Fear is the key: What Sushma, Rajiv and i-pill have in common

ipill

Vivek Kaul

It’s around midnight as I write this and I am just back from a late dinner with a friend. Before we started to have dinner my friend insisted that I use a hand sanitiser. While I have nothing against people pretending to be clean all the time, but the smell of a hand sanitiser really puts me off and can even make me sneeze.
Given that I refused to use it.
“How can you not use a hand sanitiser before eating?” she asked.
“Well I have washed my hands,” I replied.
“But that’s not enough,” she insisted.
“Why not?” I asked.
“Because a hand sanitiser kills all the germs.”
“What germs?” I asked, ripping into the tandoori chicken.
“Ah. End of conversation. Guess cleanliness isn’t really your thing!” she exclaimed at my ingratitude.
The idea of using hand sanitisers has caught on(especially with women) after the recent global swine flue scare. But does it really help? As brand management expert Martin Lindstrom writes in his latest book Brandwashed – Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy “Neither swine flu nor SARS can be prevented by the use of antibacterial cleansing gels. Both viruses are spread via tiny droplets in the air that are sneezed or coughed by people who are already infected. ”
In fact as Lindstrom told me in an interview “What’s ironic is that none of those products…actually do any better job than soap and water.”
That being the case why are women so in love with hand sanitisers? As Lindstrom puts it in Brandwashed “The idea of an unseen, potentially fatal contagion has driven us into nothing short of an antibacterial mania.”
And companies making hand sanitisers have simply captured this mania as a profitable money making proposition. As Lindstrom told me “The companies have 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…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 has become too clean – the Japanese have weakened their immune system as a result of overuse of hand sanitising products.”
What this little story tells us is that fear of something happening (or not happening for that matter) is a great selling strategy and you can’t argue with a woman who has made up her mind.
As Lindstrom put it “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,” said Lindstrom.
The fact that fear is a great selling strategy makes companies build it directly into their advertisements. The advertisement of i-pill, an emergency contraceptive pill, shows a mother telling her daughter “Kyun risk le rahi hai?” when the daughter calls and hints that she has had unprotected sex.
Or take the case of Saffola oil which has run a highly successful campaign over the years on the fear of a heart attack. It used to run an advertisement for years showing a man being wheeled into the operation theatre, with the sound of the ambulance siren in the background (Let me concede I also use Saffola oil for cooking).Fair and Lovely, which claims to be a skin lightening cream, has run on a plank of the fear of rejection for a “dark” girl. This despite protests from several quarters. The advertisement of the health drink Complan is built around the fear that those not having Complan will not grow as tall as those having it.
Almost every insurance company uses fear as a selling strategy. This can vary from the fear of death, to the fear of not having enough money to meet hospital bills, to the fear of not having enough money for the son’s or the daughter’s education or not having enough money for the daughter’s wedding and so on.

As Tyler Cowen, an economist at George Mason university in the US, writes in the book, Discover your Inner Economist “Often , buying insurance is about investing in a story about who we are and what we care about; insurance salesmen have long recognised this fact and built their pitches around it.”
Having given these examples, let me concede that some of these advertisements do push consumers towards buying the right product. But most of these advertisements are misleading. As the Business Standard recently reported “Whether it’s Complan or Horlicks, they claim to make a child taller and smarter. But their promises are not based on any scientific data….Abu Hasem Khan Choudhury, minister of state for health and family welfare informed the Lok Sabha in a written reply on November 30 that the food regulator had begun prosecution proceedings against manufacturers of 19 leading brands and issued show cause notices to 19 others for making false claims regarding the nutritional value of the product in advertising and on the label.”
As the story further pointed out “ For instance, Complan, a leading drink brand, claims it makes children grow twice faster. Horlicks promises to make children “taller, stronger and sharper”. Kellogg’s Special K claims people who eat low fat food in their breakfast tend to be thinner than those who do not, without providing any scientific study to back this claim. Products like Saffola oil, Rajdhani Besan and Britannia Vita Marie biscuits have been booked for making false claims of being “heart-friendly” and “reducing cholesterol”.”
All these products play on the fears and insecurities of consumers. If my kid doesn’t drink Complan/Horlicks he won’t grow tall. If I don’t eat Kellog’s Special K I will become fat. And if I don’t have Saffola oil I will have a heart attack.
Lindstrom summarises this phenomenon very well in a paragraph in his book Buyology – How Everything We Believe About Why We Buy is Wrong “That if we don’t buy their product, we”ll somehow be missing out. That we’ll become more and more imperfect; that we’ll have dandruff or bad skin or dull hair or be overweight or have a lousy fashion sense. That if we don’t use this shaving cream, women will walk by us without a glance…That if we don’t wear this brand of lingerie no man will ever marry us.”
Politicians are looking to do exactly the same thing when they practise the politics of fear. The recent debate on FDI in big retail had Sushma Swaraj saying things like “Will Wal-Mart care about the poor farmer’s sister’s wedding? Will Wal-Mart send his children to school? Will Wal-Mart notice his tears and hunger?”
She also said that “The remaining 70 percent of the goods sold in these supermarkets will be procured from China. Factories will open in China, traders will prosper in China while darkness will befall 12 crore people in India.” This is scaremongering of a kind similar to that indulged in by companies to sell their products.
Arun Jaitley, the leader of opposition in the Rajya Sabha, also indulged in the same when he said that “India will become a nation of sales boys and girls.”
And before I am labelled to be a Congi by the internet Hindus let me clarify that politicians from across the political spectrum have practised this strategy at various points of time.
“When a big tree falls, the ground shakes,” said Rajiv Gandh after his mother Indira Gandhi was assassinated by her Sikh bodyguards.
A section of the Indian National Congress (back then known as the Congress-I) whipped up mass frenzy against the Sikhs after the assassination. In the pogrom that followed Sikhs were killed all across northern and eastern India. And the Congress Party got 415 seats out of the 540 seats in the Lok Sabha, a feat not achieved even by Jawaharlal Nehru, the biggest leader that the party has ever had.
Kanshi Ram, had formed the the Dalit Soshit Samaj Sangharsh Samiti or DS4, before forming the BSP. The rallying cry for DS4 was”Thakur, Brahmin, Bania Chhod, Baki Sab Hain DS4.” This worked so well that when Ram decided to form the BSP he came up with a similar sounding but a more subtle slogan. “Tilak Tarazu aur Talwaar, inko maaro joote chaar.
The late Bal Thackeray was a master of this craft first putting fear of Tamils in the minds of the Marathi Manoos and then Muslims as times changed. His nephew Raj, who left to form his own party the Maharashtra Navnirman Sena, took this strategy further and has put the fear of Bhaiyyas and Biharis in the minds of the Marathi Manoos.
Varun Gandhi made front page headlines when in a speech he said “Ye panja nahi hai, ye kamal ka haath hai. Ye kat** ke galey ko kaat dega chunaav ke baad.” Then there are also examples of parties like DMK, which have been built on creating the fear of the loss of culture and language.
When politicians try to create fear in the minds of the citizens their aim is similar to that of companies trying to create fear in the minds of consumers. Fear “is what our brains remember…”writes Martin Lindstrom in his book Buyology. Fear creates what Lindstrom calls “somatic markers” or brain shortcuts that link the brand sold to what needs to be done to take care of the fear: “Want you kid to grow tall? Get him to drink Complan!”
“Want a healthy life without a heart attack? Eat Saffola oil.”
Or in a political context “Don’t want the Chinese take away Indian jobs or sell goods in India? Vote for the Bhartiya Janata Party.”
“Want freedom from the oppression of upper castes? Vote for the Bahujan Samaj Party.”
“Want to revenge the assassination of Indira Gandhi? Kill Sikhs but don’t forget to vote for the Congress.”
While it is not as simple as that, but that is what it essentially means. Fear also gives rise to anxieties and insecurities of people and helps politicians come up with a war cry and make themselves easily heard. As Bill Bonner and Lila Rajiva write in Mobs, Messiahs and Markets “Men are ready to die for the group and kill anyone who resists its will.”
The war cry before the Babrji Masjid was destroyed was “Ek dhakka aur do, Babri Masjid tod do!”.
As Lindstrom writes in Brandwashed in the context of marketers “So whether it’s germs or disease or some feared version of a future self, marketers are amazingly adept at identifying a fear out of the zeitgeist (a German word which means the spirit of the times, italics are mine), activating it, amplifying it and preying on it in it in ways that hit us at the deepest subconscious level.”
Politicians do the same thing. They identify the prevailing fear, like Wal-Mart will get in all low cost Chinese goods (as if Indian companies are not) and destroy the kiranawallas. And then they activate it and amplify it by talking about it in their speeches. And if the comments on this piece that I wrote a couple of days back are anything to go by, they have been successful at it.
And so was Rajiv Gandhi!

The article originally appeared on www.firstpost.com on December 7, 2012.

(Vivek Kaul is a writer. He can be reached at [email protected])

 

FDI debate: Why Sushma should get the stupid-statement award

sushma swaraj
Vivek Kaul
It’s that time of the year when awards are given out of for the best things and possibly the worst things of the year. And the award for the most stupid statement of the year has to definitely go to Sushma Swaraj, the leader of opposition in the Lok Sabha.
During the course of the debate on the government decision to allow foreign direct investment into multi-brand retailing or what is more popularly referred to as big retail, she said: “Will Wal-Mart care about the poor farmer’s sister’s wedding? Will Wal-Mart send his children to school? Will Wal-Mart notice his tears and hunger?”
These lines sound straight out of a bad Hindi movie of the 1980s with dialogues written by Kadar Khan. Yes, Wal-Mart will not care about the poor farmer’s sister’s wedding. Neither will it send his children to school. And nor notice his tears and hunger simply because its not meant to do thatThis is because Wal-Mart is a selfish company interested in making money and ensuring that its stock price goes up, so that its investors are rewarded.
The same stands true for every Indian company which is into big retail (be Tata, Birla, Ambani or for that matter Big Bazaar). No company, Indian or foreign, into big retail or not, is bothered about the tears of the farmer. And neither is the government.
Let’s look at some other things that Swaraj went onto say. “The remaining 70 percent of the goods sold in these supermarkets will be procured from China. Factories will open in China, traders will prosper in China while darkness will befall 12 crore people in India,” she declared.
Already a lot of what is sold in India comes from China. Around three weeks I went around several electronic shops in Delhi trying to help my mother choose a refrigerator. Almost all Indian brands had compressors which were Made in China. If one takes the compressor out of the equation what basically remains in a refrigerator is some plastic and some glass. And all that is Made in India.
My television set which is a Japanese brand is also Made in China. A leading Indian electrical company buys almost all the irons that it sells in India from China and simply stamps its brand name over it.
A lot of pitchkaris that get sold around the time of Holi and diyas and electronic lighting that get sold around the time of diwali are also Made in China. As a quote from a story that appeared in The Times of India story earlier this year went “It seems that ‘Made in China’ has researched our festivals and sensed the need of the customers. For the past 10 years, the business of local sprinklers is decreasing due to stiff competition with Chinese sprinklers. We are facing huge loss, plastic powder through which the pichkaris are prepared locally are bought at Rs 100 per kg while at the same time, there is no subsidy or relaxation on the name of festival,” shared Bihari Lal, a local manufacturer and trader of sprinklers.” Chinese made colours also available during Holi.
And none of this has been brought to India by Wal-Mart. It was brought to India largely by Indian entrepreneurs and traders, a lot of whom form the core voting base of the Bhartiya Janata Party (BJP) and also fund the party to a large extent.
Made in China has become a part of our lives whether we like it or not and it will continue to remain a part of our lives, with or without Wal-Mart. If Wal-Mart does not supply us with Made in China goods, the Indian entrepreneurs and retailers will surely do, primarily because Chinese goods are cheaper than the Indian ones. Hence, what Swaraj wants us to believe is already happening with no Wal-Mart in sight.
The other point that comes out here is the ability of Wal-Mart to source stuff from China. This is not rocket science. Indian retailers can also do the same thing. As Rajiv Lal of the Harvard Business School told me in an earlier interviewIf 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.”
Swaraj also talked about predatory pricing that Wal-Mart would resort to. “These supermarkets introduce predatory pricing. At first, they will introduce such low prices, that will finish the rest of the market. Then when the customer has no other choice, they will keep hiking prices and looting the people,” she said.
This statement is also misleading As Rohit Deshpande of the Harvard Business Schoool told me in a recent interaction that I had with him “ For a company like Wal-Mart historical strategy is fairly easy to understand. It is to make a major branded product available cheaper. So you will have a wider assortment of branded product than any of their competitors that’s the first thing. The second thing is that they have private label. They keep increasing the percentage of their private label within each of their broad categories. So the consumers get trained to come to the store because they can find an assortment of branded products. And once they become loyal to your store then they find that they can make price comparisons within the store and they end up buying your private label. And then your margin is really so much better. It’s a strategy that has worked well for Wal-Mart.”
So for this strategy to work Wal-Mart has to ensure that they stock private label goods (basically their own brands) which are cheaper than other brands. Hence, Wal-Mart might decide to stock it’s own brand of soap which is lets say cheaper than Lifebuoy. For this strategy to work their own goods will have to be cheaper than other branded goods. Hence, it can’t keep increasing prices and keep looting people as Swaraj wants us to believe. Indians aren’t exactly idiots.
Also, if you have visited any of the big retail shops over the years you would have realised that these shops have been increasing the number of private label brands that they sell. As of now this is largely to limited to things like pulses, noodles, sugar etc. The point is that big retail in India is following the same strategy that Wal-Mart does worldwide.
The other interesting point that comes up here is that Wal-Mart is able to offer low prices primarily because of two things. One is the fact that it gets its real estate cheap because it typically sets up shop outside city limits. And two is the fact is the homogeneity of the population when it comes to consumption.
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 marketing guru V Kumar agreed with when I interviewed him sometime back. “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 other factor as to why Wal-Mart may not be able to offer very low prices in India is because there is no homogeneity when it comes to consumption behaviour leading to a situation where the company may not have the same economies of scale that it does in other parts of the world.
As Kumar told me “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 localised 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.
The point I am trying to make is that Wal-Mart is not such a big fear that it was made out to be by Swaraj. They do make their mistakes as well. As Deshpande told me “They have had hiccups in the interest of scale and cost efficiency. They have sometimes pushed products that did not make sense for the local market. An example, I believe it was in Argentina, where Wal-Mart, around July 4(the American independence day) had a lot of American flags shipped into their stores.
Pankaj Ghemawat, the youngest person to become a full professor at Harvard Business School makes an interesting point in his book Redefining Global Strategy. As he writes “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.””
Wal-Mart had to pull out of South Korea as well in 2006.
Hence, Swaraj could have clearly done some better research before making one of the most important speeches of her career. She could have read the recent column that P Sainath wrote in The Hindu , where he talks about Chris Pawelski, an American farmer and the onions that he produces.
As Sainath writes “While the Walmarts, Shop Rites and other chain stores sell his (i.e. Pawelski’s) kind of onions for $1.49 to $1.89 a pound, Pawelski himself gets no more than 17 cents. And that’s an improvement. Between 1983 and 2010, the average price he got stayed around 12 cents a pound. “All our input costs rose,” he points out. “Fertiliser, pesticide, just about everything went up. Except the price we got.” Which was about $6 a 50-pound bag. Retail prices though, soared in the same period. Distances are not the cause. The same chains sell cheap imports from Peru and China, driving down prices.”
The other interesting point that Sainath makes it that companies even dictate the size of the onions he produces. As Sainath writes “Pawelski held up the onion. “They want this size because they know you won’t use more than half of one of these in cooking a meal. And you’ll throw away the other half. The more you waste, the more you’ll buy.” The stores know this. So wastage is a strategy, not a by-product.”
Such examples on Wal-Mart and other big retail chains are not hard to find. A Google search throws up plenty of them. A speech against the negative effects of big retail should have been full of such examples instead of saying things like whether Wal-Mart will be bothered by farmer’s sister’s wedding. 

The article originally appeared on www.firstpost.com on December 5, 2012.
(Vivek 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])

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])
 
 

'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.
Excerpts:
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]