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Archies: The Way Indians Greet It (Archies) is a phenomenon that touches your life from womb to tomb. - An Archies Retail Outlet Owner, in December 2001. A company in trouble! In February 2002, the Delhi High Court dismissed an application for injunction filed by leading Indian greeting card and gift company, Archies Greetings & Gifts Ltd. (Archies). The company wanted a stop order to restrain Hindu fundamentalist groups—the Shiv Sena, the Vishwa Hindu Parishad (VHP) and the Bajrang Dal—from "interfering in the Valentine's Day celebrations and sales promotions in its showrooms and outlets." Archies filed the application fearing that the groups will vandalize their outlets as they had in February 2001.1 The Court's decision shocked Archies' management, for any disruption of business on Valentine's Day would translate into huge revenue losses for the company. Director Vijayant Chhabra said, "Everyone knows what happened last year. Our outlets were targeted in Mumbai, Delhi and other parts of the country. Our business has been affected severely." The dismissal of the injunction appeal came at a time when the company was facing a host of problems on various other fronts that were taking a toll on its performance. In the late-1990s, e-cards became very popular. Archies was forced to launch its own egreetings website, archiesonline.com, through its wholly-owned subsidiary Archies Online.com Ltd. in mid-2000. However, by late 2001, the company made archiesonline.com a paid service. Youhan Darrab Aria (Aria), Chief Officer (Logistics and Finance) of the portal commented, "E-commerce was not happening from our site as expected and ads were also not forthcoming. We wanted to increase our revenue and charging s was the solution." As expected, a large number of the 0.6 million ed s stopped using the service. Aria itted, "We have suffered massive drops in our ed base since we became a paid site." In addition to these problems, Archies' initiatives to convert its network of franchisee outlets into company-owned outlets and its distributor set up into a Carrying and Forwarding2 (C&F) set up were proving to be major burdens on its finances. As a result, in 2000-01, for the first time in its over 20-year history, the company experienced a negative growth. Turnover declined from Rs. 710 mn in 1999-2000 to Rs. 680 mn in 2000-01, while net profits for the same period declined by around 32% from Rs. 130 mn to Rs. 91 mn3. Archies' market share remained at 45% between 1998 and 2000. Analysts remarked that the company's leadership status in the Indian greeting card and gifts market seemed to be doing it no good in increasing its market share and sustaining profitability. Background note

Archies was the brainchild of Delhi-based Anil Moolchandani (Anil), whose family business was selling saris. In the late 1970s, he decided to buy and sell good-quality posters through mail-order catalogs, d in one of the popular magazines in those days, Sun. When the demand increased, he started getting posters of film stars, natural sceneries and other subjects of interest, printed by local printers. Exhibit I Archies – Shareholding Pattern (as on March 31, 2002) Shareholder(s) % of shareholding Promoters 66.18 Institutional Investors 8.79 Banks/FIs/Insurance Companies 0.23 FIIs 0.01 Private Corporate Bodies 6.37 Indian Public 17.44 NRIs/OCBs 0.11 Shares in transit 0.87 Total 100.00 Source: www.archiesonline.com An avid music enthusiast, Anil decided to sell books containing lyrics of hit English songs in addition to the posters. He wrote down the lyrics of songs himself while playing them on a gramophone. He began to sell songbooks containing the lyrics of hits from groups such as ABBA, Beatles and BoneyM. Commenting on his experiences, Anil said, "I would spend hours listening to a sound track, meticulously translating lyrics which were initially incomprehensible, so when we finally managed to sell the entire lot to a music shop in Chanakyapuri, we were so excited we could barely contain our emotions." As customer awareness increased, he started coming out with songbooks containing hits of a particular year and he was soon selling over 10,000 copies per year. Anil then decided to enter the greeting cards business. He observed that in India, cards were typically sold out of dusty shoeboxes marked `Birthday' and `Anniversary' kept in the corners of stationery shops. In 1979, Anil and his brother Jagdish Moolchandani (Jagdish) got `Archies Gifts & Greetings' ed as a partnership concern for starting the greeting cards business. The name Archies was chosen after Anil took a fancy to a neighbor's dog named Archie. During a visit to South-East Asia, Anil was impressed with the exclusive greeting card shops offering good ambience and soft backdrop music. He said, "The card shops there were like a Raymond or Bata showroom here. If we had to retail, we had to have a proper shop." He decided to try out this concept in India as well, which led to the launch of the first Archies' outlet in Delhi in 1984, named `Gift Gallery'. Commenting on the runaway success of the shop, Anil remarked, "Theme cards—Valentine's Day, Mother's Day,

Father's Day, Friendship Day—were concepts entirely alien to Indian buyers. They immediately caught the fancy of teenager shoppers." In 1987, the first exclusive Archies gallery was set up in Kamla Nagar, situated in the heart of the Delhi University campus. The 1000 sq. ft. rented shop became an instant hit with college students who flocked to buy cards and gifts. With sales touching Rs. 2.2 mn, the Moolchandanis managed to break even in the first year itself. Following this, the brothers decided to franchise the name to interested parties. Exhibit II A Note on the Indian Social Expression Industry In 2001, the Rs. 4.5 bn Indian social expression industry was growing at a rate of 20% per annum. Of the total market, around 25% belonged to cards from charitable institutions like Child Relief and You (CRY) and Unicef. Another 25% was ed for by the unorganized sector consisting of over 200 manufacturers producing low-priced and low-quality cards. The organized sector comprised only 50% of the greeting card market, of which Archies and Vintage had market shares of 38% and 35% respectively (Vintage Cards is a Pune-based company and the Indian franchisee for global greeting cards major, the US-based Hallmark company). Revenues for the greeting cards market were mainly concentrated in the urban areas, specifically cities such as Mumbai, Delhi and Bangalore. Everyday cards ed for 50% of overall sales, season's cards for festivals such as Diwali, Christmas and New Year ed for 25%, and the rest by special occasion cards like Valentine's Day, Mother's Day, and Friendship Day. Though the unorganized sector ed for almost 25% of the industry, organized sector players did not see them as a major threat. A spokesperson for Archies said, "Our cards are in a different category altogether. However hard the unorganized sector tries, you only have to look at their production quality to realize the difference. We don't even view them as any threat because they don't fall in our segment. If you're talking cheaper price tags, then even our cards are priced competitively—our range starts at Rs. 4." With the economic slowdown in the country, the margins were going downhill for most players. However, many players were entering the marketing including the tobacco-to-hotels major ITC (in association with the UK-based design company, Simon Elvin), Gutka manufacturer Manikchand, and pen company Rotomac. In 1990, the brothers established Archies Greetings & Gifts Pvt. Ltd., which took over the partnership firm's business. In 1994, Anil decided to install a printing unit for the company, because it was no longer economical to get printing done from outside. He invested Rs. 80 mn in a five-color printing machinery and an additional Rs. 50 mn over the next few years. The same year, Archies tied-up with the US-based Gibson card

manufacturing company. According to the agreement, Archies could sell cards that had Gibson's designs, in India. In 1995, Archies was incorporated as a public limited company, with its initial public offering of Rs. 74 mn (1.056 million equity shares at a of Rs. 60 per share). The issue was oversubscribed 4.5 times (Refer Exhibit I for the company's shareholding pattern). By the end of the 1990s, Archies was operating in three clearly demarcated businesses— greeting cards, gift items and stationery products (Refer Exhibit II for a note on the Indian social expression industry). The greeting cards division contributed 69% to the company's revenues in 1999-2000 with a sales volume of 85.8 million cards and was growing at 15%. The cards were sold with designs sourced from various international collaborators such as American Greetings Corporation (Paper Rose), Gibson Greetings (Fine Expressions and Gibson), Portal Publications (Paper Magic), Kingsley of UK and Kel Geddes of New Zealand. In addition, the company also sold cards under the HelpAge4 brand. Archies had an in-house creative team of about 85 people—artists from premier art institutes and writers with excellent writing skills. Archies had cards for almost every major festival in both English and Indian languages. It was the first company to retail regional language cards on a national scale. The company launched cards with new designs every month to keep its portfolio updated. Besides the retail route, it also sold greeting cards to corporate clients such as Reliance, Samsung, LIC, Birla International and Dabur. The gift items division, which became operational in 1994, contributed 15% to the turnover as in 1999-2000. Growing at 30%, the division was primarily outsourced by the company. The gift items include photo albums, frames, clocks, stuffed toys, mementos, quotation plaques, sunglasses, pen stands and other decorative articles. In 1997, the music cassettes and CDs from its music division were also retailed under this division. In 1999, the division began to sell deodorants and perfumes under the brand names, Boyz, Gals, and later on launched the `01' range. The stationery product division contributed 16% to the company's revenues—all its products were manufactured in-house. The product range comprised autograph books, diaries, calendars, posters, gift-wraps, designer stationery, fancy stationery, business organizers, wrought-iron frames, friendship books, telephone indexes, and planners. The division was growing at 10-15%. The company sold its products through a vast distribution network that covered every major state in India and even in remote towns. Thus, Archies' products were sold through around 8000-10,000 multi-brand retail stores across the country and serviced through 70 dedicated company distributors. Archies had four branch offices in Mumbai, Ahmedabad, Ludhiana, and Hyderabad to extend its reach and penetration. These branch offices catered to the needs of both franchisees and retailers, and were managed by the

company's representatives as well as its C&F agents. Products were retailed through the following channels: • Archies Gallery—The first concept store opened by Archies, typically 500-1000 sq.ft. in size. • Archies-The Card Shop—Smaller in size than the Archies Galleries. • Paper Rose Shoppe—Shops with an area of 100-150 sq.ft. with around 85% of Archies merchandise. • Archies Feelings—In April 2000, Archies took over the popular 25-store `Feelings' chain of greeting card and gift outlets in the state of Gujarat. Following this, Feelings outlets were renamed as `Archies Feelings'. • Archies Galleries or Vision 2000 stores—Exclusive Archies showrooms housed at prominent locations, spread over a larger area with a lot more shelf space than the other outlets. • Other retail outlets. By the end of the 1990s, Archies had established automated production lines using the latest printing and card production technologies. In April 2002, Archies entered the Rs. 8 mn kids stationery business and launched crayons, pencils, erasers and rulers. The company planned to reach the Rs. 100 mn mark by 2005, cashing in on the fact that the Archies brand name was very popular among kids. The product range was to be extended to include glues, poster colors, geometry boxes, and school bags. In the same month, Archies entered into an alliance with Normak Fashions, manufacturers of the famous Estelle brand of women's fashion jewelry. According to the agreement, Estelle's line of fashion jewelry was to be made available at Archies outlets across India. Exihibit III Archies-Over The Years Year 1979 1980 1984 1985 1987 1989

Event Anil Moolchandani starts Archies as a mail order supplier of posters and songbooks. Jagdish Moolchandani s Archies. The company starts producing cards and stationery products with Disney characters, under license from Walt Disney Ltd., USA. A 3-day exhibition, ‘The Archies Explosion’ at The Taj Palace Hotel, New Delhi, where 10,000 people shopped for Archies products. The first Archies cards, posters and stationery gallery opened in Kamla Nagar, New Delhi. AG&G ties up with HelpAge India to market and produce greeting

1991 1992 1993

1994 1995 1996

1997

1998

1999 2000

cards in aid of under privileged elderly. All proceeds of the sale of HelpAge Cards are given to HelpAge India Charities. Archies becomes a household name, thanks to the advertising initiatives. AG&G ties up with Gibson Greetings Corpn., USA to produce an exquisite range of cards. Archies Gallery opens the 100th outlet at Karnal. AG&G launches Fine Expressions Cards under license from Gibson Greetings Corpn., USA. AG&G launches Paper Rose Cards under license from American Greetings Corpn., USA. The first Archies – The Card Shop opened in Saket, New Delhi. Archies converts into a Public Limited Company, and comes to be known as Archies Greetings & Gifts Ltd. The company floats its first Public Issue. The company's stock is listed and traded on the Delhi Stock Exchange. Enters the music business through a separate division, and releases 10 albums. AG&G acquires a license from world-renowned photographer, Anne Geddes to print her designs on cards and posters under the brand name ‘Paper Magic’. – The Archies scrip gets listed on the NSE and BSE. AG&G launches the Archies Parfum Division. AG&G acquires an exclusive license from Kingsley UK, to produce Kingsley Cards in India. -The company starts to develop in-house scanning facilities and installs automatic envelope making machinery, insert-pasting machinery, automatic greeting card folding machine, fully computerized paper cutting machine, card packing machine and five colour offset printing machine. – Comes out with the concept of Vision 2000 stores. AG&G stock makes its way to the BSE 200 Index. The Archies share price touches an all-time high of Rs 809 (ex-bonus price). Archies goes regional by launching greetings in Marathi. AG&G launches its portal archiesonline.com. Archies cards, gifts, stationery, music and perfumes are made available on the Net.

By 2002, Archies had 240 Archies Galleries, 112 Archies Card Shops and 58 Paper Rose Shoppes, and over 50 Vision 2000 Stores in 120 cities across eight countries. There were six franchisee outlets in Bangladesh, three in Nepal, three in Sri Lanka and one each in Bhutan, Muscat and Abu Dhabi. Export revenues from these 15 outlets touched Rs. 20 mn in 2002. The company had distributors for cards for Indian festivals and occasions in the US, UK, the Middle East, South Africa, and South-East Asia (Refer Exhibit III for a chronological profile of Archies' growth over the years). The story behind the success

According to analysts, Archies' franchisee model contributed a great deal to its success. Bharat Shah, Chief Investment Officer, Birla Capital, the mutual fund company, said, "The key to understanding Archies is to realize that it is not in the business of cards or gifts, but in franchisee management." Anil agreed, "We made our own model suitable for Indian conditions. We created a branded franchise. Now the scenario has changed in India and everybody talks about franchising. But we were the first to do that kind of stuff. We then went in for tie-ups so as to get a greater range to these stores because these were exclusive stores." Commenting on the decision to opt for the franchising route from the very beginning, Anil said, "You don't have malls in India so we have to manage in limited area." By franchising, Archies was not only able to save on real estate costs, but share the advertising and promotion expenditures with franchisees. Archies franchisees made their own investment in the business and paid royalty to Archies for the turnover generated from the sale of Archies products. As per the franchising agreement, products were sold to the franchisee, who had the option of exchanging products, which were not profitable with the more profitable ones. As part of group advertising, each franchisee paid a fixed amount to the company every month. Archies' quality control team monitored the franchise stores and ensured that the ambience, space allocation, lighting and display were standardized across all outlets. In the late 1990s, the company also started appointing franchisees on a commission or minimum guarantee basis under which the inventory cost was borne by the company while the franchisee invested in fixtures, furniture and premises. Archies constantly updated its strategies to ensure a smooth functioning of its franchising set up. The company divided the franchise operations into three segments targeting different set of franchisees. The top-level franchisees ran the Archies Galleries, the middle level franchisees ran the Archies Card Shops and Paper Rose Shoppes, and the bottom level, and smaller franchisees operated the Feelings and other retail outlets. Another success factor was the company's `localization' strategy. While many players sold cards for Christmas, New Year and Valentine's Day, Archies became the first to come out with cards for Indian festivals such as Holi, Diwali, and Rakshabandhan. These initiatives were backed by an aggressive promotional campaign in the media to create awareness and persuade people to communicate through cards. Archies was the first cards and gifts company in India to on a satellite television channel. With its tie-ups with companies like Pepsi and Pidilite, it built a strong brand equity. The tie-up with HelpAge helped attract corporate clientele. The company entered into arrangements with movie producers, through which it offered items associated with the latest Hindi, English and various regional language movie releases. It released a host of movie-specific items, such as greeting cards, postcards, picture frames, letter pads, calendars, and posters to coincide with the release of movies that it thought will be a success. Some of the movies the company associated itself were

Hum Aapke Hain Koun, Tera Jadoo Chal Gaya, Mohabbatein, and Lagaan. These focused and well-executed marketing strategies helped Archies build good brand equity. As a result of the above initiatives, the company went from strength-to-strength and remained the undisputed market leader throughout the 1980s and the 1990s. During 1995-96 and 1999-2000, the company's net profit grew at a compounded annual rate of 68%, while sales grew at 26%. Operating profit margins over this period went up from 10.5% to an impressive 31%, while returns on capital employed went from 46% to 78%. The near-monopoly status and the healthy track record helped the price of Archies shares reach Rs. 1,400 by August 1999. Revenues also increased from Rs. 460.5 mn in 1998 to Rs. 712.1 mn in 2000. In the late 1990s, sending greetings through the Internet and mobile phones became very popular with youngsters, who formed a major part of Archies' clientele. E-greetings provided an opportunity to send personalized messages at a nominal cost and did not take more than a few minutes. Similarly, SMS was also very cheap and much more convenient than sending a paper card. Some analysts even claimed that cards were still popular because people have used them for generations and many people did not have access to email and cellphones. Though the Moolchandanis initially denied that e-greetings posed a major threat to the paper cards industry, they had to it that the Internet caused a substantial dent in their revenues. Anil said, "We realize it is a threat, but we're hoping that it's just a fad. After all one can't really replace the physical thing." However, soon the company discovered the negative impact e-greetings were having on its revenues. This compelled the brothers to launch archiesonline.com in May 2000. Tackling the e-greetings threat Archiesonline.com had three major sections—meet, greet and gift. Under `meet', Archies offered services such as free e-mail, chat, reminder services, and a greetings scheduler. The `greet' section was a consumer interaction area where ed customers could send and receive a variety of animated e-cards/greetings online for free. Over 700 programmed e-cards were made available, which were quite different from the usual cards available on the Internet. These cards had an average eight-second long storyline with animation and sound effects incorporated into them. In the `gift' section, consumers could purchase gifts and get them delivered at their doorstep. While residents of Delhi got free delivery of their purchases, customers in other parts of the country had to pay Rs. 25 as delivery charges. The minimum value of each purchase was Rs. 250. Archies tied up with courier companies Elbee and Blue Dart to deliver the gifts and cards purchased by customers. The company tied up with Easy Net Com for the payment gateway. Anil said, "We have a three-point program to ensure revenue flows by selling content on royalty basis, sell banner ments and third-party gifting." In addition, the portal acted as a B2B platform, creating a virtual marketplace for retailers and

distributors who could have easy access to the company. This attracted many new retailers and franchisees to the company. In late 2000, archiesonline.com entered into strategic alliances with various portals. This move was a part of the company's plan to secure online penetration in various youthoriented portals by leveraging the Archies brand equity. Some of the alliance partners were Yahoo.com, Jaldi.com, Indiagreetings.com, Mantraonline, and UthPlanet.com. According to the agreement with Mantraonline (an Internet Service Provider), Archies launched an Internet access product, which was sold through Archies outlets. Under the agreement with Yahoo, Archies' website was to have a hyperlink on Yahoo!'s homepage. To bridge the gap between its Internet and retail outlet models, Archies introduced the concept of e-kiosks, that introduced shoppers to the company's website and its services. The portal also came out with ments that targeted non-resident Indians in the US, UK and the Middle East with the help of India Abroad News Service, Khaleej Times, India Post and India West. For Diwali, the company came out with novel concepts like ecrackers that enabled surfers to burst `pollution-free' crackers. Surfers could also perform religious rituals at archiesonline.com. As a result of these initiatives, the portal claimed to have ed over four million page views and programming of 0.15 million egreetings in September 2000. The website became very popular in a short span of time and began to receive over three million page views per month. The number of ed s reportedly reached a phenomenal 0.6 million. Even though the number of e-greetings sent through the site touched 54 million, Archies discovered that the company gained no monetary benefit. In fact, the venture was proving to be a drain on the company's finances. Hence, Archies decided to make archiesonline.com a paid site. Aria said, "We had invested Rs. 20 mn in the online subsidiary but made just Rs. 2 mn from ecommerce. Creating and hosting one card was costing us around Rs. 6,000. We could not have continued with this free-for-all for ever since we accumulated losses of Rs. 13.5 mn." Archies snapped its ties with Yahoo! because Yahoo! did not want to be associated with Archies if it wanted to stop the free card service. Archies then approached indiatimes.com for a tie-up and finalized a 50:50 profit-sharing agreement. As per this agreement, archiesonline.com charged Rs. 399 per for 100 e-greetings per year. s were also given 10 paper cards worth Rs. 180 from Archies, a music CD and cassette and 10% discount coupons for shopping at Archies Gallery and Planet M (a music retailing outlet) stores. Archies sold boxes containing these gifts and the s to access the website at its retail outlets. Although most of its existing ed s stopped using the website, Archies was not much worried. Anil said, "We don't want to have millions of people to come to our site and shop. We have to really start very slow and make sure that the customer comes back and has a great experience in receiving or sending gifts. The idea is that the site will complement the existing physical business."

In June 2001, Archies ran a nationwide ment campaign across various newspapers and television channels. The idea was to `equate e-cards with fun' and tell people that when it came to `serious expressing of emotions', an Archies card was the best option. The company spent 6% of its turnover on the campaign, which had the tagline, `When you really mean it, send an Archies card.' In late 2001, Archies ran huge ments in leading Indian financial dailies, stating that egreetings or SMS could never be as effective as a physical greeting card. According to analysts, these developments indicated that Archies had decided to treat the online venture as an extension of its business rather than as a thrust area for future growth. Despite all the above measures taken to maintain its profitability, the company's revenues in 2000-01 took a severe beating due to a nationwide postal strike in end-2000 that affected the sale of Christmas and New Year cards. Similarly, in 2001, the Valentine's Day celebrations were hit hard due to opposition from religious fundamentalists and the earthquake in Gujarat, which was one of the key markets for Archies' products. To add to the company's woes, serious problems cropped up as a result of some of its strategic initiatives. Archies faced problems due to the distribution and retail outlet rationalization exercises it was undertaking. Rationalization gone wrong? The distribution revamp During the financial year 1999-2000, Archies decided to revamp its distribution network and replace existing distributors by a C&F agent network. According to the new distribution system, in place of 68 distributors in 21 states, Archies appointed 10 C&F agents in 10 states who catered to distributors who in turn reached out to the retailers. Manish Jain, Company Secretary, Archies, said, "The biggest advantage of this model is that the company owns the inventory, so the consumer is ensured of seeing the entire products range that is available." In the earlier set up, Archies had to accept the distributors' decision when they picked up only those products, which they believed would do well. As a result, Archies could not push its entire range of products into the retail channel. Rajesh Syal, Marketing Manager (Western Region), Archies, said, "Distribution could not match the pace with which we introduced products and with their limited resources it was difficult. Now with the C&F agents and exclusive outlets we can at least continue to revamp our product portfolio." The shift from distributors to C&F agents cut costs significantly—while the distributor margin was between 25-30%, the C&F margin was only 12%. However, after Archies adopted the concept of C&F agents, it faced bottlenecks in some parts of the country. Though the C&F agents were themselves responsible for the distribution of products across the allotted territory, many were unable to exploit the market properly. Therefore, the company began to appoint C&F agent in a particular territory who, in turn, appointed various area-wise distributors. The C&F agent was given the full responsibility to control and manage these distributors. The exercise enabled

Archies to penetrate deeper into the markets because of wider reach. In the long run, the C&F agents were expected to help the company enlarge its retail network. The retail revamp In 2001, Archies began an `exclusivity drive,' by way of which all existing Archies Gallery franchisees were asked to keep only Archies range of products. If they did not want to be an exclusive outlet, they were given the option of converting into an Archies Paper Rose Shoppe on a `non-exclusive' basis. The idea was to have only Archies Gallery and Archies Paper Rose Shoppe as the completely franchised outlets. As a part of this exercise, many shops were revamped and some even had to be shut down. Archies believed that being in direct with the customer will help assess the detailed requirements of various product lines, and have better inventory management and product mix systems. In addition, the company was also planning to increase the number of Vision 2000 stores on a large scale. The Vision 2000 stores were much bigger than any other Archies retail outlets and according to company sources, brought in 40% more revenues as well. These stores had world-class interiors and stocked all the products marketed by the company. In a sense, they were the Moolchandanis' view of an `ideal Archies outlet'. Archies was able to get full value for its products from Vision 2000 stores. The company typically sold its products at 50% discount on MRP to retailers. However, in its own stores, it could sell directly to customers at MRP, thereby ing a sharp improvement in margins. Also, while Archies had to give 30-60 day credit to its business partners, its own shops brought immediate cash flows. The company planned to own at least 50% of the Vision 2000 stores in the future, either leased, rented or bought. In order to ensure that franchisees delivered results, the new contract included a clause that demanded the franchisee to make a commitment of 30-35% growth annually. Stores, which had a reasonable size and prime location, were given a minimum business guarantee or a commission of sale (whichever was higher), to allay the apprehensions of not being able to meet the targets. In prime locations, where the company was not able to fine a suitable franchisee, it opened its own stores. In the long-term, Archies hoped that the higher costs of owning the retail infrastructure would be offset by substantial savings in trade margins. These two rationalization moves resulted in the company facing a decline in profitability. During the conversion stage (from distributors to C&F agent set up), the company took back all the stock lying with the distributors. This increased the level of inventory, which increased the working capital requirement. This forced the company to outsource fund requirements, and therefore, incur a heavy interest burden. In addition, the fact that Archies had to pay higher interest on working capital and had to write off expenses incurred on an ERP initiative also contributed to the decline in performance. Investments in real estate, which were negligible in the franchisee-based system, went up as the company had to invest heavily in real estate. Though Archies planned to take retail space on lease, it had to incur substantial investments during the transition.

For the financial year 2001-02, the company's revenues were Rs. 804.7 mn, an increase of 18%. However, net profits declined to Rs. 75.3 mn. According to analysts, the revamping of the distribution and outlets was likely to affect the company's performance at least for some more years to come. They also had their doubts about Archies regaining the growth rates it experienced in the mid-1990s. ITC's entry into the greeting cards business was not great news either. In addition, analysts also questioned the company's entry into the highly competitive music and perfumes businesses. Archies was in direct competition with giants such as Saregama and Tips Cassettes in the music segment and with Hindustan Lever and Cavin Kare in the perfumes/deodorants segments. The future—Shifting focus The Moolchandanis believed that the distribution and retail revamp exercises will yield positive results after the transition phase. Archies decided to focus more on the gifts segment, as it believed the segment was under-exploited. The company planned to develop and introduce new lines in the gift segment including higher-end items, which were lacking in the present set up. The idea was to make an Archies gallery a `one stop gift shop' for people from all walks of life. The company had already begun importing high-end gift articles such as crystal, soft toys and Feng Shui5 items from China, Hong Kong and Korea in addition to outsourcing from local vendors. The company also decided to outsource certain gift articles (such as posters, mugs and key chains), which it had manufactured till now. The decision to outsource the gift items was taken because Archies realized that the business was `faddriven'. Anil said, "We need to respond quickly and so don't want to invest in fixed assets." Many analysts saw this as a smart move. The company expected the share of the gift segment to go up from 20% to 50% in the future. Archies priced the products competitively. For instance, perfumes started at Rs. 99, as against other brands, which started at Rs. 150. The company also planned to cobrand the gift items in the near future. For the greeting cards business, Archies decided to renew its focus on the corporate sector, which had largely remained unaffected by ecards. Though the company had cards in almost all the price ranges, it planned to launch a new range of economy cards (priced around Rs. 10) called `Heart Warmers', to be sold in small towns. In May 2002, Archies decided to change its name to Archies Limited. Anil's business acumen and entrepreneurial spirit remained the same. Summing up his vision for the company, he said, "Five years from now I think we will have 100 Vision 2000 stores, which will contribute at least 40% to sales. C&Fs will contribute 40% to sales and the balance 20% will come from distributors. And, if the dotcom takes off, then you never know."

Questions for discussion 1. Analyze the circumstances in which Anil Moolchandani started Archies and highlight the reasons for the company's runaway success. Why do you think Archies could not sustain its profitability growth in 2000-01? 2. Critically comment on Archies' franchising and distribution strategies for expansion. Do you think the company's strategy in the initial years was right in the light of the rationalization exercises? Give reasons to your stand. 3. Do you think the measures taken by Archies to meet the threat of e-greetings were adequate? Was the company's decision to make its website a paid one, a sound business move? Justify your answer. 4. Discuss if Archies will be able to maintain its marketshare and leadership in the future with the entry of players such as ITC? Will the company's current strategies help sustain its competitive position? 1

The fundamentalist groups claimed that the concept of Valentine's Day was against Indian culture and hence companies should not be allowed to use sexually explicit images/words and make money from it. Reportedly, these groups resorted to vandalism and violence in various parts of the country to stop celebrations associated with the day. 2

C&F agents appointed by manufacturers and distributors of goods, provide clearing and forwarding services. Their operations include receiving, warehousing, and dispatching goods, and maintaining records and invoices. 3

In September 2002, Rs. 48 equaled one US $.

4

HelpAge India is a voluntary organization promoting the cause and care of the elderly. The NGO, which was established in 1978, has 23 major centers in India and has assisted over 1,500 age care projects worth Rs. 410 mn. 5

Feng Shui is the Chinese art of arranging buildings, objects, and space in the environment in order to achieve energy, harmony and balance. The author is a Faculty Member at ICMR. ****** Archies: Vertical Integration or Vertical Co-ordination? - Sukhpal Singh The case study, `Archies: The Way Indians Greet', reveals the changing strategies of the company with the changing nature of the larger market. However, focus of the case is on

distribution and marketing aspects in general, and franchising in particular. The company undertook many experiments in its distribution network ranging from franchised outlets to company-owned shops and even C&F agents. The case study also brings out the strategies of vertical integration and local and international strategic collaboration and alliances tried out by the company in the 1990s. Vertical integration refers to the complete ownership of various stages in the production and marketing stages of a product or service, by a single business entity. On the other hand, vertical coordination refers to control, not ownership, of various stages in the product value chain. It is also referred to as quasi-vertical integration. Vertical integration was achieved by Archies in of having an in-house creative team of 85 people and the setting up of the printing unit, besides its own retailing shops. In fact, vertical integration was complete in its stationery product division where all its products were manufactured in-house. While attempting vertical integration to deliver value to the market, the company seems to have ignored some of the disadvantages of vertical integration when there was a clear trend towards outsourcing or vertical disintegration in the economy and worldwide. Finally, it had to adopt outsourcing strategy in its gift article business to cut cost and reduce risk in a fad-driven business and an ever-changing market. On the distribution side, a major initiative was to cut the channel short by attempting to integrate vertically on the marketing side. This helped the company to retain larger margins and have access to more immediate cash flows. This is in line with the recent thought of moving closer to the consumer. The company adopted the franchising model proactively and had the first mover advantage in this regard. Its decision to franchise retailing in the 1980s was a pioneering step that proved to be worthwhile. Franchising, which is a part of the vertical coordination strategy, is an ongoing business relationship between two parties which includes not only the product service and trademark, but also the entire business format including marketing strategy and plan, operating manual, quality control and continuing two-way communication. The difference between a franchisee and a distributor is that a distributor is an independently owned and financed business with the distributor holding title to goods supplied by the company whereas, a franchisee is a business partner of the company. As against a principal-agent relationship in the case of distributors, franchising is a principal-to-principal relationship. Franchising helps the franchiser to lower investment risk and have a wider reach in the market. On the other hand, the disadvantages of franchising are that the profits are lower, supervision costs are added, and a future competitor is created in the process of franchising. Archies tried to harness the advantage of franchising and offered very favorable to begin with, like option of exchanging products not found profitable by the franchising with more profitable products. The franchisees also paid a fixed amount to the company every month to advertising. The company kept changing franchising over time wherein it had

franchisees appointed on commission basis and on minimum guarantee basis under which the inventory cost was borne by the company while the franchisee invested in fixtures, furniture and premises. It even attempted segmentation of the franchisees in order to deploy them for different market segments. But, it is important to that in a business like greeting cards and gifts, it is better to plan franchising more carefully due to the fad-driven nature of the business. Further, since the outlets are dispersed over a wide area, it becomes costly to supervise and ensure standard quality service. An important learning from the case study about distribution management is about having multiple channels of distribution. It included multi-brand retail stores serviced through dedicated company distributors, franchisees and exclusive retail stores besides its own shops in this case. Another important strategy that comes out clearly from the case study is the use of strategic alliances and networks for marketing, advertising and product development. These various focused and well-executed strategies helped the company to build good brand equity. Adaptation to the local market needs was another important strategy of the company wherein it brought in new products for new occasions and launched more Indianized products for Indian festivals. It was one of the first companies in India to on a satellite television channel. An interesting aspect of market handling is the substitute product threat which in this case was e-greetings and SMS. Though the company tried to tackle it by launching its own egreeting website by its wholly-owned subsidiary, it committed the mistake of making it a paid service which was earlier free. As a result, ed s stopped using the service. As other websites like Yahoo! or Perfect Greetings are free, the company could not have expected the s to pay for the service. However, it made good use of new technology for business to consumer and business to business transactions. It also made high use of Internet for its business through strategic alliances with various portals. There were many external factors as well which affected company's business. These factors are most of the time uncontrollable for most of the firms, and therefore, cannot be manipulated. The company also attempted lateral diversifications in product lines in which it had no experience and faced strong competition. The case study mentions the company taking on the fundamentalist groups legally. It is important to realize that a business entity should not proactively involve itself in legal matters with public at large. As an attempt to expand the market, the company targeted institutional markets and lower and (rural/semiurban) markets for mass customization. The case study also brings out the use of concept selling and market segmentation used by the entrepreneur (Anil Moolchandani) in the early years of the company's business. The text of an Archies print ment in late-2001, released around the festival of Diwali "When you really mean it, You will personally select cards, Have them put in envelopes, Print the address of your

associate, Paste a stamp, And have them posted. Diwali is here. And if you had really meant to wish your associates, clients, loved ones, you would have already sent cards and wished them Happy Diwali. But in case you missed doing that, we suggest, make sure you don't miss out on wishing them on New Year with a card. Because unlike SMS or an e-card, when you send an Archies Card, you send a message along: That you really mean it."