kishore biyani

A bit rich: Why is discount king Kishore Biyani ranting against Flipkart sale?

Kishore_Biyani
Vivek Kaul

If you shout loud enough someone is bound to hear.
Over the last couple of days the offline retail players led by the likes of Kishore Biyani have been shouting from the rooftops about Flipkart and othe retail players indulging in predatory pricing and selling products below cost.
As a very patriotic sounding Biyani told The Economic Times “How can someone sell products below its manufacturing price? This is legally not allowed in the country. Someone can do such undercutting only to destroy competition. Just because they have foreign funding, they can’t kill local trade like that.”
He hasn’t been the only one whining against the discounts offered by the ecommerce companies like Flipkart. Praveen Khandelwal of Confederation of All India Traders (CAIT) said that the association has already approached the Ministry of Commerce. “We do not understand how online retailers gave 60-70% discounts. The prices at which they sold merchandise are lower than our purchase prices. This is a clear case of predatory pricing.”
These noises have reached the government. “We have received many inputs regarding Flipkart episode. Lot of concern have been expressed and we will look into it. Now there are many complaints. We will study the matter… Whether there is a need for a separate policy or some kind of clarification is needed, we will make it clear soon” Commerce and Industry Minister Nirmala Sitharaman said yesterday.
The first question is why should the government look into what is basically finally some healthy competition in the retail sector. Henry Hazlitt explains this beautifully in his book Economics in One Lesson. As he writes “The persistent tendency of men [is] to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups.”
The offline retailers have managed to attract the attention of the government and now the government wants to look into the matter of discounts offered by ecommerce companies. Chances are that the government in the process of looking into the matter will fall victim to what Hazlitt calls the broken window fallacy.
So what exactly is the broken window fallacy? Hazlitt explains this through an example. A young hoodlum throws a stone and breaks a shop window. By the time the shopkeeper comes out, the boy has manage to disappear. A crowd starts to gather and a discussion starts. In sometime, the crowd decides rather philosophically that what happened was for the good.
As Hazlitt writes “After a while the crowd feels the need for philosophic reflection…It will make business for some glazier….After all, if windows were never broken, what would happen to the glass business?” The glazier will have more money to spend. And this will benefit other merchants. “The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be…that the little hoodlum who threw the stone, far from being a public menace, was a public benefactor,” writes Hazlitt.
On the face of it this sounds perfectly normal. But what it does not take into account is the fact that the shopkeeper will have to spend money in order to get the window repaired. And this money he could have spent on something else. In the example that Hazlitt has in his book the shopkeeper wanted to buy a suit. Now he can’t possibly buy the suit because the money has been spent on getting the window repaired.
As Hazlitt writes “The people in the crowd were thinking only of two parties to the transaction, [the shopkeeper] and the glazer. They had forgotten the potential third party involved, the tailor [who would have made the suit]. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye…It is the fallacy of overlooking secondary consequences.”
A similar thing seems to be playing out now in the battle between the ecommerce companies and the offline retailers. In the process the government, like the crowd in Hazlitt’s example, is likely to forget about the third party in the transaction i.e. the end consumer.
As I had explained in a piece yesterday, the end consumer has benefited from the discounts on offer by the ecommerce companies. While, there may have been problems with Flipkart’s recent Big Billion Day Sale, the discounts on offer on most days are genuine. And this benefits the consumers.
Ecommerce companies can offer these discounts because they do not require to maintain the massive physical infrastructure that offline retailers need to do. Over and above this, they do not need to maintain massive physical inventory and at the same time can cut through the distribution chain. These things help keep costs low, which in turn leads to discounts.
The end consumer benefits through discounts. He also now has more choice. Take the case of books. I am a big fan of crime fiction in general and Scandinavian crime fiction (translated into English) in particular. I can now buy almost all the Scandinavian crime fiction that has been translated into English from websites selling books. At the same time the choice of crime fiction available at a book store is fairly limited.
Let’s take another example shared by a friend who lives in a small town and has recently had a baby. The supply of quality diapers in his town is rather patchy. He now simply orders them online.
Further, the consumer also has more choice now when it comes to spending his money. If a consumer buys a product that costs Rs 1,000 offline at Rs 800 online, he is left with Rs 200. That money he can spend somewhere else. This will also benefit some business at the end of the day. The trouble of course is that no one knows where the consumer will end up spending the Rs 200 that he saves by buying online. Hence, a coherent argument in favour of the consumer cannot be made.
So, the likes of Biyani and his ilk may be complaining but the end consumer has benefited from the ecommerce revolution that is taking place. Another argument being offered is that ecommerce companies are taking over the business of offline retailers. As a retailer told The Hindu Business Line “The consuming class in India is in the age group of 18-30. Incidentally, they are also the ones who are driving up sales in the online space. This may erode our customer base.”
The next level of this argument will be that if this continues, then the offline retailers will have to start firing people. Hence, many people will end up losing jobs. The problem with this argument is that it again does not take the consumer into account.
Take the case of mobile phone retailers who are facing a tough time because of the discounts offered on mobile phones by ecommerce companies. The question is how many mobile phone consumers does this country have in comparison to mobile phone retailers. The number of mobile phone users is many many times the number of mobile phone retailers. So yes, mobile phone retailers are having a tough time, but the mobile phone users are benefiting (or have the potential to benefit) from the discounts being offered by the ecommerce companies and this cannot be ignored.
Further, the offline retailers have accused ecommerce companies of dumping their goods as well as predatory pricing. Sunil Jain demolishes these arguments in today’s edition of The Financial Express.
The question that Jain asks is that does Flipkart have the market power to dump goods? The entire e-retail sector in this country is selling goods worth around $4 billion, as per data from consulting firm Technopack. This is not even 1% of the $500 billion consumer market. And Flipkart is a fraction of that 1%. So, it doesn’t really have the market power to dump goods?
Further, Flipkart and other websites have been accused to selling things below cost. As Jain writes “Biyani and the others making this case will have to prove it. Just because a sale is taking place below the maximum retail price (MRP) doesn’t make it below-cost. Let’s say an article costs Rs 100 but has an MRP of Rs 200—that’s a pretty standard thing for most goods. The difference between the two is what comprises trade margins, shared between wholesalers and retailers. So as long as Flipkart is selling at over Rs 100, it is difficult to make a case for it selling below-cost—though…that is also permissible till such time that Flipkart is a dominant player.”
Also, if the selling below cost argument is taken to its logical conclusion then the “loss-leader” concept in retail chains will also have to come to an end. Investopedia defines this as a strategy “ in which a business offers a product or service at a price that is not profitable for the sake of offering another product/service at a greater profit or to attract new customers.” Airline seats being sold on a discount at the last minute will also have to stop.
It is worth remembering here that technical progress always throws people out of jobs and puts the incumbents in tough situations. Ecommerce is doing precisely that with offline retail. So does that mean there should be no ecommerce?
Hazlitt explains it best when he writes: “The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but vicious. Why should freight be carried from Chicago to New York by railroad when we could employ enormously more men, for example, to carry it all on their backs?”

PS: The irony is that Kishore Biyani who built a good part of his business by offering huge discounts over long weekends and thus created troubles for many a kirana shop, is now having problems with the same strategy.
The article originally appeared on www.FirstBiz.com on Oct 9,2014

 (Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Flipkart vs offline retailers: Kishore Biyani ko gussa kyon aata hai

Kishore_Biyani

Vivek Kaul 

Raghuram Rajan and Luigi Zingales in the introduction to their fantastic book Saving Capitalism from the Capitalists write “Those in power—the incumbents—prefer to stay in power. They feel threatened by the free markets.”
So who are these incumbents? “The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour,” Rajan and Zingales write.
Something along these lines is currently playing out in the Indian retail sector. The incumbents (or what we can now call the offline players) are feeling threatened by the e-commerce companies, the new kids on the blocks. E-commerce companies like Flipkart, Snapdeal and Amazon have changed the rules of the game.
The e-commerce companies are gradually taking business away from incumbent offline players by offering huge discounts on products that they sell. One reason for the same is the fact that the ecommerce companies have managed to get around the inefficiencies built into the Indian retail system.
Professor Rajiv Lal of Harvard Business School explained this in an interview with Forbes India. As he put it “Basically the margins that are build up because some of our retail chain are inefficient. Think about the amount of inventory that is being held in the Indian apparel business. It is humongous. Stores are full of inventory and most of them don’t even know how much inventory they are holding. All that stuff is being reflected in the prices that we pay.”
The e-commerce companies don’t have to maintain huge inventories. If they manage to build up an efficient supply chain network, they can keep ordering goods as they go along. Hence, they do not to have maintain a large inventory like the offline players. This helps keeps costs down.
Also, like offline players they do not need to maintain a huge physical infrastructure like showrooms, godowns etc., to sell their goods. They can also buy goods directly from companies producing them and get a better deal in the process. These goods can be then directly sold to prospective consumers without having to go through an elaborate distribution channel.
Take the example of books being sold online. One reason why 30% discount on books being sold online is normal because the bookstore’s margin has been taken out of the equation totally.
Given these reasons, the costs of ecommerce companies are significantly lower than offline players, leading to them being able to offer products at a discount to the maximum retail price.
In fact, people have even started ordering goods like clothes and shoes, online. :Until a few years back nobody thought such products could be sold online. One reason for this is the attractive price. As Lal puts it “even situations that we think that it doesn’t make sense for people to buy things on the internet because of the inefficiencies in the Indian retail system, the price is so appealing that people are willing to compromise on other things.”
There are other reasons as well. Online companies allow buyers to return the product under a certain time period. This has given confidence to people to order products like clothes and shoes.
All this has pushed offline players into a corner. As a retailer told The Hindu Business Line “The consuming class in India is in the age group of 18-30. Incidentally, they are also the ones who are driving up sales in the online space. This may erode our customer base.” Given this, it is but logical that these retailers now questioning the basic business model of ecommerce companies.
As Kishore Biyani told Firstbiz yesterday “Laws in this country do not allow sales below cost price. This is anti-competitive. We (at Big Bazaar and other retail brands) never sell below cost price.” He did not clarify whether his company would be approaching the Competition Commission of India.
Praveen Khandelwal of Confederation of All India Traders (CAIT) said that the association has already approached the Ministry of Commerce. “We do not understand how online retailers gave 60-70% discounts. The prices at which they sold merchandise are lower than our purchase prices. This is a clear case of predatory pricing,” he went onto add.
It needs to be clarified here that not all products sold by online retailers are sold at 60-70% discount. This is the case only for special sales that they organise. Take the case of Flipkart’s recent The Big Billion Day sale. Products were given away at throw away prices when the sale opened at 8 am. But the website ran out of these products very soon. Amazon had also recently been selling books at a discount of 60%, though they did it in a very low profile way. But not all products are sold at such huge discounts all the time.
The offline retailers are reacting in a way that existing businesses react whenever their business model is threatened by a new business model or innovation. The first salvo has been fired and they have questioned the basic business model of the e-commerce companies.
I wouldn’t be surprised if this argument is repeated over and over again in the days to come. Henry Hazlitt explains this technique in Economics in One Lesson “The public hears the argument so often repeated…that it is soon taken in.”
In fact, the small and medium telecom retailers are trying to get telecom brands to stop supplying mobile phones to e-commerce companies. Aam Aadmi Party’s Adarsh Shastri is leading this effort.
As a recent news report in The Economic Times pointed out “It was at one such meeting mediated by Shastri last month that Samsung executives announced to the trade that it will go all out to limit or stop distribution to online sellers who are discounting products. More such meetings are lined up with other brands.”
The report quotes Shastri as saying “Nokia has been cooperating on this. Some brands are more disruptive than the others, like Samsung and even Apple, to an extent. But Nokia, Motorola and HTC have been reasonably open to the idea of price parity between online and retail channels.”
Shastri also said that “”wherever the common retailer is being bullied by a large brand or by the large muscle of online retail, we (AAP) will step in. If it is required tomorrow to take up issues of small retailers, the party will absolutely do it.”
The idea here is to ensure that small and medium telecom retailers continue to stay relevant and are not wiped out by e-commerce companies. While this sounds fair, the trouble with this idea is that it just takes into account one side i.e. the offline retailers. But what about the end consumer?
The question is why is nobody talking about the consumer? First and foremost the consumer is getting a better deal. Doesn’t that amount to something? Further, he has more choice now when it comes to spending his money. If a consumer buys a product that costs Rs 1000 offline at Rs 800 online, he is left with Rs 200. That money he can spend somewhere else. This will also benefit some business at the end of the day.
The trouble of course is that no one knows where the consumer will end up spending the Rs 200 that he saves by buying online. Hence, a coherent argument in favour of the consumer cannot be made. This explains why people like Shastri end up representing only one side of the argument.
Getting back to Biyani, he obviously understands the power of ecommerce and hence is hedging himself both ways. While in public he has been questioning the discounting practises of e-commerce companies, he may also be in the process of tying up with Amazon. As a recent report in the Business Standard points out “Biyani is in talks with Amazon to sell his private labels and sharing back-end facilities.”
To conclude, it is worth remembering that when an existing way of doing things is under threat, the incumbents are bound to react aggressively. This is what is happening right now with the retail sector in India. Nevertheless as Lal of Harvard put it “Why haven’t people asked the question, that should we have introduced auto-rickshaws and taxis because the rickshawallahs would have lost jobs?”
The article originally appeared on www.FirstBiz.com on Oct 8,2014 

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

Biyani, Mallya, Suzlon, DLF: Easy money screwed up India Inc


Vivek Kaul
George Orwell the author of masterpieces like 1984 and Animal Farm once said “whoever is winning at the moment will always seem to be invincible”. The big Indian businessmen went through this phase between 2003 and 2008. They were invincible and the world seemed to be at their feet.
One impact of this was diversification or entrepreneurs following the age old adage of not having all the eggs in one basket. And so the Indian entrepreneurs went on a diversification spree. Vijay Mallya thought running an airline, a cricket team and an FI team was just the same as selling alcohol. DLF thought running hotels, generating wind power, selling insurance and mutual funds would be a cake walk after they had created India’s biggest real estate company. Deccan Chronicle saw great synergy in selling newspapers and running a cricket team and a chain of bookshops. Hotel Leela thought running a business park would be similar to running a hotel. Kishore Biyani thought that once he got people inside his Big Bazaars and Pantaloon shops, he could sell them anything from mobile phone connections to life and general insurance. Bharti Telecom thought that mutual funds, insurance and retail were similar to running a successful telecom business.
Banks were more than happy to lend money to finance these expansions. And if money couldn’t be raised domestically it could always be raised internationally by issuing foreign currency convertible bonds (FCCBs). The beauty of these bonds was that the rate of interest on these bonds was almost close to zero. Hence, the companies raising money through this route did not see their profits fall because of interest payments.
So everybody lived happily ever after. Or at least that’s how it looked till a few years back.
In the prevailing euphoria these entrepreneurs did not realize that all the money they were raising in the form of debt would have to be returned. Even if they did, they were confident that all these expansions into unrelated territories would soon start making money and would generate enough profits to pay off the debt.
Other than unrelated diversifications companies also borrowed to fund their expansion into their core areas at a very rapid pace. As Nirmalya Kumar, a professor of marketing at the London Business School explained to me in an interview I did for the Daily News and Analysis a few years back “capacity never comes online at the same time as demand because you have to add capacity in chunks, whereas demand goes up as a smooth function. Capacity comes in chunks and people generally add capacity at the top of the cycle, rather than at the bottom of the cycle because at the bottom of the cycle, everybody is hurt and nobody knows when things will turn around.I cannot set up a cement plant every time there is a 100-tonne more demand in the country, because when I set up a cement plant, I set up a 2 million tonne cement plant. There will be times when there will be a shortage and there will be time when there will be lots, right? So this boom and bust always takes place.” (You can read the complete interview here).
Telecom companies raised a lot of debt to establish their presence all over the country only to realize that the consumer had too much choice leading to the telecom companies having to cut calling and smsing rates to ridiculously low levels(I have a sms pack which costs Rs 25 and gives me 15,000 messages free per month. If I exhaust that limit one sms costs one paisa). At one point of time the Mumbai circle had a dozen odd operators competing.
The wind energy company Suzlon raised a lot of money through the FCCB route to expand at a very past pace and became the darling of the stock market. DLF raised a lot of debt to build a land bank.
So during the boom businesses just expanded into related and unrelated areas. NDTV, a premier English news channel, tried getting into the entertainment channel business with NDTV Imagine. It lost a lot of money on it and finally sold out. Even the selling out did not help and the channel has since been shutdown. Peter Mukherjea a successful manager launched News X, which he had to sell off. Satyam, an IT company tried to diversify into real estate and infrastructure as Maytas (Satyam spelt backwards).
With all the easy money going around Biyani soon had major competition in the organized retail space with the Tata group, Birla group, Ambani group and even Sunil Bharti Mittal deciding to enter the organized retail space. Then there was also Subhiksha which expanded so fast that it soon had 1500 stores all over the country. This was also the era where media companies got into the real estate business. They also wanted to set up power and cement plants, and buy coal mines.
And most of this expansion was funded by companies by taking on more and more debt. Banks also got caught on to the euphoria that prevailed and gave out loans left, right and centre. The boom period has now run out. What we are seeing right now is the bust.
Businessmen now seem to be coming around to the realisation that they have ended up raising too much debt too fast and need to bring it down. Some of them like Subhiksha and Kingfisher have had to shut down their operations. Others are facing huge losses. As Sreenivasan Jain wrote in a recent column in DNA: “Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets,” writes Jain. (You can read the complete article here)
The realisation also seems to have come around among businessmen that they need to sell of what they are now calling their “non-core assets”. Deccan Chronicle recently tried selling its Deccan Chargers IPL team but found no buyers willing to pay more than Rs 900 crore. Over the weekend BCCI cancelled its franchise. So all the debt that was raised to get the cricket team up and going has now gone down the drain. There are next to no assets to sell against it. DLF sitting on top of more than Rs 25,000 crore debt has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts its foray into luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai’s Lower Parel area to Lodha Developers for Rs 2750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore.
Hotel Leela has been trying to sell its business park. Vijay Mallya managed to sell a stake in his F1 team to Sahara. Media reports suggest that Mallya has been in talks with the British company Diageo to sell United Spirits. There are also rumors that he is trying to sell real estate that he owns in Bangalore to pay off all the debt on Kingfisher Airlines. In the meanwhile no one seems to be interested in buying Kingfisher Airlines even though the government has allowed up to 49% foreign direct investment in the aviation sector.
Kishore Biyani managed to sell off Pantaloons and Future Capital in order to pare down his debt. The Bharti group got out of the education business by selling Centum Learning to Everonn education. Also some of the big companies that had got into organized retail have either closed their stores or scaled down the level of their operations. Suzlon is in major trouble. Its FCCB loans amounting to $221million(Rs 1,160 crore) are set to mature later this month and the company is in no position to repay. Its request to extend the repayment has been rejected by the bondholders. It is now being speculated that the company will default on these loans and go in for liquidation.
The learning out of all this is that it is easy to expand when the money is easily available and the going is good. But selling out when the tide turns around is not so easy.
But what businesses should have hopefully learnt more than anything is that in this day and age it pays to focus on a few businesses instead of trying to do everything under the sun just because money to expand is easily available.
In the past things did not change in business. An interesting example is that of the Ambassador car. The car had the same engine as of the original Morris Oxford which was made in 1944. And this engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. To conclude, in the movie English Vinglish one of the characters who goes by the name of Salman Khan says “entrepreneur, shabd na hua poori ghazal ho gayi”. For the Indian entrepreneurs the expansions they thought would be as soulful as ghazals have turned into headache inducing heavy metal. Hopefully they have learnt their lessons.
The article originally appeared on www.firstpost.com on October 15, 2012. http://www.firstpost.com/business/biyani-mallya-suzlon-dlf-easy-money-screwed-up-india-inc-490747.html
(Vivek Kaul is a writer. He can be reached at [email protected])

Kirana vs Wal-Mart: Busting the big myths of big retail

 
Vivek Kaul
In a rather poignant scene in Zoya Akhtar’s Zindagi Na Milegi Dobara, the character played by Farhan Akhtar, is sitting face to face with his biological father, played by Naseeruddin Shah (in a brilliant cameo). As the story goes, Shah had abandoned Akhtar’s mother (played by Deepti Naval) after getting her pregnant and moved onto becoming a famous painter in Europe.
Akhtar finally calls up Shah, when on a holiday in Spain he and his two friends get involved in a drunken brawl and land up in jail. Shah comes and bails them out. After this, Akhtar asks Shah for the true reason behind abandoning his mother. To which Shah replies “Sach hota kya hai. . . sach ka har ek ka apna apna version hota hai!” (What is truth? Everybody has their own version of it)
This line written by Farhan Akhtar is at the heart of the current debate happening, after the decision made by the Congress led UPA government to allow foreign direct investment in multi-brand foreign retailing.
Those in favour of the decision have their own version of truth. And those against it have another version. Those in favour of the decision believe that allowing foreign investment will create jobs, build supply chains and overall help economic growth. Those against it firmly believe that it will destroy the neighbourhood kirana shop, as you, I and everybody else, hop onto Wal-Mart to buy stuff. I have my own version of truth which is somewhere between the two extremes.
The kirana store will survive: A lot of hue and cry has been made on this. Nitish Kumar the Chief Minister of Bihar believes that the aam aadmi will suffer because of FDI in retail and hence he won’t allow it in Bihar. The fact of the matter is that it is not easy to compete with the neigbourhood kirana store. My kirana guy even goes to the extent of delivering things that he does not sell, like eggs and medicines, to ensure that I keep giving him business. As Rajiv Lal a professor at the Harvard Business School told me in an interview I did for Daily News and Analysis (DNA) “Kirana stores have a lot of benefits that established retailers don’t have. First of all location. What rents do they pay versus what established companies have to pay? Employees, same story. On the consumer side they can deliver services, in terms of somebody calls them and asks can you deliver six eggs? The guy runs and delivers six eggs. That’s not something that the big established firms can provide.” (You can read the complete interview here)
No homogeneity across India: An important factor for big retail to be successful is the homogeneity of the population in consumption behaviour. This gives them economies of scale. As marketing guru V Kumar told me in a recent interview I did for DNA “Does the country as a whole consume common things or there are regional biases?  In a country like Brazil people eat similar foods that every retailer can sell.” In India clearly things are different. “In India between South, East, West and the North, there is so much heterogeneity that you need localized catering and marketing .So consumption behaviour varies therefore unless you are willing to carry heterogeneous products in each of the locations it is tough,” said Kumar (You can read the complete interview here). This is a challenge that foreign retailers will have to deal with.
The real estate conundrum: A typical Wal-Mart in the United States is situated outside the city, where rents are low. But such a strategy may not work in India. “It’s not easy to open a 150,000 square feet store in India. That kind of space is not available. They can’t open these stores 50 miles away from where the population lives. People in India don’t have the conveyance to go and buy bulk goods, bring it and store it. They don’t have the conveyance and they don’t have the big houses. So it doesn’t work,” explained Lal. This is something that Kumar agreed with. “Even if Wal-Mart is there in every place, the way they are located is typically outside the city limits. So only people with time, motivation and a vehicle, will be able to go and buy things. And the combination of these three things is very rare.” The kirana stores also provide goods on interest free credit to their customers something that no big retailer can afford to do.
The fear of Wal-Mart and others of its ilk is overdone:  It is widely believed that wherever Wal-Mart goes it destroys the local business. As Anthony Bianco writes in The Bully of Bentonville – How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting America “It (Wal-Mart) grows by wrestling businesses away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing …shopping districts into intensive care and then ripped out the life-support-system.”
But that is truer for markets like Canada, Mexico and United Kingdom, which are culturally and geographically closer to the United States. The Wal-Mart formula doesn’t always work everywhere. Pankaj Ghemawat, who has the distinction of being appointed the youngest full professor at the Harvard Business School, writes about this in his book Redefining Global Strategy,  “When CEO Lee Scott (who was the CEO of Wal-Mart from 2000 to 2009) was asked a few years ago about why he thought Wal-Mart could expand successfully overseas, his response was that naysayers had also questioned the company’s ability to move successfully from its home state of Arkansas to Alabama…such trivialisation of international differences greases the rails for competing exactly the same way overseas at home. This has turned out to be a recipe for losing money in markets very different from the United States: as the former head of the company’s German operations, now shut down, plaintively observed, “We didn’t realise that pillowcases are a different size in Germany.””
What is the experience from other emerging markets? Big retail has got some traction in countries like China and Brazil. As Kumar put it “If you look at evidence from China organized retailing has got more traction. That’s because they did not have many mom and pop stores to begin with. They were cultivating their own things which was locally community based. But with more cities coming up and migration of people from rural areas to cities, gives more scope for organised retailing in China. Also space is not an issue in China. In India space is a constraint. Look at China and India. China is much bigger than India but the population is pretty much similar. Look at Brazil, it is as much bigger than India but the population is maybe one sixth that of India.  So they also have space.” Whereas space remains a key constraint for big retail stores like Wal-Mart, Tesco and Carrefour in India.
Also in almost all emerging markets a local company is number one. As Lal told me “There is not  a single emerging market that I know where a foreign entrant is the number one retailer. In Brazil it is Pão de Açúcar, in China you have the local Beijing Bailian. In most markets even when there are foreign entrants the dominant retailer in the organised sector is still the local retailer.”
And there are several reasons for the same. The local retailers are very price competitive. “If Wal-Mart is operating in Brazil there is nothing that Wal-Mart can do in Brazil that the local Brazilian guy cannot do. If you want to procure supplies from China, you can procure supplies from China as much as Wal-Mart can procure supplies. On top of that they have local merchants that they know they can source from and Wal-Mart may not,” said Lal.
Will foreign players be able to crack the market, when most of the Indian retailers are bleeding? The biggest Indian business groups have tried to crack organized retailing over the last decade. The Tatas, the Birlas, the Ambanis, all have a significant presence in the sector. But despite that organized retailing remains a small part of the overall retail business. As Sreenivasan Jain writes in the DNA: “For starters, India has had big or organised retail for about 15 years now, not a small stretch of time. Some of the biggest Indian corporates are in this space, like Reliance, the Birlas, Godrej, RPG (Sanjeev Goenka Group) and Kishore Biyani’s Future Group. Despite this, organised retail is only 5% of the Indian retail market. The remaining 95% is still unorganised.” (You can read the complete article here).
And all these big players are losing money hand over fist. “Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets,” writes Jain.
It is in the interest of these firms that foreign investment is allowed in the sector, so that they can sell a part of the equity to foreign firms. Those in favour are of the opinion that these firms do not have the necessary expertise which the foreigners will bring in. This argument does not really work. Bharti Enterprises which runs the Easy Day stores has a back-end and cash-and-carry partnership with Wal-Mart. Star Bazaar, run by the Tata group is offered back end support by Tesco. So the big retail giants are in a way already operating in India.
Another point put forward by those in favour of foreign investment in retail is that it will help build reliable supply chains across the country. Theoretically yes, but the trouble is supply chains cannot be built if it’s left to the states to decide whether they allow foreign retail or not. Supply chains need to be seamless, they cannot be built if one state allows foreign retail and the neighbouring state does not. Also, we must remember that despite the presence of these heavy weights in the retail sector the kirana shops still continue to function as they had before.
So what is the future going to be like?  It is difficult to predict what the future of the likes of Wal-Mart, Tesco and Carrefour in India is going to be. But one thing is for sure. They won’t find it easy. As far as Wal-Mart goes Kumar had this to say “There will be a market if they are content at not being the largest retailer. If they say in India I am one among many, they will have a presence. Maybe at some point in the future, things might change, like Wal-Mart buying other retailers and that’s the way they can expand. Their specialty is supply chain and turning the inventory over multiple times than other retailers. They cannot turn it over multiples times here. Each time if they make a 1% margin they get a higher margin due to turning the inventory over multiple times. Here I don’t see them turning it over as many times as in other markets. It’s very difficult to do that.”
Kumar also predicts that over a period of time the likes of Wal-Mart will be forced to buy the smaller kiranas in order to expand. “My prediction is this that mom and pop stores or kiranas as we call them will become more and more sophisticated. Today the store owners know people by their names, as the number will grow they will have to start building a database, but they don’t have the capabilities. So organised retailing will start buying mom and pop stores individually. And then they will put all of them under one banner. It will be like how Tesco is operating in the U.K with different store formats. You have Tesco supermarket, convenience store, street corner store, express etc. So that is the way in India you will see this evolving because otherwise there is no growth for them,” said Kumar.
So my version of truth is somewhere in between those who support foreign investment in mutli brand retailing as it’s called, and those who don’t. Big retail will not be the panacea it’s being made out to be. Neither will it destroy the smaller shops as is being claimed. It will have to create its own space. And that will only happen over a period of time.
This article originally appeared on www.firstpost.com on September 18, 2012. http://www.firstpost.com/business/kirana-vs-wal-mart-busting-the-big-myths-of-big-retail-459490.html#disqus_thread
(Vivek Kaul is a writer and he can be reached at [email protected])
 
 

How the new Peter Principle caused Kingfisher’s downfall


Vivek Kaul
A few years back I had booked a ticket on an early morning Kingfisher flight from Mumbai to Ranchi, or so I had thought. I came to realize I was on Kingfisher Red and not the full service Kingfisher only once I was inside the aircraft.
Sometime later I came to realize that several people I knew had had a similar experience. They had booked flights thinking they were on the Kingfisher full service, only to realize later that they were on Kingfisher Red.
The airline clarified that it was not their mistake but the mistake of the websites that did not make a distinction between Kingfisher Red and Kingfisher First.
But the question that cropped up in my mind was that why would Kingfisher, a premium-upmarket brand, want to dilute its positioning by associating itself with Kingfisher Red, which was essentially a low-cost airline.
Vijay Mallya, started Kingfisher Airlines in 2005. A few years later he tried to get into the low cost airline business, which was the flavour of the season back then, by taking over Deccan Aviation which ran Air Deccan, a low cost airline. He rebranded it as Kingfisher Red. By doing this he diluted the premier positioning that Kingfisher Airlines had acquired in the minds of the consumer.
To explain this a little differently, let us take the example of Hindustan Unilever Ltd (HUL). It sells the Lifebuoy which is targeted at the lower end of the market and goes with the line tandurusti ki raksha karta hai Lifebuoy. The company also sells Lux which is targeted at the upper end of the market and comes with the tagline filmi sitaron ka saundarya sabun.
Of course, the positioning of Lifebuoy and Lux is totally different. And HUL tries to make this very very clear in the minds of the consumer. First of all, both the products have different names. Second the pricing is very different. And third, the advertisements of both the products emphasize on the “different” positioning over and over again.
Now Mallya running a low cost airline under the premium brand name of Kingfisher would be like HUL selling Lux soap under the name of Lifebuoy premium.
And it’s not just about the brand name and the positioning in the mind of the consumer. The philosophy required to run a premium brand is totally different in comparison to the philosophy required to run a low cost brand. Hence, Mallya buying Air Deccan was mistake. And then changing its name to Kingfisher Red was an even bigger mistake.
So in the end this did not work and Mallya decided to close down Kingfisher Red. He explained it by saying that “We are doing away with Kingfisher Red, we do not want to compete in the low-cost segment. We cannot continue to fly and make losses, but we have to be judicious to give choice to our customers.”
Kingfisher might have just survived if it had not made the mistake of buying Kingfisher Red. World-over several airlines have tried running a full-service and a low cost airline at the same time and made a mess of it. A company cannot run a low cost airline and a full service career at the same time. The basic philosophy required in running these two kind of careers is completely different from one another.
But the bigger question is what was Vijay Mallya trying to do by running a liquor business, a real estate business and an airline at the same time? This was other than spending substantial time on his expensive hobbies of trying to run a cricket and an FI team, and cheaper ones like commenting regularly on Twitter.
There isn’t really any link among the businesses Mallya runs. Some people have tried to explain that the airline was just surrogate advertising for the beer of the same name. But then there are cheaper ways of advertising than running an airline and losing thousands of crores doing it.
Businesses over the years have become more complicated. And just because a company has been good at one particular business doesn’t mean it will be good at another totally unrelated business.
Mallya is not the only one realizing this basic fact. The period between 2002 and 2008 was an era of easy money. Businesses could borrow money very easily to expand as well as get into new business. And this is what finally got businessmen like Mallya into trouble.
The British economist John Kay calls this the new Peter’s Principle. The original Peter’s Principle essentially states that every person rises to his or her level of incompetence in a hierarchy. Simply put, as a person keeps getting promoted he is bound to appointed to a job, he is not good at. The same is the case with companies which keep buying and diversifying into different businesses, until they land up in a business they don’t really understand. And that drives them down.
Mallya was a victim of the new Peter’s Principle, his non related diversification into the airline business cost him dearly. The lack of focus has hurt Mallya’s core alcohol business as well and United Spirits is no longer India’s most profitable alcohol company. That tag now belongs to the Indian division of the French giant Pernod Ricard.
An era of easy money got Indian entrepreneurs including Mallya to get into all kinds of things which they did not understand and had no clue about. Kishore Biyani brought the retail revolution to India, having been inspired by Sam Walton who started Wal-Mart. His retail businesses were doing decently well till he decided to get into a wide variety of businesses from launching an insurance company to even selling mobile phone connections. When times were good he accumulated a lot of debt in trying to grow fast. Now he is in trouble in trying to service the debt and rumors are flying thick and fast that he is planning to sell Big Bazaar, his equivalent of Wal-Mart. This after he sold controlling stake in the cloths retailer, Pantaloons.
Let’s take the case of DLF, the biggest real estate company in the country. It tried getting into the insurance and mutual fund business. It had to sell its stake in the mutual fund business and if news reports are to be believed it is trying to lower its stake in the insurance venture. It also tried unsuccessfully to get into the luxury hotel business and failed. Hotel Leela tried to get into the up-market apartments space and failed.
Reliance Energy (the erstwhile BSES) was turned into Reliance Infra and now is into all kinds of things. It is building one section of the Mumbai Metro, the completion of which keeps getting postponed. It is also supposed to build the remaining portion of the sealink in Mumbai.
The days when businesses like Tata and Birla used to do everything under the sun are long over. In fact, those were the days of license quota raj with very little competition. Hence companies could get into a new space as long as they got a license for it.
An interesting example is that of the Ambassador. The car had the same engine as of the original Morris Oxford which was made in 1944. The same engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. And when it comes to airlines its time Mallya read what Warren Buffett told his shareholders a few years back.
“Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt.”
The bigger sucker saved Buffett. But Mallya may not have any such luck
(The article originally appeared on www.firstpost.com on July 5,2012. http://www.firstpost.com/business/how-the-new-peter-principle-caused-kingfishers-downfall-368549.html)
(Vivek Kaul is a writer and can be reached at [email protected])