The Cause Related Marketing Bandwagon in FMCG

FMCG GrowthThere has been strong growth in the Indian FMCG market over the years. The sector’s revenue reported a CAGR of 17.3% over 2006-2011. Consequently, today’s marketplace is flooded with brands in all product categories of the FMCG sector. With ever-increasing competition, a company is expected to do business in such a way that it stands for not just the financial returns, but for comprehensive social and economic returns to the society at large. Gillete’ Soldier for Women, Dove’s Real beauty sketches, Proctor & Gamble’s Thank you mom and Tata Tea’s Jaago re are a few examples of attempts made by leading corporations to do well financially by doing good socially. These campaigns are launched under a marketing strategy called ‘Cause-related Marketing’.

What is cause related marketing?

Cause related marketing is a marketing strategy wherein a product/brand/company is marketed in association with a ‘cause’. This identified cause is generally an issue that is prevailing in customers’ mindset. It can be social like child welfare, environmental like wildlife conservation or even abstract like uniqueness etc. Cause marketing campaign is used by companies strategically to create brand differentiation by enhancing brand equity and credibility. It can be employed by a company to achieve a number of marketing objectives, mainly, visibility, increased sales, repeat purchases, increased brand recognition, broadened customer base etc.

Now, more than ever, the companies are realizing the potential of aligning themselves with a cause. Earlier it was used mostly to increase sales and profits, but now it is used as a great brand positioning contrivance as it works on vitalizing brand equity and enhancing corporate image with sound economic and community impacts.

Cause-related marketing: differentiated from CSR

Cause Related Marketing and Corporate Social Responsibility (CSR) are often used interchangeably but there exists a vast difference between the two. CSR is primarily the philanthropic activities carried out by the company, generally in domains of social welfare or environment. The essential objective is to project the company as a responsible corporation resulting in positive brand image in eyes of consumer. Cause Related Marketing on the other hand is a marketing strategy done with a sole objective of building profit through goodwill. It is done by associating with a designated cause and is characterized as a profit-motivated giving. Unlike CSR, it is more targeted approach and a less selfless philanthropy.

Cause marketing practices

Cause related marketing is a flexible tool and can be employed in varied ways. Some of the common forms adopted by FMCG firms, of providing assistance to cause organisations are:

Transactional programs: This is the classic form of assistance to cause wherein a company donates a part of every sale of the affiliated product to the cause organisation. Many examples can be cited for this practice, a popular one being ITC’s INR 4 donation for the education of economically underprivileged students for every 4 Classmate notebooks sold.

Propaganda programs: Under these programs, the cause is promoted and contribution, in forms other than monetary, is made by the company. An example is Tata Tea’s Jaago Re campaign where the company promoted anti-corruption and encouraged the youth to vote. 

Time frame of the program

Cause marketing campaigns can be either strategic (long-term) or tactical (short-term). Long-term campaigns are generally found to help with enhancing brand loyalty, improving brand image and lowering apprehensions regarding company’s motivation. Proctor & Gamble’s Shiksha campaign has been contributing to the cause of child education since 2004. However, short-term associations are preferred by the companies at times, as they call for limited costs and bigger impact advantages. Lifebuoy’s ‘Roti Reminder’ at the Kumbh Mela 2013, which promoted the cause of hygiene, falls in this category.

Choice of cause

The fit between the selected cause and the profile of the company is an important variable in determining its impact.  For instance, Maggi’ Atta noodles promoting Taste bhi health bhi has high cause-company coherence, with the cause being health. In contrast Coca-Cola’s Arctic Home has rather low coherence. Generally, high coherence impedes the apprehensions arising in customer’s cognition and hence mobilizing the purchase intent due to higher urge to benefit the cause.

Epilogue

Cause related marketing fills a crucial void in society by giving the individuals an opportunity to contribute to the causes they feel for. If executed creatively, by carefully pairing cause and company, it can emerge as a rare and strong marketing contrivance which would converge social and corporate interests, favouring both equally.

Arushie Mangla is a PGP1 student at IIM Ahmedabad and a member of the Consult Club. She is a graduate from IIT Delhi in Civil Engineering with a minor area specialization in Business Management.

Indian Aviation Industry: In-Flight Turbulence

2012 may be remembered as the darkest year for the civil aviation industry in India. The difficulties being faced by Kingfisher Airlines and Air India and their consequences well represent a delicate moment for the entire sector. Analysts had started to look at 2013 as the year of the recovery.  However, one thing was clear last year: business models of the major carriers were not sustainable, structural changes were needed in the industry.

APPARENT RECOVERY

In the first week of June, the DGCA (Directorate General of Civil Aviation) released the official passenger statistics for the first 5 months on the year. The overall image was of a weak recovery in the number of passengers.

Aviation 1

Passengers carried by domestic airlines during the period Jan-May 2013 were 259.98 lakhs as against 258.08 lakhs during the corresponding period of previous year thereby registering a growth of + 0.74%.

Some sector experts described these results as the beginning of a new sustainable growth trend for the industry.

The factors taken into account to support such optimism related to the fact that the Indian market is severely under-served, with less than 3% of its population utilizing the air route. Market potential is huge, and with the increase of the income per capita, demand is expected to grow at a double-digit pace in the next 10 years. According to the IATA (International Air Transport Association), by 2020, traffic at Indian airports is expected to reach 450 million, making it the third-largest aviation market in the world. However, the present reality is very distant from these expectations.

STRUCTURAL PROBLEMS

Aviation 2

According to the DGCA, India’s air passenger traffic fell by 1.84% in June from a year ago, going from 5.10 million passengers in 2012 to 5.01 million in 2013. In order to face the declining demand, all the major airlines have decided to lower or at least not increase the airfares. In particular, full-service airlines like Jet Airways and Air India have consistently dropped their fares to match those of low-cost carriers. On the other hand, IndiGo and SpiceJet are trying to keep the fares at the same level as 2012. Even though ticket fares are on average almost 20% lower this year than in 2012, no positive effect in the demand is registered.

However, demand stagnation seems to be only one of the several structural problems affecting the industry. There are a number of other critical challenges facing airline companies:

– Taxes are everywhere in India’s aviation sector, a clear indication that the government views the sector as a revenue source rather than a revenue generator. In contravention of International Civil Aviation Organization (ICAO) policy, India’s Ministry of Finance has put a service tax on tickets as well as landing and navigation charges.

– Fuel accounts for the 45% of Indian carriers’ operating costs, compared to the global average of 33%. With the presence of 8.2% excise duty, taxes are again one of the sources of disadvantage. The recent devaluation of the Rupee, and the consequent higher cost of the dollar (oil currency), is further aggravating the situation.

– Indian airlines are starved of skilled workforce. It is estimated that Indian aviation will need about 350,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labor see staff salaries rise above inflation, adding further cost pressure. Given this situation, robust training programs will be the key to a sustainable future.

WORKING TOGETHER

Looking at the structural problems listed above, it seems clear that a change plan is needed. The aviation industry supports close to 0.5 % of Indian GDP, and in an emerging economy like India the need for connectivity is critical to facilitate the growth of trade and tourism. The development process of the country is at stake.

For this reason a coordinated approach, involving the government, airline companies and infrastructure developers, is urgently required. Some points that need to be developed in order to address the central challenges of infrastructure, costs, and taxes are:

– Ensure collaboration between the Ministry of Civil Aviation, other related ministries, regulators and the industry and promote other sectors that can both support and benefit the aviation sector

– Reduce fuel sales taxes. The long-term benefits on terms of higher economic activity and employment generation would more than compensate for the notional loss of tax revenue in the short run

– Establish a world-class National Aviation University and promote private sector investments in training academies to produce highly-skilled human resources

– Implement recent policy decisions such as the 49% Foreign Direct Investment limit, and establish safeguards to prevent excessive and predatory ticket prices.

Aviation 3

This last point seems to have central role in the future dynamics of the industry. Etihad Airways, the national airline of the United Arab Emirates, can be considered the pioneer of this future trend, buying a 24% stake in Jet Airways. This acquisition represents the first foreign investment in India’s airline sector since ownership restrictions were eased on March 2012. The deal, that is expected to boost the fortune of Jet Airways, has faced political opposition in India, driven by the fear that it may hurt national carrier Air India.

Many sector experts see these initiatives as the factor that can make the difference for the future of the Indian aviation industry. Top international players such as Etihad can transfer specific knowledge and best practices, improving domestic partner’s efficiency and marketing capabilities.

However, as highlighted before, the progressive internationalization of the India’s domestic airline industry needs to be coupled with structural changes, involving the government and other firms operating in related sectors.

Only a common effort by all the parties involved, would allow India’s carriers to get out of this turbulence and start to fly high.

Laviero Satriano is a Dual Degree student at Bocconi University and IIM Ahmedabad and a member of the consult club. Before coming to IIMA, he had an internship at The American Chamber of Commerce of Texas in the USA, and he was responsible for a volunteering project in Uganda. He holds a Bachelors of Management and Business Administration at Bocconi University.

Knowledge Process Outsourcing in India: the Changing Scenario

KPO-1Knowledge Process Outsourcing (KPO) is the outsourcing of business processes that require significant domain expertise. In the early 2000s, India saw a boom in KPO activity, with the Western multinationals sourcing their high-end information processing requirements (such as analytics, data management, legal services and human resource management) to captive entities/ third-party KPO units in developing countries. According to ASSOCHAM, India’s KPO market is growing at a CAGR of 30% in spite of the global slowdown. By taking care of non-core functions of the multinationals, the KPOs have freed up their time to focus on core business activities. At the same time, the sector has opened new employment avenues for the large pool of young and highly skilled professionals in the country, thus augmenting the GDP growth.

KPO-2

Critics argue that increased level of outsourcing activity would lead to inflation and expose us to global business cycles. However, these risks can be minimized if growth in the KPO sector is matched with a focus on enhancing domestic demand. Therefore, in spite of these criticisms, the knowledge sourcing activities should be encouraged.

Although India performs the major share of knowledge processing activities globally, it is gradually losing its attractiveness as the preferred outsourcing location to the upcoming KPO units in South-East Asia, Eastern Europe and South America. Various reasons have been cited for this shift, namely, increasing real estate costs in India; difference in time zones, language and culture; domain expertise & lower costs offered at other locations; and a high employee attrition rate in India. The Indian KPO sector needs to overcome these challenges in order to sustain and enhance its current global share.

Developing expertise: Preferred outsourcing destinations by sector (Source: IBEF)

Developing expertise:
Preferred outsourcing destinations by sector (Source: IBEF)

First, high real estate prices in India, especially in the Tier 1 cities, have become a major concern for the multinational firms. A possible solution might be to shift some of the KPO units to smaller cities. Many units have already taken steps in this direction. The government can encourage this shift by providing incentives (such as tax benefits) to the firms moving to smaller cities. In the long run, such a shift would lead to infrastructural development in these areas. The economic benefits will get evenly distributed across the country, and the KPO firms would be able to tap more talent.

Second, the difference in time zones is an important factor driving the companies’ operations to other locations. The U.S. companies, for instance, now prefer South American locations for sourcing their activities. For the same reason, the European companies prefer Eastern Europe as their outsourcing location. The Indian KPO units can address this problem by identifying areas, such as research, that do not require long hours of contact with on-shore teams. At the same time, focusing on selected segments would help us develop expertise and hence, get more sophisticated work assignments.

Third, because of the high attrition rate in most KPO units, the multinationals feel that they are frequently incurring costs in hiring and training new employees. This problem can be overcome by developing in-house hiring & training facilities, rather than relying on third-party hiring agents. Furthermore, KPO entities and multinationals should invest in the latest communication technologies, such as video conferencing, in order to keep the offshore employees integrated into the business. Greater involvement would enhance their motivation levels and lower attrition rates to a great extent. Negotiating performance-based remuneration contracts with the multinationals, whenever possible, would also attract and retain talented individuals.

Finally, as the industry is becoming more competitive, the professionals should possess good managerial, communication and decision-making skills in addition to technical expertise. KPO units should focus on all-round development of their employees. The employees should be encouraged to take initiative & identify areas where they can add value. Well-rounded employees would give the Indian KPO sector a competitive edge.

A systematic approach towards addressing these issues would make the Indian KPO sector more competitive and allay some of the concerns of the foreign multinationals. The industry leaders, policy makers and employees should work together to bring out the desired changes.

Ashima Setia is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIMA, she worked with Deutsche CIB Centre in Mumbai in its Fixed Income division. She holds a bachelor’s degree in Civil Engineering from IIT Delhi.

When the going gets tough: E-Tailing in India

For many of us, the internet and e-commerce is now an indispensable part of our lives. Till around 2010, however, the Indian e-commerce story was limited to tickets, classifieds and ringtones – and physical retail had been slow to take off. These days, the ticketing and travel segment still accounts for around 80% of the total e-commerce in India, but online physical retail, also known as e-tailing, is finally catching up.

Division of the E-Commerce industry

evolution of e-commerce in India

Click to view: Evolution of E-Commerce in India (comScore report on India Internet)

2011 was the year when e-commerce witnessed a slew of investments by VC & PE firms, which were rushing to get an e-commerce company in their portfolio. E-commerce companies on the other hand were reporting double-digit on a month-on-month revenue growth. With excess funding available, companies invested heavily in back-end infrastructure such as warehousing, in-house logistics team and marketing to acquire customers.

Exhibit-A (VC Circle)

Exhibit-A (VC Circle)

However, the e-tailing in India is still facing several open questions:

  • Is the quality of internet connectivity good enough?
  • Is the supply-chain and logistics reliable enough in India?
  • Comfort of Indian consumers with e-tailing and using online payment as mode of payments?
  • Most importantly, how to achieve profitability?

Eco-system for e-tailing in India

The digital consumer ecosystem comprises several external and internal components.

E-Commerce-EcosystemAccess: How big is the potential market?

There are an estimated 150 million internet users in India, roughly 12.5% of India’s population. That is significantly lower than the world-average of 30%.

This aspect of the ecosystem, however, is improving rapidly in the past few years. The advent of 3G and 4G data networks and increasing proliferation of smartphones have accelerated the internet penetration. The expected number of Internet users by 2015 is 376 million – almost 2.5 times the current number. More importantly, the number of users transacting online will grow from the current 15 million users to 40 million users by 2015.

Assuming an average transaction of INR 500 per person/per year, we can estimate the potential market size of e-tailing in India as USD 4 billion by 2015, roughly four times the current market size.

Demographics: Life beyond Metros

The geographic distribution of Internet users has been skewed towards tier I cities. However, the number of users in tier-I&II cities has been increasing significantly. This augers well for most of the e-commerce companies as around 30-40% of current revenues are coming from tier I/II cities.

However, the average basket size (order value per transaction) for tier I/II cities is still around 70% of that of metros. Moreover, logistics and reverse logistics cost are substantially higher for these cities. Thus, profits are still going to come from the top eight metros.

Advertising: Burning a hole in the pocket

This is one the most important internal components for any e-commerce firm, because of its impact on the bottom-line. Marketing costs include digital marketing on Google and Facebook as well banner-ads on other popular websites (YouTube, CNN-IBN etc.)

While companies continue to spend aggressively on online marketing (Google, Facebook and re-targeting banner ads), the conversion rates (% of users who transact after clicking the ad) are in the range 0%-1%. In order to turn profitable, e-commerce firms have to find a way to improve the conversion possibly through alternative ways of free advertising (Google search, bulk-mail, blogs etc.).  Improving the conversion rates is the focus at the moment, and many new start-ups (such as Tooki Taaki) are addressing this concern to help the cash-strapped e-commerce firms.

Exhibit-B

Exhibit-B (The Nilson Report, RBI Bulletin – Retail electronic payment systems)


Payments: The dominance of Cash-on-Delivery

For Indians, the concept of credit-card is still alien. As a result, around 70% of the transactions happen on Cash-on-delivery (COD) basis.

The logistics partner charge an extra INR 40-50 per shipment for handling cash, which is sufficient to wipe-off the entire operating margins. To counter this, firms are increasingly charging an additional INR 50 for COD transactions or giving incentives to customers for using online payment gateway (extra points, free coupons etc.). COD, however, overcomes a major challenge of e-commerce regarding lack of trust and touch and feel and hence will continue to account for a majority of transactions in near future.

Last Mile Delivery: Own v/s Third-party logistics

Globally, top players have almost always outsourced forward logistics, while controlling the back-end supply chain and inventory management. But this model has 2 major challenges in India:

  1. Poor customer-service (delays in shipments, damaged products, handling of reverse logistics)
  2. Lack of good courier partners and increased costs due to monopoly of a few (e.g. Bluedart, First Flight etc.)
forget digital marketing

forget digital marketing

To counter this, several players such as Flipkart, Jabong etc. are building their own end-to-end supply chains. This not only solves above problems to a large extent, but also ensures customer experience while generating enough visibility for the brand on roads.

Thus, few players will follow a two-pronged strategy: developing their own delivery channel for the metros and relying on outsourced parties for tier 2 and 3 cities where they are sub-scale. A majority will still rely on third-party logistics, while they focus on the core-business of merchandising and back-end operational efficiency.

The Way forward

The E-commerce industry is going through a difficult time. The sector will see consolidation over the next few years as companies struggle to make profits and investors work towards reducing their cash-burn. A few big horizontal players (across all product categories) will remain as they can achieve higher basket size and ‘economies of scale’ quickly. Niche vertical players for fashion and lifestyle categories (such as apparel & jewelry products) can still survive as they command higher profit margins.

This sector is not for the faint-hearted. One should also understand that it took Amazon 10 years and billion USD in investments before it turned profitable. India has far more glaring problems such as lack of internet penetration, card-usage and logistics. Hence, one needs to be patient with the Indian e-commerce story. At the same time, firms need to keep an eye on their bottom line if they wish to survive this tough period. The last man standing will reap the benefits.

Rakshit Agarwal is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIM-A, he worked with ITC Limited in the operations team, and managed the P&L of a category in an early stage start-up. He is passionate about tech-entrepreneurship, and holds a Bachelors and a Masters in Electrical Engineering (VLSI) from IIT Madras.

Coal, Where Art Thou?

The future of the Indian coal industry appears dark. The demand is going to increase significantly and the government is not ready to address the potential bottlenecks. This article talks about the evolution of Indian Coal Industry, its current challenges and prospective solutions.

Indian Coal Industry is going through a very tough time. The demand of coal is increasing year after year and is expected to grow threefold in next 20 years. But it appears that the domestic coal production will not be able to meet this increase in demand.

Coal has driven the engine of Indian industries for a long time. The Indian coal requirement can be broadly divided into two categories – Thermal Coal, used for power generation and Coking Coal, also known as metallurgical coal, used for steel production. At present, around 70% of coal in India is used for power generation and rest 30% is used by other industries like steel, cement, paper, chemical and pharmaceutics.  The Indian power sector is still dominated by Coal and as per an IEA 2012 report, 68% of Indian electricity is generated by coal. Industry-wise coal usage in India is shown in Exhibit 1.

Coal where art thou

Before proceeding further, let’s have a brief understanding of how the coal industry has evolved in India. The first commercial coal mining was started way back in 1774 by M/s Summer and Heatly, East India Company in Raniganj coal-fields. Since then, the coal industry has moved at a sluggish rate and before independence it just touched 30 million tonnes (MT) mark. After independence, Government of India (GoI) established the National Coal Development Corporation (NCDC) in 1956 to give a push to coal production, with the collieries owned by the railways. During the same time, many private firms also flourished. However, concerned about the low productivity, owing from the use of outdated technology and poor working conditions for labourers, GoI decided to nationalize private coal mines. This was done in two stages – coking coal mines in 1971-72 and non-coking coal mines in 1973. The Coal Mines (Nationalization) Act, 1973, provided the right to GoI to manage all coal mines in India and this act is still a centrepiece of Indian coal policy. Today, there are three state owned firms which control more than 90% of coal production in India – Coal India Limited (with its 8 subsidiaries), Singareni Collieries Company Ltd. and Neyveli Lignite Coal Ltd.

The Coal Mines (Nationalization) Act was amended in 1993 to allow private captive mining by private companies and other public entities for power generation. This amendment led to the allocation of more than 200 blocks by the government to various companies other than CIL, SCCL and NLCL. But, out of these 200 blocks, only 30 have started production till date and the contribution of captive mining was meagre 36 MT in 2010-11 against targeted 104 MT. The reasons for this dismal performance are many – absence of accurate geological statistics; delay in environmental approvals; land acquisition, Rehabilitation & Resettlement issues. This is the first set of issues which limit coal production itself. Logistical concerns like non-availability of enough railway wagons for transportation and lack of road infrastructure from mines to railway sidings is second problem which has affected production capacity. The logistical issues are not limited to rail and road network only. Current coal handling capacity of Indian ports is around 90 MT and this has to be increased by 50 MT in the next 5 years to meet import requirements of 140 MT in 2017.

Third constraint, as mentioned above, is expected increase in coal imports in the future. In 2011-12 India produced slightly more than 550 MT and around 85 MT of coal was imported to meet domestic demand. This gap between demand and supply is expected to increase to 140 MT by 2017 as per estimates by World Energy Council. The expected coal demand in India for the next two decades is shown in Exhibit 2.

Coal where art thou 2

Import of coal brings its own set of problems. India is primarily dependent on South Africa and Indonesia for thermal coal and Australia for coking coal. Australia has shown significant price fluctuations in the past because of the Queensland floods. Further, the changing regulatory and tax scenario in these countries suggests an increase in coal prices in the future. At the same time, other potential geographies like Mozambique and Columbia lack infrastructure facilities to ensure smooth coal transportation.

Fourth issue is coal quality management. Indian coal is low to medium grade with high ash content, low moisture and low sulfur. Indian power plants often complain about high ash content and inconsistency in coal quality. Coal benefaction and washing are potential solutions to this problem and as an initiative CIL has decided to set up 20 coal washeries with aggregate capacity of more than 100 MT/year.

There are a lot of measures that could be taken at various stages of coal value chain to release various bottlenecks mentioned above. At the coal exploration stage government should provide incentives as it does for Oil and Natural Gas exploration under NELP program. At the clearance stage, the government should appoint one single committee with representatives from all the concerned ministries like environment, water, mining, forest etc. This will reduce the clearance time significantly. Adding on, coal recovery from under-ground mines varies from 20% to 70%. To address this issue at mining stage, government should encourage investment in R&D and more efficient technologies to recover more coal. To address logistical issues, the government should adopt PPP model to develop first-mile infrastructure to transfer coal from mines to nearby railway sidings and for development of port capacities for coal handling. Simultaneously, given that imports are expected to augment in future, GoI should use diplomatic approach to make the process of acquisition of coal mines abroad and price mechanisms suitable for Indian industry.

The measures mentioned above are the need of the hour to ensure energy security as well as industrial growth of India. Coal is definitely going to stay as a major force behind Indian development for next few decades and ensuring a timely supply of high-quality coal to power plants and other industries is the key to development.

Mani Mahesh Garg is a PGP2 student at IIM Ahmedabad and a member of the Consult Club. He is a graduate from IIT (BHU), Varanasi with B.Tech in Ceramic Engineering. Prior to joining IIM-A, Mani Mahesh worked at RINL, a public sector steel manufacturer.