Mirza International – consistent performer but undervalues at present?

I had a call with an ex category manager at flipkart (they worked at flipkart to manage brands in specific vertical which is footwear & apparels at different points in time). Here are the notes:

Q1. Can you please describe the nature of your engagement with mirza & red tape while working at FLipkart. What were your observations of the company while working there?
Answer:

1. Red tape kanpur based brand was a small brand earlier. Redtape earlier was mass brand. Improved a lot in terms of ASP. Definitely one of top 5 brand in Flipkart in casual footwear.
2. Flipkart, 4-5 verticals in mens footwear. Mens casual, formal, sports, flip-flop, open. Red tape comes into casual primarily. It is in the top 4-5 brand. 2 models how FK operates with RT (Red tape). Marketplace model & outright model. Marketplace: Redtape as a brand is listed as seller on FK. It could be nominated seller or their own warehouse. They lease selling warehouse.
3. Other model is outright where FK buys inventory from rdtape & stores in FK inventory.
4. Why so many models: Safeguard on inventory; SLA or availability how fast customer can receive the order.
5. Commercial side: marketplace model preferred by FK (Flipkart). In 2018 60% outright, 40% was market place model. Last 2 years transition marketplace is 80%, outright share is 20%
6. Commercials part: FK makes some money in marketplace model. Outright model has good control over the supply chain so that is also important. Stock, pricing etc. In Outright model, fk owns pricing.
7. Marketplace model: XYZ seller we charge them 14-15% commission. Redtape BAU (business as usual months), we charge 7-8% comission at flipkart. They also want to grow. So they support with some waver. Festive month: pricing cuts are very deep. Amazon does prime day we also do event. Diwali type month we also do 2-3%. Brand should also make money. To enable brand to do price discounting we reduce our commission
8. In outright model: there is no commission. There is cost price. Redtape there is a 500 rupee shoes. Flipkart buys at 200-300 rupees. Flipkart will do high discounting during holidays. Transfer price.
9. Marketplace: Two models: Redtape nominated seller & redtape itself is seller: Redtape will have limited warehouse. There are marketplace Flipkart FC (fulfillment centers) across india. We stock the FC with redtape inventory. Logistics fees is lower for zonal orders (order placed & fulfilled within same zone). National order 50% higher pricing. SLA can be lot better if stock is better in regional warehouses. Better customer experience. Slot filling is given to seller for top brands. Given on FIFO basis. Free of cost to brand. Collection is done by category manager of flipkart. Good custumer experience for FK. Good for brand since they do zonal shipment order. So save on the logistics costs.
10. Hub is the place where we store general orders after picking them up from seller warehouse. During big events flipkart goes on throttling hub gets choked, Flipkart will throttle. Low ASP it will stop showing less than 500 rupee tshirts.
11. Hub gets choked. Being in FC allows you to avoid the throttling. Ekart will take it from marketplace warehouse and store it in hub.
12. Hub can get throttled in festive season. So being in FC allows top brands (that category managers have picked) some sort of a competitive advantage since their sales can go on unfettered even when there is very high order inflow during sales time & FK has to throttle their hub. (this is an economies of scale advantage which comes from distribution idiosyncrasies).

Q2. Did you as flipkart have visibility into the inventory management of mirza & redtape & other brands? Can you tell me something about their inventory management of mirza?

1. When we go in outright model: most of times, this selection of top sellers. High repeating. Knows for sure it sells every day. We will have DOH (Days on Hand) 10 units per day. 100 stock. 10 days of stock. Accordingly we place order. Automated the orders go to vendor for replacement. Mostly 30 days we keep inventory.
2. Advanced planning goes on for seasonality stuff. If the purchasing has been done in SOR (sell or return_ model. Agreement to RTV (return to vendor) in 120 days.
3. Brand will give support to flipkart. 20 rs per unit support to flipkart. Additional discounting to customer. Flipkart will then liquidate at its own end.
4. Nike 999 campaign in BBB. FK knows we will not make any money. We bought only 20k units from puma, flipkart, adidas. Primarily for marketing.
   Key learning: two models here: RTV/SOR & non-SOR. non-SOR is better for brand. Need to figure out for each brand what is % of SOR vs non-SOR.

Q3. How did does redtape compare with the other brands that you handled in terms of growth rates, or unit economics for flipkart ?

1. Pecking order: Top tier: Addidas, nike, reebok; Tier 2: bata, sparx, redtape Tier 3: woodland
2. Good part about redtape: Availability, stock replenishment, huge presence in offline tier 3 cities. Redtape huge brand recall in india.
3. Ecom has allowed Redtape to expand very fast. They Also invested marketing etc.
4. Their selection is very good. What this means is that the Selection is not very specific designing (niche). Mass market kind of product such that masses can relate to the product. Not very specific. Designed for masses.
5. Adi, puma, nike they have huge brand recall in international as well as india markets. Redtape entered ecom in last 7 years. Known to be mass brand. Scaled up very well.
6. target Consumer for both tiers is very different who buys adidas & redtape. Look & feel is very different.
7. Adidas, nike, puma are also coming in 999 segment. So they have eaten the marketshare of redtape. (Sahil’s notes: need to be very careful about the competitive intensity & need to find a way to triangulate these marketshare data with more experts).
8. People are more into sports since it is more sports.
9. They should do more Product development could do wonders for them.

Q4. How does the unit economics work for a 1000 rupee shoes sold on flipkart? How much does flipkart make and how much does the brand make & does this vary from brand to brand?
Answer:

1. 6-9% commission for adidas, nike, puma. If there is 10% discounting then it could be split between flipakrt & brand together.
2. BAU also we can go to 2-3%.
3. The commission depends vertical to vertical.
4. 8% for cotton tshirt for redtape.
5. In general a larger brand has higher bargaining power to negotiate a better deal by virtue of bringing volumes. But deal contours also depend on what FK is getting. For example if the range is FK exclusive, FK might ask for lower commissions. If Brand do higher discounting on FK, FK might be ok with lower comissions.

Q5. Based on your experience in the industry, what do you believe are the key factors that will determine the long-term success of Mirza/Red Tape or any consumer facing brand in the Indian footwear and apparel market?

1. Top reason for success: selection & pricing. Combination of product & pricing. Cataloging, marketing are supporting. Product has to be good otherwise marketing wont help.
2. Overall: overall product offering; Design, color, overall product, competition in that price point.
3. Rating & reviews really really matter a lot for the customer.
   Sahil’s notes: need to benchmark the rating & reviews for Redtape & competitors to map out potential evolution better.

Q6. Are there any industry trends or consumer preferences that you believe will have a significant impact on Mirza/Red Tape’s future success? How is the company adapting to these trends?

1. Sports is faster growing than casual shoes. Data for growth: sports footwear has grown tremendously. It has taken the higher market share than casual.
2. Casual : redtape casual looks like sports then it sells better.
   Sahil’s notes (see previous feedback on product development. Clear feedback for Redtape here is to develop more sports shoes, They sell more. They are growing faster.

Q7. In the price ranges that mirza/Red tape operates, who are the key brands who were competitors for them who had roughly similar volume or value contribution to flipkart platform?

1. Asian : brand which is competing with redtape. Earlier used to be lower ASP, Now trying to compete in Redtape ASP range.
2. Sparx is also selling on same price point.

Q8. Mirza or red tape offers their goods at 60-75% discount all the time. Are there any other brands who also offer such steep discounts & does this actually work in terms of moving consumer psychology into buying those discounted shoes or apparel?
Answer:

1. Discounting doesnt matter now. Earlier customers placed a huge weight.
2. Customer has understood that ASP is what matters not the discount %.
3. Even FK has understood all that matters is the asp. (no more increasing price then discounting higher)

My key takeaways:

1. Hopefully will allow shareholders to ask pointed questions about SOR non-SOR mix, design choices (sports shoes vs casual) & learn management’s reasons for pursuing one vs the other.
2. We learned some interesting competitive advantages that larger brands have in terms of lower commission & fees from Marketplaces & also prioritized shelf space in marketplace warehouses to keep brand inventory
3. got to learn about who might be competitors in this space & threat of higher competition from international incumbents like Adidas, puma, nike.

Disclaimer: invested & biased. SOme interesting learning now.