VIP Industries has been one of the early implementers of the China+1 strategy, even before the pandemic. One of the important decisions that they took to see beyond the China+1 strategy was starting Bangladesh operations in 2013
In a candid conversation, Dilip Piramal, Chairman of the world’s second-largest luggage company – VIP Industries, talks about how leveraging some of the sectoral tailwinds, amplified by – internal operational efficiencies, strong brand activations, attractive designs, and strong customer communications, helped the company to witness an all-rounded growth across brands, segments and channels.
Edited excerpts
After two challenging years owing to Covid-led disruptions, VIP recorded healthy sales in FY23 with revenues crossing the Rs 2,000 crore mark for the first time. What factors contributed to this growth in sales?
There are a few factors that contributed to our overall growth story. To begin with, fundamental demand came back very strong post-Covid, it was not a pent-up one-time demand but seemingly more fundamental; people may have started valuing travel more and have increased frequency than before. That said, key demand indicators remained consistently high throughout the year and fuelled growth. Airline passenger traffic through the year increased to come back to pre-pandemic levels. Hotel occupancy levels recorded the highest level and have remained consistently high throughout the year.
In addition to the overall consumption growth of the industry, there was a sharp shift from the unorganised sector to the organised. Almost half of the luggage industry was expected to be a part of an unorganised sector, but it has been yielding to the organised sector gradually over the years. The shift accelerated with GST implementation, and further, during the pandemic, there was a complete breakdown of the supply chain in the unorganised sector. This was also a key factor adding to the tailwind and is expected to continue, though with lower intensity in the forthcoming years. We, leveraged these sectoral tailwinds, amplified by – internal operational efficiencies achieved by increasing upstream control, strong brand activations, attractive designs, and strong customer communications. We witnessed all-round growth across brands, segments, and channels.
Is demand on the ground strong enough?
The growth in the value segment not only resulted in a high growth rate overall but also helped in gaining market share. This was backed by a hard luggage strategy based on polypropylene-made moulded luggage and significant investment in ramping up own manufacturing that led to competitively superior cost efficiencies. What’s more? Cutting-edge innovations in Skybags and VIP brands—tech-enabled, FIFA cobranded, and several such themed innovations caught the eye of consumers. Further, aggressive investment in brand advertisements and activations added to the growth impetus. In addition, our international business also saw a significant shift with the doubling of our revenues in FY 23 compared to pre-Covid.
During our previous conversation, we engaged in a discussion concerning your reliance on China for sourcing a significant portion of your luggage. It is interesting to see a gradual reduction in this dependency. Could you elaborate on the significant transition of reducing dependence on China?
Our impressive growth story during the year was on the back of a completely remodelled supply chain. During our initial conversation, I always talked about how VIP Industries has been one of the early implementers of the China+1 strategy — even before the pandemic. One of the important decisions that we have taken to see beyond the China+1 strategy was starting our Bangladesh operations in 2013. In fact, we have expanded it exponentially post-pandemic. In the two years following the pandemic outbreak and lockdowns, (FY22 and FY23), we have scaled up production more than 2.5 times. Today, with a workforce of approx. 6,000. With 800,000 square feet spread over 8 factories, VIP Bangladesh is one of the single largest multi-category bag-producing facilities in the world. 70 percent of our revenue is manufactured in-house between India and Bangladesh. Due to this strategy, that we adopted earlier, our China dependency is down to only seven percent, compared to ~ 50 percent pre-pandemic.
Meanwhile, a major fire incident happened at your Bangladesh factory, which contributes nearly 10 percent of consolidated revenue. How is the factory now getting back into shape?
It was disheartening! The fire incident occurred at one of the eight factories in Bangladesh. However, the Bangladesh factory had full insurance coverage. While operations completely ceased at this facility – we quickly covered the supplies with outsourcing stopgaps and accelerated the activation of pipeline capacities that were earmarked for the coming months.
In addition to the pandemic, there was also the Future Group episode that occurred, significantly impacting a substantial portion of your sales and potentially affecting VIP’s revenue. Considering these circumstances, have you successfully overcome the hump?
Initially, the Future Group alone contributed to around ~ 15 percent of our revenues. The sudden closure of ~ 450 stores across the Future Group banner posed a huge challenge for us at the beginning of FY 23. Our teams were quick to recalibrate and found alternatives to catch the demand in the catchment areas of these stores through other Moder Trade (MT) chain stores, EBO’s and MBO’s along with promotional fests (kiosks) within malls. We were successful in tapping into the demand quickly through the alternatives and the MT channel grew by 60 percent against the odds over the pre-pandemic base. Now that most of the erstwhile Future Group stores are functional under the Reliance banner and doing well, we have emerged stronger from the setback.
Is it true that VIP Industries, as a part of its strategy, is focusing on the mass category, a sector in which Safari has been slowly gaining market share? Additionally, do you contemplate venturing into new markets or proactively engaging with customers who express a desire to minimise reliance on China, thereby expanding your export basket significantly?
The value segment, as mentioned before, was a strategic focus and a major growth driver for volumes as well as share gains for the year. The segment had an accentuated tailwind, and VIP’s play in the segment pre-pandemic was not to its full potential. Unorganised players – mainly operating in the value segment – have been yielding to branded players since even before the pandemic, which was a major tailwind for the organised sector. Our competitive PP strategy was aimed at tapping this growing market. It is visible in our value brand growth of over 75 percent compared to pre-pandemic and its salience going up to 38 percent compared to 25 percent pre-pandemic. Also, the international business reported significant growth this year, with the highest-ever revenue and over double its pre-pandemic portfolio. The bottom line is that our growth this year was driven by deeper penetration in existing geographies. In the coming year as well, we will focus on deepening our presence in existing high-potential markets. Beyond that, from FY25 onwards, we may look to expand in the US and European markets. Having said that, our focus on expanding international business would be more from a branded point of view and not white-label manufacturing.
How do you view the trend where consumers are opting for lower-priced or budget brands like Aristocrat and Sky Bags? Is it somewhere hampering VIP Industries?
The branded luggage sector in India is still in its early stages of penetration, a major growth driver is new consumers and therefore higher demand for the low-priced value segment. To maintain its dominance in the sector, VIP Industries must be the brand of choice for value-seeking consumers. The brand ‘Aristocrat’ plays the leading role in tapping into this opportunity. At the same time, we see good demand for the mass premium and premium segments ahead. Our power brands, VIP, Skybags, and Carlton, play a pivotal role in tapping into this demand.
We are seeing consistent growth across our brands, catering to both premium and value customers. In fact, our premium brand, Carlton, reported the highest growth across brands this year. Even other industries, be they cars, phones, or even household items, have been reporting rapid pick-ups in premium segment demand.
Give us some insight into the demand for domestic and international travel. Because I feel there’s an outsized demand for both?
You are right. There is a growing demand for both domestic and international travel. ICRA has predicted growth of 8 percent for domestic air passenger traffic in FY24 (145-150 million), surpassing pre-Covid levels in FY24. International passenger traffic is expected to surpass pre-Covid levels in FY23 itself and then exceed its peak traffic level, which it touched in FY19. That said, Global aviation company Boeing forecasts India’s long-term passenger growth rate of nearly seven percent annually over the next 20 years. Travel booking websites are reporting an upward trend in bookings this summer (domestic and international) despite airfares being 60 percent higher than pre-pandemic levels. A research report by the travel search engine Kayak points to a sharp uptick in summer travel searches in India.
As outbound travel from China has ebbed – airline and hotel companies around the globe are tempting Indians to travel and stay abroad with discounts and buy-one-get-one-free deals. While railway traffic recovery is slow, bus travel has seen growth at an unusually rapid pace in India post-Covid as per Inter City Smart Bus cofounder. Considering all these data points, we expect the luggage sector as a whole to grow in the range of 10-11 percent and within that branded segment to grow 15 per percent.
What are your expansion plans in terms of store expansions and domestic manufacturing? Also, can you give us an insight as to what impact this will have on your top line?
As far as our store portfolio is concerned, we exited FY23 with a store portfolio of 500 stores. For the year FY24, we aim to add another 300 to take our portfolio to ~800 stores. With respect to adding manufacturing capacities – we spent Rs 100 crores in FY23 and would further, invest Rs 200 crores in FY24 to create capacities for the next three years. We forecast peak revenue potential of this capex would be around Rs 3,200 to 3,500 crore. That said, our expansion would be in the form of greenfield as well as brownfield in India as well as existing SEZ locations in Bangladesh. Currently, our capacities are running at almost 100 per cent and we have pegged our capacity additions in the future to have a utilisation of ~80 per cent. We conduct a bi-annual exercise called LTCP – Long term capacity planning – wherein we continuously monitor demand for a rolling three-year period. Based on demand, we evaluate which part of the country and what categories the output of this exercise was undertaken. Our capacity expansion is planned based on this output at the most optimised location.
