Kashmir : Business or Politics

Many keen observers of the J&K situation say that the current state of affairs has thrown the valley back by atleast a decade or so of development. It is also felt that the simple economics provided the means for the separatist movement to gain momentum again.

Its been said that the Fruit growers saw an immediate real threat to their livelihood by the economic blockade at Jammu. In the 10 days before the army was called out to clear the blockade, people in Kashmir had already lost crores of Ruppees. It was to avoid this further loss, that they opted to sell their produce in the markets across LOC- in the POK.

What the BJP led protestors failed to understand was that the economic pressure that they had put, could play in the hands of those promoting Pro-Pakistan movement in the valley- and thats exactly what has happened.

It was history repeating itself in the valley- with slight change in roles. When Raja Hari Singh was confronted by the newly formed Pakistan to join them (as against India), the then Paki government had imposed an economic bloackade of the region. India came forward to not only remove that bloackade but also as the saviour of the interests of the people. And the rest is history!

What we need to do now is to ensure that the economic interests of the people in the valley are not compromised by parties their vested interests. If we fail now to convince the people of Kashmir, that India truly feels for their economic independence- Kashmir might move strongly rapidly towards its Azadi !

Card Spends and inflation

Was remembering my days in the bank when part of my job was to increase Credit card spends by manipulating credit lines for individual customers or clusters. My friend in the same team had a similar goal, but he could manipulate only the offers that were made available to our carded customers.

While the role was really exciting and highly numbers driven, we were not really benchmarking ourselves to some base year/month prices. Consider this: a customer who uses his credit card for all his petrol purchases would have seen 10% increase in fuel spends only because of fuel price hike. This would have resulted in around 5% increase in his total card spends. Add to this the inflation on other consumable items and the average growth in spends would have been around 7-8%.

Credit Card Spends
Source:Capitalminds.in

Now most of the metrics shared amp; reported in monthly decks are not indexed to a base month price at the start of the financial year- so how does the bank really know whether the non-inflation impacted spends have picked up or not?

The reverse should be true in a deflating economy- even if actual spends are falling, maybe there has been a genuine growth in spends indexed to base prices.

Which brings us to the next Q- how do we map spends across categories according to monthly inflation on those individual categories. Its easy to do for fuel- due to the high decibel debates surrounding it- but what about groceries, travel,health etc etc.

Is there a freely available source of monthly change in prices of commodities across categories and how can we easily integrate it into corporate MIS surrounding spends etc?

Taking a slightly different view on this- it also means that if we target categories with higher expected price rise, we might end up getting a higher share of wallet faster- which means that all card issuers who have been offering 0% fuel surcharge- will get to benefit more than the ones that charge 2.5% . I use my HSBC credit card for buying petrol and my Citibank Credit card for all other spends- suddenly the % spend on my HSBC card has increased- without any effort from HSBC’s side. Am sure the next will be grocery and air travel- no wonder I got a mail from HDFC amp; clear trip offering me 50% off on my next purchase.

The game for spend based offers has just become more interesting !

Fuel costs leading to Closed economies ?

Read a very interesting article yday- wherein the author built a case for changes he predicted in manufacturing services due to the increased crude prices. According to him the labour arbitrage opportunities that many companies/countries could exploit previously, would no longer be as profitable. Reason being that historically the increased shipping costs due to shifting of manufacturing facilities to far-off locations was a smaller percentage and the fruits of low labour cost were enjoyed. Now with increased transportation costs- the overall distance that the raw materials (to the facility) or finished goods (to the markets) travel will need to be contained.

The author predicted that this would lead to near-shoring and the likes of Mexico might again become destinations of choice.While I was kind of convinced (though am not sure at what price range will these tough decisions need to take place) with the logic, I was more tempted to take this line of reasoning a little further and see where it goes.

Assuming the crude price keeps soaring and we are unable to find viable substitutes…. this could lead to a scenario where probably one of the top optimization criteria would be to minimise transportation.Areas/regions that have both the raw materials and the market, will become the first choice for locating the production facility. But we all know these are very few… so what would happen to others:

– Create efficiencies in smaller scales also- Companies would be forced to set-up multiple manufacturing facilities- closer to either the multiple sources of raw materials or multiple demand/consumption zones…e.g. Coke already bottles its drink out of multiple bottling plants spread across the country.

– Investing in route optimization- I know from my friends who work in route/transportation optimization, that almost 70% of the players have not even looked at the possible benefits of deploying a routing optimizer.

– Precipitate process innovation- With labour cost arbitrage vanishing , the holders of the brand would be forced to innovate in their processes- to find a viable solution in their high labour cost economies.

– In an ideal scenario where all labour cost arbitrage has been exploited and where the transportation costs are simulatenously rising- the only option is to consume what you produce/process. What I mean to say is that in this scenario- a Chinese car shipped to US would cost the same as a US car, made in China and shipped to US. Now with shipping costs increasing, there would be a point beyond which a US car made in US will be cheaper than both the options above and this in my mind is the onset of closed economies.

Maybe I am wrong here, but I seriously thing that what could happen is that some regions will become closed economic regions. Imagine if India/China and a few SE Asian economies come together to create a closed economic zone/region:

We would have the raw materials (iron ore, coal,grains, meat etc), we would have labour to work on it (China), we would have the process improvements we would need (India, Japan, Korea etc) and most importantly we would have the market for these goods and services.

Reinventing the Wheels

There was a time when the best car models in India came with Maggi- Hot Wheels- thats what they were called and I remember myself trying to raise a great collection of Ferrari’s, and Lamborghini’s …. those were the days when there was just an Ambassador or Fiat to choose from- or if you were the trendy types- maybe the Standard was also an option. But thats it.

Reinventing the wheel

Then came the era of Maruti 800- probably the single most sold model in India (or maybe the world)…

Today the Indian auto market is abuzz with launches of new models and introduction of many foreign brands, one after the another. So what has changed apart from the higher personal disposable income which leads to increased demand at all levels… the passenger car segment has been growing at around 8% – absolutely in sync with the economy’s growth rate.

Apart from the rising demand, what has made this sector grow fast is the supply side innovation. The rate at which most of the auto-players have been introducing new variants and models has been unprecedented- and i suspect the reasons can be found more at the shop floor than the board rooms. What I mean is that its not that the Indian customer has suddenly become more demanding and looking for variety…its just that the manufacturers have realised that its easy (meaning doesnt cost too much) to launch a new variant by changing just 20-30% of the design.

I remember from my Engg days that a major fixed cost in car manufacturing is the cost of the die (the cast used to make the sheet metal body)…. it is this cost which gets spread over many more units- whenever a new variant is launched (which has similar doors, hoods etc)… Look at Dzire (the new car from the Maruti stable) …my nephew tells me its a Swift with a boot and he cant be further away from the truth… The same is true for Indigo and Indica.

Apart from the design changes, each model also comes in

– multiple engine capacity options – since most manufacturers just assemble the engine at the plant, creating multiple options is not adding to the cost

– variations in interiors – again since these are sourced from local vendors, its a question of negotiating hard to get more varities at the same per unit cost

– Multitude of colors to choose from- Gone are the days when Henry Ford had said- I can give you any color so long as it is black !- coz the bottleneck in the assembly line is no longer the paint shop (& black in Ford’s days was the fastest drying color)

All this supply side flexibility has ensured that we have products & variants at multiple price points, a never before seen phenomenon in the Indian industry. This has resulted in:

– A not-so-clear path towards upgradation. Gone are the days when one bought a Maruti 800 and gradually migrated to a Cielo. These days a high end Santro can cost you as much as an entry level Esteem .

– There is no default choice for the first car. With Tata’s Nano being pitched at Rs 1 Lac, the concept of entry-level cars will undergo a radical change. But even before that the Indian consumer is spoilt for choice

– This is my hypothesis but I feel that this has resulted in faster re-selling of cars (at least the high-end ones). I have seen numerous examples where someone bought a Honda City only to realise that Skoda launched Octavia, and this guy rushed to sell his City & bought the Octavia. Which in turn means a faster growing amp; moving second hand car market (again – I am tempted to assume, the skew is towards high-end cars)

– Higher marketing spends- with Hyundai roping in Shahrukh & Preity, Toyota getting in Amir Khan, the auto marketing business has gone to the Big Daddies- and these agencies and their campaigns dont come cheap- so am sure the customer is paying the price for some celebrity endorsing their car- given that I dont think Santro drivers are really that smart 🙂 (pun intended !)

– Move towards aggregated servicing – I read somewhere that the ex MD of Maruti- Mr Khattar has moved on to start his own label of service centers that would primarily cater to non-mass-market models. I think its a very smart business proposition, given that there are many more models now, with smaller # of owners in each location. If all of these manufacturers were to open their own service chains- it would lead to a huge post-sales cost and not doing that would lead to even bigger consumer dissonance. So am sure Mr Khattar would get enough strategic investors from Honda, Skoda, Toyota and the likes.

All in all, its good to see so much action in autoland, but all this frenzy would lead to many early deaths- I am reminded of Elantra (from Hyundai) which I remember v clearly sold exactly 3 units in the country in a quarter- before they decided to pull back the model. I will watch out for the cut-off for other players to take the same decision…… till then keep Vroommmmminggggg !

The Changing Business of Cricket

Cricket has always been the only rich game in the country- with rights being sold for an unimaginable amount- BCCI has always been flushed with funds. But with the new 20-20 format (in its multiple avtars) coming in- the business of cricket will surely see a lot of changes.

So lemme try amp; put on Nostradamus’ hat amp; predict what all could happen in what was once the gentleman’s game….

– The ones who must be partying really hard are the bookies  the ones who play satta through Cricket. For them IPL & ICL is like dream come thru-like they suddenly have 48 hrs in a day to “work hard” & make money :-). Where there were only some 40-50 days of business in a year.. looks like now they can punt- the year round.

– Lot of proven overseas talent will retire early and come to play in the Indian leagues. Gilly’s recent century in 42 balls shows that he is still one-of-the best batsmen even in this young format of game. And am sure the fact that he would earn twice or thrice as much playing 20-20 will be noticed by many others. So what I see happening is this- the overseas players who manage to be consistent amp; would have made a name in the ICC tournaments would retire slightly early and pack bags for India- play 2-3 seasons and buy the perfect retirement home.

– The span county cricketwill lose further sheen as there is not enough money to attract talent. And with little marquee talent, they would make still lesser money and the cycle will go on.

– Indians will be overexposed to cricket. Am not a great follower of the game but I feel that even for the most passionate fan- tracking all the league teams- ICL amp; IPL- &  their individual players etc etc will become a pain. This could lead to potential drop in viewership which could mean a drop in advertising rates OR it could lead to monopolisation of the 20-20 format (which both of em are hoping for)

– Ranji will be in doldrums- with so much action the self-proclaimed guardians of this game will align themselves to focus on recruiting talent for the smaller over game at the domestic level. Even the players who would otherwise have been happy to be in a Ranji Trophy match- will now be keen to play for their city team. A Kolkatta player would want to share a moment with ShahRukh as the Knight Rider rather than some non-glam manager for the WB teambr

– Glam quotient (GQ) of cricket will see a lift. Am from Delhi- but my favourite team is the Bangalore Royal Challengers- simple logic- if BRC wins amp; plays till the finals- will get to see more of Katrina 🙂

Same with the cheerleaders- the current dress code being imposed has taken the GQ down by a few serious notches… but am sure this should be back to its opening levels by the next season :-)Coz the media companies do realize that there is a market that is made or lost coz of this also …

The long tail of grocery retailing …

Grocery retailing is considered by most as the toughest nut to crack in any new market. More so in India where Reliance’s Fresh initiative ran into some serious trouble in the Hindi speaking belt.

But apart from the political resistance I guess grocery retailing is here to stay- atleast in the metros amp; sub-metros. With the Food World and Big bazaars of the world setting their shops in most localities – it has gradually changed the way people buy grocery.

Now most of the families go to a Big Bazaar to get their monthly supplies and seek only the “top-ups” from the kirana guys. So to that extent its not the neighbourhood kirana store that got hit- it was the bigger departmental store run by the lala. It was this departmental store which was earlier the place to replenish your monthly stocks- he had the best offers from FMCG co’s, was known for the highest quality of masalas amp; cleanest dals. And now, his ever so loyal customers now do their shopping at the malls on Sunday- while having a day out with the family.

For a typical family of four- the one time grocery purchases can run upto Rs. 4000-5000/- per month. The top-up on the other hand is stuff that never made it to the monthly list or where the inventory assesment went wrong or consists of products procured on short notices (like the ingredient for special food cooked during fasts/festivals)… which run into a healthy Rs. 600-750 /- per month.

Its these top-ups that are currently sustaining the kirana shops ,apart from the households that havent migrated to the “buying-groceries-at-the-mall” concept.

As I look at it, most retailers, will sooner-or-later need to identify a strategy to hit this long-tail effectively… Indian consumers will need something closer for their ad-hoc needs, someone who can do home delivery w/o a minimum billing commitment etc. Currently its just the kirana shop, but if the same convinience comes with assurance of quality amp; advantage of price that a branded player provides- its a no-brainer as to which way the consumers would go.

So how do the retailers attack this long tail of demand effectively:

– They can look at non-offline channels. A home delivery model where the order is placed online or on the phone. This would require investments in smaller warehouses- which can then be used as centers for home delivery of monthly purchases also.

– Partner with Kirana stores to gain maximum reach. If a customer can get the same price & assurance of quality at a kirana- they would prefer the kirana that has partnered with Big Bazaar as against the one which hasnt. This approach has some obvious challenges- how to keep the kirana owners margins intact, how to ensure that there is no last-mile adulteration or price mis-management etc etc. But if somehow the retailer is able to crack this model- he would have taken his brand to the doorstep of the consumers.

– Choosing the store location more innovatively. Most of the top-up items can also wait a day or two. Also given that more households are now moving towards a dual income nuclear family structure- it might make sense to have your store next to prominent office complexes. So that the working couples can pick up their weekly or daily top-ups on their way back home.

In summary- the Indian Grocery retailing will see a lot of localized innovation. It might not happen immediately- but as soon as the big names migrate a large chunk of customers away from the kirana stores- they would start asking themselves- “What next?” and thats when they would start looking at the long tail of grocery retailing !

Rural mobile telephony: Show me the money !

Remember the famous lines from “Jerry Maguire”-” Show me the money”

With the next battles for telecom shifting to the countryside- I guess most of the telco honcho’s are rattling along the same lines…Coz exciting as it may seem, rural cellular telephony doesnt seem “profitable” enough in all its entirety- or maybe I am missing something.

Now, from what I understand of this business- the two major costs are infrastructure (read that as towers etc)  bandwidth- both of which are semi-fixed costs. I say semi-fixed coz- these can be acquired only in batches- you cannot buy tower or bandwidth capacity for one incremental user. Even if the government subsidises the bandwidth in thr rural circles, the tower cost is not expected to come down.

Basic economic principles say that one should aim for demand maximisation in such conditions to ensure maximum utilisation of the installed capacity- assuming the Variable Revenue is more than the Variable Cost. Now given the population density in most of rural India, I can safely assume that there will never be (atleast in the next 5-7 years) enough # of concurrent calls to utilise the tower amp; bandwidth 100%. This is coz most villages do not have enough households (or househlds that can afford a cellphone connection).

Most rural users would not also relate to the “value-added-services” which currently account for a healthy 40% of revenues (in urban circles) and have been the key reason for rising ARPU in a market with reducing call-rates. The uneducated cell user will not really use the SMS/MMS functionality- which is 60% of the VAS revenues. They would infact need voice-activated services where content is also delivered as voice, unless the cell co’s decide to make the rural youth addicted to porn on the handset 🙂

Rural telephony

Add to this the govt’s keen involvement in tarriffs in this sector and one can safely assume that the cell co’s cannot experiment with higher tariffs in the rural circles. So how would these cellular operators make money in the rural circles?

There have been talks about shared infrastructure but even then the shared entity would not break even on its tower cost.I read somewhere that the govt. had experimented with giving a cell connection to the local postman in the villages- to be used by the village residents – something like a truly mobile STD booth. There were clear commissions demarcated for the telco amp; the postman- BUT the service never took off too well. So why are most telco biggies so excited about the rural circle. Well, to be honest- am not sure, but had I been a decision maker at Vodafone, I would have looked at it thus:- Most co’s want to get access to bandwidth at low rates- under the disguise of rural telephony. I would want to hoard on to this bandwidth for future or for roll-out in non-rural areas (see below) – The roll-out would be viable only in the villages of Punjab, Haryana,UP (W) etc ; not really the poorer states of the country.

– The villages that will see the roll-out (in other states) will be the ones close to some decent sized town amp; not the really interior villages. This is coz- in these villages one can expect substantial migratory population with enough disposable income. It could also lead to shared infrastructure between the town amp; the village at a much lower average cost (given that the bandwidth was acquired at the rural circle rate).

– The next lot of villages would be the ones closer to a busy highway or railway line- coz then I could provide roaming connectivity to my existing users and also look at some local customers in the circle.

So there’s some logic in getting to the village first amp; having that critical bandwidth( the only supply-constrained resource in this industry) and wait for the demand to pick up. But what beats me is why is the govt so keen on getting connectivity to the villages?I have been to many a villages during my road-trips and I can confidently say that this will only lead to an additional expense item for the rural households- something which is best avoided. What our villages need are low-cost, efficient and maybe shared resources of more basic kinds- irrigation, sanitation, healthcare,education,microfinance.

Delhi-Gurgaon Toll Plaza: Is adding more Marshals the solution ?

There has been much hue cry about the mis-management of the newly openend Toll Plaza at the Delhi-Gurgaon Expressway. There have been reports of consistent traffic jams during peak hours where commuters have alleged that they were stranded for almost 2 hrs only at the plaza.

Source: http://adatewithdelhi.wordpress.com
Source: http://adatewithdelhi.wordpress.com

While I symapthise with all those who have to undergo such drastic methods of increasing their patience levels – the management of the plaza has some serious genuine problem at their hands. Consider this:

– Most of the “regular” commuters have still not shown any early indication of shifting towards the monthly token, which would ensure a smooth pass from the plaza.

– The other option the plaza mgmt has is to manually charge issue receipt for each vehicle passing the plaza. Assuming it takes 20 seconds per vehicle- the bottleneck is pretty obvious.

– The peak demand for toll-marshals exists for only about 2 hrs each in morning evening and this is where the tricky nature of the problem is

– One can invest in multiple marshals per lane (as has been done currently)- which leads to parallel processing hence increase in the “capacity” of the plaza. But what do these “extra” hands do during the off-peak hours?

– The increased labour could be used to actively promote or even hard-sell the monthly tokens (during the off-peak hours) but I doubt the efficiency of such a step.

So is there an innovative solution to such problems where one needs extra “labour” to service intermittent peaks in demand? How does one ensure a good return on such investments? Should there be some “incentives” to drive more rapid migration to the token process. Plz do keep in mind that most of the tolled projects in India have had a history of not breaking even. Though my guess is that the Delhi-Ggn plaza will be an exception.

Fairs at Pragati Maidan-Lets Learn to Serve Information !

Pragati MaidanWas at the Auto Expo yday it was truly amazing how Pragati Maidan has changed over the last 5-6 years. There are a lot of signages ,food-stalls, kiosks now it surely is a better experience. But what hasnt changed is the lack of information for the visitors once inside the PM. We managed to find a few maps giving instructions/directions for various halls- but there were no legends to tell us which hall was housing what brands (e.g. I really wanted to see Dilip Chabbaria’s offerings- but failed to do so).

Opportunity: So I guess anyone wanting to reach out to visitors at any PM fair can do the following:

– take one of these maps that give clear hall #s directions

– Visit the fair the 1st day map the hall #s to the brands etc

– Print this map with your own brand/logo/communication hand out free to all visitors

– If someone had done this- i would have known that Nano was in hall 11, Vintage cars in 12c etc etc i would have carried the branded flyer for full3-4 hrs…enough time for the “brand” its communication to sink in.

Atleast for Auto Expo- i am sure this will get you not just brand visibility but a lot of blessings….coz I could hear so many visitors complaining that they are lost ! I am waiting for the next trade fair that happens here- you would see maps saying- “Which hall has what stall” sponsored by our company..