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Luxu-Re: Back to the Roots

Luxury is dichotomous, conflicted and conflict-creating by its very nature. “Luxuria” is Latin for “Lust”, the first in the list of the Seven Deadly Sins. The British poet Edith Sitwell is quoted as saying, “Good taste is the worst vice ever invented.” Luxuries are not a basic fundamental need to start with, yet to seek them out is innate in our nature.

For the most part, the term luxury has been and continues to be applied to tangible goods whether found naturally, hunted or manufactured, rather than to intangible services. Yet, it is the intangible that differentiates what is luxurious from what is not.

Certainly, the definition of luxury changes with time. There was a time, in today’s advanced markets, when hot water baths were a luxury and available frequently to only a few people. Indian pepper was once more expensive than gold. In fact, a significant part of European exploration of the world during the last millennium was driven by the craze for spices from “the Indies” before morphing into empire-building. Today, most modern Europeans would call neither a hot bath nor spices as a luxury, and many would gladly delegate to someone else their share of global travel.

If we want to understand the shifts in the luxury market and how the emerging markets of luxury such as India and China might evolve in future, we must understand the two most fundamental drivers of price premium: the social esteem achieved and the possessor’s own experience of the product or service.

When viewed together in the Experience-Esteem Price Premium Model (see graphic), we see the relationship of price premium and these two factors zig-zagging in an N-shape for immature or rapidly evolving markets (“New”), whereas in more mature markets the premium would follow more of an S-curve (“Stable”). The term “market” here refers to not just geography but consumer segments, including segments defined by need/use rather than by demographics such as income or age.

In rapidly evolving markets there is a significant premium available on products and services that are conspicuously expensive, whose price (or at least the apparent price level) is known in the buyer’s social circle. It’s a positive feedback loop: high social recognition keeps the price up, which in turn improves the social esteem of the buyer. Expensive cars and gadgets, designer brand apparel and accessories, holidays that would be the envy of others, Big Fat Indian Weddings (for and by Indians) all fit into this category. Beyond social recognition, however, the buyer’s own experience and satisfaction also plays a role in driving the price premium: the better the buyer’s own experience is for a given amount of social recognition, the higher the price premium is likely to be. This gives rise to the familiar pyramid for the luxury market, where the highest price is available for products and services that deliver both high social status and a superlative personal experience.

In “New” or evolving markets, more of the premium is attributable to social status; the buyer’s thought process is: “if you’ve spent a million Rupees or Yuan on something and no one knows about it, it’s not that valuable”. In more evolved or “Stable” markets, on the other hand, where tastes have had longer to evolve, personal experience becomes important in driving premium for at least some products: for example, high-fidelity unbranded speakers bought by music aficionados or a vacation in an unknown destination fit the bill. The satisfaction, and the premium, is driven more from the personal high-quality experience, not from receiving recognition or respect from someone else.

Developing taste needs time both at the personal level and for the society. On the other hand, status difference is a factor in all societies, at any given time. The pull between conspicuous and inconspicuous consumption at the higher price end plays out between indulgence and luxury versus opulence. Opulence may or may not enhance the buyer’s experience, but its main function is to make a status-statement, including instances such as millions being spent on “public” spaces to enhance a political leader’s own standing.

The thing with status is this: If others see you as worse off than them it is their problem; if you think you’re worse off than others, it is yours. By and large, the luxury industry, as it has evolved over the last 30-40 years, feeds on this status insecurity that is multiplied and amplified by media.

Luxury used to mean something that was expensive because it was highly desirable but also scarce. Today ubiquity seems to be the driving force of luxury not scarcity. As economic growth has created nouveau riche worldwide, brands (especially logo-bearing ones) have emerged to deliver instant gratification and legitimacy. Distinct, recognisably expensive brands are the accepted currency in the world of cachet. In the final price, the share of marketing spend is often higher than the cost of the core product. In a consumer society that is more conscious of the status that the product offers rather than its utility, it is the recognition and identification that matters most.

This has led to the trickle-down effect with luxury brands becoming increasingly more accessible, not just in terms of physical availability but also in terms of price units through bridge, diffusion and prêt lines, and licensing. A particular consumer may not be able to buy a Chanel dress or Dior gown, but she can surely scrounge enough to buy a perfume that promises at least a whiff of celebrity status!

The vintage of the product or service is an important component of the status or recognition premium, especially when the buyer has newly come into money. This is why the market is dominated by European luxury brands that can claim ancestry of at least a few decades, if not centuries, while there are barely any brands of note from other geographies. This is not conclusive evidence of European tastes being better or more acceptable, just the economic cycles through which societies around the world have been.

So where does India stand for luxury marketers? The Indian operations of most brands that have been launched in the last few years are bleeding, and seem unsustainable. And yet, it is tempting to compare the emerging golden bird of India to the golden dragon of China.

In our work with brands and marketers from around the world, we have to constantly remind people that not all emerging markets are the same. The explosion of luxury and premium brands in China during the last decade or so has been aided by sudden economic growth that came after a long cultural and economic vacuum. When the new money wanted links with the old and when uniform grey-blue suits needed to give way to something more expressive, well-established western premium and luxury brands provided the most convenient bridge. As China evolves further and consumer become more discerning, I believe we will see the emergence of Chinese and smaller new international brands that differentiate themselves on the core product, rather than relying on a long foreign history.

India’s case is slightly different. Discernment may be a new experience to some Indians who have come into money recently, for whom brands can be a valuable guide and “secure” purchase. Globally well-known premium and luxury brands or products that are endorsed by “people in the know” (including works of art) are the first to benefit from this spending.

However, discernment and taste are not new to India and, more importantly, differentiation and self-expression never disappeared even during the darkest years of “socialistic” economics. Therefore, India will see a layered approach to the luxury market and grow in a more fragmented manner, with slower expansion of individual brands. There would be multiple tiers of growth for international as well as Indian luxury products. For international brands customisation and Indianisation will be important, as is already visible in bespoke products by Louis Vuitton and Indian products by brands such as Canali (jackets) and Lladro. And there is a real prospect of luxury Indian brands emerging to respectable size, if they can stay the course and travel the distance.

As the market matures spending by Indian consumers on indulgences will also grow, driven by the need to satisfy themselves rather than for the status they could gain. In fact, another market to watch out for is India itself is a source of indulgences for foreigners – luxurious Indian experiences in which price is not the object but the experience – Big Fat Indian Weddings, ayurvedic treatments and meditation holidays for non-Indians are a case in point.

While on indulgences, in closing, I refer back to the ExEs Price Premium Model. For a limited number of people the price premium curve follows a clockwise-D, starting from Indulgences. For them invisible or inconspicuous products whose only function is to enhance the owner’s or buyer’s own experience are the most prized. In many cases, the fewer people that know about it, the better and more premium it would be.

In fact, perhaps invisibility could be the greatest indulgence of all in a world of hyper-information, self-promotion and instant celebrity. Increasingly we will find that anonymity and invisibility will be treated as luxuries, and service providers will charge a huge premium for taking you down below the radar, making you invisible. We don’t really need to wait to see that emerge. That world of luxurious anonymity is already here, and its most valuable service providers are banks in offshore tax havens!

(Edit: This article appeared in a special issue of the Strategist on March 26, 2012.)

(View PDF or download from Slideshare >> )

“Luxu-re” – what drives luxury price premium // China, India from Devangshu Dutta

Zen and the Art of Retail Funding

(Published in the March 2012 of Images Retail, this is a compilation of Devangshu Dutta’s responses to questions put to him by the magazine’s editor on the subject of funding in the retail sector in India.)

India is one of the largest markets that promises a sustained consumer-led growth in the foreseeable future, due to the shift from a fragmented retail ecosystem to a more modern and consolidated industry.

Modernisation and consolidation will happen not only in front-end (retail) operations, but also in the supply chain of both products as well as tertiary suppliers such as equipment and service providers. Well-informed investors are looking at the entire ecosystem rather than only funding the front-end of the retail business.

The biggest challenge for private equity and venture funds looking to invest in the Indian retail sector is finding business models that are logically scalable within a four-to-five years time frame and allow the investor a decent exit. Due to the nature of the most funds and how they are structured, a seven-to-eight year term is the maximum time a fund would be involved with an investee company and it is difficult to find an investor with a longer-term horizon.

On the other side, this can also prove to be a challenge for the investee company: some of them may feel unduly pressured to grow faster than the natural pace of their business and could make strategic and operational decisions that are destructive to the business. As consumer incomes move up and the environment becomes more conducive, the life cycle to building a retail business becomes shorter. For instance, 20 years ago it would have taken over 10 years for a business to cross Rs. 100 crore (INR 1 billion). Today, with the right mix, it would take much less time. However, building a business that is both large and profitable (hence sustainable) still takes a significant amount of time.

Venture equity is suitable for businesses that can grow and add value inorganically, either in intellectual property-driven businesses such as technology companies and brands that can provide higher margin returns on a given equity base, or by selling the business further to investors who think they can derive even more value from it in future.

Retailing, on the other hand, is inherently an organic growth business, and the most suitable sources of funding for organically grown business are internal accruals and debt. However, the rapid economic growth in the last 15 years has created an opportunity for large businesses to emerge inorganically. Good examples of this are the large corporate groups that have entered retailing. Looking at them, one could be seduced into thinking that the environment and the business have changed significantly such that other professionally created businesses could be easily launched, venture-funded, and grown to exit. My take on this: If you can create a fund whose life is 20 years or more rather than the typical 10 years, there is a better likelihood of making it work.

Of course, bank debt is not easy for an entrepreneur either – Indian banks have become more progressive, but the norms are still relatively stringent. Unless the space is bought, the retail business has few significant-value fixed assets, and bank loans are limited for businesses that cannot offer much collateral.

Each stage of the retailer’s growth needs a judicious mix between own capital, supplier credit, bank loans and external investors’ equity. The last one evolves from friends and family at the inception, to angel and venture investment during growth to, eventually, public equity, if all goes well. Each of these sources of funding come with their own expectations on returns and disclosure, so an entrepreneur needs to balance these based on his own comfort levels. One of the most important characteristics for most institutional investors is that the business seeking funding should have a broad and deep management and executive team, rather than being over-dependent on the founder-entrepreneurs. There needs to be a demonstrated track record of growth that has been delivered by this team, and a clear future direction to sustain and grow the business.

It is a curious cycle: structured, process-oriented and systematic businesses that are not dependent on one person (the founder) are more likely to attract outside money, and outside money coming in puts more pressure to create transparency and broadening responsibility with which many entrepreneurs are uncomfortable. Most of them start their own businesses so that they do not have to report to someone else, but the moment there is external money involved, you realise that you are answerable to someone else. This is often a tough call for an entrepreneur – not just in India, but worldwide – a traditional, patriarchal and feudal mind set will just not work with external investors involved, especially in today’s environment where information and opinions flow more freely than ever before.

One of the most common mistakes Indian retailers make while trying to get funding is over-estimating the market demand. The second is underestimating the complexity (and costs) involved in starting and growing the business to profitability. Once you have put a business plan out there, it not only becomes a hook for your prestige, but valuation norms are also driven by the figures that have been agreed upon. This can cause business decisions that look productive in the short term – such as adding stores to grow sales immediately – but are harmful in the long run, such as adding stores in locations that are not sustainable. We have seen such decisions being made in the last five to six years, and investors as well as bankers are more wary today while evaluating businesses to fund.

A key thing to remember is: no matter how badly you want the money, it is not just about the money. From an entrepreneur’s perspective, who provides the money can be even more important than how much and how quickly the money comes in. For example, a particular investor could bring in a business perspective and relationships that are directly relevant to the entrepreneur’s business, which can add value well beyond the money that flows in. Commonality of objectives and a shared view of the time frames involved are also important, so that business decisions have the full support of the investor.

Timing is important: If you get an investor in too early, you may be losing on the valuation and selling out too much of the business to one investor. However, holding out for the ‘ideal’ benchmark valuation is possibly worse, because there is also a cost to the time and opportunity lost in getting the required funds. If I were to focus on one piece of advice to an entrepreneur looking to raise funding from a VC, it would be this: don’t try to extract what you think is your complete lifetime’s worth from the first investor deal that you sign. If the business is successful, and the first investors are happy with their returns, they and others are likely to come back to you in far greater numbers, offering much higher valuations.

Later-stage retailers still have avenues to raise debt and private and public equity, whereas start-ups and early stage businesses that can add significant entrepreneurial colour into the business are the ones that are struggling to get funded.

In many countries early stage seed, angel and venture investments are provided incentives in terms of tax structures – this is something that the venture community in India has been lobbying for with the government, and if provided, could improve the ‘investibility’ of early stage retail businesses.

[Readers may also find it useful to go through the brief presentation on Slideshare: “What does it take to create a fundable venture?”

You can now have vegetables cut free

Shilpa Phadnis , The Times of India

Bangalore, February 24, 2012

Homemakers are likely to love this – someone cutting vegetables for them for free, someone making chappatis for them, again at no charge.

It’s the latest from Future Group’s value retail chain Big Bazaar. They call it the Seva initiative, and the store at Rajajinagar in Bangalore has become the first to launch the services.

Customers in the store can choose from a combination of different grains that go into making a dough, and the store staff will then grind, knead and make it into fresh chappatis. The promise is that the entire process will take no more than 12 minutes. Customers can go to the vegetable counter and get the vegetables sliced and diced in different styles for free.

The ‘sevaks’ at the 1.3 lakh sft store will assist customers in availing free after-sales service for the electronic goods they purchase or in identifying a vendor for dry-cleaning their carpet. The store even has a Bangalore One counter where they can pay electricity or phone bills, and avail other public services.

"We don’t merely want customers’ share of wallet or mind. We also want their heartshare," said Ashni Biyani, director of Future Ideas, the innovation and incubation cell of the Group.

The retailer incurs additional costs to deliver these free services. But analysts say the cost is mostly related to labour. "This is a clever strategy to attract customers at relatively low-incremental costs," said Hemant Kalbag, partner at consultancy firm AT Kearney.

Usually, the cost attached to delivering a service gets embedded into the product. "But free give-aways along with experiential marketing become a hook for customers, which could potentially translate into a higher billing size at the counter," said Devangshu Dutta, chief executive at retail consultancy Third Eyesight.

The Future Group has both internal and external pressures to try and find innovative ways to build a more robust business. External pressure comes from Big Bazaar’s competitors like Spar Hypermarket, which offers a better ambience and attracts more upmarket customers. Big Bazaar has been upgrading its stores to enhance customer experience, and Seva can be seen as part of this. "Big Bazaar stores launched in the last one year are less chaotic and resemble a Spar," said an analyst who did not want to be named.

Internal pressure for the Group comes from its huge debt of about $1 billion and high interest cost, which has impacted profitability. The retailer is working on a plan to turnaround its retail operations. It is exiting some of its non-core businesses and shutting down loss-making stores. It has closed five Food Bazaar outlets and 11 E-Zone stores and has laid off 3,000 people in the recent past.

To cater to more evolved customers, the Group is rolling out FoodHall, a food store for value-added food products and international food ingredients. The Seva initiative will be rolled out to 12 Big Bazaar Family Centres in the next two months. The Family Centre sub-brand makes customized product and service offerings based on the needs of the people living in and around the catchment area.

Future revives JV deal with Skechers shoes

Meghna Maiti, Financial Chronicle

Mumbai, February 22, 2012

Kishore Biyani, whose proposed licensing and distribution venture (JV) with US footwear retailer Skechers fell through last year, has revived partnership plans with the foreign firm. It has even seconded one of its senior most executives Sanjeev Agrawal previously joint CEO at Future Value Retail as CEO of the proposed JV.

“The group is in the process of signing a JV agreement with Skechers and Agrawal will head this venture,” said at least three company officials in the know of the development. Future Group already has a 50:50 joint venture with UK-based footwear brand Clarks which is steadily scaling up.

“The footwear segment is seeing evolution in terms of product mix, pricing and demand growth, helped by the availability of international brands,” said Devangshu Dutta, CEO, third Eyesight, a consulting firm focused on retail and consumer products sector.

Earlier Future group had tied up with Liberty Shoes in a joint venture that was scrapped because of poor customer response. India is one of the strategic markets for Skechers and the company is said to have done good research over the last three years to establish the right strategy and partnership to develop the brand in India.

An email sent to Kishore Biyani, group CEO at Future group on February 20, 2012 seeking comments on the Skechers JV did not elicit any response till the time of going to press. Sanjeev Agrawal, ex-joint CEO at Future Value Retail said, “No comments.” Skechers USA in an email said, “Your email has been forwarded to the appropriate department for review.”

Purnendu Kumar, vice president at Technopak Advisors said, “The growth opportunity in the footwear segment is very high primarily because of low penetration in terms of point of sales, number of brands. There is pent-up demand in the market. Growing affluence is also driving demand in this category.”

Skechers USA, incorporated in 1992, designs and markets Skechers-branded lifestyle footwear for men, women and children under several lines such as those for shaping up, running and walking. The over $ 2 billion Skechers had signed a deal with Pantaloon Retail in the year 2009 to licence and distribute Skechers footwear and apparel in India. The deal involved Winner Sports, a wholly owned subsidiary of Pantaloon Retail India (PRIL) as the licensee and distributor of Skechers footwear and apparel through Future Group’s retail format Planet Sports.

The market for premium shoe products is growing at 15-20 per cent annually, according to Technopak Advisors. The growth potential has prompted several firms to enter the market in the past few months. Tata global trading arm Tata International started its chain of stand-alone stores, Tashi, targeting the segment late last year. Reliance Retail has entered into a licence dela with US-based Timberland.

Future Group’s other footwear JV Clark, has five standalone stores and around 10 shop-in-shops across India. “This venture will take two years to become profitable and it’s now in scale-up mode. By the end of the next financial year, we are confident that cash accruals from existing stores will be able to take care of the growth requirements of the lifestyle footwear, bags and accessories joint venture,” said a top Future group official involved with that business

Home maintenance goes corporate

Vidya Padmanabhan, Mint

Chennai, February 6, 2012

Banking on the growing purchasing power and busy lifestyles of urban, dual-income families, a slew of firms are now offering to help them run their homes, attempting to bring a measure of professionalism to a largely unorganized sector.

While there’s no dearth of cook’s cousins or aunt’s office assistants who will repair a ceiling fan, wash the car and even fix software bugs, entrepreneurs are now seeing an opportunity to step in with streamlined services for affluent professionals who want to avoid the uncertainties of the informal ecosystem.

“We did the research and saw the shift,” said Siddharth Bhatia, the head of operations of Gurgaon-based eTechies.in, a company he co-founded in mid-2010 to provide onsite and remote information technology support for individual users and small businesses. Bhatia and his co-founders, who had previously worked for several years in a firm providing remote technical support to users overseas, received a $2 million infusion in January from venture capital firm Inventus Capital Partners on top of an angel investment from Google India’s managing director Rajan Anandan.

“People in the middle and upper-middle classes are now ready to pay to get professional service and peace of mind,” Bhatia said.

With more than 1,500 individual subscribers and over 400 small-business subscribers for the company’s Rs. 3,000-per-computer annual contract—a 20-30% premium over rates at local repair shops, according to Bhatia—eTechies plans to extend its services to Bangalore and Mumbai in the next four months.

The move to organize the home-focused services sector is prompted by the same economics that drives the retail industry, which has seen mega malls and hypermarkets springing up in anticipation of the increase in the disposable income of India’s burgeoning middle class.

According to a recent report by the National Council for Applied Economic Research, India’s middle class, defined as families with an annual income between Rs. 3.4 lakh and Rs. 17 lakh, will grow 67% from the current level to 53.3 million households or 267 million people in the next five years. Further, according to the report, the typical middle class household spends half its income on basic daily expenses, leaving the other half for saving or discretionary spending.

Along with the growing affluence, however, comes increasing demands on the time of upwardly mobile professionals, which is where those who seek to organize the home-directed services economy come in.

“Given today’s busier lifestyles, with long commutes and extensive work-related travel, people have less time to hunt for a specific individual handyman—this offers an opportunity to companies that can offer a comprehensive set of services,” said Devangshu Dutta, chief executive of Third Eyesight, a retail and consumer products consultancy.

“Our target is the typical working couple that doesn’t have the time to deal with (service-related) issues at the end of the day,” said Prerna Bhutani, co-founder of Chennai-based One Call India, which facilitates home appliance purchase, delivery and after-sales service. She regularly sets up stalls in information technology parks, high-end apartment complexes and supermarkets to reach out to her target audience.

For Rs. 1,000 as annual subscription, or Rs. 100 per call, the company researches best prices among retailers, offers discounts through tie-ups with the retailers, arranges pick-up and drop services for purchases and repairs, and otherwise coordinates with retailers and repair centres to improve customers’ service experience, according to Bhutani.

With around 1,000 customers in Chennai, One Call India started operations in Bangalore and Gurgaon late last year, and may seek venture capital funding to expand to all major metros in the next three years.

“We have the exposure today to the kind of services people are using in the West, and customers are demanding that,” Bhutani said.

The potential in upscale Indian homes hasn’t escaped the big guns. The Indian arm of ISS A/S, a $14 billion Danish multinational that maintains facilities for the corporate sector, began a domestic cleaning service last year.

“Our research states housing and utilities make a prominent presence in the average consumer spending pattern of people in metros, hence a huge potential exists for ISS Homecare,” Stanley Britto, chief operating officer, said in an email.

The company charges Rs. 5-7 per sq. ft for cleaning services including specialized floor care, carpet care and glass cleaning, according to Britto. ISS Homecare earned about Rs. 1 crore from its operations in Mumbai, Bangalore and Chennai in the past year, and expects the figure to double every year, with services to be extended to other cities across India in the next 12-18 months.

However, Third Eyesight’s Dutta sees a gap between the demand and most efforts so far to tap it. “Most (of the companies) rely on a network of individuals as subcontractors, and there are gaps in terms of filtering these individuals for skill level, there is little or no roster management, and the result is highly inconsistent customer service. Therefore, customer retention for repeat contracts is an issue, and with time, if the poor reputation spreads, new customer acquisition also becomes difficult.”

In the case of eTechies, it was the management outlook, more than the market demand, that motivated Inventus’ investment.

“Yes, Indian consumption growth (of devices) was clearly a driver for eTechies,” Parag Dhol, a director at Inventus, said in an email. “We tend to be hugely entrepreneur driven, though.”

The founders’ work experience in remote technical support and their business model, proven successful in the National Capital Region, clinched the funding decision, Dhol said.

The companies, naturally, insist that their services beat what’s currently available. “Personally, as a working woman living alone, I found it very difficult to repair a broken tap or flush—just waiting for the guys—and safety was an issue,” said Shaifali Agarwal, founder of Delhi-based EasyFix Solutions, which provides plumbing, electrical and carpentry solutions.

The company checks recruits’ background, technical competency and basic reading skills needed to help them check and reply to mobile text messages, Agarwal said. They also undergo behavioural training to make customer interaction smoother, she said.

EasyFix, which charges a minimum of Rs. 100 per visit, has had about 1,300 customers in the National Capital Region, and plans to expand to Mumbai, Bangalore and Hyderabad by March.

Agarwal admitted that handling a large group of workers—24 in her case—was a significant challenge, one that probably has kept the sector mostly free of corporatization.

Pegasus Facilities of Chennai, which provides cleaning services for residences and vehicles, combines attractive employee benefits with a nifty micro-management system to stay in control of its workforce of 40 full-time employees. The company’s cleaning staff earn about Rs. 7,500 a month as salary, besides conveyance fare and a customer-referral bonus, plus tips, co-founder Vijay Simha said.

Employees must check in to the company with missed calls when they reach a customer’s residence, when they finish the job and when they leave, Simha said.

The company offers several cleaning packages—entire residence, kitchen, fans and fittings, windows—of which the bathroom cleaning service begun two years ago has been the most in demand, according to Simha. For a minimum of Rs. 5,500 per year, the company cleans two bathrooms twice a month. Of 9,000 households that use the company’s services in Chennai, about 60% are dual-income families, Simha said, adding that he gets three-four new contracts and one or two renewals every day. Pegasus expects to expand to Pondicherry and Coimbatore this year, and is seeking franchisees in cities across India. Simha gets occasional complaints from customers, he said, and he tells them, “I can’t make your bathroom new—I can just clean it. What you don’t have the time to do, I do—that’s all.”

Junglee: Amazon makes quiet entry into Indian retail market via comparison shopping site

The Economic Times
Bangalore, February 3, 2012

The world’s largest online retailer is tiptoeing into India, using cover from a comparison shopping site Junglee.com it acquired 13 years ago.

Amazon, whose moves have been closely watched for any sign of an imminent entry into the Indian retail market, will not sell or buy anything in the country for now. Instead, it will direct customers to both online and offline vendors listed on Junglee.

Amit Agarwal, vice-president of Amazon, would only say Junglee would "help customers discover products from online and offline retailers in India and from Amazon.com". He declined to say more about the company’s plans.

Conspicuously missing from the list of vendors on the Junglee site is Flipkart.com, India’s biggest online retailer founded by two former Amazon executives. Flipkart expects to post sales of Rs 500 crore by March 2012. Amazon ended 2011 with revenues of $48 billion (about Rs 2.5 lakh crore).

"Its recent moves to set up a fulfillment centre (in Mumbai) and now the Junglee launch certainly look like precursors to a retail launch whenever the government allows FDI in multi-brand retail," said Devangshu Dutta, CEO of retail consultancy Third Eyesight. A legal expert at one of the country’s largest law firms said Amazon was making a ‘clever entry’.

Agarwal said Junglee will display over 1.2 crore products and 14,000 brands for Indian consumers. The company has also launched Amazon seller services in India where vendors can hook up to Amazon’s portal to acquire customers.

(Read our perspective on this launch on our blog.)

 

Amazon enters India

Amazon has beta-launched a consumer-facing business in India with its comparison shopping site Junglee.com.

The company has been engaged with India as a support and development centre for several years now, and its traffic and business from India has also grown steadily ever since it started shipping products to the country.

Given the critical mass that is now becoming visible in the Indian e-commerce market, it is logical for Amazon to look at a more direct customer-facing presence here. Its recent moves to set up a fulfillment centre and now the Junglee.com launch certainly look like precursors to a retail launch, whenever the government allows foreign investment multi-brand retail businesses.

Junglee’s current business model is technically not a retail business since the actual transaction would happen on Amazon and websites of other retailers whose product listings it is aggregating.

In the short term, Junglee could be a beneficial partner to existing e-commerce retailers, since Amazon’s robust technology and know-how would become available as a platform, and it would also provide an additional channel for customer traffic. However, with time, Junglee could well become a sizeable competitor for primary traffic which otherwise would have landed directly on the retailers’ own websites. Smaller e-tailers who sign up with Junglee may also find it harder to break away into an independent presence.

The benefit to Amazon, of course, is developing the customer base for a future Amazon-India site, and achieving much deeper insights on customer shopping behavior in India than it possibly gets from the Indian customers transacting on Amazon’s non-Indian websites.

With time, and as Amazon takes a deeper plunge into the market, Indian customers who have enjoyed the Amazon experience remotely can certainly look forward to a wider choice of products at lower costs and with quicker deliveries.

Retailers try to outdo each other to sell more for less

Raghavendra Kamath & Sharleen D’Souza, Business Standard
Mumbai, February 1, 2012

Spending on the High Street has never been cheaper for such a long period of time. If you walk through Mumbai’s Linking Road that houses the showrooms of some of the world’s biggest brands, it’s almost a surreal experience: be it Mango or Vera Moda, or Jack & Jones, or even shoe brand Aldo – all these premium retailers are literally shouting from the rooftops that they are offering up to 70% discounts. Some like designer wear Mogra has gone one up and is offering up to 80% ‘sale’.

“At this rate, I won’t be surprised if they go up to 100% discount one day,” quips Vinita Chandran ,a regular shopper.

Welcome to the Great Indian Discount Bazaar— something no retailer likes but nobody can do without, as a dull Diwali and poor offtake in the following months have forced brands to dole out more for less.

The value retailers, as the low-cost brands like to refer themselves to, are also feeling the pinch as the raison d’etre of their business is now being hijacked by the bigger players.

Vasant Kumar, executive director of Landmark group’s value retail chain Max, was worried during the end of the season sale as many brands offered up to 80% discounts and shoppers flocked to stores to buy goods on discount.

“We could not offer such discounts because of our margin structures,” Kumar said. To woo customers, Max lowered its sale prices from Rs 399 to Rs 299 and played its value card to compete with big brands. “There was no meaning of 20 to 30% discount when big ones were giving flat 50 to 60% discounts. So we lowered our sale prices and said our prices are still lower when others gave steep discounts,” he said.

Kumar is bang on. While French menswear brand Daniel Hechter offered flat 60% discount to shoppers for two days, apparel chain Bombay High was offering ‘buy two get two free’. Apparel retailer Provogue went for a flat 50% off over the Republic Day weekend and is now offering a flat 40% off.

Experts say the ‘sale’ tsunami was bound to happen. “There was a double impact—the like to like sales growth was below par and new stores could not be opened as planned…So they have more inventories to get rid of,” said Devangshu Dutta, chief executive of retail consultancy Third Eyesight. Like to like sales refers to sales coming from stores which are in the business for more than one year.

Besides steep discounts, brands are also keeping higher amount of inventory in the discount basket, say industry experts.

“If brands were keeping 30 to 35% of their merchandise on sale, now we are seeing 60 to 70% of their goods on discount. We are also seeing brands going for flat 50% discounts rather than upto 50%,” said Kumar of Max.

If that was not enough, many malls such as Raheja-owned Inorbit, Oberoi Mall run by Oberoi Realty and Kishore Biyani’s Central came out with shopping events wherein 50-100 brands offered a flat 50% discount.

It’s no surprse that many in the industry are not happy with the steep discounts brands are offering.

“I think retailers are overdoing discounts. By giving 70% discounts every other season, they are killing the full price purchases. They are sensitizing the customers to wait for the next season and do not buy full priced product,” said Jaydeep Shetty, founder and chief executive of apparel brand Mineral.

“When sales end in February, March will be empty month for brands as customers exhaust money to shop,” Shetty adds.

Govind Shrikhande, managing director of Shoppers Stop, which offers customers upto 51% discount, said: “We do not believe in this (steep discounts). It is tough and it is race to the bottom.”

But will brands be able to sustain such discounts? “I think brands believe that it is better to liquidate stock at higher discounts than cash getting stuck in merchandise,” said Dutta.

The inventory issue came to the fore when many brands advanced their end of the season by a few weeks to clear their inventory before the next season kicks in.

Though brands normally start their end of the season sale after January 15, this time around, they came out with the sale from third week of December.

For instance, Mango started its sale from December 22, while Aldo started beginning this month. German brand also Esprit also advanced its end-of-the-season sale by a over a fortnight to December 31 this year (it was January 16 last year). Spanish brand Zara also started its sale from early January.

“Some retailers started their sales from Xmas weekend and advanced sales by two to three weeks. It is obvious that they wanted to have more topline,” said Nirzar Jain, vice president, Oberoi Mall, Mumbai.

Kumar added that: “There was drop in demand in September and October. Hence brands decided to go early and get rid of inventory.”

Some brands have also extended their sale to shore up the topline. French menswear retailer Celio, which has a joint venture with Future group, is on a sale for almost one-and-a-half months till February 14, UK-based brand French Connection is having its year-end sale till March. Normally, these brands have their end-of-the-season for a month.

Steve Madden, an international shoe brand, which started sale from beginning this month has extended their sales by another week.

Liberalised FDI – Not A Threat to Franchising

As the debate over FDI (even for single brand retail) continues, over 250 international brands in the food service and fashion and lifestyle sectors alone continue to service the Indian consumers. Interestingly more than half of them are present in the Indian market through the franchising route.

Franchising has been a preferred entry strategy especially in case of the food service sector. Many of the international food brands have opted to give the master franchise to an Indian partner who can use the international brand’s name but is responsible for sourcing the ingredients and maintaining the international quality standards for food and service. One such example is Dominos, which incidentally is also the country’s largest international food service brand. Of course, as FDI liberalisation seems nearer the finish line, brands such as Starbucks are choosing to join hands with an Indian partner while others such as Denny’s Corp are planning to tie up with regional licensees.

In case of the fashion sector, in the early years of liberalisation few international companies chose franchising. Instead some chose licensing to gain a quick access to the Indian market at a minimal investment. Others set up wholly owned subsidiaries or entered into majority-owned joint ventures to have a greater control over their Indian business operations, product sourcing and supply chain and brand marketing.

However, at the turn of the last decade, many international fashion brands chose franchising owing to favourable business environment. An environment conducive for growth of franchising was created by reduction in import duties under WTO agreements, the absence of a wide network of multi-brand retail platforms, the need for using exclusive branded outlets as a marketing tool to create a full brand experience and the simultaneous growth of real estate investors who were potential master franchises ready to invest capital and real estate.

The question is how the liberalisation of FDI norms will impact the choice of market entry strategy for the international brands. Would franchising continue to remain the preferred entry mode as we set into the liberalised FDI regime? The change in foreign investment norms has already led to some brands (in particular those in the fashion and lifestyle sector) transitioning their existing licensing or franchise partnership into a joint venture or wholly owned subsidiary while the new entrants are actively considering ownership routes rather than franchising.

Certainly, the ideal scenario for an international brand would be to have complete ownership and control over the operations in a strategic market like India, but direct investment does also increase their risk and the investment is not financial alone. Amongst other choices licensing offers the least control, and while joint venture may be preferable for some brands, for many franchising still proves to be the practical choice for some time to come.

Franchising may potentially be quicker way to launch with higher chances of the retail business being successful. As it is an “entrepreneurship” model of business, the franchisee’s motivation to make the venture a success is high. The international brand has an assured income by way of royalty on the license agreement and could expand more rapidly in the market. Having a local partner with a closer understanding of the market and the ability to adapt to the changing needs of the consumers also helps to ensure that the international brand’s offering is tuned in to consumers’ demand.

Further, unlike more developed markets where brands have sizable networks of large-format store as a launch and growth platform, in India there are still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Partnering with a franchisee who has access to retail real estate can be a quick way to reach the target consumers. On his part the franchisor needs to ensure that the business model is well thought through in terms of the team and infrastructure required and is scalable.

For a successful relationship it is vital that the franchisee has an entrepreneurial mind-set. The essence of the brand needs be well understood, and the franchisee must have operational involvement rather than a “passive investment” approach.

If both partners understand their respective responsibilities, franchising can truly be a win-win business model.

Folks are dining on ice cream!

Priyanka Golikeri , Daily News & Analysis (DNA)

Bangalore, February 1, 2012

Reader guidance: the following story will likely make a mouth-watering read, potentially making you salivate and yearn for a calorie-rich sweet food that some pregnant women allegedly crave in the middle of the night.

Okay, with the disclaimer-cum-warning out of the way, let’s dive, head first, into the changing world of ice cream in India. Walk in to any 21st-centuryish ice cream parlour in Bangalore, and in all likelihood you will see hot golden-brown caramel sauce jostling for space with chilled milky-white whipped cream to drip gradually over a wide glass-bowl of sizzling walnut brownie which is sprinkled with crunchy malted milk-balls, multi-coloured marshmallows and crispy choco-chip cookies. All of them are arranged in perfect tandem with four scoops of melt-in-the-mouth ice cream in vanilla, chocolate, butterscotch and coffee flavours. Completing the picture are a few pieces of wobbly strawberry jelly that decorate a platter of juicy fruits and dry fruits spread over a layer of thick orange jam which conceals dollops of silky soft cheesecake ice cream or a fruity sorbet.

As you can discern by now, the mundane solo- and double-scoop cherry-topped treats in paper cups or wafer cones are passe. Sinful pleasures are now made of parfaits, sundaes and super-sundaes in myriad flavours, all prepared with fruits, dry fruits, malt balls and crushed cookies drenched in sauces, jams and honey.

From a post-meal dessert, ice cream is evolving into a mini-meal that pleases the likes of Deepak Gowda, a Bangalore-based marketing executive. After working non-stop for six hours last Friday, he decided to unwind at an ice cream parlour. Bewitched by the wide array of colours and flavours on display, Gowda selected a new offering containing three scoops of raspberry ice cream sandwiched between layers of strawberry jam, caramel sauce and orange jelly, and topped with thick pieces of bananas, strawberries and apricots. The sheer scale of the “dessert” left no space for a formal lunch, says Gowda.

Ice cream’s evolution has been gradual. The entry of international brands like Haagen Dazs, Movenpick, Swensen’s (and, before them, Baskin Robbins), first led to industry estimates of 12-15% annual growth, so as to touch $900 million by 2014-15. As competition intensified, innovations in the form of novel servings followed.

“With much more on offer, for many consumers, single scoops and the common flavours are no longer enough,” says Devangshu Dutta, chief executive, Third Eyesight, a consulting firm focused on retail and consumer products. Consumers, he says, are encouraged to graduate from having an ice cream as a treat to infrequent indulgences like a hot chocolate fudge or a multi-scoop banana split.

Experts say per capita consumption of ice cream in India is still low at 300 ml per year compared to the world average of 2.3 litres. Mini-meal ice cream, however, is increasingly seen replacing traditional desserts.

It would be incorrect, however, to credit international brands alone for the trend. As far back as the mid-’70s, Mangalore, the south-western Indian city connecting Kerala and Karnataka, launched ‘Gadbad’ (Hindi for amiss), consisting of a scoop of kesar- or saffron-flavoured ice cream submerged under a layer of jelly, dry fruits, fruits, and strawberry and vanilla ice cream.

Today, Gadbad is a generic term in south India for a bowl of 3-7 scoops of ice cream dotted with tutti-frutti, nuts, raisins, fruits and honey. Priced Rs38-65, ice-cold Gadbad bowls sell like hot cakes! Mukund Kamath, proprietor of Ideal Ice Cream which makes Gadbad, says consumers prefer gigantic variants to plain scoops as there is tremendous value addition for moderate pricing.

So much so that Ideal now has six parlours in Mangalore alone with a total capacity of 1,000 seats. Gadbad and the parfait outsell single scoops by a mile, says Kamath. “Compared to Rs30 for a single scoop, Gadbad is available for something like Rs50, which works out to be economical.”

Price is not always the decisive factor though. For instance, parfaits and sundaes of international brands cost upwards of Rs150. Some premium brands retail for Rs600. “It’s often the delight factor and the experience itself which draw consumers to the sundaes,” says Shirish Shah, partner at Richie Rich Ice Cream in Bangalore (where almost 90% sales at its two parlours come from sundaes).

For most players, the objective is to increase the average transaction value. Some might consider it as a method of differentiating themselves to claim a premium positioning, says Dutta.

That the ice cream market is changing stripes is a given. But the evolution, though dramatic, is by no means transformative. The demand for single and multiple scoops is almost equal in some places, says Anurag Trehan, business head at Swensen’s which operates six parlours in India. Agrees Rashmi Upadhya, managing consultant, PwC India. “Single scoop ice creams constitute nearly 40-50% of the overall market and will continue to dominate. At the same time, the sundaes and premium ice creams will grow in popularity amongst the affluent.”