Shut happens

By Ankush Chibber
 
In the 2008 film drama August, Josh Hartnett plays Tom Sterling, a young, abrasive CEO of a recently-gone-public startup, Landshark. The year is 2001 and the month August, and as a promoter, there are only a couple of months before he can sell his shares and make some money.

Sterling stalls. He wants to wait a bit more. But his main client is also stalling and investors pushing. Eventually, it’s a moment of caution stretched too long. The market plunges, investors pull the plug, and a month later, 9/11 happens. It all goes horribly wrong.
The movie August is really not a movie made for emerging businesses anywhere, be it in the US or India. But the lessons, or should we say warnings, from this motion picture are very real and dangerously close. It’s not 2001 yet. Or for that matter, the even worse 2008. But only a fool would deny that there is not an air of disappointment mixed with equal parts of uncertainty and slowdown floating about now. There might be many views you would hold about where the economy is heading, but really, there are only two dominating views – bad and really bad. R Sriram, the Co-Founder at Next Practice Retail, a retail consultancy firm, and former CEO and Founder of the Crossword chain of bookstores, is one of those who believes that even though its not 2001 or 2008, things are really bad. Down. Down. Down. Down
“Retail spending is certainly down. Overall, inflation has been high while salary raises have not been as high. People’s aspirational incomes are thus low. This has affected their spending capacity,” he says. Though he agrees that India is definitely doing better than other parts of the world, he says that there “is a mismatch between expectations and reality”. This mismatch could have its roots in what you may think is the prime indicator of the Indian economy. In April, the International Monetary Fund (IMF) released data which said that India’s gross domestic product in purchasing power parity (PPP) terms stood at $4.46 trillion in 2011, marginally higher than Japan’s $4.44 trillion, making it the third-biggest economy after the US and China. Good news? Now take a more on-the-ground medium of assessing economic health, Burgernomics, the foundation of which is the Big Mac Index developed by The Economist. The index is an informal way of measuring the purchasing power parity (PPP) between two currencies using the Big Mac, which is a standard product offered by McDonald’s across the world. This index was further worked on by Prof. Orley Ashenfelter of Princeton University in a paper this year. In his research, Ashenfelter tracked the real purchasing power of the crew at McDonald’s restaurants across the world. Ashenfelter began collecting information on the hourly wage rate of McDonald’s workers across countries in 1998. This wage rate was then divided by the price of a burger to come up with the Big Macs per hour (BMPH). Simply put, the BMPH tells you how many burgers one hour of work at McDonald’s could buy for the worker putting in his hours there. In other terms, the life of the average Joe and if he can afford to buy a Big Mac, even though he may not want to. At the end of the boom era of 2002-2007, the BMPH rate for India was 0.35, which meant that an hour of work in New Delhi outlet brought you about one-third of a Maharaja Mac, as it is called in India. In 2011, this dropped to 0.30. Joe, or, perhaps, Ashok in this case, can now buy less of that Big Mac than he could back in 2007. In other words, that great Indian domestic consumption story might not be so thrilling after all. And that is the worrisome aspect of this slowdown. Is consumption going to stay ‘strong’?
But many in the country’s ecosystem of emerging businesses are still very confident that the slowdown is not going to affect the domestic consumption end of things. Mukesh Bansal, CEO & Founder at multibrand online retailer Myntra, tells us that compared to 2008, things are still looking bright in India. “We lived through that slowdown. Things were a lot slower then. Compared to that, for now, the going is much better,” says Bansal, who claims that his company is doing daily sales worth Rs. 1 crore currently and is targeting sales worth a hefty Rs. 500 crore by the end of this fiscal year. Sriram has another view of this. While he agrees that one sector that is doing reasonably well in the current slowdown is online retail, the reason for this is different and simple. “Price is the basis on which they are competing, and their investors are bearing the losses. Online deals are shaped on the basis of price. Other sectors of consumer spending like hospitality, travel, etc have all taken a hit. Even the affluent are now thinking twice before shelling out their money.” Be it bravado or ambition on Bansal’s part, the truth is that it can change fast for any emerging business, Kanwaljit Singh, Senior Managing Partner, and Co-founder at Helion Venture Partners warns. Singh says that any large event like a sovereign default [which has looked likely in the recent past] can trigger a chain of events that would ultimately hit consumer confidence really hard even domestically. “In 2008, there were visible and tangible markers such as the big banks failing. If something like that happens again, then yes, growing businesses would see a significant impact.” A man who has seen this occur from very close quarters is Harsh Neotia, Chairman at real estate major Ambuja Realty, whose sector was the worst hit post-2008. “We enjoy global exposure, of which we partake during jubilant times and are hit by during turbulent times. And so, sometimes a very faraway incident may create a ripple that comes crashing at our doorstep,” he warns. A smaller, but credible, example of how an event can quickly change consumer confidence and ultimately consumption can be seen in India’s auto sector. A punch from the left field
In 2011-’12, the Indian passenger vehicle (PV) industry recorded sales volumes of 2.6 million units, posting a credible growth of 4.7 percent over the previous year, according to an ICRA report. While this was much lower than the scorching 25 percent plus volume growth chronicled in each of the preceding two fiscals, it was still credible given that moderation was always expected by the sector.But then, an increase of Rs. 7.50 in retail petrol prices was announced by the government in late May. Since then, the industry has shown signs of going into a tailspin. Sunjay Kapur, Managing Director and Vice-Chairman of auto components maker Sona Koyo Steering System Ltd tells us that there is now a definite downswing in demand for petrol vehicles, while the demand for diesel vehicles is still fairly on the upswing. Vishnu Mathur, Director General at the Society of Indian Auto Manufacturers (SIAM), goes a step ahead and points out that the diesel segment of cars has not been spared either. “May onwards, the industry has seen reduction and depression in demand even in the diesel segment. Inventories have been going up even for diesel cars.” If that is not direct evidence of worsening consumer confidence, sample the fact that the heavy commercial vehicles sector, more specifically trucking, is steeped in negative growth with a deceleration of about 20 percent. “The trucking industry is complaining about non-availability of business. The overall movement and trade of white goods have declined, investments are not happening and people are not buying,” he says. The auto sector is also reacting quickly to the rapidly changing paradigm for them. Companies like General Motors and Honda have already begun implementing no production days to prevent excess inventory. “Companies either have production five to six days a week or halt production every day for about an hour. Block closure and shutting down plants for maintenance are some of the other ways companies are managing their inventory,” says Mathur. Kapur says his company is sourcing new customers in unrepresented businesses, and “trying to increase business share with current customers as well as focusing on supply chain management even to a greater degree”. He says given the situation, all companies in this current market have to build scenarios on a quarterly (and sometimes monthly) basis to make sure they are aware of what the market trend is and how they can make changes accordingly. Keep that watch going
To keep an eye on the market is vital for any emerging business in this scenario, says Sandeep Singhal, Co-Founder at Nexus Venture Partners. Singhal is of the view that consumer-facing businesses of today are not being affected much at all by what is being said of the slowdown. “What we have seen in our portfolio businesses is that the consumer facing businesses are not doing badly at all. They are growing robustly and have not been affected at all by the overall macroeconomic trends,” he says. Nexus’s portfolio consists of companies such as Snapdeal, Komli and MapmyIndia. It’s the business-to-business (B2B) companies that Singhal is more concerned about in the near term. “Within our portfolio, those are the companies that are showing signs of strain. With the west in depression like it is, and India also showing a sentiment of slowdown, these companies are seeing their clients close up or cut back on the business they were giving out.” He does admit to a silver lining here as well, stating that some companies have benefited from the downturn in the west since their business is focused around bringing down the total cost of ownership. But that also varies case to case, he says, pointing to businesses in the financial services space that are suffering. To add to the strain, large businesses in core sectors such as infrastructure are also under tremendous pressure. Meher Pudumjee, Chairperson of the engineering solutions major Thermax Ltd. tell us that after the tough 2011-12 year, the company has begun FY2013 with a 25 percent reduction in its order carry forward due to the slowdown in the capital goods sector. “The power sector which contributes nearly 25 percent of our turnover has come to a virtual standstill. We expect this financial year to be challenging as our project and EPC businesses have been affected by the uncertainties and will face a decline in the short term,” she says. Pudumjee adds that the topic of growth is firmly out of the picture for now. “We have been enhancing our competitiveness by reducing costs, better sourcing and by finding newer applications for our products, as also newer markets outside India.” “Besides South East Asia and West Asia, we have been able to bring in improved business from the African continent. We have also been growing our service business to help compensate for the cyclical volatility faced by project businesses,” she says. To ignore the implications of large B2B businesses in marquee sectors coming under strain is a dangerous thing to do when viewing the entire economic picture for India. To take an isolated example of Infosys, which may or not may have other internal troubles, is prudent in this case. It was reported in June that over 8,000 people had quit the marquee employer of the IT sector in the first quarter of this year. The company has said in the recent past that even though it would continue to hire, it has put in a wage freeze this year since the business environment is not too good for the sector. Being the bellwether company for the sector, Infosys sets the benchmarks for others to follow. So what happens if they do follow on and freeze wages and perhaps suspend hiring? Yes. That consumption story? It goes for a toss. Helion’s Singh agrees on that end. He thinks that if one or two more marquee employers were to toe a similar line to check the strain that they are facing, things could unravel in a quarter or two from now. It is the reason why he maintains that the current scenario is one of uncertainty. “Right now, there is an air of hesitation rather than a collapse. Of course, you need to
be cautious.” Stay focused and all shall pass The problem is that the uncertainty is spreading fast. Hemu Ramaiah, Founder and Ex-CEO of the Landmark chain of stores and Managing Director at retail consultancy firm Shop4Solutions, says she has not seen a slowdown such as this in while, considering the way its sentiment has spread. “What’s different to earlier slowdowns is that communication around it was never this dramatic. With the advent of the internet and social media, people are talking about it all the time,” she says. Ramaiah warns that news passes around very fast today and so would news of people’s job losses. “Therefore, they tend to defer buying non-essential items. There is more need-based buying and people differ upgrading their products. It’s the same with eating out. People are saving more money today,” she says. On eating out, Moshe Shek, Chef and Founder of the Moshe’s chain of restaurants, says that in the F&B sector, a downturn often has a spiral effect. “If your restaurant is not attracting enough footfalls, you will start offering discounts. What happens is that once you start offering discounts, you get a bad name in the market, and all your hard-earned reputation goes down the drain.” Moshe advises that the best thing to do in the consumer serving space is to start strong and stay consistent. “Your concept and your management team should be very sound. This should not change with market cycles. Consistency in performance and value delivery will keep your customer coming back.” Crossword’s Sriram says that whatever may be the business, trying to meet expectations of others is what emerging businesses should guard against. “They should not be expanding to meet the growth expectations of their investors. The most important thing for retailers, for example, is that retail decisions should be driven by the fundamentals of business and nothing else.” Go for the kill?
The lessons of 2008 are still fresh in the mind of Myntra’s Bansal though. Back then, Bansal resorted to a host of tactics to survive the global financial crash, when overnight, the Indian Shining story also came to an abrupt halt. “We brought down inventory to no more than three weeks, shelved our wide-ranging marketing plans, and put a temporary freeze on hiring and increments,” he reveals. When things went bad, the company canceled its future purchase orders, and renegotiated
with vendors. Bansal says that he put in place checks such as auditing and accounting controls to streamline his business. In their totality, all those measures have helped him better his unit economics to weather this slowdown as well. It had helped that Myntra had raised its first round of venture capital in 2008, all of $5 million. With cash in hand, Bansal was pretty confident of sailing through. This time he has more cash with two more rounds ($35 million) of funding. And this time, Bansal wants go in for the kill. He tells us that the company is moving aggressively to take market leadership on the back of increased marketing, increased access with a widening shipping network and, crucially, more of the talent it so badly needs. “A slowdown in an economy corrects the talent-wage imbalance and cuts down attrition. This is beneficial for us,” Bansal tells us. Nexus’ Singhal backs Bansal’s move. He thinks that a slowdown is the right time for a business to take leadership in the market. He points to 2001, when there were many travel booking sites in the market, but when the haze after the dot-com devastation lifted, MakeMyTrip was alone at the top. “You have to be the last man standing.” Sow now, reap later
To do that, businesses would have to start now. “They should bring their resource costs down. Renegotiate existing deals and spend wisely. Don’t react and cut back on expansion. Instead, give it a thoughtful approach, and check that the market does merit your aggression,” says Singhal. “Build your brand.” Landmark’s Ramaiah echoes that approach with her experience. She talks of the 2001 slowdown, which she calls a golden turning point for Landmark. “When everyone was shutting stores, we started two of our largest ones. It was a conscious strategy I adopted. When everyone was slowing down, I went out and expanded.” “Our customers spent four-odd hours in a nice, air-conditioned environment browsing and even if they spent Rs. 20, it did not matter to us. The most important aspect was building the brand and experience around it during this period. Companies put too much focus on balance sheets,” she says. It worked for her. Revenues for Landmark increased from `18 crore in 2000 to Rs. 100 crore by 2004, even as others struggled to survive in this period. Ramaiah says that her primary learning was that if you focus on your customer, inventory and customer service, then the downturn would not be a downturn at all. This something Ambuja’s Neotia agrees with as well. He tells us that during the last recession, they resorted to listening to what the customer wants. “Once we know what it is that he wants, sometimes we may tweak our offering and make it attractive enough for him to bite despite their being a downturn.” Eventually, says Ramaiah, well run businesses will continue to do well, and only mediocre ones will go down. “Remember, in a slowdown, customers will have preferred places. Instead of going to different places, customers will choose one place to go.” And that should be yours. With additional inputs from Pranbihanga Borpuzari, Shonali Advani, Sriya Ray Chaudhuri & Bindi Shah © Entrepreneur India August 2012