TCS-Smart ManagerCase Study and Smart Insights provided by R Seshadri – MD – Anugrah Madison (Dec 01, 2009) Another beginning A high-end, 100% export-oriented, ready-made garments company, adversely hit by global recession is planning to enter markets in rural India, launching a new brand. What would be the best marketing model for the company’s foray into branded western and sportswear for semi-urban and rural India? ulthak, a small non-descript village in Jalaun District, Uttar Pradesh. Like most villages across the country, this village too had erratic power supply. There had been no electricity for the last two days. However at Umed Baug, the village’s largest house, the solar panels installed on the rooftops powered the ceiling fans. Built in the 19th century, the house also had a thick cover of trees surrounding it. The tree cover along with the large doorways and khas-grass chick covered windows ensured that the house was cool and well ventilated throughout the day. Bashir Abdhulla was sitting in a traditional aaram-kursi (an easy chair with extendable arm rests) in the veranda and watching the sun set behind the dense orchard. This was his favorite routine of the day– to watch the sun, which was still above the trees, descend slowly, disappearing bit-by-bit into the trees and finally being swallowed by the creeping shadows of dusk and the night to follow. Bashir was a man of many shades – head of the prestigious Abdhulla family; successful entrepreneur and proprietor of the ‘Abdhulla’s Knot’ store chain; a disciplined leader; a loving husband; a proud father; and a doting grandfather. He had experienced all the seasons of life. So, at the time of the global recession, even a 60% dip in business volumes did not perturb him much. He could well afford to sit back on his greatgrandfather’s aaram-kursi, watch the sun go down and enjoy his evening for the umpteenth time. “Asif many a time reminds me of Abba,” spoke Bashir. “And people say you remind them of Bade Abdhulla,” replied Ismat, his wife, passing him a cup of tea. Bashir took the cup and smiled knowingly. He knew what she meant. He was, of course, very much like his late grandfather, who was known as an erudite, principled, straight, no-nonsense and iconic man. His father, the late Sajid Abdhulla, had been more spontaneous, unconventional, outgoing and witty; as was his son, Asif. “Look at Asif ’s guts. He deliberately gave me a folder titled ‘Branded Lungi’! I was simply amazed at the title. And when I read the contents of the folder, I was surprised even further. The brat had used a misleading title. Though called ‘Branded Lungi’, the proposal is really about diversifying into branded readymade western and sportswear.” Ismat smiled and remarked, “The new district magistrate is so young, must be still in his late twenties. He took a great interest in understanding how we preserved the water table in the thirty-two villages.” “Yes, his first posting as a district magistrate, and they sent him to a place that has been drought hit for the last four years!” said Bashir without looking away from the sun, which was now a quarter into the trees. “But still we have always had water,” Ismat made this rather symbolic statement, and Bashir took note. He smiled and kept watching the descending sun. Indeed, Ismat was correct. The Abdhullas always had their water, irrespective of any drought. However, Bashir’s mind was in turmoil. How could the new venture possibly work? Inadequate infrastructure, poor law and order, illiteracy, combined with issues such as poverty, caste differences, superstitions and above all, the mindsets. And he had not even considered credit worthiness! Would it be worth the effort? A new brand, a new market, a new distribution chain, a new business altogether – too many blanks to be filled! These were some of the thoughts circulating in Bashir’s mind. But then, when was it that there were any fewer blanks to be filled anyway? The Abdhullas had always been unconventional and innovative. It was perhaps this streak, which had kept them ahead of the rest. They made their riches from faraway lands and yet always returned to serve the land of their birth. They had in a subtle way taken their people along as they progressed over the last fifty years, despite challenges and severe opposition. However, this time around, Bashir felt that Asif ’s proposal was maybe just a little too big to bite. He had to make a decision. Nausheen, Bashir’s daughter, who was among the first batch of women officers to be inducted in the Indian Navy, wanted to go ahead. So did Bashir’s cousin, the wrestling champion, former Olympian, Asian games gold medalist and now a coach who was lovingly called Pehlwan Abdhulla. Ismat who had worked over the years to create women entrepreneur groups with 350 odd members all around Jalaun was not sure, but at the same time knew that the Abdhullas had a much bigger responsibility than merely running a profitable business. Knowingly or unknowingly, willingly or unwillingly, they had become the backbone for thousands of known and unknown households. All these people were dependent on the Abdhullas for their livelihood. As a businessman, Bashir had no problems saying that he couldn’t help contracting his business footprint since the times were such. But as a father and head of the extended family, he too, somewhere agreed with his son and the rest that he could not simply throw up his hands and say nothing could be done because there was a recession in the developed world. “Fine!” he said, eventually, “let’s plan”. He turned his head to meet the beautiful eyes that had watched him for over 37 years. Both smiled. The Abdhullas of jalaun The history of the Abdhullas dated back four centuries. Their ancestors were artisans of great repute. It was once said that the land between the two rivers, Tamana and Kejva, was famous for three things – the dacoits of Singhal, prolonged spells of droughts and the Abdhullas of Jalaun. Their knitting and embroidery work was traded from China in the east to Arabia in the west. The Nawabs of Oudh, the Rajahs of Gwalior, the Peshwas of Deccan and the Rajputanas, had all been their customers at one or the other time. It was often recalled that the coronation outfit of Ramjo Roa Sheswa was made by the Abdhullas. As the influence of the European nations increased in the early and mid-nineteenth centuries, the Abdhullas’ traditional way of doing business became obsolete. They began losing market to new fashions. Mass production from modern mills started taking over. During the uprising of 1857, the Abdhullas fought to eliminate the British and claim back their business territory. Both the national and the personal battle were lost. For the next thirty years, the family was drowned in drudgery. Persistent spells of drought had also dried out the land, leading to famine. In the 1890s, Vasahat Abdhulla, then 31, left Jalaun against the wishes of the entire clan. Vasahat eventually found work in a textile mill in Tanpur; a city that was emerging on the banks of the river Tamana, as the Manchester of the East. Vasahat Abdhulla didn’t live long, but his son Suleman Abdhulla was destined to turn around the fortunes of this branch of the family. Abdhulla & Sons Vasahat Abdhulla had recognized early the importance of Western education. So as soon as he landed in Tanpur, he put his son Suleman in an English school. Suleman was a sharp kid. By fifteen, he took on the role of the breadwinner of the family, working day long in the mill and attending school in the evening. At nineteen, a scholarship from the Ali Syed Education Foundation helped him gain admission into the textile engineering course at the Lord Edwin Institute, Tanpur. He now studied during the day and worked at night. Three years later, he had worked his way up into the position of chief quality supervisor at Edwin Mill in Tanpur. His Western education along with superlative administrative skills, made him a perfect bridge of communication between the local workers and their European bosses. As Suleman Abdhulla rose in life, so did his stature within the clan. People approached him from his drought–hit native Jalaun for jobs. Suleman helped them open-heartedly. Soon people started calling him ‘Bade Abdhulla’. Then came the war! The management of Edwin Mill was asked to provide supplies for the allied forces. To meet this demand, the mill set up an ancillary. Suleman volunteered to head the Lord Edwin Ordinance Mills Supply Company. That paved the way for creation of as many as 1200 new jobs at that time. With the end of the Second World War, the political situation in the subcontinent as well as within the Edwin group changed drastically. With debts amounting to over R,00,000 in 1946, the Edwins decided to close the ancillary business. Suleman ‘Bade’ Abdhulla grabbed the opportunity and offered to buy them out. Luckily, at that time his son Sajid was in London, studying law. Sajid worked a clever deal with the Edwins, wherein the ownership would transfer to the Abdhullas, gradually over a period of five years, as and when the Abdhullas were able to pay the decided price. In 1947, India gained independence, which was once again followed by a short war. The young army of the young nation needed supplies and the Abdhullas were ready. The war was won and Bade Abdhulla bought out the Edwins within three years. On 2 October 1949, a signboard announcing ‘Abdhulla & Sons’ was hung over what was once the ancillary unit of an English company. The times were changing. A year later on the same day, 2nd October 1950, Bashir was born. Army uniforms, janta dhoti & artisan entrepreneurs Suleman Abdhulla always dreamt of reviving the family crafts that had earned the Abdhullas a great name for centuries. So while he worked for the Edwins, he also worked with the women of the family to revive the craft of stitching and embroidery. Suleman would often procure private orders from the rich, and the women of the Abdhulla family would supply the requirements. Suleman encouraged other households in his native village to join the supply chain. He paid these people for working on his orders. Incidentally, the 1950s were not the time to strut your chiffons and silks. It was the age of khadi, hand-woven cotton. Suleman and Sajid, thus, faced the challenge of juggling between the new business catering to the opulent and the existing business with a socialist bent, whilst simultaneously ensuring the viability of the new venture. Sajid was young and enthusiastic. Abdhulla & Sons became the suppliers of ‘Janta Dhoti’ (an unstitched piece of white cloth used to cover a male’s lower body) to the textile department of the government, giving the company another recurring source of income, besides supplying to the army. The unit was divided into two sections – one that produced for the army and the other that produced Janta Dhoti. While Sajid took care of this segment, Bade Abdhulla worked in the background to revive the traditional craft, ably assisted by his young grandson Bashir Abdhulla. They visited Jalaun every month and motivated more people to take up the craft and revive what was once famous as ‘Abdhulla ki gathi’– a unique form of traditional stitching. They would end each day watching the sunset over the mango orchard from the veranda of their ancestral home, which Suleman Abdhulla had bought from his debt-ridden cousins and since renovated. Abdhulla’s knot In 1958, Sajid launched Abdhulla’s Knot, a premium brand based on their unique method of stitching. Two years later, Abdhulla’s Knot set up its first store at Flora Fountain in Mumbai. The Turbulent 1970s By 1973, Abdhulla’s Knot had four stores across India. Though the Abdhullas’ supplies to the army were stable, political intervention, growing corruption and neglect towards quality standards annoyed Sajid and he started losing interest and clout in the government supplies segment. It was at this juncture that Bashir, now a sprightly 23-year-old gold medalist in Garment Manufacturing Technology from the University of Paris, returned home and joined the company as the deputy managing director. His newly-wed bride Ismat was a law graduate specializing in international trade. The times were changing once again. Bon voyage The 1970s were the era of the Beatles, rock music, and the hippie movement in the West and of political uncertainty in India. In 1975, when the Emergency was slapped on India, Abdhulla & Sons lost their government business to rivalry. An income tax raid led to the sealing of the factory premises, bringing everything to a standstill. However, Sajid did not lose hope or heart The Abdhullas had always maintained cordial relationships with the Edwin family, even after the latter’s exit from India. Fortuitously, it so happened that the Edwins had a 500sq.ft retail space in uptown London which was unused by them. They gave it to Sajid to set up a branch of Abdhulla’s Knot, and thus the Abdhullas of Jalaun entered the United Kingdom and then Europe. The Abdhulla factory in Tanpur reopened only after the court made a ruling in favor of the company three years later. By this time, the showroom in London was doing reasonably well. The supplies from women groups in Jalaun were steady. Bashir was in charge and had already planned opening the second store in Paris. When the factory reopened, Bashir raised funds from the local bank and turned the unit into a readymade garments factory. At that point, he had orders worth R8mn. Bashir’s cousin, who was a wrestler and was training for the Olympics in the US, became their marketing manager. He got the company orders from a few leading sportswear brands. Through the 1980s, Bashir and Ismat worked diligently towards rebuilding the business, and by 1990, the revenue contribution from different segments looked as detailed in exhibit 02. The Globalization era In 1992, Bashir refashioned the company into a 100% export oriented unit to claim the benefits offered by the government’s new trade-friendly policies. Bashir imported the best technologies and had his men trained in manufacturing and organizational best practices to ensure consistency in output. The GLOBAL recession had HIT the ABDHULLAS of JALAUN. By 1998, the readymade garment exports business started growing so fast that there was no way the Abdhullas’ small factory could match the requirements. They had to make a choice. They could either increase their production capacity or outsource. With quota norms that governed the industry, Abdhulla chose the second option and helped entrepreneurs in non- quota countries such as Nepal, Sri Lanka, Mauritius, Maldives and Bhutan to set up production. By 2000, the company was largely into only two businesses – a buying/exporting house for readymade garments and designer wear supplier. And they were growing 40% year-on-year. Asif Abdhulla joined the business in 1999 after acquiring a degree in fashion designing from the Indian Institute of Design. In 2003, his sister Cdr. Nausheen Abdhulla Junaid, a chartered accountant with an MBA from TIM Sangalore joined the family firm after retiring from the Short Service Commission in the Indian Navy. August 2008 the general feeling of slowdown, all was going well, until Friday, 3 August 2008, when Bashir received a message from his largest buyer in New York informing that they were discontinuing the business due to the lack of adequate working capital. No further reason was offered. Next day, newspapers announced the collapse of the world’s largest buying house for readymade garments. This was followed by the cancellation of orders from several smaller firms in the US and Europe including a company owned by the Edwin family. Within a span of 25 days, everything came to a standstill. The global recession had hit the Abdhullas of Jalaun. Although it was a big business loss, it still didn’t affect the Abdhullas personally. Over the years, the company had ensured sufficient financial cover to see through even prolonged low periods. However, the Abdhullas were no longer alone in this game. The supply chain of Abdhulla & Sons involved 33 sub-contractors employing over 15,000 people, 360 artisan-entrepreneur groups with 18 members each on an average and over 107 freelancers, mostly including young designers, quality inspectors and agents. The fate of these people, who had over the years collectively helped the company reach its current position, hung precariously. To any other businessman this would not have been a problem, but Bashir was a pious soul. He wanted to offer an alternative option to these people. He believed in the saying that “If God closes one door, he opens another.” Another beginning? In the meantime, Asif had been traveling with his uncle to places across India-Itaunja, Babukalan, Chapariya, Dootsa,Matargaon, Jhogal, Nagargundha, Akkupalli—tasting local flavors and sponsoring wrestling tournaments. Asif was the pampered scion of a wealthy business family. He had never had anything to worry about. Everything for him had been well laid out and pre-planned. Incidentally, it was Nausheen who would stick her neck day in and day out helping her father and mother manage the affairs of the company, in her capacity as Finance Director. Asif on the other hand had created his own portfolio. He was now the director of new ventures of Abdhulla & Sons. Bashir was not sure if Asif would be of any help in this matter, but then, he was a director of the company. Besides, he was sharp; had a great sense of observation; connected with people naturally and could work his way around any mess. He even managed to convince Bashir to give him the designation of director of new ventures. Bashir sent an SOS to all the directors of the company. In no time, Bashir received an email from Asif, with a copy marked to all the other directors of the company. “Guys! Look at what the latest report of the Indian Research Bureau on Economic Slowdown reveals. the global economic slowdown has not impacted the rural consumers in India. rural markets in India are vibrant and growing the only adverse effect has been on people associated with export-dependent industries such as garment manufacturing, sea food processing, etc the incomes in rural India are on the rise, driven largely by continuous growth in agriculture for four consecutive years the growth is uniform across sectors – agriculture, non-farm, housing, telecom, health, education and other services a record harvest of 230 million tonnes of foodgrains last year coupled with a 40% increase in the minimum support price of wheat and paddy has resulted in farmer incomes rising sharply the rural economy got a further boost with the farmer loan waiver of R7200 bn families in the BPL (Below Poverty Line) segment have benefited from a wage payout of R,000bn under the National Rural Employment Guarantee Scheme the ambitious Prime Minister Rashtra Nirman Yojna with an outlay of R0,000bn for improving rural infrastructure has started showing positive results access to microfinance and creation of over 70,000 women self-help-groups have helped women attain significant financial independence the rural and small-town economy has remained insulated from the economic slowdown, as employment opportunities and income streams have grown steadily with resilient demand for goods and services since the percentage of salaried workers in rural India is a third of the urban workforce (and that too mostly in government service), there is hardly any impact in terms of job layoffs except in select pockets of the country people in rural areas save in gold, followed by post office deposits or bank fixed deposits. Thus, their wealth has not been eroded unlike urban folk, who have lost huge sums of money in the stock market higher disposable surplus among consumers in these markets is leading to smart buying at rock bottom prices and advancement of purchase decisions in many categories including house construction materials, apparel and durables the FMCG sector continues to grow at 20% (urban growth 17%) with no downgrading of brands, despite the price increase in some categories consumer durables sector is growing at around 15%, with rise in demand for flat screen color TVs, DVDs and DTH connections the telecom business is growing at over 30%, along with insurance and housing spending on weddings has not shown any reduction, nor have spends on travel for pilgrimages consumer confidence is high, and many leading companies are drawing up plans to enter these markets in a serious way Bashir printed the mail and read it on his way to his native village, where the family met at least once every year. Nausheen and Ismat were both with him. They discussed the contents of the email and matched the findings with their personal experiences. As the car was leaving the highway to turn towards Jalaun, Bashir sent an SMS to his son: ‘What’s the plan?’ Two minutes later came the answer: “Already waiting for you at Ulthak.” When Bashir reached Ulthak, he was welcomed with a folder titled – ‘Branded Lungi’! The Plan In the past four months, Asif had spent most of his time traveling to small towns and rural areas all through the country along with his uncle, who was a habitual traveler looking for new athletes for the National Wrestling Academy. Asif ’s report opened with his observations about the rural markets he had traveled to and how they were changing. He talked in great detail about companies from telecom, FMCG, banking, insurance, cement, steel, fertilizers, biotech, education and automobiles, focusing on how they were spotting new opportunities in rural India. He quoted several examples, including from Jalaun and an otherwise backward district, on how they had changed, especially in the last fifteen years. Thereafter, talking about their industry, he mentioned an interesting observation to which everyone in the family agreed. Youngsters in rural areas no more wore only traditional attire. They preferred western wear. It was here that Asif believed was their new opportunity. A New brand Asif proposed the creation of a new brand of readymade garments – western wear and sportswear, specifically targeted at people living in tier-2 and tier-3 cities, otherwise referred to as small towns or semi-urban areas. The target customers, he surmised, were people in L1 and L2 segments, ie those with a monthly income of R3,000 or more. ASIF’S report said that the DEMAND was expected to be good because there were FEW established brands in the MARKET to as small towns or semi-urban areas Abdhulla & Sons, he proposed, would roll out this business under a franchisee model. Existing cloth merchants, wholesalers and bulk buyers would be the target franchisees. They would be required to have a 250 to 500sq ft space in the commercial area of the town, and a capacity to invest up to Rmn. Asif ’s report said that the demand was expected to be good because there were few established brands in the market. “Cheap duplicates and imitations rule the market,” it said. There is a demand for quality. Currently, people seeking quality mostly travel to bigger cities to shop. These purchases are primarily done to meet needs arising during marriages, festivals and special visits/pilgrimages. The report also contained a case study involving Daulat Ram, a cloth merchant with five shops between Tanpur and Unnao, each managed by one of his sons. Asif had procured the sales data of Daulat Ram’s Unnao showroom for the last one year to establish that there was demand for a new brand. ‘If offered good quality at a reasonable price, people would buy,” claimed Asif ’s report suggesting an ROI of 18% for the franchisees and 22% for the company. The report concluded with identifying 158 towns across the Indo-Gangetic plain, ie through the states of Haryana, UP, Bihar, Jharkhand, West Bengal and the neighboring areas in Rajasthan and MP for phase 1 of the launch. After reading the report, Ismat called her professor at TIM Sangalore and requested him to help her with some case studies on the readymade garments business in rural/semi- urban India. The professor instantly sent her a good amount of material by email. She studied it all through the night and compiled the following four one-pagers as highlighted in exhibits 4,5,6 and 7. The Abdhulla advantage The next evening, in a prolonged session after dinner, the team listed the advantages of the plan: Abdhulla & Sons did not have to invest anything new in this business. The seed capital would come from the franchisees besides, they had sufficient raw material stock to provide for good quality garments for one year, which would otherwise simply go waste this was an opportunity for the company to diversify and add a new stream of revenue to its portfolio, thereby reducing its dependence on a single market – exports with the export market down, the entire team could focus on the new venture the company could follow a completely outsourced model, keeping its liability to the minimum and at the same time, leveraging the Abdhulla name The Downside Ismat had one concern. Abdhulla & Sons supplied for the premium segments. Their manpower and sub- contractors were trained to adhere to higher-than- usual quality standards and practices. The company spent considerably in training and compliance. As such, launching a new brand for rural India using the same value chain and requiring lower quality parameters might dilute the workers’ quality perception permanently. None of the team members had an answer to how this issue could be tackled, because they all knew that the recession would not stay forever. Sooner or later, the markets abroad would revive, and they would again have a steady stream of high-return business from there. Besides, no one knew how viable it would be if they considered launching a premium brand of readymade wear for urban and up- market customers as an alternative. your questions: Outline the business model, which is most likely to make the Abdhullas’ foray into branded western and sportswear in semi-urban and rural India a successful one. At another level, is Ismat’s concern valid? If yes, how should the company go about ensuring that the high quality orientation of the company does not change? Smart Insightr Seshadri Asif has brilliantly captured a snapshot of what is happening in small-town, rural India in his mail to the Board of Directors of Abdhulla & Sons, justifying his proposal for venturing into a new brand of readymade garments. But what one needs to focus on is the mindset change that is also taking deep roots amongst the younger generation. The ambition of small-town India today is to become a miniaturized version of the Big City. Leading to a significant shift in the reference point of its consumers, in their perception of quality. It would be wrong to caricature these consumers as extremely price-driven, with no real preference for good quality and value for price. Having said this, let’s come to the critical issue at stake. Ismat’s concern about the potential danger to the value perception of the well-trained manpower, who have been trained to adhere to international quality standards. Abdhulla & Sons are today at the crossroads. As had happened in the past, a change in the external environment has led to a re-aligning of their priorities, resulting in a dramatic shift in their revenue generating segments. The company is now faced with the unenviable dilemma of whether to hold on to the dwindling international consumer base with the hope of a revival in the not too distant future or quickly realign existing resources to cater to a hungry and growing, small-town and rural consumer base. I believe that the business strategy to adopt for Abdhulla & Sons is to see the writing on the wall and take the latter route. Any attempt to straddle between an international market that doesn’t exist and a vibrant, growing domestic market (albeit in small towns) could be a recipe for disaster. All the company’s energies should now be focused on delivering top class quality at an affordable price, without compromising on the quality standards the skilled manpower is trained for. Here it needs to borrow a leaf out of the books of several multinational giants which produce international quality products at an affordable price to meet the growing demand from domestic consumers. Eventually, exporting them to even the quality conscious European markets. The focus should therefore now be on volumes to protect the bottomline and sustain growth in the short term. Simultaneously, the company should make two strategic moves in order to regain their export market as and when the international economy turns around: a embark upon a periodic training program for its existing labor not only to sustain and develop their skills, but also to retain their cutting edge in order to help them get perpetually honed to a global clientele. unleash a well-orchestrated PR campaign aimed at its international customer base, both current and potential, so as to retain the company’s position. As for now, the mantra for Abdhulla & Sons’ longevity should be “Grab the low hanging fruit and move ahead!”
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