Thursday, 9 July 2009

Beware the ghost of the BS art

An interesting note by Clif Reichard (please click title to read it).

We are practitioners of sales and marketing and in our more limited experience (11 years) find that mostly sales persons today are being trained to fail.

We have been in the B 2 C space and deal with products that pass from the company to distributors and onto retailers before the consumer buys them.

The sales force is required to ensure the product is available at the distributor and then sold into the retailer by the distributor.

The distributor and retailer do not buy the product from the company for the reason that the end consumer does. The end consumer wants to feel beautiful. The distributor wants to feel rich.

In fast moving consumer goods (toothpastes etc), distributor gross margins in India are about 5%. Net margins are 2%. Unless his working capital rotates 12-15 times, the distributor is better off investing money in the stock market.

In this business, salesmen need to be trained in managing working capital and advising distributors and retailers in managing working capital. What stocks to order- how much- how to stock products-how to allocate costs to various products.

We have seem the same principles apply in the PC business and in the tire business. We believe it is universal. Simple xcel tools can help sales persons understand how their customers make money.

Yet few companies train their sales persons on anything more than product benefits. We are not surprised at all that the sales community is viewed with skepticism. They dont seem to speak a language relevant to their customers.

Most senior managers don't grasp the idea that the same principles that apply to their business, apply to their customers' business.

Ritu and Venkat

Asia Rising- Only half the story

A recent blog entry in the Harvard Business web site ( spoke of Asia rising as a key trend. Sure nothing wrong in that. But it did beg the question, is the West sleeping? and if so , why?

It is clear that India and China (and Africa as well) will grow fast...why not, they are the poorest parts of the world. Especially in the case of India, poor government policies of the first 50 years of independence condemned large parts of the population to stagnation.

Now, these two countries are trying to make up for lost time and opportunity. 1 billion people in these two countries are still poor...i.e. not even in the middle class. The per capita GDP in India is USD 1000 and in China about USD 2000. About 15 times lower than Western Europe.

But this is still half the story of the world. The slowdown in western europe and the US made me ask a question to my colleagues there.

At 30,000 USD of per capita GDP, have you achieved all that you want?
Is there really no further aspiration?
Why is it that space travel is still not affordable and aspired for by your country?
Have you reached the end of research into AIDS and cancer treatment?
Have you given up on green technologies- and alternate fuels?

The world has too many unsolved problems. India and China can solve a few, but only those that don't require expensive research.

Why the West gave up on the idea of "renewing and re-educating" itself, i cannot say. The world has more than enough room to grow at more than 4% over a very long period. It needs productive investments. Both in Asia and in the West. Our leaders fail us when they allow us to get complacent. Both business leaders and government leaders in the west are responsible for the slowdown there.

One day Asia and China may also begin to bask in the glow of "contentment"- to their own peril.

India was a very rich country 500 years ago, but the kings spent the money on luxury goods- building palaces and generally decorating themselves. Sounds familiar?

Ritu and Venkatesh

Tuesday, 7 July 2009

The Indian Budget 2009-2010

There will now be numerous notes on the Indian Budget that was announced yesterday. (please click link above to read what the Economic Times has to say).

The budget disappointed those who wanted specific details on the disinvestment plan, on increased Foreign Direct Investment and on reducing the fiscal deficit.

But on the other hand, the government has spelt out clearly how it will focus expenditure on the rural economy, on building infrastructure and creating jobs for the weaker sections of society. The focus is clearly on strengthening the economically weaker sections of society- bridge the very huge gap between the rich and the poor in India.

Penetration of consumer goods in India (apart from TVs) is very low and enriching the weaker sections of society will drive consumption and hence purchase of goods and services. This should succeed in creating a trickle up effect.

We maintain that the huge salary growths of the middle and upper classes in the period 2003-2007 have raised income levels sufficiently and now the focus must be on delivering wealth more directly to the 60% of the population which is dependent on agriculture and is significantly poorer than the average family.

This is our belief. We support the budget.

Ritu and venkat

Monday, 6 July 2009

Brands that target niches- should this be news at all?

The Financial Times (click on title) had this article on Mars (maker of M&M, Twix chocolates) is targeting women with a new brand of chocolates called "Fling" -(

The news item first had me cynical. Why is this?
A friend of mine tells an old tale to describe how his company (multinational in the foods/ home and personal care business) keeps going in circles. First cuts all local brands to focus on "key brands and innovations", then goes back to investing in local brands to "revive sales and market share on a country basis"....and goes through this loop every 5-7 years.

The tale is about an old woman with 4 sons. Someone asks her how the sons keep busy to which, after much coaxing she says..."do you see the carpet hanging there. Well, two of my sons unravel it every few days...and the two others then stitch it back."

To why is the creation of segments "which the FT very stylishly refers to as 'niches' ", news?

Creation of segments based on distinct and profitable needs is the basis of marketing.

What is annoying is how marketers seem to develop needs through brands that make a connect with consumers, and then in the interest of "shareholder value" and cost-cutting, kill brands overnight, transferring the brand's properties to a larger "mega brand".

This weakens brand management and over time erodes the "mega brand" as well.


Sunday, 5 July 2009

an essay on recent pricing trends in india

Income growth estimates 2003-2007:

Given a lack of recent public statistics on income and income growth, we used newspaper reports and other estimates to paint a picture on the income segmentation in India in 2003 and its evolution in the period 2003-2007.

Table 1.1:

Number -------Annual inc(INR)----Average----Grth%(03-07)--Income 07----Inc grth% 08
of HH

4,000,000 ----->215,000 ---------215,000 -----25%---------524,902---------10%
90,000,000-----45,000-215,000----130,000 -----15%----------27,371----------8%
66,000,000------< 45,000----------22,000-- ----6%----------28,405----------6%

Table 1.2:

Average Inflation in the period 2003-2007 ----5%
Inflation 2008 -------------12%
Inflation 2009 -------------------1%

1 USD= 48 Indian Rupees (INR)

Given that the Indian economy grew between 7-9% in this period, these household income growths were not seen to be irregular. Income growths in the period 2003-2007 were significantly higher across all income segments, compared to inflation in the same period.
Note that salary growth rate fell in 2008 while inflation rose spectacularly (refer table 1.1)

Income growth in 2003-2007 must be seen in the context of supply and demand. While the Indian economy grew at break neck speed, the number of well educated graduates and competent managers was restrained by the lack of growth of high quality educational institutes. This resulted in high rates of turnover in companies, sky rocketing salaries and an overall increase in employment. In-fact this period also saw a large migration of people having very basic educational qualifications (grade 8 pass) moving from villages to cities where booming sectors such as retail were offering entry level jobs to people with modest education.

This means that apart from the 66 Mn households at the bottom of the pyramid, all other households were earning far more than inflation. This is a very big difference w.r.t. Western economies where salary increases are very closely tied to inflation. The savings rate in India increased from 27% in 2003 to 36% in 2008.

The period 2003-2007 was giving most Indian households real income growths in excess of 10%, taking into account inflation, and a lot of extra savings was being created

This is one of the reasons we wrote in 2008, that high inflation of 12% in 2008 was unlikely to impact the common man. Contrary to common opinion held in India that Indians would take to the streets to protest high prices, we maintained that “middle class” India had received a huge buffer in terms of salary increases since 2003 and would be able to withstand inflation of 12% in 2008. We maintained that if salaries rises were to reduce, the middle class would still be able to survive 12% inflation into 2009. But that inflation would need to fall in 2009 to 5% or lower.

The bottom most segment of 66 Mn households is agriculture dependent. This segment consumes what it produces and then sells to the market its excess. In a high inflation period, our understanding is that this segment is insulated from increasing prices of cereals and staples, since they themselves are the producers.

So, how did all this translate into pricing?

In the period 2003-2007, pricing went through the roof- particularly for the packaged goods and services sectors. From FMCG majors like Colgate and Unilever to airlines and everything in between, raised prices continuously between 2003 and 2007.

Capacity increases often take time and in the period where industry was constrained by capacity, prices increased sharply.

These packaged goods and services, do not have a significant impact on the calculation of inflation in India, official inflation continued at 5%. The less affluent families also did not see their basket of goods (mainly non processed food) becoming very expensive.

There was a complete “free for all” interms of pricing and companies reported huge profits in this period.

The year 2008:
In 2008, commodity prices started impacting India as well and the price of basket of goods that are used to calculate inflation, rose 12%. India also began to take note of the global slowdown, which through the fall in exports of products and services, hit home sometime in the second half of the calendar year 2008-2009.

Sentiment fell. We wrote at that stage that the large and untapped Indian market was reason enough for entrepreneurs to focus on satisfying domestic demand, and not worry about global sentiments. We added that as long as the companies representing “new India” - Infosys/ TCS/ WIpro did not lay off staff, there would not be any risk of mass layoffs and hence the economy would be able to continue growing, albeit at a lower pace of maybe 5-6%. On top of this, the government announced various incentives (farmer loan waivers/ infra investment/ pay scale revision of govt employees) all adding to almost 200 Bn USD. This is a big investment for a 1 trillion USD economy.

Companies reacted by initially holding prices steady and accepting declining volumes. A very bizarre approach in the mass market segments. Sure enough, worsening sentiment coupled with high prices (given salary increases were minimal in 2008), meant that the Indian shopper stayed home. Retail sales collapsed in the 3rd Qtr of 2008.

By the end of 2008 and in the early months of 2009, however, we have seen pricing sentiment and philosophy change significantly. Companies became more cost conscious and began to benefit from the worldwide fall in raw material prices. They started to reduce prices and most companies took a hit to margins as well. And companies looked to maximise capacity utilisation.

- FMCG majors such as Unilever dropped prices in the market.
- Promotions (cross promotions/ price discounts/ free volumes) on products have increased.
- Hotels have launched very sensible “all inclusive” packages taking care of food, non alcoholic beverages, laundry and sight-seeing for their guests.
- Low cost airlines became truly low cost opening a 30-40% differential versus full price.
- Capital goods manufacturers reduced prices as the government announced reduction in sales taxes.
- Real estate prices have fallen 10-30% depending on the location.

Over and above, companies have started looking at rural India as a viable business opportunity and have started to set up products and services targeted at rural masses (at suitable price points). The aggressive pricing has brought the Indian consumer back and Q4 of the financial year 2008-2009 recorded 6% growth for the Indian economy.

What happens going forward:
A new budget will be announced by the government early next week. We expect to see investments made to facilitate development of the less affluent, infrastructure development and privatisation of government companies (mostly to finance the budget deficit, but also to make them more competitive).

These will be good initiatives that will continue to increase domestic demand.

However, one concern is still agriculture- the monsoons are late. 60% of the employment sector is supported by agriculture and if the rains fail, this will impact the buying capacity of a significant segment of the population while diverting government resources from investments to direct support of the weaker sections of society.

Bottom-line on Pricing in India:

Our view is that India is a market where product availability and distribution are the most important factors for success. Marketing is very nascent and is limited to advertisements featuring prominent film celebrities. Marketing becomes important when people start having choices. In India, we are still many years behind that stage.

In our view, the capacity shortages of 2003-2007 which caused pricing to spiral out of control, have been corrected. A lot of investment went into infrastructure and manufacturing capacity in the period 2003-2007, and these will keep pressure on pricing. Investments in education, infrastructure are increasing and the supply-demand imbalance of talent should be mitigated significantly by the time the Indian economy returns again to its 9% trajectory.

Companies will find it hard to increase prices beyond “raw material increases” or the standard inflation rate (4-5%). While there is some segmentation in the market, penetrations for most product categories are less than 20% (micro waves/ washing machines/ computers/ vehicles). This means that driving penetration and hence gaining volumes and market shares in the market is the priority. The Indian consumer is price sensitive and hence value pricing and “penetration” pricing will continue to drive the pricing approach in India.

Ritu and Venkat
June 2009.