Fabindia Overseas Pvt. Ltd. Case Analysis

Executive SummaryFabindia was founded in 1960 with a mission to provide work and employment to India’s skilled rural artisans and to protect traditional weaving and printing skills.Change in customer consumption pattern and increased income per capita has given boost to domestic sales of Fabindia. In last five years (2002-06), turnover of Fabindia has increased by 335% and profit by 422%.Fabindia’s vision is to expand to 200 stores and grow its revenue to Rs 8.6 billion by FY 2011.Key challenges in achieving target revenue of Rs 8.6 billion are additional capital requirement, shortage of qualified personnel, threat from new retail chains, increasing rental rates, and uncertainty in supply.

Situation AnalysisRapid scale-up would require more qualified personnel and formalization in organization. Absence of organized retail sector in India has lead to shortage of qualified personnel.New retail chains like Pantaloon, Trend Ltd, Shoppers World, ITC have entered in garments sector posing potential threat to Fabindia. 70% of Fabindia’s revenue are generated from garments. Small players like, privately owned Anokhi, Govt. owned Khadi, State Govt owned Phullkari, Rajasthali, Chunari etc have also expanded and opened their shops in major cities of India.New product lines were introduced and have shown positive results. In last two years organics and body care revenue has seen a growth of 100 times.Increasing number of shops will require more investments due to increasing rental and property rates. Another major challenge for Fabindia could be capital for expansion. For desired exponential growth Fabindia may require additional external capital.Supply chain of Fabindia is based on trust with uncertainty of supplies from its rural suppliers. Estimate of supply has always been a problem for Fabindia.

Problem StatementTo grow in terms of revenue to Rs 8.6 billion by FY 2011.

Alternatives and their impact1. Increase efficiency of existing stores

In last five years operational expanses has increased from 21.8 % to 26.04 % of revenue. It has reduced the profitability of organization. An expected saving of Rs 55 million expected. (Source: Exhibit 5)

2. Increase Export ActivityAfter Fabindia’s main UK based customer, Habitat was acquired by larger firm, Fabindia was not able to utilize its export potential and has seen negative growth. In 1965, revenue from export was at Rs 2 million. Currently export revenue has declined to Rs 1.02.Exploring new market and clients may result in better results. Additional revenue of Rs 2 million can be generated by focusing on exports.

3. Collaboration and franchisee modelFranchisee model may have multiple advantages like increased market presence, saving on labor cost, rental cost, and managing cost.Franchisee model may also tarnish image of Fabindia and franchisee may use Fabindia brand name to promote its own products. A carefully legally bounded agreement may be required.An additional average revenue of 3 million (10% of average Fabindia store sales) may be expected from each franchisee store.

4. Setting up new store (with external investing)Average rental rates are at Rs 400/sq feet, Fabindia store size is 500 sq feet for small stores and 8000 sq feet for large stores. Currently Fabindia has 49 stores and additional 151 stores of medium size (4000 feet) will make an additional rental cost of Rs 241.6 million per month.A new store on rental may have average Rs 19.2 million rental cost per year with revenue of Rs 30 million per year. Other costs may include hiring personnel, salary and other maintenance cost.

5. Setting up new store (with internal investing)Fabindia has reserves and surplus of Rs 338.51 million. Rental cost of new store would be Rs 19.2 million per year. 15 stores can be established providing additional revenue of Rs 450 million per year (assuming average return per store as Rs 30 million)

6. Including more product lineGarment sector is facing competition by organized retail sector. Including diverse product line like food and personal care can generate new source of revenue while reducing competition. Concept like organic departmental store may be used. Organics and body care were introduced in 1998, till 2004 revenue from organics were very less. In last two years organics revenue has seen a growth of 100 times contributing Rs 25 million to revenue. Expected growth opportunities and additional revenue could be huge. Assuming moderate growth of 10 times in next two years may result in 250 millions of revenue and 500 million in next 5 years.

7. Increase advertisement and marketing of Fabindia productsApart from opening of new stores advertisements are not issued. Fabindia is sustaining on its quality and perceived value as spread by word of mouth. Advertisement and spreading awareness could result in 5-10% increase in sales. Expected returns could be 125 millions per year by advertisement budget of Rs 50 million (0.03 of sales revenue) which is far below than industrial norms of 1 to 1.5 percent.

Criterion for evaluation1. Consistency with organizational mission

No compromise with mission.2. Extent of revenue contribution

An activity with higher level of revenue contribution will be selected.3. Profitability

The activity must be profitable when implemented.4. Requirement of additional work force

Activity with minimum additional requirement of workforce will be given preference.

Evaluation of AlternativesEach alternative is evaluated against each criterion. Target is to increase revenue of Fabindia, thus each alternative will be judged against the extent of additional revenue it can generate.Points equal to additional revenue is provided to each alternative. One or more alternatives may be chosen to maximize the revenue as all these activities are mutually exclusive.

Increase efficiency of existing storesConsistency with organizational mission: YesExtent of revenue contribution: NilProfitability: Yes (Rs 55 million)Requirement of additional work force: NilExternal capital requirement: NoResult: No points awarded to alternative

Increase Export ActivityConsistency with organizational mission: YesExtent of revenue contribution: Rs 2 million per yearProfitability: YesRequirement of additional work force: little or not requiredExternal capital requirement: little or not requiredResult: 2 points awarded

Collaboration and franchisee modelConsistency with organizational mission: YesExtent of revenue contribution: Rs 453 million from 151 new stores (Rs 3 million per franchisee)Profitability: YesRequirement of additional work force: little or not requiredExternal capital requirement: little or not requiredResult: 453 points awarded (Table 1.2)

Setting up new store (with external investment)Consistency with organizational mission: Depends on new investing partnerExtent of revenue contribution: Rs 4530 million from 151 new stores (Rs 30 million per store)Profitability: YesRequirement of additional work force: largeExternal capital requirement: yes (approx 2500 million will be required)Result: rejected as mission can’t be compromised

Setting up new store (with internal investment)Consistency with organizational mission: YesExtent of revenue contribution: Rs 450 million from 15 stores (Rs 30 million per store)Profitability: YesRequirement of additional work force: mediumExternal capital requirement: NoResult: 450 points awarded

Including more product lineConsistency with organizational mission: YesExtent of revenue contribution: Rs 500 millionProfitability: YesRequirement of additional work force: little or not requiredExternal capital requirement: little or not requiredResult: 500 points awarded

Increase advertisement and marketing of FabindiaConsistency with organizational mission: YesExtent of revenue contribution: Rs 125 millionProfitability: YesRequirement of additional work force: little or not requiredExternal capital requirement: little or not requiredResult: 125 points awarded

Evaluation resultIncrease efficiency of existing stores: zero pointsIncrease Export Activity:2 pointsCollaboration and franchisee model: 453 points (151 stores)Setting up new store (with external investment): 0 pointsSetting up new store (without external investment): 450 points (15 stores)Including more product line: 500 pointsIncrease advertisement and marketing of Fabindia: 125 points

RecommendationsWith current growth rate of 50%, Fabindia could achieve its revenue target of 8.6 billion by FY 2011. Fabindia has to maintain the growth rate of 45% for next 5 years. Following actions may be taken from maintaining growth rate of 45%.

1. Fabindia should setup 15 more stores which could generate Rs 450 million. More stores may be opened as and when Fabindia has its own capital.

2. Fabindia should look for partners for franchisee and extensively create more franchisees and must increase their number to 150 in next 3 years.

3. More product lines in organic should be included and organic products should be boosted.

4. Better marketing and advertisement by allocating a budget of Rs 50 million.

Action Plan

Organic and body careOrganic and body care product line should be promoted, as these product line has shown 100 times growth in last 2 years. Fabindia should focus on organics and body care products.Sales Target for organic and body care products.

Year Sales Target2007 100 million2008 250 million2009 350 million2010 450 million2011 500 million

Franchisee storesFabindia should first concentrate on franchisee model before opening own stores. This will save case reserves. Franchisees should be increased to approx 150 numbers in next 3 years.

Year No of new franchisee

Total no of additional stores

2007 50 502008 50 1002009 51 151

Establishing new storesNew store should be set up in three phases starting from year 2009.

Year No of new stores

Total no of additional stores

2009 5 52010 5 102011 5 15

Revenue targets (source table 1.4)

Year Addition Revenue2007 250 million2008 550 million2009 953 million2010 1203 million2011 1403 million

Table 1.1 Rental Cost calculation

Store Size Average Rent Annual rentSmall (500 sq feet) Rs 400/month Rs 2.4 millionMedium (4000 sq feet) Rs 400/month Rs 19.2 millionLarge (8000 sq feet) Rs 400/month Rs 38.4 million

Table 1.2 Franchisee Stores and expected revenue

Year No of new franchisee store

Total no of franchisee

Revenue per store

Total revenue

2007 50 50 3 million 150 million2008 50 100 3 million 300 million2009 51 151 3 million 453 million

Table 1.3 Establishing New Stores

Year of operation

No of new stores

Total no of additional stores

Revenue per store

Total revenue

Rental charges (@19.2 million per year)

2009 5 5 30 million 150 million

96 million

2010 5 10 30 million 300 million

192 million

2011 5 15 30 million 450 million

288 million

Table 1.4 Expected additional revenue

Year Revenue from organics and body care

Revenue from franchisee stores

Revenue from new stores

Total Revenue

2007 100 million 150 million 250 million2008 250 million 300 million 550 million2009 350 million 453 million 150 million 953 million2010 450 million 453 million 300 million 1203 million2011 500 million 453 million 450 million 1403 million