Heavy online discounting hurts franchisees' expansion plans

One large franchisee operator said online prices are at times below even the wholesale rate.

India Times
December 12, 2014

Heavy online discounting hurts franchisees' expansion plans
Rasul Bailay

NEW DELHI: The battle between e-commerce and brick-and-mortar retail, having exacted on a toll on stores selling electronics brands, is now leading to casualties in other segments. Franchisees of Benetton, Tommy Hilfiger, US Polo, Puma, Lee, Wrangler and Calvin Klein say they are being forced to freeze expansion of stores because of the heavy discounting onslaught by ecommerce companies.

"We are holding expansion plans until the next season," said Keshav Tiwari, retail head for Samarth Lifestyle that operates more than 100 outlets of Puma, US Polo, Nautica, Tommy Hilfiger and several other labels. Mohali based Kapsons, which runs about 200 franchisee stores of various Indian and global brands, is only opening a few stores catering to children. It's putting on hold a plan for five department stores of 30,000-40,000 sq ft each. Another Delhi-based franchisee of Benetton and Adidas said his company has completely frozen store opening plans for 2015 primarily because of the impact of e-commerce and also because of rising rentals.

"It is confirmed that most expansions are on hold. Even companies have put their own stores on hold," said the head of one of the country's largest franchisee groups. "They are also suffering and they themselves are not expanding." Such a freeze could also have an impact on mall rentals as demand for space declines, unless the moves by brands to ease the situation take effect. This involves having separate product lines for online and offline. The brisk rise of e-commerce in recent years and heavy discounting by them is creating tensions between franchisees and brands. Franchisees of various brands complain that the companies are selling products cheaper online and that's eating into their businesses.

Samarth was expecting 10-15 per cent growth in sales this year, instead they fell by almost 25 per cent with most of the decline coming since September, when discounting rose to new levels as ecommerce firms clocked billions of rupees in sales during the crucial Diwali season.

One large franchisee operator said online prices are at times below even the wholesale rate.

"Their (online) discounts are more than wholesale rates, which is rare in any business. You are buying for X amount and selling for X minus Y amount. In such a case any brick-and mortar player could get bankrupt," the person said, adding that real world retailers generally get around 35 per cent margin on products and that ecommerce discounts exceed this.

Puma India managing director Abhishek Ganguly said most online discounted products are old stock that's also available at the company's factory outlets. But franchisees say online discounts are not limited to old stock but also apply to fresher items as sites accept coupons and offer other schemes that involve a lower price.

Some companies are now following the strategy of electronics companies. J Suresh, chief executive of Arvind Lifestyle Brands, which sells US Polo Association, Nautica and other brands, told ET his company has entered into agreements with online retailers not to "undervalue" the company's products through heavy discounting. His company is on track to open another 50 US Polo stores in the current fiscal year.

Other labels are also looking to ensure that those who run stores are protected. Many of the franchisees ET spoke to said brands such as Puma, Benetton, US Polo Association and others have pledged to work on strategies to segregate offline and online products.

For example, Puma has already stopped selling some high-end products on e-commerce sites and starting next spring-summer season, the company will fully separate lines for the two retail avenues. Similarly, Arvind Ltd, which sells various foreign brands in India, is also working on online-only product lines.

Benetton dealers said company representatives have unofficially told them that it restrict online offerings to products that are three seasons old and that it will break off ties with any distributor flouting that rule. A Benetton spokesperson wasn't available for comment. Tommy Hilfiger didn't respond to queries.

Ganguly of Puma said it was his company's "responsibility and commitment" to help make the 310 operational stores in India profitable. He said the company has devised a "strategy differentiating online and offline channels for long-term sustainability. All our offline and online partners have been on-boarded with this strategy in our recent trade meetings and they're quite happy with our stance." Without giving actual numbers, Ganguly said Puma's like-to-like sales have grown over the last one year.

Online site Jabong's managing director Praveen Sinha told ET on Monday that a correction in discounts is already taking place. But he also said that online companies will always be able to pass on discounts to consumers as they don't have the high real estate and overhead costs associated with offline retailers. Eventually, financial imperatives will lead to the market settling, said Ganguly of Puma.

http://articles.economictimes.indiatimes.com/2014-12-12/news/56990161_1_arvind-lifestyle-brands-franchisee-puma-india


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