Monday, March 30, 2015

Winning the trust of rural consumers

Over the last few years, most companies have understood that succeeding in India's will be a key imperative to secure their long-term growth prospects. But, what certainly is a market of immense potential is also one of the least understood. Doing business in rural markets is often considered challenging due to several factors - lack of infrastructure, unstable demand and improper supply chains. However, all that is changing at a rapid pace. India's rural markets are now more accessible and better connected. The profile of the rural consumer is changing and along with it, their buying behaviour. who have little or no internet access may use time-tested, established but more time-consuming processes to travel through the purchase journey. Also, given the fact they are less familiar with brands, rural consumers take much longer than their urban counterparts to decide that they trust a brand.

For high-involvement categories, they typically spend a few months gathering information, seeking advice from various sources to learn as much as possible about product features and brand differences. This is especially true in consumer durables and automotive purchases and in categories critical to people's livelihoods.

Hence, to gain wallet share in this difficult-to-grasp market, companies need an understanding of how to shift from a "push" to a "pull" strategy as they risk losing customers during the purchase journey unless they can satisfy their needs and desires at each milestone of the journey. Accenture's research terms these milestones as 'trust points', because these constitute critical moments where companies can build trust with the customer - or destroy it.

The first trust point in rural consumer's purchase journey is need recognition - though the rural consumers' social milieu is changing, they will not embark on the purchase journey until they are convinced that they have a need and buying a product or service could satisfy that need.

The second trust point is awareness - a stage at which companies need to get their brands into consumers' initial awareness set. At this stage, it becomes critical to determine the right marketing mix, depending on the product portfolio as well as the geographic and customer specificities. For example, marketing of new products or categories, which are relatively underpenetrated in rural markets, is best done through below-the-line activities - demonstrating the product in the villagehaat or mela, for instance.

The third trust point is consideration - a stage where rural consumers examine the options in their awareness set and narrow down to offerings that best meet the identified need. Companies' goal at this stage is to ensure that their product survives the transition from the awareness to the consideration set. A highly critical milestone in the purchase journey; companies can grab the attention of rural consumers by tailoring the value proposition to meet their unique needs and requirements.

The fourth milestone or trust point is validation - consumers seek inputs from trusted family members and friends as well as other influencers. According to Accenture's survey, 90 per cent of respondents said they consider their friends and family members key influencers for high-involvement purchases, confirming the significance of the influencer's role. There is also growing significance of sector-specific experts - mechanics for automobiles, electricians for consumer durables - who are often consulted by rural consumers and their opinions are valued because of their vast knowledge and practical experience. It, therefore, becomes critical for organisations to identify the right influencers and design innovative engagement programmes to target them.

The next trust point in the rural consumer's journey is the act of purchase. It is important for companies to take notice of the early signals that today's rural consumer wants a more superior shopping experience, the kind that their urban counterparts have access to. Almost 83 per cent of rural consumers claimed that they go to shopping malls in nearby cities to make their big-ticket purchases. In the future, store format - location, size and layout - will be critical for attracting rural consumers.

It may not always be feasible for companies to have a large number of branded stores in rural areas but opening just a few flagship stores may go a long way to inspire trust and build brand recognition. Companies will also need to think of ways to improve the customer experience at the physical stores. Specifically, store personnel will need to be trained to review and absorb product knowledge and customers' needs so they can provide higher levels of service. Instilling confidence in online purchasing also becomes critical, given that many rural consumers lack confidence in buying over the Internet, are unsure about available modes of payment, doubt the quality of products, and regret that most companies do not offer doorstep delivery to villages.

Now that the purchase is finally done with, the journey doesn't end here. Today, the quality of the post-purchase experience determines the likelihood of repeat purchases, as rural consumers are constantly evaluating the product's performance and the company's attitude toward them during delivery of after-sales service.

Accenture's research indicates that many rural consumers still shy away from logging a formal complaint with a company if they have a negative post-purchase experience as they feel helpless and unsure of whom to complain to. Only 54 per cent of survey respondents said they register a formal complaint if they encounter a problem with the product to the dealer or retailer from whom they had purchased the product. Thus, as rural consumers are hesitant to approach companies, it becomes increasingly vital for companies to proactively reach out to the consumers to seek post purchase feedback and resolve complaints to avoid negative word-of-mouth.

Advocacy is the last and final trust point in the purchase journey where companies need to nurture consumer advocates by promptly addressing problems to pre-empt negative word of mouth.

Win back lost customers

Did you know nearly 98 per cent of the first-time visitors on your website leave without purchasing anything? While some visitors browse the site for a short while and then move on, others add items to their cart but abandon it without going through the purchase process. If is a problem for brick-and-mortar retailers, shopping cart abandonment is one metric that keeps a large number of bosses awake at night.

So what does one do? The first option would be to make the shopping experience so compelling for consumers that they complete the purchase loop. Second, if they do indeed exit, you need to find ways to bring them back to the site. Over 90 per cent of marketers responding to a recent survey by global retargeting company, AdRoll, said that retargeted ads are as good as or even better than the gold standard in digital marketing, search ads, to do the job.

What is retargeting? In simple terms, in retargeting, e-tailers try to bring back lapsed by showing relevant ads on other websites so that they come back to the original e-store for their next purchase. Today retargeting forms part of the monthly digital budget of most e-tailers and run throughout the year just like search marketing. "Retargeting helps convert users at one-and-a-half to two-and-a-half times the website's standard conversion rate. Typically the budgets for retargeting is 10-15 per cent of the total digital spend but it could be more," says Subra Krishnan, VP, products, Vizury. Adds Praveen Sinha, founder and MD, Jabong, "Retargeting is a high return-on-investment campaign, hence, budget expansion is easier on this."

Traditionally, retargeting had been strongly associated with performance marketing and the return on investment. But the concept is being redefined today. "It has become a customer value management programme. Retargeting helps in extracting the value of the data generated and ploughing it back into the system to engage dormant or active customers," says Narayan Murthy, VP, global sales and strategy, Vserv.

A retargeting strategy would vary depending on the category and sector you operate in. Here's how you can retarget effectively and then figure out when to pull the plug.

Cracking down on the problem

Like everything else, the starting point would be the consumer - understanding her needs and why she was on the said website in the first place.

The interest of the user could be defined in a variety of ways during the customer's journey. Some parameters to look at are: how many times the user has visited the site, which products and how many products did she see, how deep did she go into the website (cart versus home page), buying history and so on. If a customer has shown a greater propensity to convert then you can target her more aggressively. "The key to retargeting lies in creating a customised message," says Krishnan. For example, you may show a 'static ad' of a product, a 'semi dynamic ad,' which will include price, discount etc, or a 'fully dynamic ad' where other relevant products with their prices are shown.

Mostly e-tailers segment the audience under heads such as abandoned users, product viewers, category viewers, checkout users, and so on. By doing that they can use different communication plans for each segment to target them better. For instance, Lenskart's first-frame-free offer was not shown to visitors who have already made a purchase from the site. Such repeat visitors were rather shown the latest collection of its eyewear.

The next question is, which medium should a brand use to retarget. Ideally, brands should engage customers in all the channels - display advertising, Facebook marketing, email, SMSes, notifications, mobile ads, apps - in a unified manner.

It is also important to time your retargeting efforts. For example, if someone has ordered monthly disposable lenses then Lenskart starts reminding the user with messages to change her lenses before the expiry date. "We keep a close check on the performance of each segment and measure metrics like click-through rate, conversion rate, cost per action and ROI on a daily basis," says Peyush Bansal, CEO and founder,

Retargeting can prove especially helpful in a category like furniture where the purchase cycles are longer. "If a customer is looking to buy a sofa, she may take 10-30 days to make a decision. Hence, by effective targeting, we can stay relevant in her decision- making frame and tailor offers depending on how far she has progressed in the purchase cycle," says Vikram Chopra, CEO & founder,

In the e-commerce space, the entire game is moving to apps. "App re-targeting makes more business sense and companies have been investing heavily on data-led retargeting via apps. We have seen four-five times better conversion ratios in apps compared to mobile web," says Murthy.

Vserve offers two retargeting platforms - Smart RT and Smart Connect. Smart RT is capable of retargeting customers from desktop to mobile and show ads to consumers in real time with customised content. Smart Connect helps leverage offline consumer intent to help brands remarket to their consumers across mobile sites and apps. Data collection tags are implemented in apps and mobile web pages and then passed into Vserv servers. The information passed on in the server contains encrypted data about the user. Once the system deciphers this data, it starts running a match for the similar user with the same unique identity variable for audience identification. After the user is identified, a predetermined action-oriented communication is shown to the user with a clear call-to-action. The final step would be closure or re-engaging the customer into the client funnel.

In a campaign there can be multiple elements to entice a user to respond. Hence, retargeting potential buyers with different styles of communication and channel is important.

Pulling the plug

Companies need to consider two metrics - conversion and RoI - to determine the effectiveness of a retargeting strategy. "Typically for e-commerce companies, 5-10 per cent of daily sales should come from retargeting. The next thing would be to check the return on investment," tells Krishnan. You also need to consider if the campaign is enabling traction on higher margin or lower margin products.

Besides this, you have to keep in mind that the retargeting efforts should not prove to be a dampener because there is a thin line between following up, reminding or retargeting and spamming. There has to be a way to identify the customer you are retargeting and stop at the right time. "The decision is mostly based on mature algorithm and judgment that help to determine that we are not moving in the direction of spamming and it doesn't become a noise," says Sinha of Jabong.

To get this right the first step would be to exclude customers who have completed a transaction or to identify users who have lost interest based on their user score that factors in responses to ads. "Don't overdo campaigns; you will end up with higher opt-outs from emails," says Kalpit Jain, chief operator officer, netCORE.

Travel portal Makemytrip retargets customers more aggressively when she is close to the departure date. Customers are not retargeted for the second time if there was no conversion at the first instance.

At the same time it is crucial that companies don't compromise on the privacy of the consumer while retargeting. It has to be a controlled strategy to ensure that you don't over-sell or reach out on too many channels, creating a lot of noise in the process. Most important, give the power to opt out of ads or emails targeted at the customer.

In other words, let the controls be in the hands of the customer.

Get the cheese, avoid the traps

Avoid these pitfalls when designing a retargeting strategy:

w Unmanaged frequency: Frequency is defined as the average number of times a unique visitor is exposed to an ad over a period of time. If it is too high, it would make a visitor feel overwhelmed

w Using same messaging for retargeting: Showing the same ad over and over again can annoy users exposed to it. One of the advantages of retargeting is that you can personalise the message based on the actions a visitor has taken on the website.

w Improper user segmentation: Ads should be relevant to anyone who sees them. Identify those who have shown interest in the brand and retarget only that segment.

- With inputs from Make My Trip

Three ways to make re-targeting work better: Tripti Lochan
Expert take

Ensuring that consumers return to a brand or third-party website to buy a product or service of interest is the focal point of re-targeting. The reason re-targeting works for the marketer is fairly easy to fathom. First, it is about building a funnel of consumers who have interacted with your brand already and shown interest in a product/service. Second, it ushers these consumers through the conversion funnel by bringing the message back in their view. So re-targeting is integral to the marketing mix. If we can create additional sales at no or little cost, then we are achieving the best possible return on investment (RoI). Having said this, there are some guideposts, which will help us make re-targeting work better:

w Keep in mind that re-targeting is a process and over a period of time you will know which audiences are more likely to convert. To work out optimal re-targeting frequency, find out those consumers within a target audience segment who don't buy and marry them with those who take a longer time to be persuaded to buy. This way you can work out the optimal re-targeting frequency.

w Ensure that you retarget with the right message. If you target consumers with a generic messages, you are likely to waste marketing money. Also, if you are far too specific in retargeting, you risk being seen as a quasi-stalker.

w In e-commerce, it is easier for e-retailers to define their RoI because any retargeting activity can be seamlessly linked back to online sales. However, for marketers who don not have any e-commerce presence, this becomes a little trickier. We have to find ways to close the loop at stores and counters to measure effectiveness of re-targeting

Power-hungry states to drive smart grid business

With states gearing up to modernise power distribution, the is set to undergo an overhaul. At least five major states with highest power consumption in the country are working with private companies to strengthen their involving smart technology.

Conductors and energy meters have registered a tremendous growth in their turnover with 44.9 per cent and 28.2 per cent, respectively, over the past year, according to the annual report by the Indian Electrical and Electronics Manufacturers' Association (IEEMA). The growth of communication cables, largely used in smart grids, has seen a 35.9 per cent the representative body for the Indian power equipment sector.

Uttar Pradesh, Karnataka, Andhra Pradesh, Goa, Gujarat and West Bengal have started addressing the constraints in their grid, entailing technology improvement in the infrastructure.

For instance, India's largest private power transmission company, Sterlite Technologies, is operating in at least five major power consuming states at sub-transmission level. In the past three years, revenue has grown 10 times to Rs 500-600 crore annually. According to the company's executives, it will double every year.

"There is a lot of system improvement taking place to prevent grid failures and tripping. Also, cities are becoming high consumption centres. So, utilities are spending more in making sub-transmission smarter and to upgrade their distribution," said Anand Agarwal, Chief Executive Officer of Sterlite Technolgies.

"There is positive momentum in sub-transmission and distribution of 66 kilovolt products and below. The growth in turnover of MCB (miniature circuit breaker), energy metres and cables is a good sign, as it indicates a vivid pace of development taking place in power and infrastructure sectors of the country," said Vishnu Agarwal, president, IEEMA.

Foreign majors such as ABB, Alstom and Wartsila are now actively working in this space with increased demand from states suffering from huge aggregate technical and commercial (T&C) losses.

"The focus is on grid stability, so most of state electricity boards are inviting a high level of investment in modern technology. This is the next stage of reforms in this sector," said Subir Pal, country marketing head of ABB India.

Average AT&C losses in India are 25 per cent, going up to 35 per cent in tier-II and III cities. While power generation at 295,000 megawatt is enough to meet per capita demand, generators complain of inadequate transmission infrastructure.

"Transmission would go through a transition process. Earlier, we would create bulk power generation and create a mega highway of transmission but tomorrow's issues are different. We'll have flexible lines which give more power, a robust grid with simultaneous communication infra and new-age electronic meters," said Agarwal.

Smart grid as a concept in India is under development, with micro solutions scattered across regions.

Fourteen pilot smart grid projects are under various stages of being bid or awarded.

"For tomorrow's smart cities, some elements are already taking shape. Once state level grids become smart, it leads to a trickle-around effect for strengthening the national grid," said Agarwal. He said the Power Grid was already working on putting optical ground fibres along the national grid.

"As we keep moving through, central grid would become smarter in phases in coming seven-to-eight years," said Agarwal.

  • Smart grid is a modern power grid with demand-supply monitoring and control
  • UP, Karnataka, Andhra Pradesh, Goa, Gujarat and West Bengal strengthening their transmission and distribution
  • Grid stability, smart solutions, reduction of AT&C losses to dive growth
  • Demand for communication & monitoring equipment surging
  • Business of smart grid to double annually

China’s tourists head for Japan, S Korea and Russia

China’s masses of globetrotting tourists are changing their habits amid currency shifts, evolving fashions and upheavals in everything from politics to visa policies — with Japan, South Korea and Russia among the biggest beneficiaries.
Despite historical enmity and persistent political tensions between Beijing and Tokyo, the number of mainland Chinese tourists visiting Japan jumped to 359,000 last month, a year-on-year rise of almost 160 per cent, according to the Japan National Tourism Organisation.

Meanwhile, China overtook Germany in 2014 as the biggest source of foreign tourism to Russia​ with almost 410,000 visits, according to Rostourism.Mainlanders’ visits to South Korea also soared, up 58 per cent to 516,787​ last month against the year before, according to the Korea Tourism Organisation.
“Currency is a big factor in choosing destinations, since Chinese tourists still do a lot of shopping while travelling and they are very price-sensitive,” says Dai Bing, head of the China Tourism Academy in Beijing. “Trips to Japan and Europe have been boosted by their weak currency. We have also noticed a significant growth in tourist numbers to Russia because of currency depreciation.”
Last year the number of outbound tourist departures from mainland China hit 100m for the first time, according to state media.
But almost half of that figure is accounted for by Hong Kong. Visits to the Chinese territory rose 16 per cent last year to 47m, despite street protests in September and October, but began to decline during February’s lunar new year holiday and fell even more steeply this month as anti-mainland sentiment grew, according to the Shanghai Daily.
In recent weeks scuffles have broken out between Hong Kong residents and day-tripping mainland traders who buy goods in the city to sell over the border.
But if fewer mainlanders are heading to Hong Kong to buy everything from milk powder to handbags, the numbers going further afield to shop have risen sharply — and they are coming home with a whole new range of products, from Japanese toilet seats and rice cookers to Korean skin cleansers and hydration creams.
“Chinese tourists now shop for a broader range of products, not just luxury goods but daily necessities”, says Mr Dai. “They no longer buy things to show off their wealth but things that they really need and are worth the price.”
Mr Dai says Hong Kong has lost its advantage over other destinations, and not just because of political tensions or hostility from the locals. “Almost all the middle-class mainlanders who have the money to visit Hong Kong have already done so, while visa policies in other countries have been relaxed for mainlanders,” he says. “The tourism competitiveness of Hong Kong has been weakened.”
Travel experts say Chinese are now travelling for experiences, not just for shopping. Ctrip, the Chinese online travel agent, says twice as many mainlanders will visit Japan for the spring cherry blossom season this year as last, while Australia’s largest provider of camping vans says Chinese rentals have doubled over the past year.
Cultural trends are also playing an increasing role in travel choices — particularly in the growing allure of South Korea.
Choi Kyung-un, a researcher with the Korea Culture and Tourism Institute, says Chinese purchases in the country are driven by trends derived from Korean television, movies and K-pop music. “Chinese people have become more interested in South Korean culture — and the country itself,” she says. Visa procedures have also been simplified.

Sunday, March 29, 2015

Facebook opens Messenger to developers

Facebook is betting that its growing messaging app will be its next big revenue generator, mimicking the model of Asian internet companies such as Tencent’s WeChat by integrating other apps.

Mark Zuckerberg, Facebook founder and chief executive, said the network had become a collection of apps, including Messenger, WhatsApp and Instagram, and it would keep on growing. Facebook has almost 1.4bn users; Messenger has 600m, WhatsApp 700m and Instagram 300m.The world’s largest social network announced it is opening up Facebook Messenger to developers at its F8 conference in San Francisco on Wednesday.
“Facebook evolved in approach to how we connect the world. We used to be this single blue app that did a lot of different things. Now Facebook is a family of apps,” he said.
Facebook follows in the footsteps of Tencent’s WeChat, the Chinese messaging app which integrates a whole range of other functions from calling a cab to making payments.
Facebook also unveiled Messenger for Business which will enable companies to communicate with their customers through the app. It hopes this will move messages with online retailers from the email inbox into Messenger.
Facebook hired David Marcus, former president of PayPal, to head up its Messenger unit last year, with Mr Zuckerberg charging him with finding the best way to monetise the personal messaging app where advertising could be intrusive.
Mr Marcus said Messenger for business would “reintroduce the personal back into shopping” in the “first step on a long journey of reinvention” of how people and businesses communicate. The initial partners include clothing retailers Zulilly and Everlane.
What Mr Marcus does with Messenger will be watched closely for signs of how Facebook could generate revenue from WhatsApp, the fast-growing SMS replacement app which it splashed out $22bn for last year.
Facebook evolved in approach to how we connect the world. We used to be this single blue app that did a lot of different things. Now Facebook is a family of apps
- Mark Zuckerberg
The announcement follows Facebook’s entry into the money transfer market, confirmed last week when it gave details of its peer-to-peer payments function in Facebook Messenger. US users will be able to send money to a Facebook friend through their debit card for free in the coming months.
The F8 conference is Facebook’s annual attempt at building bridges with the developer community, which it wants to use the network as a basis for their apps, keeping users on the site for longer.
As the social network invests further in advertising technology, it is also an opportunity for it to win more customers for the adverts it sells, which now run both on Facebook and across the web.
Facebook also unveiled new tools for developers, including allowing Facebook videos to be embedded on other sites, extending their reach and a new developer kit to help start-ups create apps for the so-called Internet of Things.

Young Americans turn to tea

If the US television sitcom Friends were to be remade today, the characters sitting in the Central Perk cafĂ© would be sipping on mugs of green tea rather than coffee.
According to the National Coffee Association’s latest annual survey, 59 per cent of Americans said they drink a cup of coffee a day, down from 61 per cent in 2014 and 63 per cent in 2013.

This is bad news for coffee traders already fretting about the recent fall in arabica bean prices.
The US is the world’s largest coffee-drinking nation and coffee remains the predominant hot beverage, say analysts. But more people — especially young consumers — are drinking tea, with the total wholesale value of tea sold in the US growing from less than $2bn in 1990 to more than $10bn in 2014.
Peter Goggi, president of the Tea Association of the USA, says the trend seems to be pronounced among those who are aged between 16 and 26. “Clearly what we’re seeing is the message that tea is good for your health has really permeated,” he says.
Tea shops are popping up nationwide, as it emerges as a low-fat beverage of choice. Companies have moved into tea such as Starbucks, which bought speciality company Teavana a few years ago.
Mr Goggi says the trend is “huge” in the US, as tea gains what beverage executives call “share of throat” among consumers. And while iced tea has always dominated the tea category, anecdotal evidence suggests consumption of the hot brew is on the rise.
According to a survey by pollster YouGov in the US, coffee and tea are equally popular among 18- to 29-year-olds, with 42 per cent preferring coffee and 42 per cent opting for tea.
This contrasted with 70 per cent of over-65s preferring coffee to tea (only 21 per cent chose tea), and a 62 per cent coffee bias among 45- to 64-year-olds.
The rising popularity of tea in the US comes as the one of the leading consuming nations of the brew, the UK, is seeing sales decline.
Trade data show that tea imports in the UK have fallen 20 per cent in volume over the past decade compared with a 30 per cent rise in the US. Statistics from Euromonitor, the consumer data group, show that the UK is still one of the largest tea-drinking countries, coming in fifth in terms of per capita consumption.
However, in the UK, people are drinking less tea and turning to coffee. Consumption has fallen steadily from 1.6kg in 2009 per person to 1.4kg in 2014, compared with a rise in coffee usage from 0.9kg to 1.2kg in the same period.
The country’s tea consumption has fallen victim to a change in workplace habits, says one seasoned tea and coffee specialist.
Lionel de Roland-Phillips, who heads Johannesburg-based international tea and coffee trader I & M Smith, says: “Thirty to 40 years ago, every company in the UK had a daily tea trolley and regular tea breaks. That’s all disappeared.”

Global grain trade hits all-time high

The global grain trade rose to an all-time high last year thanks to international buying of barley and sorghum, according to the International Grains Council.
The intergovernmental group said in its latest report that estimates for the world trade of wheat and coarse grains had risen to 309m tonnes, up 1.6 per cent from a year before.  
China has been an active buyer of barley and sorghum, which are cheaper substitutes for feeding livestock.
According to data from the US Department of Agriculture, Chinese imports of sorghum and barley — which have no import quotas, unlike other grains — jumped to 11.5m tonnes in the 2014-15 crop year from 1.7m in 2010-11.
For this crop year the grains trade was expected to remain high, although falling slightly to 304m tonnes, said the IGC.
“Improved local supplies will probably curtail imports in some barley markets,” it said, although a further increase in sorghum shipments was likely, particularly to China.
The IGC also forecast a “sharp fall” in corn production for this year, leading to a 3 per cent fall in the global grains harvest.
Corn output in 2015-16 would fall 5 per cent from a year before to 941m tonnes, it said.
Overall grain output, including wheat, corn and rice, is expected to total 1,937m tonnes.
The numbers came as grains and oilseed prices have plunged amid bumper crops all over the world last year.
Corn fell to a four-year low below $3.20 a bushel in October. Prices have since rebounded but are fluctuating below $4.
Analysts expect the weak prices to result in a fall in acres planted. Rabobank expects US 2015 corn planting to total 89.2m acres, down 3 per cent from a year before.
The USDA reports plantings and inventories next week, which would be “the next critical data point for the market”, said analysts at the bank.
Forecasts for Ukraine, another large corn producer, also point to output falls. The currency has plunged against the dollar, increasing costs of imported seed and fertiliser.
The country’s farmers need financing, which is understood to be scarce on the ground. Rabobank estimates that Ukraine corn acreage this year will fall 5 to 10 per cent, leading to a similar decline in output.
Meanwhile, dryness in Brazil could also affect corn production there.
The IGC forecasts consumption of the grain to fall 1.4 per cent given production declines, while stocks are expected to decline by more than 10 per cent.

Record India spectrum auction set to spur telecoms consolidation

 India’s mobile market is full of large numbers, from 850m active users to annual handset sales of 200m and revenues of roughly $30bn. Now there is one more: the record $18bn raised by India’s government in its latest round of spectrum auctions, which concluded last week.
The bids came in over a 19-day, 115-round process that is set to redefine the sector’s competitive landscape. What is less clear is whether the auction represents a new dawn for India’s battered telecoms industry, and in turn whether it can recover its promise as one of the world’s most exciting and fastest-growing markets. 

Vodafone’s chief executive in India Marten Pieters does not seem to think so, writing a damning op-ed in the country’s most-read business newspaper the day after the auction concluded, claiming the contest left operators saddled with debt and unable to invest in new services.
“The government has taken too much money and has taken it too early,” he wrote. “The industry should first have been allowed to do what it is supposed to do: deliver broadband and connectivity, before being charged so heavily.”
The remarks were valedictory: the refreshingly outspoken Mr Pieters is retiring soon. But many in the industry agree in private, worrying that India will struggle to fund badly needed infrastructure to improve take-up of data services, which have so far been slow to really get going.
In public, however, other operators were more circumspect, perhaps because they broadly got what they wanted from the auction — namely retaining existing spectrum licences — even if they had to pay as much as double the base price to do so.
The largest outlay came from Idea Cellular, India’s third-ranked telco by revenue and owned by the Aditya Birla conglomerate. Figures released at the auction’s close showed that the company had shelled out $4.8bn, sending its shares down 4.6 per cent on Friday and erasing some of the gains made while the auction was in process.
Market leaders Bharti Airtel and Vodafone were the next biggest spenders, while billionaire Mukesh Ambani’s Reliance Jio, due to launch later this year, came in fourth, investing $1.6bn.
Not everyone agrees with Mr Pieters’ dark prognosis.
Deepti Chaturvedi at CLSA, for example, says the auction did not reach “irrational levels”, with prices paid by top operators representing under two years of revenues.
Yet even while operators do not have to pay the full costs up front, such large figures are set to add extra pressure to balance sheets, sending the industry’s existing $40bn net debt burden up about 50 per cent, according to KPMG.
Chart: India spectrum payments
Many players may now look to increase prices to recoup their investments, a potentially painful experience in a market where customers in the country of 1.3bn people have grown used to ultra-cheap calls.
Ravi Shankar Prasad, India’s telecoms minister, has been busy offering back-of-the-envelope calculations suggesting tariffs will not have to rise beyond 1.3 paisa (100 paisa are in 1 rupee) per minute as a direct result of the auction, a fraction of 1 US cent and a tiny sum even by Indian standards.
Might much larger price increases be possible? With about eight serious operators, India’s telco space remains fragmented compared with international markets. But consolidation by stealth has taken place: roughly three-quarters of revenues are controlled by the top three operators, says Ms Chaturvedi.
That would suggest significant pricing power for those companies, but their ability to lean on their customers may be limited by competition, especially that which is shortly to arrive in the form of Mr Ambani, India’s richest man.
The dominance of India’s big three “should lead to decreasing competitive intensity and upward movement in price levels,” says Morningstar’s Piyush Jain. “However, the impending entry of Reliance Jio is more than likely to keep a lid on the prices.”
Instead, many industry watchers think India’s most expensive auction may prompt more formal consolidation, especially if nagging regulatory concerns around spectrum transfers between companies can be cleared up.
“Most markets globally have consolidated down to three or four players. The intrinsic driver of this is that it’s a scale business,” says Dunigan O’Keeffe, a partner with Bain in Mumbai.
India’s three leading telcos, plus cash-rich newcomer Reliance Jio, accounted for nearly 85 per cent of last week’s winning bids. So whether a long-awaited round of mergers happens or not, argues Mr O’Keeffe, the auctions have only served to confirm that the future of Indian telecoms already seems to be a four-horse race.

Wednesday, March 25, 2015

3G Capital, Berkshire to Buy Kraft Foods, Merge It With Heinz

3G Capital, the Brazilian private-equity firm, agreed to acquire Kraft Foods Group Inc. in partnership with Warren Buffett’s Berkshire Hathaway Inc. and merge it with ketchup maker H.J. Heinz.
Kraft shareholders will receive 49 percent of the stock in the combined company, plus a special cash dividend of $16.50 a share, the companies said in a statement Wednesday. Berkshire and 3G will invest another $10 billion in the combined company, according to the statement.
“This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” Buffett said in the statement. “I’m excited by the opportunities for what this new combined organization will achieve.”
The current Kraft was created in a spinoff from Mondelez International Inc. in October 2012. Mondelez inherited the company’s overseas snack businesses, giving it bigger growth opportunities internationally. Kraft, meanwhile, is focused on the U.S. While Kraft has a stable of household brands, including Velveeta and Philadelphia Cream Cheese, the company has struggled to reignite sales growth in a mature market.
Kraft closed at $61.33 in New York trading Tuesday giving the company a market value of about $36 billion.
Kraft management also has been in turmoil in recent months. Chief Executive Officer Tony Vernon stepped down in December, with Chairman John Cahill taking over the job. Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis, speculated at the time that Vernon was pushed out due to poor performance. The company’s top finance and marketing executives also left in February, and Kraft added the role of chief operating officer.

Younger Consumers

Younger consumers in the U.S. have shown a preference for natural and organic ingredients -- something Northfield, Illinois-based Kraft has had to adjust to. In addition, rising commodity prices have squeezed the company, according to Yarbrough.
The company also had an embarrassing product recall this month after customers found metal pieces in its hallmark Macaroni and Cheese. Kraft recalled 6.5 million boxes of the product.
Berkshire Hathaway teamed up with 3G Capital two years ago to acquire Heinz and then helped finance 3G-owned Burger King Worldwide Inc.’s purchase of Canadian coffee-and-doughnut chain Tim Hortons Inc.
Since those deals, speculation has simmered about what they’ll buy next -- be it Kellogg Co., Kraft or Mondelez. Buffett stoked the conversation with his annual letter to Berkshire shareholders, saying he expects to “partner with 3G in more activities.”
Berkshire has been a longtime investor in Kraft, tracing back to a stake in its predecessor company, part of Buffett’s investments in well-known consumer businesses. Buffett has acquired and held stakes in a range of dominant consumer brands, including Coca-Cola Co. The billionaire began paring his stake in Kraft Foods Inc. in 2010 after disagreeing with Kraft’s decision to sell its pizza brands to help pay for a takeover of Cadbury Plc.
Buffett criticized then-Kraft CEO Irene Rosenfeld for the Cadbury transaction and the sale of the pizza businesses. “Both deals were dumb,” he told Berkshire investors at the time. Berkshire was the biggest shareholder of Kraft with a stake valued at $3.3 billion at the end of December 2010.
Buffett looks for targets that have strong brands, simple businesses and consistent earnings power.
3G, co-founded by Brazilian billionaire Jorge Paulo Lemann, is known for squeezing costs out of its acquisitions and cutting jobs. Kraft had 22,100 employees at the end of last year, though that number was down almost 1,000 from two years earlier.
3G disclosed in a November regulatory filing that it is raising a fourth special situations fund, without identifying the fund’s size. A person with knowledge of the matter said earlier this year it will be about $5 billion.
Bankers from Lazard Ltd. advised Heinz, while Cravath, Swaine & Moore and Kirkland and Ellis acted as legal advisors. Centerview Partners LLC served as adviser for Kraft, and Sullivan & Cromwell acted as legal adviser.

Tuesday, March 24, 2015

Beijing to Shut All Major Coal Power Plants to Cut Pollution

Beijing, where pollution averaged more than twice China’s national standard last year, will close the last of its four major coal-fired power plants next year.
The capital city will shutter China Huaneng Group Corp.’s 845-megawatt power plant in 2016, after last week closing plants owned by Guohua Electric Power Corp. and Beijing Energy Investment Holding Co., according to a statement Monday on the website of the city’s economic planning agency. A fourth major power plant, owned by China Datang Corp., was shut last year.
The facilities will be replaced by four gas-fired stations with capacity to supply 2.6 times more electricity than the coal plants.
The closures are part of a broader trend in China, which is the world’s biggest carbon emitter. Facing pressure at home and abroad, policy makers are racing to address the environmental damage seen as a byproduct of breakneck economic growth. Beijing plans to cut annual coal consumption by 13 million metric tons by 2017 from the 2012 level in a bid to slash the concentration of pollutants.
Shutting all the major coal power plants in the city, equivalent to reducing annual coal use by 9.2 million metric tons, is estimated to cut carbon emissions of about 30 million tons, said Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd., a London-based research company with a focus on China.

‘Clear Impact’

“Most pollutants come from burning coal, so the closure will have a clear impact to reduce emissions,” Tian said. “The replacement with natural gas will be much cleaner with less pollution, though with a bit higher cost.”
Nationally, China planned to close more than 2,000 smaller coal mines from 2013 to the end of this year, Song Yuanming, vice chief of the State Administration of Coal Mine Safety, said at a news conference in July.
Coal is the most carbon-intensive fossil fuel and the leading source of carbon-dioxide emissions.
In the 10 years to 2013, coal demand globally grew by more than 50 percent, meeting almost half of the increase in the world’s total primary energy needs, the International Energy Agency said in its annual energy outlook report last year. China was the principal source of the surge, the IEA said.

Broader Trend

Closing coal-fired power plants is seen as a critical step in addressing pollution in China, which gets about 64 percent of the primary energy it uses from the fossil fuel. Coal accounts for about 30 percent of the U.S.’s electricity mix, while gas comprises 42 percent, according to Bloomberg New Energy Finance data.
Coal use is declining or slowing in China as policy makers encourage broader use of hydroelectric power, solar and wind. The nation is also pushing to restart its nuclear power program in a bid to clear the skies. China’s electricity consumption last year grew at its slowest pace in 16 years, according to data from the China Electricity Council.
The nation’s emissions of carbon dioxide fell 2 percent last year from 2013, the first decline since 2001, signaling that efforts to control pollution are gaining traction, according to a Bloomberg New Energy Finance estimate based on preliminary energy demand data from China’s National Bureau of Statistics.
Air pollution has attracted more public attention in the past few years as heavy smog envelops swathes of the nation including Beijing and Shanghai. About 90 percent of the 161 cities whose air quality was monitored in 2014 failed to meet official standards, according to a report by China’s National Bureau of Statistics earlier this month.
The level of PM2.5, the small particles that pose the greatest risk to human health, averaged 85.9 micrograms per cubic meter last year in the capital, compared with the national standard of 35.
The city also aims to take other measures such as closing polluted companies and cutting cement production capacity to clear the air this year, according to the Municipal Environmental Protection Bureau.