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The success story of Hanung Toys
Shuchi Bansal in New Delhi | October 10, 2007
Don't be fooled by the dreary, unremarkable surroundings, though. Hanung is quite unmistakably on the fast track. The order book of the Rs 275-crore (Rs 2.75 billion) soft toys and bed linen exporter is crammed: in just the past three weeks or so, Hanung has tied up deals worth over $265 million (Rs 1,060 crore).
That includes a Rs 600-crore (Rs 6 billion) order from Swedish home furnishings giant IKEA, as well as contracts with two unnamed American companies, the combined force of which is likely to catapult Hanung into the big league.
Not surprisingly, chairman and managing director Ashok Kumar Bansal is excited. "We will definitely grow by over 50 per cent this year as a result of these orders," he beams.
Bansal's pleasure hasn't blinded him to the challenges ahead, though. Hanung is increasing capacity in both toys and furnishings, partially integrating backwards with a textile weaving unit, while simultaneously protecting itself against the appreciation of the rupee and expanding its presence in the domestic market.
Here's how this toy story plays out.
Horses for courses
When Hanung set up shop in 1991, its first customer was IKEA. But the initial Rs 6 lakh order was won only after six months of determined wooing and producing innumerable samples. "It took us half a year to sell our company to them," recalls Bansal.
Still, Hanung learnt a valuable lesson: European retailers prefer direct interaction with their suppliers. Now, whether it is IKEA (Hanung is a preferred supplier), Metro in Germany or Debenhams in the UK, the toymaker negotiates with prospective customers face-to-face.
But that's not the North American way of doing business. Perhaps because of its size and diversity, the US market operates better through middlemen. Wholesalers win orders from major retail chains and distribute the work among their suppliers.
Accordingly, a couple of years later when Hanung set its sights on the American market, it first established relations with wholesalers. That practice continues even now, though the company has built up a reputation for itself.
"The wholesaler is our frontline in that market. We have created relationships with big retailers, but will have to start from scratch if we want to sell directly," explains Bansal.
The indirect approach has other advantages. If clients like Target, J C Penney or Bed, Bath and Beyond were to buy directly from Hanung, and it failed to deliver a sudden, large repeat order, that could well mean the end of the deal.
Wholesalers, on the other hand, usually keep well-stocked warehouses that can cope with such emergencies; they also have access to other suppliers who can chip in, if necessary. The intermediaries were also the catalyst for Hanung's diversification into home furnishings. But more on that later.
Toys 'r' us
Toys are serious business at Hanung. More so now, after the recent backlash against China-made playthings.
Bansal agrees that queries from overseas importers have multiplied in the past several weeks, but adds that it may be some time before they are converted into orders. Still, the company is now making it a point to communicate its quality-driven approach to all prospective clients. It voluntarily discloses all safety measures it follows in its production process.
That includes the use of non-toxic and azo-free dyes, non-toxic fibre and strength-tested threads and seams; zero lead content and all toys go through two rounds in metal detectors to ensure no stray needle is left inside.
"We are sure to benefit from the controversy," says Bansal. He's so confident that he's setting up a new factory in Noida, which will expand Hanung's toy capacity by 25 per cent, to 20 million pieces; the plant will go onstream in December.
It is admittedly more than what Hanung's current orders warrant, but there is a good reason for the extra capacity. Not only is the company preparing for additional export orders, it also plans to boost its presence in the domestic market.
That's because at 35 per cent, not only is the domestic toys market growing several times faster than the global market (5 per cent), margins in the toys business are also higher � about 22-23 per cent - which will contribute substantially to profit growth.
Hanung launched its domestic brands - Play-n-Pets and Muskan - around the same time it started its export business, and is still more or less the only organised player in the Rs 200-crore (Rs 2 billion) market for soft toys.
"Hanung offers good quality. It is available not just at our stores, but several other retail outlets as well," points out Pramod Arora, executive director, Archies.
Over the next few years, Hanung will work on expanding its footprint across the country; it is already present in over 3,000 stores, including chains such as Archies, Lifestyle, Shoppers' Stop and Pantaloons.
The company has already learnt that what sells in international markets isn't exactly what Indian consumers want. Right now, for instance, Hanung is preparing Christmas-themed toys and shaped cushions (Santa Claus, snowmen and reindeer) for Europe and North America.
In India, on the other hand, while big cats are a perennial favourite, the current craze is cartoon and animation characters. Which is why Hanung makes many, many Garfields and Popeyes.
It has also discovered the potential of film merchandise: apart from becoming a licensee for Disney characters, the company tied up with Percept Picture Co to manufacture Hanuman toys based on the hit animation movie. Now, Hanung will create Ganesha toys as well, from another popular children's film, My Friend Ganesha.
Bed and beyond
Toys may provide Hanung money for jam, but Bansal is clear that home furnishings will be the company's bread-and-butter business in the coming years. "What took the toys business 17 years to achieve, the furnishings business has given us in just three years," he explains.
Hanung is counting on high demand internationally and a growing home market to give it much-needed volumes growth; the revenue mix between textiles and toys will switch to 60:40 this year itself, from the current 45:55.
How will that happen? This is where Hanung's wholesaler connection comes in. The Indian company entered the furnishings export business in 2005, after quotas were abolished in the category.
It had a readymade client list - typically, retailers who source soft toys also sell bedroom furnishings - and the market was huge ($70 billion, compared to $2 billion for soft toys).
"We had the experience, the client base and the necessary market dynamics. It made perfect sense to diversify," says Bansal.
From the start, Hanung has emphasised superior quality, even in bed linen. It uses fine, long staple cotton fabric with high thread-counts - 300 to 1,000 - compared to what low-cost suppliers in China, Pakistan and Bangladesh churn out.
The result: higher realisations, better margins. Sheets made by Hanung typically retail at over $60 in American stores, compared to the $15 or so at which lower thread-count sheets are sold.
"US demand for high-end bedroom accessories is growing and so is the market. Hanung is an emerging player," says Sunil Khandelwal, chief financial officer, Alok Industries [Get Quote], one of the largest suppliers of bed linen to the US.
Now, Hanung is preparing for greater growth. It has invested Rs 160 crore (Rs 1.6 billion) in a new plant at Uttaranchal, which will boost capacity from 6 million metres to 39 million metres. As with toys, the new plant will also help Hanung grow its domestic business.
This will also take the company a few steps further on the road to backward integration (the factory will weave its own cloth before converting it to finished products) - Hanung initiated backward integration a few years ago when it set up a fabric processing and dyeing unit in Noida. Khandelwal applauds the move.
"It will give the company better control over product quality as well as delivery timing," he says.
An eye for finance
One of the biggest reasons for Hanung's success is its cost management strategy. It saves on raw material by entering into long-term contracts with suppliers. Its plants are located in tax-free and special economic zones, leading to substantial tax savings.
Forward hedging and interest swaps also help the company keep a lid on costs. Even the recent rise of the rupee isn't a cause for concern.
"The IKEA business is in rupees, according to Reserve Bank guidelines. We have the domestic business and we import fabric. That's a natural hedge," says Bansal.
None of Bansal's strategies for Hanung are really revolutionary. Indeed, there's a distinct impression that Hanung's strategies are evolving along with its business model. But even if it's not rocket science, it's clearly not child's play, either.
"Competition is growing. But we hope to be a Rs 1,000 crore (Rs 10 billion) company by March 2010," says Bansal, as the priest walks in with prasad.
Quickbite: Business buzz
If Hanung is the biggest organised soft toy manufacturer in India today, it is because there aren't too many mosquitoes in Europe and North America. In 1990, Ashok Kumar Bansal, a qualified chartered accountant, decided he had tired of helping others get rich.
In search of a new "export item" - this was 1990, when the licence raj limited your choices considerably - he discovered two: liquid mosquito repellent and soft toys.
Bansal reasoned that exports of the insect repellent would be more or less restricted to Asia given "the lack of mosquitoes in the developed world". That made soft toys the logical choice. Besides, there was no quota for soft toys - understandable, since the category barely existed in India at the time.
With Rs 25 lakh borrowed from his father, Bansal set himself up in business. He initiated a technical collaboration with Korea's Hanung Industrial Co. He also adopted the Korean company's name for a simple, practical reason. "India was not associated with quality products then," he points out.
"We were seen more as a Korean company than Indian. That helped in getting orders." Hanung Toys began with 50 machines - "many of them lay idle, initially". Last year, the company's 500 machines turned out 16 million pieces.
There's no question: Bansal wouldn't have got as big a buzz from mosquito repellants.