Monday, September 05, 2016

When The Going Gets Tough, The Tough Gets Going - The Positives During The Bad Times

“ When the going gets tough, the tough gets going” was a chart busting song by Billy Ocean in the 80s. He would have never expected it to be relevant in tough economic conditions far removed from the romantic overtones of the song.  But I do admit the difficulties of romancing do infact display an indication of the hard times. However more relevant is a sports team. When everything is good, all blemishes are glossed over but when it hits a tough phase, that is when all problems are highlighted.

The old adage is only the fittest survive is fitting. During a downturn, the weak and feeble will fade away and the stronger ones will survive and live to fight another day.

Having said that there are some good points in the bad times. Everything is not gloomy and there are many bright spots. Organizations need to leverage that to furrow a successful path.

  1. Human relationships are a clear indicator,  in the good times a successful person/ organization will have many friends/ partners but in bad times, fair weather friends/ partners will cease to partner or associate. This gives an indicator who will stay by the organisation.
  2. Lesser Competition: Most industries look good in favourable economic conditions. When there is no shortage of capital, competition will mushroom. As there is tightening of the belt, the weak and frivolous competition will throw in the towel.  So the positive is you have lesser competition. On the other hand however, be prepared for organisations that are strong enough to rough it out.
  3. Lesser access to funds: the sign of the tough times are when there are lesser funders/ financiers to bank roll investments. And the ones who are interested will be extra cautious. So chances of competition getting funded is lesser but so is the case with your organisation
  4. Identify the weak links in your organization: since competition is less, now is the time to focus on the deficiencies/ gaps and bridge them. This is a chance to shore up your defences faster and better.
  5. Present players are susceptible/ vulnerable too:  all players have chinks in their armour. So it will be to you to identify them and expose the weaknesses.
  6. Lesser cost:  during the bad times when economic growth is stunted, businesses employ all means to get business and primarily by reducing costs or discounting their products. Simply put, things cost less. Your vendors charge less for their supplies, you can bargain for better credit terms etc. It is a great time to renegotiate a deal that will benefit you even after the downturn ends. Even employees are more keen on saving their jobs and hence demand less and the newer ones a lower salary. It is hence a great time to optimize your costs.
  7. Higher employee retention and stability: During the boom, the employees have better bargaining power.  Attrition rates are high and at the drop of hat they leave for other pastures. There is also a huge cost of also training new employees and also need time to settle down. Since there is lesser churn in down times, the time can be used to plan and pursue long-term goals.
  8. Good people are looking for work: In the boom times, let alone finding good people, getting just employees is tough. In a downturn, highly qualified, talented and effective individuals can be found much more easily. A great time to pick and choose. And more importantly to build a strong team
  9. Optimum team & organisation – A mix of the good older and new employees will form the basis of an organisation which is fit and fine to fight it out take the organisation to the future – a lean fighting machine (it does not have to mean!)
  10. An organisation which negotiates

    the bad time is geared for the future: bad times don't last and hence the processes, systems and people which the organisation has should help the organisation even better when the curve moves north. For example in most cases there is a fair amount of belt tightening and this should  stand the organisation in good stead when things improve
  11. More focus on long term goals: for some strange reason, during the boom the focus is very short term in fact month to month. Given the fact that there is lesser competition, good team, and other reasons it gives the organisation time to think long term and take steps to reach those goals.
Bad times don't last and hence a efficient, smart and dynamic organization will be the stepping stone to success.

Tuesday, November 17, 2015

Hype ? - about Hyperlocal Grocery

At around $350 billion, India is in the top grocery markets of the world.  This is approximately 70% of the Indian retail business which is around $500 billion. Modern retail accounts for 10 - 20% of this pie.  E-commerce or hyperlocals are obviously a tiny part of the pie just yet. Most companies, therefore, are still at a stage where they have to prove their business models and change consumer behaviour. These type of businesses are expected to reach around 2% of the grocery market by 2020, creating a potential market size of around $10 billion (Rs 60,000 crore).

The hyperlocal on demand grocery has mainly two models -
a) A large player like Big Basket offering localised services. Inventory is carried by the company.
b) An aggregator using the local retailers to source products and handling the delivery
c) An aggregator using local retailers to stock and deliver

It is a no-brainer that an aggregation model, as it is asset-light, is less capital-intensive than the inventory-led one. But having said that, there are merits and demerits in all models

Offline Grocery Stores
1) Offline grocery stores are still the preferred choice for customers with the touch & feel and human interaction.
2) These stores can deliver the products quickly and at times even I have experienced gratification in half an hour. This is far faster than the online grocer
3) Further more due to the physical presence of a retailer, there is a certain amount of trust.

Online Grocery Stores
1) Stocking of a large number of skus is difficult. A local mom and pop store can carry perhaps 2000 skus which is difficult to satisfy the needs of all customers in a particular area.
2) With increasing rental costs, offline grocery stores are becoming difficult to manage.
3) Many customers are also familiar with the regular products they buy and hence will not have any hesitancy in buying online negating the impact of touch and feel to a large extent.

The Issues with Hyperlocal

1) Effective Margins - Having said that product based models earn 2-20% margins depending on the category. And there in lies the problem. The selling point for e-grocery is that it offers more convenience than the neighbourhood store; but to be sustainable they have to do this cost-effectively. And that is not the easiest job to pull off.
2) Managing Inventory and delivery - Normally e-commerce works with a delivery promise of a certain number of days however  with grocery it has to be within a few hours if not immediate. Indians like to be serviced so they need the product to be delivered to their door step. (Internationally, pick-up-point-based delivery models are popular). The key reason is that customers order groceries online to avoid the hassle of going to the store, and a pick-up will undermine the convenience factor.  So a fresh delivery infrastructure has to be created which is different from the existing e-commerce one.
3) Typically people go to the supermarket for their monthly purchase and then do tops ups from the local mom and pop stores on when it is required basis. And the local kirana is just a call away. 
4) Additionally there is a monthly credit and 
5) Delivery is done within an hour.  
6) The lack of 'touch and feel' in the case of online perishables  are pre-packed,
7) Moreover there is always "I can return it" if I don't like it.
8) Scaling up - One of the key issues with online hyperlocal grocery is that it is a locality-specific operation. Every time you add a new locality it is similar to launching the business afresh. This makes grocery a more difficult and challenging business to multiply

Arguably and for good reason margins can be improved. For example:
a) Offer premium products like imported products
b) Increase the basket size
c) Smart sourcing
d) Increase perishables but then again stocking is a big issue.
e) Open offline depots like Grofers

Even with all the pluses I am not convinced whether all hyperlocal  operations are viable.

The basic issues are:

1) Can they generate more revenue per order from customer than the cost of delivering one order? From personal experience it seems these hyperlocal grocers are incurring huge costs in delivering an order as compared to the revenues being generated by an order making it unviable. Even at Rs 20 delivery cost per order that means in a Rs 200 order it is 10%.  There is a certain ceiling on how more the delivery team can be efficient. 

2) Unlike other businesses customers want their orders delivered in half an hour but given the economies of (small) scale it is not possible.

3) Companies like Grofers are opening localised warehouses. Whilst margins will increase, there is a limitation on goods which can be stocked, costs like rentals, manpower etc. will add up significantly

My suggestion

I am inclined to go with an Aaramshop who follow a hybrid, asset-light  aggregator business model. It fulfils orders with a retailer closest to the customer, who will deliver at the consumer's doorstep within a couple of hours of placing an order. This way the cost of delivery is with the retailer. For a small transaction fee (around 0.2%) plus value adds of inventory management, integrated sourcing, analytics, promotional revenue etc.

For high transaction stores I would even partially reimburse the costs of the delivery boys thereby tying in the retailer to the platform. 

Thursday, October 15, 2015

Food Gone Good - Food (Delivery) will Work

The 'hot' business till a year ago is seemingly ' hot to handle' now. There is a pervading sense of fear exacerbated by the closure some famous start ups in food delivery business. However, the naysayers will not question the potential in food delivery-

  1. The organised food business in India is worth $48 billion, or Rs 3 lakh crore, of which food delivery is valued at $15 billion (Rs 94,755 crore).
  2. In developed nations, takeaway and home delivery contributes to about 35% of the food business. In India only about 10% of the orders are for takeaway and home delivery. Furthermore, 80% of the orders are made through phone calls.  Eateries like Dominos, Pizza Hut etc. alone get 50-60% of their sales through eCommerce.

 At last count there were around 120 start ups in this space, all jostling for the same customer in the same areas.  Given the low entry barriers and healthy wallets of investors start ups have mushroomed. That is reason enough to have these all players playing with their back to the wall.

Having said that, there ‘seems’ to be some insurmountable flaws that are causing such businesses to fail. On closer scrutiny here are some flaws, which I have identified:

  • Definition of the Business

The very nomenclature of the business by the various brands is perhaps the biggest stumbling block. Most businesses today have a kitchen (made to their requirements) that prepares food. And by that investment it is not merely a delivery business but a food & logistics business (pretty much like a airline catering business). The task is then to sweat the real estate and not look at just delivery since obviously the size of the delivery market is not large enough.  
Some points which these start ups need to ponder are:
  1. Am I able to serve food in other parts of the day - breakfast, morning/ pre lunch snacks, evening snacks etc.? 
  2. Can I get corporate/ B2B bulk deals?
  3. Can I serve this food to canteens or other restaurants?
These are not a comprehensive list of questions but some pointers, which indicate that these businesses are not in just food delivery alone but food as a whole.
This model has been proven by QSRs largely which have been in this business for many many years. This is perhaps a key learning for new food delivery brands that tend to narrow their focus on delivery alone.  The QSRs have dine in and delivery which caters to the customer either in our outside of their outlet.

  • The Logistics Angle
I have sampled food from various food delivery companies and there is a blatant misuse of delivery boys. More often than not (and in peak time) one delivery boy will travel 4 kms just to deliver one order. This shows that there is very little effort put into managing deliveries. If the same delivery boy were to deliver just one more order then the costs of delivery alone would come down by half. This is not to say that there cannot be single deliveries but proper route mapping and planning needs to be done.
A related example can be when a high loader from an airline catering company depending on the time and load may actually service between 1 and 4 air crafts thereby optimising costs and efficiencies.
An alternative would be to outsource deliveries to specialized delivery companies - no costs of manpower and only incremental costs.  I would personally recommend a mix of both.
Sceptics may mention that the location can be anywhere within a 5 km radius. Look at airline catering companies, they have to reach the food within the same distance too. And yes! An hour after preparation is a long time to deliver. Food needs to go hot and reach the customer hot!

  • Food Quality
I have heard that one of the biggest problems of the food delivery brands has been consistency of food quality. I have heard employees tell me that it is really difficult to maintain consistency. Frankly this is a feeble excuse for the lack of systems and processes. 
Some of the biggest issues which these start ups are not doing are
  1. Non - standardization of recipes
  2. Lack of detailed SOPS. And if there are, then poor adherence to them. 
  3. No menu sampling of food amongst the kitchen staff prior to introduction
  4. Non-availability of key ingredients due to improper planning
This is contrary to how a food business should be run.

  • Recruitment
Such a cliche but alas it is true. Getting the right people for this business is absolutely necessary.  I happened to see some recruitment listing that looked for professionals from premier schools to manage their kitchens. While the role is interesting, I do sense fatigue setting in very soon. There is nothing glamorous about this job infact a lot of dirty work. (Been there!).

The Larger Opportunity
  • Surplus capacities of existing eateries.
Unfortunately most food delivery companies are competing with existing restaurants/ eateries. The biggest advantage has been low entry barriers, which in turn has also been the biggest disadvantage. They are creating a business that rivals the existing businesses.  There are huge surplus capacities in most popular cuisines namely Indian, Chinese and Continental. To top this, walk ins are reducing over week day lunches and to a smaller extent for dinner.

  • Opportunities
1. Marketplace
There are large players already like Swiggy and Tiny Owl that serve this segment wherein the players list eateries and then facilitate the ordering and delivery.

2. Curated  Standardized Marketplace
The market place model has some demerits, the quality from many restaurants have been questionable.  In this model, the standards like recipes, hygiene, menu, packaging etc. are decided by the aggregator, who in turn will facilitate the ordering and delivery. There is perhaps only one company with this model - Cookaroo

While I am a strong believer in both these models,  I am inclined to explore more of the second model. Here the aggregator will have a lot more control without capital investments and lesser manpower costs.

Parting Shot

Lack of understanding, lack of processes and a myopic view can never be answers for writing off a business. Coupled with this is the same model being followed by multiple players especially since the entry barriers are low. There will be shakeout and consolidation. And it has already started! But don't write the business off.

Tuesday, December 16, 2014

'Cheap'ster - Is Cheap Passe?

The Tata Nano was a path-breaking product. Launched in 2009, with a price of Rs. 1 lakh/ $2000 approximately, this was indeed an invention of sorts. While everyone anticipated that the Nano would be a resounding success, the car actually flopped!

Walmart was the place with “Low prices ...Always Low Prices” – a line that reinforced how cheap the merchandise was. After 19 long years, Walmart changed to become the store where you could “Save Money. Live Better”.

Coca Cola had a Rs. 5 bottle in a price sensitive market like India but pulled the sku out after some time.

Kishore Biyani was India's King of Discounts, with his Big Bazaar chain of supermarkets using the 'Isse Sasta Aur Accha Kahin Nahin' (you won't find it cheaper or better anywhere) tagline. 3 years back, Big Bazaar shed the cheapest tag to latch onto  'Naye India Ka Bazaar' (New India's supermarket)

There is a common thread, which runs across – price and interestingly the problems associated with cheap prices or being the cheapest.

The change in the Walmart slogan is representative of the times we are in (and whichever part of the world it maybe)  “Save money. Live better” is a line, which shows a clear benefit. So you don’t go to Walmart because you cannot afford to go anywhere else but you go there because you want to live better.

This new positioning is aptly aligned with what people want to do and how they want to feel.   They don’t want to be seen in place that is cheap, but in a place that sells products at great value (and not necessarily the cheapest). Which resonates with the fact that people have aspirations that will pander to their psyche.

It is important to position businesses/ brands that are more aligned with what the target customers really want to do and how they want to feel. There is a growing sophistication of customers especially with their hopes and aspirations.

Big Bazaar is pushing premium products from chocolates to linen shirts, from denims to induction cookers, from perfumes to premium crockery.  The belief is that each product will represent an upgrade to people’s lives.  Big Bazaar wants to be a ‘cool’ retailer. "As a modern retailer, Big Bazaar introduces the products of tomorrow," says Biyani.

Apart from a host of products, Big Bazaar is modernizing stores, beefing up its variety with cost not being the main factor and hoping that customers will stay loyal. "With this new campaign and the accompanying evolution in stores, we are moving to become a more product and brand-centric retailer," adds Biyani.

Perhaps the apt observation came from Biyani  -“ So whether it is products for home, fashion, food or beauty, each have been carefully selected by our merchandising teams and form a part of a storyline that captures the social change that is evident in the country,"

Both Walmart and Big Bazaar at different ends geographically sought to pull away from the bottom of the pyramid and evolve into a higher value retailer.

Moreover there is a big negative that cheap is associated with. Cheap is akin to poor or low quality, compromises in product etc., perceptions any retailer/ marketer would not like to be associated with.

This brings us to the why the Nano was a flop. Nano was very cheap. Tata made it look utilitarian. However, Indian car buyers are not utilitarian but aspirational. They want to show-off their car. Tata's marketing made sure that the car looked "cheap" and not "hip". Its USP proved to be its stumbling block, actually reducing any aspirational value that car would bring. No one wanted to be seen with the cheapest car.  Moreover the fires on the cars compounded the problem. There were serious questions about the quality of the car.

As we speak, Tata wants to start afresh. Repositioning it as a Smart City Car. Cheap has gone out of the window.  The jury is out.

And we always thought that cheap prices meant that the products were a winner!  So while price can be a strong positioning plank, it alone cannot complete the home run.

It may add further credence with the following examples:

Beefeater was an inexpensive gin in England, but when the brand was introduced in the US, it became an expensive gin, and a successful one.

Corona was a cheap, working-class beer in Mexico. But in the US, it was positioned as an expensive, imported beer. Corona went on to become the largest-selling imported beer in America and one of the top 100 global brands.

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