Deep Discounts or Deep Distress?

DeepDiscounts1

I am as usual caught in a conundrum when I read some stories. On the 15th of August National Restaurant Association of India (NRAI) launched a logout campaign against the deep discount coupons that are offered by these five aggregators Zomato, EazyDinerNearbuyMagicPin and DineoutSince then, more than 2300 restaurants across the country de-listed themselves from these food apps claiming that “discount structure, terms and conditions, by the food tech companies are unjust and unsustainable.” The president of NRAI said that to stay competitive in the market, some aggregators give discount of buy one and get one free. Others have done the same thing differently; they have straight away offered a 50% discount, which means the same.  

The story does not end here. On particular Gold Card membership, such discounts are allowed on one itemBut our desi brain works interestingly. The people go to restaurant A and take starters- 50% discount. They go to another restaurant to take drinks- buy two get two free! Finally, they go to the third restaurant and order the main course- buy one get one free! Using this method, they get the whole meal at 50% discount which kills the business.   

The worst part of the whole thing is that the discounts are being borne by the restaurants and not the aggregators. The association wants these discounts to be removed so that customers get used to not getting high discounts. It is a sort of detox action that is essential, according to the association. It appears that both the sides have understood the problems created by deep discounts and they also know that it will take some time to reach normalcy and come out of the deep discount issue.  

You and I are naturally going to be unhappy with these changes. We have to now look for happy hours or special days to get good discounts. Now, these changes are going to take my outflow back to normal, which I do not like. But we should not forget that such gimmicks never work in the long term.  

I always felt as if I am an uneducated person, though I have run a small business for more than 35 years. Giant organisations like Amazon and Flipkart have been in the deep discount game for quite some time. The difference is that they give deep discounts from their pocket. For years, they offer deep discounts, give Prime memberships and so on. They keep on investing billions of dollars for years. Amazon has never made profits in the last twenty years. But they continue to invest in the business to get more and more customers all the time. Uber CEO has recently made a statement that Uber may never make profits. What is the business model of such companies? Jeff Bozos has become “poor” when he settled his divorce, and his wealth is at lowly US $ 65/ billions. He bought some time back Washington post for an all-cash deal of US $ 250/ million.  

Uneducated me does not understand the principles used in these businesses. Uber charges higher rates when demand is up. But I have seen that as a routine, they charge about 10 to 15 % more than an Auto Riksha in Pune. The price difference between an Auto Riksha and a car can be three lacs of rupees. Many Rikshas give mileage about 1.5 times more than the cars. 

On top of that, Uber takes 30% of the amount we pay to the driver. To me, the driver may break even, Uber’s figures show that they make losses. Other than making vehicles available quickly to us, are they running a charity organisation? Is it not similar to deep discounts offered by Zomato or Amazon?  Or for that matter, Oyo?

Venture capitalists, angel investors, put in their money in such companies. Venture capital is defined as capital invested in a project in which there is a substantial element of risk, typically a new or expanding business. I am sure that those who invest in such companies expect reasonable returns on their capital. By what I have described above, there are no returns, then why are the investments continued? Where is the source for such unlimited funds?  

There is no doubt that Amazon, Uber, Zomato are market disruptors. They have shown the world a new way of doing business, which even 25 years back did not exist. New methods, new ways of doing things make a lot of difference in day to day life. Consider AirbnbThe concept is so good that it is helping people all over the worldIt reduces the cost of travel and uses people’s assets which have been remaining idle.  

Amazon, WalmartJio are gamechanging companies which have made a big difference in our lives. But they are making these changes with their own money or at the cost of competitors. They are disrupting the market and making their competitors think; I am sure the competitors will come up with even newer ideas.  

But this deep discount business with own money or someone else’s money is not sustainable business model. I am not surprised that NRAI has revolted against it. I was talking to someone about these aggregators. It was felt that the aggregators probably sell the data of their customers to make money! When companies like Facebook have done it, what will stop the aggregators from selling data!  

Ultimately, market disruptors come with ideas and business models which were never seen before. But one thing will never changeSuch organisations have to make profits at some stage. Unless, of course, you are an Amazon or an Uber. But don’t forget that Amazon is the market leader in Cloud Computing business; so as a group, they make profitsBecoming Unicorn company (market value exceeding One Billion US $) is fine for publicity; it will help companies get more VC fundingBut if they don’t start making profits, such companies fall in the group of 95 % plus companies, which close down sometimes even without a whimper.  

 

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Lathe Joshi!

Lathe Joshi is a film about one Joshi, who is an expert lathe machine operator. As per the famous rule of this world, “Change is the only constant”, one day his world changes when the workshop owner decides to close his workshop as it is not profitable. Joshi loses his job. But he is not willing to change. He does not want to acquire new skills, nor does he want to retire and join a bhajani mandal to pass his time. He tries to buy the lathe from his old owner but it does not work out. His wife, and son change as per needs of the modern world; though they struggle initially, later they settle down with a reasonable success taking up modern work. They change with the time. Joshi who is known as Lathe Joshi remains Lathe Joshi and has a tough time in later life as he is out of tune with his family, who try to help Joshi. 

We see many Lathe Joshi’s in this world! Last 50 years of previous century changed our world drastically but the changes in the 18 years of this century are breath taking to even reasonably techno comfortable people. Many new things, modern things are making life easy and tough at the same time. Many gadgets that were standard in any office, have become extinct e.g. type writers, filing cabinets, typists, filing clerks. Now every person whether he or she likes it or not needs to reskill, retrain. If it is not done then it will not take time for these people to become Lathe Joshi.  

But is it necessary to change everything old? No way! Everything in the world does not become modern. Old values of love and empathy remain intact! We should all respect each other as human beings. In many areas, what changes is the method of doing things, processes being followed but basics don’t change.  

When anyone goes to take a loan from a bank, that company or the individual needs to provide various documents. These documents now can be submitted electronically, processed electronically and approved electronically. I am sure loan departments of banks are shrinking. We see the same thing while making payments and withdrawing cash. It is said that in next five years number of physical branches of banks will reduce drastically! More Lathe Joshi’s?  

Modern technology makes buying a totally new experience. Amazons and Flipkarts are changing the way we buy things; items bought still need to be shipped so shipping industry will not change. In fact, there will be more and more jobs available in this sector. The courier service, tracking of parcels will become more efficient. But in logistics basics don’t change! Whenever we have any issues with these companies, we chat with their representatives. These “representatives” are many a time BOTS, robots who can chat with you. There could be one human supervising 10 BOTS, same as self-check-out counters in the malls. As far as humans are concerned, obsolescence will happen! Retraining for people in this field is a must!  

Obsolescence looks to be the name of the game but it is difficult to predict what will happen in future. When experts find it difficult to predict, for common person it will be almost impossible to predict and judge about future. Look at the automobile industry. Since last decade, people have been talking of Electric Vehicle (EV). But it looks like finally everybody is jumping the bandwagon. In an IC Engine vehicle there are hundreds of parts in the drive train, which is in between radiator in the front and the exhaust system at the back. These hundreds of parts will be replaced by about 18 parts in the EV. Out of these 18 parts 10 will be electronic controllers! What will be the scenario in 2030/2040? This change is bound to happen once the inflection point is reached.  

An inflection point is an event that results in a significant change in the progress of a company, industry, sector, economy or geopolitical situation and can be considered a turning point after which a dramatic change, with either positive or negative results, is expected to result. Companies, industries, sectors and economies are dynamic and constantly evolving. Inflection points are more significant than the small day-to-day progress typically made, and the effects of the change are often well known and widespread.  

The automobile sector changes, will affect this world in both good and bad ways! Good way is that air pollution will reduce drastically due to lesser use of petroleum products. World will become free of OPEC hegemony. But the bad part will be that  hundreds of thousands of parts currently used in the industry will not be needed. These industries will become obsolete, even though they may want to change. The industries like casting, forging, heat treatment will shrink in size, drastically, world over. This obsolescence will be simply path breaking and breath taking. Top manpower, highly skilled, will become Lathe Joshi’s in very large numbers! Even though they may be willing to change, system will find it difficult to accommodate such large numbers.  

Friends there appear to be obsolescence of two kinds, one is like our friend Lathe Joshi. He simply refused to change and adapt. He did now want to go with the flow and change. Lathe machines were replaced by modern system performing many things simultaneously. But the changes I have mentioned due to EV, are mind boggling. I was chatting with a younger friend running a service industry and manufacturing machinery, for auto industry. His is a core automobile business. He is running the business very successfully. While we were discussing life in general in a party, I asked him a pertinent question about effect of EV’s on his business model. He said, “Pramod, I simply shudder to think about it. I am in business for 25 years, I have funds, I have technology and I have risk taking ability. Business  men running auto ancillaries today, will have to adopt from 2030 onward. There will be thousands of people with my background running businesses very successfully today. How can they re-skill themselves? How can they retrain themselves? It is going to be extremely tough. Luckily by that time, I should be around 70, so it will be left to my next generation to bother about these things.” He smiled and said, “I will make sure that I have retired by then”.  

If a smart person like my friend who employs 100 people, does not know what to do ten years hence, what will these 100 people know about their future?  I am definitely a positive guy but as of now, I am also flummoxed! Yes, there will be solutions, but people will have to make massive changes in their thinking. In whatever new industries come up, people will have to retrain massively to join them. When a lathe was replaced by machining centers, it affected a small group of people world over. But the advent of EV’s is going to create a tsunami and will create more Lathe Joshi’s in the initial period, as there will be millions and millions who will have to adopt! Retrain, re-skill from today? What skills will not be obsolete 20 years hence, I do not know!  

 

Technology Onslaught! Reskill or Perish!

Some lawyers in Pune have declared that they will go on fast until death, against the decision of Charity commissioner. It is now decided that that all registrations with charity commissioner will be done online! Thereby eliminating the need to employ lawyers to handle this work. Lawyers have gone by the only route known to them. They are cribbing, crying and fasting. Welcome to the brave new world of technology.

Technology is a part of revolution that mankind has seen from stone age. Only difference is that today’s technology can take away work from highly educated and successful people! When the wheel was invented, the strong people in that era must have gone on strike because with invention of wheel, people with brute force, for doing various manual things, became irrelevant. This sort of thing is not only technology related but it is about out of box thinking too!

Western part of China has many industries that produce goods for the world! Shipping of these good to Europe was a real long haul; taking the goods to east coast of China and from there goods would sail to Europe, in big ships. Total time taken would be between 40 to 45 days. Someone had a great idea. China had talks with Russia and rail system in western China was realigned to connect to Russian rail system. Trains full of these goods now reach Europe in 15 to 20 days! Ship owners have not gone on strike!

Human nature is such that we want status quo, all the time. While going is good, humans don’t try to find efficient methods of doing things better. Lawyers probably never understood that drastic changes that were coming up. Nobody designed something specific to make lawyers’ work irrelevant. Technology does not target anybody, it just looks to improve things or to do things in a different way. Somebody in government took a step forward to make the system more efficient and transparent. This is already happening in many areas in the private as well as government domain.

Blockchain is a classic example of technology can change things drastcially! I will briefly explain about Blockchain. A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. This allows the participants to verify and audit transactions inexpensively. This technology is already being used in cryptocurrency, Bitcoin. Technology is proven and slowly becoming popular. This technology has a potential to eliminate ALL the agents that are currently there in the system. These agents are Chartered Accountants, Bank Agents, LIC Agents, and so on. Over a period, Bitcoin Technology is expected to eliminate even the Banks and Currency! This shows two things; currency as a tool can vanish and Blockchain can push many educated people out of work, in big numbers. What is the solution? Retrain, get new skill sets! Don’t crib!

The other day, I was having coffee with my friend Sharad. He told me a story about some government agency people who wanted to do ground survey, near his factory, for a new expressway being planned. The people living in that area have been opposing the project. As a protest, they blackened the faces of the surveyors. Surveyors were cool guys. When Sharad asked them how much time the survey will take? They said 15 minutes. They moved around, put some paint marks on the rocks around and were ready to go. Sharad asked them, ” What happened to your survey?” They said, ” We are done! Now Google will take over and do the necessary survey; we just had to paint some markers.” Technology? How are local protesters going to stop Google Satellite?

Do you remember Tonga, the horse carriages being replaced by Auto Rikshas? Now a days, we rarely see young people driving Rikshas, so it could be on it’s way out! Heard of Uber and Ola? For long distance travel, the replacement was trains. Then came airplanes, local purchase is being slowly replaced by Web based selling. Amazons, Flipkarts are taking over business from local grocers! Typewriting institutes? What is that? Where are the typewriters? Where are the typists? Are we now hearing stories about Electric Vehicles? Another 20 years maybe! There may not be big repair workshops!

Most of the times, new technologies start with some mundane task or something which is not relevant at that time. It takes people thinking out of box that makes rapid and sometimes dramatic changes. Something similar is happening in another area of our lives.

When Jaya did her engineering in early 70’s, ladies in this field was a novelty! Lady engineers making a full-time career after degree was even more rare! This has been changing for some time. Early part of current century has seen major jump of ladies coming into different professions, in large numbers. They got themselves adapted and trained to handle many aspects of life which they were not supposed to know or do! How has this changed things in the society! It’s the women who have been retraining themselves, realigning themselves to out of box thinking. Some have gone into supplying home cooked food for people, some have gone into running creches! They have retrained themselves as per the need of the hour. Are men doing necessary changes in their thought process? Have enough number of men done this? Have they retrained themselves? Have they re-skilled themselves? Have they learnt cooking? Have they learnt to change diapers? Have they learnt to go to office after spending hours with the child who was unwell at night?

No, they have not! The majority have not done it! What comes in the way? It’s the so called traditional way of thinking that men are supposed to perform so and so things in life and women are supposed bear kids and manage homes. What will happen if men don’t change? They may not become irrelevant like lawyers, but whether they like it or not they will have to face ground realities. Whatever traditions or old way of thinking may say, there is one skill set which only women have! Bearing and producing a child! Yes, men are needed for this but technology has proven that you don’t need men but their sperm to produce a child! Remember, Kunti had given Karna birth by using this method! Mankind knows and is very much aware of this method, for a long time, as mentioned in mythology! But the point of inflexion for this to happen regularly, is still too far away!

What is the easier and more prudent way for men? To retrain themselves, to acquire skills to run the family jointly with women. This does not need technology change; this needs the change in mind set. Change in old way of thinking! Accept that people who don’t adapt to new technology or thinking can become irrelevant over a period of time!

Lawyers, find your selves a new area where your skills are needed. Try and re-skill yourselves for doing something different! Become a great chef, become an online teacher, become a producer for online serials! Instead of striking you may strike Gold in your new profession!

New .com bubble!

My friend Nandu Pradhan sent me a message if I have opened a blog tap! The fact of the matter is that I am on a bit of a sabbatical for a week or ten days. Thoughts keep on coming in the mind and somehow I am able to reach the end line pretty quickly.

I read an article about venture funding this morning. It said that venture fund taps seem to be shutting down, albeit slowly, at least in India. I don’t understand much about venture funding but I am told that this funding is given to start ups with brilliant ideas; then there is second and third round of funding as the idea tries to bloom into business. One term that goes hand in hand is “burn rate” while discussing startups. Burn rate is the money spent every month, without doing any business at least in the beginning.

Most of my life I have been running a small business and during this period, barring a few years, I never needed outside funds! Of course, those loans were in the form of bank facilities. I paid outrageous interest charges on the bank funds. At some stage, I decided that enough is enough and returned all the bank funds. Idea behind running my business was simple, it was my job, and it earned me a living! So idea was to keep on making money from whatever activities I was doing!

Don’t get me wrong but I honestly do not understand this concept of venture funding and startups. All can’t be Microsoft, Apple, Facebook and Googles of this world. These are some of the names that come to mind when we talk of starting up in garage and so on! Don’t forget that people behind them were brilliant people. They may not have had the best of the ideas to start with. Apple took 20 plus years to really hit it. Microsoft initially had a tough time but the idea of MS-DOS is what really took off! These guys had different business models. Microsoft has been making software products and are now also in cloud computing, in a big way! Microsoft’s obituary has been written a few times but lately they have become extremely agile to customer requirements. I need not write about Apple; once the iPod became a hit, rest as they say is history. They have real world hardware that they are selling at very high margins. Google made a brilliant search engine and the advertisements on the engine are their bread and butter; they hardly have anything else that is earning money. Facebook was pioneer in social media and have taken up Google business model but this forms 80% of their income. They have about 20% of their income from other sources. What I am trying to imply is that they are all real profit making companies and balance sheets have been in black, most of the times. They all have hard cash.

Coming back to start ups. I am sure that there is a genius lurking behind all these startups that we keep on hearing. Mr. Mukesh Ambani recently made a statement that Jio is a startup! I think what he meant by that is Jio is thinking out of box, its agile, its is taking business behemoths in the same field head on but of course there is a business plan which will make it profitable sooner than later!

I am naming two large e commerce giants in India, Flipkart and Amazon.  Amazon is doing billions of dollars of turnover world over but I understand that even after 20 years their E commerce business is not in profit! So they keep on pumping money. Because of market capitalization Bezos of this world have become billionaires. So must be Flipkart honchos. What is their business model? To my understanding this is trading business as these two companies’ sale products themselves or through their partners; they do not manufacture a single product. How come their burn rate is much more than their income? I feel that it is because of the discount war they keep on playing to gain territory It is a good thing that they do not take loans from banks; otherwise list of bank NPA’s will grow longer! Loss figures March 2016 Amazon Rs.3572/ crore, Flipkart Rs.2850/ crores, Paytm total loss Rs.7971/ crores! Not bad! Profits can always wait! (Ref. Economic Times dated 24th Sept 2017)

If the organization is not making money then what is the point in doing business? With the taps of funds being slowly turned off, the startups are thinking, in terms of operating profits! Real profits are miles away! I am not sure about operating profits too! I am surprised about both sides. Those running business are not really bothered about profits and the funding guys are hoping that one of their clients will become a Microsoft or a Google and then they will get windfall! I am sure the funding guys are very very smart people and they are pumping only part of their billions as investment in startups! But what about startups which are very small or medium size? Or do the promoters also make their money, on the side, from the “burn”? If there is no profit then how do you sustain? What do you achieve by having a high “burn rate”? Is the business model right? Do these guys have enough maturity? They must be real smart technically but running a business is different ball game! An idea, a great presentation, business plan (which always look lovely on paper) get them funding. But how long can the operations sustain on funding? Should the business not be self-sustaining? Is it easy to convert a brilliant idea into a self-sustaining business? There are many so called brilliant ideas, on paper; they face different hurdles, when they come into business domain.

Coming back to my lack of knowledge, I feel that business is a business is a business! The aim should be to make it profitable, of course not at any cost! One has to follow business ethics. When you get funding you don’t have to pay interest on funding that you get though you actually borrow it!  Funding is a cool name for this borrowing! One is really lucky that this is interest free loan. That most startups fail, is to me, an indication that most ideas don’t get converted to profitable business.

I will give you an example of a “startup”. This was not a startup in the conventional way. This person’s business and products were not hi fi type but products made for farmers and used in farming. Of course it was not cool! He was mentored by my wife Jaya. Jaya happens to be on cool side of life i.e Computers, IT and all. What she found was that the person was brilliant and knew his subject and had good products. He was trying to make too many products on laboratory scale for different produce. After a few meetings Jaya asked him, “What is the USP of your products? Which is your best product?” He said, “My products will give immediate results with very high returns in Pomegranates!” Jaya told him to concentrate only on that. He did it and rest as they say is history. Now he is a reasonably successful businessman. He received recognition from United Nations and business wise he is doing pretty alright! Mind you, he took funding but only after his business had grown reasonably well and was very much in black! Writing this story probably has answered the questions which I raised in the beginning! So startups and venture funding is good provided you have good profitable products and a profit making business plan; otherwise you have to be Amazon or Flipkart or Paytm! To hell with losses! There are enough people who will fund you, if you are large enough!