Kanvic suggests remedies for sluggish apparel retail

Before the recessionary phase set in from 2008, organized apparel retail in India was witnessing a boom time with most companies carrying out massive expansion plans in metros and small towns.However, as per a recent study by management consulting firm Kanvic

that tracked performance of leading retailers between 2008 and 2013, the organized apparel retail sector has seen a high failure rate. According to the study, companies representing about 30 per cent of the total retail apparel space in 2008 have either shut or sold their businesses. And, retailers accounting for an additional 22 per cent of the space are currently reducing their businesses or actively looking to sell out. Retailers that improved their business performance through the last five years accounted for less than half the retail segment in 2008.

Reasons for

failures

The study points out, that low profitability was a result of two factors: high-risk growth strategies and a leadership crisis. Many apparel retailers developed business models that delivered rapid revenue growth and captured high market share. As a result, steep discounts became popular. However, funding such rapid growth required additional funds, as retailers couldn't generate the necessary cash flow from operations. Consequently, many apparel retailers took on huge debts. Other retailers, on the other hand, pursued the less capital-intensive route of scaling up through franchisees. To quickly sign up many partners, they adopted a minimum-guarantee model. This created a significant downside risk for retailers who had to cut down loss-making stores. The effects of the economic slowdown further affected the high-risk business model.

The second major reason for failure in the segment, was a leadership crisis. Most expected non-stop growth. The only perceived challenge was how to open a large number of stores as fast as possible. Leaders' overconfidence in their capabilities to run businesses, as well as their ability to predict external events added to the pain. Also, many retailers lacked the management bandwidth to effectively run their companies.

Six ways to counter sluggish sales

The Kanvic study suggests six ways to counter these issues. It says, improving business economics is vital. The high cost of rentals has become an excuse for the industry to explain lack of profitability. This has distracted attention from key drivers of profitability in apparel retail -- lowering the cost of goods sold and achieving high sales. Sales can be increased by increasing differentiation, shifting from a simple push to a push-and-pull supply model, employing better markdown management and improving customer engagement.

Second, it is important to get the growth strategy right. So far, most Indian apparel retailers have achieved growth by opening new stores, rather than making existing stores more profitable. It is imperative to find the right balance between store expansion and sales productivity. Third, to prepare themselves for uncertainties, retailers need to stress-test their business models under 'extreme', but probable scenarios, not with a series of minor or incremental tweaks.

Fourth, retailers need to make the right entry decisions. After deciding on a city, retailers must assess the availability of their target customer segment and competition from retailers in the same strategic group. This will reveal micro markets within the city and help decide the right locations. Next, retailers should show boldness in exiting. To succeed, they need to maintain a determined focus on store-level profitability. The ability to quickly exit a loss-making position applies to product categories, as well as stores.

And lastly, apparel retailers have to develop a performance dashboard that incorporates all aspects. This will give retail leaders immediate visibility of company performance and allow them to track changes on a continuous basis, highlighting potential problems long before these become critical.