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April 21, 2012
Vishal Krishna, Businessworld
Bangalore, April 21, 2012
On
10 April, the Department of Industrial Policy and Promotion (DIPP)
under the commerce ministry issued a circular to clarify the grey
areas in foreign direct investment (FDI). While the note titled
‘Consolidated FDI Policy’ answered some key questions
around foreign investment in multi-brand retail, it also put a
question mark over the e-tailing business in the country.
The note says: “E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in business-to-business (B2B) e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.”
So, e-tailing ventures should be business-to-business (B2B) to qualify for FDI. But in India, the bulk of the e-tailing business is centered around selling to the consumer, and not B2B. The foreign investments are also substantial. In 2011 alone, VCs invested close to $300 million in Indian e-tailing companies.
It is estimated that there are at least 220 such businesses, of which 50 per cent have received foreign funding from an angel or first round of VC investments. For example, Flipkart, which does multi-brand retailing of everything from books to mobiles, received $150 million from Accel and Tiger Global Management over three years. Companies such as Snapdeal and Myntra have also received foreign investment.
Interestingly, the 10 April circular per se is a reiteration of the 2010 circular. The government’s stand on the issue has remained the same, as is evident from its earlier notes. So how did India’s e-tailing companies manage to flout the norms? Since the nature of the back-end was not clearly defined, many of these companies attracted funding by creating a wholesale logistics or warehousing arm where 100 per cent FDI could be used. These logistics / warehousing companies would not have a website and they technically became the sourcing arm for the e-commerce business. But that too is a violation of the law because the e-commerce business is sourcing 100 per cent of the products from its trading arm, where only 25 per cent sourcing is allowed.
“There were investments made in the backend and that’s how the e-commerce business was structured,” says Devangshu Dutta, CEO of Third Eyesight.
However, some like Bharti-Walmart follow this rule. Bharti Retail’s 140 ‘easyday’ brick-and-mortar stores source only the stipulated percentage from Bharti-Walmart joint venture’s wholesale trading arm Best Price Cash and Carry. The same rule applies to e-tailing. Precisely the reason why Amazon entered India through a marketplace called junglee.com.
“One should read the press note before going and raising money from VCs,” says Amruto Basuray, CEO of babeezworld.com, a multi-brand baby products company.
K. Vaitheeswaran, founder and CEO of Indiaplaza.com, says that multi-brand retailing should be allowed to help the retail business. “Anybody who takes VC investment into the warehouse business and then supports a multi-brand e-tailing business has ignored the government note, which says that the website should itself be servicing B2B customers,” he says.
Analysts warn that if the government takes action against e-tailing
companies that flout the FDI norms, many of them will close down.
They can continue in business if they sell in the B2B category,
but it is unlikely as the business models of these companies are
streamlined to service individual customers and not small and
medium enterprises.
(This article appeared in the Businessworld issue dated 30
April, 2012.)
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April 20, 2012
Prince
Mathews Thomas, Forbes India
New
Delhi, April 20, 2012
All
Ajay Jain wanted was for people to buy his photographs. Though
he was an engineer and an MBA and had worked in various industries
ranging from IT to media, his passion lay in travel and photography.
But he was not able to sell enough of his pictures through exhibitions. So he started a gallery and started marketing it online. Yet, nothing really worked. That’s when the 41-year-old decided to transform the gallery in South Delhi’s Hauz Khas Village into a café with wi-fi, coffee, tea and cookies. The attraction was that all of it was free. Customers could just put whatever they felt like in a small box kept at the entrance of the tiny hangout with a dozen tables of different sizes and shapes. The box was kept in such a way that no one could see who was putting what in.
“I have got everything from a torn Rs 5 note to Rs 500 and dollar and euro bills,” says Jain.
The idea worked as more and more people came visiting and brand Kunzum began to gain popularity, both online and offline.
Kunzum Travel Café is four years old now and gets about 100 customers on a typical week day. The number swells to almost 200 during the weekend.
The “treasure box” at the entrance gets an average Rs 50 per cup of coffee or tea that Kunzum serves.
“The money covers my overhead costs that include staff salaries and electricity bills,” says Jain who bought the space three years ago.
Along with books and photos, he now has added more revenue streams—advertisements inside the café, ‘specialised’ travel services and events like book readings and movie screenings that can bring Rs 6,000 for a two-hour booking.
While Jain admits that he initially discouraged backpackers “who would laze around the whole day doing nothing”, his clientele has since filtered itself. Today his average customer is a well-to-do professional in the 20-40 year age bracket, loves travelling and alternative cinema (most of the movies screened at Kunzum fall into this category) and most importantly, has a conscience.
“I usually pay about Rs 100 to Rs 150 every time I visit Kunzum,” says Abhinav Maker, a 27-year-old lawyer who likes the cafe for its “homely feel”. In the one-off time that he didn’t pay, a “guilty-feeling” made Maker go back to Kunzum and compensate for “not being good”.
Martin Spann calls this the “social norm” reason that drives consumers to pay even if they can get away without shelling out money. In his study with colleagues Ju-Young Kim and Martin Natter—Pay What You Want: A New Participative Pricing Mechanism—the economist found that customers also paid “because they don’t want the business, which they like, to close down”. This, says the professor at University of Munich, is the “strategic reason”.
Jain is not the first one to bet on the honesty of customers to build a business and brand. In July 2007, musician Prince was initially ridiculed when he gave away copies of his album Planet Earth for free. But the ridicule turned to admiration when his 21 concert dates were sold out.
In similar success stories, in 2010 Humble Indie Bundle, a video game was distributed using the “pay-as-you-wish” model, raising $11 million in revenues. The success helped it raise $4.7 million from venture capital firm Sequoia Capital.
In India, the Annalakshmi food chain has for 26 years let its customers decide the bill in most of its outlets. But with volunteers as waiters and kitchen help, the hotel chain works on a not-for-profit model. Internationally, though, many food outlets, including Lentil As Anything in Australia and One World Café in the US have used pay-as-you-wish as a successful business model.
But traditionally, a business like Jain’s is limited by its inability to scale, says Devangshu Dutta of consulting firm Third Eyesight.
Adds Saloni Nangis of Technopak: “A few formats which are targeted at the premium niche audience would be fine, but extending this to a broad consumer base would be a challenge.”
Jain has been lucky until now. Hauz Khas Village, with its fashion studios and art galleries, attracts exactly the kind of crowd that Kunzum targets. More importantly, the café is surrounded by an affluent South Delhi neighbourhood.
The Kunzum community has 25,000 members across Facebook and Twitter, and includes subscribers to Jain’s online newsletter.
“It is a profitable business and am hoping to reach Rs 1 crore in revenue at the end of this year,” adds Jain. He is in the middle of developing travel-content applications that will be available on Kindle and iPad. That’s easy. The tricky part is scaling up. Jain is planning cafes in Gurgaon and Bangalore where rents are higher.
He says he has money stashed away to open more outlets but wants to perfect a business model that will survive on rental space. He is incubating a bigger play in travel services to be hosted from the café. “There are a lot of niche travel products that the mainstream travel companies don’t provide and we want to fill that gap,” says Jain.
He is also on the verge of franchising the Kunzum brand, with the first franchisee outlet expected to come up in Connaught Place, the popular shopping destination in the capital. That is perhaps the biggest asset that Jain has built by doling out coffee and cookies—the Kunzum brand.
(This article appeared in Forbes India Magazine of 27 April,
2012.)
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April 17, 2012
Meghna
Maiti , Financial Chronicle
Mumbai,
April 17, 2012
Futurebazaar.com,
the online retail venture of India’s largest organised retailer
— Future group is supplementing its business-to-consumer
(B2C) business with a business-to-business (B2B) initiative. This
marks a major departure from its initial B2C positioning.
The Kishore Biyani-controlled group aims to extend the concept of offering deals, leveraging centralised warehousing and inventory management and volume purchases to companies; in an effort to tap into the corporate gifting market. “We will offer companies a wide range of products and killer deals on orders such as 100 units of a LCD TV or jewellery from Navras (its jewellery retail venture) using our back end network. While we are putting in place the systems and infrastructure to offer companies online access to this specialised catalogue exclusively for them, we have already started selling gift vouchers which can be used across the Future group formats to companies,” said officials familiar with Biyani’s plans.
According to officials, Futurebazaar’s B2B vertical started by selling Rs 10 crore of vouchers per month and has now got a target of around Rs 40 crore per month to be achieved in a quarter’s time. Once the products are available, the turnover is expected to rise further, according to officials familiar with the plans.
“We will take wish lists from customers for products across categories and service them. The group has launched the site around a month-and-a-half ago. We are testing the water now,” said at least three senior company officials. When contacted via email, a Future Group spokesperson said the company was ‘unable to participate in the story’.
“The group is leveraging its strength in its stores for servicing a wider network. They will use the volume available across their physical formats too, to meet the demand,” said Devangshu Dutta, CEO, Third Eyesight, a specialist retail consultancy firm.
The initiative will offer a platform where its clients will be able to connect with it through the online B2B sales site and via a dedicated team of executives.
“This venture needs to have very attractive prices and low-cost delivery,” added Dutta.
Globally, specialised online B2B ecommerce sites have had a great success; it may be a while before retail giants such as Future Group make a success of it, said industry experts. “The group should stick to B2C since this format is their forte. B2B is a different ballgame altogether,” said Jagdeep Kapoor, CMD, Samsika Marketing Consultants.
The group set up Futurebazaar.com around five years ago and has recently been in the news for plans to sell a part stake in the venture. The site offers a whole assortment of merchandise including clothes, mobile phones, car accessories, home appliances, kitchen appliances, books, CDs, DVDs, gold, silver and diamond jewellery. It delivers products within three-four business days in over 1,500 cities in India, covering over 15,500 pin codes.
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April 15, 2012
Pia
Heikkila, The National
Mumbai,
April 15, 2012
An average apartment, basic amenities and interiors in need of modernisation, is for rent in Worli Seaface in Mumbai.
"The apartment is suitable for a family or company executives," reads the property agent’s blurb.
Monthly rent? A mere US$17,000 (Dh62,442).
It’s even worse for those Mumbaikars daring to dream of buying their very own home. According to various agents, anyone with a budget of less than half a million dollars for a small one/two-bedroom apartment will be priced out of south, central and west Mumbai all together.
That seems quite lot in a city that can’t even offer clean water for most of its residents, proper roads or parks suitable for children.
It seems every inch of this island city has a high price tag. Recently there were reports of 10 square metre slum shacks being sold for $40,000.
It’s a city with a property bubble about to burst.
"Although some level of correction did take place during the slowdown, market activity over the last year and a half and reports indicate that prices have once again escalated to their peaks, keeping most projects out of the customers’ reach," says Sachin Sandhir, the managing director of the Royal Institution of Chartered Surveyors (RICS) South Asia.
"There is now a high inventory of unsold flats in the city, the reason clearly being over-pricing. Since most larger developers have considerable holding capacity, they have remained unyielding on their asking rates and now seem to have overplayed their hand," says Om Ahuja, the chief executive of residential services at Jones Lang LaSalle India.
The situation is so bad it has created a standoff between developers and potential buyers, with each party waiting for the other to blink first.
"Developers are offering discounts on the bargaining table, but remain firm on their officially quoted rates since lowering them would signal to the market that the long-awaited correction has finally arrived. However, we are seeing some relenting from investors who are saddled with non-moving properties and are desperate to cash out," says Mr Ahuja.
Market watchers say investors seem to be prepared to take a short-term hit.
"Sentiment has been impacted due to inflationary pressures and rising interest rates, which are only now starting to come down marginally," says Mr Sandhir.
"Slower GDP growth rate projections; shortage to the tune of 85 per cent in property and construction professionals available today, as highlighted by a recent RICS research and high debt burden of property developers have also impacted investor confidence in the sector."
Elsewhere in the country, while prices are nowhere near Mumbai’s level even in the capital Delhi, potential home buyers are – it seems – staying at home.
"Overall, with interest rates rising and the cost of home loans becoming dearer, coupled with continued price escalations, oversupply has set into the residential market in areas such as Delhi and National Capital Region. While markets in the south look to be relatively stable," says Mr Sandhir.
So how did Mumbai become one of the world’s most expensive cities?
It has been bursting at the seams for years. The surface area of Mumbai and its suburbs is almost 500 sq kilometres, but only 90 sq km of it is usable, the rest consisting of forest, government-owned land, salt caverns or other unusable land, according to the property research firm Liases Foras.
It’s not a lot of usable space for a city of nearly 21 million people.
Mumbai is India’s densest populated city with 27,000 people per square kilometre, and the brokerage Anand Rathi Research says the city will need an additional 30 sq km of residential developments by 2021.
Every week thousands of people move to the city, in search of a better life. Mumbai is the country’s financial capital and therefore has the highest job generation, which is why demand – even for properties that would be perceived as irrationally priced in other cities – is more or less a given.
"In metro cities, there is a significant and ongoing growth of immigrant population as the metropolises remain economic magnets," says Devangshu Dutta, the chief executive of Third Eyesight, a consultancy in Mumbai.
"However, the supply scarcity is also partially artificial, some due to government policies on land-use and some due to the major markets being led by investor-held properties."
The Mumbai market has attracted a fair number of players and risk takers too.
"Developers are willing to pay the steep prices of plots or redevelopment rights in Mumbai because they expect correspondingly high profit margins. Because of the high profit margins, Mumbai also has traditionally had a disproportionate amount of speculative property investment," says Mr Ahuja.
"There are a number of individual investors who have a capacity to hold a property empty for long periods if they don’t get the benchmark rates for lease or sale. This is demonstrated by the thousands of apartments and commercial office spaces that are empty because the asking rates are far in excess of what seems affordable to an actual user," says Mr Dutta.
Then there is the problem with lack of land, an issue in most Indian cities but particularly felt in Mumbai, which is surrounded by the sea.
"In Mumbai, land for new projects is scarce and what is available is priced extremely high. This exerts constant upward pressure on the prices of residential units in most central and suburban locations," says Mr Ahuja.
The Indian government must act before it’s too late.
"Government should facilitate land supply, offer better enforcement and stricter monitoring mechanisms, establish targets and lay down action plans, build capacity of town planners and other skilled property professionals, streamline approval processes for housing projects, among others, all of which would help contain costs, thus relieving some pressure on developer margins for affordable housing," says Mr Sandhir.
The experts say buyers should be given help.
"Research must be undertaken to assess a prospective homeowners’ requirements, not only as a factor of size and cost, but also as factors of accessibility and connectivity to basic amenities," says Mr Sandhir.
"Thus ‘affordability’ which is a relative term with different connotations for different individuals, needs to be assessed at a much broader scale."
(This article appeared in The National on April 15, 2012.)
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April 6, 2012
Janees Reghelini , Retail Today
Mumbai, April 2012
Once again the Central Government doesn’t seem to have listened to retailers’ calls. Janees Reghelini analyses this year’s budget.
Modern retail might be growing fast, but it is now starting to
face considerably more obstacles than it did in its nascence.
It is also having a much wider impact on India’s economy.
“Traditionally, retail has been known to be one of the
largest employment generators in the world. For a country like
India this is the biggest advantage. Policy changes by the government,
for example, will open up strategic investment opportunities for
global retailers. This, along with spurring employment creation,
will have a significant positive impact on all stakeholders and
will provide a necessary fillip to the growth of the Indian economy
on the whole,” says Rajendra Kalkar, senior centre director,
High Street Phoenix.
Having great expectation from the Union Budget 2012-13, retailers voiced a number of demands they feel would help.
One of the most obvious demands was granting industry status, although it wasn’t addressed once again.
Contributing to over 10 per cent of the country’s GDP, Indian retail is India’s second largest employer after agriculture. With an increasing market demand, the sector is expected to grow at a pace of 25 to 30 per cent annually. Providing industry status would be the first basic step to reform the sector, politically.
Kalkar feels retail would benefit from having a ministry for
a number of reasons, not least because its role has changed profoundly
over the last few years. “Today, large-scale retailers are
no longer perceived as mere sellers of products. A modern, advanced
retailer must be able to innovate and enrich the value of its
offering throughout its network, integrating more goods and services
under an umbrella brand that increases distinctiveness and loyalty.
In order to do so, it is necessary to have an entrepreneurial
ability orientated
Retail still in the cold towards the evolution of demand, a socially-focused
company mission, and also a legislative landscape that allows
for this innovation process,” he says
“The present value of the Indian retail market is estimated by the India Retail Report to be around $500 billion. For consumption of this size, a ministry is entirely justified for us.”
CHALLENGES FACING INDIAN RETAIL INDUSTRY
• Tax structure in India favors small retail business
• Lack of adequate infrastructure facilities
• High cost of real estate
• Dissimilarity in consumer groups
• Restrictions in FDI
• Shortage of retail study options
• Shortage of trained manpower
• Low retail management skillretail in India.
The advantages of such a status include greater focus on retail development, fiscal incentives for the industry, an availability of organised financing and the establishment of integrated insurance norms. Currently, retail businesses are answerable to a number of authorities, from local municipalities to a hotchpotch of central ministries — Consumer Affairs, Commerce, Urban Development and Human Resource Development, to name a few. “Due to the nature of the sector, while the accountability to many authorities will remain, many of the larger retailers are lobbying to be taken under the wing of one ministry that can be a single source of cohesive policy and also champion the sector’s cause, similar to other significant business sectors, such as the Ministry of Commerce Industry, Mining, Textiles and Telecommunications,” says Devangshu Dutta, CEO of Third Eyesight.
“We must provide retailers with the necessary incentive to improve their overall standards and practices by recognising retail as an industry. This also means encouraging large companies with large investments, so they will be able to bring new methods of working into the market much more quickly.”
Dutta firmly believes that, if given due attention and supported by a planning and policy infrastructure, organised retail could become an unexpected source of widespread economic benefit.
Indian retailers were expecting much more by way of GST from the Union Budget 2012; they had hoped to see definite plans for the roll-out of a formal GST regime. But no significant announcements were made on the FDI and GST fronts, although it was announced that efforts were underway to arrive at a consensus on FDI in multi-brand retail.
Guruduth Prabhu of the Shopping Centres Association of India (SCAI) has been particularly vocal about the contents of the Budget: “It was insignificant from a shopping centre point of view. The industry’s much awaited FDI in multi-brand retail was not even considered as the government is yet to arrive at a consensus.”
So what will it take to convince the government to open up FDI in multi-brand retail? There is a dire need to find a catalyst to speed up this process. Can agencies like SCAI play a role to make this happen?
“As a body, SCAI has been attempting to meet with ministers and convince them of the advantages of retail, but it is a process that is so time consuming. As an association, we will be attempting to motivate relevant ministries and educating them about organised retail, and particularly retail real estate, as a future driver in terms of employment opportunities and the growth of economy,” Prabhu says.
Shopping centres are an important asset class for investors and developers who believe in returns over a long-term investment. Presently real estate itself is trying to motivate the government for recognition. “We are also approaching the government for separate status for the retail real estate industry as we believe that this sector will be one of the major drivers of economy. Secondly, the sector feels that shopping centres should be considered as part of urban infrastructure. Opening up of FDI will have a positive impact by opening up a number of avenues for both retail and real estate. We urgently need a catalyst, and any directives by the Government to assist with the inflow of international retailers and brands into India would be welcome,” Prabhu says
Agreeing with Prabhu, Dutta also believes that we must view retail as part of urban and social infrastructure, and it needs adequate planning, support and guidance for growth, rather than being treated as a “trading activity”, an afterthought in the urban planning of the last few decades. “It should also not be overly consolidated. A healthy mix is needed between the large and the small, between local, regional, national and international,” he insists, adding that opening up FDI will help bring more international brands into the country to fill the ample retail space that India has on offer and plug the gap made by a shortage of Indian-grown brands.
The budget might have fully exempted branded silver jewellery from excise duty but it has still imposed a four-per cent import duty on gold bars and ore, and 10 per cent on platinum and coloured gems.
“This has led to a setback in the jewellery industry and the jewellers association has planned a three-day nationwide bandh to protest against new excise, customs duty and consumer tax on gold imports,” says Subhash Verma, CEO of Aerens Gold Souk Group. “Also, the downside of this increase in custom duty is that it will lead to the trafficking of gold through illegal channels and will reduce demand among consumers, who will have to pay more.”
It is important to consider both the positive and the negative aspects of the impact of FDI, says Ian Douglas Watt, director of Pioneer Property Zone. “Regrettably, most of the discussion revolves around the perceived negative aspects, rather than the opportunities that exist for both local and foreign retailers by embracing it as a positive contribution toward India becoming a major player in the retail space internationally.”
Comparing retail to the Indian cricket team, Watt says that to be considered one of the best in the world, it is important to look at developing strengths overseas. The cricket team cannot only play under a protected umbrella locally where wickets are prepared to suit their strength and nullify the strength of the competing teams. They need to master all conditions, and that is also the case for retail.
“Given the size of the Indian population and their aspirations, it needs to be recognised that the Indian retailer has to plan to be a major player in world markets in the future. Right now, because the retail industry has not had the opportunities to become globally competitive, it is at a disadvantage as it really does not have a full understanding of the standards of the other players,” he says.
The sheer force of weight once this happens will mean that Indian companies will have the potential to become significant players internationally, even if this might not be immediately obvious as there is just so much to do to meet local needs. Every international retailer that enters the Indian market creates an employment opportunity for local Indians and the demand for their goods will only be as much as the Indian consumer sees as the need.
It is important to note that by preventing international players from having a presence in India will only compel them to establish a rather stronger online presence to meet Indian demands. This will eventually place them at an advantage as they will have established a presence and developed a customer base without even having entered the country.
“They scrape off the cream with very little cost whereas if they were to establish a physical presence, they would have to do so with local conditions influencing how they operate,” adds Watt.
Kalkar says: “Reforming the corporate tax system is an international innovation we should look at. Retailers pay the highest effective tax rate of any industry. Simplifying the tax code will ease the industry’s tax burden so retailers can grow.”
He continues to address the supply chain as another huge challenge. “The government must support efforts to streamline the transportation of goods from manufacturer to retailer to customer. The industry opposes regulatory proposals that lengthen the supply chain, raise transportation costs, or undermine the rapid delivery of affordable products.”
On the government’s part, harmonisation of taxes and tarriffs across the country is another area that needs immediate attention, says Dutta. “We might be one nation, but we are not yet one economically integrated zone. This leads to fragmentation of manufacturing and distribution, inefficiencies and additional supply chain costs that are entirely avoidable.”
By the next general election in 2014, retailers hope that the scenario would have improved significantly.
Payal Chopra, director of PS Srijan Group, spells out his perfect-world scenario for 2014: “The ministry will understand the importance of the retail industry and the advantages of a regulated sector in retail. Retailers and retail developers will have a healthy understanding and will work together in bringing an organised set-up to India. Small- and medium-sized players will receive assistance from a ministry so that their presence is not eliminated; and big chains will also receive incentives so investment can flow.”
Recently, Tier- II and III cities have become major drivers for
the progress of retail. “It is for sure that these cities
offer major potential for more retail giants by 2014, not least
with their low lease rentals compared to the metro cities; they
also require lower overhead costs and offer greater availability
of manpower at much lower cost,” states L.V.S Rajasekhar,
CEO of LEPL. “One can only hope that by the next general
elections, Indian retail will be a stronger entity by itself and
work towards ensuring that all their current demands are met by
then.”
