Saturday, November 23, 2013

China may do a lot Better.

There is one news which appeared today - Brokerage house UBS has cut its rating on India to "neutral" from "overweight and while India rating went down, it upgraded China to "overweight" on the bet that the dragon country is due for a re-rating.

And therein lay the entire story for India. Today, the Indian markets are celebrating China"s reforms but little heed is being paid to the direct repercussion to India or this downgrade by UBS, which could be a harbinger of things to come. A little background first…

Well, in 1980"s China unleashed the biggest economic reform, changing the entire economy of the world and the perception of China in the entire world. It's party had then chalked out reforms to make China the factory floor of the globe, which is what China is essentially today. And with things slowing down , China is working out a slew of new reforms, just like in 1980, which many say could once again change the entire dynamics of world economics.  In 1980, the theme of the reform was investment led and this time around, it is consumption led. 

The Communist Party plenum, known as the Third plenum, even before it could officially release the data, news was "leaked" out, a "first of sorts" for China too. 

The news leak was about the one-child policy, which now stands relaxed - couples can have two children if one the parents is an only child. This relaxation is not because China has got a grip on its population but because it now has an aging population and if needs to sustain this growth momentum, it needs to have a much younger or productive population. 

The Third plenum also relaxed the hukou system or the household registration system which in turn in expected to increase mobility of labor and encourage further urbanization. Under the hokou system, those migrating to cities for work, had to give up their various welfare schemes and that prevented many from migrating. Thus relaxation will mean more movement of labor. 

Being a communist country, all land in China is owned by the Govt and the farmer has the right to only work on the soil but there is news that this has been changed wherein farmers will now be allowed to own, use, transfer and also use their contracted land as collateral or guarantee. This is a landmark reform as it will indeed mean more cash now in the hands of farmers and this will lead to a consumption led growth story. Housing prices are also expected to get affected as demand for homes will now go up as urbanization takes wings. Yes, land reform will be the biggest and most significant reform, which will change the country from being merely a factory to users too. 

In the financial sector, Chinese Govt plays the main leading role but the Third Plenum hopes to relax that too. It has announced sweeping changes in the financial sector, like a deposit insurance system by early 2014, privatizing the banking sector, reduce controls on pricing of water, electricity and natural resources. Most important and which could change the entire capital markets there - revamping the system for Initial Public Offerings (IPOs), which has drawn a lot of flak from foreign investors and has been dead for over a year now. 

Now all these are ideal and wonderful reforms, taking China towards a more market driven economy. This is not going to happen overnight, it will be long drawn plan but nevertheless, it"s great news for the Chinese. 

And that is where India needs to watch out. In the emerging markets, foreign brokerage houses will now flock to China as the country is getting more organized and opened up. Most of the reforms have come in areas where foreign investors have always complained about and citied as one of the reasons why they are queasy about going all out into China. But with these reforms, China playing as per the rules of the world, we could see a lot of money now going to China. On the other hand, India and its economy will stay paralyzed for almost 8-10 months, till elections do and appointment of a new Govt. So when the choice is between one country which is improving and promises more growth and the other which is in a limbo, with dirty politics and bad economic taking center stage, do the foreign investors really have any debate over choice here? 

Yes, we could say that FIIs will now start looking anew at emerging markets and when money gets allocated to China, some will come to India too. But is that what we will get – leftover crumbs? Indeed emerging markets will look anew post these Chinese reforms and India continues the way it is presently, the "I" in BRIC might very soon get replaced.  Thus India now needs to worry more when QE easing happens. 

FIIs are not faithful husbands; "till death do us apart" types. They are rich Casanovas and whichever market is more attractive, they will go and park themselves there. It is only Ram Leela and no Amar Prem. So does India look attractive today? 

Saturday, November 2, 2013

Indian Consumers - Packing Matters!!

Nivedita Jayaram Pawar
"My family was flabbergasted when I told them I wanted to sell vada paav with my MBA degree," laughs Dheeraj Gupta. But his dream paid off and it's the young entrepreneur who is laughing all the way to the bank. Gupta is the owner of the Jumboking brand of vada paav in India and is now on the verge of opening his 54th outlet.
But becoming the 'king' of vada paav wasn't a cake walk. Hailing from a business family, it was a foregone conclusion that Gupta would become a businessman. Soon after he acquired an MBA degree from a Pune institute, he decided to brand Indian mithai overseas. Unfortunately, the idea didn't catch on and Gupta learnt an expensive lesson.
Big Bite
Then, he ran into a franchisee of Burger King while on a trip to London and he figured he would take another bite out of the food business. "I was reading up on entrepreneurship and was particularly inspired by a book on the founder of McDonald's," recalls Mumbai-based Gupta.
So he decided to promote the vada paav as the Indian equivalent of the burger and set about researching the market. "Mumbai and Thane consume over 2 million vada paavs every day. At a market price of Rs 10 apiece, that's a market of over Rs 700 crore per annum in these two cities alone. It is a very large but unorganised market, and this is where branding the vada paav as 'Jumboking' came in," Gupta reveals. He figured that branding the product and serving it in a hygienic setting, with a transparent kitchen and stainless steel equipment would do the trick. It didn't.
With Rs 2 lakh borrowed from his father and a spot near Malad railway station which belonged to the family, Gupta took the plunge in 2001. He operated the outlet with his wife and four employees, but in the first six months, experienced a turnover of only Rs 3,000-4,000 a day. "It was very frustrating as we were unable to convince customers that we were hygienic and different," remembers Gupta.
Second Time Lucky
Not one to give up, he decided to have a second go at the vada paav -- this time serving it in a wrapper just like the McDonald's burger it was modelled after. Sales doubled, and Gupta launched his second store in Malad after 18 months and the third one in Andheri. The fourth store became Jumboking's first franchised store and, ever since, the brand has followed the franchise model. Next, Gupta infused further innovations, with automation, wrapping, using round bread, a bigger and flatter vada instead of the traditional round one, and a variety of flavours.
Revenue Model
Jumboking has 53 stores in eight cities including some metros and smaller cities. The company runs a 100-per cent franchise system. Products across all outlets are standardised as as they are manufactured in a central kitchen and transported to the outlets, where the vada paav is assembled using standardised equipment.
Jumboking is essentially a vada paav brand and the product and its variations contribute 80 per cent to the total sales. The balance comes from beverages like colas and lassi. The average spend at a Jumboking store is Rs 25-30 per customer.