Jul 21, 2010

Indian farmers have been selling their fair trade produce to developed markets for years by getting certified by the Fairtrade Labelling Organizations International (FLO). Now the FLO wants to invert that model. It will introduce a fair trade label for the Indian market next year. The Spice Board of India is looking to follow suit with a fair trade label for the domestic spice market.

First, let’s understand what fair trade is. Fair trade is an organised movement that helps producers in developing countries get a premium for their products if they follow better social, labour and environmental standards.

More than $4 billion worth of fair trade products were sold internationally in 2008, up 22 percent since the previous year. While sales of products like fair trade tea, coffee, flowers, wine and beer have grown in double digits for the last several years, cultivation has outpaced demand, according to reports.

If the fair trade movement is implemented in India, it could open up a huge new market for fair trade farmers, giving them stability against foreign exchange fluctuation.

For the movement to be successful, however, it requires the customers to be sensitive about this. “The size of the market is very small because Indians are not really concerned about this,” says Arvind Singhal, chief executive of retail consulting company KSA Technopak. “Companies are trying to create fair trade brands for their own reasons but if the customer is not sensitive then this will have only a limited impact.”

The Indian market and other domestic markets in producing countries are increasingly important for the fair trade movement because they could each be larger than the European market, which is the largest market for fair trade products. For instance, take Chetna Organic Farmers Association, which works with 9,000 cotton farmers in the Vidarbha region of Maharashtra, Telangana in Andhra Pradesh, and Koraput, Bolangir and Kalahandi region of Orissa. It sells most of its cotton in Europe at a premium of Rs. 320 a quintal. But even now it is able to sell only half the produce; the rest gets sold in India without any premium.

It is no wonder then that Seth Petchers, chief executive of Shop for Change, a marketing and labelling organisation for domestic fair trade products, is trying to launch this movement in India. Shop for Change launched a range of fair trade clothes along with designer Anita Dongre’s prêt label AND. The collection featured an ad campaign that starred fair trade cotton farmers along with former Miss India, Gul Panag.

This collection was made with fair trade cotton from Chetna’s farmers in Orissa, who were paid Rs. 35 per kilo of cotton rather than the market price of Rs. 30 per kilo. The FLO also fixes a fair trade price, which includes a minimum price for the product and a fair trade premium. Says Reykia Fick, external relations co-ordinator, FLO, “On top of stable prices (usually the fair trade minimum price), producer organisations are paid a fair trade premium — additional funds to invest in social or economic development projects.”

Farmer members of Chetna, in Andhra Pradesh’s Karimnagar district, have used this premium along with an international grant to build a storage warehouse for their cotton. During the off-season, they rent out the warehouse as a marriage hall and distribute earnings for the co-operative. Another farmer group in Maharashtra’s Akola district has used the premium to build a school. In Kerala’s Kannur district, the premium is used to create a fund for distressed farmers. It has also allowed the community to set up solar sensing technology as a benign blockade warding wild elephants off the cashew nut trees. Their cashew produce is labelled Jumbo Cashews in the European market.

All of this may or may not result in a price premium for a consumer depending on whether a retailer chooses to crunch its margins. Increasingly, retailers have started selling fair trade products without a price premium for consumers. Dongre’s fair trade collection sold at the same price as her other clothes. Cadbury’s launched a fair trade version of its Dairy Milk chocolate internationally at the same price as the rest of its Dairy Milk chocolates.

In case of fair trade products “it is the imagery which is different rather than a product differentiation,” says Shital Mehta, COO of premium menswear brand, Van Heusen. Right now fair trade numbers are small. Companies want to portray themselves as fair employers but are just experimenting with a small percentage of their products. Will they ever get all their products under the fair trade umbrella?

That change will come when it becomes a civil society movement as it has in the West, says Tomy Mathews, founder of Fair Trade Alliance of Kerala. Mathews’ alliance has been supplying through the FLO for years and he says, “Attempts to create independent labels diverting from the uniform global message on global trade justice is doing disservice to the philosophy of fair trade. I don’t look fairly on [the] Spice Board initiative or the Shop for Change initiative. The moment you confuse market with different logos you’re already losing the game before it begins.”

Retailers that have included more equitable conditions for artisans and weavers, such as Fabindia and Anokhi, have done well here already and this movement can get extended to farmers as well, says Roopa Mehta, president of the Fair Trade Forum of India.

But there may still be some distance between promise and scale in the market. Devangshu Dutta, CEO of retail consulting company, Third Eyesight, says he sees a market developing for fair trade products, albeit slowly. “Things will change. But that change will have to come from the customer side. Currently, it is a very limited market but it could be a business proposition for a few companies.”

Find this article in Forbes India Magazine of 30 July, 2010

My first brush with Zara and Inditex (Zara’s parent company) was in the 1990s, when we were comparing product development and supply chain best practices for another European retailer.

In 2002, after writing a case study on the Zara business model, I was (and continue to be) surprised at the number of downloads from the website (referenced at the bottom of this article).

In 2004, the interest at the Images Fashion Forum was so intense that the Q&A after the presentation exceeded the allotted time, to the extent that I was almost declared persona non grata by the organising team!

I’m glad to say that we’re all still friends and, together, witness to the logical next phenomenon: the much anticipated Zara store launch in India in May 2010. And what a phenomenon! On a high-footfall day, at full price, the Delhi store looks as if the merchandise is being given away for free.

In 2006, India was the 8th highest source of traffic to the Inditex website (more than half a million, almost 2 per cent of the total); incredible, considering that the other Top-10 countries already had Inditex stores. Although Zara finally signed a joint-venture with the Tata Group, I’m pretty sure that those thousands of other rejected prospective Indian licensees and franchisees must be getting their Zara-fix now as customers.

What does the Zara launch mean for the Indian fashion and retail sector? Is this the beginning of a new era? Should we expect Zarafication of the market, where the customer is driven by fashion, and the supply chain will turn and churn products faster than ever before? Should other international brands and Indian fashion brands be worried?

A peek at history is useful here. It is said that when Spanish conquistadors landed on the shores of the Americas they managed to conquer the land and the people through a combination of guns, germs and steel. [Credits to Jared Diamond for that evocative phrase.] That is, the Spanish carried guns and fine steel swords but, most importantly, they also carried diseases that were alien to the local population. In many places, the weakened and leaderless indigenous people were simply too battered psychologically and physically by disease, to fight the colonisers.

Keeping that in mind I would say, Zara’s entry is a warning bell only if your business is suffering from recent financial and operational illnesses. It is only dangerous if your team are psychologically weak, and would be overwhelmed just by the thought of the supply chain wizardry that Zara has deployed in its business internationally. It may be fatal for sleepy marketing teams whose only strategy has been to spend lots of money on advertising in season and on mark-downs after the season.

But it’s not doom and gloom for brands and businesses that have a competitive spark of life. If you’re prepared to learn, Zara’s business can provide lessons on how to create a product mix that doesn’t stay on the shelf for months, and on how to create the buzz and excitement around the brand.

Zara’s business success in India is not a foregone conclusion. Let’s look at the facts.

Zara’s business model in its home market was built on getting up-to-date fashion into the market before anyone else, and at lower costs. Its prices encouraged fashion-conscious consumers to buy more frequently, and though its limited production quantities were a way of reducing risk, it added to the allure of the brand. In most overseas markets, however, Zara is a somewhat more premium brand. The “value-for-money” for the brand rests on fashionability rather than product quality.

The Indian consumer base, on the other hand, is less fashion-sensitive than the European consumer. This is not equivalent to being less sensitive aesthetically – Indian consumers can tell good design from bad; allowing, of course, for varying taste! However, value consciousness drives many consumers to buy during discount sales with delay of 2-3 months, rather than buying current fashions at full price. This can be a problem for a brand that thrives on change.

Zara will initially have a limited physical footprint. It is targeted at the premium to luxury end of the market, fitting a certain physical profile of customer. Its products that are imported are disadvantaged by a hefty import duty and shipping costs, as well as the shipment lead time. So, there is time available to Indian businesses that want to adapt their business model, and learn from this new competitor.

With the product development strengths and the agility that Indian apparel companies have displayed in the past, there is no reason why Indian brands cannot compete effectively with Zara on their home turf. When it comes down to it, I think Indian businesses (the small ones, with less “organisation” and “process” orientation) are fast on their feet in identifying design trends and are able to responding to the trends with products being available in the market very quickly. I would call them the Indian “baby Zaras”.

So the real question is this: can these Indian “baby Zaras” learn to be disciplined and structured, and learn to scale up their businesses?

Could we, perhaps, even see some people creating copies of Zara’s styles and bringing them to the market quickly at much lower prices (in effect doing a Zara on Zara)? Let’s not forget, what is today an 11-billion Euro business was once a contract manufacturer to other retailers, and Zara started with one shop carrying low-priced versions of products inspired by those of high-fashion designer brands.

The coming years promise to be interesting and I think we should watch out for an Indian version of an Inditex emerging in the next few years. It remains to be seen whether it will be from among the existing players in the domestic market, an exporter who is a contract manufacturer for western retailers (as Inditex once was), or someone totally new.

The people who should be really worried are those international brands whose product mix in India is weak, whose prices make you want to marry a rich banker, and whose brand ethos is totally unclear. To them I would say: Zara has you in its gun-sights.

Are you being carried, or are you carrying others?

To know the answer to that question, bear with me while I take you on a short mental journey through the emerging landscape of “ethical business” and to the stories at the end of this piece. (Okay, you can cheat and skip ahead, but I would really prefer you to read through the whole thing.)

For the most part sustainability and responsibility – or “corporate social responsibility” (CSR) to use the proper jargon – is seen as more relevant to the western economies, rather than the emerging economies like China, India and Brazil.

The pressure to do the ‘right thing’ is like a carpenter’s vice, whose one jaw is public opinion and the other is regulation, together squeezing ever tighter on corporate business. Clearly, there is a significant portion of customers in western markets who are vocal in expressing their opinions on business practices that are seen as wrong or unethical. On the other side, judicial implementation of regulations is also extremely stringent.

In fact, in the last 10-15 years CSR and sustainability have become far more important to top management in western economies since the real penalties in terms of negative impact on the brand and financial penalties through regulation and litigation are extremely high. Multi-billion dollar businesses certainly have much at risk, as demonstrated by well-documented PR disasters of large brands and retailers in the last decade or so. The variety of issues they have faced has covered sweatshop factories, child-labour, product safety, food adulteration and many others.

Since the mid-1990s there has been a steady increase in CSR initiatives, or at least an increase in initiatives that are labelled under the CSR umbrella. There is no doubt that there is good intent behind many CSR initiatives.

Some of these are focussed on improving the core business processes and practices of the company, and have measurable improvement goals that also have a positive impact beyond the company itself. These can truly be called socially-responsible corporate initiatives.

However, one can’t help but question many others which are fuzzy in their impact on both within the business and outside. The motivation of this type of initiative seems to be a two-pronged PR effort: firstly to get positive PR for “good work” mostly unrelated to the business and secondly, more importantly, to avoid negative PR for poor or questionable business practices in the company’s mainstream products or services.

Lest I sound too cynical about the corporate efforts, let me say this: there is also lack of clarity and agreement in non-corporate circles about what constitutes “corporate social responsibility” or “responsible business”. The label is relatively new to mainstream management thinking and very mutable. Social responsibility, ethical business, sustainability are all terms that are broad-based, used interchangeably, and are open to interpretation which can change with the context. (I wrote about this in an earlier column “Corporate Responsibility – Beyond Babel” about 18 months ago.)

And that brings me to four separate incidents that happened recently, which are (in hindsight) neatly threaded together with a common thought process. (Thank you for your patience so far!)

The first was a discussion recently initiated by an international organisation about what could motivate Indian brands and retailers to make moves in the area of corporate responsibility, whether regulations needed to be tighter or whether it would be consumer pressure that would bring about a change. The underlying assumption – right or wrong – was that, as corporate entities, Indian retailers and brands were not sufficiently motivated to take significant and visible steps towards making their businesses more sustainable and socially responsible than their current state. The discussion was inconclusive, with many different, all potentially valid, points of view on the subject.

Very soon thereafter, I had the opportunity to participate in a dialogue with Gurcharan Das, the philosopher-author who, in his last corporate role, was Managing Director – Strategic Planning for Procter & Gamble worldwide. The dialogue primarily centred on his latest book: “The Difficulty of Being Good”. There was much debate and discussion on the wider consequence of individual actions and especially of those in positions of authority, highlighting the importance of individual choices.

A few days later, in a totally different context and with an entirely different person, the third incident occurred, when I was told an updated version of an old story to demonstrate the power of “a few good men” (and women). The story was as follows:

“50 people were travelling in a bus. Part-way through the journey, the weather suddenly turned stormy, with massive thunder and lightning bolts cracking all over the place. At times it seemed as if lightning would strike the bus and kill everyone on board. Then, someone proclaimed that there was someone on the bus whose end had come, who the lightning was seeking, and that it would be better for everyone else to get that person off the bus. The driver stopped the bus, and each person was sent off by turn, to go and touch a tree at a distance. 49 people got off the bus and returned unharmed after touching the tree. Then, as the last person got off and walked away from the bus, the bus was struck by a massive bolt of lightning.”

I thought this was a gruesome but effective moral science tale! During the next few hours I went about my activities, but kept mulling over the lesson(s) in that little story.

Then, that very afternoon, I got an email containing the following thought: “…when it looks like the whole place is going to implode – with pollution, disease, and war; famine, fatigue, and fright – there are still those who see the beauty. Who act with kindness. And who live with hope and gratitude. Actually, they carry the entire planet. (Mike Dooley)”

In looking back to the article 18-months ago, I closed the loop: it is the individual manager, who is also a citizen in a community, a consumer, and as a parent a stakeholder in future generations, who has to make the choices. His or her choices – both right and wrong – do have an impact beyond his or her own life and business. The so-called triple bottom line – profit, people (community) and planet (environment) – are irrelevant unless the first question is answered: “what does this mean for me?”

So as we go about our day, launching and growing brands, opening new stores, creating new products, I offer you this thought to reflect upon: are we carrying, or being carried? Is the bus safe because of us, or are we the ones the lightning is seeking?

[Go to the earlier post: “Corporate Responsibility – Beyond Babel“, December 2008]

India has been consistently rated amongst the top destinations for consumer businesses year after year. While international fashion brands had earlier entered India at a steady pace, there was a greater surge of the global brands in the Indian market since 2002.

Interestingly many international brands opted to choose the franchise route for their entry into India. There were changes in the market environment and government policies that made the business environment favourable for growth through franchising.

Firstly, as a signatory of the WTO, India reduced import duties consistently. Consequently products could be sourced from other countries at more competitive prices and international brands could create an internationally-consistent product offering, with greater control on the supply chain.

Secondly, with more international brands vying for a share of consumer’s wallet, there was a need for brands to create a distinctive brand identity. Exclusive branded outlets increasingly became a marketing tool through which the brands could not only showcase a complete product range but also create the full brand experience.

Simultaneously the real estate market grew significantly, bringing in many “investors” who did not have the capability or the desire to develop their own brand. The availability of potential master franchises ready to invest capital and real estate created an environment conducive for growth of franchising.

As per Third Eyesight’s report (“Global Fashion Brands: Tryst with India”), by the end of 2008, just under half of the brands were present through a franchise or distribution relationship.

Unlike more developed markets where brands have sizable networks of large-format store as a launch and growth platform, in India there are still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Also, having a local partner as a franchisee provides a closer understanding of the market and the ability to adapt to changing consumer needs.

For a successful relationship it is vital that a franchisee should have an entrepreneurial mind-set. The essence of the brand needs be well understood, and the franchisee must have operational involvement rather than a “passive investment” approach.

The question is whether franchising would continue to remain the preferred entry mode as a new decade starts. Liberalisation of foreign investment norms has already led to many brands transitioning into a joint venture or subsidiaries. (See the more recent version of the report on International brands in India.)

However, while for many international brands it would be ideal to have ownership and control over the operations in a strategic market like India, direct investment does also increase their risk and the investment is not financial alone.

Therefore, for many brands, franchising would still remain the more practical choice whether by using a national master franchisee or using site-specific franchise relationships in combination with a direct wholesale presence in India.