We're excited to host Gautam Saraogi in the 12th session of Brick by Brick to discuss the incredible story of Go Colors - Go Fashion India Ltd.

In the last 13 years, Go Colors has become synonymous with women’s bottomwear and had an excellent public listing in 2021. With >30% EBITDA margin and INR 760 crores ARR in Q1FY24, Go Colors is a fantastic story of a brand built with solid fundamentals and a razor-sharp focus on a single category.

In this episode with Hariharan Premkumar, we cover:

1. Building a brand in a low-differentiation category.
2. Right pace of growth, key input metrics and unit economics in EBOs, Kiosks and LFS (Large format stores) at different stages of growth.
3. Maintaining low marketing spends (less than 5% of revenues) and discounted sales (less than 3% of revenues) while growing rapidly.
4. Managing fashion risk and inventory challenges in apparel.
5. What it takes to build a 30%+ EBITDA margin consumer brand.

Transcript:

Hari  

Good evening, everyone. Welcome to this edition of BRICK by BRICK. We have with us Gautam Saraogi, founder and CEO of Go Colours. It's a brand that's gone on to become a defining brand in women's bottomwear.  Started in 2010, the brand's scaled extremely well in a capital efficient manner and had its listing in 2021. As of Q1 this financial year, the brand was at about 800 crores annualised revenues with a 30 plus percentage EBITDA margin. The numbers are quite stunning to be honest, you know a brand spend of less than 5 crores when you are at 400 crores and discounted sale of less than 3% as a percentage of revenue These are unbelievable numbers you know, given we look at brands all the time. So it is a phenomenal story of a business built on strong fundamentals and with a razor sharp focus on just one category. So Gautam, thank you so much for for joining us. Thanks, Hari. Thanks. Nice. Let's let's start with the initial days. You know, how how did you pick this category? And how did you think about differentiating the brand versus, you know, whatever was available in the market?

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Gautam 

Yeah, so see, I think we started the business in 2010. And at that point of time, we want to do something in retail. I mean, we ran the garment export business for a very long time. And exports at that point of time was going through a tough time. During the 2010 2009 window. We wanted to do something in retail and obviously because we had a garment export background, so we wanted to do something in garment sewing. So we studied menswear, women's wear, kidswear. And interestingly in women's wear, we saw that there was a very big shift happening in the women's attire. It was moving from the sari market to the two piece separates market where bottomwear was sending huge numbers and it was largely unorganised in topwear there were good enough number of players, but in bottomswear there were none. So that's how we selected this niche in womenswear and we started Go Colors in 2010.

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Hari  

Right and, and I think in terms of the channel that you pick, you initially started with General Trade and and then quickly pivoted to do a kiosk in EBO led channel led growth. So could you, you know, share the reason why you started with GT and why you pivoted, you had to pivot to to a kiosk and EBO led model.

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Gautam 

See,at that point in time online didn't exist in 2010/2011. Online was just about to start but it was not of that importance in the retail scheme of things. And so there it is, either you were in GT, or you were in large format stores or you were there in EBO.  These were the three channels that existed at that point of time. So large format stores we didn't get an entry because we were not a brand, we were a label as such. Brand is something which gets built over a period of time where there's a trust element in front of the customer in the eyes of the customer, so we were just a label. So LFS did not give us the space because there was no recall for Go Colours. And so we started with general trade because general trade was the largest retail unorganised market. So we started with general trade.  Very soon we realised that in general trade, you don't control your shelf space. And when you don't control your shelf space sustainability, in that business comes down when you don't have your shelf space. Because then you're dictated terms by the retailer or the distributor. And your will never earn high margins in that business because you're at the beck and call of the retailer because the shelf space belongs to the retailer. Second issue happens in general trade is that you don't control your pricing. Today, retailers are free to discount the product or whatever the retailer wants, unless you're a strong brand, which we'll get into that. And the third issue we face, which is the largest issue was receivables. I think we as a brand coming from the background of exports, we're not that familiar with collections, because then exports everything came through LCS right? So we were either coming from a different scenario altogether, and we lost a little bit of money in the singles. So we then realised that look, if we have to sustain our business, if we want to do business, how do you do it? Gender trade has its challenges. LFS wouldn't give us entry. So by points of elimination, we said okay, let's try the EBO. So we tried with the kiosk first, worked very well, then we pivoted to the store model when our product range expanded. So one of the reasons why we went into the EBO arena was because general trade had a long list of challenges, which didn't excite us.  

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Hari 

This is a very pertinent you know, pertinent topic for you know, a lot of digital first brands that are exploring the offline channel. As we speak, what would given your experience, what would your guidance be in terms of how they should think about the various options they have in offline, GT, LFS general trade, etc. Because you know, there are a lot of brands that scaled up online and are trying to figure the offline channel so how should they be thinking about it?

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Gautam 

See, there's no one recipe for everyone. Let me put it that way. Because if you work for us, and it's 75% of the business might not work for someone else, I think the EBO dynamics is very different for everyone. So there's no one recipe, let me put it this way. So for most digital first brands when they're entering the offline arena, they first need to figure out what would work for them the best. So they need to do GT, they need to do LFS, they need to do EBO, they need to put an equal effort in the three arenas, and then give it some time and then understand what works for them the best and then drive that particular model from there. See, from a profitability perspective, all three, of course, EBO has its own profitability metrics are selling to the consumer directly, you will have better gross margins. So if you profitability is a little better, but it is very subjective to each brand. So my advice to anyone who's entering in the offline arena, don't get carried away by the EBO story of ours and others, you need to first actually put in seeds for all three, see what works best for you, and then scale it from there.

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Hari 

And so, you know, your suggestion is to try all of them, experiment and double down because

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Gautam 

the dynamics are very different, right? And EBO you need to have very high repeat purchase, you need to frequency of purchase. So just because it's worked for someone does not mean it will work for someone else. Just because GT did not work for me does not mean GT does not work. So for everyone, the recipe is different,

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Hari 

I would say. Absolutely agree. So you know, let's go back to your journey. So in the first year, you said, you started focusing on kiosks. Now, if we take just the first two years of your journey, how many kiosks, EBOs did you roll out in the first two years?

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Gautam 

So you know, I'll tell you kiosk was an excellent step for us before we set up our stores, probably if we would have parachuted and opened our stores directly first, I don't think we would have done the kind of numbers we did. I think the kiosk made some sort of brand relevant for us to open a store so that once a lady saw Go Colours she entered our stores. If we didn't have the kiosk she might not have entered us. So the kiosk was a very good foundation. So we opened a first kiosk in Chennai, we experimented we saw, the numbers did very well. Then the second, the third and fourth, and we opened a network of 80-90 kiosks all across the country. Beyond the point, the point, the kiosk were not sustainable, because our product range also from a width perspective expanded dramatically. So having so many SKUs having it in the kiosk, we wouldn't be able to sell, because we started off with only two products the kiosk was an excellent model. So we pivoted to the store model, very 2013 2014 when our product range expanded. So that shift from kiosks to store happened during the 2013 2014 window. And by that time, we had already established about 80 to 85 kiosks. So we opened our first four Excel numbers, the economics record, so we started transitioning all our kiosks to stores, and then from there starting our first store until 2014, we've gone 650+ in 2023. So I will say the kiosk was a key foundation.

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Hari

Got it. And you know, I think the key question is I always get concerned when when I see brands wanting to open, you know, 40-50 kiosk stores on year one of offline expansion. So I think what will really help is, you know, your inputs on how one should think about pacing growth. You said you got to 85 kiosks, but that was over three years. Right. So what would your suggestion be in terms of, you know, till you nail down the playbook, what is the right number of range, it could be a range of kiosks, EBOs that one should open.

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See, there's no so I'll tell you what it is very important as the first three, four months of someone opening a kiosk or a store, you need to know first your economics, you need to know your ROC,  you need to your payback period, you need to know what is the working capital at a store level. I think those important questions have to be answered before you actually decide to grow at a sonic speed. And we understood that in the beginning.  See before you start replicating a model and say you open 100 stores or 150 kiosks, you need to first have those numbers in place saying that look, what is your average revenue you're getting from a kiosk? What is your average throughput and EBITDA? What is your working capital days in terms of inventory days at a kiosk or store level? What is your ROC? If those makes sense, then you should be looking at hypergrowth. And sometimes those numbers be skewed only for your first two, three kiosks because those are going to be the very big performing ones. So you need to average it out saying that, okay, look, my first two, three kiosks are getting exponential numbers. But my average numbers always going to be lower than my exponential numbers. So you draw out your average from your exponential numbers, and then build a business plan and then say, Look, these are my steady state, ROC or your return on capital, or my payback period, steady state. So your first six months to try to figure out your economics before you do hypergrowth

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Hari 

Right. And, you know, just double clicking on that, I think, fully aligned in terms of nailing down the playbook. You know, another way to ask the same question is, you know, and I don't want to generalise, you know, as you said, it's very case specific, but if we did take your own journey, how long did it take for you to get that confidence that you nailed the playbook, you know, number of years,  number of kiosks,  EBOs, I think that'll be useful.

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Gautam 

See, I'll tell you in hindsight, and I'll be very brutally honest. I mean, you might not be looking for that. I didn't know what was roc, I didn't know sales per square feet. I was when I started opening the kiosk model, I was just looking at rent to revenue ratio. And saw that my rent to revenue ratio was on par with the industry, I knew that the business model was working. I didn't know my store level EBITDA. And also, I didn't know my gross margins, when I was opening the kiosks. We were that naive. I knew rent to revenue. So I knew I'm in the rent to revenue of 15%, I'm doing something right. And if I'm having a 15% rent to revenue, that means I'm delivering good store level profitability.  So I did that very early in my starting kiosks. So when I knew I was not losing money, and I was having a very healthy rent to revenue, I just multiplied it. So I think if for entrepreneurs when they're going into the EBO model, very, very important is what is going to be your rent to sales ratio, that is the most basic question. Second level comes gross margin. Because if you're discounting very heavy, your gross margins are low. So even if your rent to revenue ratio is in intact, your store will not open. But your first step of hygiene what you really need to check is the rent to sales ratio. And I went on that benchmark. Now, some good thing what was in our businesses is a full size wouldn't say food sales, a full price sales ratio business. So for me, that was a blessing in disguise that I use only rent to revenue as a metric. And it worked forward for me. But for most brands in the universe, if you have your rent to sales ratio covered, and you have good gross margins of more than 60% in your EBO business, after discounting your fine, should be fine.

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Hari 

Right. And you've already covered, you know, the two most important metrics I think,

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Gautam 

was in 2011. We probably in the first one year went to about 20 kiosks. And the second year, we grew another 30-40 kiosks. So by 2014, we were about 50 kiosks and we were on track to touch about 80 kiosks. So we did about in the first year we did about 20 kiosks, to answer your question.

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Hari 

Got it. And what would be the same number for EBOs in the first two years. First two years of launching EBOs.

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Gautam 

My first store in 2014. I went ahead. So I think by the end of 2015, we were about what 20 stores.

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Hari

Okay, so 20 stores in two years, two years, not at

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Gautam

all the metric, because I think it just clicked and we just then went very fast.

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Hari

Got it. Now you already touched on, you know, gross margins and rent to revenues, you know, two important metrics and you gave some benchmarks as well. The other important one, obviously, is payback. So how do you think about, you know, the benchmark in terms of CapEx and inventory payback in stores, what's like the zone you want to be in?

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See, I think, look, if you're having healthy store level EBITDA then your payback is taken care of. So I think, and what's the healthy EBITDA margin at a store level, anything above north of 20% or 25% and 25 and above, is a very good period. So I think, look, how do you calculate your payback, right? You're having your capital employed, and your EBITDA. So if you can control capital employed and have healthy EBITDA, you have good payback. So anything above 25% EBITDA, very good EBITDA. And if your inventory what you're so capex is capex, right? I mean, that does not vary from brand to brand. Your other part of your capital employed is your inventory. So if you're having adequate inventory at your store level, so your capital employed will be under control from a working capital perspective. So if you're having adequate inventory and not high inventory, and having good throughput on EBITDA of more than 25%, you will definitely have a payback period of 24 months.

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Hari

Right? Yeah, it's just that

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Gautam

it's two sides of a coin.

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Hari

Other variable is on capex, where sometimes, but capex is fixed.

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I mean, look, you sorry, please. Yeah. Am I audible now? 

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Hari

You are, please, please complete, I think there was another issue, okay.

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Gautam

So see, I'm saying capex is capex, for a brand, they will have to spend 3-4000 rupees per square foot, you know, in a vanilla type of small store, they would have to spend 3 to 4000. So there's nothing really to save there. So the real question comes down to what got me at a store, and what is your EBITDA you're generating at the store level. If you're generating 25%, EBITDA and you're having adequate amount of inventory, what you should be having, which can range from 45 days to 60 days or inventory, then you're in a good position.

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Hari

Got it? What I meant to say was, you know, sometimes brands also go overboard in terms of CapEx spend. So it's important to keep that in check as well. But broadly, you know, the point,

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Gautam

You cannot fundamentally go wrong with capex. You can go 20% or 15% wrong. So I think I'll tell you what, I think it's good to do good capex, it's your visual element of your store. That's your makeup of the store. It's a one time cost, even if you do 20% higher to make your store look better, do it, I am telling you brands go higher on capex, it's not a big deal. In our format i'm trying to tell you, see, I mean, look, you say you can open a 10,000 square feet and spend crazy amount of money. I'm not trying to tell you to go to one extreme. But stores that open in our format, I think it's good to spend very good in capex, that is what your customer is going to see and enter your store. And it's a one time cost. It's not a working capital, it's a one time cost, which your profitability pays back. Even if it means that your payback period extends by three months or four months, let it be no problem. But that's the marketing element of your store. So I don't think you should cut down on CapEx spend adequately spend the right amount, don't go to one extreme, where you're going really overboard and spending 8000 rupees per square foot is not what I'm trying to say, spend a good amount of money on capex. That's the makeup of your store.

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Hari

Now, that's an interesting perspective. You know, the other question I had on on EBOs and kiosks was, you know, how do you think about, you know, when you take a call on shutting down stores, you know, how long do you give them before you decide whether to shut down or not?

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See, you have to be ruthless. I mean, look, if you will know, within the first six months, whether it's gonna work or not. See, I'll tell you fundamentally, if you are negative EBITDA 50%, that's a huge amount, the store will never, see there are certain things that you can gauge that over a period of time, I will reach breakeven, and then get into profitability. When a store is a disaster, you will know within the first six months, whether it will work or not, you don't have to wait. So when you're minus 20 or minus 50% then that store will never work. So usually give it about a year, we see what is the monthly loss in absolute terms and then decide. Say, suppose the store is losing 70 80,000 rupees a month, subjective, but again, I'm trying, I'll pursue with the store. In absolute 70-80,000 rupees per month in terms of percentages will look misleading but in absolute terms, it's manageable. I'll keep the store running until it reaches breakeven.  Now if the store is going to do -- a month I know whatever to do, by vintage also I will not get to breakeven. So within a year i'd take a call, you have to see the absolute not get misled by the percentages. But seeing the absolute EBITDA loss a year and then decide whether it's a hit on your p&l or not.

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Hari

But at the end of the year, would you like it to be at least profitable at a store level for you to continue with the store.

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Gautam

For me, most of my stores are profitable. But there are some store tail end of my stores which are lost making, maybe they lose 50 60,000 rupees a month, that's some, that's a kind of loss of a store, which my p&l can absorb. Everyone should have there threshold in the mind, up to a particular amount per month, they're willing to bear that you that you can go even beyond the years for breakeven. But there are some stores where the loss is so heavy, you have to cut down on the loss. So there's no sentimental value, if your store is not working out, you give it a year's time, it's not worked out, exit.  Now, the issue of what is going to be the barometer of loss will vary from person to person. But during the kiosk days, 50,000 rupees a month of loss in an outlet was was huge for me. So I would take a call for slightly matured company, maybe 80-90,000 rupees is not a big band. So it comes down to the size of the business. How much you're willing to bear for that particular because at the end of the day, that store itself is marketing for you. So if that store is a 30 40,000 rupees of negative EBITDA month, it's not a problem because the store is doing marketing for you by having a storefront.

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Hari

That is true. A lot of brands do sort of take that lens when it comes to EBOs as well. And in your experience, what's the typical ramp up phase to get to steady state, you know, after which the the growth is inflationary at a store level?

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Gautam

Oh, you're saying from a same store sales growth perspective? Yeah. Oh, see, well, we are even after so many years, we are seeing healthy same store sales was even for our vintage stores. So it depends on the category. So some categories are very virgin. So you will have you will have tailwinds of same store sales growth even going in your 5th year, 6th year, 7th year.  There are some mature categories where you reach maturity very fast. But if I have to draw line and take an average conclusion, I guess maybe think four years, five years, the store reaches some sort of maturity where it comes down to single digit, same store sales growth. And from there inflation, 

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Hari

right. And again, on an average basis, what would be like year five revenues versus year one for a store, again, talking averages here.

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Gautam

See, in terms of absolute terms, you will probably in year one, year two do about 40 to 50% of what you do in your year five.

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Hari

Okay, so it doubles, essentially, it doubles over five years. And that's what I was trying to get it. Got it. Now moving to the next biggest channel for Go Colours, which is LFS. And it's a channel that you know that a lot of brands dread. And I don't know of many, you know, many brands that have made money in that channel, but it's worked beautifully for you.  So fans should think about LFS a channel and how to strategize for that channel.

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Gautam

I think it's a fantastic channel to be part of. Slightly heavier on the working capital side. But ROC is good, even after having even after having heavy working capital days for the kind of profitability you can earn in LFS, still, your Roc is pretty decent. So in LFS, effectively, your Roc is your return on working capital because there's no capex. So if your return on working capital is good, and your profitability is good, even less, slightly higher working capital is is not a problem in an LFS. So LFS is an excellent channel to be part of, if you get the space provided. And you know, you can scale to tier one, tier two, tier three, tier four very fast, you can go to tier three, tier four get exposed to new customers before you decided to open your review. So theoretically today and LFS gives you the platform to enter your cities where you're not able to enter. So LFS is a excellent channel to be part of, and it should at any point of time in any business be ranging between 20 to 50% of the business. Now in our business, where we build a solid direct to consumer business LFS is about 21 22% of the business, another business where General trade is of prime importance LFS will be 30 40% of business so So, in any model, like I told you, right, for every brand the recipe will be different. The one thing which should be there is LFS should be at least 20 to 30% of the business minimum. Because it's an excellent marketing channel. It gives you entry into newer towns, it gives you exposure to new customers. But you might not get through your EBO online or GT. So the placement in LFS. And for commercial sense, it definitely makes commercial sense.

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Hari

And LFS, as a channel, I've been part of a few brand journeys, where we just seen it as a marketing channel, primarily because it's been really hard to make money. Are there any best practices that you follow for Go Colours for LFS, you know, that, that you think a lot of brands are probably missing out on,

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Gautam

Never be shy to do a commercial discussion within LFS. So at the end of the day, when you're signing up with an LFS, as a new brand, if it is not commercially viable, be very clear with the LFS on day one, because once you freeze a margin within LFS, you can never ever commercially renegotiate with them. So my tip of advice to everyone is that look, don't be penny wise pound foolish by letting an LFS go by trying to negotiate too much. But at the end of the day, don't be in a situation where you're giving away all the margins and you don't own nothing. So be very clear, don't be one extreme where you're trying to negotiate too hard for the last penny. But don't overdo it to the extent where you know where it's not commercially viable for you. Because I'm telling you from experience, if you start a business with an LFS on certain commercial negotiated terms, you can never change those negotiated terms later. So

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Hari 

that's interesting.

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Gautam

So, maintaining the balance when you're discussing with an LFS is very important, should not go either extreme.

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Hari

Right. And I missed out on you know, one thing regarding stores, when we met, you'd spoken about an interesting metric, which was customer repeats at a store level and

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Gautam

yeah, I want to touch upon that I missed that point. So, look in an EBO - if the customer frequency in an EBO is low, if the engagement with the product is less in a year an EBO will never workk. Because today, if you want to draw customers or wallet share and do sales per guest sales per square feet, customer frequency to the store has to be high which is very, very important. So in our product frequecy is very high. Today a lady when she's buying a bottom, a legging, she's coming back for another product very soon again. So, the repeat purchase at a store level the engagement of a customer at a store level should be frequent. If that is not there, you will never be able to achieve sales. And if you're not able to achieve sales per square feet, you can't get EBITDA

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Hari 

now, that's very interesting, what is it today for Go Colours at an average level. How often does a customer come back to a store and make a purchase 

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Gautam 

We could at least get a customer back to the store five times a year.

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Hari 

Now, that is phenomenal, you know, customer purchasing or

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Gautam

four to five times a year you need to sell a lot more to the customer in that one instance right basically your enough of the wallet of that customer in the years now, whether you do two times a year or whether you do four times. So, the average transaction value and the number of times a customer comes back both things are key

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Hari 

Yeah, and it also highlights the importance of data tracking customers even in the offline channel at a store level. And you know now let's zoom out and go back to your journey from inception to listing I think the total capital consumed by the business was not more than 100 crores to get to 400 crores when you list it and

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Gautam

we had close to 165 crores of capital invested. So, as promoters you put in a seed. Seqoia put in 60 crores, we had about 100 crores industry by a venture. So, I think when we listed, we had about 50 crores of cash in the balance sheet unutilized right. So, roughly you can say about 100 crores of cash invested in the business

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Hari

so, 100 crores consumed to get to 400 crores and you were profitable. If you were to distill the top 3 reasons that helped you get there because this is an important metric that we we care about at DSG, we call it capital efficiency, which is the capital infused versus the revenues achieved. And yours is at a 4x, which is, you know, which is phenomenal. It's sort of our take on return on capital employed for early stage brands. So what would you attribute that to if you were to distill just the top three reasons that help you,

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Gautam

This is a balance sheet, not a p&l business. p&l has its importance. So today, when we talk about capital employed, and we remove the cash element out of it, when we look at actual capital employed, it's your working capital. So today, keep for business, keeping an eye on your working capital in your early years, working capital in the business will be elongated because you're building for growth, you will have higher inventory in your initial years, because you're growing that much faster. At some point of time, in the journey, your inventory days have to be under control. And if your inventory days are going to be in your control that much capital is freed up.  So in a company,  margins, how much profitability you're generating from a EBITDA to path perspective, and your working capital is perspective, if you're able to keep a balance of the two, you will always build a very capital efficiency. So a) good margins in the business coming down from gross margins, and b) having very, very good turns working capital in a year so that your capital is freed. That's how you build a business where you're able to 4x your capital. So we concentrate on efficient working capital days and we concentrated on building a business around good strong fundamental margins, right from good gross margins are higher than 60%, flowing down to PAT  margins of 30 40%. And we were able to convert those PAT margins into operating cash flow, because we had control working capital days analysis.

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Hari

And the third reason if I may add, is your marketing efficiency of five crores of brand spends when you are at 400 Crore top line.

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Gautam

I tell you see, again, that recipe is very different for everyone. And I'll tell you why. In our case, we were able to pull off with very low marketing spends because our EBO was a front facing advertising tool. So we had 14 to 15% of our rent, to company sales ratio where we were spending on rent. For a non EBO business, you'd have to probably spend 10% of your revenue on marketing because you don't have an EBO storefront. So spending 10% on advertising is not necessarily a bad thing. The real point is that the eventual margins what you're able to deliver below EBITDA that whether you're spending advertising 10% or rent spending or rent 14% that eventual profitability has to come. For me, I was able to spend 14% on rent and 3% on marketing, it worked for me.  But for another business, they need to spend 10% on that. So like I said, the recipe, the structure would be very different for people.

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Hari

Absolutely, but the most important thing is you're thinking of rent as part of your marketing spend. Right? And  you're clubbing that and seeing that as a 15 to 20% pool that you're using for for marketing. I think that's the nuance, which is super important.

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Gautam

Exactly. And I think people I don't know whether this is the right thing to say you should never look at EBITDA before advertising expense. People think of capitalising advertising spends and saying, look, this is for building a brand, we will look at EBITDA before advertising, that's not the right way of looking at it. Advertising is an expense in the p&l it is not a capital item. So you have to look at EBITDA post advertising, many digital first companies get carried away saying that before advertising, we are EBITDA positive. 

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Hari

I must clarify one thing, which is on the EBITDA margin of the business itself, which is reported at 30%. I think this doesn't include the store level.

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Gautam

Unfortunately, because of India's 116 which is an accounting standard, we have to capitalise rent. So the 30% of what we're delivering at the company level what we're reporting is before rent because we have to capitalise it so our EBITDA of what we are generating at a company level is 20%  

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Gautam

EBITDA is still above 25 because we take rent as an expense.

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Hari

Right? Yeah. Fair enough. That helps. Now you're coming back to marketing. So since you operate this, this one's on a lighter note you operate, you know, at sub 4 or 5%. Marketing spends, how do you keep your marketing team motivated? You know, with such low budgets? How do you think of motivating them and driving them hard.

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Gautam

I've been blessed with a very good marketing team. And I think they look at the business for what the importance of the business is because we are a new business. But having said that, 4, 5% on today's scale is a decent amount of marketing budget a year, which we have a very strong marketing team, and they spend it very efficiently on social media influencers and other aspects of digital. I think in the early years, when we very frugal on marketing spends because 3% of a 50 Crore businesses, is nothing, absolutely nothing in terms of spend. So I think that at that point of time, we had some challenges. I think today, because we've become a 600 plus crore brand 3% even on 600 crores or 4%, even of 600 crores is a decent amount of brand building. So today, we have a very good strong marketing team and we are able to make efficient use of that. But in the early years, yes, I mean, it is a very small amount to

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Hari

spend. Yeah. And, and how do you manage such less discounting - less than 3% of your revenues, is discounted. And if you go to a mall and look at stores, everyone's going to acquire a customer in an EBO model. So how did how did you manage to find that, you know, achieve what what you have?

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Gautam

See, I think look, we have a core functional product. And core functional products are usually sold on full price, because our inventory does not go out of fashion, year after year, year after year without getting discontinued. So for this, there's no need for us to discount. Let me put it that way.  See, our average selling price is less than 1000. So the price is to begin with isquite sharp in nature, the product and inventory is x. So there's no real need for us to discount. And because we are in the core category, and we are not discounting automatically that benefit is flowing to the gross margins and then to the brand. It's because of the category we are in.

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Hari

Which means are you saying that that's the case with competition as well? 

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Gautam

 Absolutely, I mean, look, even for competition, because we are in such a category, there's no real need for them to discount. They might discount it anyways to acquire the customer, which is a different strategy altogether. But in our case, we never felt the need because ours is a low ticket item, less than 1000. And there's real need for discounting because it's a core candidate. If I was in a category where we have the fashion element where styles go out of fashion, then of course to liquidate inventory and free up balance sheet, I'll have to do that. But in ours, there's no real need.

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Hari

That's interesting. And the other interesting aspect about the business as we were going through your annual report was the emphasis on technology and how that helped you as you rolled it out, you know, 50 100 stores a year, etc. So could you talk more on that on how you've been using technology as you scale?

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Gautam

See, I think technology is very important. Right? It comes back to the question. I mean, I keep coming back to inventory always because that's the real crux of the business right? Today, technology, AI business analytics, they actually tell you what to keep where.  Here's a relatively smaller store, right. So knowing what in such a small store to what SKU in what quantity per square feet, all that you need is an analytics tool. Without an analytics tool, you cannot really optimise or keep the right inventory. So I'll give you an example. If today, you open the most prime looking store in the most prime area, but if you get your ratios of colours and products, customer will not find what she needs. So that analytics tells you based on past behaviour of sales, what you should be keeping there. And that is what analytics needs -  its your stocking. One line it helps you in your stocking and that stocking gets you the sale. It's not manually possible for one person to figure out the stocking across 1000 stores in the country.  You need an AI tool telling you that. So it's very, very important for companies at an early on stage in their life, to have a strong ERP in this, as you get bigger, it is that much more difficult to implement an ERP. So when you're small, and you have a big vision of your business, do the implementation at that point.

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Hari

What will be the right stage for that? And I think you use SAP. 

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Gautam

Yeah, we use that. See there is no right stage, it's about when you can afford an ERP. Today, SAP is quite expensive, because you have initial capital costs, then you have to keep investing year on year.  There's a running cost. If your budgets allow you, rather than spending on unnecessary advertising money, it's better to get that fundamental thing place in your business right from day one. Because when the company is small, implementing ERP is fairly simple as the business grows, grows, grows, grows, grows, it becomes that much more difficult. So if you can afford it, do it on day one. It depends. And sometimes you have to take that hard call of saying, Look, I need to do it today.

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Hari 

Yeah. So I think yeah, the takeaway is that it's better done sooner than later and obviously affordability

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Gautam  

depends on how much capital is available for you and how much you're willing to spend. But the faster the sooner the better. 

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Hari  

Yeah. I think the other headline message is just the focus on inventory and managing inventory.

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Gautam 

This is a working capital inventory, operating cash flow business, this is not applicable business by any means. In early days, yes, you can overlook it because you're growing. But once you reach some sort of maturity, this is an operating cash flow business. 100%

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Hari 

couldn't agree more. Now, moving to just the sharpness of focus in terms of category, you know, you're you're now touching 1000 crores, but you've chosen to stay focused on bottom wear and not get into men's bottomwear, topwear. Could you talk more on on the thought process?

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Gautam

See, frankly, I think, look, we feel that the growth in this category is the runway is huge. And last 10 years, we haven't digressed. And I don't see ourselves digressing for the next seven, eight years. Now, I'll tell you why. Because if you're in a particular category, where you're able to grow more than 20 30%, every year, there's no need for you to look at adjacencies. And I think we've not reached that time where we have exhausted the bottomwear category.  See today, a brand is a unique identity, right? And the customer sees you and they perceive you in a way before buying your products. Today, the minute you start extending into different different categories, you're trying to confuse the customer. Your identity is very important. So it's good to go in adjacencies. But you should go in those adjacencies only when you see that you've exhausted your current category. As long as you can grow it 20 30% Every year on your end, the market is big, there's no need for anyone to go to other adjacencies. And we've not done it. We've kept life very simple. We've kept doing the same thing for the last 10 years. And I don't see ourselves doing anything different in the next 10 years. When we are having the growth, why to complicate? .

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Hari

No, I love that focus is on keeping it simple. And that 20 30% growth right. But I think the main question that's relevant for the audience is, why are you aspiring for 20 30% growth and not higher? 

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Gautam 

I'm talking about a long term. Right? I'm not saying that look, in the initial years, the business would throw up 56% kind of growth rates in a long term category. If you're able to do it, you should do one thing. And but get that thing, right, because please understand, the customer identifies you for a particular reason. It's not necessary that you will go into adjacencies and the customer will buy you because she has bought you for something else. It's not necessarily and that can be a big failure. Today, because I'm selling bottoms, I think, okay, look, customer has acquired let me sell tops customer might not come and buy them. 

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Hari 

So you can't let go. That's a very important point. Yeah.

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Gautam

So I mean, look, it's good to get into that line of adjacencies. But you have to then see certain kind of hurdles in your current category when you reached some sort of stage where you feel you, you've done a lot, you've achieved a good market share and your growth rates are going to be tight, then look at the adjaciencies, it's better to be known for one big thing rather than doing five small things and diluting yourself. It's always better to grow up vertically then grow horizontally.

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Hari

No, that's that's a very important message that, you know, that I wanted to underline for the audience as well. And as you said, we've also seen how entering unrelated categories etc only increases the failure rate. And just, you know, standing for one thing, having a crystal clear identity just maximises your your chances of success. Yeah, and and now focusing on defensibilities and capabilities that you've built at Go Colours. Would like to understand how do you think of, you know, the core capabilities that that Go Colours has built as an organisation over the years, you know, if you can just talk us through,, how you think about building defensibilities for the business at different stages of growth?

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Gautam

Oh, I think, look, we as a business, we have kept things very simple. And I think our fundamental thesis is that we have spent more time on things that work for us. So we know those three, four things that worked very well for us. And 90% of our time at Go Colours, and all the people working for Go Colours are spent on that. In an organisation, sometimes you get carried away, or you start spending times on things that don't really add much value in your business. So all team members have actually spent time on things that matter. Now, things that matter could change from person to person, from business to business, in our business, we know, okay, Product, EBO these are the two most important and third, supply chain, our time spent goes into these buckets. Everything else is noise for us apart from that. So you have to prioritise your buckets, and spend time where it matters.  And I think we as an organisation and management are more on that basis, they think on that basis than anything else. See, I've also seen the times of 2014 2015, when we did so many other things, and we were not getting the result. That is a discovery period. Once you discover what works for you, then you have to narrow down your force. So there will be a time in any business where you will be doing 10 Other things to figure out what works like I was coming back to my discussion right in the beginning, like you have to do general trade, you have to do LFS, you have to do EBO, you have to do everything, you then you know what works for you. And then you have to put your head down and say, Okay, this is what I'm going to do.

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Hari

So to summarise, in terms of defensibility is what I heard you say was product capabilities, running a distributed EBO operation and supply chain. Is that accurate?

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Gautam

Yeah, these three things? Of course, as complicated as the other, it's in itself, but focusing on these three things.

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Hari

Right? And did you ever consider complete backward integration, etc. In terms of manufacturing?

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Gautam

See, I'll tell you one thing i We have been in manufacturing earlier and I know how tough that businesses is. If a product can be simplified and outsourced, there's no need for you to put up your own manufacturing, especially in garments. Because if you grow at 40%, every year, your own manufacturing will be a battle and a bottleneck. You have to be in a growing business like that, if you're able to outsource, it's always better to outsource than not and we've seen the manufacturing service. So in Go Colours, we're never going backward, we'll always be outsourced because today, this business flows everything from gross margins, right. If you don't have gross margins in the business, the p&l is not going to ever deliver profitability. gross margins are possible only if you work with the best supplier at the lowest rate. If I have my own manufacturing, I will be bound by my own manufacturing costs. I should have the flexibility of going to a different supplier who gives me the same quality or better quality at a lower price. So the nature of the business's gross margins if you want to have high gross margin business, has to be outsourced. 

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Hari

So when you talk about product capabilities, just double clicking on that as a core defensibility for Go Colours, what would be the two three elements that are most important in terms of product capabilities? 

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Gautam

See, for us everything what we make from a product perspective is what the customer wants. For us, at the end of the day customer is key.  The customer expects a product of a certain quality and at a certain price and we work only on that month. So today as a brand, you need to know who your customer is at what price the customer is going to buy, what is your TG, everything flows from what the customer wants. So today, whatever range we have, and whatever pricing we do, everything is keeping in mind what the customer is comfortable spending for what component. So today, whatever product developed, whether we've done it across western wear, ethnic wear, fusion wear, it's all on customers.

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Hari

Hmm. I think we have a few more questions. One last question from me, Gautam. So for those listening in, if they aspire to become the next Gautam Saraogi, what are the two three personality traits that you think really helped you in your journey?

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Gautam

Well, look, I'm not really a role model for anyone, even I have many role models to follow. But I think look, very important is to go with your own gut. And I'll tell you one thing, what we did very well, when we did the EBO business, everyone we were running behind EComm, GT. And I was going a different way altogether. Like I told for everyone, the source of truth, or the recipe is different. So because something worked for me does not mean it will work for someone else. And because something worked for someone else will not work for me. Right? So it's always very important to go with your own entrepreneurial instinct of what is right for your business. So I think that has helped me personally a lot.

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Hari

Now that is interesting

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Gautam

EBOs, when we grew, no one was even looking at EBO segment. Everyone was thinking online, GT and even focusing on something completely different where people thought why are these guys opening their own stores? We will go and buy. So I didn't know whether it will work or not. Or I met with my instinct, right? So it's, you have to go with your instinct.

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Hari

Yeah, trust your instinct and and don't follow the herd. Moving on to the audience questions. The first one is relevant. This is on you know, whether your preference is for franchise owned stores or company owned stores. And your thought process behind that?

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Gautam 

It's a function of your EBO economics. If your ROC and margins in your EBO business are good, there's no need to franchise or if you feel you're not having the capital, even if your economics are good, and you're not having the capital to put up open a store, maybe you can look to franchise so it's all depends on your economics of where you are. We are not against franchising, we franchise. So today over 65 stores, we have over 13, 14 franchises here. So 99% of our stores are company run company operated. But maybe tomorrow when we have 1500 stores maybe a franchise stores will be about 10% Because we will probably franchise in towns where I will not be able to control my store. I think that should be the reason to franchise. I think wherever you're able to efficiently manage your stores, your economics are good and capital is available you should look you should look to open a company operated store, In any location where you managing the store efficiently is the challenge you can even think about franchising. 

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Hari 

The next one is on for a new brand looking at EBO or kiosks, would you suggest a mall or a high street in terms of, you know, the location?

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Gautam

Definitely a mall. For sure, because a mall has footfalls already defined because there are footfalls happening in the mall. Of course opening the right location in the mall is very important in retail you might be part of the best mall but if you don't have the right location, nothing will happen. So if but if you're getting an opportunity you should first start with the mall and then go with high street. But does not mean that High Street will not work. If you're definitely have to open you're not getting a space in the mall and you're bullish about high street, go for it. But a mall is usually better starting step than a high street. 

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Hari

I agree. And you also mentioned how a kiosk is a great stepping stone before opening an EBO. Right. So would you suggest brands to start with a kiosk?

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Gautam

see, depends on the range of products you have. I had only two products when I started in the kiosk. So it worked for me. If you have a decently wide range of skus, where there's a visual merchandising element to it , there has to be an experience for a customer to walk into the store, you  should go for this. It depends on the product. It is very, very subjective to the product. If you feel that from a VM perspective, you can pull off in the kiosk try with a kiosk. But if from a VM perspective and experience shopping experience perspective, the behaviour happens in a store then try a store.  It is very, very subjective. 

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Hari

I think the point on VM and assortment is is an important one. So at what threshold, did you decide that EBOs  made more sense from an assortment standpoint?

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Gautam

See, because when we started adding products, the customer needed a trial. They needed a trial. Right. So today, we had no choice but to try a store with a trial. Because for the new they do need a trial. But for other value added product they did. So when we kept adding those product ranges, then we suddenly realised that the sales started stagnating, it was not growing. Our new products were not fitting, that's when we tried stores over kiosks. 

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Hari

 I think the other question is on the top two, three parameters that one needs to consider in selecting an EBO location.

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Gautam

See, I think it's always better to pay an extra rent, but take a prime location over taking a big category. Many people have that, you know, have the policy saying that look, we'll take a store of lower rent, we'll do little extra marketing, and will make the store work. It should be the other way around. A store by its nature should generate revenue for itself without marketing. So you have to get the location right. Even paying a little bit of premium rental doesn't matter, you have to take the location, then how do you go about taking the prime location. That is something where you have to study whose your TG and which brands you follow. There are certain brands we follow, we try opening near them, there are certain brands following us who try opening next to us. So it's basically a chain. So you have to make your benchmark on certain brands you would like to follow and then try opening stores next to them. And if those are prime locations, the EBO will do its work by itself. But the concept of doing higher marketing spending less on rent is a wrong decision.  If a store is of the right location, it does not need marketing dollars for it to do well. Unless your product is not good. If a product is good and you're in the right location, sales will happen and you don't have to spend on marketing.   

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Hari

This is obviously subject to that 15% rent to revenue threshold?

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Gautam

No, see, the 15% is again subjective depends on how large your gross margins are. Sometimes, business 80% gross margins, their affordability of rental revenue can be higher. So today, what any, for any business or brand, they need to first put down on paper saying that, hey, this is my gross margin. This is my OPEX what is my rental revenue budget? I might be looking at 50% some other person can afford 30% .

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Hari

That is fair. And just you know two final questions to round up. How do you think about marketing at a store level in terms of revenues? Is it you know, the 5%? How does that break down at a store level you know, store level activations, etc. 

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Gautam

For us our marketing 5% focus and 4% what we spend is for brand building and largely we spend on digital  Because there are two types of advertising right. There's online advertising that is offline advertising keeping ATL BTL aside, there's offline advertising and online. Our offline advertising is our stores. So whatever incrementally is spent over and above rent, the 3 - 4% we spend digitally. So for us, the little bit marketing spend is on brand building at top of the funnel and in the online world, which works very well for us.

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Hari

Got it? And the last question, since, you know, you track customer data very closely an interesting metric would be, you know, we spoke about the revenue ratio between the first two years versus fifth year. Similarly, would you have a sense on the number of customers transacting at a store? How does that change from the first two year versus, you know, fifth year when the store is steady state,

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Gautam

customer level, things remain constant, it's just that your stores start flattening in terms of revenue. And that's what you need to be very careful. So, you're starting your same store sales growth would be very good. And eventually your same store sales growth will start to flatten out a little bit. So the important thing here is that today when you are growing in clusters, rather than looking at each store individually at the same store sales, you look at the cluster and thinking okay, this is my cluster, this micro area, I've added so many stores, my increase in revenue, whether it is in line with my increase in cost. At a cluster level, if you're growing well and your cost is your margins are remaining the same then same store sales growth flattening shouldn't be a concern. Because in any business, it is inevitable that the same store sales growth will start flattening.  

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Gautam

what is the cluster right you take one micro area we are adding more number of stores. So instead of looking at the stores individually, you look at that one cluster is one store

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Hari

right right, but for you know given a lot of the audience is younger brands. So the first one I heard you say is the number of customers transacting is roughly the same you know, over a stores lifetime and then so it's essentially customers you know transacting 2x their initial transaction value in the first year 

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Gautam

you need to know what is your average bill basket. Is your average bill basket year on year stagnant or is it growing or degrowing? Cutomer footfall at a store you cannot control because that is dependent on the outside scenario.  recession or how the economy is doing. But the customers who are walking in, are they buying the same quantity average that is something which which is a very very important number. If you're able to grow that decimal, and I say decimal because if suppose is 2.4 garments a bill, example I'm just giving you to make that 2.5 is very difficult. Whether the 2.4 is downward or going upward that is very important. Because put forth as a brand you cannot control. The one thing you can control is the customer is walking to the store. How much is that customer transact

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Hari 

We've overshot time but but this was fantastic Gautam, I think great one on one on just focus and and especially on cracking the retail channel. So really appreciate you joining us this evening. And, thank you so much. Have a good weekend. Thanks. Thanks, everyone, for joining.

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