Business Strategy

Key imperatives in the Indian Made Foreign Liquor industry today and trends driving them
Key imperatives in the Indian Made Foreign Liquor industry today and trends driving them 1024 442 qwixpertadmin

Executive Summary

Per-capita alcohol consumption has seen an almost 3 fold increase since 2005 in India. A young population with ~50% above the legal drinking age, rising affluence, rapid urbanization and changing societal attitudes are driving this growth. However, alcohol consumption and IMFL penetration are not uniform across states indicating opportunities for growth of both economy and premium products. Mature markets are seeing increasing premiumization leading to expanding demand for Grain based ENA. Supply and cost pressures on Molasses based ENA due to the impetus on ethanol blending program, is leading to diversion of MENA production capacity to ethanol and a ~10% – 15% rise in ENA prices. This is expected to further augment GENA capacity leading to a ~186% growth between 2017 and 2022.

Supply security and sustenance of bottom-lines through cost reduction programs, alternate and innovative sourcing strategies are key challenges IMFL companies face in the short term. Economy segment strategy also becomes critical in the long run as cost pressures need to be balanced with potential opportunities in graduating country liquor consumers. While regulations prohibiting direct advertising pushed IMFL players to brand extensions, income generation potential from these businesses can be exploited to augment profits.

Alcohol consumption is rising as a social activity with increasing penetration and per capita intake

For many years, societies have discouraged individuals from alcohol consumption. Traditionally, alcohol consumers had largely fallen into one of two broad economic segments of the population – the elite, who enjoyed their drinks in the company of friends and family and the economically weak, who drowned their sorrows thanks to the intoxicating effects of liqour.

The widespread negative impression around drinking had kept per capita alcoholic consumption to as low as 2.4 until 2005, as against 12.3 for Europe and 8.2 for the USA (Ref. Chart 1) as per data from the World Health Organisation. A dramatic shift in behaviour seems to have occurred since then, across both India and Europe. While India saw a 2.5x growth in individual consumption, Europe has seen a ~20% contraction. Qwixpert’s analysis attributes the rapid increase in Indian consumption to three key factors.

Chart 1 – Per capita Alcohol consumption

Foremost among these is the increasing acceptance to drinking as a social activity. A recent study1 by IMRB-NFX, on behalf of National Restaurants Association of India, has found that 54% drink casually at social events. Respondents believed how celebrations have become incomplete without moderate alcohol. Easy access to information on the internet and awareness through social media have also contributed to the rise of social drinking.

While consumption is increasing, so is the need to ensure responsible drinking. This trend is increasingly becoming prevalent among millennials (21 – 35 yrs. old)1 who are placing a great emphasis on consuming within limits. This has come as a boon for the “Bars and Pubs” segment who target the millennials and are growing at 23.5% annually3. This segment is expected to continue growing at a similar pace as India has a very young population with median age of 28 yrs2 and is likely to remain so in the near future.

Chart 2 – Split of India’s population by age – Median age 28 years

Chart 3 – Household composition

Favourable demographic mix with ~50% above the legal drinking age of 25 yrs has also contributed to increasing consumption. This mix is expected to become 56% in 2021 according to a report2 by MOSPI. This coupled with increasing urbanization and affluence (Refer Chart 3)4 will continue to positively impact liquor volumes through increased per capita consumption and enhanced penetration.

While a large majority still consume country liquor / indigenous drinks, state level differences in IMFL penetration opens up opportunities for customized strategies

This consumption is heterogenous and according to a NSSO survey6, per capita consumption by state varies from 1.6 litres/ year in Mizoram to 57 litres/ year in Arunachal Pradesh. Most of this intake is in the form of country liquor, toddy and other indigenous drinks. Only, 7 states have >50% contribution of IMFL & Beer in overall liquor consumption. IMFL manufacturers need to design state level strategies to target increased revenue contribution from premium IMFL in these 7 states while driving migration to the “low-priced” economy segment from indigenous liquor in the remaining 22 states.

Chart 4 Per Capita Alcohol Consumption (Ltr/ Yr.)   Chart 5 IMFL + Beer Per Capita Consumption (Ltr/ Yr.)

Premiumization is on the rise in Indian Made Foreign Liquor

Chart 6 – Premium Alcohol sales growth (2018 vs 2015)

In mature markets with higher IMFL consumption, analysis of sales of various IMFL manufacturers suggest a growth in Premium alcohol volumes. Industry leaders have also seen this segment grow at 15%+ since 2015. Qwixpert research expects premiumization to continue further as industry leaders are re-orienting their resources to focus on premium IMFL sales while operating franchisees to ensure presence in the “economy” segment.

Capturing consumers with increasing disposable incomes migrating upwards to premium drinks and the millennial demand will be a key focus area for IMFL players. Industry experts believe this will lead to significant increase in malt spirit demand. With a significant portion of current demand serviced by imports, investments in new malt spirit plants are mushrooming as local cost-effective sources are being searched for by IMFL players.

Premiumization has also led to changes in the dynamics of ENA (Extra Neutral Alcohol) consumption in the industry. ENA contributes to 42.8% of most IMFL drinks. The industry has traditionally utilized molasses based ENA due to historical supply and cost advantages. Grain ENA, or ENA produced from grains unsuitable for human consumption, has been preferred by the best whiskey brands9 and IMFL companies are not to be left behind. While Pernod Ricard uses Grain ENA for 100% of its products, United Spirits’ Prestige & Above segments are 100% Grain based10

Ethanol Blending Program is diverting ENA capacity to ethanol; IMFL players are facing raw material supply and price pressures

Increasingly companies are shifting from MENA (Molasses based ENA) due to plateauing production of Molasses (Sugarcane) and diversion of MENA distilleries to ethanol production thanks to the Ethanol Blending Program (EBP). Oil Marketing Companies (OMCs) have been set a target of 10% ethanol blending by 2022, with a potential savings of Rs.12,000 Cr.11 on fuel imports between 2018 and 2022. An additional ~180 Cr. Litres of ethanol annually is required to satisfy the demands of the Oil & Gas industry.

Chart 7 – Ethanol/ ENA demand (Cr. Litres)6

In order to fast track progress on the EBP initiative, in 2018, the government increased procurement price of ethanol from sugarcane by 25% from Rs. 47/litre to Rs. 59/litre. Further, B-heavy molasses-based ethanol is now 11% more expensive at Rs. 52/ ltr5.

ENA manufacturers are seen investing in converting distilleries from ENA to ethanol production to take advantage of the higher prices. This has led to an immediate contraction in ENA supply for the IMFL industry and ~10% – 15% increase in raw material procurement costs. ENA cost pressures have had an indirect impact on the push for premiumization from IMFL leaders. Contribution margins are decreasing in the price-sensitive economy segment driving focus on premium segments for sustaining profitability. A successful economy segment strategy will have to be built at a state level, considering current and projected market maturity for IMFL, production costs and business benefits of market coverage.

To guard against supply risks IMFL players must re-calibrate their ENA in-sourcing mix. Qwixpert analysis also indicates ENA procurement cost reduction opportunities existing in vendor consolidations and innovative sourcing contracts, to avoid spot purchases and secure ENA supply. Further, it is imperative that IMFL manufacturers focus on value engineering, alternate sourcing and innovative pricing techniques in packaging material for profitability.

Basis discussions with CXOs and experts in the industry, Qwixpert understands that GENA production is also burgeoning due to diversion of molasses to ethanol production. Increasing cost of regulatory compliance of discharge and complexity in managing effluent treatments plants for Molasses ENA distilleries, incremental revenue opportunity from DDGS (Distiller’s Dried Grains with Solubles) are also compelling IMFL players & ENA suppliers to set-up more GENA production units. Thanks to the abundance of “consumption unsuitable” grains, Qwixpert estimates the GENA capacity to grow by 186% from 88 Cr. ltrs. in 2017 to 252 cr. ltrs. in 2022. IMFL manufacturers investing in GENA capacities need to build detailed business cases to evaluate benefits of in-sourcing vs procurement.

Brand extensions: Necessity or opportunity?

The Cable television network (regulation) amendment bill12, which came into effect on 8th Sep 2000 has prohibited advertisement of alcoholic products on television. As a result, the companies have to limit promotional activity to point of sale or surrogate advertising using brand extensions like glasses, mineral water, music CDs etc. having identical brand names. Advertising Standards Council of India (ASCI) has set specific guidelines to qualify a brand extension product basis in-store availability of the product – at least 10% of the leading brand in the category the product competes (as measured in metro cities where the product is advertised) or turnover of the surrogate product or service at a minimum of ₹ 5 Cr. per annum nationally or ₹ 1 Cr. per annum per state where distribution has been established8. Further, these numbers have to be validated and certified by an independent organisation such as ACNielson or category specific industry association.

With tightening margins, alcohol manufacturers are no longer looking at brand extensions to keep the regulator off their backs but to make it a profitable business division. Products, such as water, soda and soft drinks, with synergies at similar points of sale as alcoholic beverages can beef up the bottom-lines with adequate strategic focus.

Authors: Maheswaran Ganapathy, Giridharan Raghunathan, Gopika Hemachander

How digital and e-commerce are moving the restaurants beyond the physical real estate and how this is the path to recovery?
How digital and e-commerce are moving the restaurants beyond the physical real estate and how this is the path to recovery? 1379 916 qwixpertadmin

Executive Summary

The coronavirus pandemic and the subsequent lockdown has crippled the foodservice industry. With operational constraints and an increase in customer apprehensions about ‘outside food’, the industry has to innovate to survive the crisis. In the recovery phase, the focus must be on sustaining business operations, operational solvency, and curating customer experiences.  

In this article, Qwixpert explores some of the digital and on-ground interventions adopted by restaurants. They are offering safe dining experiences through contactless dining, social distancing at premises, and unmanned delivery kiosks. Innovations such as automation in food preparation, dark kitchens, and using online delivery channels can reduce cost burdens. Engaging with customers through social media can abate fears and influence them to eat out again. The industry is set to transform, and the changes will outlast the pandemic.

Background

The Foodservice industry is amongst the worst-hit sectors due to the Novel Coronavirus. Apart from being completely shut during the lockdown period, diner’s apprehension about consuming non-home cooked food and the fear of virus transmission in public spaces have continued to keep customer footfalls low even during the unlock phases. This drop in demand, coupled with a shortage of staff and disruptions in the supply chain, has led to an estimated $9 billion loss. Thus, bringing into question the industry’s sustenance in a post-COVID-19 world. As the foodservice industry opens up and slowly moves forward, we have analysed how their operating models have evolved to keep pace with the demands of the time.

A $50 Billion industry with positively aligned macroeconomic indicators until the COVID-19 outbreak

The Indian market is valued at $50 Billion. The organised sector contributing to 30-35%, comprises of Casual Dining, Quick Service Restaurants, Bars and Pubs, and the Unorganised sector (65-70%) are made up of Dhabas, Roadside eateries, Sweet shops, and other smaller establishments.

The Foodservice industry has grown at ~13% CAGR (2016-2020). The growth was driven by increased frequency of eating out (6.6 times a month) and more spend on restaurants monthly (Average: Rs 2500 a month)

Online delivery, one of the most significant disruptions in the Food Service industry over the past decade, accounts for $1.54 Billion with a 3% share in the overall foodservice industry.  It has been growing at 17.5% CAGR due to an increase in discretionary spending power, internet penetration, and a rise in the millennial population.

This period of strong growth has been interrupted by the pandemic. In the “Unlock” phases post the lockdown, restaurants were estimated to be operating at ~50% of their pre-COVID levels resulting in negative operating margins. The industry is expected to go through a long and slow recovery phase. New norms and practices have been implemented to meet Government stipulations and assuage customer concerns. We expand on the most visible and the not so visible ones below.

1. Providing a safe dining experience is the topmost priority

State SOP’s mandate thermal screening of all diners at the entrance, use of facemasks by employees and, in several instances, has capped seating capacity to 50% of pre-coronavirus levels. In several outlets, disposable cutlery and paper napkins are used, the tables and chairs are sanitised before and after use, and waiters use gloves and face shields while interacting with the customers. In June, the SOPs for restaurants in Chennai included food-bearers being mandated to wash hands every 30 minutes once.

Restaurants are redesigning their premise to make provisions for social distancing. Restaurants have spaced out the furniture and installed plastic curtains to create make-shift booths. As research has proved that the virus can transmit quickly in crowded indoor spaces, few restaurants are creatively using parking spaces to develop outdoor seating, offer drive-through take away or provide contactless drive-in restaurant service. In a recent survey conducted at Chennai, 61% of the respondents preferred to wait for a cure before venturing out for dinner; 73% preferred a drive-in option.

II. Adopting digital interventions to reduce contact with customers and dishes

Across the food preparation process, multiple people (chef, waiter, and other staff) touch the food increasing the chances of virus transmission. Automation in food preparation and delivery can reduce contact and abate fear – Robochef, a restaurant in Chennai, uses an automated kitchen where 600+ pre-programmed dishes can be prepared hygienically with 60% less workforce. Restaurants also use vending machines to offer contactless dine-in and takeaway experience. For instance, Daalchini has smart kiosks in Delhi that provide home-cooked food. The customer can discover the nearby Daalchini kiosks using an app, browse through the menu, and place orders digitally. They can visit the unmanned kiosk within half an hour to pick up their food.

Restaurants have introduced QR code-based menus. Guests now scan the code to access the menu. Online ordering and payment practices are increasing at these times. Café coffee day has managed to open 60% of its stores post-lockdown by offering contactless dining through a web-based platform. Guests order from their seats by entering the seat code (pasted on the table), pay online, and get their food served at the table. The coffee chain wants to harness the data from this portal to understand the need of the customer and optimise a personalised experience for them.

III. Catering to online orders and developing lean operations is the new normal

Restaurants may no longer be able to sustain without delivery capability. More and more customers are seeking to order online, and the reliance on delivery channels in the post-COVID world is bound to increase. Restaurants can separate menus – Delivery & Dine-in with a focus on improved packaging quality and have a separate order pick-up zone. Food delivery companies, as well as restaurants, will focus more on creating occasions for customers to order-in—Eg: Swiggy’s ads on delivering even a single piece of dessert to complete a meal. Pubs in the UK have started organizing online pub quizzes and allowing customers to order food and drinks to recreate the dine-in mood.

Restaurants are evolving their business model and setting up Dark kitchens that offer delivery only services and cater to the fast-growing consumer demand through food apps. Faasos, a pioneer in Indian cloud kitchens, was able to grow at 120% and expand to ~1,000 outlets in two years. Zomato and Swiggy have funded and developed ~1,600 cloud kitchens across India, which work on a revenue-sharing basis. These kitchens have been set up in partnership with traditional restaurants like Haldirams, Keventers, and Saravana Bhawan or launched under private brands like The Bowl Company.

While it is reported that Swiggy recently scaled down their dark kitchen business due to massive demand shock, we expect the cloud kitchen model to see more and more takers in the future. They are a safer alternative as customer contact is reduced, and social distancing can be practiced. During the lockdown, most restaurants have operated as Dark Kitchens and have continued even during the recovery phase that is a more efficient model. These kitchens reduce rental costs from ~12-20% to 6-9% of revenues.

IV. Investing in messaging around safety to dispel customer apprehensions and driving customer loyalty through social media campaigns

Marketing during pre-COVID times focused on attracting customers with offers, food choices, and the dining out experience, it has now pivoted more towards safe practice awareness as customer apprehension is at an all-time high. Questions abound on whether restaurants will continue to be looked at as social places for human interaction or functional ones to grab a quick meal in the event of necessity.

Personalised recommendations, loyalty programs, and discounts on food delivery apps along with tags such as ‘Max Safety’, ‘Best Safety’, and ‘Contactless Delivery’ are used to reassure customers who are looking to order-in.

Discounts and offers are still as high (if not more than pre-COVID). Restaurants that deregistered last year following a disagreement with these app-based delivery platforms are returning.

Restaurants are innovatively using social media to engage customers by offering online cooking classes with chefs, live streaming baking sessions, and organising wine delivery & tasting sessions over zoom calls.

V. Focusing on sanitation in procurement

Vegetable markets are being and will be eyed suspiciously by restaurants going forward. A preference for organised players who can be trusted to take social distancing measures, frequent sanitation of delivery trucks, contactless delivery, and online payments will rise. E-Procurement, using blockchain technology, is increasing transparency in the supply chain and makes it easier to enforce hygienic practices. The cleanliness of the ingredients is also a point of concern. Most state SOP’s for restaurants mandates the use of 50 PPM Chlorine to clean vegetables, dal, and rice. Zomato Hyperpure, Big Basket HoReCa, WayCool, and Dunzo are aggressively growing in this segment and cater to over ~10,000 partner restaurants.

Summary 

In this race to recovery, organizations are leaving no stone unturned to rejuvenate operations, innovatively serve customers, and minimize the cost of operations. Sanitation of dining spaces, automation in food procurement, preparation and delivery, cloud kitchens, social media led long term customer engagement, and creating at-home dining occasions are where we are headed. As restaurants “reconnect” with their customers, from a safe distance, technology and efficiency are the pillars upon which recovery is being fashioned.

References

https://www.restaurant.org/Articles/News/Study-details-impact-of-coronavirus-on-restaurants

https://www.moneycontrol.com/news/business/as-business-plummets-food-delivery-platforms-nudge-restaurants-to-open-with-newfound-goodwill-5098431.html

https://www.businesstoday.in/current/corporate/restaurants-under-pressure-as-consumer-numbers-to-dip-post-coronavirus-lockdown/story/400385.html

https://www.newindianexpress.com/cities/delhi/2020/mar/17/coronavirus-restaurant-industry-hit-as-footfall-dips-several-outlets-also-shut-down-2117880.html

https://www.newindianexpress.com/lifestyle/food/2020/may/08/77-per-cent-people-would-prefer-to-dine-out-post-covid-19-pandemic-survey-2140655.html

https://www.zomato.com/blog/hyperpure

http://www.careratings.com/upload/NewsFiles/Studies/Restaurants%20%20QSRs%20May%202019.pdf

https://medium.com/collectivfood/the-b2b-food-supply-chain-is-ready-for-disruption-4fd3ace8495

https://www.livemint.com/companies/start-ups/the-revolt-against-food-delivery-apps-1566324255842.html

https://economictimes.indiatimes.com/small-biz/startups/how-cloud-kitchens-are-helping-faasos-survive-the-foodtech-bloodbath/articleshow/61511937.cms

https://retail.economictimes.indiatimes.com/news/food-entertainment/grocery/hotels-catering-segment-now-a-big-deal-for-cash-carry/69669805

https://www.zeebiz.com/small-business/news-hyperpure-by-zomato-this-new-40k-sq-ft-warehouse-in-delhi-can-serve-3000-restaurants-a-day-96780

http://ficci.in/spdocument/23056/foodzania-release2018.pdf

http://ficci.in/spdocument/23056/foodzania-release2018.pdf

https://thelogicalindian.com/news/indian-household-bengaluru/

How Swiggy & Zomato Are Impacting Domino’s Annual Sales

https://d2w1ef2ao9g8r9.cloudfront.net/resource-downloads/2019-Restaurant-Success-Report.pdf

https://scroll.in/article/903509/the-popularity-of-indias-food-delivery-apps-is-making-indias-restaurants-think-differently

https://www.deccanchronicle.com/business/companies/140119/qsrs-tweak-strategy-to-fend-off-swiggy-zomato.htmlhttps://redseer.com/newsletters/food-tech-market-updates-june18/

Why a business case approach, to costs of owning an IPL team, is more prudent?
Why a business case approach, to costs of owning an IPL team, is more prudent? 1080 720 qwixpertadmin

Executive summary

In the previous article, the major revenue streams – Central Rights income, Sponsorships, Match day incomes were detailed and compared with mature leagues across the globe (Premier League, NBA, NFL, etc.). Growth opportunities were identified and enumerated. This article, discusses the 3 major expense streams – player fee, BCCI commission & other commission expenses. The critical question every franchisee faces with each cost element is the trade-off between the expense and its potential income generation capability. This article highlights these associations and integrates a business case approach to decision making on cost optimization.

Introduction

Franchises on an average spent around ₹430 crores1 ($90 million) to bid and purchase an IPL team 12 years ago. They come from backgrounds previously unconnected to cricket, the sports growing profile & popularity in the country testified a long-term investment. The business strategy to own a team varied across the franchises. 

Brand extension to the original business. Reliance used the platform to launch the brand in the sports industry. Vijay Mallya wanted to link the team to either Royal Challenger or McDowell no.1 for surrogate advertising to meet the Advertising Standards Council of India (ASCI). India Cements built marketing programs on the CSK- India Cements connection. Sun TV network purchased Sunrisers Hyderabad from its previous owner Deccan group with a strategy to increase revenue and eventually sell a stake of the cricket team for profit2. This strategy has been seen globally – For example: In the Premier League, Venky’s chicken own Blackburn Rovers. Etihad is using the 10-year agreement with Manchester City FC to brand the sports arena in the city as Etihad Campus and further improve the airline business in the region through a new hub and airport. Many of the Japanese baseball leagues are owned by companies and bear the company’s name like Chiba Lotte Marines which is owned by the Lotte group.

IPL’s Entertainment value as a key to its success. The founders believed a large part of IPL’s success will depend on its entertainment value as much as its sporting value. This led to the two biggest box-office draws of the country – cinema and cricket combining. Several high profile actors and actresses either partly own franchisees or have been/ are endorsers of these franchisees ever since its inception3.

While, yes, these strategies do make business sense. The key question is, on a standalone basis, is owning an IPL a valuable business proposition? It is indeed the case. On average, IPL teams have a strong 24%4 EBITDA. In comparison, Premier league teams EBITDA is 17.8%5 while most of the teams in other nascent leagues like Pro-Kabaddi League or ISL are yet to make money.

More than 90% of all the expense is from 3 major heads 

Player fee accounts to 30%-35%4 of the team revenue and is the largest expense

In comparison with other major global leagues, IPL’s player fee expense is the least. Most mature leagues like NFL, NBA & NHL spend >40%6 of their revenues on player fees

Since the first edition of IPL, there has been a cap on the total spend on players. Initially, the player fee cap was ~₹20 crores. Till 2014, the Indian domestic players were not included in the player auction pool and could be signed up by the franchises at a discrete amount while a fixed sum of ₹1 million (US$14,000) to ₹3 million (US$42,000)7 would get deducted per signing from the franchise’s salary purse. This received significant opposition from franchise owners who complained that richer franchises were “luring players with under-the-table deals”; following which the IPL decided to include domestic players in the player auction. In 2014, a strict overall team cap was set at ₹60 crores8 and grew around 3% per year. As shown in the chart below

Avg. Growth Rate – 3%

In 2018 the IPL- Star India broadcasting rights deal, generated a huge revenue and teams could afford to pay higher salaries. The BCCI increased the salary cap by ~21% (2017- 2018). In the 2020 edition of IPL, the team salary cap was ₹85 Crores9.

From 2015 to 2018, the median utilization of salary cap was ~88- 89%10 with RR, SRH, and KXIP below 83%. To ensure that teams spend a minimum portion of their budget on salaries and the general salary level increases, a salary floor was introduced in 2018, which increased the utilization to 99% in 2018.

Basis table positions, SRH seems to have achieved the best balance with player salaries, it has spent ~88% of the allotted player fee over five seasons from 2015 to 2019 and secured an average table position between 3-4. This has monetary advantages as teams earn money basis table position (being in the top 4 list). SRH had won the 2016 season and secured runners-up in 2018. RCB, on the contrary, has spent more than 95% of the salary cap and has secured an average table position between 5-6. Till the 2019 season, the total prize money was ₹ 50 crores. Winner getting ₹ 20 crores, runner-up ₹ 12.5 crores and 3rd & 4th getting ₹ 8.75 crores each. BCCI has decided to slash the prize money by half from the 2020 season11.

The distribution of budget across players tends to be rather unequal with a few highly sought-after players going for big bucks. The top 25 players get more than 55% of the salary share while the other 100 players share the remaining 45%. At a team level, ~50%12 of the salary cap is spent on the top 5 players.

Franchises like CSK, MI, KKR & RCB spend a major share of the player fee to have popular players like MS Dhoni, Rohit Sharma, Kieron Pollard, Virat Kohli or AB de Villiers in the team. These teams have the highest number of followers and are generating more sponsorship revenue and stadium ticket utilization compared to the rest of the teams.

Players fees is indeed a major expense component as top players usually come with high salaries. But they can contribute in two critical ways to revenues – increased fan following (directly correlated to major revenue streams – sponsorships & ticketing income) and prize money. Teams have to be astute about rationalizing the spend on players as one my end up being penny wise and pound foolish.

20% of the total revenue paid to BCCI as a commission is the second-largest expense

IPL was supposed to be an auxiliary project of BCCI. It now makes 16 times13 more profit in the 45-day window than the rest of the year. Major sources of IPL revenue for BCCI are Broadcasting Rights & Media Rights and Franchise fee together contributes to more than 88% of the share and title sponsorship which is 10% of the share14.

BCCI accords 50% of the total revenue from media and title rights, and league sponsors to the franchises as central sponsorship. ₹200-250 crores from 2018-2023 i.e. till the Star- IPL deal is active. Before the deal teams were getting ~ Rs 65 crores. In return, they collect a franchise fee of 20% of their total revenue from the teams14.

Globally sports leagues are managed in two ways it can be a single business entity where the team owners are shareholders in the league. There are no individual owners or investors, with all teams centrally owned and operated by the league. The league, not the individual teams, have contracts with the players. It functions as a highly centralized structure. The support staff is shared between all the teams and a single entity takes care of all aspects of team activities: Marketing, Promotion, broadcast and Intellectual property. The teams are not bound by anti-competitive laws. The business is also easily transferable and the entire league can be sold as one asset. XFL football league operates in this model

The second type is a central association that franchises the ownership of a team usually based on locality. The franchises have the contractual rights to own and operate the team. Most of the major global leagues are based on this model. The premier league, NBA, NFL, La Liga and most of the Indian leagues such as Pro-Kabaddi, Super league, and the IPL. Most of the global leagues do not collect franchise fees from the teams. But IPL does. With the reduction in prize money, in the future will the franchises demand for reduction in commission rate or follow the global trend of no franchise fee?

Commissions spent on event management, ticketing & sponsorship accounts to around 10%4 of the revenue

Teams typically outsource stadium & stand décor expenses to third party agencies. The type and cost décor are directly proportional to the ticket price of the stand. Event management expenses include expenses such as brand signages, cheer girls, generators, licenses & permissions and security.

For selling tickets online on Bookmyshow or Ticketgenie teams have to shell out commissions to these agencies. To get the right sponsors teams generally, outsource the rights to get sponsors to experts and share a percentage with them.

The split of expenses between the three categories varies between the team. Typically, the majority of the spend is from event management expenses, followed by either ticket sales commission or sponsorship commission.

These expenses are important and have several indirect benefits. For instance, creating the right environment for the spectators in the stadium drives the ticket sales as well as TV viewership leading to increased sponsorship incomes and future auxiliary brand extension opportunities. Managing the sponsors, allocating right player and player times to each sponsor, keeping the franchise & sponsor engaged through the year builds a connection between the two and is crucial & beneficial for both the parties. Franchisees need to access professional help and look at this expense strategically. A smooth management of these functions keeps sponsors, players and fans happy, encourages loyalty and steady income generation. Decisions to curtail these expenses, should assess their impact on income and not solely be taken on the outflow.

A large selection of important operational expenses account for approximately 10%

Support staff fee is the largest component in these expenses, ranging between 3%- 4% of the revenue and has been in this range from a couple of years across the IPL franchises.

Stadium rent accounts for less than 1% of the revenue. Till the 2019 season, teams used to pay ₹30 lakhs/home match to the state association as rent to use the stadium. It amounts to around 1% of the expense for the franchise. From 2020, IPL Teams have to pay ₹50 lakhs/home match to the state association. The fee is used for the upkeep of the stadium, ground and other facilities by the state association. 15

While four of the 32 NFL teams have a home ground, the rest of the 28 teams pay rent to use the stadium16. A team plays 8 – 10 games at home out of the 16 games of the NFL regular season. The average annual rent is approximately $ 2 million, i.e. about ₹1.5 crores per match17. Of the 30 teams in the NBA, 12 teams own a stadium and 18 teams rent a stadium. In a season of NBA which is played over six months, each NBA team plays 41 games at home. All the 20 teams in the premier league own a stadium & play 19 games at home. An IPL team plays only 7 games at home and the calendar is only for 2 months leading to a stronger business case for renting over owning a stadium

Summary

Assessing the expenses indicate an inextricable link of each expense head to several revenue streams. There are significant skews to certain costs (eg: player fees) and some expenses seem unavoidable (eg: BCCI commission). It is hence prudent for a franchisee to pivot their views on these costs by focusing not on optimizing them but by maximizing their returns. Every cost element in a franchisee’s P&L hence needs to be evaluated with its associated business case with a view on long term benefits prior to investing in them or rationalizing.

References

1. CricInfo Staff (2008) ‘Big business and Bollywood grab stakes in IPL’ ESPN CricInfo  24 Jan Available at https://www.espncricinfo.com/story/_/id/20427511/ipl-announces-franchise-owners

2. Leena, S. Bridget (2015) ‘Sun TV open to stake sale in Sunrisers Hyderabad: CFO, live.com, 4 August. Available at https://www.livemint.com/Money/HQhby1MGaO9UFuukWeTE9O/Sun-TV-open-to-stake-sale-in-Sunrisers-says-CFO.html

3. Kholi, Rajeev (2011) ‘The Launch of Indian Premier League’ Columbia.edu, Available at http://www.columbia.edu/~rk35/IPL.pdf

4. Financial reports from MCA filings of company financials

5. Deloitte Report (2019) ‘Annual Review of Football Finance 2019’, Deloitte.co.uk, May. Available at https://www2.deloitte.com/content/dam/Deloitte/cz/Documents/consumer-business/cz_annual_review_of_football_finance_2019.pdf

6. Sporting Intelligence ‘Global Sports Salary Survey 2019’. Available at https://www.globalsportssalaries.com/GSSS%202019.pdf

7. Wikipedia ‘Indian Premier League’   Available  at https://en.wikipedia.org/wiki/Indian_Premier_League

8. ESPNCricInfo Staff (2013) ‘Player Regulation for IPL 2014’ ESPN CricInfo 24 Dec Available at https://www.espncricinfo.com/story/_/id/21581720/player-regulations-ipl-2014

9. Wikipedia ‘List of 2020 India Premier League Personnel Changes’   Available  at https://en.wikipedia.org/wiki/List_of_2020_Indian_Premier_League_personnel_changes

10. Mishra, Aryan (2019) ‘IPL 2020: Complete list of all eight teams’ Inside Sports 20 Dec. Retrieved from  https://www.insidesport.co/ipl-2020-complete-list-of-all-eight-teams/

11. BS Web Team and Agencies (2020), ‘IPL 2020 champions’ prize money to be cut as Indian cricket hit by slowdown’ Business Standard, 4 March. Available at https://www.business-standard.com/article/sports/ipl-2020-champions-prize-money-halved-as-indian-cricket-hit-by-slowdown-120030400392_1.html

12. Sportekz (2020) ‘IPL 2020 Player Salaries’ SportEKZ 24 Feb. Retrieved from   https://www.sportekz.com/cricket/ipl-2020-players-salaries/

13. Basu Arani (2018) ‘BCCI set to earn over Rs 2000 crore from IPL’, Times of India, 13 Feb. Available at https://timesofindia.indiatimes.com/sports/cricket/ipl/top-stories/ipl-to-give-bcci-95-percent-of-its-surplus/articleshow/62894670.cms

14. Sharma, Rajendra (2018), ‘For once, each IPL Franchisee poised to earn 150+ Crore Profit’, Inside Sport, 2 May. Available at https://www.insidesport.co/ipl-franchisee-poised-%E2%82%B9150-crore-profit-0602052018/

15. Gollapudi, Nagraj (2020), ‘IPL halves play-off reward, hikes staging fee for franchises – owners object’, ESPN CricInfo 9 March. Available at https://www.espncricinfo.com/story/_/id/28872214/ipl-halves-play-reward-hikes-staging-fee-franchises-owners-object

16. Farmer, Drew (2019), ‘The NFL has 28 teams that don’t own their own stadiums’, Inside Sport, 8 Aug. Available at https://www.americabet.com/football/nfl/the-nfl-has-28-teams-that-dont-own-their-own-stadiums/

17. Las Vegas Review Journal (2017), ‘Stadium and rent details for all 32 NFL teams’, 6 March. Available at https://www.reviewjournal.com/sports/raiders-nfl/stadium-and-rent-details-for-all-32-nfl-teams/

Leveraging analytics to increase sales conversions and improve lead sourcing
Leveraging analytics to increase sales conversions and improve lead sourcing 1171 390 qwixpertadmin

Executive summary

Lead prioritization model is a predictive algorithm to score and classify leads. Primarily used by sales organizations to segregate buyers from non-buyers. Model accuracy and implementation effectiveness determine the success of “Lead Prioritization”. Organizations use a threshold-based approach or a descending order approach to target potential customers. Data maturity, risk taking ability and organization’s culture are all key factors in the choice of approach. As market disruptions are constant, effective on-ground implementation, periodic governance and timely model refresh are essential for sustained best results. Apart from focusing on the right leads, marketing can extract target customer profiles from the algorithm to invigorate their lead generation mechanisms. “Lead prioritization” can be extended across functions – Eg: after-sales service – identifying the customers who are likely to need service. Today’s and tomorrow’s business leaders are increasingly harnessing data to power business strategy. Lead prioritization is often the first step to unlocking the potential of predictive analytics. Have you taken the leap?

What is being solved for?

Before becoming a customer, a prospect is part of a sales pipeline in the form of a lead. While leads go through a specific journey to become customers, not all leads end up as one. With the bandwidth of sales teams physically limited, organizations across the world are looking out for intelligent solutions to generate the maximum out of their sales pipelines. A key metric which is tracked across organizations, is lead to sales conversion. Sales and marketing teams which own this metric are constrained by three questions on the path to achieving targeted conversion rates.

  1. How to ensure every potential customer is attended to? – Minimize opportunity loss
  2. How to optimize sales force bandwidth and improve effectiveness? – Maximize productivity
  3. How to generate as many qualified enquiries as possible? – Improved sourcing

“Lead Prioritization” answers these questions while achieving the stated objective of conversion rate improvement.

Why will it be more effective than existing experience-based practices?

Lead prioritization is a methodology to score and target leads basis their business potential (probability of conversion). Sales and marketing teams collect several customer information (demographic, socio-economic, psychographic etc.) at the time of lead generation. In most organizations, teams use one or a few of these data points to target leads. Often, this approach is different across personnel, geographies and largely derived from their past experiences. And almost always, this knowledge and its impact is limited due to one of many reasons

  1. Knowledge is restricted to the user’s intuition
  2. Knowledge is restricted for reasons of internal competitiveness
  3. Decision making does not include all necessary variables and hence the impact is muted

Fig 1: Sample customer information collected during lead generation

Implementation of a “Lead prioritization” algorithm overcomes all these challenges and institutionalizes a data driven decision making culture.

What is a lead prioritization algorithm?

At its heart, the predictive algorithm analyses past data (old sales pipeline) to draw customer profiles, compares them with the current sales pipeline and “scores” each lead. Lead “score” reflects the probability of a lead to convert to a sale.

Fig 2: Lead prioritization algorithm working

In our experience implementing this algorithm, the best results have been obtained when the model receives real-time feedback and the prediction equation is fine tuned constantly on a periodic basis. This is primarily because customer needs, aspirations and market forces all change over time. A model based on one-time analysis cannot keep pace with these changes. Effective organizations engage constantly with the algorithm. They have a robust review system with scorecards and feedback loops to evaluate the model performance, assimilate new variables and drop ineffective variable to calibrate the algorithm to perfection.

The success or failure of the lead prioritization algorithm is a combination of 2 elements – the accuracy of prediction and the effectiveness of its use in decision making. It is common to see accuracies in the range of 70% at the time of initiation. Model accuracy is sharpened over time with real-time feedback and improved to ~90% and above.

In our experience implementing this algorithm, the best results have been obtained when the model receives real-time feedback and the prediction equation is finetuned constantly on a periodic basis. This is primarily because customer needs and aspirations and market forces all change over time and a model based on one-time analysis cannot keep pace with these changes.

Effective organizations engage constantly with the algorithm. They have a robust review system with scorecards and feedback loops to evaluate the model performance, assimilate new variables and drop ineffective variable to calibrate the algorithm to perfection.

Ok, so now that leads have been scored, what next?

Two approaches are widely practiced. Organization’s culture is critical in determining the most suitable approach

Approach 1: Threshold based

This approach uses the lead scores to bucket them into 2 distinct categories – Buyers and Non-buyers. A score threshold is administered to aggregate leads into “Buyer” or “Non-buyer” categories. The success or failure of this model is determined by its accuracy – What is the % of true positives (actual buyers who are classified as buyers) and true negatives (actual non-buyers who are classified as non-buyers)?

The approach instructs the sales teams to specifically focus on one group to get maximum results – while deprioritizing or in some cases neglecting the other group. The model’s capture rate, which determines what % of total buyers have been captured is another important metric to measure the effectiveness of the algorithm.

Organizations should be wary of neglecting one group to uniquely focus on the other. This approach can create a “self-fulfilling prophecy”, thereby losing out on critical feedback from the group classified as “non-buyers” to sharpen the algorithm over time.

Fig 3: Buyer classification approaches

Approach 2: Descending order

A less risky alternative is to rank and order the leads in the descending order of their scores. It advises the sales teams to order their time and effort basis the predicted scores. This approach is favored by more risk averse organizations as it ensures there is no short-term loss in sale as all leads will be attended to. On the contrary this approach may not make the most judicious use of available sales and marketing resources.

This approach measures conversion and capture rates to evaluate algorithm performance

Fig 4: Illustrative chart on implementation of “Descending order” approach

Organizations, who are lower on data maturity, also tend to take this approach. This awards them the necessary time to sharpen the quality of their data. And in the long-term business leaders have been seen to favor the “threshold based” method.

What can marketing teams take from this model?

While leads are scored and categorized as “buyers” and “non-buyers”, this classification also helps marketing teams determine the “ideal target customer profile”. The target customer is a combination of the same demographic, socio-economic and psychographic data points used to predict buying behavior. While, the algorithm at the backend, uses this profile to match it with new data and predict their probabilities of conversion, effective organizations use this further to their advantage. Marketing heads extract this intelligence and align their team’s efforts towards campaigns and activations that generate leads most similar to the “ideal target customer profile”. This way, the marketing spend RoI is improved while organically improving sales conversions.

Fig 5: Illustrative target customer profile

Is this algorithm only applicable to sales and marketing?

While, the example of sales has been used to illustrate the lead prioritization algorithm, the use cases are plenty. Functions within an organization can extend the recommendation algorithm to improve efficiency in their roles. Eg: Procurement managers can estimate vendors risk probabilities before deciding on whom to engage with.

Cross industry application is equally possible. Financial organizations have been able to pre-empt frauds and avoid bad debts by rejigging the predictor variable accordingly. After-sales service professionals have delighted customers by forecasting their arrival at workshops and customizing the entire journey – from welcome to vehicle delivery – to their tastes.

Inter-function and inter-industry application of the lead prioritization algorithm is on the rise in the west. And India is not being left behind. Data challenges remain – as the model’s effectiveness is predicated significantly on quality of data. Organizations have begun to understand the benefits that are possible and what they are missing out on by not focusing on data. Higher investments are being seen in data architecture to capture relevant data. Future ready organizations are increasingly investing in predictive algorithms to drive business decisions – and lead prioritization is often the starting point. So, let us leave you with 2 questions. Does your business proactively collect and use data to take business decisions? By now you would have drawn parallels to your organization. So, where and how do you think lead prioritization can fit in?

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