Bata's policy of capacity underutilisation and outsourcing some the best-selling, low-margin brands was one of the major reasons for its downfall. The company has learnt its lesson, and is trying to make amends. A report.
Bata India Ltd, an associate of the Toronto-based Bata Shoe Organisation (BSO) and India's largest shoe company, has recorded one of the swiftest turnarounds in Indian corporate history during the last 15 months and claims to have increased sales by 12 per cent in 1996 after closing the previous year with a staggering Rs 42 crore loss.
In the first half of the current fiscal, the company has recorded an operating profit of Rs 15 lakh and hopes to end the current financial year with a net profit of Rs 2 crore.
But despite its lacklustre performance over the last four years, Bata for several years on the trot now has remained one of the three most popular brands in the country. The two other brands, which can rival Bata in popularity in India are Colgate and Philips. And that is primarily why Nike, the American shoe behemoth, decided to enter into a marketing tie-up with Bata, and the Nike shoes will now be available at select Bata retail outlets.
The company's inherent strength, says an analyst, lies in the continued interest that its parent company has shown in its Indian associate. It has not only lent $10 million to Bata India in times of severe funds crisis, but has also agreed to convert the loan portion into equity. Thus, the parent's stake would remain at 51 per cent after the rights issue.
The cash flow situation of the company is also expected to improve with considerably after the Rs 77 crore rights issue which the company has priced at a premium of Rs 20. The company, during the current fiscal would also receive the remaining portion of Rs 19 crore from the sale of its corporate headquarters in Calcutta.
The Bata scrip moved from an average of Rs 42 in January to Rs 56 in April. While it hovered between Rs 50 - Rs 56 over the next four months, it depreciated to Rs 37 in October, Rs 42 in November and Rs 44 in December (see chart).
Bata's earnings per share over the last four years has been Rs (16.40) in 1995, Rs 0.38 in 1994, Rs 7.75 in 1993, Rs (8.16) in 1992. The company paid dividend only once in the last four years (in 1993 of 17.5 per cent) and does not promise any dividend in 1997. Return on equity over the last four years has not been too attractive for investors either.
In 1995, it stood at (72.32) {negative} per cent, while in 1994 it was 0.97 per cent, 20.04 per cent in 1993 and (24.29) per cent in 1992.
After enjoying a virtual monopoly in the Indian shoe industry, with brands like North Star, Naughty Boy and Ballerina that had become household names, Bata was unable to capitalise on the oppurtunities created by liberalisation and instead its performance went on a decline post-1991.
Bata's setback in the post-liberalisation period can be attributed to a conscious shift in strategy from a producer of shoes for the mass segment to concentration on low-volume high-margin brands taken by its then managing director Pradip K Dutt.
The company went into a spree of tie-ups and for the first time Indian consumers became familiar with a range of European brands including Hush Puppies, Marie Claire and Littlewoods, among others. The company also went into premium sportswear, manufactured by outside contractors.
Nothing was wrong with the strategy as such. A recent example is that of the Manu Chhabria-controlled Dunlop India which, to battle against serious resource constraint, has adopted a similar policy of cutting down on volumes and concentrating more on premium products like aero-tyres and value-added industrial rubber products with great success.
The strategy flopped as liberalisation did not create a middle class with a high purchasing capacity as fast as the company would have liked. At the same time, it lost crucial market share to a host of mid-sized domestic shoe companies like Phoenix, Action, Metro, Mesco's, etc, led by new generation entrepreneurs that emerged with liberalisation.
The company's performance in terms of net sales or profit after tax did not even come close to the projected figures during the 1992-1995 period. Against projected net sales of Rs 417.4 crore for 1992, the company recorded sales of only Rs 384.5 crore. In 1993, net sales were Rs 462.8 crore against a projected figure of Rs 519.6 crore.
In 1994, sales were Rs 484.1 crore against Rs 660.2 crore projected. In the last fiscal, against a projected figure of Rs 810.6 crore, actual sales were Rs 519.2 crore.
BSO supremo Thomas Bata was soon to realise that in the three years following liberalisation, the company had lost a major portion of the mass market to competitors and that the new strategy failed totally to yield the results Dutt had promised.
In mid-1995, Dutt, finance director O P Bhutani, Amitava Ray (former India Foils managing director who was pitted to be Dutt's successor) and several other key personnel left the company for personal reasons.
William Keith Weston, then a director on the board, was appointed as the new managing director. Weston paid immediate attention towards stringent cost cutting measures and was quick to change the company's product profile, price placement, marketing and sales strategies.
During October 1995, Weston introduced the low-margin Superhit Hungama range and the Bubblegummer range for kids and scrapped the much-hyped tie up with Addidas. Weston also decided to shed its huge management cadre and after lucrative severance package was offered around 250 of the 1800-plus executives left the company.
This paid immediate results: after a Rs 41.03 crore first half loss in 1995, Bata finished the year with a loss of Rs 42.16 crore.
The bottomline was improved with the company's decision to dispose its corporate headquarters in Calcutta to a city-based engineering company for a consideration of Rs 19 crore.
Admits an official spokesperson: We have learned the hard way. Our focus will be on positioning Bata yet again as a producer of shoes for the masses.
Marketing experts say that much of misfortunes can also be attributed to the company policy of underutilisation of capacity and outsourcing some the best selling low-margin brands. As a result, quality suffered.
But now, say company sources, all these are a thing of the past. The focus is as much on quality as on high volumes.
The company has come out with a Rs 77.14 crore 1:1 rights issue, at a premium of Rs 20, primarily to retire high-cost debts and augment its working capital requirement. Interest paid by Bata increased to Rs 18.85 crore in 1995 against Rs 13.56 crore in 1994. The debt-equity ratio in 1995 was 1.89.
The parent Bata (BN) BV of Netherlands in March this year had extended a $10 million interest free loan (Rs 34.35 crore). This amount will be adjusted with against the amount payable by the parent company's towards their rights entitlement in the current rights issue. The issue closes on January 17.
The current issue is Bata's second one after a rights-cum-preferential issue in 1993. The Rs 48 crore issue was used to fund a new footwear EOU at Hosur in Tamil Nadu, modernisation of its production units and expansion and upgradation of its retail network.
The company has also been exporting footwear to Germany, Australia, USA, UK, Holland, Denmark, New Zealand, France and Canada. The f.o.b value of exports in 1995 was Rs 22.72 crore against Rs 17.92 crore in 1994.
Bata has a network of over 1,000 retail outlets, 600 franchisees, with over 200 wholesalers servicing 10,000 retail outlets all over the country. With a shift in the company's marketing strategy premium brands will now only be available at select retail outlets.
