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Tuesday, 22 November 2011

Oil and Gas Industry - Sleeping Giant of India

There are many ways to look at the oil and gas industry.
From a personal perspective, oil and gas provide the world's 6.9 billion people with 60 percent of their daily energy needs. The other 40 percent comes from coal, nuclear and hydroelectric power, "renewables" like wind, solar and tidal power, and biomass products such as firewood.
As fuels, they keep us warm in cold weather and cool in hot weather; they cook our food and heat our water; they generate our electricity and power our appliances; and they take us by car, bus, train, ship or plane to places near and distant. We all feel the economic pinch when the prices of gasoline , home heating fuel or electricity increase sharply, even though in many developed countries, they still cost less than some brands of bottled water! 
As petrochemical feedstocks, oil and gas are the raw materials used to manufacture fertilizers, fabrics, synthetic rubber and the plastics that go into almost everything we use these days, from toys to personal and household items to heavy-duty industrial goods. 
From a business perspective, oil and gas represent global commerce on a massive scale. World energy markets are continually expanding, and companies spend billions of dollars annually to maintain and increase their oil and gas production. Over 200 countries have invited companies to negotiate for the right to explore their lands or territorial waters, hoping that they will find and produce oil and gas, create local jobs and provide billions of dollars in national revenues.
From a geopolitical perspective, large quantities of oil and gas flow daily from "exporting" regions such as the Middle East, Africa and Latin America to "importing" regions such as North America, Europe and the Far East. This creates political, trade, economic and even national security concerns on both sides. Oil and gas exporters want to maximize their revenues and improve their trade balances while maintaining control and sovereignty over their natural resources. At the same time, importing nations want to minimize trade deficits and ensure a steady, reliable oil supply. China, for example, has recognized that it must obtain access to oil in order to continue its long-term sustained growth and is actively seeking new sources of supply in the major producing companies. 
From an internal policy perspective, producing countries continually wrestle with questions of how best to develop their resources and attain long-term sustainable benefits for their people. At the same time, consuming countries are always considering how to reduce their dependence on imported oil, either by imposing higher energy taxes to spur conservation, tapping into domestic resources such as coal (less costly but more polluting than imported oil) or developing alternative energy sources such as nuclear power.These issues have major long-term impacts, both within individual countries and on the world at large, even affecting such fundamental issues as war and peace.
Finally, from a health, safety and environmental (HSE) perspective, there is a continuous concern for safety in oil and gas operations, the impact that new projects have on surface environments, the possibility of oil spills and the effect of pollutants such as CO2 (carbon dioxide, a product of hydrocarbon combustion) on global climate change and air quality.
The oil and gas business is clearly a multifaceted, global industry that impacts all aspects of our lives. And yet it is one that we tend to take for granted until a crisis emerges-a tanker runs aground, a hurricane damages a refinery, a country changes political leaders or revises its energy policies. Then we blame "big oil" or OPEC or the politicians or the local service station attendant before things quiet down again.

Indian Oil and Gas Industry 
Oil and gas in India’s energy portfolio With a GDP of US$1.25 trillion, India is currently the world’s fourth-largest economy. The country’s oil and gas sector has contributed significantly to the GDP, and the sector is expected to become increasingly critical for India’s economic development, since it fuels the growth of other sectors. India is already the fifth-largest energy consumer in the world, with oil and gas accounting for 45% of the country’s energy needs. However, the proportion of natural gas consumption in India to total energy consumption in the country (around 9%) is one third compared with the proportion of natural gas in the world’s primary energy consumption. With a 53% share in the primary energy sector, coal remains the dominant fuel, but its share is projected to decrease with the thrust on gas and other renewable sources increasing. With India’s growing population and rising living standards, the demand for energy is expected to increase in future. India’s fuel needs are likely to grow at a significant rate, considering the growth pattern of the country’s GDP in the past few years. Currently, India’s per capita consumption of energy is well below that of the world average (around one fourth)

Changing business landscape

India is currently facing a substantial crude oil deficit, as its current production levels are lagging behind the fast pace of the economy. This has resulted in significant imports of crude oil. The demand-supply gap is set to widen in future with a consumption increase of 47% between 2008 and 2018  and with production poised to increase by around 12% in the same period India’s heavy dependence on import of crude oil has compelled the Government  of India (GoI) to provide a long-term policy for the hydrocarbons sector in order to meet the country’s future energy needs. There are significant implications for the oil and gas sector in terms of the growth path it has charted:

The introduction of the New Exploration and Licensing Policy (NELP) and the subsequent entry of multinational companies (MNCs) in the exploration and production (E&P) sector have given impetus to the country’s oil and gas sector. Unexplored sedimentary area of 50% in 1995–96 reduced to 15% in 2009.

In the past five years, the refining sector has witnessed additions in its refining capacities, and this trend is expected to continue with the implementation of major new capacities. It is anticipated that this sector will witness large investments for capacity augmentation, quality upgrades, the clearance of bottlenecks, and the revamping of various refineries. India is likely to boost its refining capacity by 45% by 2011–2012 as against 2008 (150 MTPA).

The petrochemical sector is poised for significant growth due to significant demand for petrochemical products. The demand is expected to touch 12 million tons by 2012, thereby witnessing annual growth of 9%–10%. With various refining companies diversifying into the petrochemical segment, existing capacities in this sector are likely to double in the next five years.

On the back of growth in petroleum production and refining, as envisaged by the Hydrocarbon Vision 2025 report, infrastructure is likely to witness significant growth, especially in the pipelines sector. IOCL and GAIL are cumulatively expected to add around 5,000 km to their existing pipeline networks.

It is expected that the GoI’s emphasis on clean fuel will lead to a marked increase in the city gas distribution (CGD) business, with around 40 cities expected to fall under the ambit of CGD by 2012.


Saturday, 12 November 2011

Changing Gears of Indian BPOs

Where are we struggling Right now?
India's unrestrained growth in business process outsourcing (BPO) services appears to have taken an unexpected stumble. A decade after dominating the market and racking up $12.4 billion in revenues, directly employing three million people and cornering nearly half the share of the offshore global market three years ago, a large chunk of the Indian BPO industry focused on voice tasks appears to be having second thoughts.
Prompted by rising wage costs, attrition and an inc r e a s i n g ly painful shortage of English proficient talent, several BPO firms are heading to the relative safety of the Philippines. Up to a dozen operators are rapidly setting up and expanding call centres in this South-east Asian nation of a 100 million people, and many more are expected to follow as clients are increasingly insisting on delivery of services from Manila.
The Philippines churns out 350,000 graduates annually, most of them proficient in English, thanks to English medium education in its schools. Also, Filipinos speak with a more familiar accent and are culturally closer to key markets in North America (especially the United States). BPO firms in the Philippines enjoy extended tax holidays and spend far less than in India particularly on office rents and transport for workers. As a result, in barely five years the BPO industry in the Philippines has grown to nearly $7 billion in size and employs some 450,000 people, a majority of them in the voice sector.
But in the background industry executives have struggled with tougher operating challenges. Of the three million graduates churned out by Indian colleges every year, only a small fraction is employable. As a result, BPO companies spend at least four weeks training each of their agents or associates to take or make calls "live" on the floor. Once the agents gain some experience, retaining them can be a tough task, with attrition rates topping 50 per cent in some voice BPO firms.Some analysts dismiss any overt threat to the Indian BPO sector from the Philippines. "India continues to enjoy the largest share of the BPO market (over 50 per cent globally) and has graduated beyond voice to higher-value services," says Arup Roy of tech researcher Gartner. Even so, about 43 per cent of India's BPO revenues today come from voicebased services and, of that, almost all from English-speaking customer services contracts. Over time, the industry has matured, evolving from just voice calls to supporting other forms of services (web, e-mail and instant message) to entering the non-voice, data-based services market. More recently, many companies have moved to the next level, with their customers trusting them to analyse sales and customer data.
Worried by these rapidly worsening numbers, companies that outsource work and the service providers themselves have rapidly looked for alternatives, especially to the proverbial low-hanging fruit, the voice BPO market. Indian BPO veterans such as Raman Roy, who founded the BPO firm Quatrro after selling off Spectramind, among India's earliest crop of call centres, to Wipro, argue that the industry here is handing its business on a platter to Manila and allowing it to scale. "The largest company in the Philippines is perhaps as big as one facility of an Indian BPO. By letting large-scale voice work migrate to Manila, we're allowing the Philippines to add heft to their industry," he says.
Aggressive incentives to BPO companies and some inherent advantages of location also help. "The IT/BPO hub in Manila is situated bang in the middle of some of the largest shopping malls," says Keshav Murugesh, CEO of WNS, which started with a 200-seat facility in the Philippines in 2008. "The government has invested in transportation infrastructure for shopping malls, thus it is easy for employees to travel to and from work." The Philippines also has better tax sops and cheaper infrastructure costs (telecom bandwidth is at least 25 per cent cheaper, for instance), which make it more lucrative to set up a unit there.
Two years ago, after Intelenet Global Services started losing clients because it didn't have a centre in the Philippines, it started with a small, 100-person team there. It has grown to a 1,000-person unit, and the company plans to scale up to 5,000 people in four years. "Filipinos don't need to attend intensive accent neutralisation classes lasting four weeks or be herded through culture courses either," says Sandeep Aggarwal, Intelenet's Executive Vice President for Sales, Solution and Transition.
The cultural similarities between the United States and the Philippines make for another snug fit. It is easier to explain to an American that a hurricane has shuttered a facility than, say, Shiv Sena riots bringing Mumbai to a halt, says Aggarwal. Clients from sectors such as consumer electronics and others are demanding that voice support be delivered from the Philippines and not India.
WNS and Intelenet aren't the only ones expanding rapidly in the Philippines. Rohit Kapoor, Chief Executive of EXL Service, made multiple visits to Manila to hunt for an acquisition to enter the market. He wasn't successful. Instead, Kapoor opted to set up a new centre around 18 months ago, which has today grown to 800 people, handling calls from eight companies.
"Customer empathy is much better in Manila... we have people empathising more personally with customers who have accidents, than just relying on preset manuals to verify claims," he says. Outsourcing experts and advisors in the Philippines say that the trend is irreversible. The country may already be a leader in voice BPO, going by where new contracts are being delivered from, according to Gregory Kittelson, Managing Director, Kittelson & Carpo Consulting, an immigration and outsourcing services provider in Manila.
"If you're doing voice work out of India and haven't lost your contract you're going to do so pretty soon," he says, without a hint of humour. Kittelson & Carpo has advised at least 150 companies this year, mainly in BPO, about setting up shop in the Philippines. This attraction was too hard to resist for Shanmugam Nagarajan, Co-founder and Chief People Officer of 24/7 Customer, a Bangalorebased BPO service provider.
His company, founded in 2000, has some 3,000 people in India, while it has already hired over 4,000 in five years in the Philippines. "India has been muscled out of the voice market," Nagarajan says. "Rising attrition and consequent wage rise make it very difficult to scale in India." So, 24/7 Customer says it will continue to expand in the Philippines and is looking for a place outside Manila, even as its expansion in India slows. India's voice BPO growth is being held back at an annual 15-20 per cent when it can expand at 50 per cent, rues Roy of Quattro.
While large BPOs such as WNS and IBM Daksh may be able to adopt a hybrid delivery model across India, the Philippines and other outsourcing locations, the decline of call centre contracts from here may be a pointer to much tougher times ahead for this once unstoppable sector.
Is their chance of Growth by small tweakings?
A post-lunch slowing of biorhythms is sweeping through call-centre country Gurgaon and the performance on a floor full of agents working on a large Indian mobile phone company's account is faltering. The slowdown is spotted some 1,400 km away at Aegis's grandiosely-named Global Command Centre, or GCC, in Mumbai. The analyst, who notices the falling metrics, reaches for the phone, flagging it to the Gurgaon call centre's head with a solution: cut down on breaks later that afternoon to bring back service levels to an even keel.

Sure, there would have been some tight bladders on the post-lunch shift, but the remote sensing ability of Aegis's so-called GCC is the next generation of outsourcing, says Aparup Sengupta, the company's Managing Director and Global CEO. "It will improve consumer experiences and in the process help companies perform better," he says.
Systems like the GCC (it cost $10 million to put up), a focus on consultancy, and its investment in training will propel growth for the emerging star in the steel-tooil Essar group of companies, says Sengupta. For a company that has made 18 acquisitions in seven years, Aegis is focused on squeezing growth through consolidating its spread. "We crossed $700 million of revenue this year. By March 2012, we want to cross the magic $1 billion mark, and this growth will be organic," says Sengupta. India's total business process outsourcing, or BPO, services revenue was around $17 billion in 2010/11.

Next Growth will be only once you move up to value chain!
Halfway across the world, another BPO unit from an old economy Indian conglomerate is also pushing the envelope. Toronto, Canada-based Deepak Patel, CEO, Aditya Birla Minacs, is busy expanding beyond plain vanilla outsourcing to high-tech consulting. "It's a domain, domain, domain game now! The earlier model of Indian outsourcing was based on labour arbitrage, but that alone is not enough now," says Patel. Companies are outsourcing even what used to be considered "core" work some years ago. For example, credit card issuers earlier would not outsource fraud detection and forensics work; today, they are.

To address opportunities like this, Minacs - as the BPO unit of the $35-billion Aditya Birla conglomerate is commonly called - has a new go-to-market approach in place, which has the company proactively presenting proposals to clients rather than merely responding to request for proposals, or RFPs, floated by outsourcers. "This happens more with existing customers, is more expensive than traditional methods, but works better in sales conversion than the traditional method of responding to RFPs," says Patel. "If you get up the value chain, the margins are higher, the business is stickier, and relationships with your partners are more respectful."

Earlier this year, for one of its unnamed North American customers, Minacs's executives visited 140 sites across the United States to understand closely the operations. "After six months of extensive touring, we put forward five proposals, each of which was tailor-made to meet their requirements. This changed the competitive landscape as nobody had the kind of insight that we did," he says. These steps are reflected in the company's revenues: $375 million in 2010/11, up from some $312 million the year before.
"There is a growing need for BPOs to use the data to drive certain business results aligned with their business processes," says Mayur Sahni, Senior Market Analyst, IDC Asia-Pacific.

mosimageIn India's rapidly growing BPO industry, Aegis and Minacs are outliers; very different from new-age start-ups seeded by professionals, such as WNS, or outsourcing units spun off from multinationals (market leader Genpact, for instance). Aegis and Minacs, by contrast, come from old world business groups which have made their millions in businesses such as cement, steel, petroleum and aluminium, among others. The closest business to tech outsourcing services they have run is telecom.
While both the BPO firms claim that a small percentage - four per cent for Minacs and less than seven per cent for Aegis - of their business comes from their respective parent groups, there is no denying the benefits of being part of large conglomerates.

"For most BPO companies positioning is a mere brand statement. Aegis and Minacs have spent money in executing their brand positioning. They have been able to do so due to the backing of the large groups that they belong to," says a BPO industry insider.

mosimageIt is perhaps such depth of support that allows Aegis and Minacs to absorb costs even if it lowers profitability. In June this year, rating agency Standard & Poor's expressed concerns over Aegis's 13 per cent operating margins - measured by earnings before interest, tax, depreciation and amortization, or EBITDA - being lower than its peers. The reason for this is its higher share of onsite delivery which piles up costs. Sengupta calls it cultural proximity to its customers. "An employee sitting in Bangalore may not be able to serve a platinum card customer from the US who lost his card skiing in Vermont," he says.

Minacs hired 30 senior domain specialists in 2009/10 - an expense that had not been budgeted for, but one which, Patel says, was critical to take the business forward. "If you are going to execute pieces of your client's business, you got to have people who are more talented than the ones your clients have." At Rs 35 crore in the April-June quarter this year, Minacs's EBITDA was flat from last year, but Patel puts it down to investments in ramping up to serve clients in the coming quarters.

Next, the Aditya Birla group plans to merge two information technology, or IT, subsidiaries into Minacs, a move lauded by an analyst. "There are two ways in which BPO vendors move up the value chain. One is by moving up within the BPO industry, where Indian vendors have been fairly successful. The other is by moving from BPO services to IT services. Indian BPO companies have been finding it difficult to achieve growth in IT services organically," says Ajay Srinivasan, Head, CRISIL Research. Over the years, Minacs and Aegis have built strong businesses. How valuable they turn out to be in the years ahead for the conglomerates they are a part of will be decided by how quickly they step out of their parents' benign shadows.

Source: compiled from various articles on Business Today 

Saturday, 15 October 2011

Carbon Credits - How does the world CAP and How do they Trade?

Cap and trade has become an increasingly popular mechanism used by governments to induce green behavior among corporate polluters, with news emerging almost daily. Just recently New Jersey Governor Chris Christie withdrew his state from the Regional Greenhouse Gas Initiative in the Northeast even as several states in the West were planning a new joint program. 

So clearly it's important for business managers in many industries to understand how cap and trade—a complex, market-based process with many moving parts and permutations—really works. A carbon trading simulation designed by Harvard Business School professor Peter Coles gives students the opportunity to experience firsthand the pressure-packed decision-making process and uncertainty involved.

"I'm a believer in interactive learning," says Coles, who has used the simulation in the elective course Managing Networked Businesses and the doctoral course Market Design. "The goal was to provide a classroom experience that would allow students to really see the impact of different design principles in the cap-and-trade mechanism."

The basic concept is straightforward enough: A cap is set on carbon emissions. Companies can then buy and sell a limited number of emission permits, which allows them flexibility in their pollution levels, and at the same time creates a market price for carbon pollution. But how well does the system function when it's implemented in the real world?

For the exercise, the class is divided into groups of five students. Several days before the exercise, each student receives private information regarding his or her role in the simulation, including an initial allocation of permits. Four of the students are assigned roles as managers of large cement manufacturers (simply designated White, Brown, Black, or Green Cement). A fifth student, who represents an environmental activist organization, is assigned the goal of purchasing as many permits as possible within a designated budget in order to reduce the total allowable pollution levels for the cement firms.

Students are instructed to try to maximize profits and not, for example, install clean technology because they think it is morally responsible.

Trading begins
In class, a year of trading is condensed into a 21-minute exercise with several decision points. At the 7-minute mark of trading, each firm decides whether to invest in clean technology, which ultimately could save the company money by reducing emissions, but comes with up-front costs. At 14 minutes, each firm sets cement production quantities for the year. After 21 minutes trading halts, and students submit their permits. They are obliged to pay a fine of $40 per ton of pollution exceeding their permit holdings.

"Putting the students through that decision-making process reinforces the role of uncertain prices in a cap-and-trade mechanism," Coles says. "It contrasts with a simple command-and-control approach to regulation that specifies maximum pollution levels allowed by industry, or a carbon tax with a known cost for each ton of carbon. Those methods don't generate as much uncertainty in future prices, so it's easier to recognize what the return will be on an individual investment."

At the beginning of the exercise students are in the dark. No one knows what an appropriate permit price is, but they try to get signals to help them make a somewhat savvy decision. "Those who make poor choices feel the consequences of price uncertainty most deeply," Coles says.

One of the cement factory managers begins with no permits. While that may seem unfair, it's a condition that mirrors real life. "Typically, these permits are grandfathered," Coles says. "They go to incumbent firms with the best lobbyists, while the new guy faces an uphill battle."

Sometimes groups will find that the price drops to zero, upsetting students who are stuck with suddenly worthless permits. In other instances, the price rises dramatically. "Both extremes offer useful discussion points," says Coles, noting that the Europe Union experienced a price collapse in 2006 that called the stability of the entire market into question.

"As a class we can talk about whether a price collapse is really a problem, and if so, what can we do to fix it. A simple solution would be to not issue so many permits, which is easier said than done. Another is to allow unused permits to be banked for future periods, while a third would be to establish a government-imposed floor or ceiling on trading prices that would protect firms from those extremes."

The profit point
The profit-driven behavior of the cement factory managers eventually creates a clear "aha!" moment.

"No one is thinking about efficient reduction of pollution during the exercise, and that is really the whole point of the cap-and-trade scheme," Coles says. "A property right is assigned to produce a certain amount of pollution and then market principles go to work. Afterward, in discussion, we look at what's happened and see that we've held pollution to the cap level incredibly efficiently." In the discussion, he adds, it's possible to go through the math behind the dynamic and the role of marginal cost of abatement in reaching this point.

Students consider other market design factors during the debriefing session, such as determining how to set initial permit allocations. As mentioned, grandfathering would give incumbent firms an advantage; other options include auctioning permits to the highest bidders, or assessing each firm's operations by size and industry and then estimating benchmark pollution levels; if a firm exceeded those levels, it would need to buy additional permits.

Trading in the United States
While the United States hasn't taken part in global carbon cap-and-trade schemes, Coles notes that it has long had trading programs for sulfur and nitrogen oxides, the emissions that cause smog and acid rain. "Our 'SOx' and 'NOx' markets are well functioning. It's an easier problem to solve because it's a more local pollution. By contrast, if China, the United States, and India decide not to join a global carbon trading scheme, Europe's efforts may appear insubstantial in reducing global warming. Worse, if cap and trade puts European firms at a permanent disadvantage in the global market, this may further erode European industry support."

Using a simulation to grasp the mechanics and economic efficiencies of cap and trade is one matter. But factoring in the complexities of global politics? Coles has been thinking about an extension of the simulation, in which the United States joins the European Union's carbon market as a means of testing what happens when markets are linked.

There will probably never be a simulation that captures and accurately predicts the intricacies of geopolitics—but it's a start.

 Source: Julia Hanna  @ HBR

Tuesday, 27 September 2011

Retail Business - How to Get Shelves of Large Retailers

Small businesses should follow 10 important rules if they want to place their products on the shelves of large retailers. But first ask yourself: Have you already tested your product with your target customers and can you provide data about the tests? What is it about your product that would make the retailer excited? Do you want to sell your product directly to the retailer, or do you want to license it to a manufacturer who will distribute it for you? If you get in, can you handle rapid volume increases, and can you prove this to a retailer? Are you prepared to share some risk with the retailer in case your product does not turn around fast enough?

The 10 Critical Rules

1. Know why your product deserves shelf space over other products. Think about a large retailer as a company that wants to maximize rent for its shelf space. This can be done in two ways, by either generating greater margins or quicker turnover. At the beginning you will likely not able to compete on price, so it is critical to know your product and what it can do for the retailer.

2. Know your target distributor and your end customers. A search for the best retailer for your product starts with you browsing stores for similar or related products and to get a feeling for the type of end-customers that frequent these stores. For example, if you want to sell high-tech products that need a fair bit of explanation, then a big box retailer might not be the right distributor for you. Make sure that the customer that likely buys your product frequents the retailer of your choice. Spend some time at the retail stores to see what is on the shelves and who shops there. Have a clear vision where in the store your product would be positioned. Keep that in mind when you present your product to the buyer.

3. Make sure you and your product qualify for listing. If there is an application process, be sure to read the guidelines thoroughly before submitting the paperwork necessary to apply to become a vendor. The bigger the retailer is, the more specific and often more expensive their vendor requirements will likely be. Make sure that you are able to meet the standards for insurance coverage, electronic business processing, labor law and product safety, and delivery and lead times.

4. Check to see if the retailer offers any special programs, including local vendor shows that serve as an entry to regional markets or that offer opportunities for women-owned or minority-owned businesses.

5. Know your way in. Inside connections are always helpful. Contact the buyer or category manager by phone to check when and how frequently they look at new products. Try to see if you know someone at one of the target retailers who is able to connect you. However, buyers often have to follow very strict rules, and being too friendly can derail your sales efforts right at the beginning.

6. Generate excitement. Determine who should pitch your product to the retailer. Your decision to either present the product yourself or hire a representative to do it for you depends on your product as well as on your strengths as an individual salesperson. In addition, if your product line is one that involves frequent changes (like fashion clothing), you may want to hire a manufacturer’s representative who will present your line, among others, but therefore more frequently than you would be able to. In the grocery industry, it is common to use a broker who will sell your product for a commission. If you have a one-time sales pitch that needs to be done, you may choose to do it yourself.

7. Avoid product placement on the “graveyard shelves.” Visibility is extremely important. As a newcomer, you compete with much larger and more established vendors for shelf space. If your product is not being put in an attractive spot, you might not want to go ahead with the listing. However, declining an offer might also jeopardize any future opportunities.

8. Therefore, consider offering some initial in-store promotion activities for your product. Retailers really want support from their vendors, including in-store demonstrations, point-of-sale displays, advertisement and any other kind of promotion they can get. This can help you to bump up sales at the beginning and to make store personnel familiar with your product.

9. Leverage your online strategy. In today’s business environment, it is critical to have an online strategy. With very little resources, small businesses can create a professional Internet presence. If you are aiming for brick and mortar distribution, your online presence should serve as a multiplier. Don’t think “either or,” think “and!”

10. Be fully prepared for your presentation before you meet with the buyer. Know about the industry standards for your product, including sale terms, discounts, credit, shipping, allowances and return policies. Be ready to present your marketing and promotion plans, including visualizations of in-store demos, point-of-sale displays, advertising, online presence, etc. Have a sample of both your product and its packaging, including bar code and language requirements available. Packaging is of great importance, and therefore yours should follow the merchandising standards of your buyer’s policy exactly. Have a product brochure that provides thorough information on the product, including wholesale and retail prices, discounts, credit, shipping, allowances and other sales conditions available. Prepare a list of retailers currently selling your product. Be prepared to prove that you will be able to provide large volumes. This includes manufacturing information and as much evidence as possible to show how you or your manufacturer will be able handle increased volume while maintaining quality sand on time delivery. Be ready to talk about both your business and your personal history.

Source: Andreas Schotte @ HBR

Thursday, 15 September 2011

India’s footwear retail Entry: Opportunities, Issues and Challenges.

Global recession had a major impact on the industry, in terms of revenue fall and markets. Some saw a dip over 30% in their revenue.  SME focusing on exports and producing only semi-finished leather witnessed low demand, increasing margin pressures and high inventories. With the collapse of traditional North American, Eastern Europe market, SME were expecting Dubai to bail them out. However, that did not happen.  Cheaper alternate markets such as Russia, Eastern Europe emerged to fill in the coffers. A major challenge faced by the SME’s, especially in Vaniyambadi, Tamil Nadu is the cost of effluent treatment. Some SME’s tanneries that could not meet the cost of CETP norms were closed. 

What next for Indian leather SME’s and what can they learn from Indian IT industry?..

The recession and the hardening of Indian Rupee against US Dollar is propelling leather companies the need to diversify and de-risk their business. Eyeing the sizeable mall-hopping consuming class, manufacturers are turning retailers, either going ahead on their own or forging alliances with international partners. Foresight, Chennai based company is partnering with Pavers, of UK to introduce European fashion footwear brand Staccato in India. Reliance Brands has entered into an agreement with The Timberland Company, a major manufacturer of outdoor footwear and apparel. 

Future Group and the UK shoe retailer, Clarks, have formed a JV to bring high quality shoes to India. Domestic footwear retail business is witnessing a shift in channels too. With large volume brands sales remaining at high streets, and mid segment customers preferring to purchase shoe and other accessories in tandem with clothes, some of the retailers are reworking their presence. Footwear retailers prefer to use Malls to de-risk their channels and product lines. 

Domestic brands are moving beyond regional markets and embarking pan-India presence. From a primarily NCR player, Mahtani Fashion, an aggressive shoe retailer who owns Vi-Ga has plans to build a national presence. Domestic market offers tremendous opportunity and hope for diversification, de-risking the export heavy business. However, it does pose challenges and issues for new entrants.  

India’s domestic leather market
Indian domestic leather goods market is estimated to be worth Rs 16,300 crore and is expected to grow at a CAGR of 20%. Domestic footwear market is estimated to be over Rs 15,000 crore in value terms and has grown at the rate of 8.8% over the last couple of years. Men’s footwear accounts for almost half of the total market, with women’s shoes constituting 40 percent and kidsʹ footwear making up for the remainder. The  domestic  market is substantially  price driven, with branded footwear constituting less than 42 percent of the total market size. 

With a direct employment of 2, 50,000 (with 50% of them being Women) and an export earnings of $14 billion, leather industry is a significant driver of  economic growth. The Indian leather industry enjoys abundant availability of raw materials, availability of low cost skilled labour, and availability of supporting institutions. More than 4000 units are engaged in manufacturing, of which 95% are SME.  
India’s share in the global footwear imports is around 1.4% and future growth is expected from the SME’s venturing into value added products. Major competitors in the export markets for leather footwear are China (14%), Spain (6%), and Italy (21%). 55% of India’s leather export comes from US and UK, and Dubai in recent years had emerged as a trading destination to Africa and other markets. SME’s export most of their finished leather (about 95% is export revenue) and have very small contribution from the domestic market.       
India is the second largest footwear manufacturer in the world, next only to China. Nearly 58 percent of the industry, which is by and large labour intensive and concentrated in the small and cottage industry sectors, remains unbranded. 
However, as part of its effort to play a lead role in the global trade, the Indian leather industry is now focusing on key deliverables of innovative design, state-of-the-art production technology and unfailing delivery schedules.

Customer Segments
Retail footwear segment in Indian is very price sensitive and has been steadily growing over the year. Major part of the demand is met by the unorganised sector and still there  is a shortfall of 300 million pairs. Branded shoe market only account for 20% of the entire market. While international brands largely dominate the higher end of the spectrum, the lower end of the market is dominated by home-grown players as well as unorganised players. While men's footwear is the biggest target category (contributing almost 48%), children's (11%) and women's lifestyle footwear (41%) is not behind in the race.

Segment wise classification of price ranges in the men’s footwear segments:
Segments Price Ranges in Rs % of growth
Mass market  185 – 700 60% (Liberty Bata)
Economy market 700- 1000 30% (Bata Liberty)
Sports market 1000 – 3000 7% (Nike Adidas)
Premium leathers  3000- 5000 5% (Charles and Keith)
Luxury 10000- 50000 1% (Gucci Louis Vuitton)

Segment wise classification of women footwear segment:
Segments Price Ranges in Rs % of growth
Traditional footwear 699 – 999 5%
Designer Footwear 599 – 799 10%
Formals 299 – 699 40%
Casual Wear 499 – 799 25%
Sports Shoes 500- 699 20%

About 37.8 percent of Footwear retail is the organized segment, which qualifies it as the second most organized retail category in India, next only to Watches. While the average spend on the footwear by urban consumers is Rs 240/annum, consumers in rural areas spend just about Rs 100/annum. The annual domestic consumption of footwear is approximately 1.1 billion pairs per annum, and top 20 cities contribute about 450 Million pairs/annum. The kid’s footwear segment is one of the fastest growing segments in India. The Indian kid’s footwear segment is highly fragmented and dominated by the unorganised sector. The branded kid’s footwear segment has a big card to play as India has the world’s largest child population. The overall kid’s retail segment has a robust margin of 20 – 25 % which is huge potential opportunities for organised branded retail footwear players. S&M is one of the players who have ventured into kids wear segment which has 27 exclusive outlets through franchise model. S&M sees a huge potential with age group of 3 – 16 years kids segment in the domestic market after the economic slowdown in the international market that hit the company’s revenues has now been targeting  the growing consumers market of India. It has set up store in store format for optimised revenue flow. The store in store format of business model has been the trend among many retail footwear players in India.

Disney kid’s is another international brand which has forayed into exclusive kids shoes in India and has targeted kids within the age group of 5-10 years. Disney shoes have a tie-up with Sierra Industrial Enterprises to manufacture and market Disney shoes for kids in India. Disney aims to become the market leader in the kid’s footwear segment in India. 
The Disney shoe collection will include boots, sandals, slippers and sports shoes for boys and girls. The footwear’s has a price range from Rs 150 – Rs 850. Disney has targeted malls across the country and in prominent chain stores such as Lifestyle, Loft, Shopper’s Stop, Pantaloon and Central.
Bata is one of the oldest brands which have a more than 50% share in the executive segment. As the young Indian executive class matures in terms of quality, design and brand, the preference will be more towards branded footwear and the growth is expected to be high in this segment with the migration of people from villages to cities for better career and profession.  The footwear retail segment is currently one of the most organised sectors within the retail domain. However, this is purely due to the highly organised nature of the men’s footwear segment. The women’s category is largely unorganised, in fact close to 95% of the category is unorganised. With respect to the rest of the world, this is an anomaly as the women’s category is majorly organised and forms a big chunk of the market. Thus for us as retailers in the women’s footwear category, the market is still largely untapped and hence a big opportunity for growth. 
At present, almost all of the organised retailers in the women’s footwear category are located in the metros and Tier I cities and towns. The Tier II and Tier III towns have over the last few years seen a spurt in income driven by the service industry boom. Hence these towns definitely are a potential target.
Organised footwear market Vs Unorganised footwear market
The average growth in the industry has been estimated at 12% and is estimated to touch Rs 47000 crore by 2025. 
Presently the Indian organised foot wear market is dominated by men’s footwear segment that contributes for nearly 60% of the market where the casual footwear has been better off with two thirds of the share in the men’s segment. The unorganised players have the lions share in the ladies and kids segment with 80 percent share. The organised footwear brands have less penetration in the ladies footwear segment mainly due to the complex buying behaviour of Indian women. The ladies and kids segment is one of the fastest growing segments in the branded footwear market and many foreign brands like Catwalk have ceased the opportunity and have set their footprints in this segment which has been untapped by major traditional Indian footwear brands. Considering this many of the Indian footwear brands have seen growing opportunities in the segment to widen their product portfolio, widen their risk appetite and increase their market share in the footwear segment by contributing to newer growing consumer segment which will boost the bottom 
lines of the retail players. The business models of the footwear retail players have been different with a wide popularity of stores in high streets, malls and new formats such as store in store has been catching up even with international brands having gone the store in store model which has been the most cost effective model in terms of testing the markets.           
Major challenges in running domestic retail 
a) Retail presence:  till recently, most companies invested in own stores as the means to grow and expand.  With commercial rents increasing in last few years, capital required for expansions was a bottleneck. 
b) Credit Management:  Brands that had no local presence, but preferred the third-party retail route had to face the challenge of receivables, often the credit period as high as 120 days. 
c) Brand:  Many of the leather firms are SME’s, have great experience in trading and vendor management, but completely lack brand building experience.  Even when attempts were made, they lacked focus and consistent efforts, thereby diluting the impact.
 d) Low IT investment:  Except the major leather manufacturers, none of the companies had an ERP connecting POS data so as to effectively manage inventories.  It was not common to have round the year discount offerings to get over the inventories.  

Some Successful Retail Entry Strategies

Red Tape is a manufacturer and an exporter under the flagship brand of Mirza International  Initially the business model is more inclined towards exports were out of 250 crore 200 crore business was done through export closures. Mirza International had very less or no presence in the domestic market until 2006. So to set its footprints in the domestic footwear market Mirza International forayed into women’s footwear, men’s footwear and accessories market in 2006. It also launched a low price footwear brand called Necleus and is positioned to cater to lower end customers for high volume sales. The company also plans to have a national presence through exclusive stores and shop in shop stores.

M&B is one of the major players in the footwear business in India. M&B has two manufacturing facility one each in Baddi and Noida. With more than 75 stores spread across the country making M&B one of the fastest growing footwear brands in India. M&B has very strong distribution network across India with Brands marketed by M&B are sold in over 1000 stores across India. 
ID is the flagship brand of M&B which is targeted towards fashion savvy youngsters it is one of the popular brands among the youth community in India.The iD store has a unique layout, striking visual impact and catchy merchandise display which will make shopping an experience to remember.Some of iD‘s brands are: 
Camdan – This boot is targeted towards ruff and tuff guys. It has a very strong upper mould that gives a tough looks on the shoes.
Colonge – Is another iD shoes from M&B is a trendy shoes with unorthodox styling blended BI- colour and antique and suede leather, which has a inspiring looks with a combination of leather and thread in the upper.
Figo – iD shoes from M&B. Figo is a brand inspired by soccer sports which has  a classic theme with a blend of sporty colour. Flashing streaks of gold and silver looks classy with comfy grip with sporty spikes at the bottom which makes a cult shoe.
Fly – iD shoes from M&B. It makes the wearer of the shoe feel high, it has a bi-coloured soles and leather with tie and die finish.
Hotshot – is a one defines complete casuals and comforts for the leisure mood.
Icon – It is the trendsetter bi-colour soles with contrast streaks on the upper.
What determines the success of new entrants Building retail presence, brands and sustaining them in the domestic market is not an easy task. Remember Corona, the legendary brand that was the no.2 brand in the market with its large network of stores, filed for BIFR in 1998 and eventually closed in 2003.  Cost management and effective marketing are key to survivors in domestic markets.  
The common underlying strategy of successful companies like Mirza’s or M&B or Lakhani’s is control over cost and right placements. 
a) Location
Successful brands are realizing that while malls offer higher footfalls, the advantages of high street are many. Average Cost/sq ft would be almost 40% less than the Malls, and considering the overhead costs of parking, energy, etc high street is more suited for “youth” targeted products. It is also more suitable for players with wide product assortment.Companies with presence in textile and leather are discovering the advantages of bundling.  Presence in a high street market such as Marthahalli, Bangalore, or Fashion Street, Bandra or S.V. Road, Mumbai or Khan Market with higher footfalls of a particular segment increases cross-selling. For example, M&B footwear does high street retailing through multi-brand outlets and discounts retail chain stores, prefers Malls to position international retail chain stores (sale of international brands such as Lee, Provogue, etc).  Domestic brands are realizing the limits to growth by pursuing own store format and switching over to franchise formats to tap markets such as Patna, Ranchi, Vizag, Raipur, etc. 

b) Product focus
Successful brands are realizing a focused product portfolio (with even fewer products) is better off at managing customer expectations and experiences.  S&M, a Coimbatore based company is targeting young customers (7-14 yrs) and Hidesign, the leather boutique firm is concentrating on business professionals and Double-Income Parents.  Focus does pay in domestic market.  Expansion into sub-brands such as sportswear, kids and women are the steps the domestic brands expected to pursue in future. SGL leathers increased their gross margins with introduction of Bags, Wallets and Leather Accessories. SME’s focused more emphatically on institutional sales. Local players such as Damask, SS and other also found safety shoes for industrial use a niche segment where margins are better than in the wholesale business.  

The informal / casual footwear holds two third of the share in the men’s footwear market in India. The informal segment has always been high on demand mainly due to the changing trends in the consumption patterns of the Indian consumer. The young population has always shown more interest towards westernised culture and brands and this has given ample opportunity for international footwear brands to have strong foothold in this segment. Allen Cooper is one of the brands which had forayed into this market in the new millennium which has entered with a floor price of Rs 1000 plus in the southern markets has been able to penetrate strongly in the segment which has targeted its products with the age group from 24 – 35 years.

a) Business model
One learning from Carona’s fall has been the need to minimise risk and spread the risk with partners. Successful brands like M&B, S&M are pursuing a good mix strategy of few owned and franchise models to expand and serve markets.  Own showrooms are used to identify the changing trends (M&B consistently targets the high end students in Delhi) and create successful product lines.  Franchise option is vigorously pursued to expand the footprints and reduce the cost of Operations. S&M, has adopted a unique “Store-in-store” model using IT as a backbone to significantly reduce the cost of operations, almost 35%. 
b) Enterprise-wide IT
Successful entrants S&M while pursuing innovative store-in-store policies have relied on IT investments such as POS and ERP.  Companies such as Khadims, M&B are heavily relying on IT to understand the models of the seasons, price ranges, store performance, etc.  
c) Pricing model
While tradition wisdom recommends, floor pricing to penetrate into markets, the successful companies have pursued premium pricing targeted towards the middle high and high income group people.   Selecting a particular segment with an affordable price has been the key underlying the success of S&M, M&B.


With organised retail on the rise and increase in the disposable  income retailing certainly looks a promising option. Potential opportunity for value added products in the domestic leather market is high; opportunity to cater to the domestic market with a blend of traditional, western fashion can bring in huge market in the footwear segment in India.

Increasing forex impact and global competition implies that leather companies cannot sustain their growth from only exports front.  The experience of companies like S&M, M&B underscores the fact that entering domestic market can derisk the business and increase revenue growth.  Success depends upon consistent strategy linking location, product range and execution. Success in domestic market requires listening to the customer, adapting the product and price, and managing the cost of operations.  Scale is important to survive and grow, and low risk models such as franchise or storein-store may prove be effective. In the final analysis success depends on each company’s willingness to take risks and implement required changes.