Abstract
Vaibhav Global Limited (VGL) earlier known as Vaibhav Gems Limited is a global electronic retailer of fashion jewellery and lifestyle accessories operating in USA and UK. This case is about current business model which many financial professionals call ‘an impenetrable moat’ created in a turnaround of the organization after 2008 global recession.
The case is on the company’s nimbleness to mould its outlook and bring in discount jewellery model so as to have a broader reach in the market. The capability to scale this model into a seamless and integrative approach augured well for its business.
The company owns two TV shopping channels abroad. After 2011, VGL became a fully vertically integrated retailer. It got transformed into a B2C player from being a B2B player. It is one of few e-tailers from India which is making profits. It markets and sells products to its consumer through a televised shopping programme. It broadcasts various programmes through hosts and hostesses for describing and demonstrating its products.
It is a vertically integrated company from being a gemstone sight holder to manufacturing, wholesaling to retailer. It is the only Indian company which demonstrates fully integrated E-tailing model and is profitable also. It is mainly operating into gemstone-studded jewellery of gold, silver or brass with gold plating. Lately it has also started selling lifestyle products like bags, scarves, i-phone/pad covers, etc.
Keywords
‘We can’t just decline like that we have to innovate and overhaul things. I know that the vanished Warburg Pincus’s investment do remind us of impending danger.’ Mr. Devender, Chief Strategic Officer of Vaibhav Global, was burning inside after hearing this news but showed confidence while addressing his team in a meeting. Vaibhav Global Limited (VGL), headquartered in Jaipur, Rajasthan, gem and jewellery exporter was on the edge, the precipice was looking ominous.
Incorporated in 1982, and going public in 1995, it has been a good journey. But the global meltdown, the consumer’s inability to pay the high prices has bought them to this brink of collapse. Warburg Pincus (a leading private equity investment firm) has lost almost more than 90 per cent of their investment (Arjun, 2014b). VGL revenues have shrunk for second consecutive financial year ended in March 2010 (VGL, 2010). It has reached just half the figure of March 2008 (VGL, 2008). The private equity firm had originally invested $ 47 million (₹2.08 billion) in February 2006 (VGL, 2006) and added another 5 per cent in an open offer, making it the largest shareholder in VGL, even more than the promoters.
Dev, as everyone called him, was not the one to sit down, ‘We got to survive this. We have the talent and ability.’ He was all about doing things. He did a few things that did not work, but he was proud that he did them and not just considered them. On the hindsight, acquisition of STS Group of companies, investing heavily in retail jewellery chain in holiday destinations like Caribbean Islands and Alaska; they all seemed big blunders. But he knew he can utilize it all and get back on track and perform better. He also knew that many people think that selling expensive jewelry through brick and mortar stores to impulsive travelers while they are on cruise ships was not a very good idea especially after what happened to world in 2008.
Throughout the previous year, VGL has emphasized on making cost structure competitive, delivering high quality matched with fine designs, distinct styles and foremost providing excellent service. They have struggled with collapsing revenues, rising variable costs in gold, silver, platinum and diamonds and certain large fixed costs and the interest on debts.
Dev continued, ‘We need to identify our strength areas so that we can get things to turnaround fast for our business. I will outline some ideas for you to consider for the conduits that you may take for our vision to be channelized: I feel that we have some competitive advantages that can help us keep our prices competitive which could help us to improve the reach; if we have a wider audience for our product; especially at a price point that looks attractive I think it should work for us. Is it possible?’
‘So how about TV and discount jewellery sound wouldn’t that be an attractive proposition?’ said Rahul, Vice President Operation.
Someone in the audience, remarked, TV is tough, TV does not sell, people avoid such channels and we are talking of Jewellery here, I mean it is not something that gets around over TV. There could be trust issues, we are not even a brand.
Another manager winced, ‘Everybody looks for the real thing. I mean discount jewellery sounds like an oxymoron; and with TV it does not sound like a plan. I also do not see the “How” of it all.’
The voice trailed off….
After the pains endured during the weekend which looked like it is never going to end, Dev met with everyone. He sat down and began listening to the varied notions of VGL getting back on its feet and moving ahead in full force.
Company Background
VGL started its journey with a small beginning as Vaibhav Enterprises in 1980. Vaibhav Enterprises was involved in export of gemstones at a very small scale. In 1989, Vaibhav Enterprises was incorporated as Vaibhav Gems Limited. For the purpose of forward integration, Vaibhav Gems Limited came with an IPO in 1996–1997 for setting up a world class manufacturing unit for exporting gem-studded gold jewellery.
They established their first unit at Adarsh Nagar, Jaipur in 1997. In 1999, a new 100 per cent Export Oriented Unit at Export Promotional Industrial Area, Sitapur, Jaipur was set up.
By year 2004–2005, it started setting up retail chains at major international tourist destinations. In the same year, it also started diamond-processing unit at Adarsh Nagar. It acquired STS group of companies which was having its presence in gold, silver-studded and branded jewellery. This group was manufacturing and marketing—‘Rhapsody’—an in-house brand for high and middle income groups. It established more retail chain stores majorly in Alaska, Caribbean Islands, Mexico, St. Kits, St. Thomas and St. Martin.
The idea of integrating various arms of the production process was to extend the presence from a rough gemstone business view at one end to international retail at the other, capturing cost savings at each point in the business model.
VGL was marketing its product through large retail chains like Wal-Mart, J.C. Penney, Sears, Macy’s, Zale’s and Sterling, etc. In this B2B segment, jewellery is normally considered as complementary product to clothing. In 2004–2005, the company also initiated three branded stores namely GenoA Jewelers (under Jewel GEM USA Incorporation, its wholly owned subsidiary). 3 The idea of establishing these stores at such holiday destinations was taken up after a comprehensive study of nomadic travellers in holiday destinations. These travellers were found to be most relaxed in such locations and hence most likely to make expensive purchases.
One of the leading private equity investment firm Warburg Pincus bought 27 per cent stake in the year 2005–2006 (VGL, 2006). A 24-hours online jewellery TV channel in UK under the name of ‘Iliana’ was started by VGL. Through this channel VGL made its presence in 8 million households and helped it earned a turnover of USD 27 million. In the same year in November 2006, the company started 24-hour jewellery channel in Germany, Der Schmuckkanal and reached 9 million households in very short time of nine months. In these markets, higher disposable incomes with an enduring visual appeal and higher penetration of digital payments were ensuring home shopping on TV a viable proposition. This medium has an additional advantage of reaching a wider clientele.
In 2006–2007, VGL entered into world’s largest jewellery market with electronic sales of USD 6 billion per annum with a mega TV channel—The Jewelry Channel (TJC) later named as The Liquidation Channel. The total estimated size of these markets was around USD 850 million in year 2006–2007. VGL was operating in retail segment in the upper end expensive holiday destinations such as Alaska, Mexico and Caribbean through ‘Milano Diamond Gallery’. The same year the number of retail outlets stores have gone up to 19 outlets. VGL was planning a proactive shift from B2B to B2C. The company’s each store recorded sale of USD 0.89 million on an average. ‘Vaibhav Gems Limited’ was renamed as ‘VGL’ in the year 2012–2013 (VGL, 2013) (Figure 1).
Catastrophe of 2007–2008
The US sub-prime mortgage crisis in 2007 provoked crisis for global credit and liquidity for the whole world. This global downturn affected the Indian exports through steep decline in demand from major developed markets especially through Europe and America. Major stock markets collapsed all over the world. The crisis which started with financial sector crawled into other countries majorly through International Trade. The consumption of discretionary items reduced significantly as there was rising unemployment and reduced government spending in USA and other developed nations. The prices of gold, silver and platinum started rising sharply as they were considered to be counter-inflationary commodities. This caused the erosion of margins in jewellery sector. A huge impact on sales also occurred. In 2008, impact on India’s export was clearly visible due to demand contraction in USA and other major developed nations. The rising gold prices, depreciation of rupee and global economic slowdown have severely affected profitability of VGL. The firm’s consolidated turnover for the 2007–2008 was USD 1.824 billion 1 (₹7.61 billion). The turnover declined by 24.64 per cent in 2008–2009 and reached USD 1.375 billion (₹5.73 billion). 2 The consolidated losses which was 1.84 billion after tax and extra ordinary items rose by 38.09 per cent as compared to previous year to ₹2.40 billion as on 31 March 2009. In view of these losses company has done diminution in some of its investments in its subsidiaries up to the extent of ₹1.01 billion.
By the end of year 2009 in June, VGL was struggling with declining revenues, increasing variable cost (input cost of silver, gold and platinum were rising) along with huge fixed cost which is air time on TV and interest on debt) up to this extent that it was referred to Corporate Debt Restructuring cell (VGL, 2015) (refer to Table 1).
VGL Net Sales and Profit/(Loss)
Rate of conversion 1 USD = ₹64.39 on 25 July 2017.
Profit/(Loss): After Tax Before Exceptional Item.
Restructuring VGL
During year 2008–2009, company took various austerity measures to consolidate operations and focus on turnaround. VGL decided to close the manufacturing and marketing operations at STS Gems Thai Ltd., STS Creations Thai Ltd., Bangkok and STS Gems Japan Limited (refer to Table 2). Company has decided to close operations of eight retail stores in Mexico, seven retail stores under the store brand ‘Milano Diamond Gallery’ and four retail stores in Alaska. In the wholesale segment company decided to close operations in STS Gems USA Inc. and STS Gems Canada Inc. The same year company also decided to file liquidation petition for its wholly owned step-down subsidiary Der Schmuckkanal Deutschland GmbH, Germany; this subsidiary was involved in marketing of Gems & Jewelry through its 24-hour online Jewelry TV Shopping Channel in Germany.
List of Subsidiaries (Direct) and Step Down Subsidiary in 2008
It seemed that recession of 2008 has helped the company identify a discount segment within electronic retail. There were 8–10 players which were operating as major players in electronic retail market both USA and UK but no player was in discount retail model. This model expected company to run thriftily to reduce its expense to sales ratio from 51 per cent in 2009–2010 to 46.5 per cent in 2010–2011.
The company also initiated its inexpensive product lines with natural gemstone-studded gold and platinum bonded silver, copper, brass beads and many more to the range. VGL started sourcing extensive fashion jewellery from micro-markets of China, Indonesia and Thailand. Along with jewellery VGL also started lifestyle fashion products. The company lowered its average price from USD 132 per piece to USD 41 per piece, in the duration of two years.
TV Sales
VGL volumes increased up to 72 per cent in the year 2012–2013 and this was a nine times increase over the last three years. It could be considered as a robust indicator that VGL has successfully transitioned its business model from B2B to B2C in fashion jewellery and lifestyle products. 75 per cent of its retail volumes were coming from Television and the rest from the web. In 2012–2013 almost 87 per cent of sales were contributed by retail segment. VGL shipped almost seven million products or 19,000 on average every single day. In year 2014–2015, VGL stated gross margin was 60 per cent, with return on capital of 43 per cent and return on equity of around 40 per cent with a net debt equity ratio of zero in its annual report of 2014–2015. The company claims repeat purchase as 40 per cent of its sales and average purchase of 26 pieces (Arjun, 2014a).
Normally an anchor displays an item for sale and demonstrates various facets about the product (Figure 2). Initially a high price is shown. After the initial display of price and available number of pieces, prices start dropping. There is a phone number which is continuously flashing on the screen encouraging customers to bid for the products. The inventory of products start declining reflecting that people are buying the products. The person who has bid for the highest has the lowest price guarantee. This means that every bidder is winner as this is like a game. Even people who had bid the highest price will also pay the deeply discounted prices that a lowest bidder had offered. So, there are no inbuilt disincentives for anybody bidding early. The $1 bid raise is also another feather in the cap of VGL. Every product in this bidding process starts at $1. There is an incentive to bid for everyone at such a low price. The bidding process can stop from 10 minutes to 12 hours. As inventory vanishes the bidding stops. The liquidation channel is now not TV dependent as it can be accessed through its web portal also (
The two main competitors of VGL are QVC (a subsidiary of Liberty Media) and HSN. QVC was having annual revenue of USD 6.6 billion in 2013 of which 17 per cent was coming from jewellery and 25 per cent was coming from lifestyle products. This means that USD 1.1 billion) coming from jewellery and USD 1.6 billion from lifestyle products. HSN annual revenue is USD 2 billion (18 per cent from jewellery and 25 per cent from lifestyle products).
The turnaround of VGL has come in the background of global economy recovering though moderately with developed nations showing growth signals from economic crisis five years ago. The market share of VGL starting rising because of increasing value conscious customers. VGL completely transformed itself into a discount retail business through TV channel from the jewellery business. The turnaround has facilitated the company in demonstrating notable growth in terms of revenue and PAT. It also endorsed that VGL is ready to face competitors once again. The average selling price that VGL has achieved along with end to end vertical integration creates an entry barrier for a new player to replicate the business model of VGL.
Future Challenges
In the annual report of 2014–2015 (VGL, 2015, p. 13) company claims:
‘Our Business is high cash flow—generative. Out of the free cash flow of USD 15.9 million (₹106 crore or 1.06 billion)
3
earned in 2014–15 USD 13.65 [₹91crore (0.91 billion) in 2013–14], we pre/repaid USD 7.2 million (₹ 48 crore/0.48 billion) of debt, paid dividends of USD 1.35 million (₹9 Crore/0.09 billion) and returned to the list of dividend paying companies. We reinvested USD 3.45 million (₹23 crore/0.23 billion) into our net worth.’
It also claimed that, ‘It might be easy for a competitor to copy our business model. However, it would be next to impossible for them to replicate our economics. This represents our competitive moat.’
There is no doubt that VGL is having a unique business model of selling through TV channels. But this source can turn obsolete as the customers engaged with this medium were retired women, middle-aged housewives with good disposable income.
Jewellery still remains a discretionary item which could be again among first one to hit if slowdown occurs.