Daybreak - Aditya Birla Fashion has a new hack for growth. Except it could also destroy its business

Episode Date: May 7, 2024

Aditya Birla Fashion is arguably one of India's most complex listed retailers. It has dozens of really diverse fashion brands and retail formats under it. On one hand it has high-end luxury labels like Sabyasachi and Tarun Tahiliani, and on the other, it also owns the retail chain Pantaloons and labels like Allen Solly, and Louis Phillip — names that we all know because they are accessible to most people. Now, you would think this we-have-something-for-everyone strategy must be working out great for Aditya Birla Fashion, right?Turns out, that’s not quite true. In fact, it's having this opposite effect. Experts in the industry say it’s almost like the company has an identity crisis.What's going on at Aditya Birla Fashion? Tune in to find out.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me. My interruptions, my analogies and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Let's start this episode with a pop quiz, daybreak style. I'm going to list out four very recognizable names in the Indian fashion industry. I want you to think about what they have in common. Ready? Okay, here they are. Pantaloons, Alan Solly, Sabia Sachi and Tarun Tehelyani.

I think you'd agree that this is a pretty diverse bunch of brands. So what is the common thread tying them together? Okay, here's a big clue. The answer is connected to billionaire Kumar Manglum Birla. And I think I may have given it away there. Like I'm sure you've guessed by now, what connects these brands is that they are all owned by Aditya Birla fans. and retail limited, one of India's biggest fashion retail conglomerates.

Now, Aditya Birla fashion is arguably one of the most complex listed retailers. And I'll tell you why. It has dozens of really diverse fashion brands and retail formats under it. Think about it. On one hand, it has high-end luxury labels like Saby Asachi and Tarun Tehiliani. And on the other, it also owns the retail chain pantaloons and labels like like Alan Soley and Louis-Philip, names that we all know because they're accessible to most people.

Now you think that this, we have something for everyone's strategy, must be working out great for Aditya Birla fashion, right? Well, turns out that's not quite true. In fact, it's having the opposite effect. Experts in the industry say it's almost like the company has an identity crisis. In fact, they think this is a big reason why Aditya Birla fashion's growth has remained stagnant over the years. And to make matters worse, since the company doesn't have the money to finance most of its acquisitions, it's had to borrow hundreds of crores, which it now has to figure out how to return.

Investors are obviously not too happy. So to turn things around, Aditya Birla fashion made a pretty surprising announcement earlier this year. It said it would demurge Madura Fashion and Lifestyle from Aditya Birla Fashion and Retail Limited and listed separately. But here's what doesn't quite add up. Madura Fashion and Lifestyle is Aditya Brila Fashion's most profitable arm, with labels like Peter England, Alan Soley, Louis-Philippe and Van Hewson under it. It accounts for more than half of the company's revenue. So what is Adity's?

Burythya Bira Fashion's game plan here. Welcome to Daybreak, a business podcast from the Ken. I'm your new host, Rahil Filippos, and I'll be joining Stigda every week to bring you one business story that is worth understanding and worth your time. Today is Tuesday, the 7th of May. Christmas came early for the Birlah Group in 1999. In December that year, it acquired Madura from one of Europe's largest clothing suppliers,

Coats Biele. Now, ironically enough, it was a crisis in the international textile industry that made this acquisition possible. And what was the crisis? Manufacturing had dipped considerably in the last few decades of the 20th century. And at the time, most of Asia was going through a financial crisis. And coats was hit pretty hard. So they were forced to reassess some of their international businesses, including their thriving South Africa. India-based subsidiary, Madura Coats Limited.

So what they did was they demurged the company, renamed it Madura Garments, and sold it off to an upcoming Gujarat-based textile manufacturer called Indian Rayon. Now, can you guess who owned Indian Rayon at the time? None other than the Aditya Birla group. When the company acquired Madurai garments, they got with it all of the company's brand licenses.

which meant that it now owned licenses for top international brands like Alan Solly, Louis-Philippe, Van Hewson. The acquisition made Indian Rayon the biggest branded apparel company in the country. And all of this happened way before the Aditya Birla fashion and retail conglomerate, as we know it today, even existed. This was a massive turning point for the Birla Group's fashion business. It was also a big moment in India's retail hill. history. This was India's introduction to international fashion brands. And thanks to the aspirational middle class, the Bidla group's bet on Madura very quickly paid off. While Madura's family of brands began raking in the big bucks, the Bidla group was slowly building up its fashion empire.

But even though it acquired a bunch of very well-known apparel brands over the years, none of them brought in as much money as Madura did. In fact, most of them turned out to be loss-making. What helped Aditya Bidla fashion was that it always had Madura to fall back on. So what is Aditya Bidhya Bidla fashion without Madura? More on that in the next segment. In 2012, the Bidla Group bought a majority stake in what was then India's biggest listed retail company. I am of course talking about PADUPS.

At the time, pantaloons was a pretty well-established retail chain with hundreds of stores across the country. Seems like a great deal for Aditya Bidhila, right? Well, it would have been if it wasn't for the fact that pantaloons was already crumbling under a massive amount of debt. More importantly, it was dealing with its own identity crisis. And Aditya Bidhira fashion thought it could fix it by pricing it just right. So initially, pantaloons was priced just below West Side, but Aditya Birla fashion swooped in and decided to make it even cheaper by slashing prices 25 to 30%.

But even that didn't seem to work. In fact, the identity crisis hasn't gone away even all these years later. Just this February, in fact, Aditya Birla fashion said it was trying to premiumise pantaloons. Today, its average selling price is over 800 rupees. This is 20% higher than it was five years ago, but still almost half of its biggest competitor, West Side. Now, experts say the reason pantaloons never quite got on Westside's level is because it didn't have a brand identity of its own.

Even today, it gets most of its revenue from third-party brands like Alan Solly and not its own. When my colleague Sita Raman spoke to Shubrata Sidhanta, the chief executive of Vredin Taylor, he told him that this is Pantaloons' biggest problem. He said that every other successful apparel business sells its own brands. But the bottom line is, while Pantelones hasn't seen much growth, at least it's still profitable. The same can't be said for Aditya Bidla fashion's other ventures.

Take for instance its ethnic wedding. business. In the early 2000s, a family-run company called Vedanta Fashions managed to revolutionise the market for ethnic wear in the country. They launched Manyawar, the country's first ever one-stop shop for men's festival and wedding wear. Until then, everyone thought that sort of thing was best left to stand-alone family-run stores. Maniavar managed to prove everyone wrong. The brand success also convinced pretty much every major apparel company to launch or buy their own Indian ware brands. Aditya Bira Fashion included. Since 2019, it has made five acquisitions in the space and the largest of it was the TCNS clothing deal, worth close to €2,000 crore

rupees. So with it, Aditya Birla fashions now added ethnic women's wear brands or Relia and W to its long list of labels. But unfortunately, it hasn't managed to become the ethnic wear Messiah Maniwar was. In fact, far from it. Both TCNS brands have been lost-making for close to four years now. And I wish I could say this was Aditya Birla fashion's only problem. Most of its recent acquisitions have also failed to take off the way it had hoped. Like its 2020 acquisition of the D2C brand Beavocouf,

or when it bought Rebox distribution license in India and try to make the sportswear brand cool again. So if there is one thing that's clearly established by now, it is that Madura fashion and lifestyle was and still is undoubtedly Aditya Bidhya Bidla fashion's MVP, its most valuable player. So why the demurger? How does that make sense for Aditya Bidla fashion? Stay tuned to find out.

Imagine you have a team of football players. Most of them are pretty average and can just about cut it at some second division leagues. But you have one star player in the team who's good enough to play the big leagues. Say even the EPL. Madura is that star player. And if it were up to you, would you keep the player in the same team and let them continue playing second division leagues? Or would you let them play in the big leagues? That's exactly how Aditya Bidya Bidla fashion is looking at Madura.

By demurging the Madura brands, it's giving Madura a shot at making it on its own, without being weighed down by the stragglers. Experts told Sita that on its own, Madura could be well worth over $2 billion. So it sounds like a pretty good idea, right? Except what happens to the other Aditya Bidla fashion brand? You know the ones that aren't making a profit?

Also, without Madura to back it, how will Aditya Birlah fashion pay off the hundreds of crores it owes after all its failed acquisitions? You see, at the moment, its net debt is somewhere around €2,500 crore rupees. So without Madura, Aditya Birla fashion will have a lot of figuring out to do. Because after the demurger, the lion's share of the debtor debt will be on Aditya Birla fashion's books. So the company is running out of options.

It'll have to magically generate a ton of cash from its existing businesses or raise some money to repay its debt. Also, the Aditya Birla fashion business has a larger problem on its hands. Sure, Madura is Aditya Bira fashion star player, but even star players have their own issues. Madura has barely grown in the last few years. It just isn't the 2000s anymore. It's true that Alan Solly and Van Hewson are brands

that anyone would recognize in any city big or small. But with more and more international and homegrown brands entering the Indian market, they're losing their sheen. Simply put, they aren't the coolest brands anymore. So yeah, demurging could potentially help boost Madura's growth. but it could also end up butchering Aditya Bidhira's fashion business. That's all for today. I'll catch you again next Tuesday.

But before that, would you mind doing Snigda and I? A little favor? If you like this podcast, could you hit the follow button on Apple or Spotify or wherever you're listening to us? Also, if you haven't rated us already, please could you do it? It really helps. Daybreak is produced from the newsroom. of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's produced by me, Snigda Sharma, and edited by Rajiv Sien.