'Tesco UK model shows organised retail will buy out kirana stores in India'

Few have approached marketing as a science like V Kumar. “My significant contribution to marketing is bringing science into it. Bridging science and practice,” says the IIT Madras alumnus, who has been greatly inspired by Philip Kotler. VK, as he is better known, is the Richard and Susan Lenny Distinguished Chair Professor of Marketing, and executive director, Centre for Excellence in Brand and Customer Management, Robinson College of Business, Georgia State University, in the US. He was recently ranked amongst the top five marketing scholars worldwide, based on his research productivity. He is also the recipient of eight lifetime achievement awards (in various areas of marketing), which is a record and a consultant to some of the biggest companies in the world. In this interview, he speaks to Vivek Kaul.
One of your core areas of work has been customer loyalty. Can you talk about that?
Fourteen-fifteen years ago the universal metric was that if somebody is loyal they are the most valuable customers. We questioned that linkage. Why is loyalty equal to profitability? Maybe in contractual relationships it is so. But most of the transactions between a firm and a customer are non-contractual .I am free to go and buy a shirt anywhere, a computer anywhere, a phone anywhere. Very few things are contractual. Your monthly subscription to your wireless plan is contractual. Maybe your internet connection at home and utilities, like electricity are. Given that we started to empirically test the relationship between loyalty and profitability and found it to be a very weak relationship. We went to the companies and said that if you want to engage customers then don’t use loyalty as a metric.
How was customer loyalty defined?
Loyalty was defined as how long a customer has been shopping with a company. How much money out of the total wallet size they have been spending with the company. How frequently they are coming and buying from the company. But there was nothing about profitability or the fact whether the company is making money out of the relationship. Banks were the first ones to start looking at how much profit a customer was bringing in and that too they were looking backwards i.e. how much profit the customers gave in the past and not how much profit they were likely to give in the future.
And you challenged that notion?
Yes. This prompted us to come up with a metric to value the customer. How much profit a customer is likely to give in the future? And we went to companies, got their transaction database of what customers are buying, how much the companies is spending on them in direct marketing costs, and accounting for all this we calculated the gross margin for each product sold. With these three pieces of data we were able to put together a customer life time value(CLV) metric. We did this in 2003-2004 and one of the first companies to implement this was IBM. In a pilot study we tested the customer life time value model and they made $20million instantly. Then that became the mantra for them into becoming a customer centric organisation and allocating resources to those customers where the most bang for the buck is. In India we worked with ICICI Bank . We worked with the Wells Fargo bank in the United States. We worked with the HSBC bank in Middle East. In telecom we worked with AT&T for six years. Then in the retail environment we worked with the Polo Ralph Lauren, Gallery Furniture, etc.
So the focus was on profitable customers and not necessarily the loyal ones…
Yes. In 2007 what happens is that suddenly there is a headline that the telecom company Sprint fires 1000 customers because they were unprofitable. So was it the right thing to do? The media came to us and said, you said profitability is the metric to chase and they are doing that and they are firing unprofitable customers. I said, if they are unprofitable what can you really do? It’s better to fire them, so that they will go to competition and make them unprofitable. It’s good for the company. But what if these customers spread bad word of mouth about the company, I was then asked? Who will listen to them, I replied. Because they are bad customers and hence they were fired. So if bad customers go and say they were fired, the response they will get is that of course something must have gone wrong in the relationship.
How did the company handle the situation?
Sprint also wrote about saying that these customers were calling the call centre eight times a month. At the rate of three minutes each time, it amounted to 24 minutes. Each cost call Sprint three dollars a minute. So the total cost was 72 dollars. And Sprint was making 15 dollars on them .So net net Sprint was losing 57 dollars a month on them. Over a year the company was losing over 600 dollars on a single customer. Sprint communicated to the customer base and told them that if they had not fired these customers, then the rest of the customers would have had to subsidize them..
Could you give us other examples of companies firing people?
After Sprint fired 1000 customers then the internet service providers Comcast and Verizon and all started putting a hold on the bandwidth. If people were hogging internet usage by constantly downloading movies and so on, then they said I am not going to service you or I am going to slowdown your speed. Proactively they tried to ensure that they did not lose money on somebody. They also fired a few consumers..
Some of your more recent work has been in the area of trying to figure out who is influential in the social media and using that insight in marketing. Could you take us through that?
This is the new wave. In 2008 me and my team developed this model. We basically wrote a software that could track everybody’s twitter and facebook conversation. Therefore when you put something on Facebook and others like it, then my software will see it. My software will also capture the tweets. You can ask if all this is legal? They had an open gate system at that point of time. Anybody could monitor anybody. Now they are putting plugs.
So how did the software work?
My software could crawl and track who is on Facebook and Twitter, what they are saying, who is tweeting to whom etc. Not only that, if I tweet something, you forward it to somebody else, they forward it to somebody else and they again forward it to somebody else, we could find out how far your tweet spreads. How far your Facebook like spreads? So when I tweet to you it spreads to 10,000 people. But if I tweet to someone else it only spreads to 200 people. So I then try and I figure out, why in a two week period your tweet spreads to 10,000 and the other person’s goes to only 200 people. And I find that you have more followers on Facebook and Twitter. And you are pretty active in the social media world and you are talking about multiple subjects or even a single subject but more of it. And whenever you say something to somebody they also reciprocate to you. We come up with eight measures like that. With the help of this we can pretty much say something like that if I use you as a seed to plant a message then it will reach 8500 people. That is what we have done.
Could you take us through a real life example on the above subject?
An ice cream retailer from Mumbai approached us and asked us to help them to promote this ice-cream. Our target group is college students and young adults, they said. They are the ones who are going to spread the word. They are active in the social media. So we want to use social media. We have a very limited budget.
So what did you do?
We created a stickiness index. Of all the conversations happening we tried to figure out who are the people who have a high degree of category relevance. So in this case who is talking about ice cream related products on Facebook or Twitter. People could be talking about milkshakes, or gelato. It could be just ice and of course ice cream. We applied the stickiness index on the influencers i.e. if there are 10,000people with a high customer influence effect meaning those who can spread the message the farthest, applying the stickiness index, we narrowed down the number to 300. So we take this 300 and bring them to the ice cream parlour and got them to taste the ice-cream. We also asked them to create their own ice cream and give a name to it.
And what happened after that?
After this we asked these guys to spread the word about the ice-cream. So in next step they put it up on Facebook. Tweeted about it. Other people who saw this on Twitter could take the hashtag associated with the tweet to the ice cream parlour and could buy the specific ice-cream created by the person tweeting. The parlour boy registered the hashtag. At the end of each day our computer read from each ice cream parlour of this chain and related it to the person who sent the message on Twitter. So what is in it for the person sending the message? Each week we had a competition where the winner got a t-shirt, tote bag, etc.
Which chain was this?
This was the Hokey Pokey ice cream chain.
So there are varying things that companies get their customers to do for them…
Yes. If I am the customer and you are the firm, then I can buy from you. If not buy, I can refer customers to you through incentives. If not, then I can write about you on my social media. If not, I can give you ideas to improve your service quality. Introduce this product. Add this feature to your product. When I give ideas to you, you take that idea commercialise it and then whatever profits you make you give a share of profits to me.
Can you give some examples on that?
Many women when they are getting married in the United States hunt for the right bridal wear and often they don’t find the one they like. So they create their own design and send it to the bridal wear company which can post it on its website and say here is a design which one of our prospective customers created. How many others like this? If 200 others like it and are ready to buy it then the company can produce 200 dresses of that design at the stated price and share profits with the person who came up with the design. Another good example is IBM. They put up the Linux operating system as an open source software. So you and I can create an application for IBM that runs on Linux code, give it to IBM, they will market it and share the profits.
Any other examples?
A fast food chain got into trouble when on a YouTube video somebody caught two of its employees picking their nose and then putting their fingers into one of their products. This was a challenging situation. The company decided to have a competition and let the customers design the ingredients. They had a competition. And two people won. The product the winners had designed entered the menu of the fast food chain and the profit was shared.
Can organised retailing compete with mom and pop stores in India?
Organised retailing at best in India could be at 9%. 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 be see this evolving because otherwise there is no growth for them.
What is the evidence from other emerging markets?
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.
Any other factors at work?
There is another major factor on which it depends whether they will survive or not, it is the homogeneity of the population in consumption behaviour. 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 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. But the organised retailers have a choice now. Do they invest capital and build their own infrastructure or should they buy out these kiranas and build them up? And clearly I see the latter as a more viable strategy than putting up their own real estate.
Should we allow the likes of Wal-Mart into India?
Wal-Mart is a value conscious store. 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. Therefore their ability to grow organically in a country like India by systematically expanding the number of outlets is going to be difficult. 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.
(The article originally appeared in the Daily News and Analysis on September 10,2012. http://www.dnaindia.com/money/interview_tesco-uk-model-shows-organised-retail-will-buy-out-kirana-stores-in-india_1738905)
(Interviewer Kaul is a writer. He can be reached at [email protected]

‘The theory of maximizing “shareholder value” has done great harm to businesses’

He is 81 and still going strong. His text book on marketing: Marketing Management is now in its thirteenth edition and still remains an essential read for anyone who hopes to get an MBA degree. He’s often called the father of marketing; something he regards as a compliment, while at the same time ceding the title of the “grandfather of marketing” to management thinker Peter Drucker. Meet Philip Kotler, the S.C. Johnson & Son Distinguished Professor of International Marketing at the Northwestern University Kellogg Graduate School of Management in Chicago. He has been hailed by Management Centre Europe as “the world’s foremost expert on the strategic practice of marketing.” In this freewheeling interview he talks to Vivek Kaul.
Historically, the vast majority of marketing campaigns have been designed to appeal to our personal needs, lusts, greed or insecurities. To what extent do marketers exploit our human tendencies toward addiction?
Professional marketers see customers as carrying on both mental and emotional processes as they consider purchasing anything. Marketers need to choose the emotional appeal(s) that are relevant to the particular product or service. For a toothpaste, the appeal might be better breath, whiter teeth, or fewer cavities. Or going further, the appeal might be looking sexier, or having longer term dental health. Each competitor must make a choice. In a campaign to get people to stop smoking, one can use a negative appeal (cancer, lung disease, kidney failure) or a positive appeal (better sports performance, living longer for your family). I have advocated using an anti-smoking appeal showing a father who puts out his cigarette when his child comes into view so as not to pass on this bad habit to his children (this is a love appeal). Human emotions range widely and the choice of an appeal is a careful decision that is conditioned by competitors’ appeals and other data. It might seem to the layman that ads often use sex, power, or ego appeals but we could cite many campaigns that use appeals that are less base.
Lately companies have been cutting their marketing budgets, given the troubled times that we are in. Do you think it is a wise move to cut the marketing budget?
That is a panic response and often inappropriate. If competitors decide to cut their marketing budgets, the remaining firm should consider keeping or even increasing its marketing budget. I would go further and sat that a well-heeled firm might even consider buying out some weaker firms during a recession. In normal times, a company finds it hard to move its market share. In recession times, a well-endowed firm can power up its market share. Much depends on the quality of the firm’s products and services. A market leader should consider adding more value rather than cutting its marketing budget. The leader will probably have to alter its messages and media but it doesn’t follow that it needs to cut its marketing budget.
The economist Milton Friedman famously said: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”. What are your thoughts on the social responsibility of marketing?
Milton Friedman was my professor at the University of Chicago and we all admired his brilliance. He was a great believer in leaving businesses unencumbered by regulations and he wanted the leave the business owners to decide what they wanted to do with their profits. I took exception to this view.
Why was that?
Businesses are social organizations that can do great good or great harm. We don’t have to be reminded of the environmental damage companies did by dumping waste into water and pollutants into the air. We don’t have to be reminded of Enron and Madoff and other crooks and pyramid builders. We need appropriate regulations for the competitive system to work. I would argue that companies should go beyond their worship of shareholders who often don’t care about the company and jump in and out of owning its stock. The theory of maximizing “shareholder value” has done great harm to businesses. I have argued that smart companies must focus on the other stakeholders first – customers, employees, suppliers and distributor—and make sure that these stakeholders are all rewarded appropriately and that they work together as a winning team. Satisfying the stakeholders is the best way to maximize the long run profitability of the company. I would propose that as education levels rise in a country, more buyers will expect more from companies and base their brand choices partly on which companies have practiced a caring attitude toward the environment and society. Those companies that operate on the triple bottom line — people, planning and profits – will outperform those who only pursue profit.
A major point in your new book Good Works: ! Marketing and Corporate Initiatives that Build a Better World…and the Bottom Line, is that over the last decade there has been tremendous growth in the number of marketing and corporate initiatives that appeal to our desire to help others or tackle social or environmental problems. Why has this sudden change come about? Can you share some examples with us?
Let’s recognise that societies are facing a growing number of difficult problems – world hunger and poverty, local wars, pollution, environment damage, and faulty education and health systems. Solutions are badly needed. Solutions can only come from the three sectors found in any economy: businesses, NGOs, and government. Today, the governments in most countries are in no condition to solve these problems, given their debt levels and their political impasses. The NGOs have as their purpose to help solve these social problems but are even with less funds available in these recessed times. Business is the only agent of change with the means of doing something to improve the sad state of affairs. The public is increasingly interested in which companies are willing to help make a difference in some of these problems. Consider what Wal-Mart is doing now to reduce air pollution. It is not only ordering the most fuel efficient delivery trucks but now asking its suppliers to change to more efficient trucks or else not be accepted as a supplier. Timberland, the maker of shoes and clothing, does a thorough job of waste reduction and of choosing only suppliers who have good environmental practices. The message is that companies have the capacity to be proactive in making the world a better place for all of us.
What do think are the biggest challenges facing marketing today?
Marketing used to be pretty straight forward. Hire able salespeople and brand managers and a top advertising agency and the team will attract many triers and buyers. Marketers didn’t have much input into the product: their job was to get the product sold. Today the picture is radically different. The social media revolution has diminished the power of advertising and requires new skills in the marketing group to successfully use Facebook, You Tube, Linked in, and Twitter. Buyers are now all-knowing thanks to Google and their Facebook friends and they can get excellent information on different brands and their worth. Companies have to make a basic decision: Should the marketing department basically remain a communication group (one P – Promotion), or a 4P group (Product, Price, Place and Promotion)? I am in favor of giving marketing more power to participate in the product development process, and pricing, and place (distribution decisions).
Could you elaborate on that?
I would go further. The ideal marketing department would be headed by someone with the mindset of Steve Jobs. The Chief Marketing Officer (CMO) would be responsible for identifying the best opportunities for the business for the next five years, calibrating the profitability of the different opportunities, and participating with the other senior officers to make the right choices. The marketing group should know more about what is happening in the marketplace and what is likely to happen over the next few years and therefore be in a position to visualise where the business should be going. I remember that some years ago, GE asked its appliance marketing group to anticipate what will be the size and activities in kitchens in the next five years. The marketers came up with a great number of new ideas, many of which GE Appliance implemented. So the basic choice is whether marketing should remain largely a “service” department dishing out communications or it should be a proactive marketing group helping the company identify its best future opportunities. I sometimes say that a company should have two marketing departments: a large one that is busy selling what the company is making , and a smaller marketing group trying to figure out what the company ought to be making the in the coming years.
What is social marketing? Can you share some examples with us?
In July 1971, Professor Gerald Zaltman and I published “Social Marketing: An Approach to Planned Social Change” in the Journal of Marketing. The question was: “could you sell a cause the way we sell soap.” At the time, there was a lot of interest in how we could help people avert unwanted pregnancies, stop smoking, and say no to drugs. We could imagine creating ads that would change certain beliefs and behaviours. We could imagine making new products and services that would provide solutions in these problem areas. We could imagine distribution arrangements that would reduce the accessibility of unsalutory products or increase the availability of better substitute products and services. We could imagine using price to encourage or discourage certain behaviors. All four Ps would work on these social questions as they have worked in the commercial market.
And things have changed since then?
Since that time, social marketing has become another branch of marketing. There are over 2,000 social marketers operating in the world and addressing social causes of poverty and hunger, health, environment, education, littering, literacy and others. Social marketers don’t stop with advertising: they use a planning framework that applies the ideas of segmentation, targeting and positioning and the 4Ps to craft a workable social marketing plan. Dozens of social marketing examples are described in the 4th edition of Social Marketing that Nancy Lee and I published. There is now a hotline where social marketers interested in working on some social problem can put it out to other social marketers to learn of previous work and results in the same problem area. I believe that social marketing methodology has been a major contributor to the decline of smoking, the practice of birth control, the improvement of the environment, the providing of more health facilities and practitioners in poor countries, and rising rates of literacy.
Your basic training is as an economist. How did you move on to marketing?
Marketing is economics, even if many trained economists don’t recognise or read marketing and ignore the one hundred years of marketing writing. As I majored in economics at the University of Chicago (M.A.) and M.I.T. (Ph.D), I was impressed with the high level of theory but disappointed at the neglect of the real actions taking place in the marketplace. Classical economists didn’t say much about several key forces affecting demand such as sales force, advertising, sales promotion, and public relations. Economists focused mainly on price and how it affects demand and supply. They didn’t say much about distribution and the roles played by wholesalers, jobbers, retailers, agents, brokers and other transactional and facilitating forces. In fact, the first marketing books written around 1910 were written primarily by economists who wanted to bring the role of Promotion and Place into the understanding of markets. Even when economists discussed price, they rarely described how price is set separately by manufacturers, wholesalers, and retailers as price setting moves down the value chain.
So how did you move onto teaching marketing?
When I joined the Kellogg School of Management at Northwestern University, I was given a choice to teach either economics (macro or micro) or marketing. I chose marketing because it brought in all these additional forces that affect demand and supply. Earlier I was in a Ford Foundation program with Jerry McCarthy who was writing his textbook on Basic Marketing and proposing a 4P framework: Product, Price, Place, and Promotion. He was influenced by his professor of marketing at Northwestern University, Richard Clewett who taught Product, Price, Promotion and Distribution (which Jerry renamed Place to get the alliteration of 4Ps). Remember that the 4Ps are demand-shaping forces and should be part of basic economic theory. The interesting development today is that classical economics is undergoing the challenge of a different school of thought, namely behavioural economics. Behavioral economics drops the assumption that producers, middlemen and consumers always make rational decisions. At best there is “bounded rationality” and “satisficing” behavior rather than rational profit maximization. What is most interesting is that “behavioural economics” is just another name for “marketing” and what marketing has been researching for 100 years.
How do you manage to write about marketing from almost every angle?
I recognised early that marketing is a pervasive human activity that goes beyond just trying to sell goods and sales. What is courtship, after all, if not a marketing exercise? What is fundraising, if not a marketing exercise? What about building a stronger brand for your city, if not a marketing exercise? Every celebrity and many professionals are engaged in building and marketing their brand. This led me to want to bridge marketing theory and practice to other things than goods and services. I started to research and write on place marketing, person marketing, cultural areas marketing (museums and performing arts), cause marketing (i.e., social marketing), religious institution marketing, and so on.
(The interview originally appeared in the Daily News and Analysis on August 27,2012. http://www.dnaindia.com/analysis/interview_theory-of-maximising-shareholder-value-has-done-great-harm-to-businesses_1733089))
(Interviewer Kaul is a writer and can be reached at [email protected])