Sapna Agarwal, Mint
Mumbai, 15 September 2016 

Foreign luxury, apparel, and accessories companies that can own their own retail chains in India—the government allowed foreign investment in so-called single-brand retail in 2012—still continue to operate through local franchises and distributors.

Of the 28 apparel and accessories brands which have entered India since the country allowed 100% foreign direct investment (FDI) in single-brand retail, 23 came in through a franchise or distribution partnership, according to data from Third Eyesight, a retail consulting firm.

Under a franchise or distribution agreement, a global retailer partners with a local company. The latter pays a fee to the brandowner, and invests in marketing and launching the brand in India. In the last year, Gap Inc, Aeropostale Inc, Desigual, Rider and Ipanema have entered India through franchise agreements.

“Most companies do not see India as a strategic market, and tend to take lower-risk export-oriented approach through franchise or distribution relationships,” said Devangshu Dutta, chief executive officer, Third Eyesight.

Foreign investment into the business, regardless of the quantum, is an indicator that a company is making a serious long-term commitment to the country, since it brings along with it investment of management time and effort as well.

One exception is H&M Hennes and Mauritz AB. The Swedish fast fashion retailer, which has come in through the FDI route, will have 12 stores in India by the end of the year.

“The government’s decision to allow single-brand retailers to open stores by themselves came at right time,” Janne Einola, country manager, H&M India, said in an interview in August while explaining that the timing matched the company’s internal research which showed that India was emerging as a good retail market to set up shop.

India is the second-most attractive market for global retailers to expand after China, according to the 2016 Global Retail Development Index by consulting firm AT Kearney. According to the firm, India has, in the past couple of years, improved the ease of doing business. Clarity on foreign direct investment (FDI) regulations too have helped.

To be sure, the challenges remain. India continues to be a complex market for foreign retailers, where understanding dynamics at the local level is important as the country’s 29 states have the power to opt in or out of FDI reforms. Infrastructure bottlenecks, including archaic labour laws, complex regulations, high attrition rates and limited high quality retail space, remain important areas of concern for retailers, said the AT Kearney report, adding that still, the potential is vast as the country presents a $1 trillion retail market.

Meanwhile, even the firms entering the country through franchise and distribution partnerships have become a lot more sensitive to the challenges of doing business in India.

Many are working with their local partners to ensure that the products are right for the market, and also available at the right price. Products sold through franchisees may turn out to be costlier due to multiple margins (the brand owners, and the distributor’s).

“We are collaborating with our partners at every level— from store fit-outs to (product) assortment for India. Also, they sell to us at manufacturing cost which then allows us to price the goods at a globally competitive price in India,” said J. Suresh, MD and CEO, Arvind Brands Ltd, the franchise partner of Gap and Aeropostale in India.

In March last year, Arvind exited a franchise agreement with UK retailer Debenhams citing the chain’s steep pricing.

(Published in Mint)

Suneera Tandon, Quartz
New Delhi, 12 September 2016 

The Platonic ideal

“Efficiency is doing better what is already being done.” – Peter Drucker, Innovation & Entrepreneurship: Practices and Principles

The practice

Research firm Gartner defines supply chain as, “…the processes of creating and fulfilling demands for goods and services. It encompasses a trading partner community engaged in the common goal of satisfying end customers.”

Sounds simple? But it hardly is. In fact, the supply chain can be one of the most complex structures in a business, piecing together design, development, sourcing, manufacturing, and distribution. It gets even more complex when it relies on rural India, which is scattered over 640,867 villages and are often hard to access. Fabindia, a chain of retail stores, has spent close to five decades scoping India’s hinterland to connect rural Indian artisans to urban shoppers. Here’s how they did it.

Fabindia began its India sojourn back in 1960 when John Bissell, who was first introduced to the country in 1958 while on a two-year grant from the Ford Foundation, decided to set up an export shop to sell home furnishings to overseas customers. Bissell, whose work at the foundation involved advising government-based craft organizations on handloom fabrics, spent a lot of time traversing the length and breadth of the country.

In 1976, the export house diversified into retail through a small store that sold leftovers from export orders in Delhi’s tony market of Greater Kailash. It took another two decades for retail to became the mainstay of the company’s business.

Fifty years later, Fabindia, managed by John’s son William Bissell, is a widely recognized global brand, known for handwoven and hand-made goods that connect some 55,000 artisans from the country to consumers worldwide. In the process, it has achieved two broad goals: to market the handloom tradition of India to the rest of the world and to provide sustained employment to artisans in rural areas.

The chain sells everything from handwoven saris, rugs, apparel, home d�cor, and organic food in its 220 stores across 83 cities in India, including eight stores in overseas markets such as Dubai, Singapore, Malaysia etc. It also retails its products online to 33 countries. For the fiscal year 2014-15, Fabindia had a turnover of Rs1,148 crore (approximately $170 million).
 
But behind the red and black Ikat-printed scarves, Kalamkari prints from south India, and block-printed Bagru fabric from north India is an extensive and complex supply chain that runs from villages across the country, covering a third of India’s over 650 districts.

The retailer has successfully taken its founder’s vision to enable social change at the grassroots level while engaging in a profit-making business for urban shoppers. It does this while building systems that encourage not just fair remuneration to India’s rural artisans, but also provides infrastructure, access to technology and systems, quality guidelines, and timely payments to these craftsmen. Fabindia also offers access to capital and raw materials to artisans working with the retailer.

As William Bissell puts it in a Harvard Business School case study: “It seems contradictory that we pursue both a social goal and a profit, but I believe that is the only way to do it.”

Through most of the ’90s and early 2000s, Fabindia grew as a retail chain expanding modestly in the country’s top metros.

Since the opening of the Indian economy through the economic reforms of 1991, Fabindia’s interaction with artisans scattered across the country has grown significantly (pdf). The complexity of the company’s supply chain is far different from that of a regular manufacturer that works through designated factories.
 
The company’s interaction with these artisans is very localized since it works with them through multiple associations. The retailer deals directly with individual artisans who work out of their homes and also with clusters of crafters and rural NGOs and organizations that have a crafts supply base.

In addition, the company uses its 11 production hubs across the country, which are basically aggregation points, to centralize orders and pair up vendors with artisans. Each hub has a number of field offices attached to it.

“The production hubs and field offices act as nodal points for interaction with the artisans that constitute the supply chain, which is one of the most unique in the world,” said Prableen Sabhaney, head of communications and public affairs at Fabindia Overseas.

While most artists have the skill and the craft, they don’t have the acumen to decipher fashion trends for the season. So Fabindia acts like a conduit between their crafts and the market.

At Fabindia, a large proportion of products carry some element of the handmade, which requires an ability to communicate with artisans and institute quality control as most artisans work largely in India’s hinterland. For instance, an 18-step process is required to create a simple pattern in Bagru print, a traditional form of block-printing using natural dyes perfected in the northern state of Rajasthan.

And the company has spent years putting processes to ensure newer collections reach the stores on time. Recently, the product range has become more diversified as well.

As for remuneration, Fabindia follows a bottom-up structure. It asks artists what it costs them in terms of—time, energy, skills, and raw material to hand-make a certain fabric or accessory and pays accordingly.

Analysts who track the sector believe that Fabindia’s unique model sets it apart from other domestic or export-focused handicraft companies purely because of the sheer volume of artisans it works with.

“In handicraft, there are several companies that have created substantial export-led supply bases, which tap into craft both from the rural artisans as well as those based in smaller urban centers,” Devangshu Dutta, chief executive at consulting firm, Third Eyesight said. 

“Among these, Fabindia has certainly had the most visible success in terms of size and brand profile domestically. Fabindia has achieved scale by working through artists, intermediaries and supplier companies who have acted as anchors in the rural communities,” said Dutta.

Sabhaney offers that challenges span from co-creating contemporary products while using traditional techniques to quality issues, since the products are created in environments that are very different from where they are finally used. The company also works hard to provide access to raw material and capital across many hard-to-access areas—and doing all of this at scale.

“The ability to do this and not lose anything in translation has been and will continue to be Fabindia’s strength,” added Sabhaney.

The takeaways

As the market evolves with e-commerce and the entry of foreign brands, which has altered consumer preferences and style-cycles, Fabindia knows it needs to quicken its response to these changes.

Not all of the innovations the company has tested remain. In a unique ownership structure created by Bissell, Fabindia set up supplier regional communities (SRCs), which were community owned companies, self-managed by a group of artisans, weavers and craft workers in a particular geography back in 2007. According to a case study by INSEAD (pdf), these SRC’s “offered artisans joint ownership of resources and access to common facilities. It also trained artisans and developed new handicrafts. The SRC allowed Fabindia to consolidate supply capacity instead of dealing with single-loom weaver units, and to implement a standard system for production and delivery control.”

The 2010 book, The Fabric of Our Lives reveals how production worked under the SRC model. A number of dedicated designers and sourcing officers worked closely with rural artists giving them design inputs in tandem with the latest trends in the market and order quantities through dedicated distribution centers in key villages. These designers worked with the weaver to develop samples. They were then shown by the designers that refer it to a product selection committee. The fabric was then approved and the cost price finalized. The quantity of fabric to be produced the first time was pre-determined by software based on a minimum stock requirement ratio and an order is given to the weaver to make the product. The weaver produced the requisite amount of fabric in a month and brought it into the distribution centers.

But the SRC model has now been diluted as the company looks more innovative ways to engage rural artisans.

In the company’s next vision plan, it is focusing more on cluster development that will basically help bring artisans up to speed with the processes and market trends.

“There are plans for a greater focus on the handloom and hand-craft sector,” Sabhaney said.

“There is a much bigger focus on the social aspect, there are going to be significant investments in developing clusters and bringing them up to what is required around the country,” she added.

(Published in Quartz)

Priyanka Pani, The Hindu Businessline

Mumbai, 6 September 2016 

Going digital seems to be the mantra for some of India Inc’s generation-next. Kavin Mittal, son of Airtel’s Sunil Bharti Mittal; Ananyashree Birla, the eldest daughter of Kumar Mangalam Birla, Chairman of Aditya Birla Group; Isha and Akash Ambani, scions of the Reliance Group, are spearheading various online and digital ventures.

The new generation not only wants to carve a niche for itself by getting into the online ventures but also plans to take on the digital biggies.

Harminder Sahni, founder of consultancy Wazir Advisory, said that “the trend clearly shows that the new generation wants to step out of the traditional businesses and create a separate identity for themselves. They don’t want to get associated with business that they don’t relate to, a trend opposite to what their parents did.”

While Isha Ambani played a pivotal role in the launch of fashion portal Ajio.com, Akash is deeply involved in RJio telecom venture.

Twenty-eight-year-old Kavin Mittal is the founder of messaging app Hike, which recently raised about $175 million from Chinese Internet giant Tencent at a $1.4-billion valuation.

Ananyashree Birla is coming out with her own luxury portal, CuroCrate, never mind that the Aditya Birla Group has a fashion portal Abof.com. Ananyashree, who started her first venture when she was 17, has declined to join her father’s $41-billion diversified conglomerate.

According to Devangshu Dutta, founder of advisory and research firm Third EyeSight, “The new generation has grown up in the age of Internet. They understand it better than their parents. Digital business, Internet of Things (IoT), e-commerce are moving rapidly in India and hence it makes sense for the GenNext to enter this space.”

But can the next generation compete with established players such as Flipkart and Snapdeal?

Arvind Singhal of technology research firm Technopak says “digital is the toughest segment as it has no entry barrier. Besides, even if you have enough money and infrastructure, one can fail as in this space all you need is agility, hunger to do something different and innovation.” 

(Published in The Hindu Businessline)

Ankita Rai, Financial Express
New Delhi, 30 August 2016 

Take the case of Snapdeal. According to industry sources, it has cut down on commission paid to affiliate marketers by 50-60% for existing customers from March this year.

For high volume categories like mobile and tablets, it now pays 1% for the existing customers for upto a monthly threshold of 2,500 transactions against the flat commission of 2.5% paid in August 2015.

In case of high margin categories like clothing and accessories, the commission is down to 3% from 12% in 2015 for existing customers for upto a monthly threshold of 2,500 transactions. Snapdeal was unavailable for comment.

Paytm, which was the darling of affiliate marketers due to its cashback offers, has also stopped paying commissions for its marketplace this year, with its focus shifting towards services such as ticketing, mobile recharges, billing etc.

While Flipkart’s affiliate commissions have remained the same, more or less in the last one year, there is a shift in favour of new customers and apps. It pays 1.5% commission on mobile phones for existing customers while and 2.5 % for a new customer order.

This figure stands at 3.5% for mobile apps. For high margin categories like fashion and lifestyle, the commission for a new customer order in apps is as high as 15%. Flipkart and Paytm didn’t reply to the emails seeking their comments on affiliate marketing commissions.

Amazon India, on the other hand, has a flat structure of advertising rates and pays 4% commission for electronics. But top selling brands such as Xiaomi Redmi Note 3 or MotoG4, do not qualify for advertising fees.

The top e-commerce players are moving away from coupon and cashback affiliates in favour of price comparison, product review, aggregation and blogging-based models. “We have discontinued business with cashback and rebate sites.

We want to enable customers to discover and shop directly on Amazon without the need to come through intermediaries,” explains Kishore Thota, director, digital marketing, Amazon India.

“While we still work with rebating sites for enabling discovery of deals and prices, we have stopped any cashbacks from being passed on to the end customer.”

Also, wallet players have changed the game for cashback-centric affiliate marketers. “While wallet players may not be traditional affiliate partners, they have certainly eaten into the affiliate pie,” says an e-commerce expert. With GMV in the e-commerce space down by 20-25% this year during the first six months, a similar impact is expected on the affiliate industry. Does all this spell doom for couponing and cashback sites and other kinds of affiliate marketers?

Focus on the bottomline

Traffic obtained from affiliates may be even more valuable than qualified leads since affiliate sites already provide some context to the product (for instance, product comparison websites or lifestyle blogs). However, the e-commerce business has changed in the last six months.

“It is not surprising that e-commerce companies are relooking at affiliates. Most of the traffic coming from affiliates is of bargain hunters. Therefore, they are rationalising the commission as they are trying to focus more on quality organic traffic and customer loyalty,” says Pragya Singh, vice president at retail consulting firm Technopak.

While price comparisons, deals and cashbacks were significant contributors in the initial years, lately e-commerce players are seeing good traction from individuals with social media accounts and from content sites who have regular visitors/fans.

For example, the Amazon Associates programme allows individuals to connect with relevant products from articles.

Lenskart is now working with only five partners in the affiliate space which include CouponDunia, Komli and vCommission. “Till last year, we were working with 15 affiliate partners. We now work with few partners who have better capabilities of buying inventory, provide quality traffic and are doing better customer segmentation at their end,” says Amit Chaudhary, co-founder, Lenskart.

]The firm offers up to 20% commission to the affiliates and, in fact, has increased its commission over time. “We are capitalising on the situation. We are 90% a private label entity,” he explains.

With affiliate marketing being the “cheapest medium after email” investing 10% of overall marketing spends in it is a no-brainer for Lenskart.

However, for e-commerce players who are at a slightly more mature growth stage, discounts can’t be the main driver anymore. “Now price is less of driver,” says Nitin Agarwal, AVP, marketing, ShopClues.

“Majority of the traffic coming through cashback and coupon sites is from tier II and tier III cites. Only those affiliates are doing well overall which are adding some value beyond deals and discounts.”

The big picture

The business environment for affiliate websites is becoming tougher with time. “With fewer sites to send their traffic to, margins may be reduced, business thresholds for higher margins may be moved up, payment thresholds may also go up to reduce administrative effort and expenses, and the period for expiry of a referral may be shortened,” says Devangshu Dutta, chief executive, Third Eyesight.

However, affiliates are upbeat about their business models and see consolidation in e-commerce space, cutting down of deep discounting and focus on quality traffic as a boon for the ecosystem.

CouponDunia added cashback as a feature in April this year and believes cashback and coupon will continue to work well in the space because it’s human nature to save.

For every commission it earns, the portal keeps 30% and pays rest as cashback. “The economics of transactions has to make sense. If a retailer is losing money or has very low margins on a transaction, it cannot afford to pay us high commissions,” says Sameer Parwani, founder and CEO, CouponDunia.

“The new discounting norms won’t impact coupon and cashback players. If retailers reduce discounting, they have more room to pay for our commissions and the cashback part will see an increase.”

He cements his argument saying that once the e-commerce player cuts back on discounts, the only way for consumers to look for the best offers is through affiliates.

Then there are others like Rohan Bhargava, co-founder of cashback site CashKaro who say that the e-commerce focus on profit is good for affiliates. Due to investor pressure, e-commerce companies may have cut down on affiliate commissions but this could be short-term.

“In certain cases we have seen a rise in commission like in Healthkart’s case. Niche sites are doing well while commission has been steady for players like Flipkart and Amazon for the last one year,” he says. He further states that the beauty of cashback is, the discount happens after transaction and therefore, doesn’t impact GMV. But not everybody agrees with him.

Ravi Kumar, founder, FreeKaaMaal.com, says the cashback model is totally incentive-driven and doesn’t add any value and at the end of the day, affliates also need to be profitable.

Currently, a large chunk (80-90%) of the revenues earned by cashback sites is going back to the users.

“To offset this, these companies need to increase the transactions manifold. But that is not possible anytime soon,” he says. “If you look into the traffic trend of cashback sites, 90% of the traffic is repeat users. This is contrary to deal sites where 50% traffic is new users.”

A focus on profitability is also forcing affiliates to adopt better business models. Currently, two models exist: charge on per pay basis and per customer visit (PCV). The industry is moving towards the latter as the risk is minimal.

The price comparison and product discovery platform MySmartPrice attracts 10 million unique consumers on its platform every month and claims to do three lakh transactions per month. “Annually close to 660 million unique customers transact on our site,” says Sulakshan Kumar, co-founder, MySmartPrice. “We help e-commerce get two to five times increase in daily GMV volumes during the sale season.”

Industry experts say affiliates will soon be as big as e-commerce sectors. In developed economies, 15 to 20% of the sales come from affiliates. In India it is less than 10%. The affiliate industry in India is less than Rs. 1,000 crore.

“In the US, online branded apparel stores such as Nike work a lot with coupon and cashback sites because their margins are good. But horizontal players prefer price comparison, deal and review sites. This trend is yet to catch up in India,” Kumar adds.
The new government rules on e-commerce marketplaces and discounting have actually made players go back to the drawing board and relook at their financial models.

“Changes in affiliate commissions are a byproduct of this. Affiliates are part of the e-commerce ecosystem and cannot be seen in isolation,” sums up Anil Talreja, partner, Deloitte.

(Published in Financial Express)

Suneera Tandon, Quartz
New Delhi, 19 August
2016 

The Indian defence services could teach the country’s top private retailers a thing or two about making money.

A chain of 3,900 stores of the Indian defence ministry’s canteen stores department (CSD) earned Rs236 crore ($35 million) in profit in financial year 2014-15, according to a report in the Economic Times on Aug.17, based on a reply to a right to information query.

For the same period, the Kishore Biyani-owned Future Retail, which runs supermarket chains such as Big Bazaar and eZone, reported a profit of Rs153 crore; the corresponding figure for Reliance Retail was Rs159 crore.

The CSD stores typically work on operating margins as low as 1%—this figure can vary anywhere between 8% and 18% for a private retailer. These canteens function on a not-for-profit basis, but their volumes are huge. In 2014-15, their turnover stood at Rs13,709 crore, according to the report, trailing that of Reliance Retail at Rs17,640 crore but ahead of Future Retail’s Rs11,149.87 crore.

A big reason to the CSD stores’ better profitability is lower overhead costs.

“CSD does not have to bear two expenses that are major operational costs for retailers—real estate and advertising,” explains Devangshu Dutta, CEO of Third Eyesight, a New-Delhi based consulting firm. That’s because they are located within easy reach of defence staff, typically inside cantonments and not in commercial locations such as markets or malls.

“Staffing and training costs are lower than private retailers since the management workforce is partially shared with the standing armed forces. CSD also has a focused, sometimes captive, audience which it doesn’t really have to fight for,” Dutta said.

These stores account for a bulk of the turnover of large consumer good companies. In fact, business from these canteens contributes between 5% and 7% of total sales for some of them, according to estimates by the Economic Times.

The country’s largest consumer goods firm Hindustan Unilever, for example, counts CSD as its biggest customer in south Asia. The same holds true for liquor major United Spirits.

Why CSD canteens?

CSD canteens were set up in 1948 as stores to ensure “easy access to quality products of daily use, at prices less than the market rates.” Their customers were serving army, navy and air force personnel, besides the retired ones and their families.

The stores have served Indians troops even during wars and natural calamities.

For instance, during the Indo-China war (1962) and the Pakistan incursions (1965), the canteens ensured swift supply of goods to Indian troops, according to the CSD website.

In the 1970s, as the number of stores increased, the defence ministry sanctioned an organized structure to manage them. Today, CSD has nearly 2,400 employees.

These stores reportedly serve some 12 million customers annually with over 4,500 products such as television sets, audio and video systems, refrigerators, soaps, shampoos, liquor, and even cars—all at prices considerably lower than market rates.

In fact, liquor is the highest-selling category and contributes 26% of CSD’s sales, followed by toiletries.

For those serving the country, these canteens are an inseparable part of routine life and brands just cannot miss out on these stores.

(Published in Quartz)