PE backed apparel retailers/brands struggle to remain afloat

While on one hand the government is pondering over how to increase foreign investment in India’s retail sector, leading apparel companies are suffering from growing debt pressures and differences with their investors. After Lilliput Kidswear

announced its plans to sell off the company after a fall-out with PE investors TPG and Bain Capital, the second largest India kids’ wear brand Gini & Jony to witnessed its financial investors, including Anil Ambani's Reliance Capital making an exit. The company had gone through corporate debt restructuring (CDR) last year.

According to industry experts, false expectations and rapid unplanned expansion of businesses with initial funding by the investors is leading the apparel firms run into big trouble ahead. PE investors too are not showing interest in the sector following the recent collapse of Lilliput Kidswear and Avigo Capital Partners's troubled buyout of Spykar Jeans.

Gini & Jony’s debt woes have come to the fore at a time when retailers like Koutons and Lilliput are already scouting for takers. According to analysts, this is a classic example of how Indian companies heavily borrow funds from PE investors on board to carry out aggressive expansion plans without keeping the sales target ratio in mind.

India’s apparel market was estimated at $35 billion (around Rs 19,000 crores) in 2011 and expected to grow to $50 billion (over Rs 27,000 crores) by 2016, according to management consultancy Technopak Advisors. The organized apparel retail market in India was pegged at $5.5 billion (Rs 30,338 crores) in 2011 and expected to touch $8 billion (Rs 44,128 crores) by 2016.

Though, globally PE funds backed brands such as J Crew, Gap and other retailers have done very well, high retail costs, lack of knowledge about inventory management and unplanned expansion is making things hard for the companies in India. The trouble for apparel retailers began when they started expanding indiscriminately but without focusing much on the profitability of each store. Private equity cash may have triggered some of the expansions. In fact, a lot of retail apparel companies have made mistakes in choosing locations while trying to quickly add to their store count in order to service the interest of PE investors, feels Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha & Co, a financial consultant. Some experts say most companies had exaggerated their business plans. They were not real. To that extent, it’s a failure of PE firms to not pay much attention to estimates. However, entrepreneurs, on their part, say expansion is essential for capturing the market share as competition is increasing.

Also, only a few apparel brands and retailers have the necessary supply chain experience to manage such rapid growth in an industry where ever-changing fashion can create a huge problem requiring deeply discounted sales or resulting in dead stock, affecting margins. Given the current situation, fund raising will not be easy for apparel retailers now.