Fashion wars

Darshan Mehta is wearing his enthusiasm on his sleeve. The president of Arvind Brands has tied the knot with American fashion house Tommy Hilfiger.

The designer and head of the popular brand in the world of high fashion was in India for 10 days to mark the event, even though he gave both Australia and South Korea "" the other markets where Tommy Hilfiger has debuted this year "" a skip. "It shows his commitment to India," Mehta says.

It couldn't have happened at a better time. Arvind Brands is sewing up huge investments to double its profits and growing at a scorching pace in a branded-wear market that is currently stagnant.

And Tommy Hilfiger is only the cherry on top of the icing. Next year, Mehta hopes to have sold Rs 50 crore worth of Tommy Hilfiger garments through 10 exclusive stores across the country that hold the same promise as shopping internationally for high fashion.

But Mehta isn't stopping with just the super premium segment. Arvind "" which straddles most sections of the ready-to-wear business "" is making an aggressive pitch to push sales in the branded mass market.

Street brands Ruff and Tuff and Newport should hopefully sell 4.6 million jeanswear pieces in 2005-6 (as opposed to 2.1 million this financial year) , which should go a long way towards doubling Arvind's sales in the mass ready-to-wear market from Rs 140 crore to Rs 280 crore by the end of the next financial year.

What makes the ready-to-wear branded market so attractive is its Rs 20,000 crore volume, and a huge untapped market of customers who still go to the nearest tailor.

Clearly, Arvind has identified the mass market as the segment that's set to grow at a scorching pace, while the premium or upper-end segment (clothes sold at an average of Rs 1,000-plus but lower than Rs 2,000, which includes Arvind brands Arrow, Lee and Wrangler) is either growing slowly or not at all.

Acknowledges Mehta: "In the mass market, even if you grow 100 per cent annually, you don't have to take away anyone else's share since the size of the market is huge, but in the Rs 3,000-crore premium market you might see a growth of 20-25 per cent in a good year, so there is the tendency to grow your business at someone else's expense."

Not that it's an an easy market to crack. The key impediment to growth is distribution "" how to sell branded-wear in small towns and rural markets, pay distributors their margins and at the same time keep prices low so that customers have no reason to patronise either tailors or local brands.

"The challenge has been to keep relationships with over 3,000 stores across the country, service their needs, give them credit, and control them," says Mehta.

Arvind is now working on innovative ways to break the impasse; the answer may just lie in tying up with hypermarkets and large chain stores cropping up across the country.

Their advantage lies in redefining the distribution system: since the company deals with only a few large retailers and sells directly, middlemen and their margins are eliminated from the process.

For instance, Arvind has tied up with Kishore Biyani's Big Bazaar as an exclusive retailer for its cheapest brand of jeans, Ruff and Tuff, at a unit price of Rs 299.

Next year, the company hopes to move about 1.2 million pairs through this tie-up alone. Mehta says the savings of 6-10 per cent on the total cost of the product are being passed on to the customer.

With at least 20-odd hypermarkets coming up next year (Westside, Lifestyle, Shopper's Stop are all setting up hypermarkets), it will tie up with these companies directly.

Arvind is also leveraging other advantages such as support from group company Arvind Mills, which is one of the largest manufacturers of denim cloth in the country. Next year, about 7-8 per cent of the denims manufactured by Arvind Mills will be for consumption by Arvind Brands.

The advantages are obvious "" uninterrupted supply, first call on new cloth designing, the ability to freeze prices six months in advance on bulk volume purchase "" even though Mehta insists there is no accruing price benefit on it.

At the Rs 250-crore super premium end, Mehta's strategy is to price products slightly cheaper than available in the US while offering a similar experience in shopping.

Tommy Hilfiger products, for instance, command prices 5-30 per cent cheaper than the US stores, while each store has a size of approximately 3,000 sq ft. More importantly, to ensure quality, 90 per cent of the apparel is being imported and only a few items made in India.

The company is investing Rs 10 crore in building stores and the brand across the country. It also hopes to cash in on the limited number of outlets other international brands in the same segment "" Hugo Boss, Mango "" currently have.

Nor is he ruling out tie-ups with other international super-premium brands. "We are getting offers," he says, "but what we look at is whether it creates value for our customers and shareholders." The criterion: a brand must offer a 12 per cent return on the investment.

Competition, however, isn't too far: other brands like ITC and Grasim are also moving in aggressively. More importantly, margins in the business are getting squeezed (net operating margins are 7-8 per cent) and Mehta acknowledges that his rivals are discounting heavily in the market.

Says Harminder Sahni, associate director in KSA Technopak, an international consultancy firm: "The biggest challenge for companies like Arvind is cracking the price barrier. If you have to sell to the masses, it has to be priced below Rs 300."

Sahni points out that Arvind is trying to resolve the distribution issue by tying up with companies like Big Bazaar. But despite a lot of stores, Big Baazar's reach is still limited.

On the other hand, ITC is leveraging its e-choupal and plans to set up rural malls across the country to address the mass market. Sahni says: "ITC has the advantage of selling many other products apart from garments, thereby reducing costs."

Industry experts say the ITC model looks more likely to address the mass market than that of Arvind, which is dependent on others for penetrating the market. "ITC has more cash as well as a successful distribution model in e-choupal already underway," says one such observer.

According to Sahni, even the Rs 1,000-plus mid-segment brands will increasingly feel the squeeze "" a challenge Arvind too will face. "Brands like Arrow, Zodiac, Louis Phillipe are also under pressure as the volumes are not growing in this segment," he says. "They are being squeezed from both sides "" the super premium brands on the one hand and mass brands like ITC's John Players on the other."

Arvind, of course, is aware of the challenges. Mehta is already putting together a Rs 35-crore advertising war chest to push its popular brands.

It will also add another 20 stores (not including Tommy Hilfiger's 10) for its brands (it already has 180). And it is breaking new ground with women's wear under the Arrow label. More importantly, it has decided to reduce discounting "" it now conducts only one sale every year as compared to two earlier.

That's not all. Arvind is also flexing its export muscle through newer markets such as Russia, South Africa and Saudi Arabia, so that the export booty goes up from Rs 15 crore this year to Rs 23 crore next year.

There's no denying that Arvind faces a tough task ahead. But it has proved successful in creating power brands in the garments business in the past.

No wonder Tommy Hilfiger decided to showcase its winter haute couture line in India, previously restricted to just the New York Fashion Week. But the question now is, can Arvind create a similar brand equity by cracking the mass market?