October 2019 Edition Apparel October 2019 issue | Page 6

FROM THE PRESIDENT’S DESK
Dear Friends,
It cannot be denied anymore. The Domestic Industry is on a slowdown.
And it is no longer a question of certain sectors. Whether it is Organised Retail or Unorganised,
Large Chains or MBOs, Offline or Online, Value Format or Lifestyle, Bridge to Luxury or
Luxury—all are facing the ‘chill’ to some extent or the other. There could be some variations or
individual exceptions, but it merely boils down to a matter of degree. The fact is that the entire
Industry is facing a challenging period rarely seen before.
There is no point in looking to the Government for relief. The Government will hopefully take the
necessary steps at the macro level. Investment climate, FDI, Cost of finance, etc. but none of
these measures are going to bring about an immediate change in the scenario. The Industry
also has to look within itself for the structural flaws that have been built up. And I believe that
we have as much to blame for our current situation as do external factors.
I am of the firm belief that the Industry has built two factors in its Business Model that are
largely responsible for our current mess:
1. The Discount Culture that has been built in over the last few years
2. The SOR Model that is in force (it is no longer just the LFCs which are following this mode—
even the leading MBOs have started to adopt this.)
Enough has been said about the Discount Culture we have allowed ourselves to be devoured
by. Virtually, nothing sells without some form of a discount today. We may cloak it with fancy
names of Promotions and what not, but that is now not even fooling the public. It is only fooling
ourselves. The fact is that most Brands operate on an annualised rate of 20 per cent to 25 per
cent lower ASP than its stated MRP. Obviously, no normal costing system can absorb such a
discounting level. So we all artificially increase our prices, which make the product unattractive
to the Consumer. Hence lower sales. Hence higher inventory. Hence higher discounts to get
rid of the inventory. Net result? Lower Bottom lines! An amazingly simple case of circular logic if
ever there was one!
The other structural flaw we have built in, perhaps not as obvious as the first one, is the SOR
model. Sale or Return. In the good old days, there was a clear-cut division of responsibility
between the role of a Brand and that of a Retailer. The Brand’s role was to design, develop,
produce the product, and communicate with the consumer. The Retailer’s responsibility to
sell it. Both had their areas of expertise. And individually paid the penalty for errors in their
respective fields.
Today, the game has changed. The SOR model means the Brand is not just responsible for
the development of the products, but also liable for all the errors of judgement regardless of
who makes them. The Brand is not only liable for all the unsold goods—by way of RTVs—but
is also paying an additional amount for the cost of Retail space (over and above the agreed
Margins) in case the sales fall below expected levels—by way of Minimum Guarantee. In other
words, the Brand has to bear the responsibility and cost of any decisions, judgements, or
estimates going wrong, whether they were done by the Brand or the Retailer.
In today’s competitive world, the Brand simply does not have the margins to undertake
the above structure, which results in low or no profitability, which in turn leads to business
being stressed.
I am not suggesting that the above factors are causing the slowdown—but they are certainly
adding to the Industry’s inability to deal with it.
Business slowdowns are a part and parcel of any industry’s life span. It is our Industry’s inability
to cope with it, which is causing a question mark in its future and prospects for survival.
RAHUL MEHTA
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October 2019