Bangalore: Retailer Arvind Lifestyle Brands Ltd is both wary and hopeful. While the company sees sales growth slowing this year, it’s also upbeat about a demand rebound. There’s been a strong kick-off to the holiday shopping season, chief executive J. Suresh said in an interview. The former Hindustan Unilever Ltd executive, who has been at the helm at Arvind for more than seven years now, spoke about the company’s plans for its newly acquired department store business, Megamart, its revamp and what foreign direct investment (FDI) could do for retail. Edited excerpts:
How has consumer sentiment been amid the economic slowdown?
Consumer sentiment has been a bit muted since last Diwali. We’ve had spurts of good sales and spurts of slow sales. The festival season, however, seems to be taking off quite well. Two places where festival sales happened—Kerala for Onam and Kolkata for Durga Puja—those places are indicators that buying is strong. Sales growth at these two places has been substantially better than last year’s growth; we grew sales over 25-30% on a like-to-like basis in these two markets.
You revamped your Megamart outlets. Why? What changes have you made?
At Megamart, sales were not an issue. The problem was profitability, which we are now correcting. The pricing strategy has changed. It’s moved from being a discount store to a value fashion brand. So you won’t find 50% discounts, but items at the right prices. We’ve added the international brand Jeffry Bean. We’ve consolidated all 12 of our value brands into Megamart, including Mossimo, Jeffry Bean and Cherokee. We’ve changed the look of the stores and the logo as well.
The logo was earlier communicating a kind of hypermarket look so we’ve made the new one much more fashion-oriented. The re-launch began in Bangalore, and currently we are implementing it in Tamil Nadu.
Like other retailers, have your margins been under pressure due to discount sales? How many stores have you opened this year?
The pressure on margins for us was not because of discount sales but because of excise duty. This year, we’re looking at marginal growth in margins in our branded apparel business.
For Megamart, our margins got eroded last year (because of higher excise duties), which we are gradually building back this year. Cotton prices have dropped. We are working on other cost efficiencies as well. We’ve shut about 15 underperforming stores so far this year. At any time, we watch 20-30 stores (for potential closure) on a base of 700 stores. We’ve opened 45 stores so far. For the last two years, we’ve been opening 150-170 stores per year. This year, we will probably open 100 stores.
What was the thinking behind entering the department store business (Debenhams and Next) when others are seeing a sharp slowing in growth?
We see a huge opportunity in the bridge-to-luxury segment. We also want to strengthen our position in womenswear and kidswear. And both Debenhams and Next offer us a ready opening in these markets.
Currently, menswear is our largest contributor but we will immediately be strong in kidswear also. Our US Polo kids collection sales have already touched Rs.50 crore in just its second season. We’re also launching kidswear under the Elle brand. Next year, we’re targeting more than Rs.100 crore in kidswear.
What are your expansion plans for Debenhams, Next and Nautica?
I am looking to open 10 Debenhams stores by 2018. We are also seriously looking at an opportunity to slightly reduce the prices. Next is a bigger opportunity. They have a new format globally and in the UK Next is doing exceedingly well and has become number 1. In the new format, the look and feel of the store is much better. The brand recall for Nautica is very high. It will grow aggressively and we will have 18 stores by end 2013.
What are your capex plans?
We usually invest Rs.70-80 crore. But this year it will be more because we’ve acquired three new businesses where we invested Rs.60 crore.
Our overall capex will be around Rs.120 crore.
What are your sales expectations for the year?
Our CAGR (compounded annual growth rate) of the last three years is 38%. Brands grew at 47% and retail at 31%. This year our growth rate will come down— we’re expecting Rs.1,500 crore in sales this year from Rs.1,200 crore last year. One of the brands doing really well is US Polo. I don’t think any brand in any category, leave alone apparel, has done Rs.200 crore in two years’ time. We now have 103 stand-alone US Polo stores. We also have some new drivers now. Elle has started doing Rs.25 crore (of business) in its first full year. Together, Debenhams, Next and Nautical will do another Rs.80-90 crore. US Polo will do Rs.250-275 crore this year.
With the addition of new brands and such a large portfolio, are there any consolidation plans?
Within our group, we are handling almost 25 brands and four retail formats—Megamart, Debenhams, Next and Club America. We have a business group which looks after Arrow, Izod and Gant and this operates as an independent company.
There’s a womenswear group handling Elle, and now there is a Debenhams and Next business group and another for Nautica. These operate like independent companies. Within our company, there are five independent companies and each has its portfolio of brands.
How are your brands performing? Are there any under-performing brands that you want to phase out? Which are your best-selling brands?
We didn’t have a single Rs.100 crore-plus brand four years back. We (now) have four brands including Megamart which crossed the Rs.100-crore mark. Today we have Megamart, which is Rs.500 crore-plus, Arrow which did Rs.360 crore last year, US Polo with Rs.200 crore-plus business, and Flying Machine, which does Rs.100 crore-plus of business. We also have growth brands like Nautica and Elle, which hopefully by next year should become Rs.50-60 crore-plus brands.
What key concerns still remain in the retail sector?
There are three major challenges. Real estate is going to be a problem. During the downturn, most developers had stopped making malls, and started doing residential projects and as a result, not many malls are coming up now. As more and more new brands come in, there will be a fight for mall space. High streets are saturated and unfortunately, for some international brands, very few high streets provide the right environment. We can take as much as 70-80,000 sq ft. space in a mall; with new formats such as Debenhams coming in, we would get preference. Getting the right talent will also be a challenge if you want to expand fast. Thirdly, for apparel retailers, sourcing will be a problem. We don’t have a manufacturing capacity and outsource everything. We are developing strategic, long-term relationships with our suppliers.
What’s your view on FDI in retail?
It’s not going to be a game-changer, particular in the case of fashion, because there’s no cold chain, no direct sourcing from farmers, which are seen as big benefits from FDI. Brands we are talking to haven’t changed their views. Earlier too, they wanted to come in with a partner. Most of them are single-brand retailers, who can come in on their own but they are not talking about coming in on their own. They feel India is a complex market, and the local partner will bring in value. There could be a change in the food and grocery sector with FDI.