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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s


The unanswered part of KILLER PUZZLE

After doing the initial work on Kewal Kiran Clothing, there is no doubt its a fabulous
business model run by a conservative management with a decent track record. They have
been able to create a brand like Killer from scratch which is their flagship brand and now
spending behind other brands like Lawman Pg3 and Integrity.

However, as investors we always want to discount future. In order to do that, we need to
have some idea in terms of the source of such continued growth.

Would it be primarily driven by MBOs and Modern retail like it has been in past? Or
would it be largely be through an expanded franchisee network? Or a mix of the two?

The gut says it must be a franchisee led growth after all they hardly have 300 stores in a
country where the scope could be north of 1,000 even if one were to just consider Metros,
Tier I and Tier II cities.

So, a franchisee led growth would come only if either:
the company is successful in creating an immense brand pull and thereby lot of
individuals approach company to be franchisee OR
the company reaches out to franchisees through events/activities and incentivize them
financially
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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s

We decided to approach KKC as a prospective franchisee to assess if it makes sense for
an individual to be a franchisee for K-Lounge, which is a large format store having all 4/5
brands by KKC.

Finally after 10 days of repeated calls and mails, I got to meet company representative.

On the initial parameters it indeed looked attractive:
You need to have a 1000 sq ft store for a K-Lounge
Capex is ~36 lacs which include inventory of 20 lacs, interiors of 15 lacs and a
miniscule 75 grands as franchisee joining fees.
You get stock by KKC at 58% of the MRP i.e. you enjoy a good 42% margin. So, the
initial 20 lacs inventory is actually worth 34.5 lacs on MRP basis.
An illustration of P&L & break-even point
The broad range of rent for a 1000 sq ft store could be 50 grands to 5 lacs a month.
Assume I rent a store at an average location like a typical Relaxos store (inner lane of a
high street or a not-so-preferred location in a mall or a local shopping market in a
residential area) at 1.5 lacs per month. Other store operational expenses like staff salaries
and electricity would be 75k - 1 lac taking total opex to 2.5 lacs per month.

To break-even I need to sell goods worth at least 6 lacs in a month or 20k in a day.
Assume average billing at 4k (buying a pair of jeans along with a shirt), I need only 5
conversions daily on an average. Is that a difficult number to achieve? Not at all, as
weekend footfalls and conversions alone could be five times this number making up for
the duller weekdays.
After crossing this threshold, every 1 lac of incremental sales would fetch 42k to the
bottom line.

So far it looks good. Next on the agenda was to visit all the franchisee stores in
Delhi/NCR. The Google search was disappointing as it revealed that there are only
THREE franchisee stores in entire Delhi.
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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s

I visited the Ashok Vihar & V3S stores and found the collection pretty good. Quality
stuff is available at all price points with good variety, so basically not easy for a genuine
customer to walk out without buying something.

Since the sample size was too small, I also visited MBOs like Shoppers Stop, Bindals
and Reliance Trends to get a feel of the brand awareness, visibility, sales and general
perception. Overall feedback from the store employees was decent.

This brings me back to my question- How come just THREE stores in Delhi, which are
by the way owned and operated by the same individual.
Let us look at how much this fella makes:
Cumulative monthly sales at all three outlets 2,500,000
Gross Margin 42%
Average Rent paid (12%)
Salaries (3 Sales Manager, 9 helpers) (100,000)
Electricity (100,000)
Misc/Discounts* (50,000)
Net Profit 500,000
Average per store 166,000
*Loyalty card holders get 10% off. Card is issued on first purchase of 5,000 or above
Considering all three stores are 5-6 years old, these figures are a bit discouraging!
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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s


Till now I havent got any strong reason to avoid this franchisee opportunity. Reason
behind just three stores could be low visibility leading to low franchisee interest and/or
KKCs lack of interest in competitive markets like Delhi/Mumbai. Why the current
franchisee in Delhi isnt making any KILLER money could also be because of his own
choice of location/rental terms/staff etc. So still have to dig deeper in franchisee story.

The final step in this process was to go through the terms and conditions document.

It was only after going through this document things started to make sense to me. Now I
could understand why there have been so many closures year after year. It also became
clear why they havent been able to add a second franchisee in Delhi all these years.

Following are some unusual and extremely unfavorable terms for a franchisee:

Tomorrow you can have another K-Lounge in your neighborhood
It is expressly agreed and understood by the Parties that nothing herein contained shall
restrict or prohibit Company from appointing any third party or parties as authorized
resellers for the Products whether in/ near the locality where the Outlet is situated or at
any other place(s).

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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s

You are not discouraged from undercutting other franchisee stores & MBOs
(Bad for overall market and dealer-margins)
Authorized Reseller will, however, be entitled to sell the Products at a price lower than
the suggested/ prescribed maximum retail price by Company.

Only a 3-year agreement?
This Agreement shall commence on and from the Effective Date and shall remain in
force and effect for a period of Three (3) years unless earlier terminated as provided
hereinafter. The Parties may however renew/ extend the term of this Agreement on expiry
by a longer period by a written agreement duly executed between the Parties.

During termination, Co.s discretion to buy-back inventory at 20% below your
price
Upon the expiry or earlier termination of this Agreement, then, notwithstanding
anything contained in this Agreement, Company may at its discretion repurchase
Authorized Reseller's inventory of the Products at the prices at which the Products were
sold by Company to Authorized Reseller, less a twenty percent (20%) handling charge
provided such Products are current Products, in their original packaging, unused and in a
saleable condition

No credit period (Behaving like Levis?)

Shouldnt KKC be reimbursing for the discount coupons issued by it and
redeemed at franchisee outlet?
Authorized Reseller shall take prior written approval of Company before launching any
sales promotion scheme/ discount scheme on its own at the Outlet. Authorized Reseller
shall accept all gift/ discount vouchers from end-users that have been issued by
Company. Authorized Reseller shall bear the cost of discounts and sales promotion costs
incurred to sell the Products.

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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s

Comments
The first point must be a big deterrent in taking up this partnership. As a franchisee, if not
10 km, I would seek some asurety that you would not open a competing store in may be
at least 3-5 km radius.

Logically one would feel that even if its not there in writing none of the parties- the new
franchisee and the company, would like it to be in neighborhood of an existing
franchisee. To confirm this, I told KKC I own a 1200 sq ft retail space in Shalimar Bagh
(<2 km from Ashok Vihars store) and I want to open a K-Lounge there to which they
had no objection.

KKC enters into a 3-year contract unlike the usual 5-7 years. When an individual takes up
franchisee of a brand, he is literally tying himself to the fortunes of the company/brand.
He is dependant on them for they will be spending on branding. Especially in this case as
these are not-so-known brands compared to biggies like
Levis/Pepe/Wrangler/UCB/Flying Machine etc. So he should have visibility of at least
5-7 years where he rides the rising popularity of the brand and earn a good RoI.

Franchisee doesnt know Kewal Chand Jain and whether he is ethical or not, for him its
the corporate he is dealing with. He could think what if in 3 years, they ask me 10 lacs for
renewal of this contract?

KKCs executive told that company does not offer any credit to new franchisees. Page,
even today, allows its distributors/dealers to pay PDCs of 15-30 days. Those who can
afford to pay are encouraged by 2% cash discount. And you expect franchisees to pay
advance for Killer?


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J a t i n K h e m a n i , R e s e a r c h A n a l y s t , A a d h a r S e c u r i t i e s

MBOs
All the big MBOs I visited had only one brand by KKC- KILLER. Feedback was decent.
At Shoppers Stop, Rajouri and Reliance Trendz,V3S I found that employees of KKC
were looking after the Killer counter.

Reliance Trends does monthly sales of >3 lacs
Shoppers Stop does monthly sales of 5 lacs (Levis 15 lacs, Wrangler & Pepe ~5 lacs,
Spykar & Flying Machine ~3 lacs)

Market leader Levis is the ultimate brand people aspire for.
The most important parameter people look for is FIT
There is brand loyalty for Killer-Jeans; many repeat customers pick just a different color
without trying.
The unanswered part of Killer Puzzle
In the past 7 years, average realization has gone up at a CAGR of 7%. To keep
sales momentum going at 25-30%, KKCL has grow volumes at north of 20%.
What would be the source/drivers of the desired 20%+ volume growth?
Is company not serious about franchisee-led growth? If no, why isnt there a
professional team to acquire/manage leads? Why are terms so adverse for the
franchisee? (It was a sad experience; try it yourself by initiating it through
their website or calling them)
H1 results were great partly because of additions in MBOs and franchisee
stores. Can the momentum continue? Wouldnt ultimately company have to
spend meaningfully behind the brands to create a pull and traction in same-
store-sales growth and attract new franchisees?
Is there a branding strategy in mind to deploy some part of 180 crores of cash?