If it were a school debate, the subject of the topic would be ‘Sodexo coupons – A boon or a curse. Discuss’.

Fortunately most of us are past that stage of life where we need to debate such issues in front of other school kids. Unfortunately though, unless we discuss and debate, we would lose money on a transaction like this. Let us look at the bare bone facts of the Sodexo business and try to draw some conclusions.

The perquisite valuation rule (Sodexo/Food coupon is a perk) (Fringe Benefit tax) governing the issuance of Food coupons states (Rule 3(7)(iii)) -

(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:

Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.

If you didn’t have the patience to go through the rule, here’s what it states in summary. The Employer cannot pay more than Rs. 50/- per meal during working hours. Assuming a reasonable 2 meals per day and 22 working days in a month, it works out to Rs. 2200/- p.m food coupons (which is the limit that most of us get) (the max. anyone can get is Rs. 3000/-). Of course, since the Employer cannot pay more than Rs. 50/- per meal, the maximum value of any one Sodexho coupon cannot exceed Rs. 50/-. Hence the denominations are always Rs. 50/- or lower (usually they are Rs. 50/-, Rs. 35/-, Rs. 20/- and Rs. 10/-).

These coupons are useful for different parties in multiple ways. There are four parties involved in any food coupon transaction as illustrated below (along with Sodexo’s business model):

Employee: The Employee is usually very excited with any prospect that saves him a little tax. And so is the case with Sodexo coupons too, where availing the Sodexo coupon opportunity will make the food coupon amount tax free. For employees in the highest tax bracket (30%), this would save tax of Rs. 660/- p.m (or Rs. 7920/- per year). Of course, if you didn’t opt for the coupons, you would get Rs. 1540 as deposit in your bank account (Rs.2200/- after tax deduction). But did the food coupon craze take off in huge numbers just because an Employee could save some tax and buy food from his office canteen? Absolutely not. The reason it took off was because the retail chains (FoodWorld, Spencers, Foodbazaar, Big Bazaar, MK Retail, Total, Reliance etc.) started accepting the coupons for anything and everything that you purchase at their store. Employees jumped at the opportunity (and most people mentally classify these coupons as free money than hard cash – look at some stuff they buy using the coupons. They would never buy it with hard cash).

Company: Most companies started this perk out as a differentiator to employees (and marketed it as ‘it’s actually extra money in your pocket since it’s tax-free). And then all companies started offering it. From a nice-to-have feature, it has now turned into a must-have feature in the pay package. Companies don’t make or lose any money on this transaction (apart from the administrative headache).

Retail Store: Initially, the retail store used to accept Sodexo coupons only for pure food item purchases. It was a pure sales/marketing tactic from thereon – to attract more customers and to wean away customers from other competing chains, they started accepting Sodexo coupons for anything and sundry (which apart from increased sales, also increased customer loyalty). Eventually, competitive destruction happened and the retail chains till Dec 31st, 2011 accepted Sodexo coupons for all purchases. They redeemed their Sodexo coupons with Sodexo for a 5% discount (and they used to receive cash only after 20-30 days after submitting the coupon; credit card companies credit the retail store within 24 hours usually). It’s almost become mandatory for retail chains to accept Sodexo, else they risked losing customers to other retail chains and very fast (the cornershop marwariwala lost his business this way, till of course he also started accepting Sodexo!). Of course, to cover up the lost 5%, people usually concur on the fact that retail stores usually mark up the prices of certain items (although this cannot be corroborated with any data available).

Sodexo: Who exactly is Sodexo? This link gives more information (and this one in more juicier detail), but in summary, Sodexo is a French multinational corporation Sodexo is one of the largest food services and facilities management companies in the world, with 380,000 employees, representing 130 nationalities, present on 34,000 sites in 80 countries. They are the biggest beneficiary in this transaction. Since this is almost like a parallel currency, they have to invest a lot of money upfront to get the govt. machinery working in passing certain laws. They make money in three ways:

a) They receive Rs.100/- worth of coupons, while give back only Rs. 95/- in cash, netting a straight 5% gain.

b) Sodexo coupons usually come with an expiry date (think of it as a currency with expiry date *shudder*). Once its expired, no retail store would accept it and it becomes null and void. However, Sodexo had already received the money from your Company when they issued the coupon (and hence a 100% profit!). There is a complex process through which you can get new coupons issued, but most people would not have the time or the patience to go through the process for getting the new coupons.

c) The biggest of them all. They get money at 0% interest. Have a look at the diagram once again. Day 1, they receive Rs. 100/-. Day 24-34, they give back Rs. 95/-. That is, they have had the money for a full 20-30 days without paying any interest. In fact, till the coupon is used, it is practically free money (and they can lend this money at interest, thereby making money).

So, if this was a win-win-win-win arrangement for all the folks involved, why did the retail store chains suddenly stop taking Sodexo coupons in lieu of items?

There is no clarity on what exactly happened, but here are the news items floating around -

a) They have increased the brokerage from 5% to 9%. That is, the retail chains used to get back Rs. 95/- of their money, but in the revised scenario, would get back Rs. 91/-. Already under pressure for margins, this was not acceptable by retail chains. Presumably, they formed a clique and stopped taking the coupons across the table.

b) The number of days in which cash conversion happens has gone up from 20 days to close to 60 days, thereby impacting the cash cycle of organizations

thereby, resulting in a clique where the retail chains have closed ranks and have decided to put up a fight with Sodexo – to i) reduce the brokerage rate below 5% (and they’ll eventually settle to the original 5% figure) and ii) reduce the cash conversion cycle (and settle back on the 20-30 day figure).

Sodexo certainly has to negotiate and accede to the demands of the retail chains, simply because without them, Sodexo ceases to exist. Retail chains will also join the negotiating table because they will have too much to lose (the corner stone marwariwallah is still accepting Sodexos, and more probably, there is always a possibility that one retail chain breaks away from the clique to grab customers quickly). All in all, this is bound to be a temporary situation (max of 1-2 months), and as usual, the employee is being inconvenienced for the greater good of the mankind or some such.

My personal opinion is that the entire Sodexo tamasha is not worth the administrative hassle that most companies undergo (the big IT firms have everything automated, but all other firms are not). Why not give Rs. 2200/- as a food perk straightaway as cash instead of this circuitous food coupon route? Or tax it at the minimum rate? This whole hassle could have been avoided. But then again, there are vested interests at play here and I am not even a micro-bit player in the rational minority.  (As an aside, I always wondered about an active secondary market. For example, you get Rs. 2200/- worth of coupons and you save Rs. 600/- in tax. Which essentially means, you would be willing to sell the coupons for cash for anything above Rs. 1600/- thereby making a neat, tidy profit. I am almost sure this is illegal, but I just wonder!). Also, Sodexo coupons involve a lot of paper. They can shift to card based system (if at all this system has to exist) and save a lot of money (IT firms usually give out cards, but try using a card in any retail chain – nada for now!).

Disclosure: I don’t subscribe to Sodexo coupons. My wife does and hence have a vested interest liquidating the Sodexo vouchers

P.S: I can also see a govt. conspiracy here Sodexo coupons out of circulation means Employees will not subscribe to them January end (or future months). Which means, more taxable income and which means, more taxes. Government #FTW

P.P.S: I explained a scenario above where a Employee can technically make a profit by selling the coupons at a discount. One enterprising person actually tried to sell these coupons at a premium on an internet site. Why would anyone pay hard cash (say, Rs. 105/-) in exchange for Sodexo coupons (worth Rs. 100/-). Beats me. Not too sure what the guy who posted this was thinking though

With the brouhaha around the new IPL teams and their steep prices, one wonders if it makes economic sense to buy these new IPL teams or has it something to do with human behavior (ego?) to own and run a team. (As an aside, I was talking to my friend the other day and he made a very interesting point. He said “Accountability in IPL is pretty stunning if you look at it. There are no more excuses like ‘building for the next world cup’, ‘team is in transition’, ‘it’s the process and not results’. The results are pretty instantaneous.”)

The following analysis is a guesstimate of what make up the numbers in these IPL teams, both old and new. It is broken up into two parts –

a) Existing IPL team’s economics

b) New IPL team’s economics

a) Existing IPL team’s economics

When IPL was inaugurated in 2008 with much fanfare, the number of teams were restricted to 8. These teams were owned by Bollywood and Indian Corporates alike. The 8 teams were – Rajasthan Royals (RR), Kings XI Punjab (Kings), Delhi Daredevils (DD), Kolkata Knight Riders (KKR), Mumbai Indians (MI), Deccan Chargers (DC), Bangalore Royal Challengers (BRC) and Chennai Super Kings (CSK). Through a closed auction system, the bid winners were declared, with Mukesh Ambani bidding the highest with Rs. 450 cr ($111.5mn) for Mumbai Indians and Emerging Media Group bidding for Rajasthan Royals at the lower end at Rs. 268 cr ($67mn). The sum total of all bid winners was Rs. 2894 cr. which has to be handed over to the IPL management team over a period of 10 years (in equal amounts).

Let’s look at the two different components that make up Profit for any enterprise. Costs and Revenues.

Costs:

a) The franchises have to pay the bid amount every year, spread over 10 years. The team is then to perpetuity by the owner, without paying any more franchise fee.

b) The franchises also had to bid for different players. Stars like Sachin Tendulkar, MS Dhoni, Rahul Dravid etc. command a premium (close to Rs. 1.5 cr each, every year) while unknown players command the minimum (Rs. 8 lakh every year). Depending on the capacity of owner’s capital and different sponsors involved, various players are bid for and paid in full.

c) The bidders also have to take care of the promotions – television and print ads for the teams as well as star players, to keep the marketing buzz going. This involved, for example, Delhi Daredevils roping in Akshay Kumar for the first IPL season (while dropping him for the 2^nd), while the Royal Challengers chose Katrina Kaif. There were other Bollywood owners like Shilpa Shetty and Shahrukh Khan who were spared the Bollywood expense, but nevertheless had to shell out money for other marketing expenses.

Revenues:

a) Approximately 60% of TV rights revenues is distributed among the franchise owners. TV rights with Sony were renegotiated in the 2^nd season for a record Rs. 8200 cr ($1.6bn) to be spread over 10 years (It was initially Rs. 4000 cr for 10 years. However, basing on the popularity of IPL Season 1, the bid was renegotiated to Rs. 8200 cr for 10 years)

b) Revenues from sponsors (Nokia, Wrigleys, Kingfisher, Pepsi, Reebok etc.)

c) Ticket receipts, selling memorabilia and merchandise etc also called Gate revenue.

The following excel sheet gives a snapshot of the approximate profit/loss for each franchise in IPL Season 2.

(Assumptions: Promotion cost@50% of Team cost, Gate revenue@10% of TV rights revenue, Sponsors revenue on average @30% of TV rights revenue – assumptions made in line with other sports franchises across the world – feel free to disagree)

As seen in the Profit/Loss sheet, inspite of very generous assumptions regarding revenue, 7 out of 8 teams are in the red. The assumption on sponsors revenue might be a bit skewed since Mumbai Indians have the capacity to bring in more sponsor’s revenue while the lesser know Rajasthan Royals might bring in less. Nevertheless, the profit/loss sheet gives us a fair idea of how the franchises fared in IPL Season 2 inspite of low entry cost during the inaugural kickoff.

B) NEW IPL TEAM’S ECONOMICS

Sahara Group and Rendezvous Sport are the two new entrants to IPL. Sahara Group won the bid for Pune while Rendezvous won it for Cochin. The biggest downside for these two groups however is the cost. These two to-gether have paid slightly more than what the other 8 had paid combined in 2008. Sahara paid Rs. 1702 cr while Rendezvous paid Rs. 1533 cr bringing the grand total to Rs. 3235 cr.

Assuming all other parameters remain constant (TV rights revenue have to be shared across 10 teams now instead of 8 but with corresponding increase in matches from 60 to 94 in IPL Season 4, I expect the TV rights revenue to be approximately constant; the Team cost will obviously go up due to higher bids and competition for atleast 3-4 star players), the franchise cost per year is pretty steep.

Conclusion:

With the kind of losses that Sahara Group and Rendezvous are supposed to incur, I wonder what would be the actual cost, if the opportunity cost of investing the franchise fee (say, a corporate deposit @8% per year) is included. To think that the existing IPL teams are making a loss with such a low cost base, it is close to impossible to think that either Sahara or Rendezvous are looking to make money off their IPL franchises in the next 4-5 years unless they come up with stunning marketing strategies and make money off them. Buying a stake in the existing teams would have given them far more leverage in terms of better opportunity cost as well as an already established team than buying a totally new franchise.

]]> http://kirandhanwada.com/2010/03/23/ipl-economics/feed/ 1 http://kirandhanwada.com/2009/02/24/business-fundamentals-aka-business-101/ http://kirandhanwada.com/2009/02/24/business-fundamentals-aka-business-101/#comments Tue, 24 Feb 2009 02:21:36 +0000 Kiran http://kirandhanwada.com/?p=190 At the start of my corporate career, armed with a MBA, I was like any other greenhorn ready to take on the world – with my jargon that is. I had solved numerous case studies and studied various books to understand the nuances of management.

Alas, all that came to nought. Or maybe.

As they say, Experience, simply put is just a matter of knowing what works and what doesn’t. As I progressed in my career, I was helped through various mentors to understand the business – in its truest sense; accelerating my understanding of the business fundamentals. I would like to share a few -

1) Finance is very simple. All the corporate finance, M&A strategies come to nought if your product doesn’t sell for a profit. Make a product at $1, sell it at $5 with expenses of $3 or less. Essentially, a profit margin of 20% on every piece and you’ll be rich. That’s all the finance you need to know.

2) Don’t try to please all the people all the time – Customer experience definitely is the key to success. But that doesn’t mean you need to please all the people all the time. Know your market, make them extremely happy. Better to have 20% of your market extremely happy than 50% of your market okishly happy/not satisfied.

3) Know what you want and the rest will follow – (I found this awfully strategic to understand. Some people find it sooner rather than later).

4) If it doesn’t generate money, it is not a good business – (This was in response to some Web 2.0 idea that I had thought of). Nowadays, this is better known by the jargon ‘monetize your transactions’. (So simple, yet incredibly hard to deal with. Consider the case of SAAB of GM which had been generating losses for 19 out of 20 years of its operation. Now, who was managing GM again?)

5) Surround yourself with ‘knowledgeable’ people – Now, ‘knowledgeable’ is definitely relative, and hence controversial. But you get the point – its only a positive spiral.

6) The last but the most important – Be ethical and operate with a smile. Ethical courses in B-schools do not solve the problem nor do communication skills courses. The fulfillment of this important aspect can only happen through the person himself.

The genesis of this ‘Free ISD’ idea was in a conversation with a friend of mine (Arvind).  As the conversation progressed about some other business idea that we were trying to brainstorm, I had this brainwave of offering Free ISD calls. For starters, I certainly thought it was a crazy idea. However, the more I thought about it, the more it made sense. Nothing revolutionary, Nothing iPhonish – it’s just a simple idea borrowed from the ‘Search’ and ‘Movies’ world.

Let me explain.

Search engines like Google are able to provide us services like search, google maps and other gamut of services – all for free. However, these services require a huge amount of processing power and lots of mathematical modeling (which in turn means, hiring a lot of smart Ph.D candidates). All these cost money. Google, however, as we all know makes it money through selling Ads for the most part.

Entertainment sites like Hulu stream movies and tv shows for free, some of them being fantastic classics. However, any person who has used Hulu.com would know that there is an advertisement for about 30 seconds every 30 minutes or so. Those ads pay for the movie itself.

I am sure, by now, the drift is very clear.

Why not, offer free ISD calls, with ads in between.

Let me explain a wee bit further.

What is the average cost of a per minute call from US to India? Some sites like Stanacard, FreeCallPlanet charge 3.3 cents per minute, while established players like Airtel charge 4 cents per minute.

For simplicity purposes, let’s just average both and conclude that the average cost of a per minute call from US to India is around 3.6 cents per minute.

A 10 minute call would cost 36 cents per minute. That’s about Rs. 17 (exchange rate taken at Rs. 48 per dollar).

The idea here is to place an ad just at the start of the call, and an ad every 10 minutes. That is basically two ads, working out to Rs. 8.5 per impression within 10 minutes.

From a customer experience perspective, restricting the ads, to say, 15 seconds duration would probably be optimum, although some tests need to be done to validate that.

So, there it is – an extremely effective way of reaching a consumer at a very low cost.

Why is it effective?

a) Low cost

b) High impression – brand recall of these ads will be very high

c) Hopefully, will lead to increased revenues.

What kind of companies might want to put their ads? Well, let it be context-specific.

a) Money – Marketing money2india.com, Western Union Money Transfer etc

b) Stock broking – NRI broking companies

c) Gifts to India – Companies which supply gifts to your loved ones back in India

d) If consumer demographics are collected well, marketing of Shaadi.com type websites might also not be a bad idea.

What are the disadvantages? And Solutions to those?

a) The consumer might be turned off by the ads – Well, no way out for this. He/She is getting ISD calls for free. Whosoever doesn’t like it, will move away to paid services.

b) The consumer might be apathetic to these ads – Here is where creative ads come into play. A 15 second, creative audio ad competition will do the trick.

c) Conversion might be low – That was always the case with Google ads, ain’t it? The right placement of ads is definitely going to be the key.

What about competition? And Solution for that?

a) Internet Messenger to Internet Messenger talk is free anyways. What is new? – Well, the pervasiveness of computers in India is not as much as in the US. Mobiles are more pervasive, hence it makes more sense to call mobiles than computers.

b) Skype to mobile – Well, this one is definitely a competitor. But then again, which company doesn’t have competition. We need to work out details to beat the competition.

c) Vonage services, VoIP to VoIP is free – Yes, it is indeed free. However, I have heard hundreds of complaints from my friends wherein the broadband in India was not proper and hence the VoIP phone couldn’t work properly.

Any other ideas in concurrence with this?

Oh yeah. If this idea takes off, we can as well extend these services to inter-city (STD) calls. Say, village to village calls might have agriculture related ads etc. Service extension ideas are plenty.

The idea is awesome. So?

Here is where I have a problem formulating my business case. I, for one do not have the capital to set up an Airtel network nor do I have the capital to borrow Fibre Optic capacity. I am definitely not a company that can advertise like money2india.com or shaadi.com. And, starting an advertising company is a far shot. So, who am I in all this idea thingy?

The only role I think I can play is bring the advertisers and the phone companies to-gether to think about this idea. However, once I do that, there is every chance that they will cut me off and strike a deal with one another. The question really is, what can I do to build a business here? Rather, is there a business case at all to this idea – for me?

Thoughts are very much welcome and would be appreciated.

]]> http://kirandhanwada.com/2009/01/29/new-business-idea-free-isd-calls-say-us-to-india/feed/ 4 http://kirandhanwada.com/2009/01/26/customer-lifecycle-lifecycle-messaging/ http://kirandhanwada.com/2009/01/26/customer-lifecycle-lifecycle-messaging/#comments Mon, 26 Jan 2009 05:32:39 +0000 Kiran http://kirandhanwada.com/?p=159 Customer Life Cycle (CLC) is an oft-used term in Marketing to describe the progression of steps a customer goes through when considering, purchasing, using, and maintaining loyalty to a product or service. The firm which pitches the product/service to the customer typically has the following stages in a marketing campaign:

Reach —> Acquisition —> Conversion —>Retention —>Loyalty

Firms follow different strategies to target different sets of customers at different stages in the CLC.

Let me illustrate this with an example.

A wedding planner cannot increase business if he just targets marketing about conducting weddings. Sure, he can reach and acquire the customers who want to get married. However, marriage is usually a one-time affair for most, and hence if the wedding planner intends to pitch in only for conducting weddings, his business too will be limited.

However, consider the concept of Lifecycle messaging. If the wedding planner is smart enough, he can customize messages to his customers and secure more business. How about marketing an anniversary planning message to couples who got married a year earlier? When the couple starts having children, why not customize messages for conducting birthday parties and so on and so forth.

The Web is an important channel to connect to your customers in this increasingly interconnected, Facebook economy world. The usage, rather under-usage of the Web today in the CLC through Lifecycle Messaging is shocking, to say the least. I am appalled by different email marketing messages I am bombarded with – not only from unwanted sources but from stores I bought a product from previously. I am bombarded by the same message if I bought a computer or if I had bought a mixer. I am showered with the same message irrespective of me being a new customer, a one-time purchaser or a long-time purchaser. Isn’t there an opportunity here to apply the concept of Lifecycle messaging and secure more business. Let me use some examples again to drive home the beauty of this very simple but very effective concept -

1) The first and a universally known example is the Loyalty card. An enterprise wide implementation of this Loyalty card concept would exactly pinpoint the stage of Lifecycle in which the customer is in, and the kind of usage (which would indicate profitability, another sub-category where the messaging can be even more personalized).

2) Customized Email messaging to credit card customers to shop at places where they shopped before to get more points. Different messages to new customers vis-à-vis a year-old customers vis-à-vis a 5 year old customer. Same messaging may be effective, but not as effective as messaging according to the Lifecycle.

3) Online web portals displaying different prices and different products depending on the customer lifecycle stage and new customer/repeat customer basis.

Those were but a few of the many examples that Lifecycle messaging can be implemented. From a local grocery store to a huge organization, from a B2C business to a B2B business, a fundamental concept such as Lifecycle messaging would prove very effective in improving business in a significant manner.

Other interesting links which have a great insight into this topic

- By Josh Kopelman Link 1, Link 2

- By Joshua Porter

To round this post off, here is an image from the Wired magazine which beautifully illustrates the concept of remembrance, an inherent component of Lifecycle messaging.

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