Vivek Kaul
DLF is India’s largest listed real estate company. During the hey days of the company a few years back, such was the craze for the DLF stock that Kushal Pal Singh, its owner, was listed among the ten richest people in the world. Those days are now gone.
The company has recently been accused by Arvind Kejriwal and Prashant Bhushan of giving interest free loans amounting to Rs 65 crore to Robert Vadra. Vadra is the married to Priyanka Vadra, daughter of Sonia Gandhi.
Kejriwal and Bhushan have released documents which clearly show that companies set up by Vadra borrowed money from DLF and then used that money to buy properties from DLF among other things. (You can access the press release here). The market value of these properties has increased considerably since Vadra bought them.
According to a tweet on the Twitter handle of news channel NDTV, DLF has said that their dealings with Vadra have been completely transparent. Vadra on his part had explained his relationship with DLF to the Economic Times in March 2011. “I have a good understanding with DLF. Our children are friends, we are friends. They are seasoned businessmen. They are not daft. They are educated, sensible people and are reasonable and shrewd in their business. They don’t need me to enhance them. They’ve existed for years,” Vadra had said. (You can read the complete story here).
On the face of it this might look like a completely normal business transaction between two different businessmen. But the latest annual report and the analyst presentation made DLF throw up some interesting questions nevertheless.
As per an analyst presentation (dated August 6, 2012) made by DLF, the gross debt of the company stands at a whopping Rs 25,060 crore as on June 30, 2012. At the end of March 31, 2012, the gross debt had stood at Rs 25,066 crore. (You can access it here).
The annual report of DLF points out “the company’s borrowings from banks and others have a effective weighted average rate of 12.38% p.a. calculated using the interest rates effective as on March 31, 2012 for the respective borrowings.”
So what this means is that the company had debt outstanding of Rs 25,066 crore as on March 31, 2012, and was paying an interest of 12.38% on that debt. The debt outstanding as on June 30, 2012, had not changed much and was at Rs 25,060 crore. It is fair to assume that over a period of three months the interest rate on the debt outstanding wouldn’t have changed significantly.
What is also interesting is that during 2011-2012(i.e. the period between April 1, 2011 and March 31, 2012) the sales of the company stood at Rs 4582.67 crore. This means that the debt of the company is nearly 5.5 times its annual sales, which is extremely high.
The question that DLF needs to answer is that why is a company which has such huge debt outstanding and is paying an interest of 12.38% per year on it, giving out interest free loans? Also it seems to have been having trouble in bringing down its outstanding debt. The outstanding debt between March and June 2012, has gone down by only Rs 6 crore.
The company has been trying to bring down the debt by selling investments that it had made over the last few years. It recently sold a plot that it owned in Lower Parel in Central Mumbai to Lodha Developers for Rs 2,750 crore. The company has been trying to sell several of its other investments over the last few years.
The high debt level has been a huge concern for the analysts who track the company. As Sandipan Palan analyst with Motilal Oswal wrote in a recent report “DLF’s high debt has been a key concern for investors; however, we believe leverage(which means debt in simple English) of Rs 16,000-17,000 crore would be a sustainable level for the company.”
So here is a company which analysts believe should be cutting down on its debt by around Rs 9,000 crore, and it has been giving out interest free loans to an individual with zero or very little experience in running a real estate business. DLF needs to tell us in some detail the “business” reasoning behind this decision.
Another interesting point that comes out while going through the annual report of the company is that it has 65 non current investments. The annual report of DLF points out that “Investments are classified as non-current or current based on management’s intention at the time of purchase. Investments that are readily realisable and intended to be held for not more than a year are classified as current investments. All other investments are classified as non-current investments.”
Of the 65 non current investments only two are joint ventures. One of these joint ventures is with Skylight Hospitality Private Limited, a company owned by Vadra and his mother Maureen. Skylight owns a 50% stake in Saket Courtyard Hospitality Private Limited, which runs the Hilton Garden Inn Hotel in Saket, New Delhi. This is the only operational hotel of the company.
When it comes to making non-current investments joint ventures are not a favoured form of investing with DLF, given that only two out of its 65 non current investment are joint ventures.
The venture with Skylight is very small by DLF standards. In the annual report of the company the book value of the joint venture is put at just Rs 5.6 crore. Also why would a company as big as DLF is enter into a joint venture for a four star hotel with an individual who has absolutely no or very little prior experience in running a hotel? This is something that needs to be answered. A recent report in the Daily News and Analysis seems to suggest that the hotel run by this joint venture is on the block. (You can read the story here).
The entire Congress party has come to the rescue of Robert Vadra and tried to project the deals between Vadra and DLF as normal business transactions. One senior leader even went to the extent of saying “doesn’t Vadra have a right to occupation?” Yes, Vadra has the right to an occupation and so does DLF. But there are too many unanswered questions here that need to be answered.
The article was originally published on www.firstpost.com on October 6, 2012. http://www.firstpost.com/business/dlf-borrows-money-at-12-38-lends-free-to-vadra-481727.html#.UG_tdwlmmIs.twitter
(Vivek Kaul is a writer. He can be reached at [email protected])
Business
Why Chiddu wants insurance agents to mis-sell
Vivek Kaul
There’s nothing more thrilling than nailing an insurance company – Deck Shifflet (played by Danny DeVito) in The Rainmaker
Around three years back I suddenly got a call from my bank. “I am your relationship manager Sir,” the female voice at the other end said. “Since when did journalists start to have relationship managers,” was the first thought that came to my mind. It turned out she wanted to help me plan my finances.
Fair enough. But why did the bank have a sudden interest to plan my finances? I had been banking with them for close to four years and they hadn’t shown any such interest earlier. I checked my bank account and realised that there was a fair amount of cash lying around in my savings bank account. A friend had just repaid some money back and a fixed maturity plan which I had invested in had matured.
So the reason behind the bank’s sudden interest in planning my finances became clear to me. I asked my new relationship manager to come and meet me immediately. I was curious to see what financial plan she had in mind.
What she did not know was that my area of specialisation as a journalist was personal finance. The relationship manage soon turned up and within ten minutes she offered me the solution to all my financial problems in life, which as expected, turned out to be a unit linked insurance plan (Ulip).
The bank she worked for also has an insurance company and this particular Ulip was from that insurance company. I just checked the brochure she had brought along and was not surprised to find that the premium allocation charge for this Ulip for the first year was a whopping 60%. What this meant was that if I were to pay a premium of Rs 1 lakh, only Rs 40,000 would be actually invested. The remaining Rs 60,000 would be deducted as an expense.
A major part of the Rs 60,000 deducted as expense would be given to the insurance agent (in my case the bank) as commission. And it would help my relationship manager meet her rather stiff targets.
I pointed this out to my relationship manager and she realised that the game was over. I wouldn’t fall for her sales pitch. Then we got talking about other things and realised that we grew up in the same town. Before leaving she apologised for trying to sell me such a plan. She also told me that in the pressure to meet her target last year she had sold the same policy to her brother.
He had taken a policy with a premium of Rs 1 lakh of which Rs 40,000 had been invested. The stock markets had taken a beating since then and the value of the investment had fallen to Rs 32,000. “He doesn’t talk to me properly anymore,” she said, as she left with a tinge of regret in her voice.
Those were the heady days of mis-selling in insurance when even sisters sold Ulips to brothers so that they could earn a high commission and meet their targets. Since then commissions have been reduced and as a result the mis-selling has come down.
But if the finance minister P Chidambaram has his way with things,mis-selling is all set to return in the days to come. But before I get to that let me just share some numbers that the Insurance Regulatory and Development Authority, the insurance regulator, has released in its September 2012 journal.
For the period April 1 to June 30, 2012, the insurance companies in India collected Rs 12015.5 crore as first year’s premium by selling around 67.9 lakh new policies. Given this the average premium per policy works out to around Rs 17,690 (Rs 12015.5 crore divided by 67.9 lakh).
The total sum assured (or what is in general terms referred to as a life cover i.e. essentially the money the nominee will get if the policyholder dies) on these policies was Rs 1,50.902.8 crore. So the average life cover per policy works out to around Rs 2.22 lakh (Rs 1,50,902.8crore divided by 67.9lakh).
Hence, for the first quarter of 2012, the average premium on a life insurance policy was Rs 17,690 and it had an average life cover of Rs 2.22 lakh. If a 35 year old were to just buy a pure life cover of Rs 2.22 lakh, the premium works out to around Rs 500-700 per year on a 25 year policy. Assuming that a pure life cover of Rs 2.22 lakh can be bought for a premium of Rs 700 per year that would mean a premium of Rs 17,000 is left over.
And this is the amount that is invested by insurance companies after deducting the commission paid. In the year 2010-2011(i.e. between April 1, 2010 and March 31, 2011), the average commission paid on the first year premium was 8.89%. This is the latest data that is available.
Assuming this to be rate of commission, the commission on a premium of Rs 17,690 works out to Rs 1573 (8.89% of Rs 17,690). Deducting this from Rs 17,000, around Rs 15,417 is left over. This is the amount that is invested depending upon the mandate chosen by the policyholder which could vary from 100% stocks to 100% debt.
So what this basically tells us is that Indian insurance companies do not sell life insurance, they sell high commission paying mutual funds. As my calculations show less than 4% (Rs 700 expressed as a % of Rs 17,690) of the total premium goes towards actual insurance. Around 9% is paid as commission and the remaining amount is invested depending on the mandate given by the policy holder.
The finance minister P Chidambaram now wants to encourage the sales of these high cost mutual funds masquerading as insurance policies. He is in the process of offering a series of sops to insurance companies so that they can sell more. Among the proposed sops are greater tax deductions on insurance premiums, banks being allowed to sell insurance policies of more than one insurance company etc.
This is being done so that insurance companies are able to sell more policies and in the process more money from the domestic investors is channelised into the stock market. Since the beginning of the year domestic institutional investors have sold stocks worth around Rs 38,475 crore. The government wants to turn this tide in order to ensure that the stock market continues to go up.
This is very important if the government hopes to divest its stake in a lot of public sector companies. The disinvestment target for the year is Rs 30,000 crore. But a lot more shares will have to be sold if the government wants to control the burgeoning fiscal deficit. (you can read a detailed argument on this here).
So the higher the stock market goes the more the number of shares that the government will be able to sell. And for that happen more and money from domestic investors needs to come into the stock market. And that will only happen if the insurance companies are able to sell more policies.
As anybody who does not make money selling insurance policies or is honest enough, will tell you that mutual funds remain a better investment option. So the question that crops up here is why does Chidambaram want to encourage only insurance companies to sell more and not mutual funds?
Mutual funds are much more transparent. There performance when it comes to generating returns is much better than insurance companies. They don’t pay 9% commissions to their agents. And it is very easy to figure out which are the best mutual funds going around in the market. I haven’t seen anybody who makes a living out of selling insurance talk about returns generated by insurance policies till date.
There are a couple of reasons for Chidambaram encouraging insurance companies and not mutual funds. One is that commission offered by mutual funds is very low compared to the commission offered by insurance companies. Hence, agents of all kinds prefer to sell insurance rather than mutual funds. Chidambaram needs a lot of money to enter the stock market and he needs it to come quickly. That being the case, it’s easier for insurance companies to do this than mutual funds.
The second and more important reason is the fact that Life Insurance Corporation(LIC) of India which is India’s biggest insurance company, is government run. Between April and July of this financial year LIC collected 76.5% of the total first year’s premium. So three fourths of insurance in India is basically LIC.
The money collected by LIC can be directed by the government into specific stocks. If the stock market does not how enough interest in shares of a company being divested by the government, LIC can be instructed to pick up those shares.
If Chidambaram had encouraged mutual funds instead of insurance companies he wouldn’t have had this flexibility. So once these measures to help insurance companies are pushed through, insurance companies and agents will be back to doing what they do best i.e. mis-sell. Don’t be surprised if in the days to come you run into insurance agents promising you the moon, from your investment doubling in three years to you having to pay premiums only for five years.
And in this case this renewed attempt at mis-selling will be a result of the Finance Minister P Chidambaram encouraging insurance at the cost of mutual funds. The more insurance agents mis-sell, the greater will be the money invested in the stock market which will lead to the stock markets rallying and thus help the government sell more shares than it had originally planned.
The article originally appeared on www.firstpost.com on October 5, 2012. http://www.firstpost.com/economy/why-chiddu-wants-insurance-agents-to-mis-sell-480473.html
(Vivek Kaul is a writer. He can be reached at [email protected])
iPad or running water? Today’s tech is no patch on the past
Vivek Kaul
So here is a thought experiment. You have to choose between two options. The first option allows you to keep all the electronic technology invented up to 2002 which includes your laptop with a Windows 98 operating system loaded on it and an internet connection that allows you to log onto the internet to access websites. You are also allowed running water and access to indoor toilets as a part of this option, but you can’t use anything invented since 2002.
The second option allows you to keep everything invented in the last 10 years which means you can have access to Gmail, Facebook and Twitter through your iPad or iPhone or even a Samsung Galaxy or Blackberry for that matter. But you do not have access to running water and an indoor toilet. This means that every time you need water you will have to haul it up from your neighbourhood well. And going to toilet on a rainy night would mean going through a muddy pathway to the outhouse or a field near where you live.
Which option would you choose? This is a real no brainer. Everyone in their right minds would choose the first option and willingly give up on all the technology that has been developed in the last 10 years.
This thought experiment has been developed by Robert J Gordon, an American economist. And what is the point that he is trying to make? “I have posed this imaginary choice to several audiences in speeches, and the usual reaction is a guffaw, a chuckle, because the preference for Option A is so obvious. The audience realizes that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent,” writes Gordon in a recent research paper titled Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. (You can access the research paper here).
The broader point that Gordon is trying to make is that today’s so called “information revolution” looks rather puny and small, when you compare it to the game changing technologies that were invented over the last few centuries. And it is the invention and the subsequent exploitation of these technologies that have driven economic growth over the last few centuries.
As Martin Wolf writes in the Financial Times “The future is unknowable. But the past is revealing. The core of Prof Gordon’s argument is that growth is driven by the discovery and subsequent exploitation of specific technologies and – above all – by “general purpose technologies”, which transform life in ways both deep and broad.”
Gordon divides the invention and discovery of these technologies into three eras. As he writes “The first centered in 1750-1830 from the inventions of the steam engine and cotton gin through the early railroads and steamships, but much of the impact of railroads on the American economy came later between 1850 and 1900. At a minimum it took 150 years… to have its full range of effects.”
The second era was between 1870 and 1900 and according Gordon had the most impact. “Electric light and a workable internal combustion engine were invented in a three-month period in late 1879…The telephone, phonograph, and motion pictures were all invented in the 1880s. The benefits…included subsidiary and complementary inventions, from elevators, electric machinery and consumer appliances; to the motorcar, truck, and airplane; to highways, suburbs, and supermarkets; to sewers to carry the wastewater away,” writes Gordon.
The third era started when electronic mainframe computers began to replace routine and repetitive clerical work as early as 1960 and peaked with the advent of the internet in the mid 1990s.
Gordon argues that the second era had a higher impact on economy and society than the other two eras. “Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared,” writes Wolf in theFinancial Times.
These developments also liberated women from a lot of things that they had to previously do. As Gordon writes “The biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water.5 Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.”
These developments that happened in the late eighteenth and the early nineteenth century essentially changed the way the Western world lived. They have gradually been percolating to other parts of the world as well.
More than anything these development increased economic productivity leading to faster economic growth. The increase in per capita income in Great Britain was almost flat at 0.2% per year between 1300 and 1700. After this it marginally jumped but it was only after 1850 that this rate crossed 0.5% per year. And it crossed 1% a few years after 1900.
So the entire concept of economic growth is a fairly recent trend if we look through history. As bestselling author and economist Tim Harford put it in a recent column “Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards.” (You can read the complete here).
The economic impact of these inventions was so huge that it led to the assumption that economic growth will continue forever. As Gordon puts it “Economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”
And it might very well come out to be true. The core of Gordon’s argument is that modern inventions are less impressive than those that happened more than 100 years back. “Attention in the past decade has focused not on labor-saving innovation, but rather on a succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines,” writes Gordon.
The phenomenon is not limited only to the last ten years. As Tim Harford told me in an interview I did for the Economic Times a little over one year back “If I wanted to fly to India, I would probably fly on the Boeing 747. The 747 was a plane that was developed in the late 1960s. The expectation of aviation experts is that the Boeing 747 will still be flying in the 2030s and 2040s and that gives it a nearly 100 year life span for its design. That is pretty remarkable if you compare what was flying in 1930s, the propeller aeroplanes. In the 1920s they didn’t think that it was possible for planes to fly at over 200 miles an hour. There was this tremendous progress and then it seems to have slowed down.”
The same seems to be true for medicines. “Look at medicine, look at drugs, antibiotics. Tremendous progress was made in antibiotics after 1945. But since 1980 it really slowed down. We haven’t had any major classes of antibiotics and people started to worry about antibiotic resistance. They wouldn’t be worried about antibiotic resistance if we thought we could create new antibiotics at will,” Harford added. (You can read the complete interview here).
So the basic point is that growth of economic productivity has petered out over the last few years because game changing inventions are a thing of the past. These game changing inventions changed the Western countries (i.e. the US and Europe) and helped them rise at a much faster rate than rest of the world. But that might have very well been a fluke of history.
William J Bonner, an economist and a bestselling author made a very interesting point in an interview I did with him a couple of years back. “It seems normal to us that a person born in Houston earns 10 times or 20 times as much per hour as a person born in Bombay. It has been that way for a long time. We have known nothing else in our lifetimes…in our parents’ lifetimes…or in the lives of our grandparents. But go back a bit further and you will find that through most of the time the human race was the human race, the fellow born in Bombay was just as rich…or even richer…than the fellow born in other places. A man’s labor produced about the same output, whether then man was in Tennessee or Timbuktu. We’re only aware of a single exception – the space of time beginning in the 18th century to the present…or a period of less than 0.2% of the human experience. During this time, and this time only, people in what we now call ‘developed’ countries spurted ahead.”
And why did they spurt ahead? “The biggest leap forward of all came in the 18th century, when Europeans found that they could get a lot more energy. Great advances in living standards have been driven by big increases in energy use. The really big boom came in the 19th century when we learned how to use the earth’s stored-up energy – in coal…and then in oil. GDP growth rates – which had been negligible for thousands of years – soared above 5%. Human population bulged too. European countries – and their colonies – were on the case first. The use of stored energy allowed them to spurt ahead of their competitors in Asia. Over the course of the 19th and 20th centuries, Europeans came to dominate the world,” said Bonner.
And perhaps now that boom phase is now behind them. As Bonner put it “Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity – fired by coal, oil…and later, atomic power – made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental…with diminishing rates of return from innovations. The Internet did nothing to change that. It was not a ‘game changer.’ The game is the same as it has been since the steam engine was first developed.” (You can read the complete interview here).
To conclude, let me quote Martin Wolf “This was the world of the American dream and American exceptionalism. Now innovation is slow and economic catch-up fast. The elites of the high-income countries quite like this new world. The rest of their population likes it vastly less. Get used to this. It will not change.”
The piece originally appeared on www.firstpost.com on October 4, 2012. http://www.firstpost.com/economy/ipad-or-running-water-todays-tech-is-no-patch-on-the-past-478789.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
‘How we organise our digital inheritance will be a major concern in the future’
With more and more of our lives moving online in the days to come we will have to figure out who to leave that legacy to. “How do we organise our digital inheritance will be a major concern in the future. To whom do you want to transfer all your digital life is a question that will need to be answered,” says Ferdinando Pennarolla, an associate professor at the department of management and technology, Bocconi University in Milan, Italy. He was in India teaching the first batch of students at the Mumbai International School of Business, an initiative of the SDA Bocconi School of Management. In this interview he speaks to Vivek Kaul.
I wanted to start by talking a little bit about our digital lives. More and more of your lives are moving online. So how private are our lives?
There are two pitfalls of this story. One is the pitfall of the consumer and the other one is the pitfall of the agencies and the authorities that have to set rules about the privacy for the future. The consumers are not asking themselves to what extent their digital lives are there forever. When you write something on the internet it is written on the stone. It is forever. It is very difficult to erase things on the internet. Once you get Googlised it is very difficult to cancel or erase your news. There many stories of people who want to remove themselves from Facebook and Twitter. But there are many other stories where people cannot erase their contribution to things like community groups and forums. How do we organise our digital inheritance will be a major concern in the future. To whom do you want to transfer all your digital life is a question that will need to be answered.
Could you discuss this in detail?
Our digital lives are characterised by services to which we have subscribed, say newsletters, social networks, e-commerce websites, free email accounts, blogs, and any other sort of profiling registration we do on the web to access to services and make our online purchases. Since we are not yet in the (eventually) forecoming era of the “digital identity” with an hopeful single sign-on technology that gives the pass to all we need on the web, the issue that remains open today is what happens to all this digital heritage when we will pass away. Who will have access to all of this? Will these accounts just be cancelled because they will remain unutilised? Will the vendors still keep on bombarding our mailboxes with news and advertising? I think there is a need of an integrated service that in the future will take care of all our digital and networked life, and pass it to our loves, according to our will.
What are the pitfalls at the agency level?
The pitfall of the agencies and the regulatory people who have to work on privacy are the following. I think we have to reformulate drastically what we mean by privacy. Let me quote a story which I was not mistaken happened two years ago and turned into a major scandal. It was found that there was a log file in the Apple iPhone available only when the user was synchronizing the iPhone with iTunes and this file was sent to Apple. It contained all the log information about the GPS presence of the user. And it was a big scandal. People started saying things like Apple is investigating about our lives. Apple knows where I am walking with whom I am talking. Apple knows whether I am travelling not travelling. Is this fair? Is this against private? It was a big debate.
And what happened?
I went onto the internet and I saw many of the blogs talking about it as well. And do you know what was the most common response? Who cares! I am not a criminal. I am not a government representative. Whether I am walking in Mumbai or I am walking elsewhere, who cares that they know. So there are people who have no problem in disseminating their information. The problem is that in many cases we think privacy is being violated but everyone else may not be thinking on similar lines.
That’s a very interesting point you make…
Let me elaborate on this a little more. I don’t wish that this happens to anybody, but do you know what is the very first thing you will do, if you are diagnosed with a cancer? You will go on the internet. Yes. You will go on the internet. You will start grabbing information about your case and similar cases. And do you know what is going to be next step? You will be sharing your story with other people. There are zillions of websites with cancer patients sharing their super private lives with everybody and pharmaceutical companies don’t know what to do with it. So there are some circumstances in life, where the traditional old fashioned notion of privacy is definitely in dire straits. Zuckerberg and his friends, they made an IPO with our privacy. They built a huge company with pictures and facts that I share with my circle of friends.
How are companies using this information that we leave online?
I think there is a big room for business on this. Let me make a case. Yesterday it rained very heavily in Mumbai (the interview was taken on an earlier date). I just talked to the head of the academic activities at my school and it took her four hours to get home and she only reached around midnight. Is that sane? It’s insane. Now routing traffic on the basis that people want to share their local information would be fantastic. It would mean exploiting the possibility of returning services to citizens based on the data they produce and the data they want to share. Google has started this in some cities. But they are still in the test phase. So we will have to wait and see to what extent this will become a popular service. I like to say that it is much less expensive to move bytes instead of moving atoms. Moving atoms should be the ultimate solution.
Any other examples?
Then there is the case for the health care businesses. And I would say that we are at a very early stage. I have been working with the giants of the industry and if you get into the Facebook pages of the pharmaceutical companies or look into the social network strategies of these companies, you will discover that some of these companies are trying to listen what is happening on the web. They are trying to understand how consumers are talking about their products and their therapies. That I think is a start and then eventually these companies will use this kind of data for returning services to the end consumer.
But you are talking from a positive point of view…
Yes. You know it is a of trade off. Let me put a case. Every time something dramatic happens in my country like a kidnapping, shooting, or a major accident, what happens is that police gets into a desperate search of webcams that eventually had the fortunate possibility to shoot the situation. These cameras could be something like private cameras for security purposes at a hotel. Now if you spread out cameras all over the city definitely you are invading the private life of your citizens and that they are being filmed at every single step of their lives in the city. But the returning action is that you can defeat criminals, who are a major problem in any country. Nothing is safe because in the end we are talking about human beings. But I do believe in policies and practices and I do believe in their enforcement.
Do companies like Google benefit because they have an access to a major part of our digital lives?
There is the famous quote from the Google founders “don’t be evil”. They know that they run the risk of being perceived as the evil of the world sitting on an incredible amount of data on processing information about users. I think Google is sitting on a pile of data which is very difficult to process and analyse. In fact, they are very cautious in turning this data into further initiatives. It is very difficult to trace behaviours when you move in different areas of the world, when you have different IP numbers and when you have different devices. So it is very difficult to then a have an interpreting model of the user behaviour. So once again it’s not easy to trace what you are actually doing. Can I say that, that’s the not the solution that we have to talk about.
Then what should we talk about?
The Google people made the brilliant contribution of re-inventing the way we do searches and making a business about that. Searches will be the most important engine of mankind in the years to come. But because of all the information that will be there, the difficulty will be in catching the information that you are looking for. So we need different engines. I predict the Google story will come to an end or they themselves may re-formulate their engine view and get into different type of searches. People get a little bit dissatisfied when they do traditional searches on the web. They get lots of popular stuff that they are not looking for. When you are under pressure when you have to make a fast decision you don’t want that to happen. You want to have exactly what you are looking for. This will have to change.
What kind of specialised things do you see them getting into?
The answer is semantic search engines which have the ability to interpret what you are looking for. But these are still in their early stages because semantic engines are very expensive to build and they need a lot of self learning. This database of semantic searches is the future that I see. In a recent blog you wrote “customer service operations today are similar to the organisation of the early mills and factories of 100 years ago. There is a long long way to improve in customer service, anywhere in the world. Neither the best admired companies are immune from this.” What made you say that?
Deploying a service with a face to face encounter in many businesses is no longer rewarding. Think of type of services like insurance or giving support to the customer once the product supplies have been done. They don’t have any reason to keep on opening local offices and having customers visiting those local branches. So more and more customers are logging onto the web or making a phone conversation to get their problems resolved. But there is a problem with the way customer service operations and call centres are organised. These jobs are of the highly repetitive kind where you do and do the same thing over and over again. You are bombarded by mails and phone conversations and then at the end of the day you are exhausted because you are working hard eight hours a day managing hundreds of complaints from customers.
Yes, I guess that’s true….
If you visit these organisations, I am sorry to say, they look like chicken gates, where people are organised in small cubicles. Sometimes the environment is very noisy as well and at the same time the people who work in these call centres are trying to understand what the customers are saying on the phone. I would say that this is insane. This is really like old industrialised assembly lines of 150 years ago. The other kind of organisations have been evolving their orgnisational modes towards much more up to date and more humanised, productive and motivation oriented environments. I am not surprised in many of the customer service operations, also in India, experience high turnover rates. So there is a major challenge for customer service managers to reinvest these organisations in such a way that I enter the customer service operation as a junior manager and I leave at the retirement age, let me provocatively say.
Do you see that happening?
No. It is not happening with the exception of a few cases. In 2003, there was a scientific research in the Academy of Management Journal which is one of the leading publications in my field. The research demonstrated for the first time ever that in customer service operations there is a positive correlation between customer churn rate and employee churn rate. This is very interesting and which means that if you want your customers happy, you have to make sure that your employees are happy. As opposite, if your customers are unhappy it is very likely that one of the reasons is that your employees are unhappy. But are customers happy with customer service operations? I fight on a daily basis to be served on the phone. And the quality of the service is lousy. It is very poor. Sometimes you have to remake the connection or re-explain the things with several agents over and over before getting a problem solved. This is happening in insurance, banking, travel, transportation and even in telecommunications.
Why?
Just to be frank and open, it is very difficult to find the right solutions and the right processes working in the back-office without any face to face interaction with the customer.
Another interesting blog of yours was on the growing number of digital subscribers of the New York Times newspaper. That raises a few questions. Do you see newspapers being a viable business model in the days to come? Or will the biggest newspapers of the world largely move online?
We are at a turning point and the turning point is the following. Definitely the news business is becoming more and more free. Everybody has news. The earthquake followed by the tsunami in Japan was communicated across the planet, faster than anything else. And it started with basically a few people shouting about it on Twitter. All this is fantastic news for mankind. We want to be informed and we spread out the news all over the planet. But the point is that we have to make a balance between the crowd-sourcing of news and the authoritative production of news.
Could you elaborate on that?
I would not want to stop the crowd-sourcing of news from people who become journalists simply because they are eye witnessing something that is very important. At the same time we need editorials. We need people who can interpret news. I value this a lot. I am still on old fashioned customer. I still purchase newspapers. Of course I purchase the digital version. But I still pay for the news that I get. But at the same time I am a very well informed citizen. I am always connected to the internet. I have my news websites open. And I grab the news instantly as soon as it comes. But still a day after I love to get into editorials to get an understanding of what is happening. I think the publishing industry has to find a solution. Is a solution readily available now? No. They are still in between.
The interview originally appeared in the Daily News and Analysis on October 1, 2012. http://www.dnaindia.com/money/interview_how-we-organise-our-digital-inheritance-will-be-a-major-concern-in-future_1747236
(Interviewer Kaul is a writer and he can be reached at [email protected])
Call of the mall: Tricks they use to make you spend more
Vivek Kaul
On a recent visit to a refurbished supermarket I was surprised to see a bakery right at its entrance. What it clearly told me that Indian retail was finally catching up with its global counterparts when it comes to marketing. Now you might like to believe that having a bakery as a part of a supermarket is a perfectly natural thing. But there is more to it than what meets the eye.
So why do most modern supermarkets have bakeries right at their entrances? Martin Lindstrom has the answer in his book Buyology – How Everything We Believe About Why We Buy is Wrong. As he writes “Not only does the fragrance of just-baked bread signal freshness and evoke powerful feelings of comfort and domesticity, but store managers know that when aroma of baking bread or doughnuts assails your nose you’ll get hungry – to the point where you just may discard your shopping list and start picking up food you hadn’t planned on buying. Install a bakery, and sales of bread, butter, and jam are mostly guaranteed to increase. In fact, the whiff of baking bread has proven a profitable exercise in increasing sales across most product lines.”
In fact Lindstrom even points out that some Northern European supermarkets don’t even bother with setting up bakeries they just pump artificial fresh-baked bread smell straight into the store aisles from their ceiling vents. In some cases a florist shop or a cookie store comes into play. “Smell and sound are substantially more potent than anyone had even dreamed of…All of our other senses, you think before you respond, but with scent, your brain responds before you think,” writes Lindstrom.
Music also has a role to play in this. Ever wondered why supermarkets generally tend to play soothing music? This is to slow down the consumer so that he takes time to look around the items in the supermarket.
And this is not the only trick that supermarkets malls and companies use to get you to buy more than what you may need and even things you may not need.
Another favoured trick is to offer something extra free rather than pass on an equivalent decrease in price to the consumer. Now this sounds a little complicated so let me explain this through an example that Akshay R Rao, a marketing professor atthe Carlson School of Management, University of Minnesota in the United States, discussed with me in a recent interview.
“Imagine that I am selling coffee beans, and I offer you 100 beans for Rs. 100 on a normal day. Then, one day, I offer you a 33% discount, so you receive 100 beans for Rs. 67. On another day, I offer you 50% extra (or free). You now get 150 beans for Rs. 100. But, I impose no limit on how many or how few coffee beans you can buy, on either day. So, on the day in which I offer 50% extra, you could quite easily have bought 100 beans for Rs. 67! Yet, most people prefer 50% more to a 33% lower price, even though the two options are economically equivalent,” said Rao. (You can read the complete interview here)
This inability of the consumers to distinguish between the options is exploited by businesses. Bookstores often resort to this trick. As Paul Ormerod writes in Positive Linking –How Networks Can Revolutionise the World “Marketers observed…that discounts offers such as ‘buy one, get one free’ or ‘three for the price of the two’ – a concept I am very keen on because this is how bookstores often package up their offers – tend to be more effective is boosting sales than the exact equivalent price reduction on a single purchase. The amount of money which is paid for the bundle of products is identical in each case, but more will usually be bought if they are packaged under an offer than if there is a simple equivalent reduction in the individual prices.”
Another trick used to great effect by retailers is contrast effect. It has been put to great use by retailers as well to increase the attractiveness of certain products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled. As an article on the website of the Harvard Law School points out “Apparently, the $275 model didn’t seem like a bargain until it was sitting next to the $429 model.” (You can read the complete article here)
This is a trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.
Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover Economist– “In Dalston, Sainsbury’s (a big retailer) own brand of fresh chilled juice was sitting next to the Tropicana at about half the price., and the concentrated juice was almost six times cheaper than the Tropicana.”
You would be surprised to know that malls and supermarkets are even built in a way so as to encourage people to shop more. In a multi floor store, typically the women’s apparels are on the first or the second floor. This is because women are likely to go the extra distance to shop for something than men. Also, a lot of things that can be bought instinctively and do not require much thought are placed near the payment counter so that people can almost pick them up mindlessly while making the payment.
In fact the reason why most food courts are on the top floor of the mall is because the retailers want you to buy more and pick up things you hadn’t planned to. This is done by ensuring that in order to reach the food court you have to go through the length and the breadth of the mall and in the process you might pick up something along the way. The smarter individuals might just take the lift to the food court. But then once a person reaches a mall the tendency is to loiter around for a while. This also explains why there are multiple escalators in a big retail store or a mall. This is done to ensure that once you are in the mall you go through a large part of it.
Supermarkets use the same logic and ensure that essential items like wheat, rice and vegetables are placed inwards in the store. This is to ensure you to go through the entire store and thus increase your chances of picking up something you hadn’t planned to. The next time you are at a big supermarket try buying an essential item like milk and see the sections that you pass by the time you have found the essential you are looking to buy. Chances are you might find chocolates and other junk food along the way.
Supermarket shelves are also strategically planned. The more expensive items are typically around the middle shelves to ensure that they are at the eye height of the consumer. The cheaper products are rather right at the top or at the bottom. This ensures that a consumer might just be lazy and buy the expensive product. There is also a psychological aspect at play. The supermarket by placing the expensive products in the middle is trying to project it as a quality product in comparison to the ones placed in the top or the bottom shelf.
So the next time you are at a supermarket or a mall be aware of these tricks and don’t get caught in the trap of buying things you did not plan to in the first place.
The article was originally published on www.firstpost.com on September 28,2012. http://www.firstpost.com/business/call-of-the-mall-tricks-they-use-to-make-you-spend-more-472689.html
Vivek Kaul is a writer. He can be reached at [email protected]