. Over the past two years, it has already opened about 30 Westside stores — compared to 95 stores from 1998 to 2016 — and launched a new fast fashion vertical, Zudio, with seven stores. They have also begun expanding into Tier II and III towns and cities such as Palakkad, Jamshedpur and Dimapur and have a robust expansion plan in place for the next 10 years with an annual capital expenditure of about 1.5 billion. Westside, which brings in the lion’s share of revenue, will have its flagship stores and curated smaller stores in non-metros and emerging micro-markets. “This year, the growth plan is a lot more aggressive with a target of opening 40 Westside and 40 Zudio stores across Tier I and II cities,” says Tata.
The expansion has been funded largely through internal accruals and commercial borrowing, the recent one being commercial paper worth 1 billion in FY18. The capex, however, has not taken a toll on the company since its debt/equity continues to be at 0.25x, with overall debt moving from 2.67 billion in FY15 to 3.91 billion in FY18. Operating profit has expanded in the same period from 1.69 billion in FY15 to 2.45 billion in FY18 even though interest cost doubled from 210 million to 430 million. Tata exudes the enthusiasm of a start-up founder as he proclaims the ambitious target for the company, “Trent’s revenue would reach 150 billion in 10 years.”
Retail experts aren’t surprised by the target. Dippankar Halder, founder, Jalongi, states that Trent has always led change in organised retail in India. “They gave us many modern formats which were truly international in look and feel. They also brought in a few big international retailers through joint venture (JV) partnerships,” points out Halder, who was earlier the business head of Easyday supermarkets, (then with Bharti Retail) and CEO of retail chain Spinach.
Saurabh Mukherjea, founder, Marcellus Investment Managers, believes that retail, when done well, is incredibly profitable, as shown by retailers such as Radhakishan Damani-led DMart and Trent. “I don’t think anyone in apparel retailing in the country has nailed it the way Trent has,” he says, adding that Trent has been able to position itself as an ‘aspirational’ brand, something which its peers such as Aditya Birla Group’s Pantaloons and Future Group’s FBB haven’t managed to do.
Trent’s success, for a large part, is credited to Tata’s single-minded focus on building the business with private labels. This decision was taken back in 1998, when Trent was formed by renaming a subsidiary, Lakme Exports. The conglomerate had identified retail as a huge growth opportunity. Around the same time, Littlewoods, a UK-based fashion retailer was looking to exit India. They had just one store in Bengaluru. Trent acquired Littlewoods and renamed it Westside, thus setting foot into the fashion retail segment.
Tata, who was then handling Tata International was brought in to steer Trent as the CEO and managing director. He was elevated as vice chairman in August 12, 2010 and subsequently took over as chairman in 2014, after the retirement of FH Kavarana. Philip Auld joined as CEO of Trent in 2011.
“One key decision we took at the very beginning was to continue as a private label retailer, which Littlewoods already was,” says Tata. Explaining why, he says that at the time, private label retailers across the world such as Zara and Mango were growing much faster than multi-brand departmental stores. Secondly, at the time, the Indian market consisted only of men’s brands. Women’s apparel was primarily unbranded. They, thus, set about creating their own brands, especially in women’s wear.
Choosing private labels meant that Westside had to go beyond merely cherry-picking from existing national brands. Instead, they had to work on the entire supply chain and identify ever-changing trends. “We set out to make Westside a fashion destination offering an exclusive house of brands,” says Auld, who was redesignated as managing director in 2014. He adds that they had to build the right product and deliver it quickly, and create a visually exciting brand experience. “It was not just putting up stores,” explains Tata.
An important part of this journey was creating an excellent in-house design team, with a head for each private label. Westside’s shrinkage, which measures slip-ups in operations including unsold inventory, is at 0.12%, a testimony to the fact that the designers have been able to rightly identify designs that will sell. In contrast, a multi-brand retailer can only pass on customer insights to the brands, who may or may not act on the feedback. Mukherjea says, “Trent’s team of designers, none of whom are well-known, is the secret sauce that transformed Westside.”
Madhulika Damani, buying head, ethnic wear, says, “As a retail brand, we ought to be able to predict trends. This has worked really well for us in the past”. For instance, Damani recalls launching a small line of front-open kurtas under their brand Utsav. “This silhouette was so well accepted by our customers that we continued it in the coming seasons. It has now been replicated across all our ethnic wear brands,” she adds.
Today, it has become second nature for Trent to forecast key trends for the coming seasons. NUON, with edgy and colourful apparel; Bombay Paisley, with a range of quirky ethnic wear; and Wardrobe, which caters to the needs of office-goers; are some of their popular womenswear brands. Their menswear portfolio includes formal, semi-formal and casual brands such as ETA, WES and Ascot. There are also kids’ lines called Y&F, Baby Hop and Hop. In all, there are 26 private brands across categories such as apparel, footwear, lingerie (Wunderlove), cosmetics (Studio West), perfumes and handbags, household furniture and accessories that are retailed at the Westside stores ranging from 8,000 sq ft to 34,000 sq ft in size.
Analysts believe that such enhanced cross-offerings from higher-ticket-size categories such as footwear and cosmetics have enabled Westside to improve its same-store-sales (SSS). While in FY12, SSS grew 6% (YoY), in FY15, they had peaked to 11%. And in FY18, SSS grew 9%. This helped raise the average bill size from 1,543 in FY14 to 2,197 in FY18. Sales growth over the past three years has moved from 14% in FY16 to 20% in FY18.
Currently, almost 98% of total sales for Westside comes from private labels. They also yield high margins. “It allows Trent to create a distinctive identity as well as accrue significantly better margins than competitors that sell much higher proportion of national and international brands,” says Devangshu Dutta, CEO, Third Eyesight, a retail consulting firm. Mukherjea agrees, and says it also results in substantial improvement in working capital.
Their views are substantiated by ICICI Securities’ recent report on Trent. It notes that a higher share of private label brands has led Westside to post industry’s best gross margins of around 60% and consistent SSS growth of around 8% through FY13-18.
Slow And Steady
While the private labels within Westside grew rapidly, store growth happened at a deliberately muted pace. Critics often argue that Trent did not capitalise on its early-mover advantage and its corporate heft to build momentum quickly enough. Since inception till FY10, Westside adopted a conservative store addition strategy with a total count of 43, implying addition of three to four stores per annum.
But Tata was confident of his business plan. The priority, for him, was to get the products and the format right. He was focused on the sales-per-square-foot figure to ensure store-level profitability. “Don’t forget, at that time there were not many other retailers to learn from,” points out Tata.
Gradually, after perfecting its Westside store model, Trent opened most of them in malls. “We have always paid a lot of attention to property and we have let go of properties when we were not sure about the location. Perhaps that is one reason why we have grown at a slower pace than the others,” says Tata. Trent recently refurbished 11 Westside stores, which translated to a 38% growth in footfalls to 36.1 million in FY18. Analysts believe that healthy store addition coupled with steady same store sales growth will continue to drive revenue (See: Westside’s gallop).
In addition to achieving store-level profitability before expanding further, the company also adopted a unique franchise route in 2007 with a Westside store in Mysuru. Franchises today comprise about 10% of their overall stores. This asset-light model aids in improved return ratios as Trent earns a franchisee fee as well as from sale of its products in those stores, believe analysts. The management now plans to increase its presence in Tier II and III cities through the franchise route, Philip Auld had said in a media statement, during the Westside store opening in Kolkata in 2018.
Harsha Razdan, partner and head, consumer markets and internet business, KPMG India, says, “Along with an offline store strategy, it is important for retailers to have a robust online channel.” Trent seems to be addressing that with an exclusive arrangement, Tata Cliq, the group’s e-commerce arm. “It has been a very small percentage of our turnover but has been growing fabulously well,” says Tata. In the last year, business on Tata Cliq grew 400%. The company is targeting online sales of 1 billion in FY19. Tata adds, “All our sales on Tata Cliq are from the current range displayed in our stores and not from past season merchandise. They are also full priced, and not sold at discount, except during the two end-of-season sales annually.”
The measured expansion strategy was adopted by Tata for not just Westside, but also the newer businesses that he set foot into. Take, for instance, the grocery segment, which he ventured into with Star Bazaar in 2004 through subsidiary Trent Hypermarket (THPL). By then, Kishore Biyani’s Big Bazaar, founded in 2001, had already begun expanding rapidly. The following years saw a number of new entrants in the grocery retail space, such as Mukesh Ambani’s Reliance Fresh in 2006 and Aditya Birla’s More in 2007. More and Reliance Fresh quickly scaled to about 600 stores each, while Big Bazaar had about 120 stores. Star Bazaar, meanwhile, merely had 20 stores until 2015. This meant significantly lower scale and topline, but also lower capex compared to others.
Though this worked in Trent’s favour during the years of economic slowdown, Trent’s hypermarket venture is yet to match the success of its departmental store format. One of the reasons for delayed profitability is that the stores were mostly located within malls, as opposed to standalone stores, thereby leading to high rental costs.
Halder adds that retail is a local business and there are many examples of international retailers struggling big-time outside their home turf. “Star Bazaar was overly inspired by Tesco. India needs Indian formats built with the best practices of developed markets. Further, food and grocery, in small as well as medium format needs immaculate execution, especially with margins at half of fashion retail,” he says.
Despite the slow pace, most analysts and retail experts continue to believe in Trent’s ability to turnaround Star Bazaar. Mukherjea observes that generally in India, every grocery format barring DMart has struggled — be it Reliance Fresh, More, Nature’s Basket, Big Bazaar or Star Bazaar. High cost of real estate in low-margin business makes profitability seem impossible. Of Trent’s FY18 total expenditure of 20.32 billion, rentals constituted 2.74 billion, i.e. about 13.5%.
Razdan adds that, unlike the US, modern trade is yet to evolve in India. Of the 40-trillion Indian retail market, only 9% is organised. Furthermore, penetration of the organised market in the food and grocery segment (24 trillion), which dominates the retail market, is even lower, at 3%.
Between 2016-17, Trent Hypermarket added 22 more stores and experimented with various formats. It primarily operates three hypermarket formats — Star Bazaar Hypermarket (20,000-30,000 sq ft), Star Market (5,000-10,000 sq ft) and Star Daily (neighbourhood stores of 2,000-5,000 sq ft). In FY18, Star Daily and Star Hyper concepts were consolidated on the lines of Star Market, which turned out to be a sweet spot for Trent.
“We have finally arrived at the final format for all our future stores. These will be called Star Markets and range between 7,000-10,000 sq ft, but with hypermarket pricing. With the pressure on infrastructure in our major cities, particularly the traffic congestion, customers are unwilling to spend time going to hypermarkets. They would rather shop closer to home,” says Tata (See: Star cluster).
Bharat Chhoda, research analyst, ICICI Securities, says, “The management would be following a cluster-based expansion strategy,”(That is, new stores opened within a radius of a few kilometres of existing stores to strengthen presence in a region.). ICICI Securities, in its recent report, noted that “smaller formats generating higher revenue per square feet will prove beneficial for Star”. These outlets, located on high streets, would mean lower rentals and other operating expenses.
Star Bazaar plans to quadruple the number of stores to 105 by end FY19. Its aim is to become profitable over the next three years driven by rightsizing of store model and enhanced share of private label brands.
Like Westside, Star Bazaar, too, has adopted the private label formula. About a year ago, a team was set up at Trent to develop private labels for Star Market. This led to the launch of three brands — Klia for home products, Fabsta for food products and Skye for health and beauty. There are about 100 products and 200 stock keeping units (SKUs) under these, which Tata believes will differentiate them from other retailers. In most cases, he says, their private labels account for 40% of sales. They are also rolling out StarQuik e-commerce platform to extend the reach of their stores. “We can deliver products to our customers within three hours,” says Tata.
The other business which needs ironing out is the Chennai-based books and music store, Landmark, which currently has five standalone stores across the country and a presence in select Westside stores. Trent bought 76% stake in the business in 2005 and acquired the remaining 24% in 2008. Tata is cognisant of the fact that the entire market for Landmark has changed. “The three major categories of Landmark — books, music and video — has shifted to digital,” he acknowledges.
Halder points out that Landmark knew the harder part of the game — sourcing and managing books, as a category. They needed to go multi-channel possibly just when Flipkart started showing early success. Having missed the bus, Trent is now downsizing the business. “Over the past couple of years, Trent has significantly reduced the number of Landmark stores, from 15 independent stores in FY14 to six in FY15 and five in FY18. It also has 10 store-in-store operations through Westside. The result of this cost-cutting is evident in Trent’s improved margins,” notes Chhoda.
Tata states that they are now in the process of re-imagining Landmark. “I am hoping that by April we will have finalised the Landmark of the future,” says Tata, shying away from revealing anything more.
Along with fashion, grocery and books, Tata also forayed into the premium segment. In September 2007, Trent entered into a franchisee arrangement with Benetton Group’s Sisley for a period of five years. The business has since been discontinued because operations did not grow beyond “marginal”, as stated in the company’s FY14 annual report.
If the Benetton JV did not work out, the one with Inditex has certainly fared better. In 2009, it entered into a JV to operate Zara stores in the country, and now runs 20 of them. Massimo Dutti, another brand from the Inditex portfolio, entered India in 2016 through a JV with Trent and currently has three stores in the country. Such JVs are strategically important for the company since it helps diversify the business and improve topline.
Interestingly, Zara has shown consistent growth. Its revenue has grown at CAGR of about 45% through FY11-17, making it one of the fastest-growing retail companies in India. With increased competition from peers in the premium fast fashion segment, such as H&M, its FY17 profitability was hit — falling to 476 million from 1.06 billion in FY16. However, it recorded a revenue of 12.21 billion and net profit of 825.9 million in FY18. Trent’s JV with Massimo Dutti recorded a total revenue of 457.5 million.
Besides a renewed focus on reviving their hypermarket business and reimagining Landmark, Trent is also betting big on fast fashion with Zudio. The new format also promises value. For instance, there is no product priced above 999 and 60% of the products are under 499. “We were already addressing that market through apparel sold in our hypermarkets. It is just that three years ago we decided to make a separate label,” says Tata. Since FY14, revenue from Zudio (including sales from standalone stores, Star formats and Tata Cliq) have risen from 960 million to 1.44 billion in FY18 (See: Fast-forward).
This is the second time that Trent is dabbling with fast fashion. Back in 2008, Trent had launched a value fashion format called Fashion Yatra targeted at low-middle income shoppers in Tier II, III and IV towns. However, following losses, all five stores were closed. Identifying customer preferences in the segment proved to be a challenge for Trent back then. Meanwhile, peers such as Biyani-led FBB and Landmark Group’s Max Fashion went on to create a strong niche in this segment.
Tata though remains unperturbed, and states that their long-standing focus on private labels will come in handy as they go about building Zudio. Tata says, “I think we will differentiate it through fashionability.” Razdan of KPMG underlines the fact that the demand for fast fashion is growing rapidly. Retailers in this space are targeting customers who are young adults — a third of the total population — looking for fashionable yet affordable clothing. “Newness will be measured in days rather than weeks or seasons,” says Auld. Trent’s private labels, with their faster concept-to-market cycle, will again work to its advantage.
An independent design team handles the product lines at Zudio to ensure there is no similarity with products sold at Westside. Tata hopes that customers who are not shopping in a Zudio will soon start buying there and then later shift their loyalty to Westside. “We are extremely encouraged by the customer response, and we are, therefore, aggressively growing this format with 40 stores this year,” says Tata.
The Zudio expansion is faster than Westside’s because of the lessons learnt earlier. “After 20 years as a retailer, it is much easier to build Zudio today than it was to build Westside,” says Tata. Zudio stores cost less too. On average, Trent spends 1,500/sq ft on Zudio compared with 2,000/sq ft on Westside. “We would love to open 100 stores next year,” he says.
Tata also makes sure to underline his bullishness on the hypermarket formats. “The market for food is much bigger than apparel. So the opportunity for Star Markets is bigger than the opportunity for apparel,” he says. Auld adds that regardless of whether the customers choose to park and shop at 7 pm or browse and click at 11.30 pm, Trent will be open for business.
As Tata puts it, constantly tweaking the product range and designs is a never-ending journey as long as a retailer is in business. “We are willing to be judged by the fashionability, relevance and the quality of our product,” he says. Evidently so far, the judgement has been in Trent’s favour.