Summary – Kewal Kiran Clothing Ltd. (KKCL) is a manufacturer of branded apparel, operating the ‘Killer’, ‘Lawman Pg3’, ‘Integriti’ and ‘easies’ brands, predominantly selling menswear and denims (57%). Having top quartile fundamentals on account of multi channel asset light distribution, conservative management, and strong brand recall for denims, studying KKCL has been an interesting case study of an impending death of a franchise, different coping mechanisms and an eroded moat.
|Total Assets / NW||1.2||1.3||1.3||1.3||1.4||1.4||1.4||1.5||1.4||1.3|
KKCL has one of the best fundamentals in the listed apparel space in India, which has been on account of the following –
- KKCL follows an asset light model in its sales channels with MBO (multi brand outlets, 42%), franchisee EBO (exclusive brand outlets,17%), national chain stores (26%)and online channels (7%) forming the bulk of distribution for sales. Thus KKCL has no rental and store costs, and it can focus on design, manufacturing and advertising.
- KKCL has also been conservative in its operations by never taking any sort of leverage, rarely resorting to discounting (until recently), selling outright to the retailer / franchisee and focusing on affordable segment (Killer Jeans retail for INR 2300 – 3100 MRP).
However, since 2016, KKCL’s revenue growth has considerably slowed down. This is on account of multiple factors, some of which are –
A. New brands have not performed well – After Killer’s success, KKCL has introduced 3 other brands, none of which have picked up as well as Killer –
As can be observed from above, while Killer brand revenues has moved from 140 crores to 320 crores in 2020 (not considering 2021 due to Covid), no other brand has been as successful. The Lawman Pg3 brand, which was positioned as a premium brand, has been declining over the years. One of the reasons for the same has been – all the brands target the same age group of customers (16 – 30 year olds), and only the pricing points are different. Further, while Killer was specifically known for denims, the other brands don’t have a specific product positioning.
B. Declining Bargaining Power against channel partners – As revenues through National Chain stores like Shopper Stop / Future Group and online portals increase, KKCL’s bargaining power has been going down as not only does it have to give these large chains better margins, but have to also engage in discounting at the behest of the value chain participants. Thus despite increase in MRP turnover, the revenues of the company have not increased –
The realisations per unit have been declining over the years and sales growth has been coming largely from volume increase.
Despite increasing MRP every year, the excess margins are simply passed on as discounts to customers or given to the channel partners. This is bad news for the company as online and organised retail pie continue to grow –
It can also be observed that KKCL’s overseas foray has largely been unsuccessful with revenues declining over the years. Sales through factory outlet (8%) are the ones that are off season and are more like clearing out inventory.
While MBOs are the cheapest distribution channel for a brand owner, there is a significant trade off in terms of brand visibility (easy comparison with other brands), positioning (pushing the highest selling item and hesitancy to showcase newer variety) and shopping experience of the customer. EBOs, especially franchisee owned are better for the longevity of the brand since they have a better display, right incentives for the franchisee and also garner publicity, creating a virtuous cycle for KKCL as geographical expansion can happen without employing any capital. In case of KKCL, the EBO channel continues to deteriorate with stagnant revenues per store, increasing store closures and declining store openings –
With the total store count stagnating in the last 3 years, KKCL has now taken a call to start opening its own stores, thereby investing in real estate, furniture and maintaining own inventory. This is a potential red flag in the deteriorating value of the brand, and it would be extremely difficult for KKCL to recreate its brand image and loyalty. This is further indicated by the company channel stuffing its inventory –
|Increase in Sales||1%||23%||12%||12%||0%||-1%||9%||5%||-43%|
|Increase in Debtors||-1%||33%||22%||41%||-3%||14%||47%||-4%||-23%|
High Disruption Risk
Apparel inventories tend to have a short shelf life on account of change in fashion trends which is how the phenomenon of fast fashion has evolved. Online apparel players having access to capital, higher assortment and improving return policies pose a major challenge to the existing offline distribution model of apparel retailing on account of the time to market and limited assortment in one store. Further, large national stores who can curate the experience are now starting to focus on selling private labels since these are more profitable.
Foray into real estate by promoters –
The promoter management has been dabbling in real estate in their personal capacity through Kewal Kiran Realtors and have a scheme ongoing in Dadar West worth almost 450 crores. Although this investment is in their personal capacity, this venture might lead to lower management bandwidth, which is further exacerbated by the fact that the company has no senior professional management and all the key functions are undertaken by 4 brothers from the promoter family.
Interaction with KKCL team to understand franchisee agreement clauses –
I had a telephonic conversation with Mr. Rakesh Waths from KKCL to understand various clauses offered to a franchisee. I also found what these were in 2013. Below is the comparison and my comments –
|Parameters||2013 Clauses||2021 clauses||Remarks|
|Minimum Area||1000 sq ft||400 sq ft||KKCL has relaxed the area condition|
|Compulsary Inventory||20 Lakhs||20 Lakhs||same|
|Margins offered||42%||46%, after GST is 35%||GST on MRP has been passed on to franchisee|
|Brand Fee||75k||1.2L||Marginal increase|
|Geographical monopoly||Not available||Not available|
|Margins to MBO||NA||22%|
|Discounts borne by||NA||Franchisee. Discounted products to have 22% margins|
|Credit Period||0 days||30-45 days, 2% CD within 7 days||KKCL has relaxed this condition|
|Contract Term||3 years||3 years||Low compared to other players|
Although some conditions have been relaxed, the franchisee terms still seem to be more in favour of KKCL. Response from Spykar is awaited.
Overall on account of growing risk of value migration to larger chains and online channels and the inability of KKCL to invest further into its brand leads us to conclude the investment in this idea need not be made.