Seriously clueless

India, private equity and more ...

Monday, November 28, 2005

Long and short of Indian retail

Shorts and longs are terminology used in the financial markets. Going long is synonymous with buying a stock and the expectation that the company would do well. Selling short implies the opposite – expect something to get worse. My colleague Jeremy Levine wrote about his ‘shorts’ and ‘longs’ here. Two recent articles on the Indian retail sector triggered this post on my ‘long’ and ‘short’ views on Indian retail.

Retail in India is an extremely interesting area, where companies are still experimenting to get the right mix of store formats and categories. While Bessemer still cannot invest in Indian retailers due to FDI restrictions, I follow the sector quite closely out of personal interest. Large retailers, with chains of stores following similar formats, are just beginning to make their presence felt and India’s largest retailer is still short of $500 million in revenue.

Here’s an idea that I’d go short on. From the Business India dated November 21 – December 4, 2005:

__ has kick-started the yoga wear segment with its new brand named “Urban Yoga”. What’s more, the brand has two ranges “Body” and “Soul”. In the next six months, __ plans to open at least 10 exclusive outlets across the country. In addition, it also plans to open yoga centres through which it hopes to attract more converts to yoga and, naturally, by extension to Urban Yoga. If __ has its way, Urban India will be moving towards spiritual fitness dressed in Urban Yoga.
I am sure you can trace which company this is, if you want to. This is fantastic news for yoga enthusiasts who are worried that their clothing isn’t as well coordinated as their postures or want that extra performance boost to their suryanamaskars. I am aware of specialty retail and all that, but doesn’t this whole idea seem a little too niche.

Moving on, Food & grocery retail is as non-niche as it gets. This category accounts for nearly half of India’s consumer spend and is still dominated by mom-and-pop ‘kirana’ stores. I read an article that Chennai-based food retailer Subiksha will be opening over 70 stores over the next month in other South Indian cities and is looking to expand into North and West India as well (I cant seem to find the link). I am ‘long’ on Subiksha and view their format to be best suited to the Indian market for food & grocery retail. Their approach combines the local low-overhead front-end of Indian kirana shops with the efficient supply chain of a large retailer. Subiksha’s shops are no-frills (sub-500 sq ft, non-airconditioned), do not allow consumers to walk through the store to browse products (no aisles – no wasted area) and well distributed (they aim to have a store within 1 kilometer of any household – I suspect they are close to this target in many parts of Chennai). The consumer experience is similar to that in the kirana store – no browsing, option of home delivery, proximity of store to their residence allowing frequent buying in small lots. Their USP is a Walmart-style everyday-low-price (5-10% less than MRP and/or their nearest competitor), enabled by combining centralized buying and an efficient supply chain, with their simple (and inexpensive) store format.

The other retail format that is gaining prominence is a big-box type format, adopted by Big Bazaar and Giant. These are large shops with over 50,000 sq ft area that offer a wide range of goods in one location (e.g. food, grocery, utensils, furnishings, apparel, even appliances). By definition, such large stores are fewer in number, and their consumer catchment area could span a 5-10 kilometer radius. Big-box stores also offer low prices, similar to Subiksha. Big-box stores are well suited for retailing apparel and durables, which tend to be more infrequent, larger ticket-size and event-driven purchases. To succeed in food retail, they would require (similar to the US) good roads, cheap fuel, high car penetration, large refrigerators and storage space. Then, consumers could drive to such stores on weekends and stock up in large lot sizes. Almost all these factors don’t hold in India. While the in-store experience is superior to Subiksha’s format, getting to the store and back imposes tangible (Rs. 50-100 per trip) and intangible (inconvenience & time) costs. Further, several of these shops are located in malls that people visit as an entertainment destination. Lugging around large bags of rice and wheat don’t gel well with this. I am told (and haven’t independently validated) that apparel accounts for over 75% of Pantaloon’s profits from their big-box stores, which would be consistent with my expectation. Having said this, I do expect the larger format to dominate categories such as apparel, consumer durables, furniture and home furnishings.

I see two challenges for Subiksha’s format. First, the consumer experience at the store isn’t great. While the average Indian would readily trade this off against savings of several hundred rupees a month on the grocery bill, they could lose upper middle class and affluent consumers who spend disproportionately more. Second, to get to $1 billion revenue, Subiksha would require well over 1000 stores! Handling this many stores (including several that may be franchised) poses an enormous control and managerial challenge. Subiksha has so far adopted a gradual expansion approach, taking care to ensure quality and consistency across its outlets. Hopefully, they’ve now figured out how to manage this complexity, as they expand aggressively outside their home state.

Friday, November 25, 2005

Shortcode nation

SMS has completely transformed marketing as known to civilized man (this does not imply, by any chance, that marketing is civilized!). Every other ad hoarding between Nariman Point and Bandra demanded a follow-up sms action from the reader. They all said “SMS __ to ___” (and presumably, one’s wildest fantasies would be fulfilled by the concerned service provider). Apart from Elbonian mail-order brides (no, that is not my wildest fantasy), you could order pretty much anything else by SMS-ing a few letters to the appropriate shortcode.

This SMS-craze falls into two segments. The first lot includes companies (mostly in financial services) hoping that the reader is stupid (or lonely) enough to open up their cellphone to a barrage of sales calls. The second comprises a new breed of TV programs, where viewers decide the fate of bright-eyed men and women, who attempt to sing and dance their way to fame.

In the first category, the shortcode-Oscar went to HSBC for actually having 3 different shortcodes (possibly more – I found 3 in a mere 20 km stretch). You could sms PVA to 6161, HSBC to 8558 and Invest to 7333, to reach the hallowed bank. If you think I am making this up, go ahead and try out all three (thereby proving that you need to get a life). I suspect the same call center agent would call you thrice. Wait till their CEO figures out what his three SBUs have been up to. Other banks are not far behind, including Kotak Bank who also use 6161 (sms KM instead of PVA). So were insurers (ING to 8558, Life to 7827, BSLI to 7333). The most interesting one was a new Hindi movie – Neal n’ Nikki – asking me to sms NN to 3366. I haven’t tried it yet, but expect a steamy MMS clip from the movie, in return. Of course, you could sms any random text to the big daddy of all shortcodes – 8888 – and get something in return.

Indian television (as known to civilized man, again) has been hijacked by a new breed of reality shows where contestants sing or dance or both, undergo public humiliation at the hands of the judges, become India’s sweethearts and make shitloads of money. Some bright marketer (fill in your own witty comment here) had a lightbulb-moment and decided to get viewers to vote through SMS. We didn’t stand a chance after that. We laughed and wept as our favorite contestants swayed and hummed, and used up our hard-earned chota-recharges egging on gawky kids with colored hair. Last night, I watched one of these programs, where pairs of TV stars (presumably, married to each other) danced till all-but-one get eliminated. One lady participant tearfully told the whole nation that the greatest thing her hubby had ever achieved in life was to complete his dance performance, despite feeling somewhat under the weather. The hubby looked suitably moved due to the emotion of the moment, but would hopefully realize exactly what his wife thought of his other achievements in life. After some calm reflection, I suspect that he’ll be looking up the shortcode for Elbonian mail-order brides.

This is only the beginning. I am awaiting the speciality magazine for shortcode-afficionados (suggestions welcome for what this mag would be called). The mag would include a weekly shortcode popularity ranking, thumb-exercises to stay sms-fit (accompanied by photos of sixpack thumbs), free software to change your sms font to Helvetica etc. That would be followed by specialized brand consultants who would help companies identify the shortcode that best reflects their brand positioning (after which, the aforementioned bank would ditch 6161, 8558, 7333 in favor of 4722). As a logical extension of TV show voting, Bihar elections would be done on SMS (sms Laloo or Nitish to 24427). Naturally, the elections would not get completed, as multiple sets of goons ‘capture’ sms gateways of mobile operators and furiously stuff stamped ballots into hapless servers.

Remember 100s of monkeys clattering away on typewriters forever, with a rather small probability of producing Shakespeare’s works. Give the same set of monkeys a mobile phone each. They are still unlikely to write prose, but I’ll bet that they’ll emerge with health insurance, bank accounts, credit cards, free movie tickets and a mail-order bride! Better still, they’d have dashed the hopes of several tearful TV hopefuls in the process through their random voting.

PS. Just as I finished typing this and was getting onto the internet using my mobile data-card, I received the following sms – “Subscribe 4 Daily dose of Fun: Sms SUB JOK to 8282 to get your daily dose of Fun two times a day for 30 days @ Rs 30”.


Monday, November 21, 2005

You can contribute to primary education in India

Pratham is an Indian NGO that has done some commendable work in this area. They are working on the Annual Status of Education Report (ASER) that aims to measure progress against the government's goal of universalizing primary education by 2010. Please check out Pratham's website on how you (and I) can help.

Annual Status of Education Report or ASER – is a process by which citizens (especially urban professionals) can measure and keep track of how their money is being spent to impact primary education in India. It will go on till 2010 – the year by when government has promised to unilversalize quality primary education in India. We have missed earlier goals to universalize primary education for all children – but this time its achievable !! Pratham is launching and facilitating ASER to keep track of the progress in primary education - across every state in India to cover more than 80% of all districts. We are doing this along with more than 200 grassroot organizations across India to create a citizens initiative to measure and monitor work on primary education. Government of India has promised universalization of quality primary education in India by 2010 – something that we believe is quite doable. Towards this end, over and above other taxes – 2% education cess has also been levied by government to finance this aspiration. Large progress has been made – especially with regards to enrollment of children in schools and access to school – even in the most under-developed parts of rural India. But the drop out rate continues to be very high – more than 70% children are not completing schools. Primary reason for this appears to be that learning in schools is dismal (with more than 50% children in the primary schools not being able to read, write or do basic arithmetic). Across the country, in the school educational domain, there is a need for the following: 1. To measure and track progress 2. To motivate the entire government machinery towards outcome focus and not just allocating more funds. 3. There is a need to talk about what children are learning in schools and not just how many are enrolled. We need to understand what these numbers mean. 4. There is a need to talk about factors which influence a child’s learning viz., teacher attendance, student teacher ratio, teaching learning material, teacher training, basic infrastructure, toilets, drinking water, working of village education committees etc. 5. For urban India and professionals there is a need to go beyond paying education cess and taxes – there is a need to know numbers and need to ask questions to government/s at various levels. Against this backdrop, ASER has been launched as citizens initiative to track and measure progress. The final report will be presented to the highest level of government (the report will be presented before January 26 – efforts are on to invite the Prime Minister to accept the report. Planning Commission and Ministry of HRD have agreed to accept the report – which will be presented by 600 representatives from 600 districts who will share their findings across the country). We will also go back to the district collectors, MPs, MLAs, zilla parishads, panchayats asking them about the progress in their districts and how they compare with other districts and asking them to give us plans on how they want to move forward and how they want to spend the allocated budgets (all the communication will happen before the budget in February 2006.). We will provoke gram sabhas and panchayats to discuss the state of affairs in their district and how that compares with other districts. We believe that measuring, tracking and asking questions creates its own motivation (whats gets measured.. tends to get done).

Sunday, November 20, 2005

The real India - lest we forget

Trust The Hindu to write an excellent article on how (poorly) Indian farmers fare, based on the latest NSSO data. The article also highlights growing inequities, as liberalization has helped the rich get a lot richer.

The collective net worth of 311 Indian billionaires is now Rs.3.64 trillion. This is up 71 per cent from last year, when it was a paltry Rs.2.13 trillion. The tribe has also grown. It now includes 133 new entrants who just months ago were merely millionaires.
So, Peter's doing quite well. How about Paul?
The average monthly per capita expenditure (MPCE) of farm households across India was Rs.503 in 2003. That is just about Rs.75 above the rural poverty line. And it is an average across regions and classes and income groups. So even this dismal figure hides huge inequities.
Its obvious he's not doing well at all. Here's what I found even more alarming -
The data from the NSSO survey on farm spending once again points to the link between poverty and family size. The average household size for farmers was 5.5 at the all-India level. But in those with an MPCE equal to or less than Rs.225, the number goes up to 6.9. On the other hand, households with an MPCE of more than Rs.950 were much smaller. Their average size was 4.1. Broadly, the better off the household, the fewer its members. In the NSSO survey, Bihar and Uttar Pradesh logged the highest average household size of 6.1. The poor tend to have larger families. That is their insurance against higher mortality. Particularly against infant mortality. The logic of "more hands to work" cannot be wished away.
I dont recommend robbing Peter to pay Paul. It's clear Paul needs help, though. I dont have any answers, and like most of us, havent done anything about it. For me, writing about the real India keeps me honest and reminds me that there's more to India than South Bombay. But I should get off my butt and actually do something about it.

Thursday, November 17, 2005

How to NOT write a business plan

My colleague David Cowan writes on how to construct a business plan. He distinguishes between the more elaborate version prepared as an internal operating document and a more concise version that's better-suited for getting through to a VC with a limited attention span! I've been guilty (along with my former colleagues) of consistently violating this principle, in my earlier role at McKinsey. We regularly prepared dense slides with loads of data, that were ideally suited to leave behind as a document of record. However, the same slides were disastrous to present in a progress review and communicate key messages to senior client managers.

Are Indians averse to investing in stocks?

Help me out here, as I cant figure out the following. Indian households are supposed to have a very small percentage of their financial savings in the stockmarket. RBI data indicates that under 2% of household financial assets are invested in equity & mutual funds. This works out to ~$2 billion invested in stocks. Here is where it gets confusing. If you look at the shareholding of listed Indian companies, published data shows that over 12% of equity in the 30 BSE-Sensex stocks are held by "Indian Public". BSE Sensex companies have a combined market capitalization of $250 billion, implying that Indian public have $30 billion invested in these stocks. Sensex stocks account for only 50% of India's total market cap, implying that public investment in all Indian equities could be over $ 50 billion. $ 2 billion and $ 50 billion way off. I've thought of various explanations, including 'black money' not being included in RBI data. Am I missing something here?

I think I figured this out. Despite being called "financial assets", RBI data appears to be a 'flow' figure and not a 'stock' figure. They start from GDP, separate out savings, then household savings, finally financial savings (called financial assets) - all of which are flows. And I compared this to the stock of household equity investments. HOW CAN YOU GET THIS WRONG - as Tam moms admonish their kids when they dont score centum in Maths (to be pronounced Max, for full effect). Anyway, if I add up these flows over many years, it comes to $25 billion. Factoring in stock appreciation and black money, 25 can be reconciled with 50. Amen.

Tuesday, November 15, 2005

Another investor's perspective on India

Chryscapital talks about investing in India in this interview. They are among the first India-dedicated funds, and have had successful investments in the likes of IVRCL, Suzlon and Spectramind.

Sunday, November 13, 2005

An economics lesson from Mauritius

I am back in Mumbai after a delightful vacation in Mauritius. This Sunday evening is more depressing than usual, as I need to return to work after a 2-week break. While Mauritius invokes beautiful images of sea, sand and coral reefs, I’d like to write about man-made economics rather than natural scenery.
Based on what I saw and heard (from the locals), Mauritius has excellent infrastructure (notably roads), free school education and healthcare for all and low levels of poverty, crime and unemployment. Overall, the impression was one of a prosperous country, with a fairly content populace. I realize that as a tourist, one’s views on a new country are fairly skewed. Further, there is the usual trap of drawing macro conclusions based on micro data. So, I did a quick check on some development indicators, to make sure I wasn’t way off. See for yourself – per capita GDP of $4600, life expectancy of 72.5 years, 85% adult literacy, tele-density of 55%, 100% primary school enrolment among the relevant age-group. Not bad at all.
I am no economist (nor an expert on Mauritius policies based on one short jaunt), but cant help drawing two clear lessons for India – on the role of the government and need for broad-based job creation. First, the Mauritius government’s primary focus has been on education, health and infrastructure. Second, the nature of growth has created jobs for a broad section of the population. The three main drivers of growth – sugar, textiles and tourism – not only cover agriculture (and agro-processing), manufacturing and services, but also create ample employment opportunities for the average high-school or college graduate. By ensuring near-universal education, the government made sure that people could realistically access these job opportunities.
The idea is not to draw simplistic parallels between a nation with 1.2 million people and another with (almost) 1.2 billion people. I am encouraged by the secular growth that India is seeing, across sectors such as auto components, textiles, retail, travel and construction. While IT and ITES would rightfully create jobs for the young urban middle-class with access to English-medium college education, these other sectors are badly needed to do the same for far larger numbers of less privileged people. The challenge remains that large segments of the population are simply not equipped to benefit from these opportunities. If there are 3 areas I’d like the government to spend time & money on, these would be education, health and infrastructure. In all other areas, the government simply has to set the basic (and hopefully fair) rules of the game, and then get out of the way.

Wednesday, November 02, 2005

Sun n Sand

Better-half and I are off to Mauritius for a week. I intend to unplug myself from the Matrix during the holiday. I just read a very timely post on information-overload-leading-to-attention-deficit. One of those simple, yet profound, writings that leave you feeling "Hey, I can relate to that". On that note, I am off for a bit. Yensoi!