Global recession had a major impact on the industry, in terms of revenue fall and markets. Some saw a dip over 30% in their revenue. SME focusing on exports and producing only semi-finished leather witnessed low demand, increasing margin pressures and high inventories. With the collapse of traditional North American, Eastern Europe market, SME were expecting Dubai to bail them out. However, that did not happen. Cheaper alternate markets such as Russia, Eastern Europe emerged to fill in the coffers. A major challenge faced by the SME’s, especially in Vaniyambadi, Tamil Nadu is the cost of effluent treatment. Some SME’s tanneries that could not meet the cost of CETP norms were closed.
What next for Indian leather SME’s and what can they learn from Indian IT industry?..
The recession and the hardening of Indian Rupee against US Dollar is propelling leather companies the need to diversify and de-risk their business. Eyeing the sizeable mall-hopping consuming class, manufacturers are turning retailers, either going ahead on their own or forging alliances with international partners. Foresight, Chennai based company is partnering with Pavers, of UK to introduce European fashion footwear brand Staccato in India. Reliance Brands has entered into an agreement with The Timberland Company, a major manufacturer of outdoor footwear and apparel.
Future Group and the UK shoe retailer, Clarks, have formed a JV to bring high quality shoes to India. Domestic footwear retail business is witnessing a shift in channels too. With large volume brands sales remaining at high streets, and mid segment customers preferring to purchase shoe and other accessories in tandem with clothes, some of the retailers are reworking their presence. Footwear retailers prefer to use Malls to de-risk their channels and product lines.
Domestic brands are moving beyond regional markets and embarking pan-India presence. From a primarily NCR player, Mahtani Fashion, an aggressive shoe retailer who owns Vi-Ga has plans to build a national presence. Domestic market offers tremendous opportunity and hope for diversification, de-risking the export heavy business. However, it does pose challenges and issues for new entrants.
India’s domestic leather market
Indian domestic leather goods market is estimated to be worth Rs 16,300 crore and is expected to grow at a CAGR of 20%. Domestic footwear market is estimated to be over Rs 15,000 crore in value terms and has grown at the rate of 8.8% over the last couple of years. Men’s footwear accounts for almost half of the total market, with women’s shoes constituting 40 percent and kidsʹ footwear making up for the remainder. The domestic market is substantially price driven, with branded footwear constituting less than 42 percent of the total market size.
Background
With a direct employment of 2, 50,000 (with 50% of them being Women) and an export earnings of $14 billion, leather industry is a significant driver of economic growth. The Indian leather industry enjoys abundant availability of raw materials, availability of low cost skilled labour, and availability of supporting institutions. More than 4000 units are engaged in manufacturing, of which 95% are SME.
India’s share in the global footwear imports is around 1.4% and future growth is expected from the SME’s venturing into value added products. Major competitors in the export markets for leather footwear are China (14%), Spain (6%), and Italy (21%). 55% of India’s leather export comes from US and UK, and Dubai in recent years had emerged as a trading destination to Africa and other markets. SME’s export most of their finished leather (about 95% is export revenue) and have very small contribution from the domestic market.
India is the second largest footwear manufacturer in the world, next only to China. Nearly 58 percent of the industry, which is by and large labour intensive and concentrated in the small and cottage industry sectors, remains unbranded.
However, as part of its effort to play a lead role in the global trade, the Indian leather industry is now focusing on key deliverables of innovative design, state-of-the-art production technology and unfailing delivery schedules.
Customer Segments
Retail footwear segment in Indian is very price sensitive and has been steadily growing over the year. Major part of the demand is met by the unorganised sector and still there is a shortfall of 300 million pairs. Branded shoe market only account for 20% of the entire market. While international brands largely dominate the higher end of the spectrum, the lower end of the market is dominated by home-grown players as well as unorganised players. While men's footwear is the biggest target category (contributing almost 48%), children's (11%) and women's lifestyle footwear (41%) is not behind in the race.
Segment wise classification of price ranges in the men’s footwear segments:
Segments Price Ranges in Rs % of growth
Mass market 185 – 700 60% (Liberty Bata)
Economy market 700- 1000 30% (Bata Liberty)
Sports market 1000 – 3000 7% (Nike Adidas)
Premium leathers 3000- 5000 5% (Charles and Keith)
Luxury 10000- 50000 1% (Gucci Louis Vuitton)
Segment wise classification of women footwear segment:
Segments Price Ranges in Rs % of growth
Traditional footwear 699 – 999 5%
Designer Footwear 599 – 799 10%
Formals 299 – 699 40%
Casual Wear 499 – 799 25%
Sports Shoes 500- 699 20%
About 37.8 percent of Footwear retail is the organized segment, which qualifies it as the second most organized retail category in India, next only to Watches. While the average spend on the footwear by urban consumers is Rs 240/annum, consumers in rural areas spend just about Rs 100/annum. The annual domestic consumption of footwear is approximately 1.1 billion pairs per annum, and top 20 cities contribute about 450 Million pairs/annum. The kid’s footwear segment is one of the fastest growing segments in India. The Indian kid’s footwear segment is highly fragmented and dominated by the unorganised sector. The branded kid’s footwear segment has a big card to play as India has the world’s largest child population. The overall kid’s retail segment has a robust margin of 20 – 25 % which is huge potential opportunities for organised branded retail footwear players. S&M is one of the players who have ventured into kids wear segment which has 27 exclusive outlets through franchise model. S&M sees a huge potential with age group of 3 – 16 years kids segment in the domestic market after the economic slowdown in the international market that hit the company’s revenues has now been targeting the growing consumers market of India. It has set up store in store format for optimised revenue flow. The store in store format of business model has been the trend among many retail footwear players in India.
Disney kid’s is another international brand which has forayed into exclusive kids shoes in India and has targeted kids within the age group of 5-10 years. Disney shoes have a tie-up with Sierra Industrial Enterprises to manufacture and market Disney shoes for kids in India. Disney aims to become the market leader in the kid’s footwear segment in India.
The Disney shoe collection will include boots, sandals, slippers and sports shoes for boys and girls. The footwear’s has a price range from Rs 150 – Rs 850. Disney has targeted malls across the country and in prominent chain stores such as Lifestyle, Loft, Shopper’s Stop, Pantaloon and Central.
Bata is one of the oldest brands which have a more than 50% share in the executive segment. As the young Indian executive class matures in terms of quality, design and brand, the preference will be more towards branded footwear and the growth is expected to be high in this segment with the migration of people from villages to cities for better career and profession. The footwear retail segment is currently one of the most organised sectors within the retail domain. However, this is purely due to the highly organised nature of the men’s footwear segment. The women’s category is largely unorganised, in fact close to 95% of the category is unorganised. With respect to the rest of the world, this is an anomaly as the women’s category is majorly organised and forms a big chunk of the market. Thus for us as retailers in the women’s footwear category, the market is still largely untapped and hence a big opportunity for growth.
At present, almost all of the organised retailers in the women’s footwear category are located in the metros and Tier I cities and towns. The Tier II and Tier III towns have over the last few years seen a spurt in income driven by the service industry boom. Hence these towns definitely are a potential target.
Organised footwear market Vs Unorganised footwear market
The average growth in the industry has been estimated at 12% and is estimated to touch Rs 47000 crore by 2025.
The average growth in the industry has been estimated at 12% and is estimated to touch Rs 47000 crore by 2025.
Presently the Indian organised foot wear market is dominated by men’s footwear segment that contributes for nearly 60% of the market where the casual footwear has been better off with two thirds of the share in the men’s segment. The unorganised players have the lions share in the ladies and kids segment with 80 percent share. The organised footwear brands have less penetration in the ladies footwear segment mainly due to the complex buying behaviour of Indian women. The ladies and kids segment is one of the fastest growing segments in the branded footwear market and many foreign brands like Catwalk have ceased the opportunity and have set their footprints in this segment which has been untapped by major traditional Indian footwear brands. Considering this many of the Indian footwear brands have seen growing opportunities in the segment to widen their product portfolio, widen their risk appetite and increase their market share in the footwear segment by contributing to newer growing consumer segment which will boost the bottom
lines of the retail players. The business models of the footwear retail players have been different with a wide popularity of stores in high streets, malls and new formats such as store in store has been catching up even with international brands having gone the store in store model which has been the most cost effective model in terms of testing the markets.
Major challenges in running domestic retail
a) Retail presence: till recently, most companies invested in own stores as the means to grow and expand. With commercial rents increasing in last few years, capital required for expansions was a bottleneck.
b) Credit Management: Brands that had no local presence, but preferred the third-party retail route had to face the challenge of receivables, often the credit period as high as 120 days.
c) Brand: Many of the leather firms are SME’s, have great experience in trading and vendor management, but completely lack brand building experience. Even when attempts were made, they lacked focus and consistent efforts, thereby diluting the impact.
d) Low IT investment: Except the major leather manufacturers, none of the companies had an ERP connecting POS data so as to effectively manage inventories. It was not common to have round the year discount offerings to get over the inventories.
Some Successful Retail Entry Strategies
RED TAPE
Red Tape is a manufacturer and an exporter under the flagship brand of Mirza International Initially the business model is more inclined towards exports were out of 250 crore 200 crore business was done through export closures. Mirza International had very less or no presence in the domestic market until 2006. So to set its footprints in the domestic footwear market Mirza International forayed into women’s footwear, men’s footwear and accessories market in 2006. It also launched a low price footwear brand called Necleus and is positioned to cater to lower end customers for high volume sales. The company also plans to have a national presence through exclusive stores and shop in shop stores.
M&B
M&B is one of the major players in the footwear business in India. M&B has two manufacturing facility one each in Baddi and Noida. With more than 75 stores spread across the country making M&B one of the fastest growing footwear brands in India. M&B has very strong distribution network across India with Brands marketed by M&B are sold in over 1000 stores across India.
ID is the flagship brand of M&B which is targeted towards fashion savvy youngsters it is one of the popular brands among the youth community in India.The iD store has a unique layout, striking visual impact and catchy merchandise display which will make shopping an experience to remember.Some of iD‘s brands are:
Camdan – This boot is targeted towards ruff and tuff guys. It has a very strong upper mould that gives a tough looks on the shoes.
Colonge – Is another iD shoes from M&B is a trendy shoes with unorthodox styling blended BI- colour and antique and suede leather, which has a inspiring looks with a combination of leather and thread in the upper.
Figo – iD shoes from M&B. Figo is a brand inspired by soccer sports which has a classic theme with a blend of sporty colour. Flashing streaks of gold and silver looks classy with comfy grip with sporty spikes at the bottom which makes a cult shoe.
Fly – iD shoes from M&B. It makes the wearer of the shoe feel high, it has a bi-coloured soles and leather with tie and die finish.
Hotshot – is a one defines complete casuals and comforts for the leisure mood.
Icon – It is the trendsetter bi-colour soles with contrast streaks on the upper.
What determines the success of new entrants Building retail presence, brands and sustaining them in the domestic market is not an easy task. Remember Corona, the legendary brand that was the no.2 brand in the market with its large network of stores, filed for BIFR in 1998 and eventually closed in 2003. Cost management and effective marketing are key to survivors in domestic markets.
The common underlying strategy of successful companies like Mirza’s or M&B or Lakhani’s is control over cost and right placements.
a) Location
Successful brands are realizing that while malls offer higher footfalls, the advantages of high street are many. Average Cost/sq ft would be almost 40% less than the Malls, and considering the overhead costs of parking, energy, etc high street is more suited for “youth” targeted products. It is also more suitable for players with wide product assortment.Companies with presence in textile and leather are discovering the advantages of bundling. Presence in a high street market such as Marthahalli, Bangalore, or Fashion Street, Bandra or S.V. Road, Mumbai or Khan Market with higher footfalls of a particular segment increases cross-selling. For example, M&B footwear does high street retailing through multi-brand outlets and discounts retail chain stores, prefers Malls to position international retail chain stores (sale of international brands such as Lee, Provogue, etc). Domestic brands are realizing the limits to growth by pursuing own store format and switching over to franchise formats to tap markets such as Patna, Ranchi, Vizag, Raipur, etc.
b) Product focus
Successful brands are realizing a focused product portfolio (with even fewer products) is better off at managing customer expectations and experiences. S&M, a Coimbatore based company is targeting young customers (7-14 yrs) and Hidesign, the leather boutique firm is concentrating on business professionals and Double-Income Parents. Focus does pay in domestic market. Expansion into sub-brands such as sportswear, kids and women are the steps the domestic brands expected to pursue in future. SGL leathers increased their gross margins with introduction of Bags, Wallets and Leather Accessories. SME’s focused more emphatically on institutional sales. Local players such as Damask, SS and other also found safety shoes for industrial use a niche segment where margins are better than in the wholesale business.
The informal / casual footwear holds two third of the share in the men’s footwear market in India. The informal segment has always been high on demand mainly due to the changing trends in the consumption patterns of the Indian consumer. The young population has always shown more interest towards westernised culture and brands and this has given ample opportunity for international footwear brands to have strong foothold in this segment. Allen Cooper is one of the brands which had forayed into this market in the new millennium which has entered with a floor price of Rs 1000 plus in the southern markets has been able to penetrate strongly in the segment which has targeted its products with the age group from 24 – 35 years.
a) Business model
One learning from Carona’s fall has been the need to minimise risk and spread the risk with partners. Successful brands like M&B, S&M are pursuing a good mix strategy of few owned and franchise models to expand and serve markets. Own showrooms are used to identify the changing trends (M&B consistently targets the high end students in Delhi) and create successful product lines. Franchise option is vigorously pursued to expand the footprints and reduce the cost of Operations. S&M, has adopted a unique “Store-in-store” model using IT as a backbone to significantly reduce the cost of operations, almost 35%.
b) Enterprise-wide IT
Successful entrants S&M while pursuing innovative store-in-store policies have relied on IT investments such as POS and ERP. Companies such as Khadims, M&B are heavily relying on IT to understand the models of the seasons, price ranges, store performance, etc.
c) Pricing model
While tradition wisdom recommends, floor pricing to penetrate into markets, the successful companies have pursued premium pricing targeted towards the middle high and high income group people. Selecting a particular segment with an affordable price has been the key underlying the success of S&M, M&B.
Conclusions
With organised retail on the rise and increase in the disposable income retailing certainly looks a promising option. Potential opportunity for value added products in the domestic leather market is high; opportunity to cater to the domestic market with a blend of traditional, western fashion can bring in huge market in the footwear segment in India.
Increasing forex impact and global competition implies that leather companies cannot sustain their growth from only exports front. The experience of companies like S&M, M&B underscores the fact that entering domestic market can derisk the business and increase revenue growth. Success depends upon consistent strategy linking location, product range and execution. Success in domestic market requires listening to the customer, adapting the product and price, and managing the cost of operations. Scale is important to survive and grow, and low risk models such as franchise or storein-store may prove be effective. In the final analysis success depends on each company’s willingness to take risks and implement required changes.
Source: http://www.browneandmohan.com
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