Hidesign And The Battle Of Rent For India’s Retailers
With airports the negotiations are proceeding smoothly, but not with malls. Hidesign Chief Executive Dilip Kapur says “this negotiation is going to be the most critical negotiation that has ever happened in retail in India; how malls and brands are going to survive”.
Two-thirds of the leather goods maker’s 103 stores are in malls. They’re all shut. So are the 30 located inside airports. Of the six high street stores, a few reopened last week—in Goa and Puducherry.
Hidesign is among 200 brands that have come together as the Fair Rental Group to negotiate rents with landlords. Malls are willing to charge retailers lower rents for the lockdown period. But on reopening they want full payment. Kapur recounts arguments made by both sides so far.
“Malls are saying that look, all these cheques which you’re signing to us are already discounted to the bank. If we don’t send those cheques over to them then we are non performing assets. The banks will declare us NPAs and we are in trouble.”
“(For brands) the agenda has been set—we’re all agreed that somewhere along the way we cannot pay for when the place was completely closed down. And we need to pay a reduced rental or a revenue share until the footfalls get back to normal.”
This traffic argument has gone down more smoothly with airports, Kapur says, adding that may be because their own contracts are also linked to traffic. He sounds both sympathetic and firm at the same time. “It’s a question of survival for both,” he repeats.
Kapur launched his handcrafted leather accessories brand in Australia and U.S. in 1978, adding U.K four years later. In 1990 it set up a factory in Puducherry—with most sales overseas. It took till about 2010 for Hidesign to shift focus and become a national brand in the home market.
Now, 10 years later, with a turnover of more than Rs 200 crore, Kapur says he’s less confident than he’s ever been in business.
We’ve seen nothing but continuous levels of growth, we’ve never known degrowth. So, when we suddenly saw that wow, degrowth is possible, something like this can happen, that was a shock. And there was disbelief that this would really go on for very long.Dilip Kapur, Founder, Hidesign
He remembers the excruciating, step by step, city by city, shop by shop shut down of his business in March. Every day brought a different calculation, he recounts.
“How are we going to manage with 80 percent of the turnover? Next day, how will we manage with 60 percent of the turnover? Okay, my god, we are not even going to have that, we only have 40 percent now, how are we going to manage that? So, the calculation kept changing every day. Then, in a sense when it happened (the nationwide lockdown) oh my god, 100 percent is gone. It was almost like a relief. That we didn't have to every day try to figure out how the hell we were going to survive this, because much of it was gone.”
Eventually all of it closed, even e-commerce. Nobody could have ever imagined that e-commerce would stop, Kapur says, pointing out that in no other country has e-commerce stopped.
Accompanying the shutdown were two immediate concerns. People and money. Several of his 2,300 employees are from outside Puducherry (earlier known as Pondicherry). In the early days of the virus spread it wasn’t clear if they should stay or go. The lockdown closed that option. Taking care of those who stayed back—the depression, anxiety, worried parents—has been tough, he says. “One’s father got seriously ill and died and she couldn’t get back. It was really awful.”
Parallely, Kapur was anxious about money. Would the banks survive? Is it okay to keep all our cash in the bank? Will the bank honour the credit limit? These fears were strong enough to prompt him to move money to another bank to pay wages.
Around that same time all payments stopped coming in. Even from big, “rich” companies that he expected would honour payment deadlines. “The whole system jammed up.”
We have been growing through our own internal resources which meant that all the profits went right back. Since we continued to grow year-on-year, we never worried about using up all our resources for investing into new stores. We just didn’t worry about it, maybe it was stupid, but we didn’t think because it had never happened. So we didn’t plan on it. Now this sudden interruption meant that you have very little reserves with you.Dilip Kapur, Founder, Hidesign
The Battle Of Rent
Kapur says he decided he would pay his people and make no other payments. That is, no rentals to malls. The first month, April, he was able to cover all salaries. Then he had to cut back on that expense too. After all this is not a business that can work from home. Employees were asked if they wanted to go on leave without pay. Some agreed. Some stayed on. Some shop staff were on probation and were told they could return when shops reopened.
And then the Battle of Rent began.
About 20 percent of Hidesign’s revenue is spent on rent. Another 15-20 percent on employees. Raw material, production, design and overheads consume 50 percent. Leaving the business with a margin of 10 percent.
When business restarts Kapur intends to rationalise production. Use smaller tannery drums that produce 15 bags instead of the 300 that the large ones do. Try smaller production runs. Reduce the number of designs from 100 to maybe 10.
With each of his shops carrying between a month or two of stock, the lower production will help cut inventory over time. It will also reduce overall raw material costs, but without scale the cost per bag will increase.
With no clarity on when revenue will return, the only way the business can sustain is if rents go down.
For an individual store, if the rental goes above 20-22 percent (of sales), it’s very difficult to survive. Unless it’s a very high sales store like at the airport. At the airport, often the sales are so high, that even though the rentals have a very high percentage, other overhead costs go down.Dilip Kapur, Founder, Hidesign
And so the negotiations with airports and malls continue. Retailers are pushing their landlords to agree to a revenue share, atleast till business normalises, whenever that happens. “This is something that some airports seem to be able to digest, but the malls have been having a hard time.”
There’s one more challenge. The biggest. The customer.
When will she return? And what will he prefer to buy?
Kapur says since he manufactures everything locally, and production is vertically integrated, it will take him not more than 75 days to fully restart the business after the lockdown lifts. Had he imported supplies it might have taken up to six months, he assesses.
But that’s of little consolation. Production depends on the reopening of malls and airports, the reopening of stores and the return of customers. Demand is the biggest variable, he says.
Yet, the recent resumption of online sales offers some hope. E-commerce contributes 20 percent to overall sales for the company, and in the past 85 percent of online sales were on Amazon, Flipkart, Myntra and other platforms.
Last week, Hidesign saw a 400 percent increase in sales on its website at a time when the brand’s sales on other platforms didn’t do as well. Maybe because some were not fully operational, or weren’t emphasising fashion goods. It's also possible, he says, that the customer is looking for certainty, more trust, more integrity and if they want a Hidesign bag, they are going to the Hidesign site.
But, he notes, most of the purchases were goods selling at a discount. Hidesign is not a discount-led brand. In its stores, discounted sales account for 8-10 percent of the overall. E-commerce sites are discount driven, though.
Kapur tries to get an early read on the returning customer.
So, 20 percent of the product range on our own website, which is on discount, is accounting for more than 80 percent of our actual sales. The customer is going to be very price conscious when they come back.Dilip Kapur, Founder, Hidesign
That just adds to the financial pressure. But Kapur is confident that his business, that has never raised any external equity or debt funds, will overcome this challenging period.
After all, it could have been worse, he says as he recounts a difficult decision he made over a decade ago when global luxury major Louis Vuitton made a 5 percent “friendship” stake purchase in his company. At the time 60 percent of Hidesign’s sales were in international markets. Louis Vuitton advised the company to focus on India. Now, just a fifth of sales is from overseas. Had we not done that we would have been a “total mess”, Kapur says.
“Large parts of the business would be sitting in England or Paris somewhere; far away where we could not travel, we could not manage. The further away you are from the business the tougher it is to manage it right now.”
(By the way, Kapur has repurchased the 5 percent stake from LV.)
One final question: Is there enough assistance forthcoming from the government?
“I can’t think of one thing. I definitely deserve help. I have 2,300 employees. But nothing has been done.”
Kapur’s Hidesign isn’t eligible for the collateral-free loans guaranteed by the government for small business. It has no loans to seek a moratorium on. The working capital line extension might be helpful when production retstarts. So far the only government intervention has been via “scary” circulars that threatened businessmen against wage cuts and layoffs. This week that circular was finally reversed.
“I don’t expect (anything from the government) and I think it is very clear that we should not expect very much.”
This is the second in a series on how small businesses are coping with the pandemic-led economic crisis and what they are doing to survive. You can read the first story here.