Goodbye Armani, hello DKNY

THE 15TH FLOOR OFFICE OF DLF Brands in Gurgaon is strewn with samples of colourful home decor articles and other products. Cardboard boxes, sealed and open, are everywhere. While DLF, the parent company, continues to bring down its debt by divesting non-core activities, DLF Brands is on an expansion spree. “We took an office thinking it was good for four to five years, but we ran out of space in six months,” says Timmy Sarna, managing director, DLF Brands. The wall opposite his desk has floor-to-ceiling shelves full of product samples.

The company partners foreign brands and helps them open and operate standalone stores without the help of its parent. Nearly 90% of its store space is in non-DLF properties. It has partnered 11 brands, including Alcott, DKNY, Mothercare, Claire’s, and Sunglass Hut. The swift expansion is the result of a deliberate change in tack: exiting luxury brands and focussing on aspirational, bridge-to-luxury labels. Earlier this year, the company discontinued its three-year-old partnerships with Giorgio Armani and Salvatore Ferragamo. The rethink lifted revenues from Rs 33 crore in FY10 to about Rs 300 crore in FY12. Sarna’s target: Rs 1,000 crore in two years.

Saloni Nangia, president, Technopak, points out that Indian consumers are relatively new to branded goods, so they are more likely to buy bridge-to-luxury (or premium) labels than luxury: “The segment is bound to grow.” By her estimates, bridge brands amount to about Rs 1,000 crore of the Rs 32,000 crore organised apparel market today.

“When we started this company we tried to test the waters in all forms of retail, including hypermarkets and supermarkets. We even tried talking to [French hypermarket chain] Carrefour but realised there’s no guarantee of profitability. So we stuck to branded speciality retailing,” recalls Dipak K. Agarwal, chief executive, DLF Brands. “One option was to handle 20 or 30 luxury brands and wait five to 10 years to achieve scale. But with brands such as Mothercare we got instant scale.” The company has Ebidta margins of 15% to 18% across brands. Sarna asserts that they were unable to achieve such margins when dealing with luxury brands.

However, in FY10, the company had a consolidated loss of Rs 45 crore, so one is compelled to question the possibility of attaining high growth. A look at the competition puts things in perspective. According to the website of close competitor Major Brands, which has tied up with bridge-to-luxury labels such as Promod, Aldo, Charles & Keith, and Nine West, it had 131 stores in seven cities at the end of 2011. At that time, DLF Brands had 72 shops across 11 cities, but now has 120 stores across 15 cities, with more coming up in five to six more cities. While Major Brands was set up in 2001, DLF Brands was incorporated in 2008 and its expansion started only in 2010. “We expect to have 170 stores by the end of this year. We aim to reach 500 stores in about three years,” says Sarna. Major Brands as per policy does not speak to the media, so recent numbers are unknown.

For markets where it’s not viable to have a standalone store for each brand, DLF Brands is launching Ave.neu, a chain of multi-brand outlets selling selected products from its 11 partners. These stores will come in three different formats depending on the neighbourhood or market: The full-size store, somewhat along the lines of a Lifestyle or Shoppers Stop; Ave.neu mart, a factory outlet of sorts; and Ave.neu accessories for smaller markets, selling only accessories. Locations will include Surat, Jaipur, Sonepat, Noida, and Amritsar.

AS PART OF ITS MOVE TOWARDS aspirational brands, the company is working on a multi-channel strategy to distribute products. “One channel is to have 13 or 14 Ave.neu stores by the end of FY13. We have three more opening in September,” says Agarwal. And for products such as Mothercare toiletries, plans are afoot to make them available at stores in every neighbourhood. “We do not want to be simply looked at as a brick-and-mortar-retailer—we want to be seen as a large, lifestyle business house,” says Sarna. He adds that the company will offer its products online by next year, and expects these non-store strategies to boost the top line significantly. In the coming years, the contribution of neighbourhood retail and e-commerce could be as significant as 10% to 15%.

Sarna often draws parallels with Zara of Spain’s Inditex Group, which he says has redefined the bridge-to-luxury space in India. Supporting his argument is a Euromonitor report on apparel that states: “Premium brands will also make their mark further [in India] as foreign direct investment develops over the next few years. Multinational players, including Inditex with its brand Zara, will expand their presence across metros. GAP may also enter India in 2012, whilst Japan’s Uniqlo, by Fast Retailing Co., also plans to enter the local scene.”

But the challenge is that the space is crowded and the overall health of retail poor. “The past six months to a year have been tough for retailers. It has been a challenge for them to keep same-store sales positive,” says Nangia.

But Agarwal brushes this argument aside: “The first industry to be affected by a downturn is retail, but it is also the first to benefit. Economic cycles are a part of life.” In retail, it is important to be clear which segment you want to operate in and then focus on strategies and timeline, he elaborates, adding confidently that “if two years is the timeline for [generating] Rs 1,000 crore, then we are very much on track. We are growing at 80% to 90% [overall].”

Did DLF’s real estate experience help DLF Brands create a new, successful model in retail? Agarwal says no. While the promoters are the same and some resources are shared for human resources, taxation, and infrastructure, the real estate company is not involved in the day-to-day operations of DLF Brands. “It is a business that cannot be run just by financial muscle—this has been our biggest learning. It [retail] has an infinite ability to suck money. We had the option of pumping in money and opening stores everywhere. But we chose to go for operational efficiencies instead,” says Agarwal. “The result is that locations that were not viable two years ago have now started looking viable.” Sarna adds that costs have come down, the supply chain is in place, markdown costs are low, and occupancy costs are under control.

While the company has no fixed investment figure in mind, the expected investment for each Ave.neu store is likely to be between Rs 3 crore and Rs 5 crore. Agarwal says, “The company is completely funded by promoters and it will continue to be so in the near future. The long-term capital mix will be decided as it happens. At this point we are not looking for outside funding.”

Now that the retailer has found its calling in aspirational, mid-level brands and has a multi-brand format in place, the natural progression is to launch a line of its own: “We already have one in-house brand, Pure Home + Living,” says Sarna. It is these products that fill his office. “Home decor is one area where we believe we have the capability and knowledge to have our own format, but we are not going to launch a fashion label at the moment. We believe in our partners and we are their natural brand extensions.” DLF Brands is in the process of finalising a deal with a European beauty brand in the next few months, which Sarna feels will complete the portfolio. “We don’t want too many similar brands cannibalising each other,” he adds.

Sarna’s aim is to take each brand up to 30 to 40 stores across the country, and draws a parallel with China. Retail in China is booming today, while it is just about taking off in India. He feels that in a few years the numbers for India will be as big: “In China someone who is in retail talks about 1,000 stores per brand and here I am only talking about 500 stores across [brands]. But India too can be a huge market.”