“Phoenixes burst into flame when it is time for them to die and are reborn from the ashes”

                                                                - Professor Dumbledore, Harry Potter Series.

As Professor Dumbledore said Phoenixes are reborn from their ashes. They have been used as a symbol of resurgence quite often. A symbol of old order destroying and a new one rising from its ashes. Quite fascinating for the spectator but definitely chaotic for the Phoenix. 

Speaking of chaos, the last couple of years have been nothing short of that. We as part of the branded apparel industry have certainly felt every part of that. However, if one casts their mind back and reflects on the last few years, the insufficiency of the existing business model has been increasingly getting exposed. With each disruption, be it GST implementation or demonetization the wear and tear have gotten more pronounced. But the writing has been on the wall for some time that the current business model is well past its use-by date. 

The existing model has served the industry quite well and delivered superlative growth for the companies. The reason for its lack of relevance can be understood by understanding how the industry has shaped up over the years. We will travel through eras and examine what shaped consumption and how companies responded.

Evolution of the apparel industry

Stage 1: Early 1990s to end of the decade.

Ready to stitch was ruling the roost.

Ready-made garments were a novelty and consumer adoption of ready-made was a hot topic. Slowly the brands started getting seeded in the country. Most of the prominent brands (with a few notable exceptions) were “born” during the period. Multi-brand outlets were the only channels where there was a salesman between the product and the consumer.

The consumer usage occasions were very well defined. Formals were the dress code to the office for most people and casual was something that one didn’t wear to work.

Stage 2: Early 2000s to say 2014

The era of brand proliferation. 

Indian consumerism was flying high thanks to the wings of aspirations that had been unleashed. Usage occasions multiplied, dressing norms in the offices started relaxing and we saw the stratification of wardrobe There were now formal, casuals, jeanswear, clubwear, party wear, etc. What this explosion of demand led to –

1. Brands expanding through exclusive outlets (certainly with enhanced range and demand feasibility was there)
2. Growth of departmental stores 
3. Heightened activities attracted more players and there were new launches, international brands coming to the country, and multiple brand extensions.

This is the period where brands discovered the now common trade show-based selling model.

The year broke into 2 seasons -Spring-Summer (Feb-June) and Autumn-Winter (Aug- Dec). For each season the brand would showcase its collection 6 months ahead of the season. (which meant that the design and product team worked on the collection 6 months prior. That made a mind-to-market cycle of 12 months). The customers would place orders and the brand would produce and fulfill those orders. It was a convenient departure from the sell and make model. Allowed brands to lock in large revenues against securities of large orders. Life was all about executing trade shows well. It worked very well as creative booking incentives started getting thrown at retailers’ basis the quantities purchased and trade show became the be-all and end-all of brand’s existence.

Stage 3: Beyond 2014 to now

A real consequence of the frenzy of the last period was that the difference between brands started to diminish and each started looking like the other. This was also a period where e-commerce started making a dent in the consumption space.

The heightened competition and need for growth resulted in – higher discount led sales (End of season sales days have been steadily going up), cost of occupancy (rentals have been up), and an increase in input cost (through currency fluctuation or taxation). The sum total of these factors has led to a massive profit squeeze across companies. No wonder there are a handful of brands in the industry with sizeable scale (greater than 400 crs) greater than 10% EBITDA. The overall profitability in the value chain has been steadily diminishing.

In terms of the key reasons for the model not working are as below-

1. Peak of working capital requirement and Cash shortages: It is because the companies want to supply the trade show orders as early as possible. However, consumer sales happen in a phased manner as a result there is always peaking of inventory. The supply happening in bulk means the debtor also peaks. As a result, the gross working capital in the business is always very high. In any kind of disruption therefore the companies across the board find a lot of cash tied up either in inventory or debtors.
2. Volatility in Sales and consumer preference: The consumer preference and pathway to purchase has been perhaps fundamentally altered. There are increased volatilities that impact consumption. The full price period (where merchandise sells without any promos or discounts) is hardly existent. The number of days for which the End of season sale is on has touched close to 80 days for the last few seasons. As a result of this, the channels with outright terms are also beginning to behave like consignment channels where the brand has inventory liability. This results in either higher stock returns or higher discounts ultimately killing the profitability.

In sum, the existing model has run out of its applicability. Its high degree of sensitivity to macroeconomic changes and its high reaction time can push companies out of business.

RELATED TOPICS:#Apparel