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In this new era of retail, three corporate giants are leading the charge in India’s transition from unorganised to organised retail: Tata, Reliance & Aditya Birla. These powerhouses are not just adapting to the changes; they are shaping them and setting new standards in the industry.
Among them, Trent Ltd., a part of the Tata Group, stands out for its innovative approach. Known for its innovative store formats, trend-setting merchandise, and a deep focus on customer experience, Trent is redefining the retail experience in India.
In this article, we will cover
- What’s going on in Trent?
- Despite the success of Westside, what drove the decision to introduce Zudio, potentially its own competitor?
- What is the secret behind Zudio’s explosive growth?
- Zudio does not have an online presence, they don’t do discounts, and they don’t have seasonal clothing. So how is it able to survive in this highly competitive market?
- What is Trent’s competitive moat?
- Views and Valuation
First, some context
The story of Trent Ltd begins with a historical backdrop in post-independence India. Around 1950, India’s Prime Minister, Jawaharlal Nehru, was focused on reducing foreign exchange expenditure and promoting self-sufficiency across various sectors. At that time, the Indian market was heavily reliant on imported cosmetics, leading to a substantial outflow of foreign exchange.
To address this issue, Nehru approached J.R.D. Tata, the chairman of the Tata Group at the time. He proposed the idea of creating an Indian cosmetics brand to provide a domestic alternative to imported beauty products, thereby reducing India’s reliance on foreign brands.
Responding to Nehru’s vision, the Tata Group founded Lakme in 1952. Lakme was among the first cosmetic brands made in India, specifically catering to the needs and preferences of Indian women. Over the following decades, Lakme grew to become a leading cosmetics brand in India, well-known for its quality and suitability for Indian skin tones and climate.
In the late 1990s, the Tata Group decided to diversify into the retail sector as part of a strategic business shift. To facilitate this, they chose to leverage the well-established brand name and network of Lakme. However, the group’s vision was to broaden its focus beyond beauty and cosmetic products to a more extensive retail operation.
In line with this strategy, in 1996, the Tata Group sold the Lakme brand to Hindustan Unilever Limited (HUL). The proceeds from this sale were then used to establish Trent Ltd in 1998. Trent Ltd was envisioned as a broader retail venture, marking a significant shift from the Group’s previous focus solely on cosmetics and beauty products. This move into the retail sector represented a new chapter for the Tata Group, expanding its presence into a rapidly growing and evolving market in India.
Trent is divided into two main segments:
- Owned brands: Westside, Zudio, Landmark Xcite, Misbu, Utsa.
- Alliances: Star Market, Zara, Massomi Dutti
Owned Brands:
- Westside: A diverse collection including fashion, home decor, and beauty products.
- Zudio: Affordable, trend-led fashion and home essentials.
- Misbu: Quality, budget-friendly cosmetics.
- Utsa: Contemporary-traditional ethnic wear.
Alliances:
- Star Market: A supermarket chain for daily needs.
- Zara: Global fashion trends through a strategic partnership.
- Massimo Dutti: Sophisticated, upscale fashion and accessories.
Trent Growth
Trent Limited’s approach to expansion has been characterized by a strategic and cautious growth plan. Rather than a rapid, unchecked increase in store numbers, the company has consistently emphasized quality over quantity. This disciplined approach is evident from their operations from the year 2000 to 2017, during which Trent opened an average of just 7 Westside stores annually.
For Zudio, they leveraged the established infrastructure of Star supermarket stores. Trent meticulously assessed product viability before inaugurating their first independent Zudio store in FY18. This period of careful evaluation of store economics has led to a low rate of store closures, consistent sales per square foot, and an impressive return on capital employed (ROCE). Between FY18 and FY23, this measured approach gave way to a more robust expansion, with Trent’s store count more than tripling from 147 to 566 within a mere five years.
This accelerated expansion has had a direct and substantial impact on the company’s revenue. Trent’s revenue has surged, exhibiting a robust CAGR of 34% over the last five years. The most significant increase occurred in the last year, where revenue doubled to ₹8242 crore, from the previous year’s figures.
Trent’s profitability has remained robust despite the brisk pace of store rollouts. This can be attributed to Trent’s sharp operational execution, an increasingly significant contribution from private label merchandise, a tightly controlled supply chain, and a growing base of loyal customers.
Trent’s financial health is further evidenced by its key ratios. In the last five years, Trent Limited has managed to grow without compromising its profit margins and has maintained a healthy cash conversion cycle, indicating efficient management of its working capital.
Zudio: Accelerating Trent’s market dominance
In 2018, Westside contributed 96% and Zudio contributed 2.2% to Trent’s standalone revenue. As of FY23, Westside is contributing 52% and Zudio is contributing 48% to Trent’s revenue. So,
Despite the success of Westside, what drove the decision to introduce Zudio, potentially its own competitor?
To understand this let’s go back to the initial years of Westside. Westside started in 1998. Right from the start the aim of Westide is to provide premium shopping experience to its customers. Westside started in an era when there was not a high demand for branded apparel. It was just the start. So to cater to the right customers it opened it stores in Tire 1 cities and in these cities, their location was always in posh areas.
As economic growth permeated through Tier 2, 3, and 4 cities, there was a marked increase in disposable income and awareness of fashion trends. The consumers in these cities developed an appetite for trendy clothing, paralleling the demand seen in more metropolitan areas. Westside responded by extending its reach into these emerging markets. However, the expansion into Tier 2 and Tier 3 cities did not yield the expected success because of its premium image. The price points of Westside products, typically around or above 2000 rupees, were a deterrent for a demographic seeking both quality and affordability.
Trent Limited identified this gap between consumer desire and Westside’s offerings—a gap where demand for affordable fashion was not being met by the existing market. In response, Trent launched Zudio, a brand specifically designed to cater to this vast and growing segment. Zudio aimed to offer quality apparel at more accessible price points, effectively capturing the attention of a cost-conscious yet style-aware population.
In the last 5 years, the standalone store count of Zudio has gone from 7 to 352. They are also planning to open 150 new stores in FY24. So, the next question is,
What is the secret behind Zudio’s explosive growth?
- Pricing: Zudio’s competitive pricing strategy is at the heart of its success. It has a very attractive pricing proposition where you will get everything under 999. This pricing specifically targets the audience in Tier 2 to 4 cities, who prioritize affordable fashion over brand names. This strategy appeals to customers looking for fast fashion with quality at accessible prices.
- Private Labels and Fast Fashion: Owning private labels is key to Zudio’s identity as a fast fashion brand. This control over the inventory allows them to respond quickly to changing trends, churning out new inventory in just two weeks. This agility is inspired by Zara, a global leader in fast fashion, with whom Trent has a 50-50 partnership through Inditex Group. By managing its private labels, Zudio ensures a rapid turnaround, keeping their offerings fresh and aligned with current trends.
- Bulk Manufacturing: A critical component of Zudio’s success is its reliance on bulk manufacturing. This approach enables the brand to benefit from economies of scale, significantly reducing the cost per unit of clothing. By producing large quantities of each item, Zudio can negotiate better prices for materials and manufacturing, further keeping production costs low. This strategy aligns perfectly with their aim to offer trendy fashion at affordable prices.
- FOCO Model: Zudio’s explosive growth can also be attributed to its adoption of the Franchise-Owned Company-Operated (FOCO) model. Under this arrangement, franchisees invest in the store infrastructure and bear the capital expenditure, while Trent operates the stores, ensuring consistent customer experience and operational efficiency. This model accelerates expansion as it minimizes Trent’s financial burden, allowing rapid scaling without significant investment in fixed assets. Furthermore, it mitigates operational risks for the franchisees and leverages Trent’s expertise in retail operations to maximize sales and profitability. The FOCO model has allowed Zudio to penetrate new markets swiftly and establish a presence in various geographies with reduced operational risk and investment, underpinning their widespread adoption across India’s urban and semi-urban areas.
What is unique about Zudio?
1.No Discounts Strategy: Zudio stands out in the retail world by never offering discounts. Their philosophy is simple: the prices are attractive enough to encourage immediate purchases, without customers having to wait for sales seasons. This approach has several benefits:
- Encourages Immediate Purchases: Without the prospect of future discounts, customers are more likely to buy on the spot, ensuring consistent sales year-round.
- Builds Customer Trust: Consistent, fair pricing means customers never have to guess or wait for a better deal, fostering loyalty and repeat business.
- Protects Margins: Operating on thin margins, Zudio’s strategy to maintain steady prices helps them manage costs effectively, avoiding the need for clearance sales that can erode profitability.
This no-discount policy underscores Zudio’s commitment to providing value through their pricing, making trendy fashion accessible without the need for sales gimmicks.
2. No seasonal clothing: Not following the traditional seasonal clothing model allows Zudio to manage its inventory more efficiently. It reduces the need for clearance sales to move out-of-season stock, thereby minimizing waste and loss. This strategy aligns well with their fast fashion model, ensuring that their offerings remain relevant and desirable throughout the year.
3. Marketing Strategy: Zudio’s marketing strategy significantly diverges from conventional approaches. Rather than allocating substantial funds to traditional advertising, such as billboards, TV ads, or celebrity endorsements, Zudio focuses on delivering quality products at affordable prices. This quality and value proposition effectively markets itself through word-of-mouth, supplemented by influencer marketing, which aligns with their cost-effective and targeted marketing approach.
4. Only Offline Stores: Zudio’s decision to operate exclusively offline is strategic, driven by two main considerations: the high logistic costs associated with online sales and the substantial return rate for online apparel purchases, estimated at 25%. These factors would adversely affect Zudio’s already thin margins. Therefore, by focusing on a vast offline presence, with over 300 stores across India, Zudio can offer a tactile shopping experience without the additional costs and complexities of online retail, ensuring their pricing remains competitive.
Competition
Trent’s profits jumped to ₹371 crores, up by 140% from last year, with better profit margins but still investing a lot in new stores. While Trent is doing well, Aditya Birla Fashion and TCNS Clothing are facing tough times with higher costs and dropping sales. Vedanta Fashions, on the other hand, has great profits and returns but also saw a small dip in sales, showing that even successful companies are feeling the pressure from a slower economy and other challenges
What is the Moat?
Trent Limited has meticulously crafted a competitive moat that sets it apart from rivals. This moat, grounded in strategic brand positioning, innovative private labels, and invaluable experience garnered from international collaborations, underpins Trent’s sustained growth and market penetration. Let’s delve into the three core elements that constitute Trent’s moat.
1. Strategic Brand Positioning Across Price Points
Trent’s masterful brand strategy covers the entire spectrum of consumer segments by offering distinct apparel brands at varying price points. At the entry-level, Zudio makes fashion accessible with all products priced below INR 999, catering to the budget-conscious shopper without compromising on style or quality. For the mid-range segment, Westside offers a diverse array of products under INR 3,000, blending contemporary fashion with value. At the premium end, Trent’s partnership with Zara places it in a unique position to offer high-end fashion above INR 3,000. This strategic tiering allows Trent to capture a broad customer base, from value-seekers to luxury consumers, ensuring a pervasive presence across India’s diverse retail landscape.
2. Mastery in Private Label Retailing
A pivotal aspect of Trent’s success is its deep-rooted expertise in private label retailing. Historically, Westside transitioned from generating 80% of its revenue from private labels in 2013 to a complete 100% focus on private labels today. This shift underscores Trent’s proficiency in brand management and product differentiation, enabling it to deliver unique value propositions to its customers. Following Westside’s success, Trent replicated this private label model with Zudio, achieving remarkable success by offering 100% private label merchandise. This strategy not only differentiates Trent from competitors like Pantaloon and Reliance, which rely on a mix of private and external brands, but also fortifies its margins and brand loyalty through exclusive product offerings.
3. Leveraging Experience with Zara for Fast Fashion Mastery
Trent’s collaboration with Zara, one of the world’s leading fast fashion retailers, has been instrumental in sharpening its retail acumen, particularly in the fast-paced segment of fashion retailing. This partnership has endowed Trent with invaluable insights into the dynamics of fast fashion, from inventory management to trend forecasting and supply chain agility. Applying these learnings, Trent has significantly enhanced Zudio’s market presence, enabling the brand to offer trendy, affordable fashion at a rapid turnover rate. This synergy between Trent’s operational strengths and Zara’s global best practices has propelled Zudio’s growth, setting a benchmark in fast fashion that is challenging for competitors to replicate.
Valuations stretched despite growth
In assessing the valuation of Trent Limited through a Sum of the Parts (SOTP) analysis, we observe a stretched valuation despite applying generous valuation multiples. By assigning a Price to Sales (P/S) ratio of 8 to both Trent and Zara, and a more conservative ratio of 5 to Star, we aim to reflect the best-case scenario within the valuation framework.
When these optimistic multiples are compared against the calculated SOTP valuation, it becomes apparent that the resulting valuation exceeds the current market capitalisation only by 8.2%. This suggests that the market has already priced in a significant portion of the anticipated growth and efficiency gains into the current share price. Thus, even under the most favourable conditions, the market’s expectations seem to align closely with these forward-looking metrics, leaving little room for undervaluation arguments.
In Summary:
- Trent has shown strong growth with a revenue CAGR of 34% over 5 years.
- Profits remain strong despite rapid expansion and maintained operational efficiency.
- Zudio: The next big thing for Trent, growing from a 2.2% revenue contribution to 48%.
- Bulk manufacturing & FOCO model fuel rapid expansion.
- Valuation is high, pricing it above perfection.
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Disc: Trent is part of our Capitalmind Momentum Premium Portfolio. This article is for information only and should not be considered a buy or sell recommendation for any stocks.
