The rupee is off 21.3% from highs hit earlier this year. It’s not the decline that matters to me as much as the rate of change. Think of it this way, the Rupee hit all-time peak and trough all in the same year vs the dollar.
Whenever evaluating FX changes in this business, one must always net out the sourcing change vs. the revenue translation change. The good news here is that most companies have failed miserably in any effort to grow in India.
On the cost side, there are clear opportunities to up the proportion of product sourced in India. Only 3-4% of our apparel and 0.5% of US-consumed footwear is sourced in India. To be clear, there are structural reasons why this is so low, the least of which are logistics and receptivity towards foreign direct investment. But if an Indian government that increasingly needs to bow to a populist positioning opts to lower the barriers for the US to tap into Indian labor and apparel sourcing capacity, then we could be looking at a net positive for the industry by sometime in 2010.
As it relates to revenue…
… there are few companies that have any presence at all. Interestingly enough, one of the top brands in India is Reebok – after years of Reebok endorsing the National Cricket team. This is one of the few brands where there is, in fact, a positive delta between Indian-denominated revenue and costs. We’re talking less than 3% for Adidas/Reebok, but there is exposure nonetheless.
As it relates to Nike, presence in India was fairly limited until Nike outbid Adidas and Reebok in 2005 for the contract to outfit the Indian National Cricket team. To those that do not know, Cricket is to India what Hockey is to Canada, Football (soccer) is to Europe, and Baseball/Football is/are to the US. Nike bid 1.97bn rupee in ’05 for this deal, which then equated to US$430mm over 5 years. The cost since escalated to $490mm, and with the recent correction in the Rupee, we’re now looking at $380mm. Why is this good? Mark my words, there is no way Nike is within shooting distance of making money on this endorsement contract. When total cost comes down more than total revenue, that’s generally a good thing.
VF acquired a 60% interest in a newly formed joint venture with India’s Arvind Mills to design, market and distribute VF- branded products in India for a total cost of approximately $33 million – or about 1x revenue. This largely covered its Lee and Wrangler subsidiaries. This business is not hugely accretive to the P&L, but it does in fact run at a profit. This is likely a topic VFC calls out in the coming quarters as an area for weakness.
Other specific call outs… Arvind is a key manufacturer and licensee to Phillips-Van Heusen, VF Corp, Tommy Hilfiger, and Cherokee Inc. Arvind has been manufacturing and distributing Phillip-Van Heusen’s Arrow brand in since their agreement in March 2008. Arrow was a 65 million dollar brand for PVH, 12.3% of PVH’s wholesale dress furnishings segment and 2.6% of total net sales in 2007. Arvind is one of nine Cherokee licensees and represents about 0.5% of total revenue.
The last, and by far the most important point to me is how CEO’s view India as a strategic risk vs. opportunity. Any time we see emerging markets blow up, the second tier players with no real strategy or reason for being run for the hills, write down assets, and find other geographies to ‘fish where the fish are.’ Case in point – check out the sheer number of companies that decided it was a good idea to invest in China over the past year AFTER a massive run in the currency (see our 9/18 post The Race To China).
But the winners will take that opportunity to invest capital despite near term pain to establish dominance to be in the pole position for when the market turns. This is what Nike did in Brazil, Argentina, and Mexico 5-years ago. It was #3 in those markets, and when they blew up, it invested and now it is #1 by a wide margin. Same goes for both Nike and Adidas in China.
This is an opportunity for CEOs to show some backbone and show that they really believe in their Brand and opportunity to execute.