Year: 2011

The Art of Selling Discounts

admin

July 15, 2011

Poornima Kavlekar, The Smart CEO
July 15, 2011

Who doesn’t love to strike a deal, especially if discounts could vary anywhere from 10 per cent to 90 per cent on lifestyle products and services? Exactly the reason why group buying (discount deals) businesses show strong potential for growth in India. But there are many variables that these businesses need to pay attention to in order to succeed in this space. A strong consumer-merchant equation, a clear understanding of each of these interested parties and the capability of bringing them together in the most profitable manner are the foremost parameters. This apart, one needs to be present everywhere, scale up quickly and differentiate itself from competition. Sounds simple? Then again, who said simple was easy?

When I walked into my gymnasium during my routine workout timing, I was baffled to see a number of people waiting in a queue for their turn to hit the cardio-machines. This was the first time, in the 15 months of my membership in the gym that I had to wait for my turn. I realised then that a good number of faces were new which made me wonder if June was some auspicious month to start an exercise regime! And interestingly, the profile of the gym users was slightly different too – most of them were in the age group of 18 to 25 years from what used to be 25 years and above. As a regular gym goer, I was intrigued by this sudden change in the profile of my co-exercisers.

Well, before I lead you on, this story is not about the business of fitness or gyms in the country. This story is about understanding how the gym managed a sudden spurt in its membership without any offline promotional activities. And my question was answered by the gym instructor who said that they had sold memberships for a day through a popular group buying website. That explains two things: one, the sudden rise in membership in the month of June, and two, the change in the profile of my co-exercisers (those who have grown up with the Internet). This story is to understand the group buying landscape in India, the changing dynamics of the consumer profile and what it takes to succeed in this space.

Understanding the ecosystem

While low Internet penetration and the lack of consumer comfort with transacting on the Internet (both very critical for group buying businesses) were two major hurdles for e-commerce growth in the past, things have changed over the last two to three years. Internet penetration has improved significantly, particularly with mobile usage. "Though e-commerce in India is still in a very nascent stage – save for the travel segment, I believe that with the exponential growth of smart phones, 3G and 4G, India is at the cusp of an e-commerce explosion," says John Kuruvilla, founder-chief executive officer, Taggle, a group buying website.

While using credit cards online is still a challenge, e-commerce players have so far circumvented this by coming up with different payment options for the customer. But, Devangshu Dutta, chief-executive, Third Eyesight, a consulting firm focussed on the retail and consumer products sector, says, "We are approaching a tipping point, with more widespread availability of credit cards among younger users, who have grown up with the Internet during the last decade." This makes spending on the Internet an option that’s waiting to take off.

The gradual rise in investments by the venture capital industry into the e-commerce space in the last three years is a reflection of this change. According to Venture Intelligence, a company that provides information and analysis on private equity, venture capital and mergers and acquisitions in India, the investments in this space have increased from US $33 million in 2009 to US $83 million currently.

Group buying or the discount deals business, a model popular in the U.S., adds a whole new dimension to the e-commerce industry. Put it simply, the sector gives offline retailers the opportunity to drive traffic into their stores through the online medium. Some experts even use the term offline-online commerce to describe the sector. This space has also grabbed the attention of the venture capital industry. Battery Ventures and Greylock Partners invested US $8.75 million in Bengaluru-based Taggle in June 2010 and Nexus Ventures and Indo US Ventures invested around US $12 million in January 2011 in New Delhi-based Jasper Infotech, the parent of Snapdeal.com.

The macro picture

In 2010, group buying saw phenomenal success with Groupon in the U.S. In fact, last August, Forbes magazine crowned Groupon the ‘fastest growing company ever’. It says Groupon made US $713 million in revenue in 2010, up from US $30 million in 2009. As of March 31 this year, its subscriber base was 83.1 million, up from 1.8 million at the end of 2009.

In the U.S., the retail industry is mature and there is already familiarity with the couponing system. While India is yet to get there in both these areas, there is no argument over the business potential in this space with over 20 million active Internet users (of a total of 90 million Internet users) in the country with an increasing number of them shopping online. It has already attracted entrepreneurial interest in India with several group buying sites, such as Snapdeal, Taggle, Dealivore, Dealsandyou and Vamoosevacations.com coming up in the last two years. Apart from products and services, many of these sites offer discounted deals in their city’s spas, gymnasiums, dance classes, car service centers and restaurants.

The whole model of offline – online discount coupons is based on a simple fact that everyone loves to strike a deal, to make a bargain and avail discounts. But, like Kuruvilla shares, there is no clear road map or trends on what works and what does not in a very nascent e-commerce space in India. And this means that you need to constantly try new things and continue experimenting with novel ideas to arrive at a working formula. He thinks a working model will evolve over the next 12-18 months with consumers getting hooked to buying great value online.

"But what’s happening in India is not a Groupon business clone," clarifies Vani Kola, managing director, IndoUS Venture Partners. The business model has been adapted to suit the changing demography of the Indian consumer and the orientation and exposure of the Indian merchant to the digital world.

Success definers

Companies need to differentiate themselves from their competitors. It could be based on the target audience, types of deals, brand positioning, the sectors they target and so on. The idea is to recognise and capitalise on one’s strengths and leverage on the scope of e-commerce growth in India. Taggle, for instance, felt that everyone was playing with bottom of the pyramid deals. So, it strategised to start at the top. "The move was a necessity given that by June 2010 many other group buying sites were already very much around, and it was important to get noticed quickly," says Kuruvilla.

(Article continues after the ad below)

---

Wholesale Hopes 

admin

July 11, 2011

By VISHAL KRISHNA

Business World

11 July, 2009

When Martin Dlouhy, managing director of Metro Cash & Carry India – a 100 per cent subsidiary of the German firm – signed a Rs 900-crore agreement with the Punjab government earlier this year to set up six stores in the state over a fiveyear period, it seemed to reinforce the intention of global retailers wanting to penetrate the Indian market. Foreign direct investment (FDI) in multi-brand retailing is not allowed under the current policy regime; besides, most consumers in India still buy the bulk of their retail products from the neighbourhood kirana (mom-and- pop) stores. The cash-and-carry (C&C) business caters to the needs of these store owners.

But in their brief history of five years, C&C players have not been able to generate cash from the business in India. "They continue to bleed not because of the supply chain, but because the kirana store owner has to have a reason to buy from a C&C," says Devangshu Dutta, chief executive officer of Third Eyesight, a consulting firm in Delhi. Ninety-five per cent of the retail trade is dominated by traditional wholesalers, the backbone of India’s fast-moving consumer goods (FMCG) industry. "These wholesalers can give the kirana store the best price," says Ajay D’Souza, head of Crisil Research in Mumbai. He says traditional wholesalers continue to rule the roost because they manage to deliver goods at the doorstep of the kirana stores.

But this is just the beginning. Large global corporations – such as Metro – can burn cash and stay unprofitable for a very long time. They have deep pockets. Bharti Wal-Mart, a joint venture between Bharti Enterprises and US based Wal-Mart, has recently set up its first C&C store with an investment of nearly Rs 30 crore in Amritsar, and hopes to spend Rs 500 crore to set up 15 more stores over the next five years. Metro has invested over Rs 750 crore so far, apart from the Rs 900 crore mentioned earlier. Their plan is simple: to convert 12 million store owners into dedicated customers. This is not an easy task. The capital costs for a C&C are very high. According to Crisil Research, capital costs are close to Rs 3,700 per sq. ft, which is three times higher than that involved in setting up a hypermarket retail store.

The average size of a C&C is 100,000 sq. ft. To top it all, the real estate is owned by the company itself. Therefore, for Metro to turn cash positive is not easy in the short run. It takes at least 15 years to turn profitable and 11 years to generate cash in this sector (see ‘Long Gestation’ and ‘Wait And Watch’). Like any other retail business, it works on a high-volume, low margin basis. Sources in the industry say that Shoprite – a South African firm that has a C&C joint venture with Nirmal Lifestyle in Mumbai – was losing Rs 40 lakh a month at the back end, supplying to just one store in the country. An email sent to Nirmal Lifestyle did not elicit any response. Given the enormous challenges encountered by those trying to make a go of the retail business, will Metro and its brethren be able to survive the cash bleed?

New Avenues

Though kirana stores are the primary target customers for a C&C, business for the moment is coming mostly from others – hotels, restaurants and caterers, who buy in bulk from this wholesale format. A C&C can also gauge the quantity needed by understanding client demand and stock only as much required. Metro’s success has been supplying fruits, vegetables, meat and fish to its hospitality clients based on only demand. "Our strategy is to understand what our customers need, and then provide them a solution which offers quality product, right packaging size, and competitive pricing," says Dlouhy. The supply chain is not a problem for Metro as it worked with consolidators, farmers and fishermen to share knowledge on waste reduction, increase yield and produce high quality.

"The kirana guy will have to travel to a large cash and carry, usually located outside the city, and think twice if his transportation costs negates his margins," says Dutta of Third Eyesight. The other challenge is of scale. Most C&Cs have a bad kirana turnout because they never buy in bulk. More often than not, a kirana store owner will pick up the phone and call his distributor to send in the supplies. Metro or any other C&C does not provide such a service. But they believe their model can be successful, and they are serious about their intent, opening as many stores as they have.

For the kirana store owner, it is about saving on inventory costs. Analysts say that another reason why a C&C could work for a store owner is its ability to avoid stockouts for the customer. Metro serves as a warehouse and offers a selection of over 18,000 products. "We give the kirana guy a choice of products; with traditional retailers a kirana has to buy one product and in bundled quantities," says a spokesperson for Metro. In certain cases, Metro is also trying to specialise by sourcing from local manufacturers and stocking local brands, including an assortment of spices, rice and other food items. "This was earlier a forte of the traditional wholesaler. But we offer these solutions too," he adds.

Such a strategy of sourcing local products is also being employed by Bharti Wal-Mart. The C&Cs have their own private labels, which are selling well with the stores they have tied up with. Fifteen per cent of the sales of Bharti’s front end stores – called Easy Day – are in the form of private labels sourced by their backend partner. Bharti Wal-Mart is also selling honey, pickles, fruits and more under the private label name Great Value, which is also the international private label for Wal-Mart. Metro sells items under its international private label Arro.

"Their processes help reduce operational costs, which are very low, and they also have lesser employee cost per sq. ft," says D’Souza of Crisil Research. This is also why foreign brands such as Tesco and Wal-Mart sense opportunity in the Indian market with their back-end expertise. Tesco has already announced it is investing £60 million (Rs 474 crore) in the Indian market and has tied up with Trent, one of the retail arms of the Tata Group.

"While FDI is held up in the front end, the C&C business allows foreign retailers to sort out supply chain issues," says Pinakiranjan Mishra, partner and national leader for the retail practice in Ernst & Young (E&Y) in Mumbai. "Once that opens up, they will create efficiencies that will set the tone for building modern retail." Raj Jain, managing director of Bharti Wal-Mart agrees: "The whole Wal-Mart business revolves around saving in every aspect of that supply chain," he says. "It is not just about negotiating better prices with the suppliers, but actually about working with suppliers to remove any inefficiency in the supply chain." Bharti Wal-Mart is currently working with suppliers on packaging, stock control and inventory management.

Breakthrough Ideas

So what is eating into C&C margins? Simply put, there are not many kirana store owners walking in on a regular basis. For a C&C to make a dent in the Rs 2 lakh crore FMCG industry, it has to beat the traditional wholesaler who has been around for years. A C&C can help a retailer reduce the problems of dealing with multiple wholesalers, but cannot wipe them out. The distribution system in India has been built by the FMCG companies themselves to get their products off the ground quickly. Analysts say this multi-layered system takes a product to the smallest of stores in a village. "It makes sense for a C&C to find large buyers; they will burn cash if they focus on small businesses," says Dutta of Third Eyesight.

There has also been concern about how C&Cs can sell to their customers. Although a C&C is typically seen as a wholesale trade supporting small businesses which possess a trade licence, many point out that there have been sales to individuals who do not own businesses. The average threshold billing is Rs 1,000, and then it does not matter what you purchase in the C&C, or if it is personal purchases. This flouts the FDI norms that prohibit C&Cs from selling directly to consumers. As Businessworld noticed in a certain C&C recently, a man shopping with his wife had bought many single items. The only items they bought in bulk were brooms.

But Metro and Bharti Wal-Mart maintain that they have checks to avoid such a situation. "It is difficult for C&Cs to monitor every customer who buys because he will be a member who has a trade licence," says Mishra of E&Y. "This implies they are legitimate business owners, but it is not the job of a C&C to check their background." Stopping a customer and questioning him about the particulars of his purchases could create customer service problems that are avoidable.

Bharti Wal-Mart has about 30,000 primary members and about 75,000 total members registered in a particular trade area, around a 30-40 km radius of where its first store is opening in Amritsar. "There has been a very rigorous programme to control processes in our stores. People have to possess a trade licence," says Jain of Bharti Wal-Mart. If they do not have a trading licence, they need to have a trading association licence. "We will continue to renew that licence every year to ensure that only businesses are dealing with us, which is the law," Jain adds. Metro follows similar processes.

These hiccups, however, do not appear to slow down the C&Cs, at least the international ones. Metro Cash & Carry has opened 40 stores across the world in 2008, taking their global store portfolio to 655 wholesale stores. Their focus lay on growth markets such as eastern Europe and Asia. Officials say that group sales rose by 5.8 per cent to €68 billion (Rs 4,62,400 crore) last year. Its bigger rival Wal-Mart has even greater staying power. All of them appear to have enduring faith in the adage that only the strong will survive.

---

Trent in talks with Inditex for one more brand

admin

June 28, 2011

Raghavendra Kamath, Business Standard

Mumbai June 28, 2011

Trent, the flagship retail arm of Tatas, is in talks with Spanish retailer Inditex group to bring another fashion brand, Massimo Dutti, to India, according to a person close to the development.

However, it is not known whether both parties would enter a joint venture (JV) or go for a franchise agreement. Trent has a JV with Inditex for Zara, wherein the Spanish company owns 51 per cent. The JV runs five stores in India.

If the talks succeed, Trent may set up a couple of stores in metros in the initial years, said the source on condition of anonymity. Massimo Dutti has 542 stores in 50 countries and offers a variety of collections, from high-end fashion to easy-going casual wear.

None of the companies replied to emails on the subject. In a recent interaction, Trent management did mention expanding the scope of its alliance with the marquee Spanish brand house. “We are exploring the possibility of bringing another retail format of the Inditex group to India,” Trent Vice-Chairman Noel N Tata had told Business Standard recently.

The Inditex group, which clocked revenues of ¤12.53 billion (Rs 80,192 crore) in 2010, is made up of more than 100 companies, operating in textile, design, manufacturing and distribution. The group runs over 5,000 stores in 78 countries.

It is one of the world’s largest fashion retailers, which operates different formats such as Zara, Pull & Bear, Massimo Dutti, Bershka, Oysho, Stradivarius, Oysho, Zara Home and Uterque.

Retail consultants say it is logical to bring in more brands from the same partner.

“It is a logical thing to do. If anyone has a joint venture with a particular group, it makes sense to build a portfolio of brands. If you bring in more brands, you can spread your costs. Then cost per brand will be lower and you can reduce risks associated with it,” said Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy.

According to retail consultants, Zara has been a huge hit in India since its launch in May-June last year. Industry sources say Zara stores in Select City Walk and DLF Promenade in Delhi are clocking revenues of Rs 5-6 crore and Rs 4 crore, respectively, per month.

Trent’s plans to open Benetton’s Sisley stores, with which it has a franchise agreement, have not worked out as planned, as it had difficulties in matching Sisley supply chain to customer demand.

---

Apparel sale slump after imposition of excise duty on branded garments

admin

June 28, 2011

Pradeep Pandey & Pramugdha Mamgain, The Economic Times
Mumbai/New Delhi, June 28, 2011

Apparel sales in the country have slumped about 20% since March, forcing many brands to start end-of-season discount sales two weeks earlier than usual.

Companies blamed high apparel prices-increased due to the mandatory 10% excise duty on branded garments introduced in the Union budget and soaring cotton prices-for the fall in demand.

"The present trend indicates that the industry will hardly be able to sustain a growth of 10-15% as margins are under tremendous pressure," said Rahul Mehta, president of Clothing Manufacturers Association of India ( CMAI).

Most manufacturers and retailers have reported a 10-20% increase in their inventory levels, the association said in a report submitted to the textile ministry last week, and sought removal of the tax to cut prices and boost demand.

Or, the excise duty be cut to 1%, said the association, which represents 200 garment makers and 60 retailers including Arvind Brands, Aditya Birla, Madura Garments and Pantaloon Retail.

The organised apparel industry, which booked sales of around 40,000 crore last year, is hit by shrinking profit margins because the rise in cost of production-raw material, labour and borrowing costs-have outweighed increase in prices.

The rise in raw material prices was passed on to consumers in tranches earlier, but now it has become difficult to carry forward, Mehta said.Any more increase in prices will impact demand. Already, many consumers, hit by rising food and fuel prices, have already started buying lower-priced brands than their usual favourites.

Reliance Trends Chief Executive Arun Sirdeshmukh said consumers are downtrading to more comfortable price points within national brands. "As a result, volumes of private brands have grown even though prices have increased for that segment too," he said.

"But the real impact on sales will be known in the festive season as cotton price increase will start reflecting then," Sirdeshmukh added.

Retailers are wary about business growth in the coming months. Some have cut their winter garments bookings. "We may see sluggish demand for high-priced garments in the coming months," Pantaloon Retail CEO Kailash Bhatia said.

Although cotton prices have corrected, the component of raw material cost will be high in the stock that will be sold during autumn and winter. So prices will be up for those products, Bhatia said.

Meanwhile, rising inventory costs have forced many brands to advance summer season-ending clearance discount sales two weeks ahead of the normal July first week schedule.

Brands that have already started season discount sales include Reebok, Adidas and Mango.

Organised retail sector’s inventory cost in the last three months stood at around 2,500 crore, while total sales were around 10,000 crore, industry insiders estimated. Arvind Brands-which manages the country’s largest denim manufacturer Arvind Mills’ brands such as Arrow, Lee and Flying Machine-has reported sluggish sales in June. "We need to wait and watch whether this continues in July and August," said J Suresh, MD and CEO of Arvind Lifestyle Brands and Arvind Retail.

He said the company’s sales have grown in the first quarter ended June.

Devangshu Dutta, chief executive of retail and consumer products consultancy firm Third Eyesight, said demand from lower-income group will fall the most because this section will spend most of its income on food, which is getting costlier with continuing inflation. "It is still positive for the middle class and above salaried consumers as increments have grown along with inflation and confidence remain high," he said.

---

Succeeding In The Indian Market

Tarang Gautam Saxena

June 27, 2011

In most conversations we have had with international brands in the last 2-3 years, India consistently appears on list of the top-5 markets in which to expand into.

The second most populous country in the world, India has a young population that offers a vibrant population mix that will provide a workforce and consumers in decades to come. There is steady growth in per capita income and a greater availability of credit, as well as a significant change in the consumers’ outlook to life that has propelled consumption levels.

Many of them are value brands in their home markets and may, therefore, be more a logical fit into a “developing” market, but there are also plenty of premium and luxury names on the list. For instance while the growth has largely been led by soft goods product brands, as incomes have grown, the presence of more expensive consumer durable brands has also expanded.

While most brands want to target the Indian middle-class millions, their sourcing structure and strategy places them out of the reach of most of the population. Brands that have succeeded in creating a significant presence, maintaining their brand image and having a sustainable operating model have, almost uniformly had a significant amount of local manufacturing. Notable examples from fashion include Bata, Benetton, Levi Strauss, Reebok, among others. In case of certain food brands such as Domino’s and McDonald’s, the companies have collaborated with and developed their vendors locally to bring down costs, and improve serviceability.

Apart from the costs and margins, another important issue is that of the adaptability of the product mix. Brands that are sourcing locally and have a significant product development capability in India are also able to respond to specific needs of the Indian market better, rather than being driven by what is appropriate for European or North American markets. This is an enormous advantage when you are trying to be “locally relevant” to the consumer in an increasingly cluttered marketplace.

Indeed the question is more to do with the brand’s willingness and capability to create a product mix that is most suitable for India through a blend of international and India-specific merchandise. The famous “Aloo-tikki” burger by McDonald’s is a great example of a product specifically developed for the Indian consumers. Not just that, India is probably McDonald’s only market in which its signature dish, the Big Mac, is not sold.

Of course, flexibility in tweaking the product to suit Indian market can become a concern when it amounts to losing control over the brand direction, and mutating away from the core proposition that defines the parent in the international market. Many brands wish to control every aspect of product development head office, but this also severely limits their ability to respond to local market needs and changes. A one-size fits all strategy obviously will limit the number of consumers that the brand can effectively address in a market such as India.

Another key question is: what is the degree of control that a brand wants to exercise on the brand, the product, the supply chain and the retail experience of the consumer? The corporate structure itself may be determined by the internal capabilities and strategies of the international brand in their home market or other overseas markets. A brand that has presence through a wholesale business in the home market may not have internal capability or experience in retail, and would look for an Indian partner who can fill in the gap.

Based on whether they want direct operational control over store operations, international companies can set up fully owned subsidiaries or joint ventures to manage the business in India. Many brands prefer to take a slow and steady approach as they do want to exert a significant amount of control over the business (including companies such as Inditex, the owner of Zara, and other retailers such as Wal-Mart and Tesco), entering only when they are fairly confident of being able to closely manage the business in India right up to the retail store.

During our work we have come across both extremes – companies that want to manage the minute details of the India business out of their own head offices, as well as companies that are so hands-off that they only want to hear from their franchisee or licensee when things are especially good or particularly bad. While a balanced, middle-of-the-road approach would be the logical one in each case, in reality individual styles of the top management have a huge influence on the approach actually taken. Also, the size of the potential market segment – relevant to the brand – has an important role to play in the strategy. If the brand is meaningful only to a small segment of the population, or priced at the top-most end of the market, one company may choose to establish an exploratory distribution relationship, while another might choose to set up an owned presence rather than look for an Indian partner to handle their small business.

While perfect partnerships seldom exist, companies could be a lot more careful we have found them to be, in questioning the criteria and motivations for choosing partners. In some cases, financial strengths, or past industrial glory were qualifying factors for picking franchisees, and the relationships have failed because the business culture was divergent from the Principal’s. In other cases, partners have been picked because they “have real estate strengths”, but no consideration has been paid to whether the partner has the operational skills to manage a fashion brand.

On several occasions, franchise relationships and joint ventures have split because one or both partners find that their expectations are not being fulfilled, or the water looks deeper than it did when they got into the business.

The opportunities in India are many. As the managing director of one international brand commented in a conversation with Third Eyesight, India is a market where a brand can enter and live out an entire lifetime of growth.

However, international brands do need to carefully identify what role they wish to play in the market, and what capability and capacity they need operationally to create the success that can truly root a brand into the rich Indian soil.