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April 27, 2006
By Devangshu Dutta (Column from The Financial Express – 27 April 2006)
In my previous column (“Deal Ya No Deal”, 9 March, 2006), I raised a point about unrealistic volume expectations on the part of many marketers launching new products and brands in India.
In some part these are due to the marketer believing his or her own hype. However, a more insidious influence on the expectations are the unrealistic assumptions – a big factor being the incorrect assumption about the size of the market.
Back in the early days of economic liberalisation, during 1993-94, I remember figures being thrown about that talked about the 200-300 million middle class. Multinational and Indian consulting firms, in the slick presentations on behalf of Indian clients pitching partnerships to foreign companies, fed the legend. (Hey, let’s face it, for a while I, too, was part of that game!)
Well, for the last two to three years, those times have been upon us again. The difference is that, instead of hiring consultants, Indian companies have smartened their act, hired a few (or a few dozen) young MBA’s, who are making the exact same pitch to potential international partners again.
As a fall-out in my own small little corner of the world, I have been severely troubled by several international clients and associates whose first question is: “Just how big is India as a market?” and I must say that not many of them like the answers I have given them.
Foreign companies’ first attraction to India is the billion-plus population. Brands from countries which have domestic markets of 50-300 million salivate at the prospect of 1.2 billion Indians starving for their particular make of biscuit or coffee or the latest backless cropped blouse. The thinking goes, “If we can capture even 2% of the market to start with…
Let’s stop dreaming and tell the truth for a change. And I promise you, the truth is still very palatable – you just need to shift your perspective a bit.
The simple fact is that, if we were to evaluate incomes, spending and consumption the way they are evaluated in the developed markets, even allowing for purchasing power parity, the Indian “Middle Class” is possibly less than 20 million individuals.
“What?! But that’s less than 2 per cent of the Indian population,” has been the anguished reaction of many international marketers that I have spoken to in the past year or so. Followed by, “Where are you pulling out these figures from?”
The answer to the first question is: “that’s correct”. And the answer to the second question is: the sample survey carried out by the National Council for Applied Economic Research (NCAER) over the past few years focussed on household income.
Let’s consider the figures that NCAER has been coming up with. In its figures for 2001, NCAER estimated that approximately 2.5 million households earned above Rs. 500,000. The reason I see the Rs. 500,000 figure as important is because, in absolute terms in the Indian, context it is a good benchmark – about Rs. 40,000 per month – by which to categorise the middle class. Also, in relative terms, adjusting for PPP (say a factor of 3.5), this is an annual income of about US$ 40,000.
After allowing for mandatory household and other expenses, these (or higher) income levels do leave a good margin for discretionary spending. This population has much greater access to the stimuli and information that international marketers rely on to build a brand presence across borders. Other sources of brand and product influence include overseas travel (or relatives travelling in from overseas).
NCAER has dubbed the class earning between Rs. 500,000 and Rs. 1,000,000 as “the Strivers”, and that I believe is the most apt definition of the middle-classes across the world.
Currently, the estimate for this population would be over 3 million households, or about 18-19 million individuals. That then, my friends, is the size of the middle class, to be targeted by international companies and premium Indian brands.
Ouch! that was the sound of thousands of dreams shattering and hundreds of business plans going into waste-bins!
Come, come, let’s pick the pieces up and look at them afresh.
Firstly, a population of 19 million is no small market by itself. Many of the international brands’ home markets are about the same size – Australia’s population is a little over 20 million. Italy’s total population is estimated at about 58 million and UK’s slightly above 60 million, and so on. The problem is that when you start with a reference point of 1-billion, a figure in the vicinity of 20 million looks very uninteresting. So, the first solution is to shift one’s initial perspective on the Indian market.
Secondly, a significant part of this target population in India is concentrated in a few large cities in the country. This makes it easier to target this consumer group, rather than dispersing the budget and management effort across a very large number of locations. The reality is that most national brands can achieve a bulk of their sales from the top 8-12 cities in the country, and there is no reason why the story should be any different for international brands looking to create a new presence in the market.
Third, and very important, I would challenge you to show me another similar population anywhere else in the world (other than China), which is growing at the rate of 11-12% a year i.e. doubling every 6-7 years. This is certainly not because the upper income classes are producing babies at a more prolific rate – it is the rise in real incomes and the wider distribution of wealth through greater business opportunities for businesspeople and increases in salaries for the employed.
So, as an international brand, or as a premium Indian brand, by the end of this decade you’re looking at a potential market of 30-40 million consumers.
Now, that number is a respectable market anywhere in the world. What’s more, on the back of the growing market, if you launch your products now, you’re looking at very healthy business growth rates over the next few years.
“But where is the mythical 200-300 million middle class?” was the third painful question raised by our clients and associates, “Do they really exist and how do we reach them?”
But that, my friends, is the next
column.
The author is chief executive of Third Eyesight. ( www.thirdeyesight.in )
admin
March 9, 2006
By Devangshu Dutta (Column from The Financial Express – 9 March 2006)
We love sales! Big Bazaar just proved it on Republic Day this year, when it couldn’t handle the crowds on its “Sabse Sasta Din” (Cheapest Day). And the designers ousted from the recently demolished shopping malls are privately thanking their stars for the sale-struck consumers who have flocked to the hotel in south Delhi, for the “(insert a designer’s name) at never-before-prices and never again”.
The psychology behind the discount sale is that we think we’ve got a great deal, having paid less than what the product is worth. There is a hint of the illicit, a feeling of having “got away” with something faintly irregular.
Let’s not even begin to dissect how many discounts are actually just padded-up prices being “slashed”, or how much “promotional merchandise” is bought cheap by the store especially for the sale. Such faux-discounts are not peculiar to India, nor are they a problem for retailers or brands providing, as they do, an event around which to build excitement and customer traffic.
The bigger issue is the nightmare the Indian market is proving to be for brands in terms of genuine discounts. Many brands end up achieving as much as 40-70% of the total annual sales turnover in one or two discount sales—clearly not a recipe for long-term business success. The problem is not restricted to a few brands. We seem to be caught in a vicious cycle of low sales in season and mad traffic during end-of-season discount events.
To me there are two main aspects to this problem—unrealistic expectations of volume and the “full-ticket price” that the products carry.
Unrealistic marketing projections may actually be the lesser of the two evils. Each brand manager believes that “customers will definitely choose my brand over other brands in the market”. Some just end up believing their own hype too much, over-rating the demand or under-rating the competition.
Some managers end up being driven by that international image more than the saleability of the brand. The end result is a marketing plan that is based on the premise that if you make enough product, create enough retail points in the market and spend enough money on advertising, the brand will deliver up to the hype.
Yes, a rising tide lifts all boats and a growing market lifts all brands. The problem arises when your boat, or brand, is leaky and results in lot of left-over product being thrown overboard at the end of the season, at discounts of 25-70%.
The bigger question is what’s the right price? Arrogant brand managers may think that there is a customer (read: sucker) at every price point and the trick is to find enough suckers…oops!…customers. Unfortunately for them, customers are fairly sharp—and reject overpriced merchandise if they can get comparable value elsewhere at lower prices.
Let me take one comparison with a market that is economically at a stage similar to India. In Bangkok, you can buy a pair of reasonably well-made polyester-viscose trousers for the equivalent of Rs 225-275 from a Thai hypermarket. Retail prices at a normal high street store in Delhi or Mumbai for a comparable product may range from Rs 400-600 or even higher. Differences of similar magnitude are visible in personal electronics and electrical items, as well as a range of other products.
If the Indian retail price points were in line with, say, the Thai retail price points, surely a lot more merchandise would move off the shelf.
Clearly, cost of goods has a large part to play in this difference. Manufacturing costs can be much higher in India due to lack of process-driven efficiencies. Also, most Indian manufacturing capacity targeted at the domestic market is sub-scale and even qualitatively sub-par.
Retail costs — including high real estate costs and store overheads — add to the problem. Most retail locations in India are priced at levels where the only store that could make money consistently would be a luxury store where low price is the last thing on the customer’s mind! Higher unit costs lead to higher prices and lower volumes, while low market off-take pre-vents larger scale and better manufacturing — a vicious cycle.
One way out is to take a holistic approach to the product and the supply chain. The strategy needed is “Aim low, engineer low”. Once the threshold target price at which large volumes will be sold is known, one can engineer the entire organisation, supply chain and retail location to make sure that the price point can be delivered.
As Prof C K Prahlad proposes, there is a fortune to be made at the bottom of the pyramid. At the right price, the Indian consumer is always ready to confirm, “Deal!”
The author is chief executive of Third Eyesight. (
www.thirdeyesight.in
)
admin
March 6, 2006
MUMBAI, March 6, 2006: The presence of Tier-II cities on the growth map of leading retailers has been on the rise in recent months. While sales are growing by 50-60%, albeit on a lower base, leading retailers say that volumes have been significant enough to encourage them to pan out quickly to other similar markets.
Currently, while the top metros growing at 35-40% are the biggest contributors to total sales, retailers say the format in the smaller cities is more profitable, owing to lower investments in land and manpower. In fact, the entry of several retailers in smaller cities has sent real estate prices zooming. Retailers say consumers in smaller cities are making more aspirational purchases in clothes, jewellery, accessories and footwear, among other things.
“The growth rates in the smaller markets show great promise. But it cannot be this or that. Urban markets continue to be crucial and there’s no question of saturation at all. In terms of sustainability, it is clear that consumers keep coming back, even after the initial novelty wears off. The entry of several retailers, including Indian corporates, means that real capital is coming into the business” said a top official in Big Bazaar.
Harminder P Sahni, chief operating officer of KSA Technopak, said that retailers are trying to tap growth in the smaller markets when the bigger cities are not really saturated. “It’s not unusual for consumers in the smaller markets to get aspirational or seek choices. Most retailers are trying to pan out faster in the smaller markets, worried that they may miss some great opportunities. While the smaller markets will offer the scale, retailers need to consolidate their presence in one area before moving out into the next,” he said.
When a big retailer opens outlets in a smaller city, that city is immediately on the map for other retailers, said Devangshu Dutta, chief executive of Third Eyesight. “These markets are growing faster than the industry on a whole, but this will stabilise over the next seven to ten years,” he said.
“Clothing is seeing a 5-10% growth in Tier-II cities, but the base is very small. There is an increase in employment and the number of working women is also going up. As a result, leading retailers are looking at these markets more seriously,” he added.
The driving growth factors are discontinuity in terms of lifestyle, coupled with a growing young population. Personal care, which is growing at 10-15%, is another segment which is gaining popularity in the smaller cities. As a result, grooming has also been seeing steady growth since the past five years.
“Retailers will have to cut prices for there to be an upsurge
in the market. There is a lot of buying during end-of-season
sales, so consumers do have a price point which they follow,
which retailers will have to address,” said Dutta.
admin
January 31, 2006
Written By Dr. H K Sehgal
In their frantic efforts to reduce cost to attract and retain customers, retailers / buyers have now innovated a new way to source – through reverse auction. Under this system, buyers / retailers issue specifications and invite, online, lowest bids for the garments from across the world.
Online discussed this new phenomenon with Devangshu Dutta,
a textile and apparel industry professional and international
consultant, on the future of this alternative to sourcing as is
being done today. This, he felt, could only be possible for mass
product categories rather than small, niche products that we specialize
in. We also spoke to Lalit Gulati of Modelama and Richa Exports
who has actually participated in reverse auctions, but failed
to click, as suppliers from Bangladesh and Indonesia could quote
much less that what he could possibly afford.
Dr. H. K. SEHGAL
In the sheer fight for survival, retailers are attempting to attempting to give more respect to “value for money”, which the consumer is seeking more vigorously than ever before. They are cutting corners to provide products to the consumer at the lowest rates to pass on the benefit to their consumer. One of their latest tools is “Reverse Auction”, which places the onus for competitive bidding on their suppliers with the support of new electronic methods.
Now imagine a fictional scenario. The room is dimly lit. All eyes stare transfixed at the projection of a computer screen. Every number must be legible to those gathered around the conference table this early morning.
Suddenly the image projected on the wall comes to life. The reverse auction pilot test has begun. Dollar figures flash as vendors from around the globe bid for the apparel order at hand. The atmosphere in the conference room has changed from one of apprehension to excitement as it becomes evident that the price that will be paid for today’s order will become quite competitive indeed.
Someone whispers encouragement for a long-time vendor as the group watches the contractor place his online bid in real-time. This spurs another buyer at the table to rally behind one of her favourite supplier, “Come on, you can do it! Just a little lower.” And all the while the dollar amounts on the screen become smaller and smaller and smaller still.
Will the increasing use of business-to-business (B2B) exchanges and reverse autions to procure apparel and soft goods change the way the retailers and the vendors conduct business with each other?First let us understand how the system works.
What are B2B Exchanges?
B2B exchanges are online marketplaces that enable trading partners to conduct real-time business communications with each other, whether they are issuing requests for quotes (RFQs), bidding for orders, sharing product forecasts or collaborating on product development. Exchanges usually are classified as public or private. Examples of public exchanges include Global NetXchange and the WorldWide Retail Exchange (WWRE).
Examples of private exchanges include Wal-Mart’s Retail Link and other portals that individual retailers, brands and trading companies have established for B2B communications with their own networks of customers and suppliers. (Article continued below)…
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What are Reverse Auctions and How Do They Work? Reverse auctions involve bidding for orders – such as for a new type of product that a retailer needs produced to its specifications. The orders could be for everything from basic towels to private label jeans and dresses. Typically, before an online auction takes place via an exchange, the retail buyer issues product specifications and order requirements via the exchange to a select pool of approved vendors who are invited to participate in the auction. Request for product samples are usually issued at this time so that the buyer will have samples on hand to examine / approve prior to the auction. At the designated auction start time, the vendors log into the auction via the Internet, and begin submitting their prices to win the business. Bids are automatically processed in real-time, and the exchange automatically guides the vendors through the auction process. In some cases, vendors can see the prices being offered by competing vendors, although the identity of the other vendors is not revealed to them. The auction typically closes after a pre-determined period of time, which may be hours or days, and the retailer then determines which vendor will win the business based on the price and other variables at the retailer’s discretion, such as each vendor’s quality record, shipping history, etc. There can be many variations of the reverse auction business model, depending on differing retail procedures and exchange tools, but this is the gist of the process. Pertaining to apparel and soft goods procurement, the major public exchanges are being used by some of the world’s largest retailers but not many mid-tier or smaller retailers. For instance, among GNX’s members are retail heavyweights like Sears, Roebuck and Co., Federated Department Stores, Pinault-Printemps-Redoute (PPR), Carrefour, Linens’n’Things and Bed, Bath and Beyond. WWRE members include such major players as JCPenney, Kmart, Target, Target, Gap, ShopKo. |
BREAKING MYTHS A study by M. L. Emiliani of Lally School of Management, Hartford, USA and D. J. Stec of the Centre for Lean Business Management, Kensington, USA has listed some pointers relating to the concept of reverse auction. The key highlights, though not specific to the garment industry, are:
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WINNING STRATEGY – Deepak Mohindra The assured success or the winning strategy for bidding in reverse auctions can only happen when all the members of the supply chain get together and jointly bid or the bidder should be a vertically integrated unit. Since the fabric constitutes some 65% of the total garment cost, the mills should be willing to reduce the cost of fabric by one cent for every two cents reduced from the manufacturing cost of the exporter / bidder. The costing of a product should be transparent
and open to all members of the supply chain with a total
professional approach and an attitude to win. This alone
will see the bidder get any foothold. To save on extra
fabric width-wise or length-wise, the mills should not
hesitate for any re-adjustment of the looms or re-working
the pattern by the supplier. The bidders should also
be encouraged to increase productivity through better
incentives. All factors, including flexibility, which
is India’s strength, should be built into the process
to get any foothold in the bidding process. |
What Worries Vendors? The advantage of reverse auctions is that all parameters are accessible in one place prior to bidding for an order, and the auction provides valuable insight into whether a price is “realistic”. One the flip side, it “hurts partnerships because price is not everything”. Although vendors must pass through the same retail approval processes and are competing for business based on the same set of specifications, they may not be getting credit for producing a better product. This, however, does not reveal the full story. Apparel Online asked Devangshu Dutta if “reverse auction has a future as an alternative to the sourcing option”. He says, “Reverse auctions have been most successful in standard and commodity supply areas, where a like-for-like comparison can be made. “Fashion goods mostly do not fit the description of ‘commodity’. Other than design, or look and feel, small qualitative changes or even labelling and packaging changes can create cost differentials, which can upset the standard reverse auction method.” He adds, “A retailer with almost US$ 3 billion of fashion buying per year, is reported to have sourced only around US$ 20 million over a two-year period through reverse auctions in an e-market in which it has a direct financial / equity investment. |
Say, if 75% of that US$ 20 million was this year, that is still only 0.5% of the total sourcing. Note that, as an equity-holder, this retailer has a vested interest in making this e-marketplace survive.” There may also be other motivations.
Devangshu says that, despite the fact that it is traditionally believed that there are increasingly more suppliers in the world than buyers, the reverse auction platform had most buyers registered than suppliers. So despite the technology, he asks, is the buyer really getting the best choice – are the best suppliers even participating in the reverse auction?
Second, despite all the contractual flim-flam, there were deals that did not go through, even if the buyer got his target price met by one or more of the suppliers.
Thirdly, the activity, and all that buzz, seems to be bunched around the very end – maybe even the last couple of minutes of the reverse auction. The result could be that the reverse auction gets extended – but how many times will it get extended and until when? Is that time really bringing the savings needed, he questions, or could those savings/ better margin have come from other areas? Reducing costs from specialised, non-commodity or engineered products needs discussion and collaboration between the buyer and the supplier, not an impersonal reverse auction, Devangshu feels.
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The Indian Concern There is, however, one grace. India’s strength is not so much in “mass production” as in niche products in smaller quantities. Apparently, reverse auctions will not be possible in such cases. To that extent, the suppliers would be relatively safe from the onslaught of international competitive bidding. It is only the big players making basic garments, who might have to face the music, but then they, because of their inherent strengths, can possibly compete. Again, this concept will take its own time to catch up. On balance, it is felt that the technology-enabled reverse auctions are here to stay, but their importance is often blown out of proportion – perhaps there is a lot more hope or a lot more fear than there should be, Devangshu concludes. One could not agree more. Source: ApparelOnline, January 16-31, 2003 |
EXPERIENCE – Lalit Gulati Lalit Gulati of Modelama is one of the very few Indian exporters, who have actually participated in this process. Talking of his experience, Lalit said that the choice of vendors is entirely a prerogative of the buyers, who know which particular product can be made by which suppliers (manufacturer-exporters). “The buyers give us the style and specifications,
and we make the sample. They also quote their price
for the product, say $5 a piece. Now, once the competitive
bids start, every two minutes there will be price reduction
by different bidders. Suddenly there is a price quotation
of $3.60. Now, we cannot bring our price down to that
level. Though we have tried to offer our bids, we have
never been able to get any business. Generally it is
only for basic products, where such a reverse auction
system is possible, which again is bagged by other countries
like Bangladesh or Indonesia. Reverse auction is not
possible for value-added and fashion products, which
are our niche. “In yet another case, both Modelama and Richa jointly
participated in the reverse auction process but failed
to get business even when we were reducing the rates
– when quoted at $7.20, we offered t reduce to $5.60,
but someone made an offer at $4. At this price level,
there were no margins left at all and though we wanted
the business to come to India, we could not go down
to that level.” |
Source: ApparelOnline
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January 1, 2006
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