INDIAN APPAREL INDUSTRY

Introduction

Dressing up the Indian consumer is today a challenging task. With plenty of players already on the ready
to wear apparel scene and many others on their way, the options for the customer have multiplied
tremendously. This has made the customer more wary and more demanding. In such a scenario, the type
of merchandise on offer at the retail store and the price range become the chief differentiating
factors among brands. The Indian apparel business is in fact quite peculiar. While there are several large
brands in menswear, there are none in the women or children categories. Retailers have begun developing
smaller vendors to target these segments to offer a complete range of merchandise and better price points.
Although menswear will continue to dominate the apparel business with newer brands pushing prices
down to pull customers, women’s wear and kids wear are expected to be the future action zones.
Recently, retail stores have been diverting all their energies on private labels which have emerged hugely
successful.

Private labels offer a magical combination of higher margins to the retailers along with more attractive
prices to the customer. The apparel market is thus poised for huge and troubled growth in the next few
years. Huge because there is already a growing market and troubled because the competition in the
marketplace is far in excess of the growth. Only players that are able to give the best value for money to
the customers and still manage to be profitable will survive.

Understanding the apparel market is not an easy task as the Indian apparel market is quite complicated.
On the demand side, there are various segments, based on customer types and preferences. Other than
menswear, branded goods haven't really made a significant impact. Fragmented supply is the other
problem. There are very few large producers and only some have a national presence.

A dependence on national brands has the danger of making a commodity out of retailing, which is
something no retailer with national ambitions would want. So the emphasis will be on the kind of
products on offer. Those who build a solid private label or are able to source and develop quality small
labels will have an edge. Driving prices down can also be a winning strategy. Discounters have done well
the world over and could work in the Indian market too.

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Evolution of the Apparel Industry

The Indian apparel industry, though more than a decade old is witnessing some very interesting trends.
The market is shifting from just ready-made shirts to other segments. Though menswear still accounts for
a large portion of the RMG market, there is vast potential in several other categories like women's
western wear and kid’s wear. Other areas of growth are women's ethnic wear, women's undergarments,
maternity wear and school uniforms.

Another trend clearly visible in the industry is the demarcation between the various players in the market
and emerging relationships between the apparel manufacturers and retailers. The apparel market is
divided into four major segments –

• Old Established brands,

• New smaller labels,
• Private labels and
• International labels.

Each of these functions differently. The new players and international firms are already looking at
professional and collaborative relationships with the retailer. This is forcing the older brands to review
their business models and modify their traditional methods to meet the demands of the retailers and the
customer. Players like Colour Plus and Provogue, who are now well established, have changed the rules
of the game with risk regarded as a challenge and not something scary.

One major reason for the shift in the market is the move towards price play. With more and more players,
the options for the consumers have increased substantially. Therefore, price has become a key
differentiating factor for all the second rung brands. There are very few names that appear in the top of
the mind recall for consumers - especially in the menswear segment. Thus, several new brands are just
working on giving better prices to customers.

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The apparel market - mainly menswear - is thus increasingly shifting to the mid-price points.

Low End
Brands

Few Players,
Mid Range
low margins
Brands

Large no. of
players, large
customer
base, normal
margins

High End
Brands

Few players,
small customer
base, higher
margins

This range is, thus, expected to witness maximum activity and there would be many entries and exits
here. In spite of the risk, this is also the highest growing segment in the marketplace as more and more
people shift to RMG. The ultimate winner will, of course, be the consumer who will now get the best
deals and value for money.

Significantly, the private label in retail stores is emerging as a threat to brand manufacturers. The private
label movement has really picked up in India and most of the large retailers have already achieved a
critical mass in private label penetration. Private labels can give as much as 6% extra margin to the
retailers, while offering almost 20% price advantage to the customers as compared to national brands.
With most of the retailers now on an expansion spree, the penetration of private label is only going to
increase.

This is expected to be one more reason for consolidation in the RMG industry. Importantly, most of the
private labels are equally if not more strong in women's and kids' segments. This is mainly because of the

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dearth of well-established brands here. As a result, new brands in these areas would also face competition
on the shop floor from the established brands of the stores.

The apparel market is thus poised for huge and troubled growth in the next few years. Huge because there
is already a growing market and troubled because the competition in the marketplace is far in excess of
the growth. Only players that are able to give the best value for money to the customers and still manage
to be profitable will survive.

Size of the Sector

Apparel Retail in India is estimated to be at Rs.113500 crore which is 2.5% of the nominal GDP. The
figure for the USA stands at 1.8% and that for China is 3%.

MBOs including the textile outlet constitute 98% of the total urban apparel retail outlets in Urban India. It
is evident that today majority of the apparel retail sales are channeled through the MBOs.

Total Organized Retail Sector: Rs 55000 crore

Clothing & Textile Sector: Rs 21400 crore

Share of clothing & textile to the total organized retail sector is 39%

• Food & Grocery – 11%

• Catering – 7%

• Entertainment – 3%

• Jewellery – 3%

• Consumer Electronics – 9%

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Structure of the sector

Total Size of the Sector: Rs 113500 crore

Organized: Rs 21400 crore

Unorganized: Rs 92100 crore

In recent times the Indian menswear market has changed from a strictly made-to order market to a much
more westernized ready-to-wear market.

• Shirts
The shirts hold the largest share (31%) in men’s wear with total of 295 million pieces (88 million pieces
in readymade valued at over Rs 32 billion and 207 million pieces in tailor mades valued at about RS.29
billion).

Branded shirts command 33% of the total shirt’s market amounting to Rs 2400 crore and 63% of the
readymades.

The market size of all kinds of shirts in the organized retail markets at all over India level can be
estimated at Rs.1200 crores.

The shirts market is growing at 8% whereas branded market is growing at 15%. The consumption in
western countries is 60-80 times more than this.

Segments in Branded shirts Growth

Super premium Rs.1,500 onwards 20-25%
Premium Rs.900-1500 18-20%
Upper Middle Rs.650-900 12-15%

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Middle 8-10%
Economy upto Rs.375 12-15%

• Trousers
The readymade trousers market in India is estimated at Rs.3700 crores, with a growth rate of 10%; the
branded sector though is growing at a higher rate of 18%.

The premium segment is growing at a much faster pace of 18-20% because of the insignificant presence
earlier and very low absolute value.

• Suits
The market for suits is growing day by day. The organized and branded market for suits is estimated at 6-
7 lakhs units annually, accounting for over Rs 150-200 crores market for suits annually at retail value.

Branded, merchandise account for less than 30 per cent of the overall domestic market for suits, blazers,
coats and sherwanis. But, after years of semiformal dress codes for men, formalwear was resurging across
the world. Almost all price segments have shown good growth in both volume and value, causing a
significant jump in the market size to 13 per cent. The branded segment in this category showed 17 per
cent growth this year. Since there are a lot of parties happening in this cities, we can find that the
eveningwear is growing day by day.

According to Technopak Research, RTW suits/jackets/blazers account for 15% of the total suiting market
in India but are growing at a higher rate, 12-15% per annum compared to under 10% for suitable fabric.

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Four Major Segments

1. Manufacturers, Established Brands:

These are either old manufacturers or established brands or both. Players in this group include Madura
Garments (Louis Philippe, Van Heusen, Allen Solly, Peter England, Byford), Arvind Mills (Arrow,
Newport, Lee, Wrangler, Flying Machine, Ruggers, Excalibur, Ruf & Tuf), Zodiac, Raymond (Raymond,
Park Avenue, Parx) and Colour Plus. These are mainly the domestic brands, which have established
themselves very firmly in the market and have created substantial customer awareness, resulting in brand
pull, rather than a brand push scenario.

2. Manufacturers, New brands:

As far as new manufacturers are concerned, the retailers rule the roost. These are typically brands that
have established themselves over the last decade and do not have the marketing and distribution power to
push themselves. Thus they depend primarily on the retailer to drive their products rather than relying on
demand pull.

3. Private label:

The private label is fast emerging as a serious player in the entire landscape of apparel retailing. In a strict
sense, although the private label is like any other brand and functions like one in terms of timeframe - the
differentiating feature is that while other brands have to develop platforms to display their merchandise,
there already is an available platform for the private label. Private label, by definition, is the store label,
developed and designed by the store. Internationally, the private label has been associated with stores that
have, over the years, developed a solid brand image in terms of the quality of merchandise they sell. This
assures the customer that anything offered by such stores would be worth considering.

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 4. International labels:

Although FDI in retail is not allowed, a large number of players from the international markets are
already operating in India through the licensing route - Lee, Benetton, Levi's, Lacoste, Nike, Reebok,
Adidas, Mango, Lee Cooper and Pepe among others. International players have recognized the market
potential in India and have used licensing to establish their brands here. What works in favour of these
brands is a highly evolved manufacturing and design structure, which gives them an edge over domestic
labels. Most of these names have a worldwide presence so having a perfectly working set-up is a must for
these companies.

Methods of Retail:

Channel of Distribution:

• Manufacturers, Established Brands:

These players have been in the industry for several years and have established a large distribution
structure. They work through agents and distributors and sometimes (particularly the newer companies)
may deal directly with the stores. However, the old companies like Madura Garments and Arvind Mills
already have a complex distributor-agent model in place and rarely interact with the retailers directly.
This web-like structure has also increased the overall cost of the garment.

• Manufacturers, New brands:

The new players have come up in the last one decade and thus they do not have a simpler distribution
structure. Many of them work through distributors and/or agents. But a whole lot of them also work
directly with larger retailers to give them the benefit of lower costs. Usually, the distribution structure of
these companies is structured more to suit the requirements of their customers than their own
convenience and this is quite different from the way the larger players function.

• International Players:

The international players work through complex distribution structures. Most of them have their own
stores in some countries; then there are licensees and franchisee networks in other regions. Some of them
also have local agents in each of these countries to ensure that the licensees do not miss out on the core
brand values.

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Mark-ups & Margins:

• Manufacturers, Established Brands:

These players work on lower mark-ups and margins for retailers and also have lower credit periods.
While Arvind works on a principle of cash against delivery, the others give 30-45 days credit, with
penalties for delayed payments. Thus these companies exercise substantial power over the retailer. In
several cases, the distributor and agent margins are also carved out from the retailer margins thus
shrinking them further.

• Manufacturers, New brands:

These players typically give much higher mark-ups of 55-60 per cent to the retailers, which results in
margins of 35 to 37.5 per cent. Often, these margins are structured as pure margins without deriving the
distributor and agent shares. Thus the total trade margins sometimes exceed 40-45 per cent for some of
these players if they are following a complex and a multi-layered distribution set-up. Due to this many of
them try to keep costs low and deal directly with the retailers. Also, the simpler and flexible distribution
structure ensures that the retailer gets higher margins.

• Private label:

On an average, the private label margins are 30 to 50 per cent more than the margins provided by the
national brands. The average mark-up provided by national brands varies between 28 to 65 per cent,
which translates into margins of 22 to 39 per cent. On the other hand, retailer private label mark-ups are
as high as 75 to 100 per cent, which means margins of 43 to 50 per cent. This gives a lot of flexibility to
the retailers to undertake promotions and even mark-downs, without affecting the overall margins of the
company. Across the world, successful private labels have tremendously boosted retailer margins.

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 • International Players:

The international players have been known to give reasonable retailer margins. The average margins vary
between 28-40 per cent. A large part of the margin level is determined by how well the player was
established in the market, its distribution set-up and the consumer perception of the product. But what
really affects and limits the penetration of these brands in the domestic market is the high MRPs of these
labels. Of course, there are various reasons for this.

First, is the royalty to be paid to the parent company. This varies between 7-12 per cent of the MRP.
Next, these players have huge administrative costs - international benchmarks in terms of quality of
office, the systems, salary structures and so on are followed, which further increase fixed costs. Players
like Levi's ship in some of their accessories, have imported fixtures in their shops and use expensive
displays - all of which pushes up costs. Finally, sourcing costs are higher as these players not only use
mainly imported goods, but also source through programmed lots in the domestic market. All this results
in 27-41 per cent overhead cost versus just 5-7 per cent for private labels (see table below). The final
price tags are, therefore, often out of reach for many thus limiting the customer base of these brands.

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