Fabindia's Tightrope Walk

In 1993, while holidaying in Australia, William Bissell once ran into an experienced surfer who shared an invaluable lesson with the 27-year-old. Don’t just surf the course, but keep a constant watch on where the next wave is coming from, he advised him.

Bissell, 45, hasn’t forgotten that incident. Over the next few months, Bissell’s balancing act will be tested as he prepares to navigate the next wave that’s about to strike Fabindia, the incredibly successful retail business that his father John started to built way back in 1960. It wasn’t until William took over the reins in 1999, that Fabindia started to go places.

Today, Fabindia is considered one of the most profitable retailers in the country. It earns a net margin of 8 percent, nearly three times more than the industry average, evoking the envy of every rival. What’s more, under Bissell’s leadership, Fabindia has almost singlehandedly built a network of a rapidly vanishing breed of handloom weavers and artisans, which in turn supply handicrafts to a loyal set of city folk across India’s 35 top towns through its network of 144 stores.

Fabindia’s elaborate — and almost dedicated — supply chain organisation is now in place, thanks to Bissell, who co-opted 22,000 artisans and made them into shareholders through an elaborate community-owned model that became the subject of a Harvard Business School case study in 2007 and made Bissell a poster boy of inclusive capitalism.

“It seems contradictory that we pursue both a social goal and a profit, but I believe that is the only way to do it,” says Bissell in that case study. Over the next year or two, striking that balance may become a lot more difficult. So far, Fabindia has remained a privately held company, run by a board that has the Bissell family and old friends fully aligned to Fabindia’s mission. William and his family own almost half of the company. Even though he has managed to grow the company manifold since he took over, much of that growth has come through internal accruals. The only time he has taken external funding was in 2007 when former World Bank president James Wolfensohn’s private investment fund picked up a 8 percent stake in the company for Rs. 50 crore.

But now, he realises that Fabindia has hit a glass ceiling.

Fabindia can easily add about 30 stores a year without batting an eyelid. Except that even the die-hard Fabindia customer now has a lot more to choose from. In New Delhi’s Greater Kailash N Block market, where the Fabindia story began, there are multiple stores — Kilol, Anokhi, Cottons, all selling ethnic Indian wear — surrounding the flagship Fabindia store. Retail chains like Lifestyle and Shopper’s Stop too have expanded their ethnic wear sections. And the disquieting truth: Even though Fabindia has a huge share of mind, at Rs. 404 crore, its turnover is smaller than some of the kids brands like Gini and Jony or Lilliput.

Bissell knows he has to up the ante now. Which is why he is working on a new vision plan, one that will grow the company’s outlets to three times the number it currently has over the next four years. After saturating much of the demand in the bigger cities (Fabindia has 13 stores in Bangalore and 22 in NCR) he now wants to unlock demand in smaller towns like Vellore, Karnal and Rishikesh. By 2015, he wants to put 300 stores in these tier two towns. There are also plans to open 10-12 large format stores to showcase Fabindia’s home furniture range.

To fund this growth, Bissell needs capital. In the last few weeks, he has been holding daily meetings with venture capital and private equity firms to dilute about 25 percent of its equity and at least a dozen firms — from Carlyle, Sequoia, Everstone to PremjiInvest — are said to be queuing up at his door. The valuations are said to be steep. Sources say Bissell expects to dilute at about six times current revenue. Part of the money will go towards buying out Wolfensohn’s share, some of it will go for ESOPs (employee stock ownership plan) and the rest will be for growing the business.

While a marquee investor (sources close to Fabindia say that a deal may be imminent in the next few days) validates Bissell’s model, there are larger concerns that it might push Fabindia down a road where it might be forced to make tradeoffs between its performance and doing good for the artisans.

Infographic: Sameer Pawar

No wonder that Bissell says he’s willing to wait as long as it takes to find the perfect partner. People close to him say that being the hard negotiator that he is, and given how well he understands this business, it is unlikely that an external investor will have the right to veto any decision taken by him.

But even if the money flows in on his terms, managing public perception may be altogether a different challenge. Last year, the public outcry around SKS Microfinance’s IPO that allowed a few private equity investors and some of the founders to make millions is still fresh in people’s minds. And it didn’t stop there. It eventually prompted Andhra Pradesh to bring in stringent laws targeting privately owned micro-finance firms, putting nearly Rs. 7,500 crore at risk.

Vineet Rai, founder and CEO, Aavishkaar, a micro venture capital fund, which has invested in four of Fabindia’s supply chain organisations, may seem unusually alarmist. He believes that Indian society tends to celebrate martyrdom and not success in social entrepreneurship, “Just look at Vikram Akula or Vijay Mahajan. William too has created an audacious, brilliant model, but it will not be seen positively because the world does not want the poor to be partners in for-profit structures.”

The Moorings
These criticisms about “mission drift” had surfaced even when William inherited the business from his father. His approach was completely opposite to that of John. Over the years, William has often been criticised about opening Fabindia stores in malls, as opposed to stand-alone heritage properties which lent a unique character to the brand. He’s also criticised for bringing in powerloom fabrics, where John was fanatical about handlooms, of replacing cotton thread for stitching with polyester thread, of combining plastic shower curtains with ethnic home furnishings, but most of all for growing Fabindia too fast. John’s philosophy, says Radhika Singh, the author of the Fabric of Our Lives, was that “Fabindia did not need to become greater than the sum of its investment in handloom and the artisans that created it. The consequence was that business could only grow slowly, but the philosophy turned buyers and suppliers into joint shareholders of a shared mission.”

Laila Tyabji, chairperson, Dastkar, a society for crafts and craftspeople, wrote in November 2010, while reviewing Fabric of Our Lives, “The difference between William and John is in approach and scale. And while John was passionate about the process of handloom and handcraft, moved and inspired by the tactile symbolism of khadi; William’s mantra seems to be ‘giving the customer what they want’ — in the most efficient, accessible and eco-friendly way. Seeing power-loom and machine embroidery infiltrate the Fabindia shelves, there’s always a niggling question about whether it has grown too fast and too indiscriminately.

“In popular myth, John Bissell was an idealistic visionary and his son William his antithesis: Discarding Fabindia’s core principles en route to exponential growth. The truth is (as his book Making India Work makes abundantly clear) William, though differently, is as much a visionary as his father; while idealist John was also an intensely practical business man.”

In many ways, setting up of the community operating companies (COCs) in 2007 offered a glimpse of William’s real philosophy. It proved that he not only shared the same idealism as his father, but by scaling up Fabindia, he managed to impact a far greater number of livelihoods than John ever could.

William, who has a degree in philosophy, political science and governance from Wesleyan University in the US, realised very early that only market-based mechanisms can lift the poor out of poverty. He wanted the artisans to start thinking like him, invest in warehouses, and become aware of what designs sold better, plan for seasons and work ahead of schedules. He decided to create a fund, Artisans Micro Finance Private Limited (AMFPL), a fully owned subsidiary of Fabindia that would bring these artisans into regional supplying companies spread across the country. By creating private limited companies he also made it easier for these companies to borrow money from banks against orders from Fabindia.

In 2006-07, Sumita Ghose, who had been working with artisans in and around Bikaner in Rajasthan as part of an NGO since the mid 1980s, approached William with an interesting proposal. Ghose had founded a producer company, Rangasutra, which sold crafts of Rajasthani artisans in bigger cities like Delhi. But scaling up was a challenge because Rangasutra was not able to raise funds from the banks or private investors. When she heard Bissell was setting up AMFPL, she went to meet him. Around the same time she had also been talking to Vineet Rai of Aavishkaar. Bissell, Rai and Ghose decided to come together to register Rangasutra as Fabindia’s first community-owned company. Through AMFPL, Fabindia invested 30 percent, the artisans contributed 27 percent, Aavishkaar put in 23 percent and Ghose and the other employees of Rangasutra contributed the remaining. Fabindia also secured working capital loans for Rangasutra by standing as a guarantor.

Convincing the artisans to put their money into the company was tough, but Ghose says William made that happen. “He sat with the artisans and explained how inherently valuable their craft was and how it could be capitalised. He convinced them that they should also have a share in this value by investing in it. That was the key,” says Ghose.

Ghose was surprised when almost 1,000 artisans eventually invested Rs. 1,000 each to kick-start the company. One such investor was 52-year-old Paru Bai of Dandkala village in Bikaner, who like most other artisans working with Rangasutra, crossed over from Sindh province of Pakistan after the 1971 war. Bai today owns 176 shares of Rangasutra, of which 80 were purchased earlier this year at Rs. 400 a share (as against a face value of Rs. 100). She understands that these shares represent her right to demand work from the company, apart from being a neat instrument of saving.

“We were nomads, there was no stability in our life, no secure way of earning money. Today, we benefit from the steady orders,” she says. Bai, her daughter and daughter-in-law earned between Rs. 2,000 and Rs. 3,000 per month each. Today, she has a pucca house, with a fully tiled toilet (a novelty in her village) and a barbed wire securing the house.

Over the years, Rangasutra’s business has grown rapidly, from Rs. 30 lakh in 2006, to Rs. 7.5 crore in 2010-11 and the company is profitable. Fabindia has gradually reduced its holding to about 25 percent today. Ghose says that although Fabindia is their largest buyer, Rangasutra is free to find other buyers.

Like Rangasutra, Fabindia created 16 other supplying companies. Till 2010, only 14 out of these 17 companies were profitable. Two companies are in the process of being merged, and one has been shut down.

Bissell faced resistance from inside Fabindia. Many felt that splitting the supply chain from a centrally managed operation into 17 companies would place a huge burden on the system. There were concerns that artisan shareholders would start driving up prices or not send supplies on time because they had more power now. It was a radical idea but Bissell knew that if this plan succeeded the company would achieve two things: Fabindia would get an assured supply chain and artisans were empowered to control their means of livelihood. It’s been a hard long grind, and even though the system is not perfect, it has been streamlined to a large extent. The investment for the last four years has created a capacity that will take Fabindia to its next trajectory of growth. “We have a locked in supply chain that’s hard to replicate, there’s enough capacity to double of our turnover without blinking an eye,” says Smita Mankad, head, SRCs (supplier region companies), Fabindia.

Bissell says that the Rs. 8 crore investment that Fabindia made in these SRCs is now worth three times that. Fabindia’s shareholding in these companies ranges from 25 percent to 49 percent. A micro exchange set up by AMFPL, allows artisans to trade shares. Over the years, as more artisans become shareholders, Bissell says Fabindia’s holding will come down to an average of 26 percent.

After five years, Rai says he is looking to exit from these SRCs but says he is afraid that he won’t be able to get a market valuation for his holding because Fabindia wants to keep share price appreciation modest. The fear is that if valuations are high some artisans will think it is better to sell their shares. Bissell denies there’s any attempt to control share prices and says he would be happy to see valuations go up because it benefits everyone.

Ghose, on the other hand, agrees that Rangasutra and Fabindia have decided that the artisan share-holding should not decline. Says Ghose, “The current share price of Rs. 425 is a little modest if one looks at the company’s performance and the current market scenario, but we do not want to over-inflate the share price.” If the price is too high, she says new artisans will find it difficult to become shareholders. As for the eventual price at which Rai would sell, she says, it is the Rangasutra board and not Bissell, who will decide.

Of the six members on the Rangasutra board, three are artisans. “I don’t know whether I’m right or they are. The question remains, should artisans make money or should they own the company?” says Rai.

Revving Up
Having painstakingly built the capacity over the last four years, Bissell now plans to turn his attention to scaling up his network of stores. “The brand is much bigger than the size of the company, and by a multiple, it will be a shame if we don’t capitalise on that opportunity,” says Sunil Chainani, executive director of Fabindia.

A critical part of that expansion plan is to take the brand to tier 2 and 3 cities through a new format called micro stores. These are smaller stores, which do Rs. 50 lakh turnover a month, about 600-800 square feet, work on a single shift and are not open on Sundays.

Fabindia has already opened six such stores to understand how that model works, and by the end of this year, there will be 30 such stores. “When we had fewer stores, the quality of the managers, their understanding of product was much more intense. Now with over 140 stores that’s a real challenge. On a monthly basis at least 7 or 8 being replaced, to get the ethos of the company ingrained in smaller places like Nellore is going to be a challenge,” says Charu Sharma, chief operating officer.

Over the years, Fabindia has added several new product lines to its business — from apparel to furniture, jewelry and personal care products and even organic food. But it kept adding new SKUs (stock keeping units) in the existing space with the result that many of its stores are now packed to the brim.

For instance, furniture is now a Rs. 100 crore business, but it is still being sold from ready-to-wear stores. There are only four standalone furniture stores in the entire country. Last year, Bissell decided to open a new concept store for furniture, the first one recently opened in New Delhi where a consumer can see five different kinds of bedrooms, living rooms and kitchen furniture. Over the next four years, Fabindia wants to open 10 more such stores.

In the past, William has grown the company in a cautious way, keeping investments tightly controlled and with a very close eye on the bottom line.

Till 2002, the company would open only one new store every year. Fabindia is one of those rare retail brands that does not advertise or even give discounts. “Mr Bissell is a very astute businessman and very hard negotiator,” says Arvind Singhal, chairman, Technopak. “Malls will not announce the rate they are giving to Fabindia, but I’m sure he enjoys better rentals than other brands may be enjoying,” Singhal adds.

“I love being a sharp trader, a baniya. Investors tell me you are a brutal negotiator and I tell them if you invest in my company you will have the benefit of the same,” says Bissell.
Simran Singh, head of markets, says that Fabindia’s obsession with profits is a result of its history, “Lots of other retailers have grandfathers with deep pockets or they are living off the stock market so cash is in plenty and they can afford to postpone their profitability. Fabindia has not given itself that option. Every new store we open has to be profitable from year one. We don’t look at break-even.”

A four member expense committee consisting of Chainani, Singh, Sharma (COO) and Mukesh Chauhan (CFO) looks at every proposal for a new store and the go-ahead is given only when it’s sure that the store will be profitable. “We are very nimble, sometimes we reach a decision within an hour, at other times it takes couple of days,” says Chainani.

Even though over the years, Fabindia’s growth has been good, Bissell does get the estimate wrong sometimes. An internal memo written by him in December 2008 shows that against a targeted growth of Rs. 450 crore for 2008-2009, Fabindia reached revenues of only Rs. 325 crore. The Mumbai terror attacks and a slow down in the economy contributed to the sluggishness, but a gap of Rs. 125 crore also proves that retail is in the end a fickle business. The company reacted swiftly by cutting senior employees’ bonus by over 50 percent. Till such time Fabindia was a closely held company, a bad year was a matter of private concern. With a large outside investor now coming in, there will be a greater scrutiny.