Fabindia Overseas Pvt. Ltd.

Case Analysis

Executive Summary
Fabindia was founded in 1960 with a mission to provide work and employment to India’s
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%.
Fabindia’s 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 Fabindia’s 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 Fabindia’s 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 can’t 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 Sales Target

2007 100 million
2008 250 million
2009 350 million
2010 450 million
2011 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 No of newTotal no of
franchisee additional stores
2007 50 50
2008 50 100
2009 51 151

Establishing new stores

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

Year No of new stores Total no of

additional stores
2009 5 5
2010 5 10
2011 5 15

Revenue targets (source table 1.4)

Year Addition Revenue

2007 250 million
2008 550 million
2009 953 million
2010 1203 million
2011 1403 million

Table 1.1 Rental Cost calculation

Store Size Average Rent Annual rent

Small (500 sq feet) Rs 400/month Rs 2.4 million
Medium (4000 sq feet) Rs 400/month Rs 19.2 million
Large (8000 sq feet) Rs 400/month Rs 38.4 million
Table 1.2 Franchisee Stores and expected revenue

Year No of newTotal no ofRevenue perTotal revenue

franchisee store franchisee store
2007 50 50 3 million 150 million
2008 50 100 3 million 300 million
2009 51 151 3 million 453 million

Table 1.3 Establishing New Stores

Year of No of newTotal no ofRevenue perTotal Rental charges

operation stores additional stores store revenue (@19.2 million per
year)
2009 5 5 30 million 150 million 96 million

2010 5 10 30 million 300 million 192 million

2011 5 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