S. Bhaskar, Browne & Mohan
With a direct employment of 2, 50, 000 (with 27% of them being Women), turnover of Rs 15,200 Crores and an export earnings of Rs 1500 Crore, leather and leather goods industry is a significant driver of economic growth. Footwear is the major segment of the leather goods market and constitutes about 1400 Crores. The industry is labour intensive and is concentrated in the small and cottage industry sectors. The country produces over two billion pairs of different categories of footwear and nearly 95 percent of its production goes to meet its own domestic demand. The major production centers of leather and leather products are located at Chennai, Ambur, Ranipet, Vaniyambadi, Trichy, Tamil Nadu, with Tamil Nadu is the biggest leather exporter (40%) of the country and its share in India’s output on leather products is 70%.
While leather shoes and uppers are concentrated in large scale units, the sandals and chappals are produced in the household and cottage sector. More than 4000 units are engaged in manufacturing, of which 95% are SME. India’s share in the global footwear imports is around 1.4%, and wwith world’s largest livestock stock, India’s export is to reach 10%. About 46 per cent of the production in the leather sector is exported to other countries. The major markets for Indian leather products are Germany, Italy, UK, and USA. Other destinations such as Hong Kong, Spain, France, Netherlands, UAE and Australia act as trade hubs.
Global recession had a major impact on the industry, in terms of revenue fall and markets. Exports dipped by 11% and SME’s that were primarily into semi-finished leather processing saw a dip over 30% in their revenues. Exports to Germany, UK, and USA, the three major exports markets saw a fall of 17%. With the collapse of traditional Germany and UK market, SME were expecting Dubai to bail them out. However, that did not happen. Cheaper alternate markets such as Russia, Eastern Europe with lower gross margins emerged to fill in the coffers.
Central Government announced Stimulus package offering the following to leather industry:
- 2% interest subvention scheme for leather sector continued till 31st March 2010,
- Duty emissions for Duty Entitlement Pass Book Scheme (DPEB) scheme,
- removal of FBT,
- Service tax exemptions for ‘Transport of goods through road’ and ‘Commission paid to foreign agents’ instead of going through refund route.
SME’s we analysed had benefited little from the stimulus package. Duty Entitlement Passbook Scheme (DEPB) for duty emissions did not have any impact as most of the SME’s avail the Duty Drawback Scheme. With buyers delaying fresh orders and payments getting delayed, the credit ratings of the SME’s suffered and hence their likelihood of accessing the MSME Credit. On the market development side, the MDA assistance available to exporters with turnover up to Rs 15 Crores and for only three participants per fair, limits the exposure to a small percentage of the SME community. Our estimates of the incremental credit support to leather industry are around Rs 120 Crore, clearly quite inadequate for the industry.
Slowdown had brought four significant learning. First, the need to diversify and expand in order to stay competitive in the market and explore domestic market. The leather SME’s needs to exploit opportunities for leather products in countries such as Russia and Newzealand which has huge potential for value add products like gloves, saddler and leather clothing this can enable the SME’s to grow at a faster rate with better global reach. Opportunities in countries such as Russia (primarily imports from Turkey), Argentina, and Brazil with no manufacturing base were targeted more aggressively. Vaniyambadi and Agra based SME’s also discovered Japan as a profitable destination for low quality leather products.
Secondly, focus on domestic market beyond semi-finished leather and uppers. Retail footwear segment in Indian is very price sensitive and has been steadily growing over the year. Major part of the demand is met by the unorganised sector and still there is a shortfall of 300 million pairs. Branded shoe market only account for 20% of the entire market. While international brands largely dominate the higher end of the spectrum, the lower end of the market is dominated by home-grown players as well as unorganised players. While men's footwear is the biggest target category (contributing almost 48%), children's (11%) and women's lifestyle footwear (41%) is not behind in the race. From a price perspective the market consists of four primary segments: less than $3(about 19%), $3-$8 (46%), $9-$16(41%), and >$16(4%). While an average Indian male purchase 3 shoes per annum, the second gender purchases an average 6 pairs per annum. Store format targeting women and children is an unexplored area in retail footwear market.
With organised retail on the rise and increase in the disposable income retailing certainly looks a promising option. Domestic footwear retail business witnessed a shift in channels too. With large volume brands sales remaining at high streets, and mid segment customers preferring to purchase shoe and other accessories in tandem with clothes, some of the retailers were reworking their presence. For example, M&B footwear does high street retailing through multi-brand outlets and discounts retail chain stores, prefers Malls to position international retail chain stores (sale of international brands such as Lee, Provogue, etc). Domestic brands moved beyond regional markets and were embarking pan-India presence. From a primarily NCR player, Mahtani Fashion, an aggressive shoe retailer who owns Vi-Ga has plans to build a national presence. Domestic brands were realizing the limits to growth by pursuing own store format and switching over to franchise formats to tap markets such as Patna, Ranchi, Vizag, Raipur, etc. Expansion into sub-brands such as sportswear, kids and women were the steps the domestic brands expected to pursue in future. Domestic Tier-II market (semi-rural) with high support crop prices and loan waivers had seen growth over 30%. According to the National Council of Applied Economic Research (NCAER) reports, there are 720 million consumers across 6,27,000 villages in rural India. Led by the rising purchasing power, changing consumption patterns, the rural market (semi-urban) which constitutes about 32% showed a growth rate of 17%.
Thirdly, moving up the value chain from just suppliers of semi-finished leather and expansion into retail helps to grow revenues even in difficult times. SGL leathers increased their gross margins with introduction of Bags, Wallets and Leather Accessories. SME’s focused more emphatically on institutional sales. Local players such as Damask, SS and other also found safety shoes for industrial use a niche segment where margins are better than in the wholesale business. Finally, branding does pay off. Even in price sensitive markets, Customers prefer to buy brands they can relate and trust. Marsons India (known for leather jackets) and Stylo (leather bags) held on to their margins in European markets because of their branding efforts.
The recessionary period has been a great teacher. It taught SME’s to seek out opportunities in moments of challenge.
S. Bhaskar, is Associate Consultant (Business Advisory Group) Browne & Mohan