Tropicana gets squeezed

Working in brand committee has inspired me to go ahead and give an insight about "Brand".
This article will give you an insight about pepsico's brand, tropicana.

Go ahead and have a ride about the journey of delicious fruit juice .....Tropicana.

The recent hubbub over the Tropicana packaging change shines a light on several marketing myths. Take note so you don’t make the same mistakes with your brand.Tropicana brand background :

Tropicana is a 60-year-old brand. Originally the company sold gift boxes of oranges, but looking for something to do with the smaller fruit that went to waste they got into the frozen concentrate business. But that category was well established and Tropicana was just another brand.
The key event that really built the Tropicana brand came in 1954. Not satisfied with being just another player in the concentrate category, the company pioneered a flash pasteurization method that raised the temperature of the freshly squeezed orange juice for a very short time, extending the juice’s shelf life to three months while maintaining its flavor. Tropicana then dropped the frozen concentrate product and focused entirely on the fresh, "not-from-concentrate" product.
Being first in a new category is the key to success. Tropicana got into the mind with a great name and built a new category. Tropicana owns not-from-concentrate in the mind and is the "real thing" in fresh orange juice. With the success of Tropicana, eventually the majority of the market for orange juice moved from frozen to fresh.
Today, Tropicana remains the dominant brand and the world leader in chilled orange juice. Since the original entrepreneur sold the company in the 1970’s, there have been several owners. Since 1998, PepsiCo has owned the brand.
Last month, PepsiCo introduced a major overhaul of the Tropicana packaging. Which was done after PepsiCo Chairman-CEO Indra Nooyi announced the company would embark on a sweeping revamp of all its brands. To be changed: "every aspect of the brand proposition: how they look, how they’re packaged, how they will be merchandised on the shelves and how they connect with consumers."
What? Is she crazy? Apparently. The last thing PepsiCo should do is totally redo all of its brands. The new Pepsi logo that is a little too close to Obama’s logo hasn’t been very well received. And results for Tropicana have been disastrous.
In just a few short weeks after the packaging change, the company bowed to consumer outrage and scrapped the Tropicana changes. The previous packaging will be brought back and Arnell will finally be humbled.
Unfortunately, the company will continue the advertising campaign by Arnell that accompanied the new packaging look. The tagline is "Squeeze. It’s a natural." Squeeze? That is not language that consumers would ever use. Tropicana should have remained focused on fresh not from concentrate orange juice.

"Squeeze" is a typical campaign that left-brain management loves. Management values cleverness in advertising. Advertising campaigns that are clever and new appeal to left-brainers. You see squeeze is used as a double-entendre in the ads. The advertisement are filled with people hugging. Peter Arnell says the campaign is all about love. Love? The worst part is there is not an orange in sight in any of the ads. How clever indeed! Reminds me of the Saturn ads with no cars.
Right-brain marketing values credentials in advertising. Advertising that is relevant, familiar and consistent is what works best at reinforcing a brand in the consumer’s mind.
Now that you know the background, let’s debunk some enduring marketing myths:
It is the product not the brand that consumers care about. Wrong.
Consumers care about brands. The brand is what gives the product its authenticity and credibility. The brand includes everything from the name, the look, the logo, the color and the package.
When you change the look of the packaging, you lose some of the power of the brand in the mind. It no longer looks authentic. And worse, consumers think you have also changed the contents.
"We underestimated the deep emotional bond consumers had with the original packaging," said the President of Tropicana. Consumers weren’t attached to the packaging! Consumers are attached to the Tropicana brand. And it didn't feel like their Tropicana brand when you changed the packaging. The packaging is the visual that signals the brand’s familiarity in the mind.
Suppose Coca-Cola changed its classic bottle. It would be a disaster. In fact, Coca-Cola has been aggressively increasing its use of that bottle imagery on cans, cups, and billboards to reinforce its brand. Good move.
The verbal is more powerful than the visual. Wrong.
Both are necessary and should complement each other. One of the worst things about the Tropicana redesign was the loss of the iconic orange and straw. It was a powerful visual that reinforced the fresh, not-from-concentrate idea in the mind. Instead they used the words “100% orange” on the containers. Bad move. But typical of left-brain management that thinks verbally rather than visually.
The strongest brands have powerful visuals that reinforce the brands in the mind.
Marlboro – Cowboys
KFC –Colonel Sanders
Pizza Hut – Red Roof
AT&T - globe
McDonald's - golden arches
Brands need constant change to keep up with consumers. Wrong.
Strong brands should not make radical changes. Leading brands in particular should be wary of change.
(Of course, if nobody knows your brand, you can change it as much as you want.)
Occasionally (like once a decade or two) brands may need some slight changes and updates. But only very infrequently and very subtly. The changes should be ones that few people even notice.
And sometimes it is a good idea not to change at all. Jack Daniels is proud of the fact it never changes. In fact, it is the theme of its advertising. “Not subject to change, not now, not ever.”
If your brand is facing an uncertain future because of a declining category, it might be better to launch a new brand. You can’t change a brand radically in the mind anyway. Think Kodak.
Here are some classic logo changes that kept the brand’s authenticity but made slight changes to keep the look current.

SANTOOR OVERTAKES LUX : WIPRO V/S HUL

When one talks about 'Wipro', the first thing people think of is about their IT business. The fact is that IT is a relatively new business for Wipro and they have been into others businesses which are much older, like lighting and consumer care . In fact they started their business in the vegetable oil business. These older divisions have for a long time been under the shadow of their larger younger cousin software, but of late the consumer business is coming to age, last three years it is one the fastest growing FMCG companies in the country.The flagship brand of the consumer care division is 'Santoor'. Since its launch in 1986 the brand has been doing quite well in the fiercely competitive soap business dominated by HUL. The industry estimates the brand to be worth more than Rs 500 crore. But the big news is that it has become No 2 brand in the south edging out Lux. (It is the largest selling brand of soap in Andhra). Nielsen data shows that it has 15.6% market share in south versus 12.4% of Lux. The fact that it has overtaken Lux is something which is commendable, looking at the history and support which a brand like Lux receives with Priyanka chopra and Aishwarya Rai Bachchan being the brand ambassadors for Lux. Wipro plans to leverage the brand by extending the brand into new categories like creams, moisturizers, body sprays and washes, after the relaunch of the brand.The company website describes the brand as "a truly unique soap that combines the goodness of natural ingredients - Sandal, Turmeric and natural Skin Softeners". The long standing positioning of the brand has been - a skin that is so healthy and beautiful, it lies about your actual age !. The product is available in three variants, Santoor (Sandal & Turmeric), Santoor White (Sandal & Almond milk) and Santoor Chandan. They have extended the brand into talc, face wash and fairness cream.For me santoor is an addition to my list of sucessful Indian brands which have done well against competition from much larger multinational companies. And as a marketer it is obviously interesting to find out more about how the brand become number two overtaking Lux which obviously has spending more money on ad and promotions. A successful case of low cost marketing....

ITC : Fiama Di Wills

Ad-Analysis:ITC has prided itself on breaking the clutter with its different approaches towards advertising in Sunfeast and then Bingo. But it has gone for a safe bet on Fiama Di Wills.The advertisement looks more like a Pantene TV ad rather than a new entrant.Description:Cigarette and FMCG major, ITC has launched its first mass personal care offering, a high-end shampoo. After a year of speculation, ITC has launched its first mass market personal care product. ITC 's shampoo brand, Fiama di Wills is in the premium segment, that’s growing faster at 44%, compared to 21% for the overall market.Interestingly, ITC didn’t introduce a new brand name for its shampoo. Instead it has opted for a brand extension of its two year old, super premium range of personal care products, Essenza di Wills. But unlike Essenza that was available at ITC hotels and Wills Lifestyle stores, Fiama di Wills shampoos will be stocked at retail stores across India. The product will be available at Rs 99 for a 200 ml bottle.On the pricing front, ITC is taking established players like HUL and P&G head on.Expanding its range of personal care products, and following the successful launch of Fiama Di Wills Shampoos, ITC presented yet another world class range of products for the Indian consumer through its new range of Fiama Di Wills Shower Gels.Fiama Di Wills’ new premium range offers three transparent shower gels with suspended beads. Each variant provides a specific benefit to the consumer:Shampoo Variants: Silky Strong,Everyday Mild, Aqua Balance, and Volume Boost.Continuing with its tradition of offering a superior product and brand experience to the modern Indian consumer, ITC also launched today the Superia range of soaps and shampoos in select markets .Superia offers a range of four soap variants and two shampoo variants with a range benefit of Glowing skin and Shiny hair. Each of the variants have been designed to deliver specific benefits to the various consumer needs.SOAPS: For Glowing Skin1. Fragrant Flower with the fragrance of Rose & Lavender Oil2. Soft Sandal with the fragrance of Sandal & Almond Oil3. Natural Glow with Neem & Coconut Oils4. Healthy Glow with Orange OilSHAMPOOS: For Shiny Hair1. Shiny Black with Triple Conditioners and the natural goodness of Hibiscus & Brahmi extracts2. Vibrant Green with Triple Conditioners and the natural goodness of Amla &Arnica extractsSuperia soaps will be available in sizes ranging from 50g to 125g, and the shampoos in 125 ml and 55 ml.

Distribution makes the change : MARICO

Marico's distribution width and penetration is acknowledged as one of the best in the industry and is a leverageable strength.Every month, 56 million consumer packs are sold to about 1.8 million households through 1.6 million retail outlets spread across the country.Marico's distribution network covers almost every Indian town with a population of over 20,000. The chart below depicts Marico's distribution network in the urban & rural markets:Thus, 1 out of every 10 Indians is a Marico consumer.Distribution Alliance:Our distribution strength has been recognised by Indo Nissin Foods Ltd. through their association with us for the distribution of Top Ramen products on a national basis.Rural Sales & Distribution: Marico's parallel rural sales and distribution network ranks among the top three in the industry and contributes 24% to the company's topline.Their infrastructure comprises 882 direct distributors, 153 super distributors, catering to 2393 small stockists and 4523 van markets. A dedicated team of Territory Sales Executives and Pilot Sales Representatives distribute Marico's as well as alliance brands through this vibrant network. Sales Capacity:They have made significant progress in the areas that enhance sales capacity. Quality of our distributors Quality and number of the distributor field force Upgradation in the role of the company's front-line sales force. Technology (IT) in Sales: Marico has been making investments in IT to ensure: Supply Chain efficienciesAvailability of the SKU at the right distributor point,at the right time in right quantitiesTimely availability and reliability of SalesMIS, which help in taking prudent decisions on a real time basis. In order to reap maximum benefits from its sales and distribution network, Marico embarked on an internet-enabled application - MI-Net - to establish a network between Marico and its distributors through a web interface. This project is aimed at providing real time information on the status of various business operations between Marico and its distributors. This initiative is expected to provide business benefits in the form of increased penetration by the sales force, reduced communication costs, reduced working capital requirements, etc. The project went live on April 1, 2002 with connectivity to 330 urban distributors, who together account for about 3/4th of Marico's domestic turnover. The business benefits are expected to accrue over a period of time.

New Mantra for success : " Differentiate or Die "

Experience the difference !!! Exactly, that is what marketing is all about.It is not the product which is sold but the better idea.If the idea! is better and different than sky would be the limit.It determines, you should differentiate or die....!!In this competitive world there would be many players in the market who would be fighting for their bread and butter but this can be taken as a warning either to differentiate their product and services from their competitors or they should die.Market does not have enough number of vaccancies for same players only stronger and innovative firms would survive...Now,What would the company prefer, ofcourse differentiation aspect which would be accepted in the market....we all know customer is the king and to satisfy this king companies need to offer pure value for money and something different and innovative...A new mantra for success..differentiate your product from your competitors, get the better edge over them.

PRICING : "An Important Strategy" Inspired by Prof.Javed.

Gone are those days of barter system, as the need arised for calculating the the actual value of product in quantitative terms rather than qualitative terms.Something was always missing to justify the value of the product and than "Price" came into picture.Price is real worth of the product or value for money.

Let me take you all to a real ride : Put the customers specs and have a glance.......

I went to a ezone in treasure island in indore...I thought of purchasing a plasma T.V. of sony but as I realised by having a glance at price tag I was shocked it was 164000 indian rupess.

But the sensatious experience forced to buy atleast something,as it was a diwali time various promotional offers were going on then I thought of purchasing a micro-wave-owen but as soon as I saw the price tag it was of LG worth rupees 9000 with some special offer, coupons were offered on its purchase.

Soon I realised to go for the hand mixer for my mom and I approached the shelves where it was kept and suddenly I felt this is actually what I can purchase, price was just rupees 2999 only.

At this particular moment my internal stimuli forced me to buy mixer as stimuli responded I purchased it and felt very happy that purchasing from treasure island is cheaper than purchasing from local electronic store as the mixer's price at local stores was whooping, ........................rupess 3000, and I got it for just rupees 2999 only.

So the pricing strategies plays a very vital role in moving the products from the shelves.Before pricing the product company should consider various factors :Govt. regulations,target consumer,competitors and many more.

There are many ways to price a product. Let's have a look at some of them and try to understand the best strategy in various situations.

Premium Pricing.
Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Sony, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.
The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Economy Pricing.
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.
Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing strategies. They form the bases for the setting the price. However there are other important approaches to pricing.

Psychological Pricing.
This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 rupees not 100 rupees.

Product Line Pricing.
Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be rupees 100, wash and wax rupess 400, and the whole package rupees 500.

Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing
Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.
Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.
Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.
Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.
This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Brand Resonance : A Magic !!

The first level of the pyramid deals with establishing the identity of the brand. Keller the world renowned marketing guru... suggests a single building block for this phase and terms it brand salience. In building a highly salient brand, he argues that it is important that awareness campaigns not only build depth (ensuring that a brand will be remembered and the ease with which it is) but also breadth (the range of situations in which the brand comes to mind as something that should be purchased or used).

A Live Example : Have a LooK At.....

Richard Branson’s Virgin brand has achieved depth of awareness and is easily recognized and recalled in South Africa. The challenge facing the brand is to make consumers aware about its breadth and diversity of offerings including air travel, game lodges, finance, health clubs, drinks, and mobile communication. Follow the Virgin brand around the globe, and that challenge stretches to books, trains, cosmetics, jewellery, wines, radio, and even space flights in the next few years.
The second layer of the pyramid deals with giving meaning to the brand as two building blocks: brand performance and brand imagery. Brand performance is the way the product or service attempts to meet the consumer’s functional needs. Brand performance also has a major influence on how consumers experience a brand as well as what the brand owner and others say about the brand.
Delivering a product or service that meets and, hopefully, exceeds consumer needs and wants is a prerequisite for successful brand building. In communicating brand performance, marketing guru identifies five areas that need to be communicated: primary ingredients and supplementary features; product reliability, durability and serviceability; service effectiveness, efficiency and empathy; style and design; and price
Brand imagery deals with the way in which the brand attempts to meet customers’ psychological and social needs. Brand imagery is the intangible aspects of a brand that consumers pick up because it fits their demographic profile (such as age or income) or has psychological appeal in that it matches their outlook on life (conservative, traditional, liberal, creative,etc). Brand imagery is also formed by associations of usage (at work or home) or via personality traits (honest, lively, competent, rugged, etc).

The Magic oof Advertising Begins :
It is in this building block that advertising plays a major role in shaping the image of the brand, although word-of-mouth recommendations and a consumer’s own experience are equally important. However brand imagery is built, it is important that brand managers and strategists craft strong, favourable and unique associations for a brand.
Luxury cars, BMW in particular, are brands that work hard to communicate brand performance and imagery. Sales people, brochures, Internet sites and car journal reviews will all tell you about the performance of a BMW.Even I as a student, have come across several magazines just pick up any of them like top speed....you will get it. The delivery of this type of communication has largely remained consistent, only being updated at regular intervals to reflect the specifications of new models. What has changed is the imagery used to communicate the brand from the power-impregnated advertisements of a BMW outrunning a land speed rocket car to the more esoteric imagery of innovative kinetic sculptures being powered by the wind (we all saw delhi hit & run cases where BMW was involved-----great engeneering a powerfull machine). The change in advertising imagery reflects a shift by the German automaker away from targeting the affluent automobile enthusiast to targeting the “ideas class”, a market segment which comprises up-market buyers more interested in design and innovation than brute performance.
Having dealt with brand identity and meaning, we move upwards to the third tier of the pyramid to develop a consumer response to the brand. M.G, I guess you all got confused well its not Mahatma Gandhi but Marketing Guru proposes two building blocks for this tier, namely brand judgments and brand feelings. Judgments about a brand emerge from a consumer pulling together different performance and imagery associations. These judgments combine into a consumer’s opinion of a brand and whilst there are multiple judgments that an individual can make, M.G believes therefore that companies must pay attention to their brand-building efforts. They are the perceived quality of the brand; brand credibility (the extent to which the brand is perceived as having expertise, being trustworthy and likable); brand consideration (the brand must be relevant to the consumer so that they are likely to purchase or use it); and brand superiority (the extent to which consumers view the brand as being unique and better than other brands).
Maintaining brand judgement is particularly important when a company embarks on brand extension as what counted as quality, credibility, consideration and superiority in one market can evaporate as the brand extends its product line and/or market reach. Baby food manufacturer Gerber tried to enter the adult food market in the 1970s by producing small helpings of fruits, vegetables, desserts, etc in the same jars it used for infant food. Unable to garner credibility (adult food is very different to baby food), consideration (how many adults would think about buying food for themselves that is packaged in a well-established baby-food jar) and superiority (many other brands specialize in adult food) for its new product range, Gerber quickly ditched which was widely regarded as a spectacular failure.
Whereas brand judgments can be fairly logical, brand feelings are consumers’ emotional responses to the brand. M.G. identifies six brand-building feelings that he regards as important emotions that a consumer can have towards a brand, namely warmth, fun, excitement, security, social approval and self-respect.
The first three are experiential and immediate and increase in the level of intensity whilst the latter three are private and enduring and increase in the level of gravity. These responses are likely to come together in different combinations for individual consumers and the distinct brands they are relating to.
What is important for the brand manager and strategist is that responses are positive and come to mind when a consumer thinks about the brand.
Telecommunication companies often depict the emotional rewards of making a call such as me here in campus in maharashtra bringing joy to my geographically-distant parents sitting in indore by speaking to them on the phone. Fun is a major component of brand communication with well-known South African examples such as Castrol’s “Boet and Swaer” and “Mad About Oil” campaigns and Vodacom’s “Yebo Gogo” and “Meerkat” campaign. Volvo plays on the brand feeling of security by emphasizing the safety of its cars(now it has launched a new accident free car). Investment management firm Allan Gray also targets the feeling of security by emphasizing the long-term performance of the investments it makes on behalf of its clients.
The final tier of the pyramid deals with the consumer’s relationship with the brand and here M.G. introduces the sixth building block which he calls brand resonance. Resonance is characterized by the intensity of the psychological bond that customers have with the brand and their level of engagement with the brand. The challenge for the brand manager and strategist is to develop the bond and increase the number of interactions (repeat purchases of a product or service) through the development of marketing programmes that fully satisfy all the customers’ needs, provides them with a sense of community built around the brand and even empowers them to act as brand champions.
Along with Apple, Harley-Davidson is a brand that succeeds in creating a strong and lasting bond with its customers. The motorcycle manufacturer’s primary vehicle for achieving this is the global Harley Owners Group, known affectionately as HOG, which organizes regular events for its more than 600,000 members. Executive from the company often join these rides, which can number up to 25,000 riders, which successfully reinforce the brand’s message of freedom, individualism, self-expression, etc as well as building the sense of community that the brand creates. Harley-Davidson customer are famously loyal with over 45 percent of owners having previously owned one of the brand’s distinctive motorcycles.

In wrapping up this review of the pyramid model, it is useful to heed Mr.Marketing Guru -Keller's advice not to take shortcuts: “The length of time to build a strong brand will therefore be directly proportional to the amount of time it takes to create sufficient awareness and understanding so that firmly held and felt beliefs and attitudes about the brand are formed that can serve as the foundation for brand equity.”

The Race For Chair Is on.......!!!!

With the general election clouds gathering in the horizon, all political parties and their leaders are gearing up for the Mega War infact I should say its "MEGA CHAIR WAR". Historically the role of marketing in an election campaign in India has been quite minimal, especially when seen in the context of the US Presidential elections. But the advantages of the leveraging social media and technology to connect directly with people has not gone unnoticed and our political parties , their leaders are trying to ride on the technology wave especially to connect with the 100 million first-time voters who would start voting from this general election.
Though the attempt to connect to people directly is a very good idea on paper, but how does it get implemented is some thing which needs to be seen. All across the internet on most of the websites that one would visit regularly one can see the campaign of L K Adva
ni BJP’s Prime Ministerial candidate . I was tempted to write about it after I got a call from IIM indore marketing professor almost a 3 days back. But the fact is that wherever you go on the net , blogs, websites you have the banner ads of L K Advani's election campaign floating, estimated at 200 websites.Don't you people think so the cost involved in it..........getting space on net that to on almost each website.How much funds would have messed up in this?But who cares afterall CHAIR IS PRIORITY.BJP government has alloted rupees 250 crore for their campaign.
So it can be estimated how costly it is to target mass audience and go for marketing.

Race for chair still continues......................................................

INDIAN RETAIL MARKET TO TOUCH 18.1 TRILLION BY 2010..!!

The country’s retail market will grow to Rs.18.1 trillion ($395 billion) by 2010 as organised retail is expected to be 13 percent of the total market, according to a report.”The organised retail market, which is expected to grow at 45 percent, will be worth Rs.230,000 crore (Rs.2.3 trillion) by 2012,” said the India Retail Report 2009, released by the New Delhi-based research group Images F&R Research.“This will require investments in real estate alone of over $50 billion, much of which will be FDI spurring the balance of the trade,” it added.“The consumer spending in India has increased by an impressive 75 percent in the last four years and will quadruple in the next 20 years, even when this quarter has seen some decline in spending on account of inflation,” the report added.This will trigger the growth of this sector.Food and grocery dominated the retail segment with 59.5 percent share valued at Rs.7.92 trillion, followed by clothing and accessories with a 9.9 percent share at Rs.1.31 trillion.However, the report said the market for specialised retail, especially the luxury retail, will grow significantly in the next few years.“Even when the metros and tier II cities will get the major share of organised retail, emerging cities like Chandigarh and Jaipur, which have a growing cosmopolitan population and high purchasing power, will emerge as new centres for the global luxury brands,” it added.The report has contributions from over 100 think tanks in the retail industry.“However, to enable this sector to realise its full potential FDI restrictions will have to be relaxed further and retail rentals will need to go some degree of rationalisation,” it added.Commenting on the report, Commerce and Industry Minister Kamal Nath said: “India retail model needs to go beyond the urban shopping malls and create an attractive retail environment where a large number of rural population can also find products and services.”

SLOWING ECONOMY MAY OFFER RESPITE TO RETAIL SECTOR..!!

Inflation may be eating into consumers’ wallets, but domestic retailers are not giving up just yet,as it has came down . Retail rentals are showing signs of fatigue after soaring multi-fold until recently. A slowing economy, hardened home loan rates and liquidity crunch indicate rental rates will soon fall in a manageable range. As of now, rentals have dropped by 5-10 % and are set to see a further fall of 15-20 % in the next few months. Even older deals are being renegotiated towards lesser per sq foot cost. Currently, lease rentals account for 15-25 % of retailers’ revenues in India and constitute the second-largest cost head, next only to merchandise cost. Salaries & wages and energy bills are next in line. Given the fact that operating profits of major retailers range from 5-10 % of their net sales, small savings on lease rentals can have a dramatic influence on their profitability. For instance, Pantaloon Retail’s rental cost for FY07 was Rs 209 crore, which was 6% of its net sales. The 80% growth in rental costs, compared to the 73% increase in sales, has hit operating margins. Though a part of the rise in rentals can be attributed to the company’s rapid expansion, the effect of soaring realty prices last year can’t be ignored. However, one cannot help miss the savings in the total operating cost. Even if we were to consider that rentals will stabilise at current levels, it will help Pantaloon Retail’s operating margins as the company continues to grow its revenues.
The scenario is quite similar for Shopper’s Stop with rentals bills at Rs 101 crore for FY08, comprising 8% of the company’s turnover. Here also, the rental growth has doubled vis-a-vis the increase in retail sales. If rentals were to decline by an average of 10% at the current sales level, the company would have ended FY08 with a positive bottomline. EMERGING TREND: The domestic retail industry is following in the footsteps of its international counterparts. Having attained a decent geographic reach, players are experimenting with various formats to suit their respective business models. This is done keeping in mind the needs of the catchment area as well. Another important trend that has emerged from this drop in rentals is the co-existence of the revenue-sharing model in the domestic retail sector. In this system, there is no fixed monthly rent. Instead, there is a minimum guarantee amount, plus a revenue-sharing percentage between the landlord and the retailer. For instance, a typical co-existence deal will consist of the minimum guarantee of Rs 20-25 per month per sq ft with about 5% of revenue, compared to the Rs 70-110 per month per sq ft rent for an anchor tenant.
In the current scenario, this model works well for the bigger players rather than the smaller players, as it is difficult to keep track of their ,sales. Big Bazaar, Shopper’s Stop, Provogue and Vishal Retail are going ahead with their expansions as planned. Some of these players have already worked out deals on a revenue-sharing basis. Online retailing or e-tailing is another format which is fast catching up with the conventional brick and mortar form of retailing. The fact that products can be delivered anywhere makes it a seamless form of shopping. Retailing through mobile phones, though a very recent phenomenon, is also catching up. GLOBAL VS INDIAN: Typically, international retailers pay just 3-4 % of their sales as rentals. Moreover, it is during similar downturns that global retail majors like Wal-Mart , Carrefour and Tesco increased their store presence, as rentals were low. Till not too long ago, real estate developers in India were not ready to negotiate prices, as there was ample demand for any mall located in a good catchment area. As retailers went on an expansion spree to attain geographical reach, it was a seller’s market. However , things have changed now. Not only have these organised retailers realised the importance of a sizeable reach, but they also know that good mallmanagement is important for a thriving business. Internationally, good facility management seems to be the key differentiating factor for the success of any mall. In India, too, it is now being recognised as an important deciding factor. As they say ‘customer is king’ ; it will be the customers who can make or break this entire euphoria about the retail industry’s success.