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May, 09 2011

Dumping grounds? Not anymore

Factory outlets, the mere mention pops up an image of a giant store stocking either discontinued products, irregular products or products whose orders were cancelled. The main objective of any factory outlet was basically to sell all the unsold products a

FACTORY outlets are not just for distorted stuff. They fall into three categories: Profit Centre (run by manufacturers interested in earning huge profits), Clearance (for liquidation of surplus and irregular merchandise) and Showcase (to display merchandise to customers and retailers). Over the years, the concept of factory outlets has undergone a drastic change. Earlier they were considered to be the dumping grounds for old stocks and export rejects and were more popular as multi-brand outlets (MBOs), where some local retailers used to tie-up with five six brands to sell their old, seconds and export reject stocks.

Today, factory outlets help retailers raise brand awareness and sell merchandise. Highlighting the same, Ritesh Hingorani, Manager Alternate Sales Channels, Spykar Lifestyles Pvt. Ltd, Spykar, says, “Spykar started selling in factory outlets in 2002 in an (multi-brand outlet) MBO. Later, in 2005, the company launched its exclusive brand outlet (EBO)." With the entry of organised players, the concept developed into an organised retail format. 'The Loot' store is one big example. According to Jay Gupta, Founder, The Loot (India) Pvt. Ltd, “We started with our first store in Marine Lines, Mumbai, in 2004. Today, we have 144 fully operational stores, including company-owned and franchised. Over 13 stores will be launched in the coming month.”

Anupam Bansal, Executive Director, Liberty Retail Revolutions Ltd, says, “The concept of factory outlets is quite popular in India and is generating profits for the respective companies. We shift previous season's products to the factory outlets when we launch our fresh collections. The factory outlets are targeted at the aspirational class with the products being made more accessible through price discounts.”

Factory outlets to discount stores

With the changing retail sensitivities, organised players entered into the business and hence came a modified version, called discount stores, also known as mass sellers. The discount store concept is mainly targeting towards youth and the lower middle class segment that appreciate discount in any form. Factory outlet is an exclusive brand outlet (EBO) where the company sells its merchandise on discounts while a discount store is a multi-brand outlet (MBO) where the retailer ties up with five to six brands to sell their old merchandise. According to Hingorani, “These days, factory outlets are almost the same as retail outlet as far as look and appearance is concerned.”

So when the concept is same, how are they different? The difference lies in the services offered. Says Gupta, “Discount stores vary from factory outlet mainly in terms of the services provided by the discount stores. The factory outlet does not provide the facility of exchange, alteration, trial room, air condition and computerised billing, which is provided by the organised discount stores.”

Franchising works here too

Observing the huge demand of discount stores, few retailers, mainly in apparel, footwear, bags and luggage, fully developed the concept and took up the franchise route to expand their reach. The significant franchise players in this segment are Raymond, Spykar, Levis, Puma, Liberty, adidas, Reebok and Samsonite.

Gupta says, “The Loot entered the franchise business in 2006 to seek solutions to issues arising out of manpower management at a distant store. At present, the brand has 100 operational franchise stores across India.” Says Hingorani, “Franchisee being a localite understands the needs of a consumer and is quite familiar with the locality.” Adds Bansal, “To expedite our expansion process, we opted for the franchise route in 2004-2005.”

Franchisees get full support from franchisors in operating the outlet. Informs Bansal, “We provide regular training to our franchisees. This includes selling skills, inventory management, IT management, communication skills and customer service tailored to meet the varying needs that differ from franchisee to franchisee.”

As per Gupta, “The Loot helps franchisees in staff and systems training, merchandise planning, store layout, best vendor deals on furniture and fixture, dedicated area manager region wise, national and local advertising support, 100 per cent goods return facility and fixture buy back.”

Location is crucial

Location of a factory outlet plays a pivotal role in its success. According to Gupta, “Majority of our stores are at high streets across the cities we are present in.” Disagreeing a bit, Hingorani states, “Though location for a factory outlet varies from place to place, it should always be away from the high street or main market. Spykar has maximum factory outlets on the highways.”

Bansal says, “Location plays a key role in attracting the right target audience. Currently, 10 per cent of our sales can be attributed to the factory outlets.”

Significance

The growing importance of factory outlets can be attributed to the fact that the volume of unsold merchandise has gone up with the increase in the number of exclusive stores across the country. Highlighting the significance of factory outlets, Bansal says, “While implementing our expansion strategy, we did not lose sight of the importance of factory outlets as a parallel sales channel. Our first factory outlet was opened in year 2005. At present, we have 15 factory outlets and plan to open around 50 more such stores in the next three years.”

Box 1

STAT SPEAK

The size of India's retail industry is estimated at USD 350 billion. Of this, organised retail is only USD 8 billion. Around 45 per cent of products sold are through factory outlets, which offer a 15-40 per cent discount throughout the year.

THEN...

Factory outlets, the world over, existed for four main reasons:

= Manufacturers can control where their merchandise was being sold.

= They are more profitable in the long run because they have low operating costs, no extra frills or added benefits, rent price is low and no competing distributors.

= Some brands, like Reebok, find factory outlets an easy way of promoting themselves.

= Manufacturers have control over their outlet and can supervise the functioning of the outlet.

NOW...

Manufacturers have started stocking apparels of different brands to break the monotony of the shoppers. Of course, factory outlets do not exist solely for the purpose of manufacturers. It is also used to analyse a consumer's shopping pattern, whether it is a preference for branded goods or moderately priced goods.

Box2

Factory outlet mall

Huma Mall, India's first factory outlet mall with a multiplex, was opened in Mumbai in 2005. The mall was started with a motive to offer best product at best price. “We invited big brands to open their factory outlets in our mall. The idea was a big hit. At least for two years, we had the monopoly in the market,” says Khalid Siddiqui, Manager, Huma Mall. Some big brands in the mall are Raymond, Biba, Provogue, Peter England, Weekender, Hidesign, adlabs and United Colors of Benetton.

Here's what he has to say on…

Misconception

“The conception that factory outlet sells seconds goods or defective merchandise is absolutely baseless. Rather it sells out-of-season or surplus merchandise.”

Rental difference

“Factory outlet malls offer space at a lesser rent than a regular mall so as to pass on the benefits.”

Box3

Franchise facts

The Loot

Investment: Rs 25 to 75 lakh

RoI: 30%

Employee cost per sq.ft: Rs 2,500 - Rs 5,000

Working Capital: Rs 1,200 - Rs 1,800 sq.ft

Payback period: 3 years

Marketing cost {% of sales}: 5%

Area: Minimum 1,000 sq.ft

Liberty

Investment: Rs 2 million

RoI: 30%

Employee cost per sq.ft: 5% of the sales

Working Capital: 4 month's stock

Payback period: 2-3 years

Marketing cost {% of sales}: 5%

Area: 800- 2,000 sq.ft

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