Kids' wear retailers are now burdened by heavy debt and poor brand recall
Kids' wear retailers are paying the price for reckless expansion, in the form of heavy debt, poor brand recall, high rent costs, and continued competition from mom-and-pop shops in a highly fragmented market.
Kids' wear retailers who expanded recklessly are now burdened by heavy debt and poor brand recall <em>Photo: Aditya Kapoor</em>
Being taken to court by a private equity investor in May was just the latest on the list of troubles of home-grown kids' wear retailer Catmoss. The private equity firm, SAIF Partners, alleged that Catmoss was selling company assets, doctoring its books and fudging meeting minutes. Last year, SAIF roped in accounting firm KPMG to carry out a limited audit of Catmoss Retail, suspecting that Catmoss's management mismanaged its Rs 100 crore investment.
In 2011, PE firms Bain Capital and TPG Capital took Lilliput Kidswear to court over alleged accounting fraud. In a compromise last October, both the PE investors wrote off their entire investment in Lilliput and transferred their holdings to the promoters.
The organised children's wear market is suffering from growing pains. Catmoss and Lilliput are two of its three organised retail chains - and the third retailer, Gini & Jony, is not in great shape either. The organised segment, according to PwC, accounts for about five per cent of the market. It is paying the price for reckless expansion, in the form of heavy debt, poor brand recall, high rent costs, and continued competition from mom-and-pop shops in a highly fragmented market.
Things need not have been this way. The potential market - children up to 12 years old - is a good 23 per cent of the population. The kids' wear segment is one of the fastest growing in the country's apparel industry.
KPMG estimates the size of the kids' wear market in India at Rs 28,000-30,000 crore, and expects it to reach Rs 43,000 crore by 2016 and Rs 72,000 crore by 2021. Given such expectations, companies went on expansion sprees, and PE investors backed them.
"One calculates as per the market forecast," says Anil Lakhani, Executive Director of Gini & Jony, which opened India's first exclusive kids' wear store in 1996/97 in Hyderabad. "Before 2009, everyone bought into the India shining story." Such was the euphoria that the company was set to go public in 2008, and planned to have a total of 260 exclusive brand outlets by the end of 2009 and 300 a year later. "Gradually, we went through a learning curve and corrected as per the new market reality," he says. Gini & Jony shelved its IPO plans and now depends heavily on internal accruals for expansion. The number of its exclusive outlets went up from 191 in 2010/11 to 203 in 2011/12, and dropped to 188 in 2012/13.
Lilliput, which had exported to international retailers since 1991, ventured into direct retail in India with its first store in New Delhi in 2003. By September 2011, it had 290 exclusive stores in India and 40 in 10 other countries. It has since shut down international operations, and the number of stores in India had dropped to 240 by 2012.
Sanjeev Narula, Lilliput's Chairman and Managing Director, says: "We have shut down international operations. The focus now is on cash sales to improve cash flow." Lilliput, which is servicing debt of Rs 850 crore, says its entire debt has been restructured by 10 banks.
Rival Catmoss - which opened its first store in New Delhi in 2004 and had 165 exclusive outlets as of last year - had secured loans of Rs 76.82 crore and unsecured loans of Rs 7.7 crore, according to its filing with the Registrar of Companies on March 31, 2010. More recent figures are not available.
PwC Associate Director Rashmi Upadhya says funding will remain the biggest challenge for companies in this sector. Accusations of financial irregularities have sent out the wrong signals to investors, making growth harder for these cash-strapped companies, which are already wrestling with huge debts.
Analysts say that all three retailers expanded too quickly to achieve deeper penetration in a nascent market.
PwC's Upadhya says that given the high cost of real estate, even though revenues grew in some cases, revenue per store lagged, and this hurt cash flow. Stretched balance sheets became a breeding ground for financial irregularities.
Ritu Marya, Editor-in-Chief at Franchise India Holdings Ltd, a franchise and retail solutions company and publisher of Retailer magazine, says some companies dabbled in too many things, although they did not have adequate resources and supply chain support. They lacked not only the funds necessary for the aggressive expansion of company-owned and -operated stores, but also the organisational strength to service franchisees.
Besides, these companies could not build brand recall, especially as their products did not stand apart from the offerings in the larger unorganised market. Nor were they able to overcome the personal relationships that mom-and-pop stores had with customers . Giny & Jony's Lakhani says the biggest competition for branded products is the value market.
Take the example of art teacher and customer Shikha Joshi, who shops for her 20-month-old daughter at a local store in her West Delhi neighbourhood. She says: "A branded dress costs Rs 500 to Rs 600. Even on sale, it would cost at least Rs 350. I can get a similar one from the local store for Rs 200." She adds that she does buy her daughter branded clothes, but only for special occasions; most of her child's clothes are from the local shop.
As if they don't have enough on their hands, the three branded wear companies now have to worry about new rivals entering the market - rivals with deep pockets and a clear strategy. Mahindra Retail Pvt Ltd, part of the $15.9-billion Mahindra Group, launched a venture called Mom & Me in Ahmedabad and Ludhiana in 2009, which quickly gained a foothold in the infant market. Mahindra Retail Managing Director K. Venkataraman says: "We entered with a focus on the mother and child segment and developed relationships with customers so that they grow with us. Women who have used our products during maternity continue to do so in the baby's infant years, followed by toddler years."
Mahindra is not the only threat to the older kids' wear brands. Shoppers Stop has launched its own brand, Carrot, in the segment. Benetton, Pantaloons and Allen Solly have also jumped on to the children's wear bandwagon. So have international luxury brands such as Zara, Gucci, Fendi and Dior. Analysts say this rising tide has helped create brand awareness and clearly segment the market.
"With less time on hand, the family would like to complete its entire apparel shopping under one roof, rather than going ... to an exclusive kids wear store," says Lakhani of Giny & Jony. "These retailers give them the comfort of shopping for everything under the same roof." He says his company plans to concentrate on kids' wear, as that is its area of expertise.
Most companies agree that there is a market for just about every player in India. Home-grown children's wear brands are banking on their expertise in production, sourcing, and design. Lilliput's Narula says: "We have learnt the hard way how this market works, the power of regional designing - what sells in the North does not sell in the South - and how colours work in different markets."
Lessons learned, Lilliput plans to float an IPO. Narula says: "India is the biggest kids' wear market in the world. The Indian consumption story is intact. It's a great opportunity. In the next 10 months, we will hit the market."
In 2011, PE firms Bain Capital and TPG Capital took Lilliput Kidswear to court over alleged accounting fraud. In a compromise last October, both the PE investors wrote off their entire investment in Lilliput and transferred their holdings to the promoters.
The organised children's wear market is suffering from growing pains. Catmoss and Lilliput are two of its three organised retail chains - and the third retailer, Gini & Jony, is not in great shape either. The organised segment, according to PwC, accounts for about five per cent of the market. It is paying the price for reckless expansion, in the form of heavy debt, poor brand recall, high rent costs, and continued competition from mom-and-pop shops in a highly fragmented market.
We have shut down international operations, as the focus right now is on cash sales to improve cash flow: Sanjeev Narula
KPMG estimates the size of the kids' wear market in India at Rs 28,000-30,000 crore, and expects it to reach Rs 43,000 crore by 2016 and Rs 72,000 crore by 2021. Given such expectations, companies went on expansion sprees, and PE investors backed them.
"One calculates as per the market forecast," says Anil Lakhani, Executive Director of Gini & Jony, which opened India's first exclusive kids' wear store in 1996/97 in Hyderabad. "Before 2009, everyone bought into the India shining story." Such was the euphoria that the company was set to go public in 2008, and planned to have a total of 260 exclusive brand outlets by the end of 2009 and 300 a year later. "Gradually, we went through a learning curve and corrected as per the new market reality," he says. Gini & Jony shelved its IPO plans and now depends heavily on internal accruals for expansion. The number of its exclusive outlets went up from 191 in 2010/11 to 203 in 2011/12, and dropped to 188 in 2012/13.
Lilliput, which had exported to international retailers since 1991, ventured into direct retail in India with its first store in New Delhi in 2003. By September 2011, it had 290 exclusive stores in India and 40 in 10 other countries. It has since shut down international operations, and the number of stores in India had dropped to 240 by 2012.
Sanjeev Narula, Lilliput's Chairman and Managing Director, says: "We have shut down international operations. The focus now is on cash sales to improve cash flow." Lilliput, which is servicing debt of Rs 850 crore, says its entire debt has been restructured by 10 banks.
PwC Associate Director Rashmi Upadhya says funding will remain the biggest challenge for companies in this sector. Accusations of financial irregularities have sent out the wrong signals to investors, making growth harder for these cash-strapped companies, which are already wrestling with huge debts.
Analysts say that all three retailers expanded too quickly to achieve deeper penetration in a nascent market.
PwC's Upadhya says that given the high cost of real estate, even though revenues grew in some cases, revenue per store lagged, and this hurt cash flow. Stretched balance sheets became a breeding ground for financial irregularities.
Ritu Marya, Editor-in-Chief at Franchise India Holdings Ltd, a franchise and retail solutions company and publisher of Retailer magazine, says some companies dabbled in too many things, although they did not have adequate resources and supply chain support. They lacked not only the funds necessary for the aggressive expansion of company-owned and -operated stores, but also the organisational strength to service franchisees.
Besides, these companies could not build brand recall, especially as their products did not stand apart from the offerings in the larger unorganised market. Nor were they able to overcome the personal relationships that mom-and-pop stores had with customers . Giny & Jony's Lakhani says the biggest competition for branded products is the value market.
Before 2009, everyone bought into 'India Shining'. We corrected as per the reality: Anil Lakhani
As if they don't have enough on their hands, the three branded wear companies now have to worry about new rivals entering the market - rivals with deep pockets and a clear strategy. Mahindra Retail Pvt Ltd, part of the $15.9-billion Mahindra Group, launched a venture called Mom & Me in Ahmedabad and Ludhiana in 2009, which quickly gained a foothold in the infant market. Mahindra Retail Managing Director K. Venkataraman says: "We entered with a focus on the mother and child segment and developed relationships with customers so that they grow with us. Women who have used our products during maternity continue to do so in the baby's infant years, followed by toddler years."
Mahindra is not the only threat to the older kids' wear brands. Shoppers Stop has launched its own brand, Carrot, in the segment. Benetton, Pantaloons and Allen Solly have also jumped on to the children's wear bandwagon. So have international luxury brands such as Zara, Gucci, Fendi and Dior. Analysts say this rising tide has helped create brand awareness and clearly segment the market.
"With less time on hand, the family would like to complete its entire apparel shopping under one roof, rather than going ... to an exclusive kids wear store," says Lakhani of Giny & Jony. "These retailers give them the comfort of shopping for everything under the same roof." He says his company plans to concentrate on kids' wear, as that is its area of expertise.
Most companies agree that there is a market for just about every player in India. Home-grown children's wear brands are banking on their expertise in production, sourcing, and design. Lilliput's Narula says: "We have learnt the hard way how this market works, the power of regional designing - what sells in the North does not sell in the South - and how colours work in different markets."
Lessons learned, Lilliput plans to float an IPO. Narula says: "India is the biggest kids' wear market in the world. The Indian consumption story is intact. It's a great opportunity. In the next 10 months, we will hit the market."
