India's apparel retail industry faced severe turbulence in late 2008 with the onset of the global economic crisis. A report by management consulting firm Kanvic titled 'Fashioning a winning trail: How to build
sustainable business models in Indian apparel retail' examined the performance of apparel players since then.
It took into account the occupied retail space of the top 40 players in India. Some parameters used to draw insights were that of annual reports, financial statements and rental space of apparel retail players.
India's organised apparel retail was estimated at $11.3 billion in 2012. It has grown at over 12 per cent CAGR (Compound Annual Growth Rate) over the last five years although players are still looking for a winning formula to establish a successful and robust business model.
According to Kanvic's analysis, over 30 per cent of retail players have either closed down or sold their businesses since 2008 (out of the total apparel retail space). Twenty-two per cent of them are currently
reducing the size of their businesses or actively looking to sell.
Whereas retailers accounting for less than half of the retail space in 2008 have been able to improve their business performance over the last five years on major indicators such as like-to-like sales, EBITDA (Earnings before Interest, Tax, Depreciation, Amortization) and inventory turnover since then.
Some causes for failure were high-risk growth strategies and crisis of leadership (through linear growth assumptions, overconfidence and lack of management bandwidth). Low profits were a result of low gross margins (not high rentals as is often argued). Low gross margins were caused by poor supply side economics and the retailers'
inability to pass on higher costs to customers.
Apparel has risen to gain the highest share of organised retail. The rapid expansion of apparel retail players was driven by customers' increasing need for convenience - they wanted to switch from tailored to ready-made garments.
Modern apparel retail industry dates back to the 1990s when a new breed of modern retailers such as Shoppers Stop, Pantaloons, Trent and Lifestyle opened stores in different parts of the country during the process of economic liberalisation.
While
retailers focused on store expansion as the main driver of revenues, sustainable growth requires finding the optimal balance between new store openings and increased sales productivity. Apparel retailers have received a majority share of private equity deals in both the retail industry as well as in the textile value chain.
The study says that the companies that suffered during the 2008 crisis had an average debt to equity ratio of 1.05 to 1 whereas the average for those who survived it was only 0.33 to 1.What this means is that high debt undermines sustainability.
Overcoming linear growth is seen a huge challenge, the study says, or in other words, 'execution risk' - how to open as many stores as quickly as possible and gain a pan-India presence.
By benchmarking seven top listed Indian apparel retailers' against global leaders such as Zara and Uniqlo, Kanvic found that after over two decades of organised apparel retail, none of the existing business models have been able to achieve margins on par with international leaders. On the key benchmark of EBITDA, India's top apparel retailers achieved less than half the figure of the top global players. EBITDA allows comparison of operating performance across companies irrespective of their financial leverage and investment intensity.
The report suggests Indian apparel retail players need to work on business economics due to an uncertain economic climate, threat of new entrants such as international retailers and online players.
A quick exit can stem losses early. It would also allow resources to be focused on more profitable parts of the business. Reducing the cost of goods sold, right sourcing, investing in the supply chain, increasing private label can help apparel retailers resume track. They also need to consider increasing sales by increasing differentiation, move to the push-and-pull supply model and improve customer engagement, according to the report.
Special 
