Lack of investment hindering e-commerce potential

An interview with Romana Abdullah and Harris Syed, CEO and Chairman, Highpoint Ventures (Pvt) Ltd

BR Research recently sat down with Romana Abdullah and Harris Syed, founders of the fast-growing kidswear brand Hopscotch to discuss the brand’s journey so far. Hopscotch is owned by its parent company, High-point Ventures (Pvt.) Ltd. Today, Hopscotch has 20 plus stores across 18 cities in Pakistan and an e-commerce website, www.ilovehopscotch.com. Prior to becoming an entrepreneur, Romana has previously been part of MCB’s management team and led the group’s strategic planning and new initiative functions. Earlier, she spent significant time at the Boston Consulting Group (BCG) and Merrill Lynch in New York, where she focused on strategic, financial and operational assignments for Fortune 500 companies. She is also on the board of Karandaaz, a DFID and Gates Foundation funded company that promotes access to capital and digital financial inclusion for SMEs in Pakistan.  Harris has worked in investment and corporate banking for JPMorgan Chase, Barclays and other top firms in the US and is also the CEO of T.H Syed (Pvt) Ltd., a leading indenting business which represents world-renowned manufacturers in the oil and gas sector in Pakistan.

 Below are edited excerpts from the conversation.

BR Research: Please walk us through how Hopscotch came about.

Romana Abdullah: We launched Hopscotch in April, 2014. The main reason we started it was because we felt there was a gap in the market. After doing market research and being parents of young kids ourselves, we couldn't find clothes that we wanted for our kids. We personally did not like shopping at the local brands that were available. I'm sure they are great but we didn't like the product or quality. Moreover, the international brands that exist here are middle to lower-middle class brands in the West but are sold as super-premium here.

Harris Syed: The other thing we realised was that Pakistan is the fourth largest cotton producer in the world. Why then have we been unable to create an international quality world class brand? That was really the aspiration. We wanted to get best in class product at a really competitive price for the Pakistani consumer.  We want to sell ourselves as an aspirational brand.  Our products are made entirely in Pakistan except for a few items

BRR: How difficult is it for a brand in Pakistan to procure quality raw materials including yarn and fabrics?

RA:  For knitwear it is easier because you can actually buy yarn locally and have it knit. The only problem is the currency fluctuation and its impact on raw material prices. We employ quality testing throughout the production process to ensure the best raw material quality.

HS: The problem is when you want more sophisticated knits. If you want specific items such as napping yarn for example, it is not readily available in Pakistan. On the woven side, procurement is troublesome too because you have to get the material from the market. Most of it is imported from China and you have to go through local vendors who are importing it from there.

BRR: Who are your main competitors? How does your pricing rank compare to them?          

RA: We are the new kids on the block. When we started Hopscotch, it was from 0-5 years. The next year we went up till 8 years and now we are at a point where we cater to the 0-14 year’s age bracket. Our competitors are established brands that have been around for a while and include Minnie Minors, Outfitters, Breakout Kids and Leisure Club.

HS: Our pricing is very competitive now and in line with our competitors partly because we have learnt but also because we have scaled. Our main focus is quality, and for the quality we give our pricing is excellent. Our exchange claims our very low and our number of repeat customers is quite high, which indicates high customer satisfaction.

BRR: How many stores do you have right now?

HS: We have 28 stores spread across 18 cities in Pakistan and we reached this mark in four and a half years.

BRR: How many of these stores are franchises, and how many do you operate yourself?

HS: Eight out of these are franchised and twenty are self-owned.

BRR: What are your plans for expansion?

HA: By April or June next year, we plan to increase to around 35 stores.  It depends on the real estate cost. We don't have a store in Karachi as yet although the most number of customers on our e-commerce site are from Karachi. It's a huge market and we know it. However, we are waiting to find the right location in Karachi for our flagship store where there is relevant and sizeable customer footfall. The per square foot price in malls across Pakistan is exorbitant now.

RA: That’s true. The malls here price things that work for well-established women ethnic brands. For smaller players like us, going into malls just becomes a brand building exercise. The smaller cities are the ones that give you the profit.

BRR: How much of your sales mix is through e-commerce?

RA: E-commerce is growing very fast, but honestly it's not where it should have been in Pakistan.  It's still a very tiny base relative to where our neighbours are or where we should have been given we are a 200 million strong country.

E-commerce on its own for us is not large enough to account for the rest of the network. The revenue that we get from online sales is equal to about two stores worth compared to half a store two years back.

BRR: How do you think e-commerce penetration can be improved?

RA: Here's my hypothesis. Everyone ascribes cash on delivery (COD) to be the major impediment and a lack of payment systems. I disagree with that because India probably is still 70-80 percent COD and China till about five years ago was almost 80-90 percent COD. But that did not affect their growth. Sure, payment systems should come and a transition should be made towards a cashless economy. But I don't think COD is the reason e-commerce potential isn’t being realised.

In my opinion, the real hurdle is investment. Look at the example of Flipkart in India. They put hundreds of millions of dollars in marketing and training. Same was the case with Amazon.  We haven't had that kind of money pouring into any aspect of our economy. Amazon took more than fifteen years to turn a profit, but that's because they knew that growth was going to get them the next round of capital

Here, even if you put money in the venture, there is no guarantee that you will get the right valuation. There is no point in valuing a start-up company like a big multi-national company because the growth in start-ups is much faster. Even if you compromise on the valuation, then there's no guarantee that you are going to get successive rounds of funding. So everyone plays rather conservatively and the main hurdle is a lack of liquidity.

BRR: What's your current product range?

RA: Our initial range was around 150 designs for one season. Now, for one season we have around 450 designs. We've gone deeper into more t-shirts and pants but also more breadth, which includes a standing eastern collection for girls and boys. We also have more party wear for girls. We also do accessories such as watches and earrings.

HS: Currently, we are concentrating on the 0-14 years’ segment, but in the future we would like to expand in the 14-20 age bracket as well. However, right now our focus is primarily on strengthening the base that we have and then move forward. Also, the minute you extend your range, you need to think about shop space that becomes a constraint.

BRR: How much do spend on marketing in terms of your revenues?

RA: I think it is variable. We have made a push towards social media versus billboards; so the numbers have changed, but it would be somewhere around 5-8 percent.

HS: For bigger cities like Lahore and Islamabad, we have done away with getting big billboards because it doesn't really give the bang for the buck. We'd rather use the social media model here, but for smaller cities we rely on more traditional means of marketing.

BRR: Do you plan on going into international markets eventually?

RA: Definitely. But we have not started working on it yet. Right now the focus is on streamlining existing processes and realising the maximum potential of the domestic market.  Ultimately, when we are able to untangle ourselves from the operational side, the focus will move to exploring new markets.

BRR: Could you please shed some light on the sort of problems that SMEs in the garments sector face given that you yourself are one?

RA: The energy shortfall has been a big problem. Access to credit is also another issue. This affects the brands as well as their SME suppliers. If the bigger brands are cash strapped, they delay payments to the smaller player; so it is a trickle-down effect. Another challenge in Pakistan is finding skilled labour, which also has strong work-ethics.