Sunday, May 20, 2018

Warning to retail tenants: adapt or die


When sausage roll sellers start to warn about consumer sentiment, the depth and breadth of the high street’s woes become all too evident. The warning from Greggs in the UK — the purveyor of cut-price hot snacks that has been viewed by some analysts as practically recession proof — is only the latest in a relentless series of downbeat reports from the high street. Retailers are failing at a rapid pace, with almost weekly announcements about restructurings and different forms of administration in the UK. The picture in the US appears similar, with the demise of Toys R Us the most prominent of the retail failures that have left gaping holes in malls and shopping strips. The collapsed toy seller has come to symbolise the woes hitting traditional retailers: a business model disrupted by the rise of cheaper and easier alternatives available online, not least on Amazon’s popular website. Often the cost is borne by the landlords, forced to accept the financial terms of rescue deals or outright collapse that leave them saddled with empty properties in some of the worst locations. Tony Christie, head of retail at Aviva Investors, one of the UK’s biggest real estate fund managers, says the role of property has changed as retailers now typically need fewer and smaller stores. “Two of the more visible impacts of these trends and a challenging economy are the increasing number of vacant units on the high street and the number of retailers entering into CVAs [a form of administration] during 2018. This is the symptom of too many retailers unable to meet the challenges of an increasingly competitive landscape,” he says. The downturn in the retail market has also hit the listed property sector. Investors in the stock market are already pricing in sharp discounts on the reported net asset value of some listed property companies, as reflected in their share prices. Analysts say that falls in the booked valuations of such commercial property portfolios are sure to follow. “Shopping centre economics are unwinding and 4 per cent valuation yields used by estate agents for prime malls look stretched to the point auditors risk being accused of signing off aggressive asset value recognition,” says Mike Prew, analyst at Jefferies. This fall has also killed off the proposed takeover of Intu by Hammerson, with the latter blaming poor sentiment on the high street as the reason for the collapse of the approach. Other landlords are seeking to limit their exposure to the sector. UK property group St Modwen is disposing of more than a quarter of its shopping centre portfolio, for example, blaming the shift in sentiment. In the first quarter of 2018, the RICS UK commercial property market survey showed the weakest confidence reading since 2009 for the sector, with more than 40 per cent of respondents seeing a fall in demand for retail property as well as an increase in availability. The high street isn’t dying, it’s evolving at a very rapid rate — and those that are quick to respond and nimble are seeing some very respectable results Mark Phillipson, head of UK retail at Colliers International But property experts say that the gloom around the retail sector is sometimes overdone — and point to reasons for the enduring success of shops in the better locations and with the right approach. David Atkins, chief executive of Hammerson, says the recent rise of CVAs highlights how polarised retail is becoming, and the divergence between ailing high streets and more successful consumer destinations. “Experience, convenience and alignment with technology are key to the future of physical retail in meeting both consumer and brand needs,” says Mr Atkins. “We now operate in a world where brands want to showcase themselves and allow customers to touch and feel products — whether they go on to buy in store or online.” He points to innovations — “from climbing-walls and crazy golf to high quality restaurants and pop-up events” — that will help keep the consumer engaged. Mr Christie adds that — where necessary — property investors are also considering alternative uses, such as repurposing retail park space for residential use. “Typically this includes an intensification of use on the site with convenience retail and food and beverage occupiers on the ground floor with residential towers above.” Shopping centres in Bath and Exeter owned by Aviva in south-west England have been updated with mixes of bars and casual dining restaurants “carefully curated to ensure the right offer for the customer”, for example. Boutique cinemas can act as an anchor, he adds. Ian Kelley, fund director Europe at BMO Real Estate Partners, says that the effects of ecommerce giants such as Amazon have been exaggerated. Those retailers that have failed often have only themselves to blame. “Most of the retail failures in the US comprise brands that have neglected to renew themselves and no longer meet consumer expectations — think Sears, JC Penney, Payless Shoes, Forever 21 or Abercrombie & Fitch.” In this context, he says, comparisons between the US and Europe are irrelevant, pointing for example to the oversupply of space in the US compared with Europe. “Retailer demand for physical stores remains very strong in prime locations and in top cities, which benefit from above average economic growth, strong tourism levels and affluent footfall.” Mark Phillipson, head of UK retail at Colliers International, the property consultancy, agrees retailers and property owners have to adapt to new consumer behaviour. “The high street isn’t dying, it’s evolving at a very rapid rate — and those that are quick to respond and nimble are seeing some very respectable results. All the changes and challenges in the industry are tantamount to retail’s ‘industrial revolution’. Some companies seem to really relish that challenge are doing a fantastic job of it and sadly, some others are being left behind.”

Friday, May 18, 2018

Young left out of US boom in housing wealth


America’s housing wealth has staged a complete recovery since the financial crisis, but the holdings are increasingly skewed towards older borrowers and those with strong credit ratings and away from the young, the Federal Reserve Bank of New York said.  Home ownership rates among those under 45 have slid sharply since the previous boom. As a result, many younger Americans have missed out in a house price resurgence that has taken values up by 50 per cent from the crisis-era trough. At the same time, it has become much harder for younger borrowers to tap home equity to use for other spending.  More than 40 per cent of housing wealth is now concentrated in the hands of those aged 60 or more, according to the New York Fed. That compares with 24 per cent in 2006, on the eve of the financial crunch. At the same time people under the age of 45 now hold only 14 per cent of America’s housing wealth — down from 24 per cent in 2006. The figures underscore the fragile foundations of America’s economic recovery as inter-generational inequality increases alongside widening gaps between rich and poor. If younger and less well-off individuals have little wealth stowed away in the property or the stock market they will be heavily exposed when the next recession strikes. “Lower and middle income individuals are not benefiting as much from rising housing wealth and stock market values as in the past, and that means the main pillar of the economy is less robust than it used to be,” said Gregory Daco, head of US economics at Oxford Economics. “Lower and middle income individuals are the key driver in terms of spending and the overall economy’s fortunes.”  The New York Fed’s finding suggest that, on an aggregate level, America’s stores of wealth have fully rebounded from the crash, buoyed by a recovery that has now been running for 106 months, one of the longest on record. Financial wealth, which includes stocks and other financial assets, now stands at more than $80tn, more than 75 per cent above the 2009 trough. Yet the prosperity boom has been concentrated in a relatively small sliver of the population. The top 10 per cent of households own 84 per cent of stock market wealth, for example. Housing wealth tends to be more widely distributed, but here too there are signs that larger sections of the population are missing out, in part because mortgage lending standards are far tighter than before the crisis. Back in 2006, about 40 per cent of those who extracted equity from their home for other spending — for example, house refurbishment, education costs or holidays — were under the age of 45. Now that share has dropped to 25 per cent. By contrast, in 2006 just 13 per cent of those who tapped their home equity were aged over 60; the figure has now swollen to 28 per cent.  The New York Fed argued that while US households were sitting on a lot of housing wealth that could serve as a cushion in the case of economic shocks such as unemployment, that wealth was now less likely to be held by those most exposed to those shocks — namely the less prosperous.  “Household formation and transitions from renting into home ownership are much lower than their pre-crisis levels, especially among the young — meaning fewer young people have benefited from the increase in house prices,” said Beverly Hirtle, director of research at the New York Fed, in comments at a presentation on Thursday. “At the same time, current homeowners have drawn on their equity at much lower rates relative to the pre-crisis years.”

Thursday, May 17, 2018

Ethanol hopes rise as crude oil prices surge


The rebound in the oil price has made the prospects for ethanol made from farm waste — once the great hope of the alternative fuels sector — look promising again. The head of the last consortium still pursuing large-scale production believes other companies are wrong to have written it off, as consumers face rising fuel bills. Feike Sijbesma, chief executive of Royal DSM, a Dutch company that is part of the group working on cellulosic ethanol at the Project Liberty plant in Iowa, said it was on course for being able to compete with petrol, and the higher oil price was helping. The recent rebound in prices to above $75 a barrel for Brent crude has raised hopes that cellulosic ethanol can be competitive, if the remaining process engineering problems can be fixed. “It has not been an easy road, but we are getting there,” he told the Financial Times. “The technology is more complicated than anybody thought at the beginning.” DSM, a chemicals and biotech company, set up Project Liberty with Poet, a US ethanol producer, to produce fuel from corn cobs, leaves and husks that are left in the fields after the harvest. The plant held its opening ceremony in 2014 but has still not yet reached its full production capacity of 20m gallons of ethanol per year. DuPont of the US and Abengoa of Spain, which had been pursuing similar projects, have abandoned them. The higher the oil price, the more economic we are. At what oil price are we comfortable? $70. Feike Sijbesma, chief executive, Royal DSM Project Liberty is still in production, however, and its output is rising. In a sign of the Poet-DSM consortium’s continued confidence in the technology, it last year committed to building a facility at the site to manufacture the enzymes used to break down the cellulose in corn waste to make fuel. Mr Sijbesma said the principal challenge that Project Liberty had faced was managing the logistics of collecting the corn harvest residue and processing it for treatment at the plant. The enzymes had exceeded expectations in their effectiveness in breaking down cellulose, but there were engineering problems such as the difficulty of removing dirt, sand and stones from the plant material. He added that those process challenges should ultimately be easier to solve than the fundamental science of using enzymes to break down cellulose, because they were the types of issues that were more familiar from other manufacturing processes. Last November the company hailed a “major breakthrough” at the plant, pre-treating the corn waste so that the enzymes and yeast used to make ethanol could work on it more easily. Poet and DSM hope to license their technology to other producers, saying it “offers an enormous business opportunity” to companies that are making first generation ethanol from corn and other grains. If Project Liberty were producing at full capacity, its ethanol would be competitive with petrol at current prices, Mr Sijbesma said. “The higher the oil price, the more economic we are,” he added. “At what oil price are we comfortable? $70.” Brent crude rose above $79 a barrel this week for the first time since 2014. A decade ago, cellulosic ethanol was widely seen as vital for future energy supplies, providing an alternative to oil-based fuels that had lower greenhouse gas emissions and did not compete with demand for food. The US Energy Independence and Security Act of 2007 set ambitious goals for cellulosic biofuel use, which the industry has not come close to reaching. Just 10m gallons of cellulosic ethanol were produced in the US last year, only 0.2 per cent of the original biofuel objective. Share this graphic DowDupont, the company formed by the merger of DuPont with Dow Chemical, has stopped production at its cellulosic ethanol plant in Iowa and put it up for sale. Abengoa similarly stopped production at its cellulosic ethanol plant in Hugoton, Kansas, in 2015. The Hugoton plant went into Chapter 11 bankruptcy protection in 2016, and was bought at the end of that year by a US company called Synata Bio, which beat Royal Dutch Shell in an auction with a $48.5m bid. Industry sources said the plant did not appear to be producing cellulosic ethanol. Synata said: “We are not making any comment on Hugoton at this time.”  Other companies are trying different routes to making cellulosic ethanol. DowDupont, for example, sells enzymes for what is known as “1.5 Gen” fuel, made from the corn kernels left over after the production of conventional ethanol. California-based Aemetis has a plan to develop a plant to produce cellulosic ethanol from orchard waste and nutshells.  The mandates for biofuel use set in the 2007 act remain in a vastly modified form. The requirement for cellulosic biofuels has been reduced to about 5 per cent of its original level, and most of that is met not by ethanol but by renewable natural gas, produced from sources such as landfills and municipal waste water treatment facilities. For 2018 the mandate for cellulosic biofuels has been set at 288m gallons, down from 311m gallons in 2017. Geoff Cooper, of the Renewable Fuels Association, warned that the move could have a “chilling effect” on efforts to increase cellulosic biofuel output. President Donald Trump has been looking at possible regulatory reforms to encourage ethanol sales, and for the time being the US industry’s future will remain heavily dependent on policy support. In the longer term, however, the prospects for cellulosic ethanol and other biofuels around the world will be much brighter if oil prices remain at current levels or rise higher.  

Monday, May 14, 2018

Spotify and the Triumph of the Subscription Model


IN 2011, WHEN Spotify launched its streaming music service in the U.S., the future of digital media lay squarely in the realm of advertising. Sure, everyone knew ad-based models—sometimes called “the Internet’s original sin”—had flaws. But companies like Google, Yahoo, and Facebook were able to grow very large, very quickly by attracting big audiences to their free services and selling ads. Spotify aimed to emulate that success, but with a different model that also included an odd consumer option: a subscription.
At the time, Pandora, the market leader in music streaming, had already positioned itself as the future of radio, going after the industry’s $17 billion advertising market. Spotify executives took aim for that same pool of money, calling advertising “a huge part of the company strategy.” Both companies offered a paid subscription option. Spotify's main difference was the ability to play any music on-demand, where Pandora only offered radio-style playlists with limited options to skip songs.
No one could have foreseen the digital media world’s recent shift toward paid subscriptions, driven, in part, by the success of Netflix and newspapers like the New York Times. Consumers have grown increasingly comfortable with the idea of paying to access digital media that they once got for free. Venture capitalists are now more excited to invest in tools and platforms that enable subscriptions.
Likewise, no one foresaw the rise in anti-advertising sentiment. Ad blocker use continues to grow and advertising boycotts are now a frequently-deployed culture war tool. Ad fraud remains a problem. Even Facebook and Google, the successful digital advertising duopoly, now look like sinister privacy invaders due to their data-collecting sales operations. Rival tech executives, like Apple CEO Tim Cook, are weaponizing this anti advertising sentiment to slam competitors with advertising-based business models.
Lucky for Spotify, the company’s paid tier of subscriptions put it in a strong position to ride that shift. Of Spotify’s 157 million users, 71 million pay a monthly fee to subscribe. Only around 10 percent of the company’s revenue comes from ads. On Tuesday the company went public. Investors valued the company at more than $26 billion at market close.
The focus on subscriptions, combined with its hard-won relationships with the record labels, has saved Spotify from the fate of its many failed streaming music peers. That includes MOG, Turntable.fm, Muxtape, Imeem, Playground.fm, Myxer, Mixwit, Seeqpod, Grooveshark, and Skeemr. Pandora, which bought Rdio in 2015 in a distressed sale, endured takeover speculation for the last year, culminating with a bail-out investment from SiriusXM.
Spotify has long argued its service fights the music industry’s piracy problem by offering a convenient alternative. By doing so, it proved it was possible to convince a generation of users who grew up with Napster and Kazaa to pay for music for the first time. That shift is notable: Spotify subscribers who pay $10 a month, or $120 a year, to access the service are spending more on music than the average U.S. consumer did at the peak of the CD boom. (Detractors would argue that that money now gets spread across a lot more songs, therefore shorting artists.)
Spotify CEO Daniel Ek’s promise has been that Spotify can help return the music industry to growth. He’s delivered on that. Last year the industry experienced its first double-digit revenue growth since 1998.
But new challenges loom for the company. Spotify is not profitable. Plenty of artists and record labels that the company relies on continue to criticize its business model. And the company’s success has attracted competition. Apple, Google and Amazon all have competing subscription services which threaten Spotify’s leadership position. In that sense, Spotify will do well to remember the fate of Pandora—success is precarious.

India becomes world’s fastest-growing market for apps



India has become the world’s fastest-growing market for mobile applications on both the Apple ioS and Google’s Android Play Store, with a sharp spike in revenue in the first quarter of 2018. The country also leads in the most number of mobile app downloads across both platforms according to app market data and insights company App Annie.

The thirst for content among Indian mobile phone users is fuelling rapid growth, with video streaming apps proving to be the most popular downloads. Three of the top ten apps downloaded in the country fall in this category unlike both China and the US where just one streaming app finds a place in the top 10.

“India is the fastest growing of any market, its Q1y-o-y growth was 41%,” said a representative for App Annie. Indonesia ranked second with revenue growth of 24%, while Albania came in third at 23%.



“India was the number one market globally by combined downloads on iOS and Google Play, ahead of the United States (2nd), and China (3rd, iOS only),” the App Annie spokesperson told ET.

NetflixTinder Most Popular Apps
The two most popular applications in India by revenue were content streaming service Netflix and dating app Tinder. Chinese apps UCBrowser, SHAREit and Hypstar, now called Vigo Video, rank in the top ten, based on combined downloads, as do three apps from the Facebook stable – social network Facebook, messaging app WhatsApp and Facebook Messenger.

The rapid spread of broadband services, including the launch of Reliance Jio, is contributing to a change in consumption habits. According to data from the department of telecom, the average data usage per subscriber grew 25 times from 62 MB per month in 2014 to 1.6 GB per month in 2017.
India becomes world’s fastest-growing market for apps
To be sure, while the rate of revenue growth is rapid, the country ranked 29th in terms of absolute revenue generated from sale of mobile apps estimated at $47 million. Based on the combined iOS and Google Play revenue in Q1 2018, US stood first with a spend of $3.2 billion, Japan was second with $2.7 billion of revenue, while China was third at $2.4 billion (iOS only).

Experts are of the view that change in mobile download patterns will help India catch up rapidly in terms of absolute revenue generated.

“Price of smartphones is coming down and the adoption is very high in India. The sub-Rs 10,000 market is really growing in India. So, the number of people using a phone and who are downloading apps are on a rise, which grows the base,” said Sreedhar Prasad, partner and headconsumer markets and internet business, at KMPG India.

India had an estimated 281 million daily Internet users in 2017, of which approximately 30% are women, according to a report by the Internet and Mobile Association of India. 62% of all internet users are in urban areas, the report said.

“People are willing to pay for games and there is slowly a subscription culture coming to India,” said Prasad.

While video streaming apps — JioTV, AirtelTV and Hotstar — proved to be popular downloads, there are no gaming apps in the top 10 in India whereas China has two — Travel Frog and PUBG Mobile — and the US has one — PUBG Mobile, according to App Annie data.

The US data company had in its 2017 Retrospective Report put India behind China in number of downloads, but ahead of the US, as it also includes thirdparty app store data in its annual retrospective ranking.

Globally, 2018 has emerged as the strongest quarter the app economy has ever seen, breaking records set in the last quarter of 2017, in terms of both consumer spend and downloads.

Shopping apps experienced a big year-over-year growth in market share of downloads in Q1 2018 across both stores.

Consumer spend on Google Play grew 25% in Q1 2018 yearon-year, while iOS saw 20% year-on-year growth.

Signals pick up for Indian telecom companies


The telecom sector, or whatever is left of it after the massive disruption created by Reliance Jio’s entry, saw the top few players defending their territories and living to fight another day. The smaller and regional players, however, just gave up.
Indeed, fiscal FY-18 saw an unprecedented churn in the mobile services space, so much so that a seven to eight player industry is now reduced to effectively just three now.
The hyper competition in tariffs, the regulator’s intervention in reducing interconnect charges and down-trading by customers to attractive lower-rate data packs, all played their part in squeezing the financials of major telecom operators.
Revenue was down 10-20 per cent in FY-18 compared with the previous year for the likes of Bharti Airtel and Idea Cellular. Key parameters such as the average revenue per user (ARPU) and realisations were at their lowest levels in at least the last five to seven years. Idea reported losses, while Bharti’s profits were down over 71 per cent. Vodafone, Idea and Airtel have witnessed their ARPUs decrease to 105-116, down a good 25-30 per cent over the last one year. Even Reliance Jio’s ARPU was down sequentially in the March quarter, but was higher than that of peers, at 137.
So, is the telecom sector in a state from which recovery seems impossible? Not quite.
Within the gloomy scenario, there are several encouraging and important factors, which if played out over the next year or so, may usher in happy tidings for the likes of Vodafone, Idea and Airtel.
Lower competitive intensity, with just three or four players left, steadily decreasing churn in the customers of these networks and increasing levels of ‘active’ subscribers for the top mobile operators could bring back pricing power to the service providers over the next couple of years.
Apart from these, the increasing proportion of higher ARPU 4G customers coming on board for the top operators, and the massive rise in data usage (up three to six-fold in the last one year for all the operators) are other lucrative avenues that could be monetised better.
Apart from mobile services, Airtel and Vodafone also derive significant revenue from other business such as enterprise connectivity, which is an added positive.
From a cost angle, Airtel and Idea have kept a tight leash on employee expenses and those related to sales and marketing, which helped them hold margins to a reasonable extent.
We get into each of these factors in greater detail to get a sense of how a slow and painful, but definite recovery is possible for incumbent operators.

Fewer operators, larger share

From 12 players in 2016, to seven in 2017, the mobile services arena now has only three main providers, with BSNL coming in as a weak fourth operator.
Several regional and national players — Aircel, Tata Teleservices, Reliance Communications (RCom) and Telenor — have either merged with larger operators or filed for bankruptcy.
Tata Teleservices (mobile operations) and Telenor India will merge with Airtel, and RCom (mobile operations) with Reliance Jio; Idea and Vodafone are set to integrate and become a single entity. Aircel has filed for bankruptcy.
Effectively, only three dominant players — Airtel, Idea-Vodafone and Reliance Jio — remain in the race, with state-owned BSNL coming in at a distant fourth.
This consolidation has revenue implications for the incumbent operators.
Till about a year back, Airtel, Idea and Vodafone enjoyed about 75 per cent of the total revenue market share among themselves. The other private operators and BSNL accounted for the rest.
State-owned BSNL (together with MTNL) has about 10 per cent revenue market share.
With the industry morphing into a three-player arena, the top three operators would now command a greater share of the overall mobile services pie.
Therefore, these operators would now enjoy nearly 90 per cent revenue market share after the consolidation is complete, giving them a much larger scale. After the mergers mentioned earlier are completed, Airtel and Idea-Vodafone are expected to become more resilient in the face of Reliance Jio’s tariff onslaught.

Given the consolidation of the industry in favour of just three operators, it would only be a matter of time before pricing power returns for the mobile service providers.

Lower subscriber churn

Next, the churn in subscribers of the top three to four operators has been declining over the past four quarters.
Subscribers are moving out of the networks of Airtel, Idea and Vodafone at a much slower pace — 2-4 per cent in the recent quarter — down significantly from 4-7 per cent levels as of March last year.
Thus, customers of the incumbent operators seem to be settling in with their networks and aren’t exiting as quickly. One of the main reasons for this is that tariffs across operators have started to converge to a reasonable extent.
All the top three operators now offer hybrid packs that club voice (mostly free) and data services. With Jio’s free usage phase over and the company charging users from FY-18, and competition matching or coming close to its tariffs, the differentiation in rates gets diminished considerably. Though further rate cuts cannot be ruled out, the hyper competitive nature of tariffs may well be behind the top operators.

Increase in active base

One key parameter that indicates how much customers stick to their operators is the VLR (visitor location register) data. The VLR gives the list of subscribers who use their mobile services regularly; those who are in a position to send/receive calls and messages.
As of February 2018, the proportion of ‘active’ subscribers for Bharti and Idea was quite healthy. For both these operators, the proportion of active subscribers from VLR data was in excess of 100 per cent. The figure is 86 per cent for Reliance Jio and the proportion is close to 95 per cent for Vodafone. When Idea and Vodafone merge, the joint entity is likely to have a VLR proportion of close to 100 per cent.
A ratio in excess of 100 per cent indicates that there are several roaming subscribers on the network as well. The proportion of active subscribers, as seen from the VLR data, has improved for the top three operators in the last one year.
Clearly, after the initial heavy churn, subscribers have been retained by the incumbent operators.
Taken together, a lower churn and a large active customer base mean that that the phase of hyper competition in terms of chasing subscribers at all costs may be slowing down.

Encouraging 4G additions

Reliance Jio had a clear advantage over peers from day one of its launch — it had 4G subscribers on board. This move ensured that it was able to tap data customers in the initial stages itself. Despite offering data services at low rates, its average revenue per user (ARPU) was higher than the likes of Airtel, Vodafone and Idea.
A typical 4G customer provides twice the ARPU of a normal 2G subscriber for mobile operators.
But after the initial setback, Airtel, Idea and Vodafone have come back strongly and managed to claw back into the reckoning with robust 4G subscriber additions.

Airtel, for example, has witnessed a 79 per cent increase in its 3G/4G subscriber base in the recent March quarter. About 28.3 per cent of its total customer base now comprises 3G/4G subscribers compared to 21 per cent in March 2017.
Data consumption is skyrocketing. The data usage in the March quarter has been in the range of 6-9.7 GB per user for the likes of Airtel, Idea and Jio. Consumption of data is up three to four-fold in the last one year for all the top three-four mobile service providers.
With subscribers hooked on to networks, monetising additional data usage could bring back revenue and profit growth for the operators.
Additionally, Bharti Airtel and Idea Cellular saw two successive quarters of robust subscriber additions in the second half of FY18, after facing the heat in the first half. While Bharti managed to add 22 million subscribers in the second half of last fiscal, Idea increased its customer base by over 12 million in the same period.
The backdrop of easing headwinds may allow the top three-four mobile service providers take rate hikes without hurting their customer bases.

The rural opportunity

One aspect that is not often highlighted in the seemingly all-pervasive presence of mobile services throughout the country, is the low level of tele-density in rural India.
As of February 2018, urban penetration of wireless services was nearly 159 per cent, while rural tele-density was just 57 per cent, according to data from the telecom regulator, TRAI. India’s total subscriber base is around 1157 million.
Clearly, there is a huge untapped opportunity for operators to tap into, especially as the urban zone reaches saturation levels in terms of penetration.
In this regard, Airtel, Idea and Vodafone have substantially larger reach in rural areas than Reliance Jio. Airtel has a 29.4 per cent rural subscriber market share, while Vodafone and Idea have 22.9 per cent and 21.1 per cent shares respectively.
Jios’s share of rural subscribers is around 8.2 per cent.
Between Airtel and Idea-Vodafone, the operators have nearly 75 per cent rural market share, indicating a strong and entrenched presence despite the hyper competition over the past 18 months.
As of now, Jio’s success appears to be largely restricted to urban areas. But the company is launching feature phones and offering bundled packages that are largely targeted at rural customers.
It remains to be seen how Jio’s moves play out in villages and non-urban areas. Those areas are dominated by voice services and, here, the incumbent operators appear to have the scale and reach to withstand competition from Jio.

Non-mobile divisions fire

While much of investors’ focus has been on the mobile services division of Indian operators, it is important to note that the older operators such as Airtel and Vodafone also derive significant revenues from other segments.
Airtel’s DTH and enterprise connectivity (B2B) businesses contribute nearly 25 per cent of its overall revenues. The DTH segments accounts for 6 per cent of revenues and has 14.2 million customers. The B2B division contributes 18 per cent of the overall revenues.
The company is among the top DTH operators in the country; revenues from the segment have grown at over 10 per cent in FY-18. Its B2B business too is growing at a healthy pace.
Vodafone India derives nearly 19 per cent of its revenues from delivering enterprise solutions to corporates, up from about 12 per cent a year ago.
Thus, these large operators have significant non-mobile operations, where EBITDA margins are in excess of 35 per cent. They have fairly diversified revenue streams with reasonable growth trajectory.
Of course, Reliance Jio could also enter these segments at some stage either this fiscal or the next, but the incumbents have the advantage of established customer relationship and connectivity, and a head-start.

Tower sales

The incumbent operators are also looking to reduce stakes or fully sell their tower arms to raise cash for their core operations.
Vodafone and Idea decided to sell their tower businesses (other than those held by Indus Towers) to ATC Telecom Infrastructure (American Towers; a specialist company) for 7,850 crore in November 2017. Vodafone received 3,850 crore from the transaction, while Idea would get 4,000 crore by the first half of 2018.
Apart from this transaction, Indus Towers (owned by Bharti Airtel, Vodafone and Idea Cellular) is set to merge with Bharti Infratel. The joint entity would have 1,63,000 towers.
Airtel is also steadily reducing stakes in its tower arm. After the Indus Towers-Bharti Infratel merger, Airtel is expected to gradually pare or exit stakes in the arm to raise funds.
Separately, Bharti Airtel is also looking to list its African mobile operations on the London Stock Exchange. The company hopes to sell 25 per cent stake for $1.5 billion in an IPO planned for FY19.

The cost focus

While revenue took a big hit for the older players, they did their best in terms of containing costs significantly in FY-18.
Selling and marketing expenses, which are at around 15-16 per cent of sales for the likes of Airtel and Idea, have been trimmed by about 10 per cent in FY-18 compared to FY-17.
As there are only three major players around, advertising and marketing may not be as aggressive as it was earlier. Given the consolidation in distribution, selling, general and administrative (SG&A) expenses are likely to be trimmed or kept on a tight leash by incumbent operators.
Employee expenses are also under control and costs under this head have been cut by 10-12 per cent in FY18 compared to the previous year. Network operating costs have also come down.
As a result, despite experiencing significant erosion, margins aren’t poor. Idea has an EBITDA margin of 21.4 per cent, while Bharti Airtel has a healthy 36 per cent.
The focus on costs should help them maintain margins at these levels.
Bharti Airtel still has a fairly robust balance sheet. It has over 95,000 crore of debt as of March 2018. But its interest coverage ratio is still a healthy 4.4 times. Debt equity is reasonably comfortable at 1.37 times. Although Idea’s financials are not as robust, its merger with Vodafone in the first half of this fiscal should bring in the much-needed synergies on costs and revenues.
Over the next couple of years, the incumbent operators can be expected to come back strongly in terms of subscriber additions and stable revenue market shares.
The debt level for Jio too is fairly heavy, at over 58,000 crore as of March 2018. Its interest coverage ratio is less than half of Airtel’s, at 1.54 times in FY18. The company could report profits largely as a result of the cut in interconnect charges from 14 paisa per minute to 6 paisa from October 2017. At some stage, operators would be forced to take a call on increasing their tariffs — a factor that may take a year or two to play out — if they are to service debt and shore up their balance-sheets.

Walmart shifts global strategy to battle Amazon


The day after announcing a record-breaking $16bn investment in Flipkart, Walmart’s chief executive Doug McMillon met reporters in a Delhi hotel dressed for the occasion — in a black top emblazoned with the logo of the Indian online retailer. “Nice T-shirt,” said one reporter. “Thanks,” replied Mr McMillon. “It didn’t cost much.” The visiting executive’s cost-conscious jest in the context of a multibillion-dollar purchase poked fun at the reputation of a US retailer that came to dominate its home market with a promise of “everyday low prices”. But the black Flipkart gear was also the sign of a company in transition. In recent weeks, Walmart has reset its international playbook as it battles Amazon for supremacy in global shopping. Renowned for its hands-on approach at home, Walmart is in effect becoming an investor in retailers abroad. At the end of April, Walmart merged its UK-based grocer Asda with bigger rival J Sainsbury in a deal that will give the US retailer a 42 per cent stake in the combined company, which will have revenue in excess of $50bn a year. This month, it acquired an 80 per cent stake in Flipkart, India’s biggest ecommerce company, for $16bn. Grand in size — it was the biggest M&A deal in the history of Walmart and India — it reflected a new approach by the Bentonville, Arkansas, retailer. You can’t run Walmart like it’s one monolithic thing Doug McMillon, Walmart’s chief executive “It’s a departure from the historic way Walmart thought about international markets,” said one person familiar with the company’s thinking. “Historically they said: ‘We have the secret sauce and we will sprinkle the holy water in every country.’ The current management approach is very different. It’s about deciding the best way to access a market, and in India that was Flipkart.” Trial and error has marked Walmart’s efforts to move beyond the US. Now operating in 28 countries, the company has abandoned markets such as Germany and South Korea where it failed to achieve the dominance it enjoys in the US. Walmart’s previous attempt to go it alone in India failed miserably. Walmart has “lost a lot of the arrogance they had in the 1990s,” said Bryan Roberts, analyst with TCC Global, a consultant that works with large grocers. “They’re being a lot more careful to preserve local brand equity and local practices, rather than imposing the Walmart culture everywhere.” Mr McMillon stressed the need to be “creative” and “fast” as he discussed his plans in India. As a result, he said: “You can’t run Walmart like it’s one monolithic thing.” The pressure is on Walmart — which will this week reveal its quarterly results — because its stock has fallen 20 per cent in the past three months. Previously red-hot online sales in its home market have slowed, raising questions about whether the $3bn purchase of ecommerce start-up Jet.com in 2016 will be the game changer Walmart has sought. Share this graphic Investors do not seem thrilled about Walmart’s latest deals, either: shares have dropped 7 per cent since the Asda deal was announced on April 30. “As investor advocates, we barely tolerated paying Jet.com $3bn,” said Bernstein analysts. “To once again pay a sales multiple of 5-7x feels like something silly, unless it is the last penalty price [for being slow on ecommerce].” Mr McMillon, Walmart’s fifth chief executive over the course of nearly six decades, has been pushing the acquisitive strategy, according to people familiar with the negotiations. He admits that it carries risks. “There are some people who may want us to focus on the bottom line and earnings in the short term,” he said. “We don’t feel that is in the best interests of the company. We don’t feel it creates the most value over time.” The 51-year-old, who has worked at Walmart for his whole career, has looked to brand himself as part of a new generation. He calls himself a “gadget guy” and has touted a futuristic vision for Walmart, speaking of virtual-reality shopping and ordering grocery delivery through voice devices at home. Share this graphic Under his watch, Judith McKenna, who was promoted to chief executive of Walmart’s international unit in February, has been engineering Walmart’s flurry of foreign activity. Ms McKenna was the “quarterback”, driving the day-to-day discussions behind Asda and Flipkart, people familiar with the matter said. The question is whether Walmart can afford to test investor patience, and for how long. The Waltons — the world’s richest family — still own about 51 per cent of shares, giving Walmart more flexibility than many other publicly traded companies to make long-term bets, analysts say.  “What we forget is Walmart is very close to being a private company,” said Mr Roberts. “That family stake means they are less beholden to Wall Street and can take something of a long-term view.” Complicating matters for Walmart is that it is competing head-on with Amazon, which has enjoyed substantial patience from investors. Its shares have soared for years even as it burns cash on endeavours ranging from Hollywood films to drones. “I would not characterise any Walmart management team that I’ve covered for the past 15 years as being passive. They go 180 miles an hour,” said Charlie O’Shea, retail analyst at Moody’s. “The difference is the Amazon shareholder base is very patient.” Share this graphic Walmart, which will issue debt to finance the Flipkart deal, said the investment would wipe between 25 and 30 cents from earnings per share in the current financial year, and 60 cents next year. S&P downgraded its outlook on Walmart from stable to negative.  The gamble is being taken because Walmart saw India as a battleground it could not afford to lose to Amazon, people familiar with the matter said. Walmart still makes three-quarters of its sales from the US. China and India are seen as the two big growth opportunities, and China is dominated by Alibaba. In India, Amazon and Flipkart control 61 per cent of the ecommerce market, which is worth nearly $30bn today, but is set to grow 27.8 per cent a year for the next five years, according to Euromonitor. “So much of the action in this industry is about keeping opportunities out of competitors’ hands,” the person familiar with Walmart’s thinking said. Moody’s Mr O’Shea said the emphasis on international ecommerce reflected the fact that “what will work in the US won’t work everywhere. Walmart couldn’t build supercentres in India, but you can grow online sales, and revenue is revenue.” Recommended Analysis Retail What next for UK supermarkets after ‘Sainsdas’ The Jet.com deal had been Walmart’s previous answer to the online challenge. Investors sent Walmart’s stock to a record high in January as ecommerce sales grew by between 50 and 70 per cent each quarter of last year. But then growth slowed. Walmart still only makes about 4 per cent of its $500bn annual sales from ecommerce. Mr McMillon said the boost from Jet was expected to diminish over time. Walmart’s bet on Flipkart will take much longer to pay off than Jet did, analysts warn. “The idea is that one day, hopefully, this will make them a significant sum of money,” Mr Roberts said. The Bernstein analysts said: “We see Walmart as a long-run survivor who will develop various partnerships to grow into an ever-larger monster, locked in an epic struggle for global retail dominance against Amazon and Alibaba. The outcome of battle is not particularly clear at this stage.” Mr McMillon appreciates the stakes. He told reporters in India: “We know from retail history that if retailers don’t change, they go away.”