After deep discount, value retail the new success mantra

Sanjay Lalbhai’s Megamart, an apparel company owned by Arvind has dropped its discount tag to focus on value retailing concept. This, after it witnessed a drop in profit margins owing to the excise duty imposed on branded garments in 2011

Union Budget. Moreover it also wanted to change peoples’ perception that discount stores sell old stocks at lower prices. Many deep discount chains like The Loot, Koutons, Cantabil and others that flourished before the economic slowdown of 2008, have hit a road-block post-recession due to low consumer sentiment, slow economy, high inflation and rising costs and the excise duty on branded apparel announced in FY 2011 Budget further made their lives difficult. Now they are struggling to remain afloat. In fact, most of them have either shut stores or scaled down operations.

Even Megamart tracking Rs 650 crores revenue this fiscal, saw its operating profits drop from 6 per cent to 2 per cent after the tax hit. It is fortunate to have the backing of Arvind Group. So the company has chalked out a fresh retailing strategy with new logo and fresh merchandise already donning stores in Bangalore. Megamart stores competing against Dubai-based Landmark Group’s Max Value Fashion and Reliance Trends are sporting a value price tag without actually focussing on discount offers anymore.

With regular apparel retailers and brands facing the music due to excise duty, high raw material costs and economic slowdown forcing them to announce heavy and extended discount season, fate of deep discount chains seems to in turmoil. If one was to track the reason why these chains got hit due to the excise duty, it reveals that they had to pay excise duty on actual product costs and not the discounted rate. Suppose a product costs Rs 750 and is sold at a discounted rate of Rs 500 and then the retailer had to pay duty on Rs 750. Because of this, the profit margins were obviously negatively affected.

Megamart began factory outlets 15 years ago selling brands such as Arrow, Flying Machine, Newport, Excalibur, which were either owned by Arvind or for which it had India rights. It developed into a 225-store discount chain with over seven lakh sq. ft. retail space and added exclusive rights for international labels, including Cherokee and Geoffrey Beene. Now Megamart has stopped giving discounts on brands such as Cherokee, Mossimo and Geoffrey Beene but they will be sold under value segment and have fresh stocks. Arrow may not be a part of the new arrangement since it does not belong to the value retail category.

As a part of the new retailing plan, the chain has increased its share of value merchandise at Bangalore stores to 80 per cent from 78 per cent earlier and share of discount merchandise has come down from 22 to 18 per cent. And once the transition is complete, the company expects the share of value merchandise across the stores to go up to 80 per cent. Starting from Karnataka, the renewed brand logo and look will be implemented at its stores in Tamil Nadu, Andhra Pradesh and other parts of the country post Diwali.

According to the recent brokerage report by Nirmal Bang Institutional Equities, the growth momentum for the branded apparel company Arvind has revived in the September 2012 quarter with its branding and retailing division witnessing strong demand. Megamart’s shift to value retailing format is definitely a positive move towards meeting the consumer demand for value for money product range.