“Trent”-ing Fashion On The Bourses 👜

In 2016, a 110 year old heritage building at Flora Fountain in South Mumbai was restored to house the one place where rich college students go to flex at – it being one of the world’s largest fashion brands – Zara.

Keep in mind, its neighbours include Hermes, Sabyasachi and Christian Louboutin.

The 50,000+ square feet property made for one of the biggest transactions of this kind, with an estimated monthly rent of Rs. 2.5 crore – that’s Rs. 30 crore annually (isme tera poora ghar jayenga)

Around the same time, a new private label picked up an 8,000 square feet property at Commercial Street in Bangalore, which is a supremely commercial (obviously) space with hundreds of local shops, sans luxury.

It targeted the aspirational Indian mass market, providing good quality fashion at affordable prices; and quickly gained immense popularity.

And within just 7 years, with more than 350 stores, it is now the largest apparel retailer in India – Zudio.

The link between the luxurious Zara and the affordable Zudio is that they are both owned and operated by the same entity – Tata Group’s Trent, under which also comes another uber-successful retail chain that falls right between the two price points – Westside, creating a fashion trifecta.

With brand chains that strongly appeal to consumers across segments, Trent has emerged as the undisputed leader in apparel retail.

Across all three brands, Trent has been doubling its store count every 2.5 years. And, not surprisingly, 80% of the store addition over the last 5 years has been of Zudio, which went from its first store in 2016 to more than 350 now.

Over the same time, Trent’s share price has gone from Rs. 200 at the end of 2016 to Rs. 2,000 now! Naturally, the success of Zudio has contributed meaningfully to the market cap for Trent so far.

But will this fashion trend continue?

Large Addressable Market

Zudio is now literally everywhere, but the story is far from over. With 200 more stores planned to be added in the next year itself, Zudio (and Trent) is set to further strengthen its market dominance.

The business has a large TAM (Total Addressable Market), with 70% of young Indian consumers looking for aspirational and quality lifestyle purchases. This audience has been nailed by several players through their focus on pricing and brand. Some notable players who have nailed the market include the likes of Boat for consumer electronics, Fastrack for accessories, and Chai Sutta Bar in QSR.

Zudio’s positioning as an affordable brand with a price range that starts as low as Rs. 29 and maxes out at Rs. 999, has worked wonders in driving masses that aspire to consume brands like H&M and Uniqlo. With a larger TAM still untapped, Zudio has a long runway for growth still left.

Influencers Hysteria

With so many Zudio stores around, it’s difficult for one to have missed observing the expansion and popularity of the brand. However, at parallel, it has been running a very aggressive influencer outreach campaign, which was based on:

1. Highlighting Zudio’s price points against competitors
2. Building a strong association between Zudio and the Tata brand to instil trust despite low pricing
3. Sharp targeting through hyperlocal influencers, across regional languages

Aggressive store expansion and the backhanded outreach programme have resulted in a combined potential of long-lived popularity expansion.

They Still Make Money

While Zudio sells its product at a max Rs. 999, the obvious question that arises is: how can Zudio even afford it? Several reasons give Zudio extremely low costs, making it not just affordable for Zudio, but also profitable. Among those factors are:

1. Effective supply chain management, and sourcing of material from low-cost suppliers
2. Leveraging the Trent network and ecosystem to lower costs at scale
3. Zero advertising expense, with reliance on cheaper and more sustainable marketing means like word of mouth and local influencers

With overheads set low, Zudio is able to sustainably expand the business without burning money – a rare sight in the Indian retail industry.

The Number Story

Despite its price point, and aggressive expansion, Zudio has been profitable for the last two years. From margins of -38% in FY18, Zudio has pulled off margins of 3% in FY22 and 6% in FY23.

With its expansion momentum maintained, Zudio can continue growing at levels similar to what was seen in the past (140% CAGR over the last 5 years). Additionally, as the higher scale is achieved, margins have the potential to further rise from 6% right now, towards double digits, ranking at where its peers lie now!

There’s much more than Zudio

Zudio has been a major contributor to Trent’s growth over the last 5 years, making for

• 80% of the incremental store addition
• 50% of the incremental revenue
• 30% of the incremental operating profit

However, Zudio is still just about 35% of Trent’s overall business. The rest of it is divided between Zara (25%), and Westside (40%).

Even Trent’s other chains – Westside and Zara have been exhibiting high growth of 16% revenue CAGR over the last 5 years, healthy margins of mid-teens, and strong cash generation. Additionally, it also operates several other retail businesses, which support strong performance – Misbu (beauty and fashion), Star Bazaar (home and food retail), and Massimo Duti (luxury fashion).

The strong financial performance of these businesses helps Trent pump money into Zudio, which is currently in its expansion phase. As the businesses matures, Zudio is also expected to start contributing to profitability and cash generation to a higher extent, resulting in an overall improvement in Trent’s performance – basically, Zudio = good!

What About The Peers?

The combination of

1. High growth, healthy margins and strong cash flows in established businesses like Westside and Zara,
2. Super-normal growth and improving margins in Zudio

have been setting Trent above peers in the past, and is expected to do so in the future as well.

Naturally, Trent has also been trading at valuations much higher compared to peers. With Zudio hitting all the right spots, it wouldn’t be surprising for Trent to continue outperforming, making the stock look like it’s on a sale, much like its products!

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