Strategy Digest Vol 1 (Oct)

Bharti Retail to enter western India, follow its cluster strategy

After the north, Bharti Retail will soon enter western India with its first hypermarket in Mumbai followed by 20 more stores in cities such as Mumbai, Pune and Nanded. The retailer is also planning to set up a mother distribution centre on the Mumbai-Pune highway.

Unlike other retailers such as Reliance Retail, which set up stores across the country in one go, Bharti is focusing on creating a cluster in one region before entering another. This consolidation before further geographic expansion results in efficiencies in supply chain and logistics, which require significant investment.

SpiceJet to double fleet by end-2013; add more routes

Gurgaon-based low-cost carrier SpiceJet said today it would double its current 22-plane fleet by the end of 2013 which will be utilised on the 12 new domestic routes being planned. The company is also starting an international service. It already has rights to fly to Dhaka and Male and they feel the expansion will be easy given the similar demographic profile in these destinations. These routes are being based on a hub-and-spoke model so that the additional costs are minimised. Colombo, for example, will be a spoke from the Chennai airport, which acts as the hub.

More players looking at premium personal care market

The high-end or premium segment of the personal care market in India has been growing at about 35 per cent per annum. This segment, pegged at over Rs 1,000 crore, has a small base but is growing fast. Major companies such as HUL, P&G are already devoting their attention to the premium end of the market. J&J has jumped in, too with its skin care product, Neutrogena, last year. Some of this focus also comes from the fact that the customers have been moving up the value chain in terms of their needs.

Elder Healthcare, the FMCG Company which has brands such as Tiger Balm, AMPM Mouthwash and FairOne fairness cream in its portfolio, is a new entrant. It plans to focus its attention on the premium end of the personal care market, with in-licensed products. It has tied up with companies such as Uriage Laboratories of France and POLA Chemicals of Japan already.

Coffee Day may buy logistics company

There is a buzz that Coffee Day Holdings is trying to acquire a logistics company. Analysts believe there could be a merit in doing so as the group has close to 1,000 CCD outlets spread across the country, most of which are supported by a centralized kitchen in Koramangala, Bangalore, hence requiring a periodic replenishment of coffee beans, raw materials and other consumables. There is also the need to carry furniture for existing and new outlets from its furniture factory in Chikmagalur. The firm also exports coffee abroad. Hence, acquiring logistics assets with a retail connect , not one that involves huge cargo movement, might be on the cards.

ONGC ventures into shale exploration

Oil and Natural Gas Corporation (ONGC) has ventured into shale gas exploration by spudding the first shale gas well near Durgapur in Burdwan district of West Bengal. The country’s biggest energy explorer also notified two new discoveries in the KG onshore basin and Cambay Basin to upstream regulator Directorate General of Hydrocarbons.

Shale gas is a natural gas contained within shale formations. Shale gas exploration and production has witnessed a surge in activity recently and is making substantial contribution to gas production. Shale gas is often regarded as a game changer in the hydrocarbon industry. In the US, shale gas production contributes to nearly 17 per cent of their total gas production. ONGC’s move seen in this light, is a move to not miss the bus as competitor’s like Reliance and Bharat Petroleum Corporation have already begun exploration.


Role of consulting in M&A

It is a statistically proven and a widely known fact, that only 3 in 10 big mergers and acquisitions create meaningful value for shareholders, while 5 out of 10 actually destroy value. In spite of the oddly skewed statistics, mergers and acquisitions continue to be a popular way for organizations to grow – horizontally, vertically, across the border- and to diversify – synergistically or unrelated.

When a firm decides on starting the process of merger and acquisition with another firm, it hires a gamut of outside professionals – investment bankers, consultants, valuation experts, accountants, attorneys. These professionals help with various steps of the M&A process right from scouting for firms to acquire or merge with, to aiding in the post-merger integration of firms. This article concentrates on the role of consultants in the process.

The first stage at which consultants are involved, is the M&A strategy phase. Consulting firms do a lot of projects with companies to formulate their growth strategy. Hence, the M&A strategy work is an extension of the same. Consultants are hired to form a detailed M&A program that consists of conceptualising the goals, areas to grow in, kind of partnership vehicle to be preferred (M&A, Joint venture, Alliance etc.) etc. The next stage is the screening of acquisition targets. This includes generating a list of potential targets based on criteria decided by the M&A strategy, creating profile and investment thesis for targets, and then developing an approach plan for the targets. The third stage at which consultants enter is strategic due diligence. Strategic due diligence involves detailed study of the target to confirm the investment thesis, establishment of possible synergies, forecasting of market trends etc. The fourth stage, which is also the most crucial stage because of its high contribution to failure or success of the merger, is the merger integration. In this stage, value from the merger needs to be extracted, but with as less friction as possible. Apart from the operational decisions that need to be taken, a lot of cultural issues need to be sorted out in a speedy manner – organization structure, a shared decision-making system etc. A consulting firm may aid the company through all four stages or may make an entrance at any intermediate stage of the process.

M&A activity had taken a hit in the initial phase of recession, but now private equity players are back in the game and the credit and equity markets are again financing M&A deals. This will boost the M&A activity in the near future, which spells good news for the consulting industry.


Strategy Digest Volume 6

Google aims for premium content

Google is gearing up its premium content aggregation in India. The market available is huge – total view of premium content from India has increased by almost 350 per cent globally, on a year-on-year basis (Q2, 2010 compared to Q2, 2009). Active videos have grown 440 per cent and new video uploads have gone up by 300 per cent.For Google India, activity went up a notch after the success of live streaming (simulcasting) of Indian Premier League (IPL) matches on YouTube. Google recently tested the simulcasting segment with Cinemaa Awards on Maa TV — receiving approximately 170,000 views.

Google has a network of 10,000 partners globally that includes Indian players like ZeeTV, Sony Entertainment Television, Yash Raj Films and Turner, among others and is an ideal position to expand and capture the market. YouTube, a popular platform for running campaigns, trailers and short format videos, is fast becoming popular with its long-form content, celebrity channels, and simulcasting programmes. Targetting regional movies and small-budget cinemas is next in line.

Media houses entering into private treaties

Private treaties is essentially a programme where media houses enter into treaties with companies. Media houses such as BCCL (Bennet, Colemen & Co. Ltd.), Hindustan Times and the Bhaskar Group have all entered into such treaties with companies.These treaties involve divesting stake in the companies to the media houses in return for advertisements or material benefit such as cars and houses.

There is growing concern over such treaties since these could influence the news being published by the media houses. To address these concerns, SEBI recently made it mandatory for all media houses to disclose their stake in the company being reported.

Sun Pharma buys Taro finally, to complement existing resources

After the long legal battle, India-based Sun Pharma finally attained a controlling stake in the Israeli company Taro Pharma. Taro’s portfolio of dermatology, topical and OTC drugs will complement Sun Pharma’s generic portfolio.

Also, the presence of Taro in the US and Israel will allow it increase its presence in these countries. At the same time, the R&D facilities of Taro in Canada and Israel will be complementary to its current facilities.

Flavoured water: The next big drink?

The promoter of Bisleri and Thums Up is now looking at promoting flavoured water. Ramesh Chauhan, the septuagenarian promoter of Bisleri, believes that flavoured water has a lot of potential which has been untapped.

A sector which has till now been untouched by the big cola majors, Chauhan is of the opinion that many urban consumers will convert to flavoured waters given the increasing health consciousness. Currently, only D S Foods has introduced flavoured water in India but has not a great success.

Flavoured water exists in the international market in the form of Aquafina Flavour Splash and SoBe Life Water (PepsiCo) and Dasani Flavoured Water (Coke). As such, if Chauhan succeeds, the cola majors might move quickly to introduce the international brands in the domestic market.

The price is right!

For a long time in business, the pricing decision was the last cog in the wheel. The consumer needs were identified, product attributes were defined, the technology to be deployed was given consideration, production centre established, then while starting the marketing process, pricing came in as a final step.

For the most part, pricing was cost-based and hence fraught with the basic chicken-egg problem. The cost depends on the volume of the production, the volume depends on the price charged from the consumers, and yet price was being decided on the basis of cost. The logic feels a little bizarre, but in many cases such a strategy would seem to work fine. It took some years before it dawned on people that pricing could be used as a strategic vehicle – to segment, to position, to differentiate, to effectively enter the market etc. and also that pricing could have a significant effect on market share. In fact in a recent report by McKinsey, it has been stated that a one-percentage-point improvement in the average price of goods and services leads to an 8.7 percent increase in operating profits for the typical Global 1200 company (the world’s largest 1200 companies by market capitalization).

Many brands have committed pricing blunders and went down under. A good example is the direction that Indian telecom operators have taken; their continuous price wars have left the industry in danger of becoming unsustainable. Similar is the case with airlines, their price slashes have caused the airline industry to bleed badly. On the other hand, several brands have exploited innovative pricing to their advantage. In the mid 90s, Ford reduced the price of their high-end cars a little bit, to stimulate purchase but not enough to cut into their margin. This price cut led to greater sale of the high-end cars, but also led to cannibalisation of their low-end cars. But since it was in the high-end cars that they had more profit margins than the low-end cars, in spite of the market share that they lost, their profits soared. Having learnt by several such examples, many companies are now investing in pricing infrastructure, right from establishing separate pricing departments to developing and acquiring pricing systems to collect accurate current pricing data and tools to transform that data into information.

There are different kinds of pricing strategies that a firm can deploy:

Differential Pricing Strategy: This strategy is deployed in order to sell the same product at different prices to consumers. Some examples of this strategy are Second market discounting, where the products are sold cheaper at a second geography assuming that arbitrage is not possible due to transaction costs by consumers; Periodic discounting where the prices vary at different periods of time depending on utility and need of consumers (Happy Hours concept in bars); Random discounting where some search or effort by consumers will result in discovering discounts (in several foreign tourist cities, discount coupons are freely available for tourists, but need to be enquired about).

Competitive Pricing Strategy: If there is a threat of competition, the periodic discounting gives way to penetration pricing and experience curve pricing, where scale and experience economies are exploited, respectively; in these pricing mechanisms the products are priced less as compared to the competitor since the producer can take low prices better due to volume or experience.

Product line Pricing Strategy: When an organization has some related products it can try different pricing strategies like price bundling/two-part pricing where products are bundled to extract maximum value from buyer (McDonald’s Happy Meal; Entry into amusement parks and separate payment for some rides); premium pricing where one brand/product of a firm may be positioned as better in quality and hence more costly than another brand/product (Hotel rooms: Suites, Luxury, Deluxe).

These were limited examples, but several more pricing strategies exist and the appropriate ones can be chosen depending on the kind of product, brand life cycle and objective of the organization. It is time to recognise that pricing plays a critical role in driving performance of an organization. Hence, organizations need to invest in appropriate pricing infrastructure and utilize pricing as a strategic tool to achieve their objectives.

References: Beyond the many faces of price: An integration of pricing strategies – Gerard J. Tellis

Building a better pricing infrastructure – McKinsey Quarterly

Strategy Digest Volume 5

Stake in Paras up for grabs

(Expansion strategy)

Paras Pharma is the Ahmedabad-based unlisted firm which manufactures over-the-counter and personal care brands like ‘Moov’, ‘Krack’, ‘D Cold’, ‘Set Wet’ etc.

Its products are popular but have a low penetration till now, which indicates their future potential. Its two major equity holders – Actis and Sequoia Capital – are looking to sell their stake for around $700 million. Companies that would have synergies with Paras Pharma products would be FMCG firms and other pharmaceutical companies. This synergistic effect has been recognised as is evident from the nature of the companies (Marico, Dabur, Emami, Glaxosmithkline) which have expressed interest in buying a stake in Paras.

P&G reduces prices; may lead to price war

(Market competitiveness strategy)

In what could lead to a price war in the competitive FMCG market, FMCG major P&G has decided to reduce the prices of certain brands even though input costs have been increasing. It has reduced the price of Whisper Choice, a product for female hygiene, by 20% and that of Pampers Baby Active, a baby care product, by 12%.

It is usually difficult for companies to reduce prices in these categories since they have high taxation. However, following the price cut by P&G, it is likely that rivals such as Johnson & Johnson will also cut prices, leading to a price war.

Expansion of JK Tyres

(Expansion strategy)

In view of increasing demand, JK Tyres is undergoing an aggressive expansion policy with smart pricing policies. Since the prices of rubber have risen (doubled in the past one year), JK Tyres has increased its prices and passed on the increase in raw material costs to the car and commercial vehicle manufacturers.

They have also decided to explore a segment they had left 20 years back – two wheelers – after looking at the rapid growth in the segment.

Vishal Retail finds buyer

(Survival strategy)

Vishal Retail, which was under heavy debt and had been looking for a buyer, has finally succeeded in finding buyers for its business ensuring its survival. It will sell its frontend retail trading business to the Shriram Group and the back-end wholesale trading business to the Indian arm of private equity firm TPG for a total consideration of Rs 100 crore.The sale will also include all the underlying assets and liabilities of the firm.

Vishal Retail, which conducts its business under the names of ‘Vishal’, ‘Vishal Megamart’ and ‘Vishal Fashion Mart’, had declared accumulated losses of Rs 427 crore as on March 31, 2010, which exceeded the net worth of the company. It has expanded its business using the debt-heavy capital structure but its earnings fell below expectations during the economic slowdown.

Even though Vishal Retail has ensured its survival through this sale, it will lose its core business of retailing and will have to look at new business avenues.

CWG 2010 and Urban Development

An umpteen number of articles, headlines and columns have been written about the organizational inefficiencies and corruption controversies that boldly mark the past and present of Commonwealth Games-India 2010. The opinion that the enormous expenditure related to the organization of Commonwealth Games is anti-poor and unwarranted is totally valid. However, there is no denying the fact that the Commonwealth Games are the world’s third largest multi sporting event and few doubt the global impact and opportunity for development that they offer. Now that India is closing in fast towards the completion of this tremendous challenge it undertook a few years ago, it is imperative that we look at the economic benefits that the games offer.

The CWG is going to be the first major sporting event to be held in the capital city since The Asian Games in 1982. A lot has changed; India is aiming to become an economic superpower and the games are seen as a perfect opportunity to break out on the world stage. The major challenge is to ensure that the potential of CWG as a catalyst for change is harnessed. Be it Barcelona hosting the 1992 Olympic Games or CWG 2002 in Manchester, history has numerous instances where whole cities have been revived due to the change brought about by the games after long periods of low growth and degradation. On a similar note Delhi wishes to stimulate economic growth and improve city infrastructure through CWG 2010.

The development work relating to CWG 2010 Delhi can be broadly classified as:

New stadiums and renovation of existing stadiums

The construction and up gradation of sports facilities is central to CWG 2010. A games village planned at an estimated expenditure of INR 955 crores is aimed at boosting public sports infrastructure. The govt. plans to handover this village to the Delhi University for usage as hostels in future. This in turn would be great news to education infrastructure in the city. Another INR 1250 crores is to be spent on the extensive renovation of existing sport facilities which would be instrumental in putting these otherwise under-utilized facilities to use.

Hospitality Sector

Hospitality is another area that will benefit greatly from the influx of about 8000 athletes and thousands of other foreign tourists. The exponential increase in demand for hospitality services will spell money for the players in this sector. The demand for hotel rooms is estimated to be 30,000 during the games. DDA has planned to auction about 20 sites for new world class hotels. This would raise hundreds of crores for the DDA and would boost Delhi’s capacity to handle inflow of people just a like a world class city should do.

Transport Sector

It is Delhi govt.’s foremost aim to develop an effective mass transport system and solve the massive congestion problems that the city has been facing over the past years. The emphasis has only increased with the games being organized in the city. We have already seen the development of the grand Terminal 3 of the Delhi airport, which got a great impetus in teh speed of development from the CWG. It is now the 3rd biggest airport terminal in the world, with a capacity to handle more than 34 million people a year domestically and internationally. A lot of other enormous plans are in the pipeline; flyovers, bypasses, broader roads, a larger metro system, a high capacity bus system etc. In fact, the transport sector has already been assigned 23.68% of the Tenth plan outlay which amounts to about INR 23,600 crores. Road and transport infrastructure define a city and all this activity in background of the CWG will keep the capital city alive and competitive on the global scale.

Business Promotion

Business promotion for the Indian industry is a key agenda for the CWG Organising Committee. It has even partnered with Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI), to help it achieve this aim. In fact, talks are in progress with Australia, Scotland, South Africa and UK regarding the building of business collaborations in the Pharmaceutical and IT sector. Other sectors like medical tourism, food processing, energy and education also hold lot of promise. It’s estimated that about six to eight memoranda of understanding will be signed with these countries.

All this also spells good news for consulting firms as they get an opportunity to rope in several projects in event management. Some examples are the consulting firms of Mike Bushell (Sports Marketing and Management) and Craig McLatchey (Event Knowledge Services) that are involved in the event. A lot of Indian consultancies will also benefit as several opportunities are in the offing; for example, Air India sometime back was looking for a brand consultant to manage its image makeover during the CWG.

All in all, the Commonwealth Games, in spite of all the corruption and drama, have already contributed a lot to the development of the Indian industry and infrastructure. Now it just remains to be seen, whether they hold some positive news on the Indian sports front as well.

Integration at The Adani Group

Overview of the Adani Group

The Adani Group is a Gujarat based Indian conglomerate with the industrialist Gautam Adani as its CMD and promoter. The core businesses of the group include commodities trading, edible oil manufacturing, Mundra port operations, power generation and the distribution of natural gas. The group has more than 50 companies under its ambit; key ones being Adani Enterprises Ltd, Adani Power Ltd and Mundra Port and Special Economic Zone Ltd. It recently catapulted to the top five conglomerates in the country, going by the market capitalisation of listed companies on Indian bourses.
By the end of August 2010, the combined market capitalisation of Adani Enterprises (AEL), Adani Power ( APL) and Mundra Port & SEZ (MPSEZL) stood at Rs 1.33 lakh crore. This surge is largely due to the number of shares in AEL going up by 33 crore on account of the company’s Rights Issue and the merger of MPSEZ with AEL. The restructuring exercises have brought all group businesses under one entity, Adani Enterprises Limited.

Growth and Integration

Acquisition of Coal Mines

Adani’s next phase of growth envisions taking the group’s asset base from $6 billion to $15 billion in the next five years. To fuel his ambitious plans, Adani is acquiring coal mines and ships. These would serve to insulate the group from the price vagaries of the commodities and shipping markets. Adani Enterprises would thus offer an integrated infrastructure play with coal, power and mining under one umbrella.
The flagship company of the Adani group, Adani Enterprise (AEL) acquired the coal mines of Australia’s Linc Energy in a cash and royalty deal worth A$ 2.9 billion (Rs 12,220.6 crore) early in August this year. The deal is reported to be the biggest acquisition by an Indian company in Australia. Linc said it can produce up to 60 million tonnes per year once the mine was fully operational.
The deal would give a major boost to the Rs 27,800-crore Adani group’s expanding energy business and would enable Adani to source coal at $45 a tonne against an average international price last year of $76. In the pipeline are plans to invest about A$6 billion to create infrastructure — ports, railway and development of mines — Down Under over the next five years. According to the group’s chairman, Gautam Adani, the acquisition would help the company achieve self-reliance in fuel supplies for its power generation business.
Coal from the Galilee basin would support the rapid expansion of the power business of Adani Power in India as well as the expansion of AEL’s coal business. It may be pointed out that the Adani group is the largest importer of thermal coal in India.
Last month, the group has also signed a preliminary agreement in Indonesia to build a railway line and coal terminal in remote southern Sumatra, Indonesia. Adani would invest $1.6bn to lay down a railway line between a major coal pit and the island’s southern port of Tanjung Api Api. The move by the Adani group is considered to be a strategic foray to tap the underexploited coal stores in Sumatra.

Expansion of Power Generation Capacity

The coal mine deals would give a significant impetus to the company’s plans to increase its power generation capacity. Adani Power Limited (APL) is looking to expand aggressively, with plans to commission 1,980 MW of generation capacity by the end of fiscal 2011 and 6,600 MW by mid 2012. Currently, APL operates 990 MW of generation capacity and aims at achieving 90% plant load factor during the current quarter.
APL’s 16,500 MW capacity generation projects include Mundra (4620 MW), Tiroda (3300 MW), Kawai (1320 MW), Dahej (2640 MW), Bhadreshwar (3300 MW) and Chhindwara (1320 MW). It is also exploring the opportunities in the international market to commission power generation capacity.
The first unit of 330 MW at Mundra became operational in May, 2009. The Mundra facility will continue to commission one 660 MW super critical unit each at an interval of every three-four months, and the entire capacity of 4,620 MW will be operational by March 2011
APL’s 3,300 MW power generation facility at Tiroda in Maharashtra is in advance phase of implementation, the first unit of 660 MW will start generation by August 2011 and the entire facility of 3,300 MW will be commissioned in a phased manner by 2012. Its other projects at Dahej, Chindrwara, Kawai and Bhadreshwar have received terms of reference from the ministry of forest and environment and are in advance stage of clearance. The projects are likely to be on stream by 2013-14. All plans of Adani are based on super critical technology units of 660 MW each.
Meanwhile, APL is also setting up transmission lines for evacuating the power to the national grid. The major transmission power line projects by APL include 400 KM Mundra -Dehgam line, country’s first 1000 KM HVDC line in private sector between Mundra -Mahindragarh in Haryana, 50 KM Mahindragarh-Bhiwani and 200 KM line between Tiroda-Warora.

Strategic Positioning of Mundra Port

Another Adani Group company, Mundra Port and Special Economic Zone Limited, owns and operates one of the largest private sector commercial ports in India, a Special Economic Zone at Mundra and a railway line between Mundra and Adipur; leading to strong synergies with the company’s projects being set up in close vicinity. In order to increase coal carriage capacities, Adani is doubling the 65-km rail line connecting the port of Mundra to the national rail network. This will help it carry three times more cargo. Mundra, once a sleepy town known for its date palms until just a decade ago, today handles 40 million tonnes of cargo, and will soon start handling 100 million tonnes once a coal import terminal comes up by October 2010.
The company is fast emerging as the only power generating company in the country that has a strong chain of vertical integration – from mining to ports and shipping to power generation and transmission. This integration has enabled the Adani group to achieve its meteoric growth, and will hold it in good stead as it looks to further expand its business.