pinnacle 2014 - the business of fashion

8/10/2019 Pinnacle 2014 - The Business of Fashion

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PINNACLE

2014


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THE BUSINESS

OF FASHION


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A Primer on the Fashion Industry

The typical processes in any fashion company can be depicted as follows:

Design and Product Development

The branded apparel industry (or even non-organised sector) operates in two major seasons: Spring-Summerand Autumn-Winter. Designers and Product Managers continuously track customer preferences, buying patterns

global fashion trends, design concepts and ranges based on these and place orders with internal and externa

suppliers. Apparel retailers typically segment their products into different models on the basis of the speedcos

trade-off. For each of the three models described below, there is a unique value chain that maximizes gross

margin by addressing the most important needs of the garment.

1. Trend: White-hot items that have a short shelf life, sometimes only weeks. Womens tops typically fall into this

category. The average lead times for these products from design to shelf cannot be more than 4 to 6 months.

2. Style: Fashion-oriented collections that can last through 2 to 3 seasons, often with more original design.

Examples include form-fitting trendy denim jeans.

3. Core: Garments that endure over time and can potentially live over many years examples include a perfec

white or plain blue shirt.

Retailers that have a range of products incorporating items from the trend, style, and classic categories

segment their development model into multiple streams to accommodate each product segment. The key driver

of profitability influenced by design and product development is effective management of the prime cost to

maximum retail price you can command (PC: MRP). This needs to be balanced with the brand equity and the

need to ensure freshness of stock in stores at any point of time.

DESIGN&

PRODUCTDEVELOPMENT

MERCHANDISING& DISTRIBUTION

SOURCING ANDSUPPLY CHAIN

Evolving Channel DynamicsIn the future, it is expected that the growing reach beyond the major urban centers into the upcoming markets

and the development of alternative retail channels will continue to drive the growth of the apparel category.

The disruptive growth of direct selling, home shopping (through TV) and e-tailing channels are the factors

contributing to the growth of alternative retail. Fashion and fashion accessories have a 15% share within the

~USD 0.2 billion Home Shopping market in India. Lifestyle categories have a 35% share in the overall e-tailing

market, which is worth ~USD 1 billion. The rapid penetration of Internet-supporting devices is contributing

immensely to the growth of alternative retail. The world of e-commerce has sped up the evolution journey from

incremental progress to quantum leaps, and is forcing every single offline business to rethink its growth strategy

for the future. The classic purchase funnel of Awareness, Interest, Desire and Action is completely irrelevant

today and this has, in turn, led to ever-changing consumer expectations.


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Merchandising and RetailingThe apparel merchandising process begins with sales forecasts based on past performance, expected organic

growth and new expansion. A merchandiser plans inventory as per the sales plan at sub category, product and

item level. He/ She links it to shelf life and sourcing timelines and achieves desired stock turns to manage

the working capital in better way. The merchandiser ensures availability of garments in stores in the right

quantity, time and price and manages the stores aesthetics freshness and balance of stock. Product managers

work closely with channel partners (described in next section) to maximise profit and ensure that stock is

properly monitored and available, and that underperforming lines are stopped and stock of popular products is

increased. To generate superior returns, specialty apparel retailers need to keep inventory off the mark-down

and clearance racks.

Distribution ChannelsThe distribution is led by 5 major channels: Retail, Department Stores, Trade Sales, Depletion Chanel and

E-Commerce. A brief description of the channels is given below:

Retail Channel

Also called Exclusive-Brand-Outlets (EBOs - Comprises outlets sell ing pr imarily MFL products - such stores

may be solely company owned or could be owned by franchisees. Most of these stores do not buy stock from

MFL MFL picks up both the risk and accountability of selling the products to the end consumer. The key

challenge in running a successful retail chain of stores is to maximise Same Store Like-to-Like Growth year on

year (LTL). Typically, rentals in India are very high and can amount to 15% to 25% of retail revenue, sometimes

even higher. Also, due to supply constraints in good retail locations, rentals keep rising by 6% to 8% p.a. In this

context, profitability is not easy to achieve and even more difficult to sustain.

Department Stores (DS)

Store Chains such as Shoppers Stop, Lifestyle and Central that offer a wide range of consumer goods and

allows shoppers to choose between multiple merchandise lines across product categories. Most of these stores

buy stock from MFL and then sell to the end consumer. Department stores also experience the same cha llenges

of the retail channel and have struggled to maintain profitability.

Trade Sales

Also called Mult i-Brand-Outlets (MBOs) - distribution channel that covers al l stores from the neighbourhood

apparel stores to large textile showrooms that also buy stock and in turn sell to the consumer. While the Trade

channel has been the primary channel for the apparel sector, it has lost out in the last decade with retail

expansion. However, trade stores are modernising and reinvesting to improve customer experience. A typical

trade outlet stocks multiple brands and products, often on the same shelf. Understanding of customers and

customer trends is considered to be the highest among owners of these stores. While the trade sales channe

managed to survive the onslaught of exclusive stores, it remains to be seen if it will survive the e-commerce

revolution.

Depletion Channel

Heavily discounted stores focusing on selling previous seasons unsold merchandise.

E-Commerce

Through In-house website TRENDIN.com and other external e-commerce players. With Indian consumers now

confident enough to make online purchases of up to INR 25000 p.a. from INR 2000- 5000 p.a. in the recent

past, this channel is slated to change the way the industry operates. The convergence of stores, e-commerce

social media and mobile has opened up possibilities of creating an Omni-channel experience for consumers.


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Supply Chain

The fashion industry is characterized by its complex supply chain - sourcing is highly fragmented and finished

goods travel to the entire length and breadth of the country. For instance, MFLs sourcing & distribution is

supported by 400+ raw material suppliers, 300+ factories (in-house + outsourced), 17 warehouses and 7

transportation partners distributing to 5 distribution channels.

Supply chain function is extremely critical to the business, this can be emphasised by the fact that on an

average the company has to produce/procure 38 lakhs of finished products (all categories) per season.

Balancing forward booking of capacity with the flexibility to handle market changes, thus ensuring freshness

of merchandise in store, define a successful and agile supply chain. The diverse demographic nature of Indian

markets, evolving variety in consumer profiles, regional preferences, festivals etc. results in demand variability

prediction of demand is cr it ical in any season. With fashion & li festyle products sold in almost al l existing

distribution channels the supply chain needs to have the width to handle the demands of all the channels. Largeformat warehouses are typically the entry point for primary distribution - small format warehouses and Carry

and Forward Agents (CFAs) enable the supply chain to be more responsive in nature as some of the stocks are

stored with these warehouses which are closer to customers.

SourcingSourcing is sub divided into the procurement of finished goods, trims, fabrics and accessories. On an average

one piece of shirt requires around 40 trims and accessories (starting from threads, buttons, collars to brand

label and so on) for manufacturing. They work with 40000 style codes, 150 types of fabr ic and 80 types of trims

The major role of sourcing lies in meeting the production calendar, managing the lead times of the various

vendors, textile mills, manufacturing units, etc. The objective is to keep the product cost within the budget at the

desired specifications and to manage the inventory level at warehouse so that the cost of holding raw material

(fabric, trims and accessories) before the manufacturing starts, does not go beyond the optimum level. The

various roles associated with the function are to get efficient fabric makers, suggest better garment construction

methods and to work closely with factories to provide technical support and with designers to understand trends

and fits. Given that sourcing forms a key component of the value chain, segmenting products by volume, style,

complexity and source will help identify differentiated supply chains for key segments.

MFL - Current State

MFL is one of the few vertically integrated apparel organizations in the country. The in-house manufacturing

works under Madura Clothing (MC) and Madura Garments Exports (MGE) - These in house manufacturing

works as preferred vendors to MFL. It designs and manufactures most of its products in-house and markets

them through key channels. Always at the cutting edge of fashion and innovation, it has set up its own design

studios to keep abreast with the rapidly changing world of fashion. Here, latest developments from across the

world, related to fabric, washes, colors, designs etc. are researched.

MFL has been steadily expanding its retail footprint across the length and breadth of India and has touched

even small cities and towns in the interior parts of India with its strong distribution model. Today, MFL has pan

India presence across all metros (8), 345 cities and towns through 1586 EBOs, 3750 MBOs, 662 DS and 2.2

million sq. ft. of retail space giving its customers the ease of access to its products and services. MFL has

recently started its operations in Middle East, Nepal, Maldives and Sri Lanka as well. About two years ago, MFL

took the first steps in establishing a strong presence in the e-commerce space through its online site, TRENDIN

The TRENDIN platform is expected to hit a turnover of INR 100 crore in FY16 in less than 2 years.

MFLs portfolio includes product lines that range from affordable and mass-market to luxurious, and caters to


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Outlook - Key Challenges

Ashish real izes that in order to become an INR 12000 crore company by 2020, MFL needs to grow revenues

significantly faster than market and create a future-ready portfolio. In the last 5 years, the Indian fashion industry

is undergoing a significant transformation with large, new segments are emerging fast and key competitors are

taking strong position on future market segments. While the current brands are expected to deliver a part of this

growth, it is imperative to expand into new categories and capitalize on emerging whitespaces.

These changes will further accelerate over next 5 years & may bring about a structural change in the industry,

threatening our leadership. The following are the key challenges he foresees:

1. Driving aggressive growth requires building new businesses in many areas where MFLs current capabilities

are limited and delivering healthy same-store (LTL) growth despite saturated market conditions.

2. In terms of profitability, the key challenge is balancing the need for large investments in new businesses

which takes longer to turn profitable versus short term profitability. Rising costs, decreasing availability of real

estate and rising competition from discount-led models such as e-commerce puts further pressure on retail

profitability.

3. With the spurt of digitization in recent years, channel strategy is changing dramatically - not just in theway consumers communicate and interact, but more importantly in the way they buy. This has dramatic

consequences for any business whose existence and success has been rooted in the offline world. While the

channel has managed to expand the apparel market itself dramatically, purchase cycles, search for information

recommendations and fulfilment - all the key aspects of how we transact have changed beyond recognition.

Undeniably, these changes are permanent and their pace and sophistication will only grow at a much faster rate

youth, men and women. The main brands of MFL are Louis Philippe, Van Heusen, Allen Solly, Peter England,

People, Planet Fashion, The Collective, Hackett and Trendin.com. The key products are formal and casua

Shirts, T-Shirts, Trousers, Denims, Suits and Blazers with our increasing presence in womens wear domain as

well. In July 2012, ABNL has acquired a controlling stake in Pantaloons, thereby establishing its presence in the

big-box retailer space and opening a further avenue for MFL to take its brands to consumers.


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As a team, share a business proposal advising Ashish on the following areas, using the following questions as

thought-starters:

Where to PlayWhat are the whitespace opportunities that that MFL should focus on? How will the final portfolio play

be? In particular:

1. How should the MFL portfolio in the market look like in 2020, split in the following manner:

a. Revenue split by price category and consumer category

b. Distribution channel mix

c. Revenue from organic growth and new categories

2. What are the new opportunities MFL should target to achieve the above? In order to retain focus, we

recommend you pick maximum of 2 whitespaces that will prove to be the next big elephants.

3. Within the identified space(s), what are the major sub-segments and product categories? What are the

consumer preferences for the particular segment/category?

4. What is required to win (key success factors) in the identified space(s)? What are the requirements

(capabilities, assets, etc.)? How do we leverage our current strategic advantages, capabilities, assets, etc. in

terms of existing brands/ distribution network/ supplier/vendor relationships etc.?

5. What are the strategic options (acquisitions/ licenses/JVs/Organic growth etc.) to pursue these opportuniti es?

What are the key risks and risk mitigation plans for each option?

6. Who are the current competitors? Do we anticipate any new competitors? What are their brand positioning

and competitive advantages?

7. What might an implementation table look like? Illustrate with a high-level time table.

How to Win:What are the key Corporate-level enablers / transformations required to deliver the projections above?

In particular:

1. What should be the channel strategy for MFL with your strategy? How do we ensure a seamless integrated

brand experience between offline and online entities? What will it take to bridge consumer expectations across

online and offline and how can best practices from both be leveraged for greater growth?

2. What should MFLs strategy be to ensure greater consumer connect with its brands (current and recommended

whitespace)?

3. The pressure on the offline business is expected to intensify. Consumer walk-ins to physical stores will be

constrained due to changing lifestyles and pressures on infrastructure. Malls and High Streets that have housed

MFL brands for years will begin to see lower footfalls. How can MFL counter this?

4. Should MFL continue its strategy of adding stores and expanding its physical distribution at todays pace, or

should it focus all its energies on online accessibility?

5.How should MFL play the game in the online space similar to entities like Jabong and Myntra (covering a

wide spread) or should it develop a specialised MFL model that provides greater depth and expertise in the

fashion category?

Questions to Answer


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Overall Market Size

Source: Technopak Compendium-Textile & Apparel_March 2014

Key Category Indicators

CAGR Cumulative Annual Growth RateSSPD Sale per Square-feet per Day (Used for Retail Stores primarily)

GM Gross Margin (Definition in Appendix 3)

The quoted ranges of GM and SSPD are overall

averages and will vary based on target segment.

FY20-RS. CR IN OOO FY13-RS. CR IN OOO

CATEGORY DESCRIPTION MARKET SIZE

2013-(INR000

Crore)

CAGR

(2013 to 2010)

SSPD

(INR)

GM%

Mens Shirt Woven shirts (full- and half-sleeve) 28 7% Low High

Mens Trousers Woven trousers (formal wear, casual wear) 22 8% Low High

Womens Tops Woven tops/shirts/dresses mostly for formal wear 2 11% Low Medium

T-shirts Knitted T-shirts for Men and Women 7 14% Medium Medium

Womens Trousers/Skirts Trousers (formal and casual), Capris, Skirts, etc. 1 10% Low High

Active Wear Sportswear, Gymwear, Swimwear, etc.for men andwomen

3 13% Low Medium

Wedding Wear (sliced fromother categories)

Shirts, Suits, Lehengas, Sareers etc. focused on thewedding market

4 12% Medium High

Time Wear All timewear products for men and women 5 3% High Low

Accesories Ties, Socks, Handkerchiefs, Gloves, bags etc. 12.5 12% High Low

Womens Ethnic Sarees, Salwaar-Kameez-Dupattas,

Lehengas, Churidars, Dresses, etc.

58 11% Low Medium

Kidswear All categories of apparel targeting boys/ girls 35


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Current MFL Portfolio

Category and Segment Mix

The following is a split of revenue (after discount)

of MFL by category and segment.

Revenue Split

Reach and Penetration

Total no. of Towns = 596Total No. of Markets = 1192

Category Mix

Formals 51.3%

Casuals 39.2%

Denim 4.9%

Others 4.6%

Total 100%

Segment Mix

Men's 90.8%

Women's 4.1%

Kids/Accessories/

Others

5.0%

Total 100%

Appendix 2: Current MFL Portfolio, Category Mix, Reach and

Penetration

BRAND NO. OF

TOWNS

RELEVANT

NO. OF

TOWNS

PRESENT

REACH

%

NO. OF MARKETS

HIGH-

STREET MALL TOTAL

NO. OF

MARKETS

PRESENT

PENETRATION(%)

LP 135 58 43 272 149 421 163 42

VH 135 67 50 272 149 421 171 41

AS 135 55 41 272 149 421 128 33

PF 161 65 40 351 48 399 111 29

PE 223 133 60 480 154 634 305 49

People 223 46 21 480 154 634 80 14

BRAND REVENUECONTRIBUTION %

Louis Philippe(LP) 20% to 25%

Van Heusen(VH) 20% to 25%

Peter England(PE) 20% to 25%

Allen Solly(AS) 15% to 20%

People 4% to 5%

Others (Collective,Hackett)

4% to 5%

Total 100%


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Definitions

Gross Margin: Margin after Discount and Product Cost

Selling Expenses: All selling expenses including commissions/ rentals/ ` staff salary costs/ electricity etc.

which can be directly linked to sales of a product - includes margin given to Wholesale partners

Marketing Cost: Communication/ Advertising cost that is linked to building brand equity

Overheads: Management cost/ office expenses etc.

Costs incurred for a running business

Estimated Channel Growth (Industry)

Appendix 3: Cost Estimates

Key Assumptions

Marketing Cost for a new set up (brand or category) can be assumed to be around 10-15% of targeted

average 5 years sale for the first 3 years. This includes only communication costs digital marketing costs

are captured as a part of selling expenses.

Assuming that all new stores will be taken on a rental basis, a cost of 4000 per sq. ft. for capital

expenditurewill be incurred to set up a premium brand store

Inventory to be held in store for a running business would be around 3 months of sale (value terms)

CHANNEL GROWTH

(INDUSTRY)

CAGR

(2013 TO 2030)

MFL- CHANNEL-MIX

Revenue Terms

Trade 10% to 15% 27%

DS 15% to 20% 14%

Retail 20% to 25% 46%

Exports 15% to 20% 4%

E-Commerce 50% to 100% 2%

Depletion 15% 8%

Overall 18% to 20% 100%

CHANNEL WISE GROSS MARGIN% OF REVENUE

SELLING EXPENSES(% OF REVENUE)

MARKETING COST(% OF REVENUE)

OVERHEAD(% OF REVENUE)

EBITDA

Trade 55% 6% to 8%

DS 50% 8% to 10%

Retail 65% 35% to 45%

Exports 60% 10%

E-Commerce 60% 50%

Depletion 40% 30%

Overall 60% 35% 4% to 5% 8% to 9% 12% to 13%


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Appendix 4: Potential Categories To Explore

A typical Indian consumer will always plan two big investments in life one on

Housing and other on Wedding. The overall wedding market in India is highly

unorganised. Competition offered is from regional, conventional localised stores

on one side or a niche, well publicised and marketed private labels or designers

on the other side. Modern retail, especially large format retailers are ramping up

their expansion plans across metros and Tier I & Tier II cities. This will contribute

significantly to the growth of the Indian wedding wear market. Overseas sourcing

has definitely facilitated greater diversification in terms of product development

raising expectations of season-wise developments with proper color trends. But

globalization should be accompanied with local taste in terms of design collection,

innovation in terms of cost effectiveness and perceived value of the fabric, time

bound deliveries and continuous development in terms of quality.

Improving Indian demographics (brand preferences, rising disposable incomes)

and increased preference for proper fits, sizes, etc. lend credence to the growth of

organized players in the Indian innerwear market. A large part of the market was

dominated by the low, economy and mid-market segment offerings of domestic

suppliers. The entry of foreign players has revamped the way the indus try operates.

The innerwear segment was earlier not as bold in terms of advertising and product

display. With the increasing presence of modern retail, innerwear products are

displayed through exclusive brand outlets and also in malls. Mass segment is

catered to by small departmental stores, street shops and hosiery stores and

requires an extensive distribution network.

Due to higher levels of discretionary spending in recent years, accessories proves

to be a promising market. While this market has also primarily remained an

unorganized category, each organized apparel player merchandises accessories

as retail space filler. The vendor base for the category is highly fragmented. Grow th

in organized retail has inspired exclusive accessory players, though not at a very

large scale. With an estimated CAGR of 12% on a base of 12500 crores today, this

can prove to be a highly attractive market, if we can develop a winning proposition.

Internationally, exclusive accessories players cater to either a specific segment or

seasonal trend. The big question is whether MFL can organize a highly unorganized

industry, and run a profitable business doing so.

The denims market is symbolic of the success of the branded apparel industry in

the last 2 decades. Denim companies managed to create highly brand-conscious

consumers with a strong urge for upward movement across segments from brand

perspective. While most players are integrated denim manufacturers and retailers,

some major players have licensing agreements with global brands. Increased use of

denims as office-wear, especially by women contributes to further category growth.

While the most preferred format for sale is retail, seconds/ discount stores have

made a mark in this category. While most of MFLs brands operate in this space, is

there scope for a pure-play denim brand? Or are there ways of improving upon the

companys existing model in this category?

DENIM

ACCESSORIES

W

EDDINGMARKET

INNERWEAR

Ashish has listed down the fol lowing potent ial categories and his top- line thoughts on each of them for you to

think about. MFLs presence in all these categories today is either zero or insignificant in revenue terms. We

think that these categories have considerable potential and play to MFLs strengths however, feel free topick any categories beyond these!


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Watches today are a lifestyle product while they traditionally were perceived as

just a ut il ity product The consumer base of time wear market is stagnant with the

biggest player in India having grown 2-3% in last fiscal year. But with only 27% of

Indian population owning a watch, it is an underpenetrated market. Currently MFL

has no expertise around specialised design, manufacturing and distribution of time

wear. Front end delivery and service is also very different from fashion apparel.

The big question lies in whether entering into this category shall help in enhancing

an existing brand image or whether it should be explored as means to increase

revenues.

Is active-wear the new Denim? Much like denim before it, active-wear is

increasingly being integrated into daily attire- just as the denim industry had been

successful in marketing denim for the office, formal, weekend, seasons, locations

active-wear makers should be able to do the same. Over the past two-three years,

the growth of athletic apparel companies has consistently outpaced the growth of

traditional apparel companies. MFL has presence in the fashion wear for sports

through its sub-brands like LP-Sports, Allen Solly Sports and VH Sport. The kind

of premiumisation that gave rise to the highly successful designer jeans category

is also picking up in active-wear. Variety in styles and designs, along with the

high quality of products remains the top priority. So does active-wear offer fashion

brands the same kind of growth potential that designer denim did a decade ago?

The womens ethnic-wear market can broadly be class ified across two sub-segments

hand woven and machine made. Whi le th is is largely an unorganized, f ragmented

market in the mass segment where regional manufacturers and distributors

dominate, recent forays by retailers have proved successful. Emergence of private

labels in the machine made segment through departmental stores is also a key

trend. With a regionally diversified customer preference, is there scope for a large

retailer to take up significant share of this space profitably?

With 50 Million babies in the age group of 0-2 years and 304.8 Million children

are in the age group of 0-12 years, kids-wear is a market of unlimited potential.

Growing Exposure of Parents and Children to Fashion Trends and evolving buying

behavior of kids make branded retail an attractive proposit ion. Currently, the market

is characterized by largely unorganized players with variety and price being offe red

as proposition. Is the market too saturated to enter, or is there a winning proposition

in this segment? And how does this fit in with MFLs existing brand portfolio?

Big-box retailers operate in the attractive segments of casuals, youth & women

through large format stores and afford scale and profitability through significant

leverage in space acquisition costs. The market in this space is expected to

change dramatically - While some foreign players are entering the market through

partnerships with Indian apparel companies, some others are planning for 100%

direct investment. Pantaloons is present in the affordable retailing category, but

there is a significant market in the premium space that exists. With several options

of entering the space for MFL, the question is on which model will deliver the best

value to the consumer and be an engine for company growth and profitability in the

long run.

TIM

EWEAR

ETHNIC

WEAR

KIDSWEAR

BIG-BOXRETAIL

ACTIVE-WEAR


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