Noel Tata’s brahmastra

[Image from Unsplash] 

Jharsuguda is an industrial hub located in western Odisha, known for its proximity to thermal power stations and metallurgical industries. 

Today though, the town has hit the headlines in the retail industry ever since Zudio, a value lifestyle brand, set up shop at a prominent location in town. Retail watchers say that the single store is doing brisk business, contributing about Rs 3 crore a year to Zudio’s topline of Rs 2,500 crore.

It isn’t just Jharsuguda. Zudio is rapidly spreading its wings across more than 120 locations and is likely to touch more than 500 stores by 2023. Many of these locations weren’t even on India’s retail map till now: Dimapur, Ujjain, Imphal, Pathankot, Gorakhpur, Hapur, and Madhyamgram, to name just a few. With 15-20 stores being added every month—and each new store generating significant traction—it isn’t inconceivable that Zudio will double revenues to Rs 5,000 crore in the next two to three years.

For the uninitiated, Zudio belongs to Trent, helmed by Ratan Tata’s half-brother Noel. It also operates the Westside department store chain and has a partnership with Spanish retailer Inditex for the Zara brand. Zudio is a Turns Retailer—industry-speak for retailers with low markups and high inventory turns (retailers with high markups are called Earns Retailers; these terms were coined by Wharton prof GP Cachon in 2000). 

Zudio’s dramatic expansion has set the cat among the pigeons: with Reliance recently announcing Yousta, its new youth focussed brand foray to take on Zudio and Shoppers Stop with InTune, apart from Landmark’s Max, which has been the market leader in the space. Pantaloon has so far watched from the sidelines, with its value offering, Peter England having lost its way. 

Now, there are a few tailwinds behind Zudio’s success. It signals the coming of age of India’s new consuming classes. For long, organised retailers stuck to metros and Tier 1 and Tier 2 towns. This is among the first indications of the huge opportunity in Bharat. Besides, with the GST regime, better road infrastructure, and modern third-party warehouses and transportation systems, it has become a lot easier to build a more predictable supply chain and logistics that is able to penetrate deeper into the hinterland. Brand owners nowadays insert a clause that threatens cancellation if the order isn't delivered within three days of the assigned delivery date. The delayed delivery penalty is for textiles as well as for 'garmenters' (an industry term for people who convert fabrics to garments). And that’s made fabric vendors a lot more disciplined in sticking to deadlines. 

What was the inspiration behind Zudio? It seems to have taken a leaf out of its Spanish partner Inditex and its luxury fashion brand Zara’s famed nimble and responsive supply chain practices, its merchandising, product display, store layouts including its trial rooms, say retail experts. Trent has its own representatives on the Inditex Trent Retail board, but the joint venture is managed entirely by Inditex. It is entirely possible even its presence on the board would have helped it pick up some insights on Zara’s global best practices.

At the same end, the Chinese brand Shein has evolved its own version of an affordable fast fashion brand. It is now considered the biggest fashion retailer in the world. Shein perfected a hugely successful and efficient sourcing, manufacturing and online selling model which has created huge economic value.

According to this story from Wired, last year Shein was valued at $100 billion—higher than the combined worth of fast-fashion titans H&M and Zara, and higher than that of any private company in the world besides SpaceX and Byte-Dance, the owner of TikTok. Yet its model also has been roundly criticised for harming the environment, for relying on dyes that don’t meet standards and using poor quality, disposable and unsustainable rayon fabric. In May this year, Reliance Retail announced it was tying up with Shein.

With Zudio, Trent appears to be striking a middle ground between the innovativeness of Zara and the ruthlessly efficient Shein. But being from the Tata group, Trent will undoubtedly focus on sustainability, without taking any shortcuts.

Zudio followed Noel Tata’s time-tested playbook: when it launched in 2016, it initially set up four to five stores, with a menswear range, aimed at a young demographic. It patiently finetuned the business design, focussed on getting its product-market fit, and perfecting the model. It expanded the portfolio to include menswear, womenswear, kidswear, accessories and footwear. It eventually built a model that it was confident about scaling. (Even during the pandemic, Zudio was busy signing up new stores and franchisees.) 

This is somewhat different from Reliance Retail, which typically jumps headlong into full scale expansion, with the understanding that it will fix the model, even as it moves forward.

Led by two expats, Trevor Perren and Marjolein Van Brandwijk, Trent is now straining every sinew to gain the first mover advantage for Zudio. Their rapid scale up and their clear-headed business model has forced both rivals and retail experts to do a detailed teardown of Zudio’s model. One, it has ensured that its products are affordable and aspirational for its core audience—young couples in the 28-35 age group—in these new locations. Its pricing is nearly half that of Westside, yet the quality of the fabric handles is good. It is able to offer good quality by focussing on fast moving items, instead of stocking a wide range. (Typically, core styles—like women’s tights, men’s shirts and trousers, jogger pants, shorts and T shirts—account for 35% of the store’s cumulative business. They also stock women's ethnic wear, which is unusual in the fast fashion space, which is usually construed as Western.)

Trent has deliberately eschewed building an e-commerce business for Zudio, choosing to entirely focus on selling through its bricks-and-mortar stores. This may be sensible, given the fact that its pricing model may not be able to sustain the high delivery costs and the cost of returns, which is endemic in the e-commerce model. Contrary to the existing retail fundamentals of chain stores, Zudio does not follow the practice of transferring stocks between intercity stores, largely because of the low margin, and therefore, they are unable to absorb the corresponding logistics costs. This means the products live their entire life inside the same store until they are sold. 

At the back end, it is able to significantly reduce its fabric sourcing costs by promising huge volumes to its vendors. Reliable, timely payments also help Trent extract the best from suppliers as they become partners in progress for Zudio.

It keeps minimum inventory at the store and is able to quickly replenish based on accurate offtake data. As a result, the key is high stock turnover, of at least 8-9 times, far higher than typical department stores that manage 3-4 times. The gross margin is around 45%, far lower than the 75% for specialised lifestyle retailers like Levi's, Van Heusen, AND, Biba, Tommy Hilfiger and many others. Yet it makes up because of the huge volumes it pumps out from each store. 

Zudio does not discount its merchandise. Its conversion rate (around 60% and more) among the people who enter the store, is almost double that of a typical department store. Its cost of goods sold (COGS)—or the cost that goes directly into products sold by a retailer—is close to 59%. And earnings before interest and tax (EBIT) is around 8%.

Rentals in locations like Jharsuguda are a fraction of that in the metros. At around Rs 17-30 per sq. ft for a 8,000-10,000 sq. ft store, the rentals are far more reasonable, at around Rs 1.5 lakh to Rs 2 lakh a month. Zudio usually avoids malls and prefers to look at standalone prime locations in the town. That way, it keeps its cost lower through some hard bargaining with landlords. For malls, the  common area maintenance (CAM) costs tend to be much higher than for standalone stores. In a few locations like Mumbai, Zudio has followed a shop-in-shop format inside Trent’s hyper market model Star Bazaar.

Experts say that while Reliance Trends enjoys higher salience, the group has a tendency to commoditise the experience in every sector that it operates, from telecom to apparel. Big Bazaar, one of the most successful hypermarket formats, realised the fallacy of flooding its stores with the cheapest offering (Isse sastaa aur achcha kahin nahin) and losing the aspirational value that consumers seek from apparel.

This is where Zudio scores. Its stores and the buying experience retain the aspirational value. Its stores are elegant yet simple, compared to the high cost of fitouts at Zara. It has pegged the fitout costs (including furniture, fixtures, cash counters, surveillance equipment, trial rooms) at around Rs 1,800 per sq. ft, compared to at least Rs 5,500 per sq. ft for Zara. It uses flat lighting with low-cost bulbs and fittings, avoids using expensive Belgian glass for mirrors, and other such value engineering methods that still create a premium experience for first time organised retail customers in these locations.

It has been able to tap into the pent-up demand for a more aspirational lifestyle and offer better shopping alternatives in these new locations. Much of this consumption has been fuelled by the IT boom, new white-collar jobs and relatively lower cost of living in these towns. This has allowed young families with monthly incomes of Rs 45,000-50,000 to comfortably spend around Rs 2,000 on apparel. This is no different from the early 1990s when Shopper’s Stop and Lifestyle opened in the metro towns.

The product portfolio has been kept simple, without too many frills and detailing. Trousers, for instance, don’t have fancy twill tape inside waistbands; joggers use drawstrings and don't even need a fly front, thus reducing construction and cutting costs. Every month, Zudio launches 200-300 new styles to inject novelty value, which for a consumer, could even mean the same shirt in a new colour. 

Also, Trent has wisely chosen to use a franchisee-owned, company-operated (FOCO) model. Small town franchisees better understand the lay of the land and regulations. They typically are able to hire better through the local community, know the local language and culture and almost become like local guardians for the company. Routine tasks, permissions and administrative coordination is simpler as well in these distant markets. Plus, the Tata name helps attract better, potential franchisees. 

As an alumnus of INSEAD, where he attended the international executive programme, Noel Tata is well-versed with the Blue Ocean Strategy, the Big Idea which emerged out of the business school. Blue Oceans are typically uncontested market spaces, as opposed to crowded market spaces (or Red Oceans). With Zudio, Tata and his team at Trent are learning to apply the principles of Blue Ocean Strategy. However, the issue is: can he stay ahead of the competition, which is starting to rev up and snap at their heels? Either way, this promises to be a riveting battle.

(A shorter version of this column first appeared in Business Standard)