New Age Fashion Retailing in Malaysia

www.kopihangtuah.blogspot.com

Research shows that there is huge potential for online fashion retailing. The fashion business (in Malaysia) is now recording RM16 billion for 2014 (forecast) and it is expected to balloon up to RM21 billion in 2020 with a per annum growth rate of 7%. With 50% of the population owning computers and 56% internet penetration rate, coupled with an average of 5 credit or debit cards per household, it can only mean that the figure can grow significantly.

ASHION has been one of the popular means for entrepreneurs to showcase their passion for business. It may consist of small and medium enterprises but it has significantly contributed to the sub-economy of the creative industry in the country and pretty much fuel the retailing sector as well. It is no surprise that many youth, particularly female, have been interested in having their own fashion business. My wife is one of them. She has a retailing business selling costume jewellery on social media.

 

What is the current trend in fashion retailing in Malaysia? You may have noticed the word social media in the previous sentence. Well, that is the hint. Retailing has gone beyond physical stores. Gone are the days where people rush to Jalan Tunku Abdul Rahman to queue in front of Mun Loong or Globe Silk Store or even Wisma Yakin at Jalan Masjid India. People are talking about Zalora and Fashion Valet. In the new era of internet, youth are brave to purchase online when their parents are still contemplating using ATM machines! (I know my father refuse to use ATM machines - he queues at the bank with a cash cheque in his hand :)

What makes it possible for youngsters to embark on fashion retailing online? Gen Y in particular works on visual basis. What is being showcased online is good enough for them. On the other hand, Gen X still requires the touch and feel of the garment and worry too much about cyber security. There is a mismatch for economic potential here - the ones with money, i.e. Gen X, are the ones who are without confidence (for online purchase) and the ones who are willing, i.e. Gen Y, are not at the mature income level for significant purchases. Nevertheless, both Gen X and Y aging from 20 to 39 with average income of RM10,000 per month continues to be a major driving force as far as online purchases are concerned.

 

Research shows that there is huge potential for online fashion retailing. The fashion business (in Malaysia) is now recording RM16 billion for 2014 (forecast) and it is expected to balloon up to RM21 billion in 2020 with a per annum growth rate of 7%. With 50% of the population owning computers and 56% internet penetration rate, coupled with an average of 5 credit or debit cards per household, it can only mean that the figure can grow significantly. Malaysia is within the Top 10 of the e-commerce index (AT Kearney Study) garnering RM250 million worth of e-commerce transactions that is expected to double in the next 5 years. With the infrastructure and logistics quality for delivery that is on par with the United States of America (Based on World Economic Forum), it only reinforces the new age shopping habit.

 

The AT Kearney Study also uncovered that the new economies that will significantly fuel the fashion online industry globally are United Arab Emirates, Oman, Saudi Arabia, Kuwait, Brazil, China and,... surprise, surprise,.... Malaysia. As mentioned earlier, these countries have good logistical infrastructure unlike countries like Indonesia, India, Philippines and the consumers are more confident of online shopping unlike their counterparts in countries such as Russia, Turkey, Jordan, Panama and Morocco. An aspect worth gauging as far as confidence is concerned would be the return rates of goods sold via online. Some countries like Germany has return rate as high as 50%. Some countries have poor internet penetration and online banking facilities; and as such, their method of retailing is stuck at conventional cash-based transactions such as Cash on Delivery ("COD").

Sometimes the term "Demand Pull" does not work in the fashion industry as fashion is not derived from what people want. Fashion enlightens people with what they don't know what they want.

What is next in the new age fashion retailing world? Ever heard of augmented reality? Modern consumers demand much more that just product showcase. They want experience. They want to be told what their total fashion solution would be. Sometimes the term "Demand Pull" does not work in the fashion industry as fashion is not derived from what people want. Fashion enlightens people with what they don't know what they want. With that kind of complex behaviour, no wonder consumers get excited with fashion shows both live as well as online. The total combination of all apparels from head to toe matters. Some online stores offer that trial and error before a purchase is done. Consumers can pick and choose combinations of apparels - the augmented reality mentioned earlier. Some e-commerce engine piggy ride on the world of media and entertainment. TonTon for example gives viewers of online TV/Film content the pleasure of clicking on celebrities' image if they fancy what the celebrities are wearing - linking them to an e-commerce site that sells that particular outfit worn by the celebrities in the TV/Film show. 

Another new age platform is the social media. Consumers are on the go and they want to see product showcase at the utmost mobility. Asian market will tend to follow the behaviours of large economy like China where 88% of its population uses social media and 66% writes product reviews after doing online purchases. Facebook and Instagram prove to be very useful for visual attention. You see many celebrities minding their daily lives on Facebook and Twitter and along with that, fashion gets showcased. Tagging a fashion brand with celebrities creates a powerful tool for marketing. Just recently I had a conversation with a famous emerging fashion designer, Fairuz Ramdan, who claims that he has achieved that success by using a real live walking fashion model, Wak Doyok (See picture in earlier paragraph above), who lives his life on daily basis with the sole purpose of showcasing his fashion every hour of his daily routine. A bizarre phenomenon but hey, if it works, why not? Today fashion designers have turned their backs on conventional mediums such as TV/Radio commercial or newspapers.

What is next in the genre of fashion? You may recall some of the countries I mentioned earlier. Most of them are from Middle East. Middle Eastern money is leaving Europe and the Americas and is heading its way towards Asia. South East Asia and China will be their (Middle Easterns) shopping heaven. Therefore, it makes perfect sense that Islamic fashion is being embraced. This movement alone will be the single most powerful catalyst to drive the world fashion movement to consider Islamic fashion as genre of the contemporary consumers globally. In Malaysia we have plenty of Islamic fashion designers and even the non-Islamic ones are testing waters (such as Melinda Looi). Islamic is in trend but not necessary forever. You will have to be dynamic in identifying what the market will accept. Zara restocks its designs every 2 weeks and Uniqlo implements "planned obsolescence" by forcing new designs to the market rather than reacting to consumers' preference - tell consumers what they don't know what they want (again).

So in a nut shell, if you want to be a fashion business entrepreneur, what do you need to consider? Well, keep your costs lean. Concentrate on matters that matter most. Go online. Forget about opening your physical store first. Continuing with the conventional placement at other retailers such as Metrojaya, Parksons and the like but do it concurrently with your online presence. Do Zalora or Fashion Valet. Do augmented reality stuff and surf on social media wave. Strive for efficiency and effectiveness of delivery activities. Choose reliable delivery partners to ensure goods get delivered expeditiously and choose reliable suppliers so that you have an optimal inventory level that keeps warehousing cost to the minimal yet ensuring sufficient stock to met demand - the Economic Order Quantity. 

 

Price your goods wisely because online buyers are very price sensitive. Benchmark your product and its pricing to competitors and rationalise what margin is healthy for your cost structure. If you have trouble in that, you may have to reconsider your cost structure or types of products. Finally, spend money on marketing that is focused in addressing your audience - social media being the best. When business gets more solid, you should also go for Omni-channelling, which means, you use all methods of selling with interaction with consumers: Online, Mobile, Catalogues, Call Centre, Pop Ups, Stores, COD, Fashion Shows, Linking e-Commerce to Content, etc - integrating online and offline channels.

..... tell consumers what they don't know what they want .....

* kopihangtuah




| mcmlxxv:viii:xxix |

Malaysia Needs to Overhaul Its Filming Industry

www.kopihangtuah.blogspot.com

The industry is becoming popular amongst investors fraternity in the United States (“US”) as the growth in the international entertainment market is huge - best illustrated by the fact that the international box office is growing at a much faster rate than the US’s. Hollywood studios have shifted focus to large films (USD200 million each).

ILMING industry seems to show a great deal of money - both from production side as well as economic profit side. We hear Hollywood boasts its films across the globe like a phoenix full of inferno. When we turn our heads to the local (Malaysian) scene, the fire extinguished. What has happened? or rather, what did not happen? Surely Hollywood is not the only success story? I even heard that Hollywood is not  ranked #1. I was told that #1 goes to Bollywood. #2 goes to one of the African nations,... cannot remember which one. Hollywood is at #3. Other nations are also performing far better such as Hong Kong, Korea and even our neighbouring Indonesia and Thailand. So what can we do to make Malaysia as awesome as those countries as far as the filming industry is concerned?

 

Recently I was privileged enough to visit Hollywood. Apart from the themed rides and the photo with the HOLLYWOOD sign on the hill, I took quite a considerable amount of time talking to many people from the filming industry in Hollywood. They include studio producers, independent producers, bankers, lawyers, insurance guys, distribution companies, talent agencies, private equities and Emmy Award winners (directors/producers). It was a rewarding experience. I now understand what is in the ecosystem in Hollywood that is not in ours (Malaysia). These missing components are quite critical that they carry with them the role of bricks to a wall. So, I would like to share the salient points that I have gathered and most of it are behind the scenes matters - the boring stuff that happens behind the actors and the cameras but without them, there will not be any filming industry (funny enough that without them, Malaysia still has a film industry - hmmmmm.... ) Oh well, here goes:

HOLLYWOOD ECOSYSTEM

STUDIO VS INDEPENDENT PRODUCERS

Studio producers manages from A to Z – Pre-production, production, post-production, sales and distribution, financing, legal, accounting, licensing and merchandising. Their primary focus is making $$$. Independent producers are more passionate with the artistic and cultural perspectives of a movie. They are more conducive for a nation’s identity building activities. Both studio and the independent producers agree on one thing : "The road to success (whether financially or artistically) would be a strong story telling."

DEBT FILM FINANCING

Gap and bridge financing for Government rebates is a necessity in the industry to fill in the gaps caused by timing of cash injections. Both bridge for rebates as well as gap financing works on Last in Last Out ("LIFO") basis for its recovery. It is also used to pre-finance pre-sales. Typically at an interest of 10% and fees of 2% totaling 12% annualised for a tenure of 12 to 18 months. Government rebates need to secure investor’s confidence. Often the banks will require a consultant to ensure that criteria for rebate is adhered to as many cases suggest that Government keeps on changing the rules. This may cause an issue of Government not honouring the rebates.

Completion Bonds are only entered into when all financing is secured. Risks can be reduced when there is involvement of a re-insurance party. Essentially the bond is an underwriting for any sort fall if the budget is blown and pay all parties if movie not completed. A cross between underwriting and insurance on completion. Other insurance such as the ones for actors comes out from production costs.

PRIVATE EQUITY FILM FINANCING

Private Equity is the most conducive way to equity-finance a film. It gives some level of comfort on the control over the operations of a production. The typical outcome (cut-off of 7 years) for a slate of projects for equity funding consideration would be:

• 25% movies breakeven
• 50% with IRR 20% to 25%
• 25% mega profits! 

The industry is becoming popular amongst investors fraternity in the United States (“US”) as the growth in the international entertainment market is huge - best illustrated by the fact that the international box office is growing at a much faster rate than the US’s. Hollywood studios have shifted focus to large films (USD200 million each) reducing the number of films made. Hence, plenty of room for private investors to finance smaller movies. They can do so by putting in place variables that can reduce risks. These are the factors that can help reduce the risks of production activities:

• Slate of projects rather than just into 1 project - diversification
• Deep industry access (projects and talent)
• Experienced team members and crew with proven success
• Higher reliance on debt financing (75% minimum)
• Maximise non-recourse Government rebates
• Maximise bankable pre-sales
• Minimal overheads
• Do co-productions instead of sole-productions

SALES AND DISTRIBUTION FOR FILMS

Backstop is a method where a procurement party values a particular Intellectual Property (“IP”) and buys the option to purchase the IPs before the producers shop around for buyers. A pre-sale so to say – a Backstop broker. They are also heavily involved in subsequent sale and distribution activities including licensing of rights and securing Minimum Guarantee (“MG”). If sold to another distributor, the latter distributor recovers all expenses and MGs paid to the Backstop broker with the surplus (“overges”) shared between the Backstop broker and the distributor based on a predetermined split. Typically, the revenue streams involved are as follows:

• Theatrical - Ticket sales split slightly in favour of exhibitors
• Home Entertainment - DVDs, pay-per-view, license fees
• TV cable & Broadcast - On air exclusively (Pay-TV) or syndication (Free-to-Air)

LEGAL ADMINISTRATION OF FILMS

Legal Counsel specific for the industry is important. Normally each movie is parked under a separate Special Purpose Vehicle (“SPV”) to limit the exposure of each movie. The lawyers look after the legal matters of these SPVs inclusive of the licensing arrangements. Collateral for financing is also a legal matter. Normally the original IP is not collateralised and only the derivative IPs are collateralised (e.g. licensing rights). Other forms of collaterals would be assignment of Government rebates and MG from distributors.

“6 charged in $5M movie fraud scheme” was reported in the Los Angeles Daily News on Friday, 28 February 2014. This shows how important the involvement of a law firm is for the industry. Fraud is everywhere. Protection and prevention is required.

ACCOUNTING THE FILM COLLECTIONS

The first USD100,000 to USD200,000 comes from the Producer after having formed up the preliminary team of main casts, directors and script writers. Release of funds for production is done when a 3rd party accounting firm confirms all monies of investment is in escrow with the lawyers. Waterfall distribution of recovery is the method used when collections are in. The accounting firm acts as a de facto credit agency for collection and the recipients of recoveries are categorised and prioritsed as follows:

       Recovery of Investment plus Profit

• Priority 1: Distributor Financier (MG + 15%-25% fees)
• Priority 2: Gap Financier and Banks
• Priority 3: Limited Partners (Incl. actors/writers/directors profit share)
• Priority 4: General Partners

       Fees only

• Completion Bond Underwriter
• Lawyers
• Accountants

LESSON FOR MALAYSIA

For Malaysia to grow further in their filming industry, the below critical 10 steps must be introduced in the film ecosystem:

1. Strong reinforcement of the IP valuation framework and IP market place.
2. Strong reinforcement of the film rebate system
3. Government incentives to encourage investors/angels on filming funds.
4. Legal profession to establish services for IP management.
5. Accounting profession to establish services for IP cash flow management.
6. Insurance sector to establish underwriting of film projects.
7. Re-insurance sector to widen scope of industry to include filming.
8. Banking sector to establish entertainment division.
9. Exchange filming ideas vs financiers.
10. Open the market to investors/financiers and service providers to experts from other countries

So, yeahhh,.... can we make this happen? I was told that relevant Government agencies have already started efforts on some of the above. I cannot wait to see the result of those efforts upon achieving the desired state of ecosystem.

Both studio and the independent producers agree on one thing : "The road to success (whether financially or artistically) would be a strong story telling."

* kopihangtuah




| mcmlxxv:viii:xxix |