Before we get to today's story, a quick recap on all the things we covered this week. On Monday we talked about the Fortis Health fiasco, on Tuesday we discussed the British Pound. On Wednesday we talked about monetising asteroids, then we discussed modern slavery and finally we talked about NavIC.

And with that out of the way, let's get to today's story, shall we?

The Story

A white sole. A blue strap in the shape of a Y. All made using plastic or rubber.

Do you have an image?

Well, of course, you do.

It’s the ubiquitous Hawai(i) chappal — a staple of every home in India. It’s cheap and durable. It can weather the Indian monsoons with ease. And it is usually the weapon of choice to kill that pesky cockroach. It’s like the Swiss army knife of footwear!

And India can thank Bata for this. They introduced these rubber slippers (or flip-flops) all the way back in the 1950s. They marketed it under the brand name ‘Hawai’ and it is now a generic name for slippers. But if you’re a curious soul with a particular interest in footwear, you’d probably have noticed something else too. The name embossed on most of these blue straps isn’t Bata. It’s Relaxo.

Over the past few decades, this company has stamped its authority as the chappal king of India — it can churn out 10 lakh slippers every day!!! In fact, a report by Centrum states that 13% of India’s annual footwear production capacity comes from Relaxo alone.

It’s a big deal!

But how did Relaxo get here?

Well, you’d have to go back to the 1970s when the Dua family, the current promoters of Relaxo, inherited a family business that manufactured cycle parts and footwear. Ramesh Dua, the current Managing Director, was only 17 years old and dreamt of becoming a doctor. But the business accumulated a lot of debt and it needed a steady hand. It needed a new leader. It needed Ramesh Dua.

And he answered the call. However, he soon realised the cycle parts business wasn’t entirely profitable. He believed that the company’s future lay somewhere else — in rubber footwear. And being the smart young man that he was, he also realised he needed to learn a lot more about rubber — — the key raw material that would sway the fortunes of the company. So he packed his bags and headed to the Plastics and Rubber Institute in the UK.

In 1975, when the Indian government imposed Emergency rule, things became a little dicey. The government was going after business people across the country. And once again, he noticed something interesting. The only store that remained open without fear in Delhi happened to be his competitor Bata. And when he asked them how they’d kept their shutters open, they pointed to their brand value.

And that’s when Dua realised that they needed a brand too. And in 1976, Relaxo, the brand, was born.

Anyway, Relaxo truly made its mark by focusing on 3 things.

Firstly, a simple realization that the business is practically recession-proof.

What do we mean?

Well, everyone needs chappals. And it’s low cost — the average selling price for Relaxo is only ₹135. Remember, that’s including all its products — premium chappals and sneakers.

Find a branded, organized player that sells a chappal for cheaper on Amazon. Go on, try it.

See how hard it is.

And that means Relaxo’s products take a very tiny sliver of your disposable income. Which explains why the customers are relatively sticky.

A case in point is the pandemic. Between FY20 and FY21, Bata’s sales cratered by 44%, Metro Shoes' dropped by 38% and Khadim’s also fell by 19%. Relaxo’s sales, on the other hand, just saw a tiny drop of 2%. That’s it.

Secondly, according to fund manager Saurabh Mukherjea, Relaxo took a counterintuitive call.

They decided to manufacture everything in-house. They used their historic expertise in the plastic business and turned it to their advantage. While everyone else outsourced manufacturing, Relaxo knew that it made sense for them to hold their cards close to their chest. Today, Relaxo manufactures 95% of its products in its own factories while Bata outsources over 50% of its production.

This allowed Relaxo to really scale up its manufacturing.

Also, unlike its peers, Relaxo tapped into a distribution network to penetrate the market far and wide. Bata stuck to its own branded retail outlets.

And finally, you have to remember that people’s disposable income began rising rather disproportionately after liberalization. And Relaxo needed to portray itself as an aspirational brand. Even if it was just selling chappals. So it spent heavily on advertising. It roped in Bollywood biggies like Salman Khan and Katrina Kaif to prance about on the telly wearing chappals. It worked. Its brand recall boomed.

Essentially, Relaxo built a chappal monopoly. And it sells 18 crores chappals a year now.

And the last two decades have been quite phenomenal for the company. In FY03, it had revenues of just ₹150 crores. In FY13, it mushroomed to ₹1010 crores and in FY22, it had soared to ₹2,600 crores.

Sure, the past looks great. But what about the future?

Okay, first the two bright spots.

One, it’s the typical “under penetration” argument. Indians don’t own enough footwear and when they buy more, it’ll benefit companies like Relaxo. For instance, India’s per capita footwear use is a measly 1.9 and that’s well below developed countries like the US and UK where it stands at 7.

And two, over 65% of the footwear market in India is still in the unorganized sector. But it has been tapering from the 80% share that it used to command. Demonetisation, GST, and even Covid have all knocked the wind out of the unorganized players. Gradually, as many shut shop, the tailwinds are likely to benefit Relaxo.

Where else would you get a branded ₹100 chappal from?

Okay, that’s all well and good. But what about its problems, you ask?

Well, there are issues.

Primarily, inflation. See, rubber and plastic derivatives are important inputs in the manufacturing process. So when inflation strikes the commodities market, it hurts Relaxo. For instance, the price of the raw material Ethylene Vinyl Acetate (EVA) has jumped by 3 times this year. That means Relaxo has had to pass on the costs to its customers. In FY22, it has already increased prices by 25% and that’s the highest jump in a single year in Relaxo’s history.

Also, the government tweaked the GST rates this year. And for footwear priced below ₹1,000, the rates have increased from 5% to 12%.

Naturally, any price increase hurts sales. Especially in such an uncertain economic environment.

But there are long-term risks too — People are increasingly looking at more premium products.

See, the mass market footwear segment (that’s priced below ₹500) is expected to see a drop in its market share. From 56% to 51% over FY15–25. And since over two-thirds of Relaxo’s sales come from this category, there could be some trouble.

For investors, the question they have to answer is — can Relaxo hold on to its chappal monopoly? Or is the stock already priced to perfection?

What do you think?

Until then…

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