FabIndia: Crafting success

Indian craft-focused retail chain FabIndia implements a stock ownership plan to allow suppliers to share in its business success.
Mention FabIndia to most of IndiaÆs urban, upmarket shoppers and chances are they will have at least visited one of its stores, if not shopped there. Now William Bissell is on a mission to ensure his suppliers reap the benefits of the brand that he has nurtured.

Bissell took over as managing director of FabIndia in 1999 and today heads a network of 87 stores in 39 cities in India as well as branches in Rome, Dubai and Guangzhou with a turnover in excess of Rs3 billion ($68 million). Plans are afoot to grow the network to 250 stores in the foreseeable future. FabIndiaÆs profits are not public (the company is closely held) but Bissell does say that an investment of Rs5,000 in 1978 would be worth Rs2 million today.

His father John, who had worked in India as a consultant for the Ford Foundation, founded FabIndia in 1960 to showcase Indian handloom textiles to the world. He opened the flagship Greater Kailash, New Delhi, store in 1975 to retail home furnishings, and subsequently expanded into garments. At the time, the business largely catered to overseas buyers.

ôWe wanted to be in control of our own merchandise,ö says Bissell, explaining the decision to shift focus from the export market to the domestic market in the mid-nineties.

Today FabIndia has expanded beyond textiles into furniture, stationery, pottery, organic foods and bodycare products. All merchandise is sold under the single FabIndia brand and the company owns all its stores as Bissell feels this helps the brand to maintain its identity.

FabIndia works closely with artisans and villagers to develop designs and colour palettes and to optimise production techniques and raw material inputs. For the textiles, mostly natural fabrics and vegetable dyes are used.

ôWe attract a specific type of customer and decided we want to give that customer the spectrum of products,ö Bissell says of the product diversification strategy, adding that FabIndiaÆs customers do not fit an age or demographic profile, but are a loyal base of people who want to support craft.

But Bissell is also candid in admitting that some of the diversifications have had unexpected problems. For example, FabIndiaÆs range of organic foods, which it launched in 2004, has a limited audience and as it is perishable has a shorter shelf life than other FabIndia products.

FabIndia sources its products from around 22,000 craftsmen and artisans across India and has a plan to increase its supplier base to 100,000 in the next few years.

Last year Bissell went one step further in trying to ensure he is sharing the wealth FabIndia creates with those who are helping him to create it. FabIndia floated a wholly-owned subsidiary, Artisans Micro Finance, which will create community-owned companies. For each company, a calculation is done of how much working capital it needs, then this is financed two-thirds through debt and one-third through equity. FabIndia is working with Indian private sector bank, Axis Bank (the erstwhile UTI Bank), to provide the debt.

The craftsmen will own 26% of the equity in the company and will buy in at a price cheaper than external investors. Of the balance, 49% will be owned by Artisans Micro Finance and the rest by financial investors and FabIndia employees.

Bissell had already tried something similar in the past. When he returned from studying in the US in 1988, he set up the Bhadrajun Artisans Trust in Jodhpur, which is in Rajasthan. It was conceived as an artisansÆ cooperative for leather workers and weavers based in the state.

ôI was an idealist, I had strong left leanings and wanted to change the world,ö reflects Bissell. But the cooperative model, based on collective ownership and decision-making (each member has one vote regardless of investment), did not turn out as Bissell expected.

ôDecision-making paralysis set in with the community ownership,ö explains Bissell. He learnt from the BAT experience and spent the nineties researching forms of community ownership and working with banks to see how liquidity for the companies could be provided before he launched the current scheme. Stock ownership is integral to the community-owned companies and shareholders give power to a board, which delegates to a management team.

FabIndia has so far created 17 such companies across the 17 regions in which it operates and Bissell is confident that this year, 16 out of the 17 will pay a dividend. ôThe way we envisage it is when the shares start paying dividends, the artisan can borrow against the shares,ö says Bissell.

The craftsmen can trade the shares among themselves and use them as collateral for loans. FabIndia has also created a mechanism that enables investors to exit their investment by getting certified auditors to value the shares based on the turnover and profitability of the company. And the experiment is proving a success. Artisan shareholders in the companies in Chanderi in Madhya Pradesh and Jodhpur in Rajasthan have already seen the value of their investment grow.

ôMaking our suppliers shareholders is a way of creating binds to the larger organisation,ö explains Bissell, who views his network of artisans as integral for him to achieve the growth targets he has for the firm.

Bissell feels so strongly about this that he is writing a book, Realising GandhiÆs dream: a framework for the governance of India, which aims to update Mahatma GandhiÆs ideas about a republic of largely self-governing rural communities.

FabIndia has grown mostly through internal accruals and the majority shareholder is still the founding family. Other shareholders include business associates, directors, employees and former World Bank president James WolfensohnÆs investment fund, WCP Mauritius. WCP bought a 6% stake in FabIndia in 2007, at a price which valued the firm at around $180 million.
Bissell does not rule out an initial public offering of the firm but is emphatic that an IPO has to come ôat the right timeö.

He says he is inspired by different brands for their success in different niches û he cites the way Zara does apparel, Crate & Barrel does home and Crabtree & Evelyn does bodycare as examples, saying: ôThe way the brands are run is exemplary.ö

FabIndia recently forayed overseas and has had some early success. For example, its store in the Gulf has been quick to take off. But this has only reinforced BissellÆs conviction that it is the Indian diaspora that makes FabIndia a profitable business. Penetrating overseas markets is a ôfocus but not a large focusö, says Bissell, who sees customers in India as the mainstay. The business derives 90% of its revenues domestically. ôOur global expansion will be targeted at places where there are a large number of Indians,ö clarifies Bissell.

Bissell is clear that it is the firmÆs decision to stay focused over the decades of its existence that is responsible for its success. ôWe have consistently operated in the niche we identified initially,ö sums up Bissell, explaining the firmÆs philosophy. ôWe are like a restaurant which serves only one kind of cuisine.ö And with takers abounding for that one type of cuisine, it is clear Bissell is on to a good thing.

This story was initially published in the September issue of FinanceAsia magazine.
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