Deficit of trust

The current slowdown in India's retail juggernaut brings out the harsh reality that 'smart' business people ultimately suffer if they take franchisees, vendors and customers for granted.

Kapil Mohan Dhingra

I am talking about the phase that Koutons has been going through and other similar tales of disappointment that have gone unnoticed because Indians have such short memories. I still vividly remember what I used to say 5-6 years ago about Koutons brand and its stores - they announce sales only two times a year, each sale lasting for 6-months! The modus operandi was simple. Put an MRP of Rs 1,500 on a simple shirt which you would have otherwise sold at an average price of about Rs 350 and put under a 70 per cent discount. Seemingly smart move which could fetch you a cool Rs 100 over and above the expected price, establish the brand in the big league and also give a huge discount satisfaction to the buyer. So, what really went wrong here? Quite simply, it's the same old story of how most smart business people take franchisees, vendors and customers to be really moron.

The hybrid franchise model that Koutons developed, tweaking it for every franchise appointment, proved just the last straw for the otherwise already crumbling company.

Koutons went public in 2007, raising long-term debt from a consortium of banks eyeing to create a niche in the then booming retail sector. As usual, the promoters siphoned off large chunks of funds meant to fuel the company's growth, putting it under severe strain. The timing was perfect to blame the pressure on the economic slowdown in the second half of 2008. The company claimed that expected sales had been hit, putting expansion plans on hold. Whereas I was and still am in regular touch with a few star franchisees, who were clocking sales of over Rs 15 lakh a month. However, the huge discounting model only left a meagre single digit margin for the franchisees, which slowly diminished their interest to run the store. As a result, inventories slowly started piling up, the cash-flow got into a bottleneck, putting severe liquidity pressure on the company, leaving it with no other option but to start reducing immediate costs - read - shutting shops.

The company, which used to operate a mix of company-owned, managed as well as franchised stores started forcing its franchisees to shift to a cash and carry model to optimise its own risk in stocks. The franchisees rejected the change as the brand neither had a great value proposition nor was aspirational for the customer, being perceived as something which was always on a huge discount. Most franchised outlets started terminating their agreements with the company, putting even more pressure as it severely impacted sales due to such a sharp fall in the points of sales. Koutons obviously termed it as a downsizing exercise to make itself a leaner company and also claimed that it was mostly shutting down retail outlets of its casual menswear brand Charlie Outlaw.

Koutons registered a net loss of Rs 38 crore on a revenue of Rs 53 crore for the quarter ended September 2011. The company's manufacturing facilities, located in Gurgaon and Manesar, are currently operating at less than 20 per cent of their capacity. The firm is today reeling under Rs 600-crore debt that carries an average interest cost of 14 per cent and is trying hard to meet with the conditions of the corporate debt-restructuring package approved by the Reserve Bank in September.

The company, it seems, is available on a 50 per cent+40 per cent discount.