Notes on Indian equities, sectors and economy

Cotton County and Sequoia deal

Posted by fairval on April 1, 2008

This is what the website of this co says — Cotton County ‘catches the eye of the customer with attractive offers of heavy discounts’. Hardly the stuff to attact large PE investors.

Sequoia reportedly will invest upto Rs 120 crore in the rapidly growing garment retail business Nahar Retail. Better known by its brand name Cotton County, Nahar Retail attempts to do what very few have managed in India – build a profitable garment brand with an associated retail presence.

To be fair to Nahar Retail, it has covered a lot of ground since its launch. Some reports suggest that it has 400 plus outlets in 300 cities. This is a massive reach. However, in retail, it is one thing to quickly expand reach. It is quite another to build a profitable business. The retailer has to ensure that a majority of the stores break even and become decently profitable. This requires ensuring foot falls, then conversion of those foot falls into sales. Not every attempt succeeds in this.
Arvind Brands tried to build an aggressive retail presence in the about 6-8 years ago. It succeeded for a while, atleast in establishing a large network. But then it rolled back most of that strategy within 2-3 years, which seems to suggest that most of the stores never reached break even.

Not too many other players have attempted the kind of rollout Cotton County is upto. Kewal Kiran Clothing, an older player in the garment business, took perhaps three years to reach the 75 stores mark. In total, the company perhaps reaches out to 60-70 cities at this point through around 100 outlets. Pantaloon Retail which overall has perhaps 1000 stores in around 80 formats, has around 40 stores under the format Pantaloon Fresh Fashions. Raymond has close to 500 outlets, but it has built them over decades. Madura Garments, part of Aditya Birla Nuvo, has close to 250 exclusive brand outlets in 43 cities.

Cotton County thus appears to be betting more aggressively than practically any other player in the garment space. It perhaps is a work-in-progress, atleast if its website is any indication. Its mission is stated thus – ‘We aim to be recognized as the fastest growing retail chain in the Everyday low Pricing business model’. Elsewhere it describes itself as a mass-volume brand. The website says Cotton County ‘catches the eye of the customer with attractive offers of heavy discounts’. This needs some straightening out. Perhaps the company strategy is more coherent that the website.

Building a strong garment brand is not easy, since barriers to entry remain rather low. It is hard to attain product and format differentiation. There is large fragmentation, and competition from small players. Large players have so far not really tried to compete on the price platform. Old established companies like Madura, Arvind and Zodiac, to name a few, are all relatively upmarket in their positioning. Amongst new successful players, Provogue and Wills Lifestyle have also consistently taken premium positioning.

Clearly, a value positioning, with wide reach has theoretical appeal. India after all is about its vast middle class. But garments are aspirational products. A brand positioned on price runs the danger of being perceived as a poor man’s brand. There are quite a few cases of garment brands which have stagnated due to a ‘nowhere’ positioning. While you can perhaps sell a mobile service on price, it may be harder to sell garments on price.

Cotton County may well emerge as India’s largest garment company if it is successful. But how much value will it create? According to reports, Cotton County is currently around Rs 100 crore in sales, and aims to be a Rs 250 crore business by FY09. Madura Garments registered sales of Rs 750 crore in FY07, with PBIT of Rs 4 crore. An Enam report of 2007 valued Madura Garment business at around Rs 500 crore, or less than 1x sales. This is despite strong brands and consistent sales growth. Zodiac has also struggled to beat valuation of 1x sales. Provogue may the only garment brand which has commanded high valuations with some consistency.
Garment remains a tough business to make profits out of. So when large funds bet on textiles despite this, then you know India story is hot.


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