Fabindia Overseas Pvt. Ltd.

Case Analysis
Executive Summary

Fabindia was founded in 1960 with a mission to provide work and

employment to Indias skilled rural artisans and to protect traditional
weaving and printing skills.
Change in customer consumption pattern and increased income per
capita has given boost to domestic sales of Fabindia. In last five years
(2002-06), turnover of Fabindia has increased by 335% and profit by
422%.
Fabindias vision is to expand to 200 stores and grow its revenue to Rs
8.6 billion by FY 2011.
Key challenges in achieving target revenue of Rs 8.6 billion are
additional capital requirement, shortage of qualified personnel, threat
from new retail chains, increasing rental rates, and uncertainty in
supply.

Situation Analysis

Rapid
scale-up
would
require
more qualified
personnel and
formalization in organization. Absence of organized retail sector
in India has lead to shortage of qualified personnel.
New retail chains like Pantaloon, Trend Ltd, Shoppers World, ITC have
entered in garments sector posing potential threat to Fabindia. 70% of
Fabindias revenue are generated from garments. Small players like,
privately owned Anokhi, Govt. owned Khadi, State Govt owned
Phullkari, Rajasthali, Chunari etc have also expanded and opened their
shops in major cities of India.
New product lines were introduced and have shown positive results. In
last two years organics and body care revenue has seen a growth of
100 times.
Increasing number of shops will require more investments due
to increasing rental and property rates. Another major challenge for
Fabindia could be capital for expansion. For desired exponential growth
Fabindia may require additional external capital.
Supply chain of Fabindia is based on trust with uncertainty of supplies
from its rural suppliers. Estimate of supply has always been a problem
for Fabindia.

Problem Statement

To grow in terms of revenue to Rs 8.6 billion by FY 2011.

Alternatives and their impact

1. Increase efficiency of existing stores

In last five years operational expanses has increased from 21.8
% to 26.04 % of revenue. It has reduced the profitability of

organization. An expected saving of Rs 55 million expected.

(Source: Exhibit 5)

2. Increase Export Activity

After Fabindias main UK based customer, Habitat was acquired
by larger firm, Fabindia was not able to utilize its export potential
and has seen negative growth. In 1965, revenue from export was
at Rs 2 million. Currently export revenue has declined to Rs 1.02.
Exploring new market and clients may result in better results.
Additional revenue of Rs 2 million can be generated by focusing
on exports.
3. Collaboration and franchisee model
Franchisee model may have multiple advantages like increased
market presence, saving on labor cost, rental cost, and managing
cost.
Franchisee model may also tarnish image of Fabindia and
franchisee may use Fabindia brand name to promote its own
products. A carefully legally bounded agreement may be
required.
An additional average revenue of 3 million (10% of average
Fabindia store sales) may be expected from each franchisee
store.
4. Setting up new store (with external investing)
Average rental rates are at Rs 400/sq feet, Fabindia store size is
500 sq feet for small stores and 8000 sq feet for large stores.
Currently Fabindia has 49 stores and additional 151 stores of
medium size (4000 feet) will make an additional rental cost of Rs
241.6 million per month.
A new store on rental may have average Rs 19.2 million rental
cost per year with revenue of Rs 30 million per year. Other costs
may include hiring personnel, salary and other maintenance
cost.
5. Setting up new store (with internal investing)
Fabindia has reserves and surplus of Rs 338.51 million. Rental
cost of new store would be Rs 19.2 million per year. 15 stores
can be established providing additional revenue of Rs 450 million
per year (assuming average return per store as Rs 30 million)
6. Including more product line

Garment sector is facing competition by organized retail sector.

Including diverse product line like food and personal care can
generate new source of revenue while reducing competition.
Concept like organic departmental store may be used. Organics
and body care were introduced in 1998, till 2004 revenue from
organics were very less. In last two years organics revenue has
seen a growth of 100 times contributing Rs 25 million to revenue.
Expected growth opportunities and additional revenue could be
huge. Assuming moderate growth of 10 times in next two years
may result in 250 millions of revenue and 500 million in next 5
years.
7. Increase advertisement and marketing of Fabindia
products
Apart from opening of new stores advertisements are not issued.
Fabindia is sustaining on its quality and perceived value as
spread by word of mouth. Advertisement and spreading
awareness could result in 5-10% increase in sales. Expected
returns could be 125 millions per year by advertisement budget
of Rs 50 million (0.03 of sales revenue) which is far below than
industrial norms of 1 to 1.5 percent.

Criterion for evaluation

1. Consistency with organizational mission
No compromise with mission.
2. Extent of revenue contribution
An activity with higher level of revenue contribution will be
selected.
3. Profitability
The activity must be profitable when implemented.
4. Requirement of additional work force
Activity with minimum additional requirement of workforce will
be given preference.

Evaluation of Alternatives
Each alternative is evaluated against each criterion. Target is to
increase revenue of Fabindia, thus each alternative will be judged
against the extent of additional revenue it can generate.
Points equal to additional revenue is provided to each alternative. One
or more alternatives may be chosen to maximize the revenue as all
these activities are mutually exclusive.
Increase efficiency of existing stores
Consistency with organizational mission: Yes

Extent of revenue contribution: Nil

Profitability: Yes (Rs 55 million)
Requirement of additional work force: Nil
External capital requirement: No
Result: No points awarded to alternative
Increase Export Activity
Consistency with organizational mission: Yes
Extent of revenue contribution: Rs 2 million per year
Profitability: Yes
Requirement of additional work force: little or not required
External capital requirement: little or not required
Result: 2 points awarded
Collaboration and franchisee model
Consistency with organizational mission: Yes
Extent of revenue contribution: Rs 453 million from 151 new
stores (Rs 3 million per franchisee)
Profitability: Yes
Requirement of additional work force: little or not required
External capital requirement: little or not required
Result: 453 points awarded (Table 1.2)
Setting up new store (with external investment)
Consistency with organizational mission: Depends on new
investing partner
Extent of revenue contribution: Rs 4530 million from 151 new
stores (Rs 30 million per store)
Profitability: Yes
Requirement of additional work force: large
External capital requirement: yes (approx 2500 million will be
required)
Result: rejected as mission cant be compromised
Setting up new store (with internal investment)
Consistency with organizational mission: Yes
Extent of revenue contribution: Rs 450 million from 15 stores (Rs
30 million per store)
Profitability: Yes
Requirement of additional work force: medium
External capital requirement: No
Result: 450 points awarded
Including more product line
Consistency with organizational mission: Yes
Extent of revenue contribution: Rs 500 million

Profitability: Yes
Requirement of additional work force: little or not required
External capital requirement: little or not required
Result: 500 points awarded
Increase advertisement and marketing of Fabindia
Consistency with organizational mission: Yes
Extent of revenue contribution: Rs 125 million
Profitability: Yes
Requirement of additional work force: little or not required
External capital requirement: little or not required
Result: 125 points awarded

Evaluation result
Increase efficiency of existing stores: zero points
Increase Export Activity:2 points
Collaboration and franchisee model: 453 points (151 stores)
Setting up new store (with external investment): 0 points
Setting up new store (without external investment): 450 points
(15 stores)
Including more product line: 500 points
Increase advertisement and marketing of Fabindia: 125 points

Recommendations
With current growth rate of 50%, Fabindia could achieve its revenue
target of 8.6 billion by FY 2011. Fabindia has to maintain the growth
rate of 45% for next 5 years. Following actions may be taken from
maintaining growth rate of 45%.
1. Fabindia should setup 15 more stores which could generate Rs
450 million. More stores may be opened as and when Fabindia
has its own capital.
2. Fabindia should look for partners for franchisee and extensively
create more franchisees and must increase their number to 150
in next 3 years.
3. More product lines in organic should be included and organic
products should be boosted.
4. Better marketing and advertisement by allocating a budget of Rs
50 million.

Action Plan
Organic and body care

Organic and body care product line should be promoted, as these

product line has shown 100 times growth in last 2 years. Fabindia
should focus on organics and body care products.
Sales Target for organic and body care products.
Year
2007
2008
2009
2010
2011

Sales Target
100 million
250 million
350 million
450 million
500 million

Franchisee stores
Fabindia should first concentrate on franchisee model before opening
own stores. This will save case reserves. Franchisees should be
increased to approx 150 numbers in next 3 years.
Year
2007
2008
2009

No
of
franchisee
50
50
51

newTotal
no
of
additional stores
50
100
151

Establishing new stores

New store should be set up in three phases starting from year 2009.
Year
2009
2010
2011

No of new stores Total

no
of
additional stores
5
5
5
10
5
15

Revenue targets (source table 1.4)

Year
2007
2008
2009

Addition Revenue
250 million
550 million
953 million

2010
2011

1203 million
1403 million

Table 1.1 Rental Cost calculation

Store Size
Small (500 sq feet)
Medium (4000 sq feet)
Large (8000 sq feet)

Average Rent
Rs 400/month
Rs 400/month
Rs 400/month

Annual rent
Rs 2.4 million
Rs 19.2 million
Rs 38.4 million

Table 1.2 Franchisee Stores and expected revenue

Year

No
of
newTotal
no
franchisee store franchisee
50
50
50
100
51
151

2007
2008
2009

ofRevenue
store
3 million
3 million
3 million

perTotal revenue
150 million
300 million
453 million

Table 1.3 Establishing New Stores

Year
of No of newTotal
no
ofRevenue perTotal
operation stores
additional stores store
revenue
2009

30 million

Rental
charges
(@19.2 million per
year)
150 million 96 million

2010

10

30 million

300 million 192 million

2011

15

30 million

450 million 288 million

Table 1.4 Expected additional revenue

Year Revenue
fromRevenue
fromRevenue from newTotal Revenue
organics and bodyfranchisee stores
stores
care
2007 100 million
150 million
250 million
2008 250 million
300 million
550 million
2009 350 million
453 million
150 million
953 million
2010 450 million
453 million
300 million
1203 million

2011 500 million

453 million

450 million

1403 million