When Kumar Mangalam Birla, the soft spoken chairman of the Aditya Birla group, took the mike to announce the merger of his fashion businesses, he created quite a stir. "This consolidation," he said, "will create India's largest pure-play fashion and lifestyle company with a strong bouquet of leading fashion brands and retail formats." In an increasingly fashion conscious culture, these words are going to be tracked very closely in the months ahead.
The group has demerged Madura Fashion, its branded apparel retail division, and Madura Lifestyle, the luxury branded apparel retailing arm of Aditya Birla Nuvo and merged it with Pantaloons Fashion & Retail to create Aditya Birla Fashion & Retail. With 1,869 stores and Rs 5400 crore in turnover, the new company is valued at Rs 12,000 crore by its financiers.
The emergence of the new entity has raised expectations all around. At the outset it promises to unlock shareholder value and deliver economies of scale. It also has the potential to counter the onslaught of online and small retailers by housing a range of Indian and imported labels under one roof. The company believes "the merger will allow it to pool the strong consumer insights across both the small box as well as big box retail formats. Second, it allows for an aggregation of a large loyalty customer-base. Third, it results in the largest retail network. Above all, it enhances the ability to leverage the combined strength of the two businesses to expand its presence across fast growing segments."
The new company will have a bouquet of brands across price categories. It will, for instance, retail shirts starting at Rs 599 going up to Rs 3,000. The company says, "In Madura, we own...menswear brands...viz. Louis Phillip and Van Heusen. In Pantaloons, 60 per cent of our sales come from private brands." Madura has premium and mid-market brands and multi-brand stores which sell luxury brands (The Collective). Pantaloons (a business that the group acquired in 2012) sells mid-premium category brands for men, women and children. The company claims, "Madura is among the most profitable fashion players with an ROACE (return on average capital employed) of 70 per cent…and Pantaloons is at an inflexion point..." Together, the businesses will make for a strong balance sheet.
The only other company which has a wide-ranging portfolio of brands is Arvind. "It (Aditya Birla) is covering all the bases by bringing together companies with brands in every segment," says Sanjay Badhe, a Mumbai-based retail consultant who has worked with the Aditya Birla group.
Aditya Birla Fashion and Retail will have 1,869 stores with revenues of Rs 5,290 crore. The consolidation will also capitalise on operational synergies such as in sourcing, real estate and technology. As a result, brand margins are expected to go up from sub-10 per cent to 12.8 per cent in FY-15. The company says, "On a combined basis, Madura and Pantaloons have grown at...40 per cent in the last five years in revenue." "We don't have many billion-dollar fashion companies. The combined entity will grow faster. It will also encourage other groups to become billion-dollar companies," says Arvind Singhal, chairman, Technopak Advisors.
The merger will also help the company counter the threat from e-tailing. Madura Fashion & Lifestyle already has an e-commerce portal called Trendin.com.
The company claims, "With the strength of our brands...we expect to reach out deep to the customers by partnering the large e commerce players and through our own platform."
"The increased size will help tackle competition from e-commerce companies," says Abheek Singhi, senior partner and director, The Boston Consulting Group. Online retail has grown at 56 per cent between 2008 and 2013, according to CRISIL. It estimates it will grow to Rs 50,400 crore by 2015-16, though it is only 2 per cent of organised retail now.
Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities, says, "With the same CEO, CFO, it will help the company to prepare better for the competition."
Not all agree, though. Prashant Agarwal, joint-MD, Wazir Advisors, says the merger is nothing but "balance sheet planning". "Pantaloons was making losses and Madura was making profits. So, on a net level, it becomes a profitable entity. Both sell completely different brands unlike Flipkart and Myntra that sold the same brands. Hence, I do not see synergies on that front," he says.