Indian Skies – Bottomless Pits!

As the Indian LCC Spicejet struggles to meet working capital requirements and is desperately seeking an equity infusion its chances for survival are looking rather bleak. It will be 2^nd major airline in the last 2 years to fold up if it eventually does down. The signs are ominous – Pilot resignations, Salary delays, Working Capital crunch – pending airport, ATF payments, desperate restructuring of routes, fleet depletion, aircraft cannibalization for parts and spares, mass cancellations of flights. We discuss here as to why the Indian skies are indeed a bottomless pit.

Indian Aviation Sector has always been filled with attrition. Small, Big, Regional, Private Charter airline – everyone has been at the crosshair of what is a difficult and competitive environment in a market with an inherently high cost structure for LCCs while still trying to be affordable.

There have been casualties galore with several start stop ventures. However in the recent past when demand surged India started bustling with new airlines. Several of them have either shut shop or have sold out or have been bankrolled by tax payer money (Air India) to carry on services. Kingfisher Airlines along with its LCC cousin Kingfisher RED (previously Air Deccan) folded up dramatically in the wake of high operational expenses and a bludgeoning debt. Others smaller names like Paramount Airlines, MDLR, Indus Air shut shop in the last few year as well. Larger airlines line Air Sahara and Air Deccan sold out to other airlines unable to continue commercially viable operations. The landscape is scarred by failed airlines from 1990s like Modiluft, East West Airlines, Damania Airways – all pointing towards challenges in the airline business all along.

What is compelling is that despite the inherent problems new airlines sold on the india growth, demand story continue to invest and fly despite seeing the plight of failed enterprises. Air Aisa, Tata-Singapore Airline JV are the latest to join the bandwagon.

The only profitable sizable airline in India is Indigo. Its been videly reported that Indigo’s profits are not always a result of the successful operational success but a result of its promoter Rakesh Gangwal’s intelligently crafted Airbus deals with major discounts on bulk orders.

So what makes airlines fail in India? Also what is the motivation for new airlines to start operations?

The motivation to operate in India stems from primarily 1 factor –

• The promise of demand from India’s low air travel penetration, increasing business activity and general increase in income levels. The caveat here being that this demand is often proportional to the pricing of airline tickets. The extend of inelasticity between the price of an air ticket and demand is well documented and researched in India. India’s airlines carried 67.5m passengers in the year 2012. It works out to about 5% of Indians taking one flight each in a year, so there is still huge untapped potential.

Now what makes the airlines fail in India’s Open Skies which turn into Bottomless Pits

• High %age of ATF cost to revenue – Fuel prices often quoted to be the biggest bane for Airlines in India. In India the airlines spend ~50% of revenue on fuel and maintenance. The global average is roughly a third.
• High Taxes on ATF, airports – its always easier to tax a few carriers than a clutch of small informal traders
• The Fare Structure – The last decade or so has shown that all airlines in their quest to garner market share offer ridiculously low fares. Hence market forces never allow airlines to hike fares as any increase saw a resultant dip in market growth.
• Catch #22 – Airlines in India have always struggled with growing demand and pricing power. This balance has never quite been struck. So while the consumer has been winning the airline industry has struggled and often perished.

As far as the airline industry goes – You get volumes in India.. but no profits!

Marketing in India – Sachet Packs!

India was always the promised land for FMCG with a sizeable population and pent up demand for products that were ‘value for money’. Poor distribution and high landing costs would however keep consumers away from committing to family packs, month packs etc. Another challenge was the large semi urban, rural  population were the disposable incomes where significantly lesser and average put down value for a purchase therefore were nominal. Marketing of FMCG Products in India was revolutionized by one major change in trajectory – Sachet Packs. The concept of sachet packs goes back a long time into British India and their distribution of tea – However only in the last 30 years has the concept been really successful. The however remains – Is it time to move out of sachet packs or stay invested in this business model.

Several studies suggest that sachet packs have help drive product penetration but have also resulted in lower consumption levels. Customers in India across a vast social spectrum have started looking that sachet packs more favourably compared to multi-serve large packs not because they can’t spend more – but because sachet packs are ‘available’.

Let’s get into how big the sachet pack business has become – Cavin Care Started the revolution with Chic Shampoos. It has since then moved into all spheres of our lives – CornFlakes @ Rs 10, Carbonated Colas at Rs 5, ‘Chota recharge packs’, Small Biscuit Packets, Tiny Milk Whitener Packets, Small Cosmetic Packs, Re 1 priced mobile VAS Services, Detergent at Rs 2, Hair Oil at 50p, DTH Add On packages, 200 ml milk pouches, ketchup  and what not. Every Brand has tried it. Cadbury sold products at 1 rupee to compete with sugar confectionery. Cosmetic Brands came out with Re 1,2,5 packs with 3ml, 4gm, 7.2ml packs to entice the bottom to the pyramid to try out its products.

The primary objective of having sachet is to induce trials and then upgrade the consumer to a bigger/larger pack. However unlike the global market where the upgradation happens, Indian consumers have been disinclined to do so.

The reason: The value offered by a sachet is higher and companies have for long not had the courage to reduce the sachet attractiveness once they achieve penetration.

The pricing of small packs doesn’t leave much by way of margins for the industry. According to industry estimates, smaller packs in most categories are expected to contribute over 75% of total sales in now compared to 30-40% at the turn of the century.

However, this growth is at the cost of margins. The profit margins on larger packs are higher by around 25-30% on an average, compared to a low unit pack. The higher the large-sachet substitution the more it hurts margins.

Several companies have tried to break this pattern with the following strategies

1. Focus Sachets in Rural and Semi Rural while larger packs are distributed in Cities [This did not work due to the diverse social groups in Indian cities – from slums to multi-storied]

 2. Launching Bigger Combo Packs – Limited success as these are mainly limited to ‘modern trade’ outlets which is little more than a drop in the FMCG world.

3. Launching Rs 5- Rs 10 Packs instead of Ultra Low price packs – This has worked to some extent, however the problem is just postponed. Rs 5-10 is not exactly what marketers had in mind but beyond this would be a stretch and could jeopardise market shares in case of dramatic changes in pricing.

2 things are happening now in FMCG pricing –

1. Pricing Correction – Value Correction: If a bigger pack offers the same value equation or even worse compared to a sachet and therefore there’s no reason why a consumer should upgrade. This paradigm is getting changed. Suddenly Maggi Packs started getting ligher – 100 gms went down to 75 gm over 3 iterations [Price Remained the same], Britannia Biscuit Packs started giving 1 less biscuit followed by another , Shampoo Packs started having 6 ml, 5ml instead of the earlier 10 ml, 8 ml pouches, coca cola became 200 ml @ Rs 8. Marketers have been over years been able to tweak pricing in a way that is now helping upgrades.

2. Mass Promotions of Large packs – Kelloggs struggled in India for a very long time. For a brand with small volume of sales the sheer number of SKUs at all kinds of price points confused the markets. However they kept 1 thing simple. the large packs come with a discounted pricing. How often do you see the large pack of shampoo with a free conditioner thrown in with it or a 500 gm pack of surf with a detergent bar free. 1 Kgs packs of health food, washing powder, 1 litre pack of edible oil to come with a jar, container, kids toys, buckets etc These promotions have over time been successful.

India as a country is poised to spend more on consumables – Its good news for FMCG companies. How they go about phasing out their lower end of product bouquet will determine who will gain faster. The consumer is ready to pay more. Can companies offer him value to extract that extra bit.

Mantras for The Mobile Internet Access Business In India

Telecom Companies in India are locked in competition for a Higher Share of the fast growing mobile internet market – leaving aside the nuances of technology – LTE, 3G, CDMA etc everyone is positioning themselves in the market as a serious internet access company and also trying to play a role the Device space as well as the online services space.

Being from this industry and having worked in the mobile internet space for some time I feel telecom companies need to focus on the following 8 action areas to come up trumps in the already cluttered and competitive market.

#1 – Capture/ Acquire disproportionate share of Smartphone/ High Value Users

#2 – Create an eco-sytem through partnerships – Today the most prominent use cases in India are Social Networking, Online Messaging Services, Music, Video Steaming and develop a pipeline of products aimed 2-3-4 quarters down the line

#3 – Develop a GTM strategy for Smart Devices – Gone are the days when internet access was through desktops, laptops – Mobile Handsets, Smartphones are the most common Access Points now – This is also rapidly changing and already tablets are a big segment and tomorrow Smart Watches would become a critical segment – Companies which are not able to reposition themselves constantly with technological advancements will fall behind.

#4 – Stimulate Use Cases that Drive Consumption – While India today claims to have in excess of 200 mn internet users – a large part of this is customers who are accidental mobile internet users – The operators need to get their act right on these ‘bottom of the pyramid’ customers who will unlock value in the coming time.

#5 – Develop High Quality Analytical abilities – Most operators are still understanding customer behaviour in a slow and traditional way. High end analytic would help in generating workable consumer insights which can help segmentation and targeting easier – Understanding of Usage behaviour is still at a primitive stage

#6 – Pricing of Internet bundles – For a long time in India Internet bundles have been sold basis MBs, GBs etc – Its become intuitive to the initiated user – For the new user/ rural user different pricing could help accelerate adoptions [p/min of browsing etc] – Also the pricing needs to be attractive from both a profitability of the operator and from the perspective of the end user. Since penetration level in India are still very low – This becomes a key point going ahead.

#7 – Rolling Out Least Cost Smart Networks for newer technologies is a key in Mobile Internet – Traditional Network planning method need an overhaul and more scientific traffic usage/ demand based network solutions need to be rolled out

#8 – Digital Service / m-adv strategy – This is a slightly more medium term strategy for operators who today are transmitting billions of websites to their users but have not yet tried shaping themselves as mobile advertising companies – Considering the detailed ananlytics and user behaviour patterns that they have access too this could become a  business of the future for them where they transform today’s dumb pipe of data that they carry into a smart pipe and a potential money spinning business.

Evolution of the Taxi Business in India and the Entry of Uber

The Taxi or luxury cabs Business in India is still evolving albeit at a rapid pace in the last 3-4 years. There were un-organised cabs followed by more organised companies like Meru Cabs etc who owned fleets of cars themselves and that dominated the space for a long period of time. In the luxury segment there were boutique companies and also hospitality chains that made their own niche. However the small time players and un-organised segment was still the largest and had the widest reach. In the midst of all this came the self drive cars segment – Hertz rolled into India – a large number of smaller companies started up in India including www.carzonrent.com and others.

In came companies like www.taxiforsure.com,  www.olacabs.com,  www.fasttrackcalltaxi.in, etc which were primarily aggregate for smaller players and sell inventory to end customers through a profit sharing model.

Most of the cab businesses were traditionally Call and Book a Cab model. In the early 2000s some of the bigger operators started to have online presence and started taking bookings online [a very small volume in the beginning]. While online was still evolving Mobile Internet started gaining pace in India. With cheaper internet tariffs/ better speeds and elasticity of internet usage on handhelds the companies felt compelled to move into Apps. However till Uber came to India the Apps were largely simple click, Fill in details and book a cab service – Almost like lead generation.

Uber which came to India in 2013 – Bangalore and the to Delhi – redefined the Cab business globally since 2012. Uber is currently valued in excess of 3.4 bn dollars based on their last round of funding in 2013.

Uber’s pricing is similar to metered taxis except for the fact that all payments and bookings are sold by Uber itself. Uber has a simple model where you just need to open the Uber App on your handheld – It takes you to a Google Map Custom Version which tell the user where are the nearest cabs and their estimated arrival time. Pricing is simply distance based and time based as in the case of any cab service except that Uber has started surge pricing in case of special days where to attract more drivers/ cabs they charge higher – to achieve economic equilibrium between demand and supply.

What sets Uber apart from all the other cab operators are the following unique features all rolled into one:

USPs

1. Application based Booking system which allows the user to book in real time and chose the car closest to them basis GPS tracking.
2. The service is extremely punctual and Uber provides luxury cabs which are comfortable
3. At the end of a ride the fare is automatically billed to your credit card – hence no hassle billing systems
4. The introductory pricing in India is extremely attractive for the type of service they provide.
5. In India they promote its services with promotional codes for first time user – Creating awareness and word of mouth.

Challenges for Uber

1. Achieving scale through this model is difficult in India where the cab services are not just limited to Metro Cities any more.
2. High Resolution touch screen phones are still scarce and contribute to only about 10% of all handsets in India [In Metros it might be 12%]
3. Credit Card Billing again restricts the service to limited people.
4. Availability of Uber Cabs is also a concern at this stage – Often cabs are not available [I’m assuming they will get over this challenge shortly as they scale up team sizes in India and enroll more cars under their service]
5. Understanding of Local markets and Local Small time players who are already tied up in contracts with other Taxi Aggregators – unplanned roads, traffic snarls and unavailability of precise address information

While in the Americas Uber is already facing competition from Real Time Carpooling/ Ridesharing solutions like Lyft [www.lyft.me] which again is through App Interface in India the market will take time to adopt this 

Ubers also hiring in India – Just in Case – https://www.uber.com/jobs

Uber is definitely changing the way a Cab rental service was looked at in India. In course of time services like Lyft, Sidecar will also open up in India and transform the taxi business. To keep up the existing Taxi Rental Companies need to plan to upgrade their accessibility/ processes and service with a year or two if they want to retain competitiveness.

India – Why Socialism breeds Corruption?

To analyse this statement I am going to look at India in the last 15 years. We will walk through the NDA, UPA and the AAP philosophies on the same. Overall India is governed by socialist views and leanings. A lot of policies are governed by the thought of subsidizing essentials for the weaker section of society. However as we will see – these policies even if well intended have systematically chewed through the fabric of society and has spawned corruption – lots of it.

The problem with subsidies is that we end up disrupting market forces and set prices which allow arbitrage opportunities. Subsidies unless limited to a very small and really needy section of society will almost always be exploited by the masses. Take for example the biggest schemes of the government [running and proposed]– NREGA, Food Security Bill, PDS of cheap food grains, Fuel Subsidy, Telecom Policy and Power/Water. All of these are prone to corrupt practices.

Over the years Fuel subsidy is one of the biggest subsidies that we have – What does it do? It makes diesel significantly less expensive compared to petrol, kerosene less expensive than diesel – what we have therefore is a huge adulteration racket across the country exploiting this arbitrage opportunity!

Come to the PDS and the schemes through which the government gives out food grains at Re 1/2/3 etc. This is so against market economics that obviously a half smart person can see through the fallacies of this scheme. The PDS system often siphons away the grains – the grains are then sold at market rates leading to windfalls for the ‘thekedars’. Assume a needy person gets the grains – he/she can sell them at market rate and get more. Effectively subsidizing food grains works against the very purpose it was introduced for.

Come to the telecom policy where licenses and spectrum were given away at throw away prices – Raja the Telecom minister’s reply was that at low prices the telecom penetration would go up. While no one is debating telecom penetration but the loss to the exchequer was significant.

Remember the Adarsh Housing scam – Why did that happen? It happened because prime property in Mumbai was available for significantly less that market price – This scam even took down a CM with it.

NREGA Schemes?

Coalgate – Coal Blocks were given away at virtually no cost at all without auctions and without transparency– Why? – There was economic value to be unlocked – The government defends its stand saying this was done for cheaper power – however what we have got instead is more corruption!

NREGA – The NDA government under BJP did not have NREGA – However jobs grew at a quick rate. People found jobs in the infrastructure projects, services sectors are kicked off by economic policies which were growth focused. UPA came with NREGA – Though a well meant project this killed private investments in rural India – Led to slow rate of growth of actual jobs – NREGA has killed the real job market in rural India and replaced it with doling out of money. NREGA schemes across the country are as rampantly corrupt as the PDS systems.

Kejriwal and AAP also dangerously has a left of center view on issues related to subsidies. Cheaper Power and Free Water that AAP talks about in the election manifestos – In the other states where farmers get cheaper power it often results in massive power thefts. Cheaper Power and Free Water promises of AAP is only likely to make the ‘thekedars’ in Delhi smirk.

Doles and Subsidies do work but in very controlled scenarios. As and when we change market economic forces in a disruptive way – the arbitrage opportunity becomes so strong and appealing – that people succumb and corruption starts!

Watch Out policy makers!

Evolution of shopping in India and the Future!

               

India has traditionally been the country of weekly haats and melas. Our forefathers have known them to be the shopping malls and for large part of history that is where India shopped. The British before India’s independence set up some modern cities – Calcutta, Delhi, Bombay, Madras – Each of these cities had their own large modern market areas – Hogg’s markets [Kolkata], Connaught Place [Delhi], Fort and Colaba [Mumbai], Broadway [Chennai] and so on.

Then post independence these markets kept thriving and smaller markets started growing. Still largely out of Tier 2 and Tier 3 cities Modern Retailing was taking shape in its un-organised and humble beginning.

In fact sometime between the 1990s the One Roof Shopping Arcades with multiple outlets and had become the preferred destinations and the stand alone/ old format stores slowly died out. These Malls or shopping centers as they were often called were changing the dynamics quickly.

The came the decade of Modern Trade Large Format Retail – The Shoppers Stops, Lifestyles, Pantaloon Retail, Reliance Trends, Max in Clothes, Reliance Fresh, Spencers, Big Bazaar,  ABG More, Nilgiris – more small city wise outlets came up as well. There was a stamp of modern retail in almost everything we bought including mobile phones [The Mobile Store], Medicine [Apollo, Frank Ross], Sports Goods [Decathalon]. The mantra for Malls was to empower the customer with choice and provide a shopping experience which was unparalleled and spectacularly different.

Along the way there were hiccups – Expensive Store Rentals, Shortage of Qualified Staff, Inventory cost eventually started taking its toll on the businesses – A few smaller players like Vishal Retail, Subhiksha etc were casualties. Slowly Internet started spreading in India – from desktops to laptops and eventually into everyone’s palms as a smartphone – As more people started getting online they started to buy online – The trends was started by the not so successful Deals Websites in India. This was followed by a plethora of online retailers that spruced up across the country.

The Big Obstacle that came up was that most Indians were without Credit Cards, Online Banking was still taking shape, most people had never done or heard of electronic money transfer. To combat this challenge Indian Online Retailers came up with COD [Cash on Delivery]. COD helped not just in getting the transaction done but also in the winning the trust of the customer.

Online Retailer had cracked the code. Unlimited options for customers, Low Cost, No Rentals, Lower Prices, Offers and Discounts and lots more. The flipkarts, infibeams, snapdeals etc started up. Slowly but surely almost any business worth noticing has online presence. Fashion/ Clothes was supposed to be difficult to sell online – people liked to try and buy – but myntra.com, jabong.com, yebhi.com and many more seem to have cracked the code on this one too. The only real things they needed to invest in were 1. Tie Ups and 2. Strong logistics – In effect online Companies are brick and mortar companies with warehouses instead of showrooms but with a logistics at the heart of its business model.

From electronics to books, clothes to shoes, gifts to stationery, Holidays to car rentals, food to eyewear  – everything under the sun could be purchased online. What this meant was that the Tier 2 and Tier 3 cities and Towns of India went online to get their stuff. The Swanky malls hadn’t reached there yet. The space was growing so quickly that it attracted funding from all kinds of Venture Capitalists, Angel Investors and Private Equity and what not.

Online Shopping today is India’s answer to low cost retailing. The scape is getting cluttered with new ventures every week. The brick and mortar businesses obviously have the advantage of customer connect and experience and are growing stronger through reinvention but online shopping is here to stay, thrive and grow faster than the brick and mortar shops.

What the future hold is a heady mix of customer choices and shopping options – eventually the fittest will survive.

In India times are changing all the time… You need to move with the tide of get left behind…

The Indian Entrepreneur – of Salaried Jobs, Marriage and Buying a Flat!

 

India is the hub of humanity. The world’s 2nd largest population in a vast and geographically diverse country  . India has the world’s larget population below the age of 18 in the world – ahead of China. After about 67 years from independence India has been at the threshold of becoming a Global Super Power for quite some time. With the young population hungry to do make a statement in the world and with increased confidence India would be expected to deliver a large number of successful entrepreneurs who would be hogging the limelight globally.

India has a large number of entrepreneurs. However the entrepreneurial ability of most Indians is confined to traditional businesses or family business or in the most common form – being traders. In a country which has seen an exposition of engineering talent in the last 30 years. More and more talented people are coming of of the schooling system in India but they get into Jobs instead of Entrepreneurship. I am also an engineer – while i still want to be an entrepreneur – crack a big idea – create a start up – get venture capital funding etc has just remained a dream.

I was thinking the reason for the same? It struck me that though Indians are probably talented enough to start up and become entrepreneurs we are mostly 1st, 2nd generation into this kind of life. While we are successful we are also defensive and are mostly consumed by the thought of ‘earning more than i spend’. We are not brought up as risk embracing individuals.

First you have to complete the customary college degrees [Steve Jobs / Mark Zuckerberg would get get enough respect in Indian Society if they were to say they are college drop outs!]. In India you need to finish school – write exams – complete with millions of people – to get into elite colleges – get a education that only few in India and dream about. once you are out of college Indian Culture’s 1st Truth of Life – Find a Job and work there and earn money. In case you do get into a PSU [Public Sector Undertaking] or any other respectable organisation that your parents and uncle/ aunts are familiar with then you are expected to do that job for life. Too bad you wanted to become an entrepreneur – In India a secure job is more important – Why? – The reason to this are many fold including the 2nd truth of life in India which I’ll come to in a bit. In summary once you finish studying you are expected to take up a job. Earn money. Repay the loans if any. Contribute to the family etc etc.

By the time you feel you are settled and can probably look to get into something you really want to do – like starting up – the Indian family/ culture hits you with the 2nd Truth of Life – marriage. Since you are educated, doing a decent job, get salary every month hence its time to marry of the boy/ girl. There is nothing wrong with the concept of marriage except for the fact that it is a overtly done affair after which you are expected to shoulder more responsibilities – become serious in life – basically come out of the cavalier lifestyle that you otherwise would have liked to pursue. With the added responsibility early on in life the distractions get eliminated and again the average Indian is in the race of daily life – only this time with a wife in tow and soon some kids – forever jeopardising his/ her desiring to take a risk and starting up.

As you fight with your desires and your responsibilities – life gives you another opportunity a little after you are married – the last opportunity for you to actually go out there and chase your dreams. With the money you have saved you can try and start up. Instead the 3rd Truth of Life in India is about to hit you – Buying a House. Every Indian married man or woman is expected to have a house – mostly a flat these days – where they pour their life’s savings and take up expensive loans from willing banks and sit on EMIs for the rest of their lives. The savings that go into the house take with them your dreams of doing something of your own and the EMI of the banks doesn’t allow you to think down that road again.

I still want to start up one day – Don’t know how I will beat the system and the Truths of life – Till such time … Dream On!

The End of an Era in Chess!

The game of chess was born in India as Chatrang-  taken by the arabs as Shatranj to Mesopotamia and then it went across the world! The game of 64 checkered boxes and 32 pieces never had a more popular Indian player than Vishwanathan Anand. Vishy as he is more popularly known as is the archetypical champion. The first real chess prodigy from India in the modern era – world champion in a hyper competitive era – he is held in immense esteem. However as we watch him lose the World Championships in Chennai to Magnus Carlsen this year one though comes to mind. Will Indian Chess again go onto the back burner again. Is it the end of an era in Indian Chess- There are no noteworthy chess champions from India apart from Vishy and for some reason Chess did not pick up in India like it did in America after Bobby Fischer rose to World Champion.

If we look back at the greatest names in world chess over a century we find a domination across eras by Russians. Through in the odd exceptions like Bobby Fischer, Jose Capablanca, Laskar Chess in Russia has been driven by supremacy and popularity generated by champions like  Garry Kasparov, Mikhail Botvinnik, Anatoly Karpov , Vladimir Kramnik, Alexander Alekhine and others. Its an institution that has been built over a century with strong foundations.

So what went wrong with Chess in India despite Anand’s reign in the upper echelons of World Chess. We as a country are just not focused enough on sports. We love cricket. The geeky boys who are perhaps not cut out for outdoor sports are clued on to academics. The ecosystem did not develop enough to produce another chess mastermind. There are chess clubs in all major cities however the progression of a player is not a clear path. Sponsorships? – Thanks to Anand sponsors have not been a challenge so far for Indian Chess players. However with the second line not being able to replicate the success of Anand the sponsorships for chess might dry up.

To be fair Anand has done his bit. He rekindled a tradition of Chess in India. I remember playing chess as a kid. My idol was Anand. However what we needed was a second champion. Anand has done his bit and now as we stand at the threshold of a new era in world chess someone else needs to pick up the baton in India.

Thank you Vishy. You are the best! 5 time world champion and a true legend of world chess. You have rekindled interest for chess in India which will hopefully produce the next Vishy. Hope you keep going and perhaps reclaim your title again.

Till such time though welcome to the Carlsen Era!