More than a decade after he purchased Madura Garments? men?s apparel brands, Aditya Birla Group chairman Kumar Mangalam Birla on Monday said he has agreed to acquire a majority stake in rival Kishore Biyani?s Pantaloons Format, a company that will house a string of brands which can be sold to women, kids and sportsmen.
The deal showed the compulsive buyer in Birla, which fits into the group?s philosophy to create scale and size. If the purchase of Madura Garments, which owns Louis Philippe, Van Heusen and Allen Solly, was an extension of the group?s traditional spinning and fabric business, Monday?s deal signalled his urge to grow revenues.
?In the late 1990s, the question in our mind was where do you go beyond fabric,? says a group executive. ?The brands owned by Madura Garments were a perfect fit and so we purchased only the brands and not the manufacturing facility.? He cannot be named as he is not authorised to speak to the media. An Aditya Birla Nuvo spokeswoman declined to comment, as it is a silent period for the company until May 15 when the company will announce its results.
The Indian apparel retail industry had total revenues of $33.1 billion in 2011, representing a growth rate of 8% over last year. The industry will grow to $40.6 billion in 2014, at a CAGR of 7% during 2011-14. The group, which earned a major part of revenues by selling cement and aluminium, took a while to understand the consumer facing retail business, unlike making and selling fabrics under Grasim and Graviera suiting brands. ?The brands did not make much headway,? the same executive says. ?It was not converting to top line.?
Apparel business went through an overhaul and brands were classified to suit men?s needs. Louis Philippe was positioned as corporate wear, Van Heusen bracketed at the premium, V., a party wear and Allen Solly, women?s wear brands.
Birla made sure that he insulated Madura Garments to preserve the premium brands identity from the Aditya Birla group which was primarily selling cement and aluminium.
The company has grown four times in 13 years to Rs 2,145 crore, dwarfed by the growth of other group business and that was the concern for Birla.
In December, the group appointed investment banker JM Financial to scout for a company which can give both brands which can be sold to middle income consumers and large volumes. The appointment of the banker gave enough signals to Kishore Biyani, founder and chairman of Pantaloon Retail India, India?s largest retail chain, who was trying to cut down his group?s debt.
Vishal Kampani, JM Financial managing director, drafted a structure which suited both Birla and Biyani. Birla, a volume-driven businessman with a string of brands that will offer him high margins by selling to lower and middle income groups, Biyani, Rs 1,600 crore debt out of his balance sheet.
On Sunday, Kishore and Kampani flew down to Kolkata to meet Birla who was celebrating his grandfather BK Birla?s wedding anniversary. Both shook hands and a win-win deal was signed, giving Pantaloon Retail shareholders a share in a new company owned by Birlas.
?The biggest winner of the deal is Pantaloon Retail India shareholders,? says Vishal Kampani. ?They will own shares in a company with less debt and owned by AV Birla group. Birla will have access to high margin volume brands,? he added.
?Women?s wear and kids wear give margins as high as 30-40%. Madura Garments was lagging in that segment and they stand to get a boost as Pantaloons? strength in women?s clothing, especially ethnic wear, will make the Birlas a complete fashion retailer,? says Amit Gugnani, senior vice president-fashion & apparel, Technopak Advisors.
?In India, there?s a fairly large consumption of mass and mid-mass brands. Pantaloon comes in handy there with its wide range of affordable clothing.?
There are two main challenges ahead. One, managing premium and mass brands under one roof, and two, pricing and brand positions.
?When a company has too many brands, ideally different people should manage each of them,? says Manoj Thomas, assistant professor who teaches strategic management at XLRI, a management school. ?The marketing activities should be kept separate as well. Each brand has its own requirements, cost needs, customer benefits and should be treated as one whole business.?
?If a premium brand is acquiring a mid-level or mass brand, the management has to be separate for both,? says Sunny Banerjea, head of management consulting at KPMG India. ?The team running the business and the one marketing the brand should also be fairly distinct.? His comments are not specific to the companies mentioned in the story.
Price and brand positioning is another challenge. ?The biggest challenge for the new company will be to achieve a parity in pricing and positioning of its brands, says Gugnani from Technopak. ?While most of Madura?s brands are targeted at the premium customer, Pantaloons operates in the mass segment and has a high share of private labels.? A unified positioning will be difficult to achieve,? he added. According to him, the company may end up ?having too many brands?.
Birla will have to move slowly in tinkering with his retail chain. ?I don?t see any big bang change in store design, store operation or product pricing, because Indians are very resistant to change,? says Anil Talreja, partner at consulting firm Deloitte. ?Their strategy will be to inject the Birla values gradually into the newly formed company.?