Month: November 2009

Eveready faces the Innovator’s Dilemma

The cover story on BusinessWorld magazine dated 28th of November is titled “Deepak Khaitan and his Magic Lamp”. The story describes the early success which Eveready is having with the LED lanterns. Since April 2009, Eveready has sold 2 Million pieces of these lanterns.The lanterns are priced between Rs 150 and Rs 450. These battery powered lamps are being pushed as a substitute to kerosene lamps in power deficient states such as UP, Bihar, West Bengal and Assam.

According to Deepak Khaitan, Executive Vice-Chairman and MD of Eveready “I can sell 500,000 a month if I could produce them.”

The LED lantern was a product launched by Eveready to provide a fillip to their falling battery sales. Each lantern uses up 6 D size batteries worth Rs  90.

Consumers like lanterns, but they do not like the battery-powered lanterns, as the same article says.

“Consumers want rechargeable lanterns,” says Sansar Lights’ Elahi. Lantern distributors echo Elahi’s voice. But the industry, as much as Eveready, is still double-guessing whether the rechargeable lantern market will ever be as strong as single-life battery lanterns. If Khaitan does introduce them, they defeat the very purpose for which he set up his lanterns business — to prop up D-size battery sales. If he does not — and a rival introduces a better value proposition —Eveready’s nascent lanterns business could be smothered. “

But what about solar lanterns? “As a company, why would I encourage selling solar? It will cut down my battery consumption,” says Khaitan.

Now, that’s a classic innovator’ dilemma, described by Clayton Christensen in his book by the same name. Should you introduce a new technology or product which will cannibalise and annihilate your own old product which generates bulk of the revenue and profits ?

Eveready’s problem is not very different from Kodak’s. Kodak saw its business as chemicals and paper which goes into photography. It did not embrace digital photography, because that would mean killing their main business. Kodak is a pale shadow of the blue-chip it used to be, because it did not wholeheartedly embrace the digital technology. 

Eveready got into lanterns to push their batteries. But if lanterns do well and consumers ask for rechargeable lanterns, the very reason it entered the lantern business would be defeated.

My suggestion to Eveready would be to go the whole hog and make a bigger business out of this accidental success in lanterns. If it means entering into rechargeable or solar lanterns or discontinuing D-size batteries, it should be prepared to do so. Already the lanterns acount for 19% of Eveready revenues, as the volumes pick-up, the revenues and profits could be much higher.

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Weekly Business Quiz # 2

Q 1. This govt owned network has 170 Million account holders and 154,000 branches in India. Name it.

Ans. INDIA POST
 Q 2. Which Hollywood superstar owns Plan B Entertainment ?

Ans. Brad Pitt

  Q 3. What is common to ANDROID. CHROME. BLOGGER and YOUTUBE ?

Ans . All are GOOGLE brands

 Q4 .What is IMEI of a GSM phone? How to check it.

Ans . International Mobile equipment identity– a 15 digit unique number for each handset. By dialling *#06#

Q 5. Name this internet phone co acquired by EBAY and now sold for 2 bn$.

Ans .SKYPE

Q 6. This info comes in USB drive costs 70000 dollars and 8 weeks . It is the new rage among rich. What?

Ans. Personal genome sequence

 Q 7.  In Manhattan where will you find CHAI LATTE on the menu?

 Ans. Starbucks

Q 8. What is a WHUFFIE ?

Ans . Social currency to measure online reputation like google hits.

Q 9. What is the unique distinction of the firm HANDOO AND HANDOO?

Ans. India’s first LLP – Limited Liability Partnership firm

Q 10. This self proclaimed management guru is helping MBA students DISCOVER THE DIAMOND IN YOU. Who is it?

Ans . Arindam Chaudhuri of IIPM

The Wealth Effect of Gold makes Indians feel richer

Among many contradictions that India is famous for, one is its appetite for gold. Inspite of being poor, Indians have always had an almost irrational love for the yellow metal. This obsession seems to be now having a beneficial impact as gold prices touch new highs.

India is one of the largest importers of gold in the world. As per World Gold Council, a total of 158,000 tonnes of gold have been mined till date. Out of this Indians’ private holdings is considered to be the highest at 15,000 tonnes. American citizens’ holdings is a mere 4000 tonnes. Indian government’s gold reserves ranks 10th among all countries at 757.7 tonnes as per wikipedia.    

The prices of gold in India have increased from Rs 13,520 at the start of the year to Rs 17,300 currently, a gain of 28%, reports BusinessLine. 

Domestic prices have merely followed global gold prices, which rose from $827/ounce to $1,139/ounce (a 38 per cent gain) over the same period. Price gains in India have, in fact, not kept up with global trends, mainly because of the rupee strengthening by about 8 per cent against the dollar for the year.

The weakness of US $ is considered to be one of the most important factors leading to the rise in  gold prices. 

Gold prices are expected to go up further in 2010. Some reports suggesting the gold prices will touch US $ 1,400 per oz shortly. As is the case with all asset classes, views of the various analysts differ as this report mentions.

Several bullion analysts like Jim Rogers and Jim Sinclair have predicted that gold price would continue to boom. While Jim Rogers says gold price will zoom to $2000, Jim Sinclair has been arguing that the next stop for the yellow metal price is $1650 per ounce.

But not every bullion analyst is bullish on gold, the hottest commodity traded in the world. Legendary investing guru Marc Faber says gold price is rising without any fundamental factors and thus the price of the yellow metal will plunge to $900-$800 levels.

The rise in the gold prices, have made the value of private holdings go up from 400 billion US $ to 540 billion US $ an increase of 140 billion US $ in the last one year. India’s GDP is of the order of US $ 1 trillion. The increase in wealth due to the rise in price of gold is a whopping 14 % of India’s GDP. So, whatever damage the economic slowdown  may have done to consumer demand, has been more than made up by the wealth effect due to gold prices. Not dissimilar to the effect of crude oil price increases on Russian and Middle-East economies.

If the gold prices continue to rise next year, as is being predicted, then this wealth effect will continue. For every 100 $ increase in price of gold, value of India’s gold holdings goes up by 48 Billion US $. However, if Indians continue their obsession for gold even at high prices, then instead of the wealth effect being favourable for the consumer markets, it may have a negative effect.

India Gold Imports statistics

Weekly Business Quiz # 1

Q 1 Incorporated as Eastern carrying company in 1939. This is one of India ‘s largest tour operator. In the news for IPO. Name it.

 Ans .COX And KINGS 

Q2. Which brand was first woven into a computer game (advergame) ?

Ans. Mcdonalds in 1973 as a part of a DEC game moonlander. 

Q3. In Chetan Bhagat’s new book  “2 states” after IIM-A which companies do KRISH and ANANYA join ?

 Ans. Citibank and HLL 

 Q4. BA and IBERIA to merge. To which country does IBERIA belong?

Ans. Spain  

Q5. Which company is acquiring the telecom equipment company  3 COM ?

Ans .HP  

Q6. Which indian IT major has instituted an award for excellence in science, modelled on Nobel prize?

Ans. Infosys   

Q7. This 90 year old is the chief designer of IZHMASH arms factory. Name him and his creation.

Ans. Mikhail Kalashnikov. AK-47

Q8. Under which brand name have SISTEMA SHYAM launched their mobile service?

Ans. MTS

Q9. What is the service of RENT the RUNWAY?

Ans. A haute couture rental thru mail order 

Q 10. Whose byline is committed to improving the state of the worid?

Ans. World Economic Forum. 

Q  11. Name the new venture fund launched by the Murthys of Infosys?

Ans. Catamaran

Reliance retail dream sours

Even as the Ambani brothers are busy fighting their legal battle over the gas, their businesses seem to need their attention ever more. The elder brother Mukesh, who is considered savvier of the two, now has a failure in the form of the Reliance retail venture. Financial chronicle reports that :

RELIANCE Retail is yet to see profit in any of its formats. The company has reported total losses in excess of Rs 450 crore in 2008-09 alone. Mukesh Ambani had launched the retail business in 2006, which now operates under 15 formats.

Data obtained from RIL shows that till March 2009, Reliance Fresh had run up the highest negative reserves of Rs 276.77 crore. The other formats such as Reliance Hypermart (negative reserves of Rs 54.32 crore), Retail Concepts & Services (-Rs 38.37 crore) and Reliance Vantage Retail (-Rs 21.23 crore) have also run up negative reserves.

Reliance Dairy Foods (with negative reserves of Rs 7.63 crore), Reliance Digital Retail (-Rs 15.49 crore), Reliance Footprint (-Rs 10.47 crore), Reliance Trends (-Rs 3.1 crore), Reliance Gems and Jewels (-Rs 5.73 crore) and Reliance Home Store (-Rs 4.54 crore) are among the other formats that have reported accumulated losses.

Reliance Retail now runs as many as 900 stores across 14 states in India, spanning the supermarket, convenience store and mini hypermart formats, in addition to specialised units which sell everything from eyewear to jewellery. The business, which encompasses partnerships with firms such as Marks and Spencer, Office Depot and Hamleys, now counts five million customers as members of its business-wide loyalty programme.

The rising losses in the retail business are learnt to have led to the billionaire Ambani downsizing the ambition for this business, which was expected to bring about a paradigm shift to his oil and petrochemicals commodity venture.

My take on why Reliance Retail has not succeeded is :

  • Reliance may be the largest company in the country and its name has tremendous equity in the financial markets. In consumer markets, Reliance brand has limited salience.
  • Merchandise sold in Reliance retail outlets were undifferentiated from the stuff sold in other stores. Just  expecting that consumers would flock to the Reliance shop because it was from Reliance, smacked of arrogance or ignorance or both.
  • Reliance have succeeded in businesses where it could use its financial muscle to build scale and efficiencies, backed by clever manipulation of government policies to its advantage, by cultivating politicians and officials. Retail business, needs none of these strengths.
  • Investing a lot of money and hiring top notch professionals  from various competitors at fat salaries is no subsitute for a sound strategy.
  • Organised retail in India, is a difficult game where achieving top-line targets through use of offers and promotions is relatively easy, making profits is very difficult. Indian consumer is very price conscious, yet India has a high cost-structure, leaving no margins for the retailer.

One should not write-off Reliance Retail because of its early failures. Yet, it must be quite humbling to the top-brass of Reliance that the humble Indian consumer is far tougher to tame and understand than the Indian politician or official.

Plastic money : Debit or Credit

The Telegraph has carried a news item titled Rebound seen in debit card use. Quoting the latest RBI monthly bulletin, the news item informs that

Debit card payments increased 38 per cent in the first half of the current fiscal to Rs 11,780 crore, signalling an uptick in consumer sentiment, the Reserve Bank of India said.

During the first six months of the last fiscal, debit card payments stood at Rs 8,531 crore, according to the RBI’s latest monthly bulletin.

“The rise in debit card payment is because of a spurt in consumer activities,” said an economist with a leading bank on condition of anonymity.

On the other hand, credit card transactions in the country have slumped 12 per cent in the first six months of this fiscal to Rs 29,330 crore as shoppers have decided against using their cards amid the ongoing economic slowdown.

The sharp growth of 38% in debit card use alongwith a decline in credit card use by 12 % could be due to some of the following reasons :

  • In India, plastic money is still equated with credit cards. Debit cards came in late. For every rupee spent on debit card, today three rupees is spent through credit card. The worldwide trend is much more balanced, 1: 2 as this table from www.creditcards.com indicates.

2008 worldwide purchase volume by card type
Visa credit – 31.7 percent
Visa debit – 28.6 percent
MC credit – 22.0 percent
Amex credit – 10.0 percent
MC debit – 6.3 percent
JCB credit – 0.9 percent
Diners credit 0.4 percent
(Source: Nilson Report, May 2009)

  • One of the largest credit card issuer ICICI Bank has been tightening its personal unsecured credit business. They have stopped issue of new credit cards and have brought down credit limits.
  • Even in a declining interest rate scenario, credit card interest rates still remain high at 30-42 % p.a. In an economic recession, surely the customers have been conscious.
  • The Indian consumer who had taken some tentative steps towards the consumerist culture of the west in the boom times, retracted to his shell , during the recession times.
  • State Bank of India even as they have been widening their ATM network , they have  been issuing ATM-cum-debit cards to all its existing and new account holders.
  • Indian middle class is beginning to realise the value of debit card as plastic money, hence safe to carry.

The cards market  will continue to grow rapidly in India, with debit cards growing faster than the credit cards.  

Expert Networks on the Net

I had long held the belief that Internet was a good medium for doing management consulting. In this flat world, it was possible to do knowledge work like consulting and research from anywhere, much like the way software is developed remotely from India. Yet, I had not come across any marketplace or professional networks of consultants on the Net. The freelance projects marketplace on the Net like www.elance.com and www.arzoo.com (in its earlier avatar) had mostly software programming and design related assignments.

Last week I discovered one expert network called Gerson Lehrman Group. www.glgroup.com. This group claims to be an expert network of 200,000 experts, known as council members. This is a global group with headquarters in the US. It has an India office also, in the NCR region. The clients of this network are mostly in the financial markets like Private Equity firms, Mutual Funds, Hedge Funds, Venture Capital Firms, Large Consultancy firms. The offerings are divided into many verticals. The basic model of consultancy is through telephonic consultation. Other typs of engagements like written reports also exist. The council members are expected to be knowledgeable about their industry and give the analysts their perspective or advice on any sector/company/deal. The GLGroup team puts the client and the council member together by fixing the time and the rate. The clients perhaps pays to GLGroup and in turn the marketplace pays to the consultant after deducting some charges. The financials of this group is not known as it is a privately held firm.

GLgroup is not the sole network of this kind. To my surprise, I discovered several networks, mostly based on a similar model.

  • Guidepoint – www.guidepointglobaladvisors.com – This is a New York HQ firm with offices in London, Boston, and Singapore.
  • Coleman Research Group- www.colemanrg.com – This is a New York HQ firm with offices in London, Beijing and Hongkong.
  • Evalueserve Circle of Experts – www.evalueserve.com – This is a US  firm with an Indian research office.
  • Tribeca Insights – www.tribecainsights.com – This is a New York based firm and has no other branches.
  • Expert Network Group- www.eng-llc.com – This is a New York based firm , having a branch in China.
  • Primary Insights -www.primaryinsight.com- This is also a New York based firm with branches in London and China.
  • Greenwood research – www.greenwoodresearch.com – This is also a New York based firm

Cognolink, Reuters Insight, TGR- Network are some other networks offering similar services. It will be fair to assume that all these networks are not equal nor similar. The differentiation must be in the verticals and the client base.

As the investment in India increases both Foreign Direct Investment as well as Foreign Insitutional Investors (FIIs), the presence of these networks in India will increase. They will also be more aggressive in recruiting experts from India who understand the Indian markets.