Managing Director, Fabindia
Size and scale
Over 100 stores, products sourced from tens of
thousands of artisans across the country.
Claim to fame
Made social entrepreneurship uber chic.
What we created is what people now call inclusive capitalism.
- Organised artisans under 17 companies.
- They own shares in these companies along with Fabindia and other investors.
- As shareholders, the artisans decide how to run the company, at what rates to sell, and how to scale up.
- Some have mechanised processes to increase production; others have started selling new products such as jewelry.
- Artisans can sell their shares or stay invested.
In our model, artisans are shareholders along with other investors and Fabindia. It now covers 95 percent of our supply chain, which is about 28,000 people across the country. We have 17 companies, of which 10 are profitable. By 2010, there will be
We defy conventional wisdom which argues suppliers ought to be squeezed.
From the outset, we were clear whatever model we adopt, it meets three criteria: Make business sense; be in line with our philosophy of strengthening the supply chain; and make a difference to people’s lives. The model we work on fulfils all of these conditions.
I have seen retailers in the West squeeze their suppliers so hard that many are forced to set up their own brand, which in turn competes with the company they once supplied to. Suppliers do this because their margins are always under pressure.
We’re saying here, why be adversaries? It’s okay to partner with people. That way we achieve more. This comes from Fabindia’s theory that business is not a zero sum game. The health of a business depends on keeping everybody in the chain happy, which is what this model does. If you starve suppliers of funds, we do not have the capital accumulated to make investments that can take your product to another level. We have been able to innovate because we try and give our supplier companies, which are partly artisan-owned, a good deal so that they have an investible surplus to go ahead and make investments. That is what I call the partnership model of capitalism as opposed to “I’ll squeeze you as much as I can” and make a quick buck model. When you are dealing with the poor, a bust can mean a loss of a substantial portion of their livelihood.
Six years ago, we set up a pilot project in western Rajasthan and tried to get artisans to invest in it. They were reluctant, but they eventually did. They didn’t know what to expect at the end of year one. When they were paid their dividends though, they could see the merits in the model. They figured that prices are linked to profits the company makes and consequently to the value of their shares. They became converts.
On our part, we learnt two things. The first being, always have liquidity. When people repose trust in an unlisted entity, you need to ensure that when somebody wants to sell a share, there are buyers. And linked to that was the second lesson. Your valuations should not go out of sight. That way, you avoid boom and bust cycles. When you deal with the poor, you realise it can mean a loss of a substantial portion of their livelihood.The rollercoaster you see on stock markets usually has nothing to do with a company’s performance.
Today you see companies that perform well being hammered on the markets for no obvious reasons. Valuations have nothing to do with reality. But we have consistently ignored the valuation game and went back to focussing on boring old things like the fundamentals of a company — profitability, assets, dividends — and linked valuations to that. Sure, valuations will not grow by leaps and bounds this way. But we know that this way, artisans will get value for their money wherever and whenever they invest.
We also built in a lot of redundancies in the system that ensures when a person wants to sell, there is a buyer. We have not used these redundancies yet. Hopefully, we never will. But they exist because I believe it would be financially irresponsible if they did not exist.
I also think a lot of people in business are like cowboys. They play fast and loose with people’s money. Our relationships with artisans are built on trust and [they] trust us [to] be good stewards. It goes beyond making a buck and I think if you look at businesses over time the ones that do well are run by people who believe in the concept of stewardship.It is like running a university.
We had to document everything. I am very clear that you have to write everything down, the procedures, the manuals. We took a year to do it because the people who run these companies are also training the entrepreneurs.
Along the way, we found some fantastic entrepreneurs. My driver, I realised, is an entrepreneur. Now he is the number two person at one of these companies. We had another guy, who was the fixer kind. He could get permits from government organised, stuff like that. He now runs one of the toughest companies in the badlands of Uttar Pradesh. He hasn’t read a book on management. But you could write a book on how he manages.
In our model we don’t expect artisans to scale up their businesses. We help get access to raw materials, machinery needed for finishing, or certain types of processes that are needed. We make the capital investment that allows them to increase their marginal productivity. Right now, they are like farmers, in terms of having very low marginal productivity. Our effort is to increase that and therefore increase wages over time. We also run training programmes for these entrepreneurs because while you’ve got brilliant entrepreneurial skills, you have to teach them institutional safeguards.
What we have done is to template the whole process. How do you, for instance, call a meeting, conduct a shareholder meeting, do cash flow planning, do working capital requirement planning? How do you do all that? We have created templates to help with all that. In a way it is like running a university for rural entrepreneurs.The biggest challenge for the sector is the lack of a market.
Everything needs a market and given a guaranteed market, banks will invest money. If they don’t see that any investment will be risky. So access to markets and access to credit are most important. As told to Saumya Roy
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(This story appears in the 19 June, 2009 issue of Forbes India. To visit our Archives, click here.)