The Denim Giant Stumbles

The value of inventory lying with the company, according to industry and market sources as well as The Strategist estimates

(on company data), is about Rs 125 crore. This includes processed fabric and finished value-added products.

What happened? Before that let us understand what has not happened at the company. According to the estimates available, Arvind will sell approximately 80 million metres of fabric (includes domestic value-added and plain fabrics as well as exports) for the year 1997-98.

This is an increase of 8.92 per cent over the last year when it sold approximately 74 million metres of fabric. The trouble is that this growth is too less. Its sales forecast and viability required it to function at 80 per cent of the built-up capacity. That meant an output of at least 100 million metres (of 120 million metre build-up) for the operation to be viable.

This did not happen. Industry sources, security analysts and sources close to the company say that Arvinds fabric distributors are sitting over Rs 35 crore worth of inventory, its converters (for Ruf-n-Tuf) have another Rs 18 crore worth of fabric with them, and the company itself has Rs 30 crore worth of Newport stock. The company flatly denies this. Govind Mirchandani, president, garments business division, Arvind Mills, said, We are right on target with Newport.

The increase in capacity was incidentally done for two reasons. One, to maintain the astounding rate of growth that Arvind Mills has had in the last two years as it has gone about creating one market after the other. Two, the impending entry of new players was an equally important reason. Three new entrants Raymond, Mafatlal-Burlington and Century Textile were entering the market with installed capacity of 17.5 million metre.

Over the past five fiscal years, from 1992/93 to 1996-97, Arvinds exports have grown at a CAGR of 23 per cent and its domestic sales (without branded products) at 19 per cent. As can be seen that while export sales had grown at full gallop, the domestic market growth had slowed down to a trot.

To offset this risk, the company got into branded products and that really put the company on a fast track in the domestic market. So much so that in 1996-97 even though Arvinds exports grew by 67 per cent, its domestic sales growth was not bad at all almost 47 per cent. This was largely possible due to launch of branded products. Without brands the companys growth was only 28 per cent. The year before, the domestic rate was 3.5 per cent without brands and 21.3 per cent with them.

In short, the portfolio of branded garments was boosting its volumes significantly, not to mention mention the value which would be even higher. Arvinds average realisation on denim fabric is about Rs 95 per metre while its is between Rs 145-150 per metre on value added products. It also reduced the companys dependence on world markets where demand growth has been uncertain for some time.

With Arvinds brands consuming a significant part of its domestic output (27 per cent in 1996-97) and netting a higher realisation, it was logical to be prepared for an even higher demand in the offing. Since Arvind had single-handedly created and driven markets for all its branded products, this assumption was quite natural.

The simple plan

From sales projections for fiscal 1997-98, which the company made for its branded products and built up capacities for, the domestic sales were to account for almost fifty per cent of the total, with the rest going to exports. This meant almost 50 million metres each for exports and domestic. Of this, its four brands were to consume 20 million metres (both Ruf-n-Tuf and Newport were to achieve Rs 160 crore and Rs 100 crore respectively in sales) and the rest was to come though bulk sales.

This was a very crucial assumption. It meant Arvind was targeting about 50 million metres in the export market in 1997-98. A growth of about 31 per cent over the last year. Good enough? Yes, but its exports had grown by almost 70 per cent in 1996-97.

Effectively, the company had anticipated that 1997-98 would see a slowdown in denim world markets. The fashion forecasts abroad had anyway predicted 1997-98 to be the year of chinos, gabardine and other fabrics in the casual segment.

That leaves the domestic bulk sales of denim fabrics at 30 million metres. In 1996-97, its domestic bulk sales had been approximately 26 million metres and 20 million the year before that. Yet again, Arvind had forecast a lower sales growth for the domestic bulk sales. Not surprising, considering that other local brands were present in the upper and middle segments which were growing at a slow rate of 30 per cent each compared to economy segment.

The fast growth segment was the economy segment of 22 million pairs. And a little over 30 per cent of this segment lay with Newport and Ruf-n-Tuf. And both these brands had grown at awesome rates: Newport at over 100 per cent and Ruf-n-Tuf at over 400 per cent.

The year of weaving dangerously

The export assumption came true almost immediately around April, 1997. According to industry experts, a little after July it started becoming apparent that the demand in the export market was slowing down. Says an exporter, Our sales were 30 per cent lower than expected. No sweat. Arvind with its global capacities could operate at low costs and still compete.

Anyway, the domestic market was always there. A company document about the financial highlights of April-September 1997 stated: The only way of countering such forces would be by catering to more discerning customers abroad. The company believes it has increased its market share in the domestic market to 70 per cent in the first half of 1997-98. In the domestic market, the focus will be on Ruf-n-Tuf and Newport.

With increased capacities in place Arvind could always push more fabric in the domestic market and work the trade. This option turned into necessity after November when three new players entered the market. Raymond entered at the higher end (ring denim) of the market with a capacity of 3-3.5 lakh metre per month. Mafatlal-Burlington JV entered the market with about 5 lakh metre per month. Century Textiles entered with almost 3 lakh metre per month. Both these players were lower down the price segment with open-end denim. While Raymonds fabric was priced at Rs 130-135 per metre, the other two priced their products in Rs 115-95 per metre.

A good part of the capacities (about 60-70 per cent) of these new entrants was initially for the export market. But seeing a slowdown there, exactly the reverse started happening. Says an official of a lower-segment new entrant, Our partners were supposed to buy 60-70 per cent of our capacities. Instead we are exporting only 30 per cent and selling the rest here.

Arvind had never anticipated an entry of this magnitude. Moving quickly, it cut prices on its volume seller the 14.5 oz variety from Rs 105 to Rs 95 in October. The idea was to make the entry unprofitable for the new entrants. The new entrants could not care less. As it is the market scenario was quite desperate; new plants needed to ramp up production and recover at least the variable costs but the export market demand had steadily moved southwards. To top it all, the biggest player in the business was not at all willing to make space and wanted to corner the entire market, says the vice-president at one of the new entrants.

So every single new entrant matched the price cuts. We did not have much to lose anyway, says the vice-president. Says another manufacturer and marketer in the Mumbai market, We operate in the middle and upper segments. The new entrants especially Raymonds were offering higher quality at prices comparable or marginally higher than that of Arvind Mills.

By November end, it was quite clear to Arvind that things were turning out to be worse than expected. To make matters worse its ready-made brands were showing some signs of slowing down. And last years hero Ruf-n-Tuf was having problems.

The going gets Ruf...n...Tuf

In May, Arvind had extended the Ruf-n-Tuf franchise with a new business model. So Ruf-n-Tuf was reaching the hinterland in two ways. One, the older ready-to-stitch (RTS) kits route. Two, the second route had the company supplying the know-how and fabrics to a converter who would then handle the sales and distribution. This new channel was to add almost Rs 100 crore to the Rs 60-crore RTS channel.

Everything seemed on course till August. A little after that, the RTS route started running into rough weather. The tailors were finding it difficult give the machine like finish to the stitched kits. And customers ordinary way of washing denim did not give the fabric the smoothness possible in factory laundromats. Fake brand makers, using inferior quality fabric, but machine finish jeans had started to take the market back from Ruf-n-Tuf.

Cant beat em? Join em

According to a distributor in Karnataka, Arvind decided to battle this in two ways. One, by taking back its unsold kits from the market and putting it in the new converter channel. Two, by altering the fabric used in the ready-made Ruf-n-Tuf. Says a security analyst, To maintain a price line of Rs 299, Arvind lowered the bottom weight of the fabric.

So it used a lighter fabric of 12.5 oz for the initial supply. The customers found Ruf-n-Tuf difficult to differentiate from its imitations and other fakes. After the initial few months push, the sales started to flag off. Instead expected 8.5 lakh pieces month, the brand was now down to about 4 lakh pieces per month.

But the worst bit of news was not yet in.

The redoubtable stumbles

Launched in late 1995, Newport had become a sensation of sorts. It had unlocked the smaller, price-sensitive markets for Arvind. Its sales had grown from Rs 1.05 crore in 1994-95 to Rs 24 crore in 1995-96 and then to Rs 55 crore in 1996-97. It was expected to double its turnover in 1997-98.

It did not, as it turned out. Newport hit the wall in the festival season. As it is, this time the festival season sales were slow for everybody. Newports sales were lower by 30-35 per cent. A lot of reasons for this can be ascribed to what happened at the dealer level and cannibalisation from Ruf-n-Tuf.

First the dealer level. Almost all jeans and garment marketers, due to bad market conditions, started discounting their brands heavily to the trade. Says a marketer, Retailers were desperate for sales this year. So whoever had them on his side got all the trade push. So discounts were given across the board by almost everybody.

The logic was that only the retailer knew the ground-level situation and since advertising budgets were limited, especially in the clamorous Diwali season, trade discounts were cost-effective.

Now Newport has already been lowering its ex-factory price to distributors over the last two years from Rs 299 per piece in 1995-96 to Rs 282 per piece in 1996-97. Further discounts would have been tough given that it costs Arvind approximately Rs 225-230 to manufacture a pair with a gross margin of Rs 15-20. That is too thin a margin on best of days. Moreover, Newport functions on an extremely tight 21-day operating cycle. Such tight working capital management keeps Newport beyond the reach of its competitors. The company had to change this too to keep the volume throughput high.

For the first time the company decided extend 15-30 days credit to its C&F agents. The results being a higher sales over last year, but at a slight interest cost. Newport is expected to do about Rs 75 crore this year. This is 37 per cent higher than last year, but well below the Rs 105-crore target for 1997-98.

The company denied the credit norm relaxation. In a statement Govind Mirchandani said, We have never relaxed and will not relax the credit norms. Trade sources in Mumbai state otherwise.

As for the cannibalisation between Ruf-n-Tuf and Newport, it happened in spite of distinctive channels for the two. Once ready-made route was adopted Newport and Ruf-n-Tuf ended up competing for the same shelf space. Says a garment marketing manager (with company that shares a lot of trade channel with Arvind in fabrics), The effect of Ruf-n-Tuf on Newport was a result of proximity in price points. The two brands do address a large common customer base. So the company decided to protect the Newport franchise by extending it into gaberdine casuals.

All together now...

As 1997 calendar year drew to a close, the already bad situation in the export market took a turn for the worse. The South East Asian manufacturers, with devalued currencies and desperate intentions were offloading stocks that were 40 per cent cheaper than what Indian exporters. Says a Mumbai-based official of a mill which entered the market last year, The best price that an Indian mill can give is about Rs 92-95 per metre. The South East Asians were offering similar quality fabric at Rs 50-55 per metre. How can you compete?

So all the new entrants started pushing their stocks into the Indian market. Century Textiles, which had set up a EOU, till recently was selling in the local market. Ditto Mafatlal-Burlington, which sold 55-60 per cent of its capacities in the domestic market. Raymonds too sold a little over 40 per cent of its capacity in the domestic market.

Arvind, as a result, could not sell more than 20-22 lakh (26 million metre for the year) metre per month. That was well short of the annual target of 30 million metre.

Ruf-n-Tufs pipelines are choked. Industry sources say about three months inventory is stuck and the company has stopped production of Ruf-n-Tuf to free the distribution pipeline.

Newport has done its bit, but there is only so much pressure that it can take. Arvind, meanwhile, is putting the pieces together.