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Customer Centric Approach In the Turnaround at Madura Garments

In January 2002, Vikram Rao was pitch forked into a role he would never have bargained for: to help turn around Madura Garments, one of Indias biggest apparel companies. This was where he had worked for 18 years before moving to Arvind Mills. Then, in 1999, Rao had helped the AV Birla Group buy it from Coats Plc. Less than four years later, Madura was in serious trouble. It had been incurring losses for two years running. Employee morale was down in the dumps and trade partners were up in arms over its high-handedness. And two weeks before Rao took over, Prakash Nedungadi, its highprofile CEO, announced he would quit. Rao couldnt have imagined things would come to such a head. After the takeover, the AV Birla group had focused on retaining employees with salary hikes of 50-60%. Then, it had put a bold strategy in place. The first milestone: grow Maduras top line to Rs. 500 crore by 2001. It was Rao who had brought in the hot-shot marketer Nedungadi from Gillette so that he could use his FMCG experience to execute the strategy. On the face of it, Madura had everything going for it. It had strong brands like Louis Philippe, Van Heusen, Allen Solly and Peter England, and a strong retail franchisee network. And even though operating margins werent more than 11-12%, the firm had free cash flows of about Rs. 37 crore in 1999-2000. After the takeover, it also had the support of AV Birla Group chairman K.M. Birla. He had vetted the strategy himself in a 10-hour session with the Madura team and also promised Maduras senior managers all the support they needed to grow the business. Once the strategizing and the reorganisation was over, Rao had gone back to the Birla headquarters in Mumbai, leaving the operations in the hands of Nedungadi. The start had been promising. In 2000-01, Maduras business grew by a hefty 30% to Rs. 325.5 crore. The following year, however, even though turnover inched up to Rs.356 crore, profitability plunged. From a cash break-even position in 2000-01, Madura went into the red with net losses of Rs. 7.6 crore. And last year turnover fell to Rs.327.5 crore, the level of two years ago, and losses increased to Rs.14.6 crore. The situation was getting out of hand. Amid rife speculation that the group chairman was getting disenchanted with Madura, in January Rao finally flew into Bangalore to try to set things right. His task was cut out; spin Madura back on track.

The initial signs were that the remedy was working. In the first quarter of this year, Maduras topline had grown 14%. Both the company and its trade partners expected the results in the second quarter to be even better. But clearly, even Rao knew that it would take more than just two quarters of sound performance to put an end to the nightmare of the past two years. The big question that the apparel industry is asking was: Why did Maduras Performance go into a free fall? Or, as a former employee put it: How could a company which had a profit before tax of 20% in 1999 end up with a negative 5% margin? The answers lay in the way Maduras growth strategy was conceived and executed. First, the operating team under Nedungadi bet big on growth through a series of initiative. But they then made a crucial mistake: they forgot to derisk the business. So when one of the big bets didnt come off, it simply pulled down the rest of the business with it. Worse, Nedungadi made two huge mistakes: he tried to apply the FMCG business model to apparel, and he ignored the customers need and mindset. Betting On Growth When the Birlas took over Madura in 2000, the garments business was on a roll. There was no reason to think that growth would taper off from the heady 30%. In hindsight, that was a very costly oversight. Immediately after the takeover, the new management put together an ambitious expansion plan. It included forays into new categories like suits and extending the established brands like Allen Solly. Madura also had ambitious plans for Peter England, its mass-market brand. The aim: make peter England a Rs.200 crore brand by 2004 from a Rs. 78 crore brand in 2001-02. It planned to turn brands like Allen Solly, Louis Philippe and Van Heusen into complete lifestyle brands, starting from suits and formal wear to ties, belts, bags and other accessories like shoes. As the only possibly unisex brand in its portfolio, Allen Solly was ready to introduce its own brand of womens wear. The company also entered the crowded denim market with a range of jeans called SE. The objective was to let the customers get a look at the complete product range, rather a wide range under a single brand. As the number of products and brands increased, the company reckoned that to sell them it needed huge retail space. Thats why it planned to grow retail space by 30% every year. It figured that the existing category of stand alone 500 - 1,000 sq. ft multi-brand outlets were inadequate. Neither did they enhance the image of the premium brands, nor did they have the space to stock the entire range. So it planned its own large format (2,000 sq. ft) Planet Fashion stores.

Now all these plans required heavy investments: while the suits factory sucked in about Rs.12 crore-15 crore, the foray into womens wear took another Rs. 3 crore - 4 crore, as did the investment in the accessories. For a while it looked like Madura had pulled it off. In the first year after the Birla takeover, Madura earned an operating profit of Rs.12.5 crore on a turnover of Rs.325 crore. When we took over the business, Madura was only a shirt company; we added several new competencies such as knits, womens wear, blazers and accessories, says Rao. But just a year later everything changed. In February 2001, the government slapped a 16% excise duty on retail price on branded garments. So product prices shot up and Maduras sales fell. Thereafter, following the World Trade Center attacks, the garment export market vanished and exporters dumped stocks in the domestic market. That forced Maduras inventory to pile up and, to move it, the company had to resort to heavy discounting. It also tried to prop up sales by increasing advertising. In 2001-02, ad spends went up almost 30%, or about 14% of revenues. But neither the advertising nor the discounting could deliver. Volumes did increase by 14%, but topline grew by just 7%. And Madura slipped into the red. While the premium brands hardly grew during the last two years, the worst hit was massmarket brand Peter England. This was Nedungadis pet project, where he wanted to try out his FMCG model: big bang mass-media advertising, value for money pricing and distribution through C&F agents. Now Peter England was a value-for-money brand and its buyers were extremely price sensitive. Besides, competition was really intense in this segment as there were several regional brands. Even before the excise duty impact in 2001, Peter England was trying to come to terms with a higher import duty on fabrics. IN 2000, the import duty on fabrics went up from 15% to 35%. A third of the fabric used in Peter England was imported, which allowed Madura to keep its prices low. The combined affect of the excise duty and import duty hike was that shirt prices, which used to range from Rs.100-120 per shirt Seventy percent of Peter Englands merchandise was less than Rs.500, but now the situation reversed, recollected Rao. Nedungadi then took his big gamble. Being a mass-market brand, Peter England was available in about 2,000 outlets, serviced by company appointed distributors who bought the stock from the company on a cash-and-carry basis. To beat the price increase, Madura appointed C&F agents, hoping that it would save 4% central sales tax. Now C&F agents received stocks on a consignment basis. The brand team had made another fatal mistake. They pushed through a mega promotion scheme during the last Diwali (in 2003), offering three shirts for 999, which, in effect, positioned Peter England as a Rs. 300 shirt. Sales did take off. But the assumption that sales

would continue at the same rate even after the scheme was withdrawn was proved wrong. But for several months, manufacturing continued to churn out volumes, even though unsold inventory was building up in the channel. The companys internal systems were not geared to work with two separate kinds of partners distributors and C&F agents. So inventory management became chaotic and stocks piled up. Since it was stuck with piles of old merchandise, Madura could not introduce new designs. The losses on Peter England virtually eliminated all the profit that Madura made on the other three fashion brands, says a senior trade partner. In fact, the debacle lopped off 17% from the company topline last year. Apparently, its volumes fell by a steep 40% in one single year. These problems were compounded by Maduras new strategy for retail. Its strong-arm tactics with trade ended up alienating many channel partners. Several dealers BW spoke to said they had lost faith in the management. Some of them, including a large franchisee of Madura in Hyderabad, A.S. Abdul Khadir and Sons, have jumped ship to competition. The traders complain that Maduras sales managers behaved with them in a high-handed way; thrusting stock upon them telling them not to stock competitors products, and dictating what stock the company will supply to them and when. Of course, the company had its reasons. It chose to rationalise the number of outlets because servicing a wise network was no longer easy. We have research, which show that to select a shirt a consumer sees at least 50 shirts of his choice, which means that the retailer must stock at least 600 shirts of that brand. To show this in a meaningful way, the retailer must have at least 16 sq. ft running space for each brand; if the retailer cannot allot that to a brand, then it is unviable for him, says Vasanth Kumar, Vice-President (Marketing). But the way it handled the communication wasnt up to the mark. To make matters worse, the trade believed that Madura had deliberately opened its own Planet Fashion stores right next to multi-brand outlets to take away business from them. In New Delhi, a Planet Fashion store had come up right next to Snowhite, a large Madura retailer, in Connaught Place. On Bangalores CMH Road, a Planet Fashion store right next door to Smartline. Madura already gets 20% of its sales from Planet Fashion, stores and plans to take it up to 110 stores by the end of next year. There is a clear shift in customers preference for large format stores. Millions of square feet of space will be added in the next 3-4 years. The small stores will lose customers to them, says Kumar. So Planet Fashion was merely picking up those customers who were looking for a better shopping ambience. Yet the strategy has its critics. Arvind Brands president Darshan Mehta says: It is not a good idea to put all the brands under one roof. That way you cannot build a distinct image for any one brand. We had a similar format a few years ago, Spectrum, and in the past we also sold

Arrow and Lee together. But now we dont have multi-brand outlets, In the words of a senior ex-employee: Its a good way to boost top line in the short-term since sales are booked on MRP and not wholesale prices (less by 33%). But in the long term, I am not sure how it will impact brand image and bottom-line. The Rearguard Action By the end on 2002, Rao had already pushed through many changes. He had put in place a new organisational structure, where the premium fashion brands and the mass-market brands were handled separately. The merchandising strategy for each of the brands was being revitalised again. For instance, the Peter England was coming back to its value-for-money moorings, while Louis Philippe was upping the ante on quality. A SAP implementation had ensured that about 400 Peter England retailers were now linked directly to the companys back-end and get stock replenishments daily. Senior managers were asked to travel and meet retailers. As spend has been brought down to realistic levels. Each of the new ventures like Planet Fashion and Womens Wear were paying for itself. Even as the situation crawled back to normal, no one inside Madura is likely to forget the lessons of the last two years in a hurry. (Source: Business world)

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