As Indian fashion brands gear up to meet the challenges of growing domestic demand, the ride ahead could be rocky unless the level of preparedness is high. And all this, as experts will tell you, is primarily because of ‘inventory’. The ‘I’ word often emerges as the villain-in-chief —destroying brands, reputations and cash flows mercilessly. Is this just a hype or a legitimate concern? First, let’s look at what some of the global biggies do. Meet Louis Vuitton, a company that never discounts its leather goods. It balances demand-supply cycle very well by ensuring that people buy its products for the right reasons—design and aspiration—and not the wrong reason—discounts. Unlike other luxury brands, Louis Vuitton never licenses out the brand to others. Running its own stores gives it control over inventory, pricing and visual merchandising.
On the other extreme, most of our Indian brands/retailers end up selling half of their inventory at the list price (as fresh stock) and the remaining half at a heavy discount (end-ofthe-season sales). Fashion business enjoys healthy gross margins but the sell-through rate (percent by volume of merchandise that is sold at full price) for most Indian brands is low—45-50%. This dampens their overall profitability and long-term viability. On top of discounts, retailers end up spending more than 40% of their annual marketing budget on communicating the announcement of sale.
Fashion brands don’t really need to participate in such ugly-queen contests, year after year, trying to outdo each other by offering more and more discounts. So, what is the way forward?
Fast-fashion, which ensures that designs move from catwalk to store in the shortest possible time, has been cited as an effective tool to combat such planned customer behavior. While it reduces incentives for consumers in multiple ways, rapid production reduces gap between demand and supply and decreases the probability of excess inventory.
Enhanced product design, on the other hand, gives customers a trendier product that they value more, making them less willing to risk waiting for a sale. Zara, H&M and Mango have been implementing this strategy successfully.
Consider this: Zara churns out more than 11,000 designs in a season, compared to only 2,000-4,000 items that its competitors offer. End result: Zara’s customers visit the store 14 times on an average per year, compared to 3-4 visits per year at traditional chains. Sellthrough rate for Zara is 80-85%. But such an approach needs a lot of planning, determined execution and meticulous monitoring.
However, the fashion sector looks attractive, and this is reflected in the increasing number of brands, even more so in terms of valuations.
But clearly, the pitch is changing. And an advice for Indian brands in a hurry—the ground you are stepping on has wall-towall landmines. Watch the business, the valuations will take care of themselves.
(Author is a Partner with Everstone Capital-Private Equity. The views expressed are personal)
On the other extreme, most of our Indian brands/retailers end up selling half of their inventory at the list price (as fresh stock) and the remaining half at a heavy discount (end-ofthe-season sales). Fashion business enjoys healthy gross margins but the sell-through rate (percent by volume of merchandise that is sold at full price) for most Indian brands is low—45-50%. This dampens their overall profitability and long-term viability. On top of discounts, retailers end up spending more than 40% of their annual marketing budget on communicating the announcement of sale.
Fashion brands don’t really need to participate in such ugly-queen contests, year after year, trying to outdo each other by offering more and more discounts. So, what is the way forward?
Fast-fashion, which ensures that designs move from catwalk to store in the shortest possible time, has been cited as an effective tool to combat such planned customer behavior. While it reduces incentives for consumers in multiple ways, rapid production reduces gap between demand and supply and decreases the probability of excess inventory.
Enhanced product design, on the other hand, gives customers a trendier product that they value more, making them less willing to risk waiting for a sale. Zara, H&M and Mango have been implementing this strategy successfully.
Consider this: Zara churns out more than 11,000 designs in a season, compared to only 2,000-4,000 items that its competitors offer. End result: Zara’s customers visit the store 14 times on an average per year, compared to 3-4 visits per year at traditional chains. Sellthrough rate for Zara is 80-85%. But such an approach needs a lot of planning, determined execution and meticulous monitoring.
However, the fashion sector looks attractive, and this is reflected in the increasing number of brands, even more so in terms of valuations.
But clearly, the pitch is changing. And an advice for Indian brands in a hurry—the ground you are stepping on has wall-towall landmines. Watch the business, the valuations will take care of themselves.
(Author is a Partner with Everstone Capital-Private Equity. The views expressed are personal)
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