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Fabindia finding difficult to balance social, business interests

Artisans from 212 districts supply all the ethnic garments and other similar merchandise stocked in 162 Fabindia stores across the country.

, ET Bureau|
Jul 25, 2012, 01.45 PM IST
Fabindia finding difficult to balance social, business interests
NEW DELHI: As William Bissell prepares Fabindia for an IPO sometime in the future, he will have to wrestle with the task of reconciling the interests of two diverse sets of shareholders - poor artisans on the one hand and a global luxury brand on the other.

Artisans from 212 districts supply all the ethnic garments and other similar merchandise stocked in 162 Fabindia stores across the country.

They artisans have helped Fabindia become one of the most profitable retailers in the country with revenues of about Rs 500 core and net margins of around 8-10%. Other retailers average half of that. Today, 17 companies in which artisans own at least 26% equity are the exclusive suppliers to Fabindia. They are not shareholders in Fabindia yet, but Bissell says artisans will be a 'large shareholder constituency' when the company eventually goes public.

L Capital, the private equity arm of LVMH - Moet Hennessy Louis Vuitton - the word's largest luxury goods group, will soon be another shareholder. L Capital is waiting for FIPB nod to invest 120-crore in Fabindia for an 8% stake - the deal will value the company at Rs 1,400-crore.

The two are as incompatible as roti and caviar. And yet, Bissell believes Fabindia, a 'social enterprise' founded by his father John Bissell in 1960, can meet the diverse aspirations of both shareholders equally well.

He sees L Captial's entry as a "source of strength" for rapid future expansion. The PE investor will not undermine artisans, but help create more value for them in the long run. This deal, he adds, will help benchmark the value of the company, helping it raise money to finance growth. "L Capital respects our long term view," Bissell says.

"It may be a question of perception management. People don't understand that an investor or shareholder doesn't necessarily run a business."

Fabindia's unique model that blends commercial interest with a social objective is what attracted L Capital, according to Ravi Thakran, managing partner, L Capital. "It has a potential to become a global leader and we'll be glad if we could help it scale to that level," he told ET in an earlier interview.

Others aren't so sure the two can tango. If Fabindia has managed to strike a balance between social objective and profitability, that's because dominant shareholders Bissell and family are fully aligned to the company's social mission. But some fear that PE investors - Azim Premji Invest also picked up 7% stake in the company this March - may come in with their own set of demands, diluting Fabindia's social agenda. After all PE funds work on the single objective of value creation.

Surprisingly, Vijay Mahajan, founder & chairman of Basix, pioneer in Indian microfinance, isn't one of them. "Most PE investors are sensible people who carefully evaluate a business and the entrepreneur and will do little to disturb their natural tendencies," he says.

"There is no way PE can dilute Fabindia's values or social objectives unless William would like to change those."

Bissell is hoping that private investors will adhere to a credo - why fix it if it ain't broke. Fabindia has built a formidable network in 38 cities. It now wants to add 350 more stores in tier-two towns by 2015. Internal accruals have been enough so far, but future expansions demand higher investments. The plan is to dilute a total of 25% of Fabindia's equity. Says Bissell: "There's a thirst for businesses with integrity and purpose. So there's no question that fresh investment will come without any strings attached."

A Social Brand

There's one thing that works in Fabindia's favour. The brand has been built on the foundation of 'social mission'. "Any smart investor will understand that if we take social purpose out of our business that would take away the soul of the brand," Bissell adds.

Bissell is doing the best he can, says Vineet Rai, CEO, Aavishkaar, a social venture capital fund. "His model is pretty simple - sell products that originate in rural India - and there's no dearth of that in the country. So the more capital he'll generate, the more he'll be able to sell." There's no dissonance in high-end investors and company's larger social vision. Aavishkar has invested in some of the artisan-owned companies that supply to Fabindia. For instance, it holds 23% in Rangsutra which sells crafts of Rajasthani artisans.

Meanwhile, Bissell is preparing Fabindia for the next big change. "All current (retail) models will turn upside down in five years as new search engines (and e-tailing) will allow price comparison and diminish geographical constraints. If you become a commodity, search engines will eat you up," he says.

To differentiate and survive, Fabindia has to make its social mission even more shrill. Fabindia stores will soon have three themes - education, activism and fun. For instance, it will display its products from different regions highlighting the issues facing artisan and how customers can help by buying those products. Take the case of Khurrampur pyjamas. "We'll educate customers about that craft by displaying stories around it," says Bissell.

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