Fashion's high priest

HE'S UNLIKELY THE KIND OF FASHION, but then, Kishore Biyani is used to being many things unlikely. Starting off as fabric seller, ending up as retail tycoon; a private equity investor; a business incubator; KB, as he is popularly known, has been there, done that. He was gaining a name in fashion retail, but in 2012 he sold his flagship Pantaloon brand to Kumar Mangalam Birla to pay the debts his Future Group had incurred. That, it was then widely believed, meant Biyani bowing out of fashion. Those in retail—including some who worked at Pantaloon—say they assumed Biyani would stick to retail and investing. Which he has. By investing in fashion retail.

Sure, Biyani’s not India’s Amancio Ortega (the world’s third-richest man and reclusive owner of Spanish fashion chain Zara). But he’s making a mark on Main Street by investing in promising mass premium brands such as Anita Dongre’s AND, Meena Bindra’s Biba, and Priyadarshini Rao’s Mineral. None of these has the snob value of say a Rohit Bal or Sabyasachi, but these are companies that are selling to much of India. And Biyani has more than a finger in each—he’s investor-cum-advisor-cum-incubator, dispensing money and advice in equal measure. And making phenomenal returns for himself, and the companies he’s invested in.

After Biyani’s investment of Rs 42 crore in 2007, Biba’s top line grew five times, from Rs 43 crore to Rs 210 crore in 2013. When Biyani made his exit last year, he walked away with Rs 235 crore. The AND exit was even more lucrative, where Rs 6 crore invested in 2008 fetched Rs 145 crore in 2013. (See table).Evidently, fashion is, shall we say, in fashion.

Global consulting major Boston Consulting Group predicts that spending on apparel and fashion is likely to grow 3.8 times to $225 billion (Rs 1,327 lakh crore) by 2020. Biyani doesn’t seem particularly surprised at this kind of growth. “We invest in categories that promise to be big tomorrow,” he says, when asked about his successful exits.

Biyani says the fashion cycle in India is just about beginning. “Even five years back, we did not see Rs 100 crore fashion brands.” Today, there are 27, of which he has invested in 10, which includes AND and Biba.

Biyani channels all PE investments through group company Future Lifestyles Fashion, one of the three listed companies of the Future Group. The other two are Future Retail and Future Consumer Enterprise. Future Lifestyles doesn’t disclose the number of companies that Biyani has invested in, nor the total amount invested. It does not disclose the value of individual investments either. According to market estimates, since he began playing venture capitalist around seven years back, he’d have invested in 12 companies or so.

C.P. Toshniwal, executive director and CFO, Future Lifestyles Fashion, says that the thinking is to invest between Rs 20 crore and Rs 25 crore every year across four to five fashion brands. The idea is to pick up promising brands and accelerate their growth. Biyani’s track record of exits so far shows that he is perhaps thinking the same way that classic private equity firms do: stay invested for seven years or so.

In fashion, it’s important to come in early. Even at gross margins of 50%, there are high overheads in the early stages, and a season failure or general slowdown can kill a young brand. “The initial setup costs and ad spends go out of pocket while revenues and profits come in later,” says Sharmila Nadkarni, a former Future Group hand, who started Re-Source World Exim, the company that owns the Desi Belle label. And this is when Biyani steps in. “We have the distribution to reach a scale after which the brands can look at opening their exclusive stores,” says Toshniwal.

The target companies are generally picked from the brands sold in the Future Group’s stores. Biyani tracks those that are popular, then studies the company and its founders (many of whom are former employees of the group). Often, the founders approach him, seeking investments.

In mid-2013, Biyani invested undisclosed amounts in two small businesses—KFC Shoemaker, which owns footwear brand Tresmode, and fashion apparel company Mineral. He has also picked up stakes in two more fashion companies, Eclat Lifestyle which owns the Famozi brand of footwear, and Nadkarni’s Re-Source World Exim.

KAPIL MAHTANI, CEO of KFC Shoemaker, says that when he was seeking funding, he wanted “meaningful, not plain, capital”. Essentially, he needed the cash, but also wanted direction on how to spend it best. And that’s what he thought Biyani would provide. “Who else if not Biyani? That was the question we tried to find an answer to after coming back from a meeting with him,” says Mahtani.

Future Group has had a successful tieup with British footwear brand Clarks, says Mahtani, and this convinced him that Biyani knew how to handle the industry. Clarks had entered India on its own in 2005, but could make little headway till it entered into a joint venture with Future. Mahtani is convinced that a large part of Clark’s success is due to Biyani. “An international investor may just not be able to relate [to the specific needs and demands of India],” he adds.

Then there’s Nadkarni, who says she didn’t want funding but rather someone who shared her vision. She gave a 27.5% stake in Re-Source to Future Lifestyles in early January. “As a startup, I was looking for a partner who could help me grow my business and correct my mistakes.”

Earlier, in December 2013, Future acquired 11% in New Delhi-based Eclat Lifestyle, which owns footwear label Famozi. Like Mahtani, Puneet Khanna, Eclat’s founder and director, needed capital: “Financial support was one aspect but more important was to bring in investors who understand brands and can help us scale.”

Biyani’s stake in Eclat cost him Rs 55 lakh, a deal which valued it at Rs 5 crore. Investors and retailers, who asked not to be identified, feel that Khanna diluted at a throwaway price. If so, this wasn’t a first. Five years earlier, AND accepted a 20% discount on the valuation other investors had come up with at that point. “We did not see Biyani as a pure private equity player,” says Mukesh Sawlani, director of AND. He may have unknowingly set a precedent. Khanna says, “We saw how AND and Biba became Rs 100 crore-plus brands. That convinced us.”

Think of it as the Biyani way. Sometimes he throws out a seemingly random number without consulting his team. Since the companies are eager to have him aboard, much like disciples waiting for a guru, they often accept his figure, though it may seem absurdly low. Equally, says Toshniwal, “there are cases when KB gets off the deal because the investee’s valuations seem unrealistic”.

Sometimes there are other constraints as well. Toshinwal says that since there’s little historic data on companies like Eclat, valuations are often not based on established methods.

Once invested, the seeming nonchalance continues even in reviews. For an investor, Biyani shows little interest in the numbers. Rather, he asks probing questions about customer profile, brand identity, store performance, and the like. Questions like “who is your customer?”, or, “why does he buy your products?”, are common. “He discusses what to do with the brand, scalability, etc,” says Mahtani.

Biyani sees his investments through the lens of a first-generation entrepreneur, and not that of a fund manager. Thus his emphasis on getting the idea right, knowing the customer, gunning for scale and managing costs. Get these right and the numbers will follow. Remember, he is the person who recast India’s consuming classes when he was trying to figure out who his consumers should be. Instead of the traditional classification based on income and education, he applied commonly used social metrics like those who are served, those who serve, etc.

Among the investee companies, Biyani’s diktats are legion. One such: Don’t position your brand too sharply. Mineral’s co-founder and CEO Jaydeep Shetty, who worked at Future before setting out on his own, says Biyani believes that it is better to have a diffused brand position, leaving room for course correction. “The sharpening can happen only after you understand your customer very clearly,” adds Biyani.

Shetty took this to heart. Initially, he had positioned Mineral as a premium brand that was priced 40% to 50% higher than AND. After Biyani’s entry, the differential was reduced to 10% to 15%.

Another Biyani diktat: A brand should have aspirational value. Again, with Mineral, he asked co-founder (and Shetty’s wife) Priyadarshini Rao about her work as a fashion designer and the profile of her clients. After that he suggested that Mineral carry the line, ‘By Priyadarshini Rao’. His insight: Customers should feel they are buying designer wear, says Toshniwal.

Then, the retailing nous that Biyani brings is invaluable—the investee companies do not have to reinvent the wheel. Mahtani says that this is a huge plus. When Biyani meets folks like him, he chats about inventory, plans to liquidate unsold stock, etc. That kind of interest is one of the reasons Eclat’s Khanna is excited to be a part of Biyani’s portfolio. “We are getting to learn the tricks of the trade,” he says with a laugh.

One such: sheer aggression. For Re-Source’s Nadkarni, a five-year growth plan had to be met in three. “Kishoreji doesn’t let you think small—he dreams big on your behalf.”
As a startup, Mineral’s Shetty had planned to see his outfit clock revenue of Rs 20 crore by 2018. Then came Biyani, and that target is Rs 100 crore today. “I was being conservative, but he felt that we have the right ingredients to reach that ambitious figure,” says Shetty. Mahtani of KFC Shoemaker admits that after the investment, he jacked up targets, “and with the right insights, the chances of meeting those are high.”

Like any smart investor, Biyani is clearly pushing these companies to take bigger risks. But the objective is scale, something he’s always believed in. Here, specifically, the target is the Rs 100 crore mark, which keeps coming back in all interviews with Future executives. Toshniwal explains that the sooner that figure is reached, the better it is for long-term stability.

There’s also a tangible benefit to being in Biyani’s portfolio: access. AND, for instance, found the Future Group association invaluable to get space in upcoming malls—at discounted rates. “Piggybacking on Future in many cases ensured availability and saving of as much as 20% on rentals,” says Sawlani. That’s substantial, given that rentals on high street account for over 20% of stores’ overheads here, compared to less than 8% in other developed markets.

Not that Biyani intervenes. “‘Let’s keep investment and commercials at arm’s length,’ he always told me,” says Sawlani, when asked if AND got preferential treatment at Future Group stores. Until Future Group divested out of Pantaloon, AND was never allowed to sell the Global Desi line at Pantaloon stores. “They feared that Global Desi could cannibalise other brands in Pantaloon,” says Sawlani. And when he asked Biyani to step in, he was told to deal with the CEO, who was given free rein. “There was no concession,” adds Sawlani.

Maintaining his investee companies separate from his retail arm is something Biyani continues to do. “But he does play referee,” says Toshniwal, explaining that Biyani would ensure that the brand (of an investee company) got the right adjacency—if it was sold in a Future store. That means the brand would be placed where it catches eyes, and also where it can be compared with peers.

But here’s the thing. Though Biyani has very strong opinions about the way he designs and drives his business, he has never vetoed investee companies’ plans, even if he doesn’t agree with them. “Biyani did not believe that franchising was the right way to grow fashion brands, but we disagreed and went ahead,” says Sawlani. “He could have blocked the decision at the board but he didn’t.” Shetty feels this is because Biyani sees himself as a partner and mentor. “He is just there for you.”

ALL THIS GOES back to Biyani’s strong foundation in retail. He insists that the companies he invests in must also have a strong retail strategy. His insight into that business means he often makes recommendations that are counterintuitive. Consider how he deals with exclusive stores. Most, if not all, high-street fashion stores run at minimal profit; often, they make losses. A typical PE investor will insist that such stores be closed immediately; for Biyani, the expense of a loss-making high-street store is “akin to marketing expenditure”, says Toshniwal. Biyani studies the financials with and without the loss-making stores, and then gives his recommendations.

The team at Future, under Biyani, advises investee companies about everything retail—from location to pricing. When Mahtani wanted to open his first store in Chennai, neither he nor his team “had any exposure to the city”. Biyani stepped in and this January Tresmode opened its first exclusive store in T. Nagar, Chennai’s shopping hub.

Shetty says he benefited most from Biyani’s advice on presenting the brand well on the shop floor. “I must admit that we were not very good at it before we got lessons from the Central team,” says Shetty. (Central is one of the Future Group’s fashion retail arms.)

Biyani manages to ensure all this with just two or three review meetings a year. “He invests in people who are passionate about their business, and are malleable and mentorable,” says Shetty, who took just 15 minutes to finalise the commercial terms of the investment in June last year.

A retailer who has seen Biyani grow, says that the Future investments in Mineral and Desi Belle were merely replacements for AND and Biba. Not everybody agrees. “Biyani is now investing in younger brands, which would have a connect with younger customer profiles,” says Shetty, who raised an undisclosed amount in June last year from Future Group for 37% of Mineral.

He adds that according to Biyani’s understanding of customer behaviour, a loyal customer stays with a brand for 15 years. Both Biba and AND have been around since the ’90s, and perhaps Biyani felt that “the next round of consumers would want to be associated with a younger brand”.

Biyani has managed to make his mark on fashion retail long after the market thought he’d bowed out. “We don’t look at the investments from the PE viewpoint until we are at the exit stage,” he says. So, it looks as if he is staying.