Will Zudio become the crown of Tata's empire?

Tops at just 199! Jeans going for 599! Dresses at an incredible 699!

Zudio sells products at prices lower than street-side shops, and that's why it's all the rage now.?

But just a few years ago, things were totally different. The Tata Group-owned Trent, which houses brands like Westside, Zudio, Zara, and Landmark, was synonymous with its Westside stores. Westside brought in a massive 95% of Trent's Standalone revenue in FY18.

Fast forward to today, and the tables have turned. Zudio is hailed as Trent's growth engine, and now accounts for 40% of its revenue. The numbers are astounding – Zudio's revenue grew over 219% in FY23, while Trent's growth reached 83%.

So, what's the secret behind this remarkable sales figure??

The answer lies in their expansion strategy.?

While it took them two decades to open 100 Westside stores, they have opened over 119 Zudio stores in just FY23. Currently, they have 214 Westside stores in 90 cities and 325 Zudio stores in 119 cities.

So, why is Tata expanding Zudio like crazy??

The reason is Zudio’s pricing strategy. Zudio offers unbeatable prices that appeal to price-conscious Indians. Let's be honest, most Indians prefer not to spend a fortune on clothes. That's why we love Zudio.

Also, Westside caters to the premium to mid-range fashion market, it faces challenges in smaller Indian cities where people are more conscious of prices.Therefore, to capture the market of Tier 3 and Tier 4 cities, it is expanding Zudio.

Zudio's strategy of offering everything under Rs. 1000 makes is winning the heart’s of Indians, but what's their secret to selling products at such throwaway prices??

Are they cutting costs or squeezing their margins??

And with this phenomenal growth, will it genuinely boost Trent's bottom line, or will it drain Trent's cash flow? Let's dig in and uncover the truth!

Super skinny margins

First and foremost, Zudio adopts some savvy cost-cutting measures to keep their prices irresistibly low. One trick they use is choosing store locations wisely. Instead of setting up shop in expensive areas, they opt for places with lower rental costs. For instance, in my city Raipur, they might have a store in City Mall, which is the least popular mall in the city and has the lowest rental prices.

Secondly, Zudio steers clear of the e-commerce game. Why, you ask? Well, statistics reveal that about one in three online purchases gets returned. Logistic costs associated with returns can eat into a company's margins, and Zudio is determined to avoid that trap. So, they skip the e-commerce model altogether, saving themselves from delivery costs and the headache of high return rates.

Thirdly, they follow the Dmart strategy. By producing in bulk, they enjoy cost reductions that allow them to pass on those savings to customers. It's a win-win situation for everyone involved!

Despite implementing those cost-cutting measures, Zudio continues to operate on razor-thin margins, and this is affecting not only Trent's overall margins but also investor satisfaction.?

Recently, Trent Ltd faced a 3% dip in its shares after announcing quarterly results. The culprit? The gross margin declined from 51% to 45% due to increased revenue from Zudio stores, which naturally have much lower gross margins compared to the company's other brands.

Here's the deal: The average selling price of a product at Zudio is just Rs. 500, while at Westside, it's Rs. 1500 – three times higher than Zudio's. This low pricing strategy has affected Zudio's margins. You see, Westside boasts a healthy gross margin of 55% and an EBITDA margin of 13%. On the other hand, Zudio operates on a narrower gross margin of 35% and a modest EBITDA margin of 6%.

In the fiscal year 2023, Zudio's revenue contribution was INR 3537, while Westside's was INR 4130, just 16% higher. However, Westside's EBITDA was an impressive INR 537 crores, 2.7 times higher than Zudio's EBITDA of 196 crores. Currently, Westside significantly contributes over 70% to Trent's bottom line. To match such a contribution, Zudio would need to pull up its socks and grow its sales threefold.

While Zudio enjoys popularity among customers for its affordable offerings, it will have to bring in some real cash to impress investors.?

In conclusion, Zudio's success stems from aggressive pricing. However, its paper-thin margins pose challenges for investors. Striking a balance between affordability and profitability will be key to their future journey.