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 users was the solution." As expected, a large number of the 0.6 million
registered users stopped using the service. Aria admitted, "We have suffered massive
drops in our registered user 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, advertised 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' registered 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
accounted 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 accounted
for 50% of overall sales, season's cards for festivals such as Diwali, Christmas and
New Year accounted for 25%, and the rest by special occasion cards like Valentine's
Day, Mother's Day, and Friendship Day.

Though the unorganized sector accounted 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 premium 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'.

• Premium 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 Event
Anil Moolchandani starts Archies as a mail order supplier of posters
1979
and songbooks.
1980 Jagdish Moolchandani joins Archies.
The company starts producing cards and stationery products with
1984
Disney characters, under license from Walt Disney Ltd., USA.
A 3-day exhibition, ‘The Archies Explosion’ at The Taj Palace
1985 Hotel, New Delhi, where 10,000 people shopped for Archies
products.
The first Archies cards, posters and stationery gallery opened in
1987
Kamla Nagar, New Delhi.
1989 AG&G ties up with HelpAge India to market and produce greeting
 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
1991
initiatives.
AG&G ties up with Gibson Greetings Corpn., USA to produce an
1992
exquisite range of cards.
Archies Gallery opens the 100th outlet at Karnal. AG&G launches
1993 Fine Expressions Cards under license from Gibson Greetings
Corpn., USA.
AG&G launches Paper Rose Cards under license from American
1994 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
1995
known as Archies Greetings & Gifts Ltd.
The company floats its first Public Issue. The company's stock is
1996 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
1997 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
1998 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
1999 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,
2000
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 support 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 advertise 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 e-
mail and cellphones.

Though the Moolchandanis initially denied that e-greetings posed a major threat to the
paper cards industry, they had to admit 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 registered 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 advertisements 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 youth-
oriented 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 advertisements 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 e-
crackers 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 registered 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 registered users 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 user for 100 e-greetings per year.
Users 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 passwords
to access the website at its retail outlets.

Although most of its existing registered users 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 advertisement 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
advertisements 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 contact 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 registering 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 `fad-
driven'. 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 co-
brand 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 support 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 terms 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 co-
ordination 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 terms 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 support
advertising. The company kept changing franchising terms 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 remember 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 advertise 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 e-
greeting website by its wholly-owned subsidiary, it committed the mistake of making it a
paid service which was earlier free. As a result, registered users stopped using the
service. As other websites like Yahoo! or Perfect Greetings are free, the company could
not have expected the users 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/semi-
urban) 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 advertisement 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."