All you wanted to know about the DLF-Vadra deal: Part 2


Vivek Kaul
Several leaders of the Congress party have termed the accusations being made by Arvind Kejriwal led India Against Corruption(IAC) against Robert Vadra as cheap publicity. Rashid Alvi yesterday even questioned the veracity of the documents put out by Kejriwal and company. But a detailed look at the balance sheets of the companies owned by Vadra and statements made by DLF throw up several questions. Vadra is the son-in-law of Sonia Gandhi, the president of the Congress party, and chairperson of the United Progressive Alliance which governs this country. DLF is India’s largest listed real estate company.
How does DLF justify giving Vadra an advance of Rs 50 crore?
Robert Vadra owns 99.8% of Sky Light Hospitality Private Ltd. The balance sheet of the company as on March 31, 2009, shows an entry of a plot of land in Manesar, Haryana, valued at Rs 15.38 crore. This means that somewhere during the period April 1, 2008, to March 31, 2009, the company must have bought this piece of land for Rs 15.38 crore. This can be concluded because the balance sheet for March 31, 2008, does not show this entry.
Vadra’s Sky Light Hospitality got an advance of Rs 50 crore against this land from DLF. The company says this in a statement released on October 6. “Skylight Hospitality Pvt Ltd approached us in FY 2008-09(i.e. the period between April 1, 2008 and March 31, 2009) to sell a piece of land measuring approximately 3.5 acres…DLF agreed to buy the said plot, given its licensing status and its attractiveness as a business proposition for a total consideration of Rs 58 crores. As per normal commercial practice, the possession of the said plot was taken over by DLF in FY 2008-09 itself and a total sum of Rs 50 crores given as advance in instalments against the purchase consideration.”
This statement tells us that Vadra’s Sky Light Hospitality approached DLF to sell a piece of land of 3.5acres sometime during the period April 1, 2008 and March 31,2009. DLF agreed to buy this land and valued it at Rs 58 crore. Against this valuation it gave Sky Light Hospitality an advance of Rs 50 crore.
What is interesting is that Sky Light bought a piece of land for Rs 15.38 crore anytime between April 1, 2008 and March 31, 2009. They approached DLF to buy it during the same period. And DLF agreed to buy it for Rs 58 crore.  So in a period of less than one year the value of the land went up by Rs 42.62 crore (Rs 58 crore – Rs 15.38 crore) or 277%. This doesn’t really sound right given that it was precisely at that point of time the international financial crisis was starting and both real estate as well as stock markets were weak.
Did DLF really complete this deal in the financial year 2008-2009 (the period between April 1, 2008 and March 31, 2009)?
DLF’s statement says very clearly that it took over the possession of the land in 2008-2009 from Sky Light Hospitality. If that is the case why does this land show up as a fixed asset in the balance sheet of Vadra’s Sky Light Hospitality as on March 31, 2011? Even the advance of Rs 50 crore given by DLF shows up as a current liability on the balance sheet of Sky Light Hospitality. How could the land be with both Vadra and DLF at the same time? This is something that DLF needs to throw light on.
Was DLF’s advance to Vadra’s Sky Light Hospitality really an interest free loan?
DLF’s statement says very clearly that the company started giving the advance amounting to a total of Rs 50 crore to Vadra starting in the year 2008-2009. This advance was still on the books of Sky Light Hospitality as on March 31, 2011, listed as a current liability. A current liability is a debt or an obligation which is to be repaid within a period of less than one year. Interestingly there is another entry of an advance of Rs 10 crore from DLF which is there on the balance sheets of Sky Light Hospitality dated March 31, 2010 and March 21, 2009. This is again an advance which was given for a period of greater than one year.
DLF in its statement also claimed not to have given any loans to Vadra. Real Earth Estates Private Ltd, another company owned by Vadra shows an entry of Rs 5 crore as a loan from DLF as on March 31, 2010. The IAC media release points out that the company in a filing with Registrar of Companies had specified that this was an unsecured loan. An unsecured loan is a loan in which the lender does not take any collateral against the loan and relies on the borrower’s promise to return the loan.
There are two conclusions that one can draw here. One is that what DLF thinks is an advance looks more like an interest free loan to Vadra. And two, its claim of not having given any loans to Vadra don’t hold good.
What did Vadra do with these so called advances and real loans?
Sky Light Hospitality had a Rs 25 crore advance from DLF on its books as on March 31, 2009. A small portion of this was used to pick up a stake of 50% in a hotel joint venture with DLF. This company called Saket Courtyard Hospitaliy runs one hotel in Saket, New Delhi, which is reported to be on the block.
Sky Light Hospitality shows an advance received of Rs 50 crore from DLF as on March 31, 2010. During the course of the year April 1, 2009 to March 31, 2010, the company paid a total tax deducted source of Rs 4.95 lakh on the interest earned on its fixed deposits.  TDS is cut at the rate of 10.3% when the interest earned on fixed deposits with a bank during the course of one year crosses Rs 10,000. What this tells us is that Sky Light Hospitality earned Rs 48.3 lakh (Rs 4.95 lakh/10.3%) as total interest. This interest obviously was earned out of investing a part of Rs 50 crore which the company received as an advance from DLF during the financial year 2009-2010 into bank fixed deposits.
Sky Light Hospitality also gave out advances and loans to other companies owned by Robert Vadra. As on March 31, 2010, Sky Light Hospitality had given a loan of Rs 6.61 crore to Sky Light Reality Private Ltd, another company owned by Vadra. This was used to fund seven flats in DLF’s Magnolias project and which are shown to be worth around Rs 5.23 crore. It was also used to buy a Rs 89 lakh apartment in DLF’s Aralias apartments.
The balance sheet as on March 31, 2009, shows an advance of Rs 3.5 crore to Sky Light Realty Private Ltd. This advance was used by Sky Light Realty to fund agricultural land in Palwal and land at Hayyatpur in Haryana. It also used around Rs 9 lakh to book flats with two builders. Sky Light Reality also earned an interest of around Rs 31 lakh by placing a part of this advance as a fixed deposit with banks.
Vadra’ Real Earth Estates had a total paid up capital of Rs 10 lakh as on March 31, 2010. DLF gave the company a loan of Rs 5 crore. This means the debt equity ratio of the company was 50 (Rs 5 crore/Rs10 lakh) which is humongous. This money was used to part-fund fixed assets worth around Rs 7.1 crore. This includes a plot in the posh GK-II area of Delhi and land in Bikaner, Gurgaon, Hassanpur and Mewat. Whether DLF benefited with its relationship with Vadra we don’t really know. But Vadra clearly benefited from the same.
The article originally appeared in Daily News and Analysis on October 11, 2012. http://www.dnaindia.com/india/report_all-you-wanted-to-know-about-the-dlf-vadra-deal-part-2_1751281
(Vivek Kaul is a writer. He can be reached at [email protected])
 
 
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‘Capitalism is not as smartly managed as cricket’


Roger Martin is the Dean of the Rotman School of Management at the University of Toronto, in Canada. In 2011, Roger Martin was named by Thinkers 50 as the sixth top management thinker in the world. He is the author of several best-selling books like The Design of Business: Why Design Thinking is the Next Competitive Advantage (2009), The Opposable Mind: How Successful Leaders Win Through Integrative Thinking (2007) etc. His latest book is Fixing the Game, Bubbles, Crashes, and What Capitalism Can Learn From the NFL (2011) in which Martin argues that there is a lot capitalism can learn from the world of sport. In this interview he speaks to Vivek Kaul.
Your book “Fixing the Game” is essentially a criticism of western capitalism. What’s the central idea behind the book?
The central idea is that capitalism made a conceptual error when it asserted that the interests of executives would be aligned with those of shareholders if executives were given stock-based compensation. It was a simple and elegant theory – that if shareholders did well, so would executives and if shareholders did poorly, so would executives – but it turns out to produce the exact opposite. Overall, shareholders have done less well and CEOs have done spectacularly better. There has been dis-alignment, not alignment.  The current theory threatens the future of capitalism.  It produces inauthenticity in management, volatility in the capital markets and contributes to the strength of forces detrimental to broad prosperity – in particular the hedge funds.
What is the game that needs to be fixed? And why?
The title is double entendre.  It means that there are people manipulating, or in the betting parlance, ‘fixing’, the current game of democratic capitalism and we need to fix it in the sense of repairing it. It needs to be fixed now because the current game of democratic capitalism is being undermined.  Capitalism can only take so much undermining until it is irreparably damaged.
One of the things that you talk about in your book is a real game and an expectations game. Can you take us through that?
The real game is the one in which real companies build real factories (or service operations), to make real products (or services), to sell to real customers, to earn real revenues and a real profit (or loss).  The expectations game is the one in which investors look at the real market and, on the basis of that observation, form expectations as to the likely performance of the real companies and, on the basis of those expectations, buy or sell shares which collectively sets the prices of those companies in the stock market. Since stocks tend to sell for a large multiple of present earnings – 15 times earnings for the SENSEX over the long term – most of the value of a given stock is in the expectations of future earnings rather than the reality of the current earnings.
What can capitalism learn from sport?
Capitalism can learn a lesson from all of modern sport – whether American football or Indian cricket for that matter.  Each major spectator sport actually involves a real game and an expectations game. In the real game of cricket, batsmen, bowlers and fielders take a real pitch and play real wickets, make real outs and score real runs. Eventually there is a real winner and real loser.  There is an associated expectations game: betting on cricket matches.  In this game, betters imagine what will happen when the teams take the field and on the basis of those expectations place their bets. On the basis of those bets, bookmakers adjust the odds against the favorites and for the underdogs to balance the amount of money bet on either side.
So what are you trying to suggest?
The betting odds in a cricket match are identical to the stock price in capitalism – both are products of the expectations market. But that is where the similarity ends. The world of sports is clear about the relationship between the expectations market and the real market: they must be kept separate. If they are not kept separate – i.e. if players in the real game are allowed to participate in the expectations game, they will wreck the real game.  Cricket fans know that from the 2010-1 betting scandals in cricket in Pakistan.  There key players were accused and tried for influencing the results of real games to aid bettors in making illegal profits in the expectations game. In great contrast to the world of sport, capitalism not only allows, it insists on the key players in the real market also playing in the expectations market.  CEOs and other key executives are forced to take a significant portion of their compensation by way of stock-based compensation. In doing so, capitalism threatens the health of the real game.  On this front, capitalism is not as smartly managed as cricket.
How does this entire idea of “real game and expectations game” contribute to the kind of volatility we have seen in the last ten years?

When executives have substantial stock-based compensation incentives, they focus on managing expectations rather than managing the real operations of their company. If an executive is given a stock option with an exercise price at the existing trading price of the stock (the way the vast majority of stock options are priced and given), the only way that option will have any value for the executive is if he or she raises expectations of the future earnings of the company to a higher level than what they are at the time of the stock option award. That means if expectations are already high, then the executive needs to take actions to prod those expectations even higher still – even it is takes extreme actions. And because expectations cannot rise forever because they get ahead of reality, executives know that the most profitable thing that they can do for themselves is jerk expectations up and then leave before they come plummeting back down.  This creates wild swings in the capital markets of the sort we have seen in the past decade.
Could you give us an example on how this real and expectations game would play out in a company like Google and Microsoft for that matter?
At Microsoft, its stock dropped dramatically after the dot.com meltdown like many other technology stocks.  But thereafter, Microsoft spent the next decade doubling its sales and tripling its profits for an entire decade.  Despite that spectacular performance, Microsoft stock price stayed flat over the entire decade.  That is because expectations were already high at the start of the decade and even with impressive growth and profit increase, Microsoft couldn’t increase expectations. Similarly, Google recently reported a large increase in sales and profits yet experienced a drop in its stock price because it didn’t meet its expectations.  Both demonstrate how the real and expectations markets often diverge.
What about a company like Procter and Gamble?
Like all companies, P&G faces similar schisms between expectations and reality.  At times, expectations get too high and then fall too low.  However, this is less pronounced at P&G because it has a culture of focusing more on the real market than the expectations market which has served it well over time.
So how do we separate expectations and reality in business?
It is impossible to completely separate expectations from reality.  Humans cannot help but form expectations; even animals do.  If you feed a pet dog at the same time of morning for a week, it will be pawing at your bedroom door at that exact time the next time you sleep in past the usual time. However, one form of expectations is dramatically more damaging and those are the expectations of hordes of investors, especially hedge fund managers and high frequency traders. Only publicly-traded companies are exposed to the detrimental effects of that form of expectations.  The best way to avoid exposing your company to the expectations market is to be a private company – like Cargill or Koch Industries.  Facebook prospered for a number of years as a private company, then went public and felt the wrath of the expectations market.  It is unclear whether Facebook will be able to pursue its strategy as a public company in the way it did as a private company as it faces investor wrath for having its stock price plummet after its IPO.
One of the things that comes out in your book is that despite all the regulations that have been put in place after the crisis of 2008, you still feel that it’s only a matter of time before another crisis hits us. Why do you say that?
I do not believe that the regulations that have been put in place or are being put in place the cause of the last two crashes. The theory of Sarbanes-Oxley was that lax boards and audit committees and conflicted auditors caused the dot.com crash and the Enron/WorldCom/Aldephia, etc. scandals. And theory of Dodd-Frank is that excess bank leverage and mixing of commercial banking and investment banking caused the subprime meltdown.  I do not believe that those theories are even remotely accurate. In my view, inappropriate mixing of the real market and the expectations market contributed centrally to both crashes and neither Sarbanes-Oxley or Dodd-Frank address that problem. For that reason, I think that the risk of another crash continues to build. All I am confident of is that the next crash won’t be because of an Internet-bubble or sub-prime residential mortgages.  Any other cause is as likely to precipitate a bubble/crash as it was before the various regulatory changes.
This entire about paying CEOs well in terms of the stock of the company was put forward by Michael Jensen in the 1970s. And it was lapped up left right and centre. What was the reason behind its popularity?
I believe that it was lapped up because it was incredibly simple and compellingly logical.  The alignment theory sounds so lovely – shareholders and executives win together and lose together. It was so easy to understand that people gobbled it up rather than first asked themselves to work through the consequences of it in a more sophisticated way. Essentially they ignored a logical fallacy.  The theory held that executives were gaming the system to their own advantage but implicitly assumed that they would stop gaming the system to their own advantage after the proposed change. There is nothing to suggest that such a behavioral change would occur – and indeed they have kept on gaming!
How was it responsible for the current state of things?
The central thrust of the Jensen argument was that the real market needed to be wedded directly to the expectations market through stock-based compensation.  The minute those two markets were tied together, democratic capitalism was changed from an enterprise that was primarily focused on building value in the real market to one primarily focused on trading value in the expectations market.
What went wrong with that idea?
The tool was wrong.  Attempting to increase shareholder value over the long term is not a bad idea.  Utilizing the short term stock price as a perfect measure of long term shareholder value was the error. This enabled craven executives and hedge fund managers to exploit the schism between the short term measure of shareholder value and the long term creation of shareholder value.
So is banning stock options a way out? Has any company done it?
Many companies have moved from utilized stock options as their form of stock-based compensation to deferred share units or restricted share units, which are in essence synthetic versions of the underlying stock which go both up and down with the movement of the underlying stock.  They are an improvement over stock options because they result in the executive feeling both the downside and upside of stock movements rather than only the upside.  However, it still focuses the executive on the expectations market. There is a trend toward deferring them for longer periods which also makes it harder for the CEO to exploit short-term movements.  But no public company of which I am aware has banned stock-based compensation entirely.
So what is way out? You talk about boards rewarding their employees based on real outcomes and not expectation oriented outcomes. Could you elaborate through an example?
Real outcomes are things like market share, return on invested capital, customer satisfaction, etc.  The most important real outcomes vary by company and depend on the company’s context. Most companies use these measures as part of their compensation structures.  What needs to happen is for companies to raise these measures from part of their incentive compensation packages to 100% of them.

The interview was originally published in the Daily News and Analysis on October 8,2012.
(Interviewer Kaul is a writer. He can be reached at [email protected])
 
 
 

Retail FDI note raises more questions than it answers



Vivek Kaul
The press note for allowing foreign direct investment (FDI) of up to 51% in multi-brand foreign retailing throws up several interesting points as well as questions.
One of the major points of the press note is that retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 census. There are 45 cities in India that meet this requirement.
Currently eight states, the national capital territory of Delhi and the union territories of Daman & Diu and Dadra and Nagar Haveli have agreed to allow FDI in multi-brand retailing. All these states are ruled by the Congress party.
But as the data from the 2011 census points out, only 20 of these 45 cities are in states that have currently agreed to FDI in muti-brand foreign retailing or big retail, as it is more popularly referred to as.
Interestingly, the Census of India has two classifications. One is cities having population 1 lakh and above. And another is urban agglomerations/cities having population 1 lakh and above. As per the former India has 45 cities of population which have a population of 10 lakh or more. As per the latter India has 53 cities/urban agglomerations which have a population of 10 lakh or more.
For the sake of this analysis the former has been used because the press note uses the word “cities” very clearly and not cities/urban agglomerations.  But even if one works with the assumption of 53 cities, the analysis that follows doesn’t change much. Nevertheless, the government needs to clear this confusion on which version of the census applies here.
The state of Maharashtra leads the pack with 10 cities out of the 20 cities which qualify for big retail. These are Aurangabad, Kalyan-Dombivilli, Navi Mumbai, Mumbai, Pimpri-Chinchwad, Pune Nagpur, Nashik, Thane and Vasai-Virar.  Hyderabad, Vijaywada and Vishakapatnam are the three cities that meet the criteria in Andhra Pradesh. Kota, Jaipur and Jodhpur are the three cities in Rajasthan. Srinagar in Jammu and Kashmir, Faridabad in Haryana (and not the fancied Gurgaon which has a population of 876,824 as per the 2011 census), New Delhi and Chandigarh are the four other cities that make the list. Chandigarh is the capital of Haryana, which has agreed to allow FDI in big retail. But it is also the capital of the state of Punjab, which hasn’t.
What is interesting is that 50% of the cities eligible for big retail are in one state i.e. Maharashtra. It also means that there are no cities in Assam, Manipur and the Union Territories of Daman & Diu and Dadra and Nagar Haveli which meet the criteria of population of more than 10 lakh.
To get around this problem the note allows companies to be set up retail sales outlets in the cities of their choice, preferably the largest city, in states/ union territories not having cities with population of more than 10 lakh as per 2011 Census.
But the most interesting part of the note is that most of the policies elucidated in the note are only enabling in nature. Hence, governments in states and union territories are free to make their own policies. This means that it is very well possible that states might allow big retail to set shop in places with a population of less than 10 lakh. What stops the state of Haryana from allowing big retail presence in the city of Gurgaon?  Or Maharashtra allowing big retail in Mira Road-Bhayander which has a population of 8,14,655 as per the 2011 census. The same can be said about Secunderabad, which is Hyderabad’s twin city, and Jammu which is the second largest city in the state of Jammu and Kashmir. Another point in the note is that at least 50% of total FDI brought in shall be invested in ‘backend infrastructure’ within three years of the first tranche of FDI. The note doesn’t specify whether this investment is to be limited in states that have allowed big retail. So the conclusion is that this investment can be made all across India. But here is where practical problems might crop up.
A company like Wal-Mart to may set up backend infrastructure in a state like Himachal Pradesh to source apples. But as we know Himachal Pradesh isn’t on the list of states that have allowed FDI in big retail. So we will end up with a situation where big retail is present in a state at the backend but at the same time it’s not allowed to set up a front end retail store. That would not be an ideal situation.
Another major problem can crop up because of the decision being currently left to the states. The states that have agreed to big retail are all Congress ruled (except Kerala which is ruled by the Congress led United Democratic Front but hasn’t said yes to big retail). Now what happens if the Congress party loses the next elections in these states? Can the party or front which comes to power reverse the earlier decision?
The note also points out that the government will have the first right to procurement of agricultural products. What is implied by this? At the same time the note points out that at least 30% of the value of procurement of manufactured/processed products purchased, shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $1 million.  This will be a huge problem for big retail companies which play on economies of scale.
But at the same time the note is silent on international procurement of goods and products by these companies. This means that companies which invest in big retail can source their products internationally. Hence, a Wal-Mart can source products for the Indian market from China. “More than 70% of the goods sold in Wal-Mart stores around the world are made in China,” point out Garry Gereffi and Ryan Ong in a case study titled Wal-Mart in China which was published in the Harvard Asia Pacific Review. Sourcing from China has been the backbone of Wal-Mart’s everyday low pricing strategy.
The state governments that allow FDI in big retail can change any of the policies mentioned above and frame their own policies because these policies are only enabling in nature. The only part that they cannot change is retail trading by means of e-commerce.
(The article originally appeared in the Daily News and Analysis on September 24, 2012. http://www.dnaindia.com/money/report_retail-fdi-note-raises-more-questions-than-it-answers_1744390)
(Vivek Kaul is a writer. He can be reached at [email protected])

Women are easily persuaded by romantic ads… Men respond to sexual innuendo and women in bikini


What’s the first word recognised by most kids all over the world? No it’s not Mum! Or Dad for that matter “Donald – a variation of McDonald’s is the word. In fact the word beats even the most simple (and emotional word): Mom,” says brand guru Martin Lindstrom. “True, most 18-month-old babies cannot physically articulate the word ‘McDonald’s’, but what they can do is recognise the fast-food chain’s red and yellow colours, roofline, golden arches and logo. Then they can jab their chunky little fingers at a McDonald’s from the backseat of a car,” he writes in his new bookBrandwashed – Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy. Such is the power of brands. In this interview to Vivek Kaul, Lindstrom talks about In the thorny issue of consumer manipulation and gives a full-frontal exposé of the wanton trickery employed by many conglomerates, iconic brands included, to squeeze money out of their loyal customers.
Excerpts:
To what extent can companies go to engineer desire to get us to buy things? 

There’s a fundamental difference between creating a need and activating a need – in my books I do not believe it is possible to create a need simply because it is against our instinctual behaviour – instead I believe it’s all about “activating a need” i.e. a fundamental need we all have – and thus which can be fulfilled in a new way. Our basic need is to be entertained – justifying the existence of the iPod, our fundamental need is to be stimulated – justifying the need for computer games etc.
Could you explain that in a little detail? 
So when we talk about engineering needs I think it is fair to say it is more a matter of engineering new ways of fulfilling pre-existing needs. Needs can be activated in many ways. The typical tools of persuasion would be fear, guilt, aspiration, sex etc. Close to 45% of all advertising in the U.S. today either is based on fear, guilt or sex – fear of not belonging to our group, fear of losing our jobs or fear of death, deceases or theft. Guilt of being overweight, not looking good, not cooking a meal for our kids (simply because we don’t have these cooking skills any longer etc) etc. A lot of communication these days press those buttons – like fuelling the idea of you attracting some disease, or the fear of witnessing some stranger breaking into your home.
An example of fear being used to sell us something that is a hand sanitiser. Why have we welcomed the hand sanitisers into our lives as a cheap, everyday, utterly essential staple, even though they are not very useful?
After the release of SARS followed by swine-flue in 2003 and 2008 we’ve witnessed an amazing uptake of hand-sanitising products. What’s ironic is that none of those products – such as Purell actually do any better job than soap and water – however we’ve led to believe it is the case. The companies has done a extraordinary job in building their brands on the back of the fear created by those global viruses – indicating that we’ll be safe using these brands – once we’ve begun using these – this habit will stay for life. The ironic side of the story however is that the life expectancy in Japan is decreasing for the first time in history – why – because the country simply have become too clean – the Japanese have weakened their immune system as a result of overuse of hand sanitising products.
How and why has fear mongering become a favoured tactic of the marketers?
Because we’re all hardwired to be seduced by fear – fear is the number one soft button in our brain – it is a survival instinct. Fear is used by most insurance companies and even Colgate who claimed in one ad that they could remove the risk of cancer by the usage of their toothpaste. You talk about how certain websites rewiring our brains to get us hooked on the act of shopping and buying. Could you explain this in detail with an example?
Rewiring is a big word – that said some websites indeed are designed to hook us – an example would be the count-down-clock on Amazon.com – which kicks in during the Holiday Season – and begin ticking the minute you’ve landed on the site – this gives you a sense of urgency – pushes the dopamine levels in your brain and result in you acting more irrational (or emotional). In the future we’ll see more and more sites based on gaming concepts – i.e. encouraging us to participate, earn points or in some cases secure access to products before everyone else.
One of the interesting things that you write in Brandwashed is that “Our brand and product preferences are pretty firmly embedded in us by the age of seven…I’d even go so far to suggest that some of the cleverest manufacturers in the world are at work trying to manipulate our taste preferences even earlier than that. Much earlier. Even before we’re even born.” Is it really so?
Before I even was born I fell victim to this very phenomena as my mom and dad danced every evening to their favourite Bossa Nova (a well-known style of Brazilian music developed and popularised in the 1950s and 1960) song. The day I was born the record player dropped on the floor and broke in to pieces – as a result it never played again – and never played from the very day I was born. Ironically I love Bossa Nova – and have done so from the first day I was born my mom and dad, tell me.
So what is the point you are trying to make?
Based on numerous experiments we today know that what mothers eat and listen to during pregnancy affects their un-born babies – this is the principal some companies are tapping into.
Kopiko in the Philippines is a scary example of how far this can go – the manufacturer has for decades been known for its coffee candy – yet recently they entered the coffee market. Their technique to enter the market was to hand out free Kopiko coffee infused candy to pedestrians and doctors for them to give to pregnant mothers. Today Kopiko is one of the leading coffee brands – a position they’ve secured within only very few years.
You write that “in general women tend to more easily persuaded by ads that are more romantic than sexual… Men, on the other hand, respond to sexual innuendo and women in bikini.” Can you explain this in some detail through examples?
Women prefer to be able to continue the storyline – men prefer to see the end of the storyline – sex can play a major role in both scenarios – yet the role of sex would have to change in order to stimulate us accordingly.
What is the ultimate male fantasy? How did Unilever use it to make the Axe brand?
A man sitting in a hot-top-spa with two naked ladies on each side – popping a bottle of Champagne. Unilever, the manufacturer of AXE discovered this very observation based on thousands of interviews and observations of men worldwide – realizing that this very fantasy indeed seems global – and today explaining why AXE uses this very imagination as the foundation for all their ads.
You talk about the migration of the male consumer into a traditional female arena is overturning the rules of marketing and advertising. Can you explain that through examples?
Cosmetics is a great example – until recently men wouldn’t dare even thinking about buying a moisturiser. Today it’s different. This is far from a coincidence – the world’s leading cosmetics companies has for years pushed this trend, by educating men to activate the need for beauty and cleanness. Unilever educated the man to liquid soap (due to cost saving reasons) in the shower in the U.S. something men avoided as they couldn’t cope with the idea of touching their own body in the shower – something they felt was too feminine. The way to justify this change – the introduction of a washing device which would separate the guys hand from the body. And P&G separated the aisles of cosmetics – so that men would have one section far away from the women – ensuring that they wouldn’t be shy buying a cream.
You point out that people get addicted onto brands in two stages, the routine stage and the dream stage. Could you discuss this in detail?
Routine – means daily duties – i.e. using the iTunes service on our iPod, while watching movies on our iPod streamed from our iTV is easy, because we don’t have to think – we just plug and play – it’s a routine. The dream stage is when a brand allows us to dream – or disappear into a dream. Let’s say that you went to Ibiza in Spain for the holiday – you had great fun, drank a lot of Red Bull’s and then return back to the grey-everyday-life. Once you see the Red Bull brand again – in your everyday life you feel the brand helps you to escape back to this dream world – the life you had for just 1 week but which “kind of” can be extended by drinking a Red Bull.
How do companies activate our cravings to get us to buy food products?
In many ways – by among other adding bubbles (or sweat as they call it) onto the cans and bottles – the more bubbles the more craving. Or by playing the sound of a cola being poured into a glass with ice (the worlds 5th most craving generating sound) or by adding many chips on the front of a snack package – the more chips the more we believe there’s in the bag – the more craving we generate.
 “Peer pressure delivers a windfall for brands and companies,” you write. Could you explain that in detail through some examples?
The entire social media space is heaven for brands as it allows to fuel peer pressure – and do it fast. Numerous studies show that this is incredible powerful including the $3 million study I did for my latest book Brandwashed where we realised that it only takes 5 people to convince 195 people to do the same. Pear pressure is everywhere from the recent release of iPhone 5 (I feel embarrassed running around with a iPhone 4) to fashion (you simply can’t wear that tie from two years ago – it is too old-fashioned) to cigarette smoking.
What is a perceived justification symbol?
It’s a way to convert intangible stuff into tangible stuff – to make the invisible benefit become visible. Let’s take the dishwashing tablet – it has a white, blue level and a red dot – indicating the powerful magical clean button. The reality is that it’s all the same but we get a sense of that something “black box” stuff is happening – cleaning our plates. Another example is Duracell’s power meter – which helps us to measure how much battery power there’s left in the battery. Why is this a genius idea? Because consumers fundamentally believe that batteries hanging in the store looses power – and thus by installing such device – a PJS we’ll be convinced otherwise.
Why does nostalgia marketing work well in uncertain economic times?
It gives us certainty, comfort and creates a framework of safety around us. Studies show that we indeed recall past memories in a more positive light that present memories – this phenomena is called Rosy Memories and is used by many brands including Pepsi’s recent Throwback – a replicate of the old Pepsi recipe and pack design to Coke’s re-play of “I want to teach the world to sing”.
Can a famous face really have that much of an impact on how we spend our money? Are we human beings that naïve?
We all need leaders around us – in today’s world where fewer countries have royal families as leaders, where politicians are failing – celebrities becomes our leaders of our time. We’re hardwired to be seduced by such leaders even though we know they might not be real – kind of like some people knock-on-wood for good luck – despite the fact that they very well know it has no effect.
(The article originally appeared in the Daily News and Analysis on September 24, 2012. http://www.dnaindia.com/money/interview_romantic-ads-seduce-women-men-fall-for-sexual-innuendo_1744404)
(Interviewer Kaul is a writer. He can be reached at [email protected])

Why oil prices won’t come down in the foreseeable future


Vivek Kaul
It is India’s Rs 2,00,000 crore problem. And it’s called crude oil.
With the global economy in general and the Chinese economy in particular slowing down, it was widely expected that the price of crude oil will also come down.
China has been devouring commodities at a very fast rate in order to build infrastructure. As Ruchir Sharma of Morgan Stanley writes in his recent book Breakout Nations “China has been devouring raw materials at a rate way out of line with the size of its economy…In the case of oil China accounts for only 10% of total demand but is responsible for nearly half of the growth in demand, so it is the critical factor in driving up prices.”
Even though the Chinese growth rate has slowed down considerably, the price of crude oil continues to remain high. According to the Petroleum Planning and Analysis Cell (PPAC) which comes under the Ministry of Petroleum and Natural Gas, the price of the Indian basket of crude oil was at $ 113.65 per barrel (bbl) on September 11. The more popular Brent Crude is at $115.44 per barrel as I write this.
The high price of crude oil has led to huge losses for the oil marketing companies in India as they continue to sell petrol, diesel, kerosene and cooking gas at a loss. The oil minister recently said that if the situation continues the companies will end up with losses amounting to Rs 2,00,000 crore during the course of the year.
So why do oil prices continue to remain high?
The immediate reason is the tension in the Middle East and the threat of war between Iran and Israel. Hillary Clinton, the US Secretary of State, recently said that the United States would not set any deadline for the ongoing negotiations with Iran. This hasn’t gone down terribly well with Israel. Reacting to this Benjamin Netanyahu, the Prime Minister of Israel said “the world tells Israel, wait, there’s still time, and I say, ‘Wait for what, wait until when? Those in the international community who refuse to put a red line before Iran don’t have the moral right to place a red light before Israel.” (Source: www.oilprice.com)
Iran does not recognize Israel as a nation. This has led to countries buying up more oil than they need and building stocks to take care of this geopolitical risk. “
In the recent period, since the start of 2012, the increase in stocks has been substantial, i.e. 2 to 3 million barrels per day. These are probably precautionary stocks linked to geopolitical risks,” writes Patrick Artus of Flash Economics in a recent report titled Why is the oil price not falling?
At the same time the United States is pushing nations across the world to not source their oil from Iran, which is the second largest producer of oil within the Organisation of Petroleum Exporting Countries (Opec).
What also is happening is that Opec which is an oil cartel, has adjusted its production as per demand. Saudi Arabia which is the biggest producer of oil within OPEC has an active role to play in this. “This adjustment in the supply of oil mainly takes place via changes in Saudi Arabian production:this country keeps its production just above 10 million barrels/day to avoid the excess supply that would appear if it produced at full capacity (13 million barrels/day,” writes Artus.
If all this wasn’t enough gradually the realisation is setting in that some of the biggest oil producing regions in the world are beyond their peaks. As Puru Saxena, a Hong Kong based hedge fund manager writes in a column “it is important to realise that several oil producing regions are already past their peak flow rates and have entered an irreversible decline. For instance, it is no secret that the North Sea, Mexico, Indonesia and a host of other areas are past their prime.”
All eyes are hence now on the Opec nations. The twelve nations in the cartel currently claim to have around 81.3% of the world’s oil reserves. The trouble is that this has never been independently verified. As Kurt Cobb, the author of Prelude, a thriller based around oil puts it in a recent column on www.oilprice.com “Opec reserves are simply self-reported by each country. Essentially, Opec’s members are asking us to take their word for it. But should we?”
Saxena clearly doesn’t believe that Opec countries, including Saudi Arabia, have the kind of reserves they claim to. “Given the fact that the vast majority of Saudi Arabia’s super-giant oil fields are extremely old, one has to wonder whether the nation is capable of boosting production…We are of the view that Saudi Arabia has grossly overstated its oil reserves and it is extremely unlikely that the nation has 270 billion barrels of petroleum. After all, the Saudi reserves have never been audited and a recent report by WikiLeaks suggests that the Saudis have inflated their oil bounty by 40%,” he writes.
This is something that Cobb backs up with more data. “Another piece of evidence that casts doubt on Opec members’ reserve claims came to light in 2005. That year Petroleum Intelligence Weekly, an industry newsletter with worldwide reach, obtained internal documents from the state-owned Kuwait Oil Co. The documents revealed that Kuwaiti reserves were only half the official number, 48 billion barrels versus 99 billion,” he writes. “In 2004 Royal Dutch Shell had to lower its reserves number by 20 percent, a huge and costly blunder for such a sophisticated company. If Shell can bungle its reserves estimate, then how much more likely are OPEC countries which are subject to virtually no public scrutiny to bungle or perhaps manipulate theirs,” adds.
Given these reasons the world cannot produce more crude oil than it is currently producing. The production of oil has remained between 71-76million barrels per day since 2005. “When you take into account the ongoing depletion in the world’s existing oil fields, it becomes clear that the world is heading into an epic energy crunch,” feels Saxena.
In these circumstances where the feeling is that the world does not have as much oil as is claimed, the price of oil is likely to continue to remain high. India’s Rs 2,00,000crore problem can only get bigger.
The article originally appeared in the Daily News and Analysis (DNA) on September 14, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])