Revenue Enhancement

Rising Spirits: The Surging Popularity of Indian Single Malt Whisky
Rising Spirits: The Surging Popularity of Indian Single Malt Whisky 2560 1706 qwixpertadmin

Executive Summary:  

This article talks about the ballooning demand for Indian Single Malts India & global markets. Growing demand has come on the back of fruiter, less smoky taste & favourable price compared to other whiskeys. The growing demand has led to new product launches & capacity expansion. Indian Whiskey makers can leverage the tailwinds through product innovation & image makeover of whiskeys in India to target millennials similar to how Japanese & Chinese whiskey makers have popularized their whiskeys. 

Single Malt is a niche segment that is rapidly expanding at 18% YoY growth due to the trend of premiumisation 

The Indian Luxury whiskey market is a niche market with sales of 5.3 Mn cases in 2021. It has grown 6% YoY (volume) compared to the degrowth of -1% in the overall whiskey market during the same period. The growth can be attributed to premiumization of the consumption ecosystem.  

The Luxury whiskey market is dominated by blended whiskeys – 96% share and an emerging Single Malt market with 4% share (Figure 1). Despite being a niche, Single Malt market has gained notable prominence in the past six years, outgrowing any other whiskey segment with a healthy 18% YoY growth. As a result, it has doubled its market share in luxury segment from 2% in 2015 to ~4% in 2021 

Figure 1: Luxury whiskey market growth and components 

Single Malts originated in Scotland around 15th century, but its sales were limited to the United Kingdom. In the last century, Single Malts gained global recognition as a premium whiskey, motivating whiskey producers in countries such as United States of America, Australia, Japan, and Taiwan to make their own version of Single Malts. Following the trend, the Indian company Amrut distilleries launched the first Indian Single Malt in 2003. Since then, Indian Single Malts have become popular with more manufacturers investing in the segment.  

We believe that there is a profitable long-term game in the Indian Single Malt market and in this article, we examine the distinctive features of the product that have led to market creation and recommend potential strategies for top-line growth.  

Indian Single Malts are growing at 37% YoY backed by their unique flavour profile, economical pricing, and captive sales channel 

The Single Malt market in India is currently dominated by Imported Scotch Single Malts with 65% market share and Indian Single Malts at 35% market share. Although Indian Single Malts is more nascent, it’s been growing 37% YoY over the last 6 years, compared to 13% growth rate for Imported single malts. The share of share of Indian single malts has increased from 15% in FY15 to 36% in FY21 (Figure2).  

Figure 2: Market share of Indian and Imported Single Malts in India 

The key brands in Single Malt in India are: French liquor manufacturer Pernod Ricard’s Glenlivet with ~24% market share, Indian player John Distilleries’ Paul John with 21% market share and Glenfiddich from Scottish distiller William Grant and Sons with 14% market share. Others includes Scotch Single Malts such as Macallan by the Macallan distillery, Singleton by Diageo and Indian Single Malts such as Amrut by the Amrut Distilleries and Rampur by Radico Khaitan (Figure 3).  

Figure 3: Key Players in Indian Single Malt market 

The tremendous growth for Indian Single Malts in the domestic market can be attributed to its distinct taste profile, economical pricing, and captive sales channels. The distinction in taste arises from the differences in the raw material, production processes and climatic conditions between India and Scotland (Figure 4) 

Figure 4: USP of Indian Single Malt 

These India-specific features cumulatively give Indian Single Malts a fruiter and non-smoky flavour with mellow taste notes as compared to smoky scotch single malts which are generally heavier on the palate. According to Hemant Rao, Founder of Single Malts Amateur Club (SMAC), these features ensure that Indian Single malts are easier on the palate for young drinkers and suits the taste preferences of Indian consumers. Further, the 3x faster ageing ensures that the inventory turnaround is relatively faster, and companies can react to emerging market trends more quickly. 

Aiding the growth of Indian Single Malts, the 150% Import duty on Imported Malts creates a considerable price difference between Indian and Imported Single Malts where Indian Single Malts are available at ~60% of the price of Imported Single Malts across India (Figure 5).  

Figure 5: Price comparison between Indian and Imported Single Malts 

The price differential has translated into increase in sale for Indian Single Malt manufacturers. Paul John, which introduced entry level Indian Single Malts in the market and is credited for democratizing the market, holds a 60% market share in Indian Single Malts market in India and is the only Indian Single Malt brand in top three Single Malt brands sold in the country. 

Indian Single Malt industry has received support from Government as well, the ban of foreign liquor in 4000+ army canteens across the country has created a captive market for Indian Single Malts. It is projected to replace the Rs.  140 Cr. worth of sales imported alcohol clocked in FY2020 from army canteens.  

All these factors together have cumulated in creating an unexpected surge in demand for Indian Single Malts resulting in supply shortage. Pioneers such as Amrut, Paul John or Rampur have been facing shortages or stock-outs in the domestic market. For instance, Amrut sold out its annual inventory of 33,000 cases in the first five months of FY22. Similarly, sales of Rampur Single Malt are constrained to Delhi-NCR region and select five-star properties due to supply shortages. Mr. Sanjeev Banga, president of international business at Radico Khaitan expects the shortage to persist till FY24. 

Demand for Indian Single Malt have outpaced the supply and Industry is reacting by investing in capacity expansion and product launch

To counter the supply shortages, strategic planning and capacity expansion spanning over long-term horizon will be crucial due to the bottleneck caused by long production and aging process. In line with this, the major players have already started investing in production and storage capacity (Figure 6) 

Figure 6: Capacity Expasion by Indian Single Malt Manufacturers

The extremely attractive domestic demand prospect has led to new product launches by global alco-bev manufacturers and non-legacy players. Diageo which has a portfolio of popular Scotch Single Malts such as Talisker and Singleton, launched their first Indian Single Malt named Godawan with the expectations that Indian Single Malt Market will overtake Imported Single Malts in upcoming years.  

Distilleries such as Piccadilly and DeVANS Modern Breweries, which traditionally produced and sold malt spirits and distilled ENA to whiskey manufacturers, have launched Indian Single Malts under their own brand name i.e. Indri Trini and Gianchand respectively. The brands have been well-received and have gotten accolades from across the globe. Recently, Jagatjit Industries, makers of popular aristocrat whiskey have also announced their plans to enter Single Malt whiskey market in India. 

The recent investments in capacity and entry of new players indicates that by 2026-27, the annual supply of Indian Single Malt would reach around 600,000 to 700,000 thousand cases, which is around 9-10 times the current demand for Indian Single Malts. To match the supply planned for Indian Single Malts by the manufacturers over the next 5 years, the market demand would have to grow 54% YoY against the 37% growth it has clocked over the last 5 years. To cater to the growth momentum, we believe the organic demand growth should be aided by investment in market development  

Whiskeys need an image makeover to appeal to a larger target segment, Indian Single Malts can learn from global counterparts –  

For market development, we believe that adopting best practises from emerging whiskey markets like China, Japan and Taiwan can be insightful as they also went through a rapid growth phase (as indicated in Figure 5).  

Figure 7: Growth of Single Malts Whiskeys in emerging markets 

While Scotch whiskeys have a strong taste and incline towards smoky flavour; Japanese whiskeys are known for a softer taste with floral and fragrant notes. Japanese Whiskey makers also offer a variety of flavours – for instance, manufacturer Yamazaki can produce up to seventy styles of malt whisky in house, using seven different types of stills, five types of casks, and two types of fermentation. Similarly, the top selling Taiwanese whiskey called Kavalan Classic has a mellow flavour than a typical single malts and is often compared to fruit jam. As mentioned by Lee Yu-Ting, CEO of Kavalan’s umbrella company, the company doesn’t want the whiskey to taste like medicine.  

There are four major factors leveraged by global single malt manufacturers – product differentiation in terms of taste profiles, shifting target segment to young population and women, liberalising the image around single malts and increasing awareness through engagement marketing.  

The distinct and sweeter taste profile of these whiskeys is loved by the whiskey drinkers all over the world, including India – evident by the growth of export for these whiskeys (indicated by figure 6). Japanese whiskeys makers like Beam Suntory have launched the premium portfolio in 2019 for top tier Hotel chains, premium bars and restaurants in India and have already sold more than three lakh cases of Japanese whiskeys since then. There is a strong play for the inherently fruiter Indian single malts to develop a wider range of flavours that can gain a strong foothold in the Indian market. 

Figure 8: Growth of Japanese and Taiwanese whiskey exports 

Growth of disposable income in the millennials and change in the perception of whiskey that it’s a men’s drink has led to the growth of non-traditional consumer segments in emerging markets. For instance, in China the imports for scotch single malts by 20x in the last decade due to growing demand from young customers and increased per capita consumption from women drinkers (1.6 Ltrs in 2005 vs 3 Ltrs in 2028). Similarly, Indian Single Malt manufacturers can redefine the target segments to include the burgeoning segment of young customers. By leverage on the social drinking and experimental tendencies of the youth, they can introduce consumers to whiskey early in their lifecycle and attract a larger customer base of millennials and women. 

To appeal to the new-age consumer segment, Japanese whiskey makers have liberalised the stiff image associated Single Malts by promoting single malts as craft cocktail. In 2008, Suntory, the biggest Whiskey producer in Japan, ran an advertising campaign to promote the consumption of highballs – a cocktail that can be made with blended or single malt whiskey and soda. This introduced Single Malts as a fun casual drink for the younger generation, as opposed to being an older “salarymen’s” drink. The Highball campaign proved to be highly successful, increasing the sales of base whiskey by 70% in the following year. Similarly single malts have been used to elevate the depth and flavour of cocktails such as Hot Toddy, Penicillin or whiskey and coke.  

Engagement marketing activities such as tasting seminars, stalls at whiskey exhibitions, partnering with whiskey fan clubs and developing whiskey bars has been a successful marketing strategy for Global Single Malt players. For instance – Taiwanese whiskey maker Kavalan opened branded whiskey bars and liquor stores in China to promote their whiskeys. Even global players such as Diageo and Glenfiddich have partnered with millennial YouTubers to educate young customers about single malts whiskeys and the preconceptions around it.  

Indian Single Malts are well positioned to follow suite the global trends due to the distinct fruity flavour, emerging theme of premiumisation and a favourable demographic of millennials. Hence, by doubling down on the advantages of Indian Single Malts, coupled with experiential marketing tactics can go a long way in exploring the exciting opportunities this nascent yet vibrant segment has for offer.  

Conclusion 

Due to an inherently unique product and driven by strong market factors like economical pricing, captive canteen markets and favourable demand conditions, the Indian Single Malt market has been growing at tremendous pace. As shortages and stock-outs of Indian Single malts prevail in the market due to unexpected demand surge, manufactures have resorted to capacity expansion projects and additional investments by new players (domestic and foreign). We believe that investment in market is also important to continue this growth momentum look towards the emerging markets like Taiwan and Japan for best practises. Indian Single malt manufactures should experiment with new flavours that can appeal to a larger target segment consisting of women and younger demography; cocktails using Indian Single Malts can help position the beverage as a casual party drink and experience marketing using tasting clubs or exclusive whiskey bars to reach the target segment. We strongly believe that exploring the potential of the segment and committing a long-term play can yield favourable results. 

Authors: Jitendra Maheshwari and Vasupradha Sridharan

How would FMCG distribution of the future look like?
How would FMCG distribution of the future look like? 781 527 qwixpertadmin

Executive Summary

Emerging Tech based B2B models are disrupting the traditional distribution space. Unlike the traditional distribution model which has only one source of revenue i.e., via trade of products, the new age tech-driven businesses can generate income from advertisements, data analytics, private label sales, financial and PoS services. These allow online platforms to pass higher product margins to retailers. FMCG Distributors must offer additional value and create differentiated offerings to retailers to level the playing field. Consolidation in distributor territories will be actively pursued by FMCG brands. Multi-brand master distributors akin to those in consumer electronics and global auto sales are expected to emerge. Partnerships with financial institutions, PoS solutions providers and distributed warehousing for faster replenishment. Additionally private labels and backward integration into 3PL and warehousing services can add to distributors ability to compete.

Emerging Business models in B2B Distribution landscape

Initially FMCG downstream supply chain had a “distributed” channel structure. Traditional distributors covered towns or part of towns and were mostly exclusive to a particular brand, built relationships with the many thousand general trade outlets and wholesalers operating locally. Retailers in a town depended on these distributors to deliver orders or visited wholesalers to pick up required stock. This traditional distributor managed demand and working capital efficiently doling out micro-credit and also drove trade marketing initiatives for the brands. This model was first disrupted by the brand aggregators – Modern Trade Wholesalers like Metro, Booker and Walmart. These MT outlets offered a one stop-shop for retailers across brands and categories, but did not offer door-step delivery unlike the traditional distributors. The informal credit practice was also not extended. Prohibitive freight costs in low volume towns meant direct coverage was ~50 – 60% for even the biggest of FMCG brands. Online platform led distribution wishes to offer the best of both worlds – aggregated demand to be a one-stop shop for the retailer, amortizing freight costs to ensure direct distribution with door-step delivery and offer micro-credit with partnerships.

Fig 1: Comparison of different business models in FMCG B2B distribution

The traditional distributor and the cash & carry wholesaler-built businesses on an inventory led model, where stock is purchased from FMCG brands to be resold. Working capital management becomes critical with low profit margins and large revenues. Success depended on the business owner’s ability to rotate capital as many times as possible. Marketplace platforms, avoiding taking inventory onto their books by creating a platform for buyers & sellers to engage directly. They may or may not undertake order fulfilment creating two business models – Discovery only and Discovery and fulfilment.

Each of these Business models have different sources of revenue

Analysis of each business highlights the various revenue models in play. A traditional distributor generates revenues on the wholesale trade of products and manages all costs of operations within the margins offered by the principal brand(s). Cash & carry stores can additionally generate promotional income from brand visibility – on shelves, cash tills, end-caps and in-store promoters. In the recent past, cash & carry wholesalers have built websites and mobile applications to allow retailers the convenience to order online and get deliveries for an extra charge.

Fig 2: Comparison of operating revenue streams in FMCG B2B distribution – FY21

E-Commerce platforms using the inventory or the marketplace model generate promotional income from brands through brand pages, search based advertisements and sponsored listings. Organizations like Udaan, Elastic Run are additionally offering micro-credit to fund for the retailers’ working capital.

Profitability built on lean and efficient operations in inventory models 

Fig 3: Comparison of operating revenues, costs and margins across business models – FY21

The traditional distribution system operates on a gross margin of ~8 – 12%, for mass market products. These wafer thin margins, drive the distributor ecosystems to have lean and efficient operations. Low inventory levels with “Fast moving” stock characterises the inventory model and hence offers the name to the industry – “Fast Moving Consumer Goods”. Manpower productivity and optimized freight costs are critical to profitability and so is effective credit cycle and cash flow management. Companies operate with 15 – 20 days of stock and ~20 – 30 days of payable and receivable days. This working capital is usually the investment made by the distributor and if these benchmarks are maintained, the distributor can expect an RoCE of ~30%. Qwixpert’s analysis indicates the median RoCE of the top distributors of the country is ~33% and they operate at 21 days of inventory, 20 days of sales outstanding and 15 days of payables outstanding.

The contrasts can be noted in Indiamart’s marketplace model, where the gross margins are at ~90%. The marketplace platform charges fees on the discovery and engagement between buyers and sellers, while IT & employee costs borne to manage engagement & discovery are the primary cost of services.

Assessment of cost drivers indicate the need for lean business operations to drive profitability

The traditional distributor is not too worried about revenues. The margin and the “fast moving” nature of the merchandise are more critical factors in deciding the SKUs to stock and volumes to purchase. Higher the premiumness of the merchandise, higher the gross margins. To drive profitability, the distributor from hereon, effectively utilizes assets – warehousing infrastructure, logistics network, inventories, sales & distribution manpower. Four key metrics – SKU throughput, freight cost per unit, manpower productivity and inventory days – are measured and optimized for religiously. An analysis of one of P&G’s largest distributors – Chamadia Group (Fig 4) – indicates how razor thin profit margins look when compared with product revenues. But, a comparison with the gross margins indicates a reasonable 9% profitability before tax.

Fig 4: Chamadia Group – Profitability waterfall – FY21

The modern trade wholesalers are yet to make profits and the likes of Walmart benefit at a group level from the Indian office, by sourcing private label manufacturers for their global businesses. Negative bottom lines are also a reflection of the operating costs not being lean, as seen in Fig 5 – This can be noticed from the similar gross margins to traditional distributors but much higher operating costs. The online distributors – Elastic Run, Udaan – have much thinner gross margins, indicating their aggressive pricing to capture the market. Udaan’s overheads are significantly higher and need to be drastically optimized or monetized for profitability. Elastic Run’s operating costs are in line with traditional businesses, indicating a much tighter business.

Fig 5: Profit margins as a % of revenue – B2B distribution businesses – FY21

There are primarily 2 ways by which firms can increase their profitability in B2B distribution landscape i.e., Optimizing the cost-to-serve or by increasing the product margins.

In the Traditional Distribution business, cost-to-serve is optimized by enhanced productivity of manpower and/or investing in supply chain automation – warehousing to achieve a trade off between throughput, storage density and labour expenses & logistics – inhouse vs 3PL, route & fleet optimizations. Increasing the mix and throughput of premium merchandise (higher margin products) in sales can increase profitability. Upgrading the customers to higher margin products is a function of consumer economic growth and brand marketing. The E-commerce distribution model, on the contrary, offers new income streams compensating for the higher margin passed on to the retailer.

E-Commerce businesses bet on new revenue streams to overcome higher costs

Traditional distributors begin to extend their businesses into the premium range, with non-competing brands or in non-competing geographies to increase bottom-lines. Chamadia Group, for instance, has a separate business focused on distribution of imported & premium products. Higher margins are also present in selling unbranded and locally manufactured products – Eg: Grains, pulses, local snacks and by venturing into Private labels. Existing retail coverage and the understanding of the General Trade market are key USPs which traditional distributors can leverage to succeed in private label businesses.

The Cash & carry players offer Product placement / positioning within their stores i.e., Endcap and Cashtill display to give brands a competitive advantage. It is often available for lease to the brands at a cost. Organizations like Walmart bet big on Private labels a ~25 – 30% of their global business is generated from Private Labels.

Additional revenue can also be generated by offering various Value-added services in both online and offline distribution models. Within the online model revenue can be generated from the Brand promotions on the websites / apps, engaging in targeted advertisements directed at an audience with a particular trade pattern or purchasing behaviour. Search Engine Optimization (SEO) services to Brands i.e., charging the brands for listing their products in the top of the search results, are opportunities similar to E-Commerce B2C models.

Value Added services such as extending a line of credit to retailers through tie-ups with Banks to ensure working capital availability to shop owners and sale of Market data to FMCG companies to help them better understand the retail landscape, their market share, penetration, and demand preferences, are potential revenue opportunities in the e-commerce businesses.

Fig 6: Revenue streams for various distribution models

The traditional distribution finds itself at a disadvantage trying to compete against an more equipped business model. However, the merits of an on-ground relationship between the brand and the retailer through a distributor cannot be overstated. More so in India, where the informal sector’s success cannot be explained only through numbers. Brands are also cognizant of their long partnerships with these distributors and evaluating options to move forward. It is Qwixpert’s belief that the traditional distribution model is still relevant but will undergo changes to remain competitive in the long run.

By 2030, the traditional distributors will consolidate, differentiate with localized products and also offer value added services through partnerships

With the digital disruption in the B2B distribution space, retailers have new wholesalers & distributors to purchase from. This also opens retailers’ option to new product offerings under existing as well as new categories and additional products – Eg: financial services on one platform. Point of Sale services such as invoicing, accounting and replenishment can be integrated which makes order placement, fulfilment and GST filing simple and fast for retailers.

Traditional distributors are expected to consolidate to become multi-brand and multi-category distributors. Global multi-brand distribution operating models as seen in Electronics (Eg: Ingram, Redington), Automotive (Eg: Autonation, Penske) are soon to be replicated to compete successfully against online platforms. Traditional distributors with close proximity to their retailer network and local connections, will cater to local tastes with regional brands. Online players with centralized procurement function will be slow or unable to adequately capture localized customer preferences, thereby limiting their distribution dominance to National Brands and Larger Pack Sizes, similar to modern trade.

Traditional distributors should think beyond working capital management for their principal brands and offer a bouquet of customer services – convenience in order management, shorter fulfilment cycles, category aggregation for basket shopping experience, financial services, inventory management and accounting support. Partnerships with fintech, logistics tech and aggregator platforms can deliver these services at optimized cost.

Traditional distributors are also likely to backward integrate and reduce costs to pass on incremental margins to customers (Retailers). 3PL and warehousing operations for principal brands are one opportunity. Private label product introduction through contract manufacturing, leveraging the vast MSME ecosystem is another opportunity to explore. Further, this would enable Unorganised or Local brands to gain more visibility as their inability to set up penetrated distribution networks impacted retailer reach.

FMCG companies, today depend on Nielsen’s retailer surveys to determine retail market shares and consumer purchase patterns. With technological intervention in order placement and fulfilment, real time and more accurate data would be available with Online marketplaces for brand analytics. These analytical insights will allow FMCG companies to roll out customized trade promotions, reorganize sales force, their beat plans and shorten product launch cycles.

The net result in a decade’s time would be a more consolidated universe in FMCG distribution, with customers – retailers & consumers benefiting the most with a wider choice for purchase, consumption and business support.

Sources:

  1. https://entrackr.com/2022/01/udaan-revenue-shot-up-6x-to-rs-5919-cr-in-fy21/
  2. Ministry of Corporate Affairs, filings from companies
  3. Company websites and annual reports

How to address the Channel Conflicts in FMCG Distribution?
How to address the Channel Conflicts in FMCG Distribution? 602 401 qwixpertadmin

Introduction

We would remember the times when grocery lists were an ubiquitous phenomenon. The local grocer or the kirana was the recipient of these lists at the beginning of every month from households in the catchment area he served. The need to deliver these lists in person or over the phone to the grocer for pick-up or delivery later in the day is slowly starting to become a thing of the past. Grocery marketplaces, some with instantaneous delivery options (quick commerce), have offered an abundance of convenience to the Indian customer. The easiest way to shop has become via the smartphone and essentials reach home in as little a time as 10 minutes. Convenience and technology led order placement is not limited to the end user and is also an option for the grocer. B2B digital marketplaces have disrupted the traditional FMCG distribution channels. The pace of this disruption and the subsequent channel conflict it has triggered has asked more questions than FMCG companies have answers to. This article analyses the genesis of these conflicts and predicts the direction the FMCG distribution model is likely to take going forward.

E-Commerce is outpacing traditional channels in the $110Bn FMCG market

The Indian FMCG market was valued at US $110 Bn in 2020 and is expected to double by 2025 to $220 Bn1. This growth is being driven by growth in rural markets, which are forecasted to beat the urban markets in consumption by 2025. FMCG retail landscape in India is dominated by traditional trade with its mom-and pop stores sells which accounts for ~86% the market (Fig 1). Digital channels including E-Commerce and D2C (Direct to Consumer) are growing much faster than the traditional channels, with Accenture estimating that top FMCG companies derive ~7 – 8%2 of sales from these channels. Marico’s E-Commerce business contributed ~1% in FY173 and has grown to 8% by FY214. Dabur’s E-Commerce business has tripled in saliency from ~2% in Q2FY21 to ~6% in Q2FY225. ITC has seen similar progress with the digital channels contributing to 7% in Q2FY226 as against 5% in FY21 and ~2.5% in FY207. This increase is spurred by the disruption by marketplace platforms such as Big Basket, Udaan, Dunzo, Amazon Pantry, Flipkart, Jio Mart.
General Trade Modern Trade E- Commerce

Fig 1: FMCG sales split by Channel – 2020     

Fig 2: E-Com contribution in leading FMCG firms

With the ease of access to digital infrastructure, there has been a rise in the number of internet users. According to the Ministry of Electronics and Information Technology (MeitY), there were 448 Mn active social media users in India in February 2021. This in turn has influenced online shopping trends with social media being the biggest customer acquisition channel. On the other end of the shopping spectrum, lies the General or Traditional Trade.

The general trade with ~13 million outlets and Modern trade with ~18,000 outlets (as per Nielsen estimates) sold FMCG products to customer. With the advent of technology, a customer today can approach alternate channels such as social media, marketplace platforms or company websites and apps for their favorite brands. Social commerce, reseller models and O2O (Online to Offline) have emerged as popular alternative channels in China and have enabled disruption across all retail categories – Food to Furniture to Fashion. The FMCG distribution model in India now has at least 7 unique channels, substantial in market size as shown in Fig 3.

Figure 3: FMCG Distribution Channels

Coverage gaps and enhanced technology penetration enabling B2B E-Commerce advent
With the advent of new channels – D2C, E-Commerce – the FMCG customer or channel partner is set to gravitate towards to online channels steadily over time. This migration is expected to be sharper in urban markets, accentuated by the COVID-19 pandemic. The Chinese Urban FMCG market has seen a near 20%+ increased contribution from E-Commerce in a mere 5 year period (Fig 4), with a growth rate of nearly 35% YoY. The Indian economy is expected to follow a similar trend, even if not at such a frenetic pace.

Fig 4. Share of retail sale by channel – China FMCG Urban market

Traditional distribution channels in India contribute to 86% of the FMCG business but direct penetration of even FMCG leaders are ~60% (Fig 5). FMCG companies have coaxed, incentivized and disincentivized traditional distributions to ensure direct coverage, only for the distributors & wholesalers to successfully argue against it with the financial unviability of a direct distribution model. While a vast majority of the remaining 40%, primarily in rural geographies, get covered through indirect distribution (wholesalers, retailer -> retailer purchase), challenges remain in logistics, lower margins for channel partners and higher than MRP prices for customers.

Fig. 5. Direct Customer Penetration

These challenges have paved the way for B2B E-Commerce firms to enter, disrupt, plug coverage gaps and offer value added services to both FMCG companies & retailers. Companies like Elastic Run, Udaan, Jio Mart are being operated on this premise and are unicorns today.

Rise of channel conflict between traditional distributors and B2B e-commerce

With the emergence of B2B E-Commerce, urban markets have emerged early adopters, transferring a share of the pie from traditional distributors to these online platforms. Competition has given way to channel conflict and the FMCG firms are caught in the crosshairs. The new year of 2022 brought new challenge for major brands. In the month of January, distributors in Maharastra9, went on a strike and stopped selling HUL products, followed by distributors of colgate palmolive. Dhairyashil Patil, President of The All India Consumer Product Distributors Federation10 and The Maharashtra State Consumer Product Distributors Federation (MCPDF), told Business Line that the decision was taken due to brands refusal to engage with them on their concerns regarding the lack of price parity between traditional distributors and organised B2B distributors (Jio Mart, Metro, Walmart and Udaan).

All India consumer products distributor federation11 alleged that FMCG companies were selling products at lower prices to B2B distributors and further the organized B2B distributors were selling the same products to retailers at a lower price. In response to the AICPDFs concerns, Amul and Parle have stopped direct supply to Udaan12. Other large FMCG organizations such as HUL, Marico have acknowledged the issue publicly and have promised credible steps13 to support fair returns on investment for their general trade distribution channel.

We at Qwixpert have spent time analyzing the issue in depth and also offer solutions to FMCG organizations to address channel conflict.

The E-commerce distribution model offers an attractive value proposition

Let us start by understanding the operating model and value proposition of emerging B2B distributors such as Jio Mart, Udaan, Elastic Run and others, to both the FMCG players (suppliers) and Retailers (customers). Convenience through technology enablement, value added services and network effects of supply & demand consolidation are core principles of operation (Fig 6).


Fig 6: Value proposition – B2B E-Commerce

  1. Multicategory demand aggregation – unlike traditional distributors B2B E-commerce players are product category and brand agnostic leading to many advantages.
    • Retail & geographic demand aggregation reducing unit cost of logistics
    • Ability to pass on lower cost of operations to retailers by offering higher margins
  2. Optimized outbound logistics for FMCG brands – B2B E-Com players can in the future replace super stockists & stockists, reducing cost & complexity in downstream operations
  3. Enhanced penetration and coverage – Shared logistics across categories and retailers allow B2B E-Commerce players to viably supply rural & remote geographies
  4. Door-step delivery – No more visits to multiple wholesalers will unburden retailers
  5. Credit facility – Partnerships with financial institutions (including new age fintech firms) offer similar or better credit options to retailers in comparison to the GT distributor’s terms or those from local unorganized networks
  6. Value added services – With the use of IT based solutions, B2B e-commerce players offer full stack app-based platform to place purchase orders and other services such as billing software, stock return indents, inventory management, fintech linked cash & loan collection, automated order replenishmen

B2B E-commerce business’ income streams threatens multiple business models

The value proposition, as noted above, substantially elevates the nature of competition to traditional distribution channels. This coupled with the potential to derive income from several new income streams can alter the very foundation of FMCG distribution in India.

Control over the demand data allows B2B E-commerce players to offer Private Label products, especially in categories with lower brand loyalty. This will adversely affect revenues of FMCG brands. Partnership fees with various service providers who digitize general trade operations – accounting, financial services, inventory & demand management. Some companies have even launched their own fintech arms. The digital platform and marketplace business model offers monetization opportunities – digital marketing – search & display ads, brand promotions, charges on fulfilment services, listing & discovery fees, sale of demand data post analytics to brands.

These income streams disrupt multiple industries and functions – Asset light approach to retail sale data will impact retail research agencies like Nielsen and Kantar, Private Label sales opportunities will promote massive contract manufacturing opportunities for MSMEs and demand aggregation may make sales organizations leaner in traditional FMCG firms. The general trade distribution model also offered higher visibility over retailer sales data with sales people collecting & servicing orders. Loss of control over this data gold mine and the evidenced success of private label in global markets, have made FMCG firms circumspect.

FMCG brands can invest in assets, new partnerships & technology to address conflict

Despite general trade being the major source of distribution in India for decades, ~50 – 60% direct retail coverage creates a just cause for E-commerce businesses. The growing Indian market allows for both traditional and e-commerce channels to co-exist profitably although the status quo will have to change. FMCG brands can take several steps to resolve channel conflict and achieve inclusive growth across channels.
Channel conflict is not new to FMCG business – was seen when modern trade emerged. Most notably, consumer electronics has seen an aggressive version of this conflict with the emergence of E-Com marketplace platforms.

  1. Channel exclusivity among products and categories is often the preferred solution. However, this solution may not offer long term equilibrium in the current environment.
  2. FMCG firms are also experimenting with a direct to retailer delivery model, which bypasses the traditional distributor in their value chain. Thereby ensuring full visibility over demand data. Asian paints has successfully been operating this model for several years, offering higher service levels & customer satisfaction to its retailer partners. Qwixpert is engaged with a leading FMCG brand in evaluating this distribution model.
  3. Direct to retailer distribution model also needs a relook at warehouse networks – locationally, structurally and operationally. Investment in technology, Automated Storage & Retrieval Systems, Robotic picking, conveying and sortation systems, become critical to manage higher order complexity & throughput.
  4. Co-opetition (Collaborate competition) among brands are critical to support traditional distributors. Demand aggregation among FMCG brands in non-competing categories by offering multi-brand distribution will improve General Trade distributor RoI. Co-opetition is not new to the distribution business environment. Automotive (Eg: Autonation, Penske) and consumer electronics (Eg: Redington, Ingram) players have long followed this in the west. Best practices from these models can be identified and emulated.
  5. Technology enablement of General Trade Distributors is another solution. Leveraging 3rd part services from logistics (eg: Delhivery, Shadowfax) to facilitate last mile delivery with synergies in demand aggregation, Point of Sale technology solutions (payment gateways, order management, fulfilment, accounting & GST filing) and fintech partnerships for easy credit can ease the burden on distributors both operationally and financially. Working capital locked up can be freed and profit margins become higher.

Fig 7: Channel exclusivity and Direct to Retailer distribution

Fig 8: Multi-brand General Trade distribution system with Competitive services

Conclusion
Technology adoption in the country is rising at a frenetic pace. With the emergence of B2B marketplaces, traditional processes have been disrupted and the ensuing channel conflict is now unavoidable. The future state of equilibrium will iron out inefficiencies but must ensure an equal competitive platform for traditional and online marketplace channels. A win-win scenario does exist but it is not a quick fix. The higher degree of convenience and lower cost of service will gravitate retailers towards to B2B E-Commerce companies unless the FMCG brands and distributors equip themselves adequately.

The traditional channel of distribution must undergo massive changes in its operating model to remain competitive. FMCG companies must invest in distributor operating model upgrades. Partnerships with fintech, logistics and point of sale technologies will equip general trade distributors to compete with online channels and also reduce their costs and working capital pressures. Consolidation of general trade distribution similar to global models in automotive and electronics industries is expected.

– Giridharan Raghunathan and Ayushi Barnwal

Sources:
1. https://www.ibef.org/download/FMCG-September-2021.pdf
2. https://www.livemint.com/industry/retail/ecommerce-emerging-as-bigger-retail-channel-11623690512609.html
3. https://marico.com/investorspdf/Marico_-_Harnessing_Digital_-_Arisaig_Partners_Consumer_Symposium_2017_-_September_17.pdf
4. https://www.livemint.com/companies/news/heres-how-much-e-commerce-is-contributing-to-sales-of-large-fmcg-companies-11626611943905.html
5. https://www.businesstoday.in/latest/corporate/story/dabur-india-q2-profit-rises-20-to-rs-482-crore-e-commerce-biz-grows-over-200-277548-2020-11-03
6. https://www.business-standard.com/article/companies/itc-doesn-t-rule-out-listing-infotech-biz-open-to-creating-value-for-fmcg-121121401480_1.html
7. https://www.livemint.com/industry/retail/itcs-fmcg-sales-via-e-commerce-doubled-in-fy21-11626348915830.html
8. https://www.bain.com/insights/a-sudden-slowdown-in-2021-fmcg-recovery/
9. https://www.thehindubusinessline.com/companies/now-distributors-to-block-hul-colgate-products-in-4-more-states/article38094485.ece
10. https://www.thehindubusinessline.com/companies/after-hul-maharashtra-distributors-to-stop-selling-products-of-other-fmcgs/article38081998.ece
11. https://www.livemint.com/industry/retail/fmcg-distributors-seek-level-playing-field-threaten-firms-of-noncooperation-11638771763050.html
12. https://economictimes.indiatimes.com/tech/startups/amul-parle-others-stop-direct-supply-to-b2b-startup-udaan/articleshow/85964942.cms
13. https://www.thehindubusinessline.com/companies/after-hul-maharashtra-distributors-to-stop-selling-products-of-other-fmcgs/article38081998.ece

Ethanol Blending Program – What is the opportunity for Indian manufacturers in Ethanol production and why it can precipitate a “Gold Rush” moment?
Ethanol Blending Program – What is the opportunity for Indian manufacturers in Ethanol production and why it can precipitate a “Gold Rush” moment? 979 489 qwixpertadmin

Executive summary

India imports ~84% of its oil requirement. Ethanol Blending Program (EBP) is being promoted with vigour to help conserve foreign exchange, provide massive employment opportunities, increase farm incomes, reduce petrol prices and meet carbon emission targets. Oil Marketing Companies, with direction from the Government of India, are placing substantial orders for Ethanol to meet the 10% EBP target by 2022 and 20% by 2025. However, we are facing a massive shortfall in production. As against a target requirement of 900 Cr. litres annually, India’s current annual capacity is 467 Cr. litres. Interest subventions, capital subsidies, tax waivers etc. are expected to prop up interest among manufacturers to invest in Ethanol production across the country. 361 projects have been approved in-principle to produce ~444 Cr. litres annually. State level schemes are expected to take this number higher as investors are enticed with additional benefits. Bihar has become the 1st state to launch an Ethanol Production Promotion Policy. More states are following suit with attractive schemes.

India’s oil import dependence is very high and needs immediate solutions

In a worrying forecast, BP Energy Outlook 20201 estimates that India’s oil and gas import dependence will double by 2050. At 84%2 oil import dependence, India imports ~227 Mn metric tonnes3 of Crude Oil every year. India has seen a quadruple rise since 1999-00 in its oil imports when ~57.8 Mn. Metric Tonnes of crude oil were imported. Although the growth in oil imports has slowed from 10.7% YoY in the 2000 – 2010 vs ~3.6% YoY in the 2010 – 2020 period, reducing import dependence on a long-term basis is more critical than ever.

Fig1: India Crude Oil Imports – FY2000 to FY2020; CAGR = Compound Annual Growth Rate

The National Policy on biofuels-2018 has been drafted with the express need to reduce fossil fuel import dependence by 10% in 2022 from the 2014-15 levels. The Indian Prime Minister has stated in multiple forums that India’s oil dependence is to be brought down to 67% by 2022 when the country would celebrate 75 years of independence4. The goal also was critical as reducing oil imports would mean conservation of foreign exchange, lesser carbon emissions, lower fuel prices for the common man and an opportunity for indigenous entrepreneurs / products. With a growing economy this has been a difficult dream to achieve.

Ethanol Blending Program can help reduce import dependence but has progressed slowly

Ethanol Blending Program (EBP) has been identified as one of the levers to achieve this goal. The program started in 2003 with a resolution to sell 5% Ethanol Blended Petrol in 9 states and 4 Union Territories. This was made possible by distilleries using excess raw material (molasses or sugarcane) to produce ethanol. As sugarcane production faced a glut, this provided a succour for farmers who had to otherwise sell their harvest at extremely low prices. The benefits for all stakeholders involved was obvious and the country took to it in earnest. However, sugarcane production would not be abundant enough to meet future targets of 10% EBP by 2008 or 20% at an unset future date. Despite these initiatives, ethanol blending took off only post 2014.

Fig2: Ethanol Blending in Petrol – Blending quantity and ratio. Year is calculated between Dec – Nov5,6

The subsequent National Policy on Biofuels set out to address supply issues. The extension of ethanol as biofuel production from non-sugarcane sources such as cellulose, lignocellulose was also found insufficient to meet EBP targets. The ethanol that is produced is being used for other purposes as well – As ENA (Extra Neutral Alcohol) for alcohol production (Indian Made Foreign Liquor and Indian Made Indian Liquor) and as Industrial alcohol. Diversion of alcohol production to ethanol will have severe ramifications from a societal and economic standpoint. These have made the government look for alternate sources.

National Biofuel Policy, 2018 incentivizes ethanol production with affirmative measures

In 2018, the policy widened the scope to include feedstock. Further, the Government announced a reduction of GST from 18% to 5% on denatured alcohol. An interest subvention scheme for manufacturers – “Scheme for augmenting and enhancing ethanol production capacity”. Further, the Government has periodically revised upwards, the price of procurement by OMCs to ensure sustainable revenue generation for ethanol manufacturers. The price for ethanol from sugarcane juice, sugar, sugar syrup is now at Rs. 62.65 per litre, B-heavy molasses ethanol at Rs. 57.61 per litre and C-heavy molasses ethanol at Rs. 45.69 per litre. GST and transportation charges are also additionally payable by OMCs7. OMCs have also fixed the Basic Rate of procurement for ethanol from Damaged grains at Rs. 51.55 per litre and from surplus rice procured from Food Corporation of India at Rs. 56.87 per litre.

Fig 3: State wise Ethanol requirement for blending in Cr. Ltrs by 2024-25 to achieve 20% blending

Fuelled by these positive forces, the Ethanol Supply Year 2020-21 (Dec’20 to Nov’21) has seen record blending rates. In the first 4 months (Dec’20 to Mar’21), 100 Cr. litres have been supplied leading to a blending rate of 7.2%8. Several states – Goa, Maharashtra, Karnataka, Gujarat, Uttar Pradesh, Haryana, Uttarakhand, Punjab, Delhi and Himachal Pradesh – are also close to achieving the 2022 target of 10% EBP. Sugar industry predicts India could end the year with an 8% EBP.

Steep targets for 2022 and 2025 and supportive Government schemes are expected to fuel future demand; Departments are clearing projects at breakneck speed

With the government targeting 20% blending by 2024-25, Ministry of Consumer Affairs, Food & Public Division estimates the annual requirement to be 900 Cr. Litres9. However, with a total supply capacity of only 427 Cr. Litres and highest annual supply for EBP @ 188 Cr. Litres, India faces a huge shortfall to achieve this target. This indicates the massive push for new projects setting up ethanol production across the country. As per the ISMA (India Sugar Manufacturer’s Association), the Department of Food & Public Distribution has approved 361 projects which will increase capacity by an additional 444 Cr. Litres / annum. 53 projects which will contribute 62 Cr. Litres / annum have already received sanction and disbursal under the interest subvention scheme.

6 states, Uttar Pradesh, Maharashtra, Karnataka, Andhra Pradesh, Punjab and Bihar have evinced maximum interest from manufacturers due to their proximity to raw material – Sugarcane / Molasses and Feed stock (Maize, Rice etc.). The approved projects have also been extended soft loans from banks and the approximate interest subvention is expected to be Rs. 4,045 Cr. for a period of 5 years.

Individual states are following the Central Government and want to cash in on the vast employment generation opportunity

Bihar, has gone ahead by becoming the 1st state to introduce an ethanol production promotion policy11. Apart from the interest subvention offered, the policy has several additional perks for investors.

  • The policy permits production of ethanol from all feedstock, including surplus quantities of maize.
  • A 15% capital subsidy on the cost of the plant and machinery up to a maximum of Rs. 5 Cr.
  • Additional capital subsidies (0.75%) or upto a maximum of Rs. 5.25 Cr. for special class of investors – SCs/ STs/ EBCs/ Women, differently-abled, war widows, acid attack victims and third gender entrepreneurs
  • Stamp duty and registration are also to be waived off while land conversion fees is expected to be revoked

To attract investments, subsidies, incentives & schemes as part of Ethanol Production & promotion policies are being offered by every state. For instance, the policy laid out by the Jharkhand Government12 has proposed a 25% subsidy on fixed capital upto Rs. 50 Cr. for non-MSMEs and Rs. 10 Cr. for MSMEs. Further, employee skill development subsidies worth Rs. 13,000 per employee and monthly ESI & EPF contributions to the tune of Rs. 1,000 per employee for a period of 5 years are also expected.

Other states are also expected to follow suit as India has moved forward the EBP target of 20% from 2030 to 2025. These present a massive opportunity to ethanol manufacturers while ensuring India saves Rs. 12,000 Cr. worth of oil imports over the next 4 years.

The diversion of molasses & sugarcane to ethanol production is expected to impact Extra Neutral Alcohol and Rectified Spirit manufacturing. Distilleries have modified their distillation columns to produce the more remunerative ethanol. IMFL manufacturers are hence looking to ringfence sourcing through own investments, long-term sourcing contracts and backward integration to protect raw materials such as molasses and broken rice.

About the Authors:

Mr. PN Poddar

Mr. Poddar is a Former, Senior Vice President and Head of Distillation, United Spirits Ltd. He has over 40+ years of experience in design, set-up, commissioning and profitable operation of distillation plants for Ethanol, Extra Neutral Alcohol, Malt Spirit production and ZLD (Zero Liquid Discharge) systems.

Mr. Giridharan Raghunathan

Giri has 9 years of management consulting experience. Giri specializes in Food & Beverages, Retail and Automotive sectors. He leverages customer insights and analytics to drive growth and profitability for his clients.

References: 

  1. Our Bureau (2020), “India’s oil and gas import dependence to more than double by 2050: bp Energy Outlook 2020”, The Hindu Business Line, 14 Sep. Available at: https://www.thehindubusinessline.com/economy/indias-oil-and-gas-import-dependence-to-more-than-double-by-2050-bp-energy-outlook-2020/article32600221.ece
  2. PTI (2019), “India’s oil import dependence jumps to 84 per cent”, The Economic Times, 05 May. Available at: https://economictimes.indiatimes.com/industry/energy/oil-gas/indias-oil-import-dependence-jumps-to-84-pc/articleshow/69183923.cms?from=mdr
  3. Data for crude imports and exports. Available at: https://www.ppac.gov.in/content/212_1_ImportExport.aspx
  4. PTI (2019), “India on track to cut oil import dependence by 10 per cent by 2022: Pradhan”, 06 Nov. Available at: https://energy.economictimes.indiatimes.com/news/oil-and-gas/india-on-track-to-cut-oil-import-dependence-by-10-per-cent-by-2022-pradhan/71937504
  5. Anjan Ray (2020), “World Biofuel day webinar: Biofuels for Atmanirbhar Bharat: Bio-ATF and Room temperature Biodisel”, 10 Aug. Available at: http://petroleum.nic.in/sites/default/files/WBD_10aug20.pdf
  6. Ethanol Blending status. Available at: https://www.bharatpetroleum.com/pdf/EBP-Programme-progress-23-11-2020-d3ad1d.pdf
  7. PIB Delhi (2020), “Cabinet approves Mechanism for procurement of ethanol by Public Sector Oil Marketing Companies under Ethanol Blended Petrol Programme – Revision of ethanol price for supply to Public Sector OMCs for Ethanol Supply Year 2020-21”, 29 Oct. Available at: https://pib.gov.in/PressReleseDetail.aspx?PRID=1668399
  8. Mukherjee, Sanjeeb (2021), “At 7.2%, India blends record ethanol with petrol in first 4 months”, Business Standard, 05 Apr. Available at: https://www.business-standard.com/article/economy-policy/at-7-2-india-blends-record-ethanol-with-petrol-in-first-4-months-121040500016_1.html
  9. Ministry of Consumer Affairs, Food & Public Distribution, Depart of Food & Public Distribution (2021), “Implementation of Policy for extending financial assistance to project proponents for enhancement of their ethanol distillation capacity or to set up distilleries for producing 1st Generation (IG) ethanol from feed stocks such as cereals (rice, wheat, barley, corn & sorghum), sugarcane, sugar beet etc. – Reg.”, 14 Jan. Available at: https://sugarethanol.nic.in/assets/Pdfs/LetterofImplementationofpolicy.pdf
  10. Industry Research (2020), “Ethanol capacities, supplies and targets: October 2020”, 14 Oct. Available at: https://www.careratings.com/uploads/newsfiles/Ethanol%20Capacities%20Supplies%20and%20Targets%20October%202020.pdf
  11. Arora, Sumit (2021), “Bihar becomes first state to have own ethanol policy”, Current Affairs Adda 247, 22 Mar. Available at: https://currentaffairs.adda247.com/bihar-becomes-first-state-to-have-own-ethanol-policy/
  12. PNS (2021), “25 % subsidy for investors for ethanol production” Daily Pioneer, 28 Jul. Available at: https://www.dailypioneer.com/2021/state-editions/25—subsidy-for-investors-for-ethanol-production.html

How will the addition of 2 new teams impact the P&L of current teams?
How will the addition of 2 new teams impact the P&L of current teams? 660 726 qwixpertadmin

The pandemic has changed the lives of millions across the globe, personally and professionally. Entertainment is no outlier, with India’s cricket-crazy fan base missing the experience of live matches. The 2020 IPL season was a much-awaited bloom in the drought. BARC India’s viewership data indicates an overwhelming response to IPL 2020. 405 million viewers tuned in to watch the IPL. Indian audiences consumed 400 billion minutes of IPL this year, leading to a 23% increase in consumption over the previous year.

The franchise finances have, however, taken a hit this year. Revenues dropped significantly due to the lower title sponsorships (Vivo’s Rs. 440 Cr. vs. Dream 11 Rs. 222 Cr.), reduced jersey sponsorships, and loss of match day income due to the shifting of venues to Dubai.

Will adding two new franchises be a boon or a bane for the existing franchises? If added, how will it further affect the business prospects of existing franchises?

Teams may have to take home a lower share of the broadcasting rights revenues – their major revenue contributor

Currently, the eight teams play a total of 56 matches in a league format (both home and away) and 4 matches in the knockout round, resulting in a total of 60 matches. If the BCCI members (state associations) approve two new teams in the annual meeting in December end, it will not be the first time the IPL has had ten franchises in a season. In 2011, BCCI added Pune Warriors and Kochi Tuskers to the original roster of eight franchises. The home-and-away format, which would have meant a total of 94 matches, was shelved due to fear of burnout. Consequently, the IPL split the ten teams into two loose groups with 70 league matches and four playoff games. Teams, though, were ranked together in one composite league table.

The proposal by BCCI for the new IPL format, if the two new teams are added, is that during the league phase, every team will play the same number of league matches (14) as of today. The teams will be split into two groups of 5. Each team will play the other four in their group, in both home and away format (8 matches), four of the teams in the other group once (4 matches, either home or away), and the remaining team in the other group twice, in both home and away. A random draw will decide the groups’ composition and who plays whom across the groups once and twice.

The broadcasting rights revenue of Rs 3,200 from Star India is less likely to increase with the addition of 2 new teams, especially with the tournament length unchanged. Hence the central rights share given to the franchises is expected to remain the same at Rs 1,600. The addition of 2 teams may lead to the existing teams getting a 20% (Rs 40 Cr) lesser share of central revenue. While the title sponsorship fell by ~50% in IPL 2020, it is expected to increase in 2021 and beyond as the tournament returns to India.

Franchisees must leverage sponsorships and brand extensions to offset rights income drop

Leading franchises have seen a 10-15% decline in 2020; for the rest, sponsorship amount has dropped by 25-30%. This year the eight franchises are estimated to have earned anywhere between Rs 300-350 crore, compared to Rs 400 crore last year.

The top four franchises earn between Rs 70-80 crore from sponsorship, while the remaining four franchise’s earnings ranges from Rs 30 to Rs 40 crore. Even as franchises could close most of the deals before lockdown, a lot of the inventory, such as space at the back of the helmet, non-leading arm, remained unsold.

From 2016 – 2017 the eight teams’ total sponsorship revenue remained flat at Rs 219 crore. In the 2018 edition of IPL, sponsorship revenue grew by 37% – 46%. The total sponsorship pacts signed by the eight teams were in the range of Rs 300–320 crore.

Sponsorships are dependent on the team’s star players and fan base. New franchisees may struggle to generate much in the initial seasons. However, the existing franchisees having an established core group of international stars and cultivated a loyal fan following will continue the growing trend. Brand extensions will become significant as teams identify ways to engage fans even beyond the IPL season. RCB Bar and Café, inaugurated on 19th Dec in the heart of Bangalore, is a case in point.

Ticketing Revenue may shrink by ~10% – 15% with lower home matches/team; a holistic approach to augmenting in-stadium revenues imperative

BCCI, in the past, had compensated franchises when the T20 tournament moved out of India to countries such as South Africa and UAE – the situation was different this year. The teams had to let go of earning from the ticket sale, which amounts to ~Rs. 400 crore. While upcoming seasons are expected to happen in India, 1 or 2 lesser home matches/team indicates lower earnings. With occupancy at ~87% overall, teams will have to maximize seat utilizations through intelligent use of analytics and augment in-stadium revenues with activities engaging fans pre- and post-matches.

Conclusion

BCCI’s AGM on 24th Dec 2020 is likely to pass the proposal to add two new teams to the IPL. It is expected that the 2021 season will remain unchanged with a mini-auction in February. The 2022 season will start with a mega auction at the beginning of 2022. This allows sufficient time for franchisees to prepare in the back end – with coaching and support staff, talent scouts identifying potential auction picks, sponsorship and marketing planning, stadium preparation, and pre-season fan engagement.

BCCI may tweak the share of central rights income from 50:50 to 60:40. While this impacts BCCI’s revenues, the new franchisee bids (Expected @ $300 Mn as per a Times of India report) is expected to compensate for the drop. However, teams must develop self-sufficiency in income generation and not remain overly dependent on the central rights income share. Enriching the in-stadia experience for fans will augment income generation. Fan and sponsor engagement beyond the playing season to generate higher sponsorship and brand extension incomes are critical for long term franchisee viability.

The BCCI’s AGM will throw some light on the upcoming IPL seasons. For the cricket crazy fans at large, the show gets only more exciting.

-By Gopika Hemachander and Maheswaran Ganapathy

What should auto manufacturers do to succeed in the Electric Vehicle era? – Automotive industry’s smartphone moment
What should auto manufacturers do to succeed in the Electric Vehicle era? – Automotive industry’s smartphone moment 774 619 qwixpertadmin

Executive summary

The migration to Electric Vehicles from Internal Combustion Engine technology has gathered pace. Customer anxieties over their purchase and usage, while they remain, are declining. Regulatory authorities, manufacturers, and investors have set themselves ambitious targets and work in overdrive to achieve them. Players across the automotive value chain are facing disruption. Adoption and migration to the new normal are critical to avoid obsolescence. Manufacturers will need to diversify their portfolio, invest in R&D and capability development, cooperate with competition to overcome product obsolescence or end up being upstaged by new-age competitors. Regulatory impetus, a significant reduction in the number of moving parts, and lower cost of ownership will drive manufacturers to innovate through value engineering. More than 90% import of EV components as of date presents opportunities for local substitution. India must continue its global leadership in automotive manufacturing by investing early in EV. Loss of jobs and livelihoods expected across OEMs and OES. The Government needs to step-in with a holistic plan, including revamping the current educational system, to secure careers and develop an EV-specific talent base. Global geopolitics may shift from the Gulf to South America if and when Lithium becomes to new oil.

Electric vehicles technology is disrupting the entire automotive value chain

A decade ago, feature phone manufacturers overlooked the disruption from smartphones. The 16x sales growth of smartphones over a decade and a ~50% market share (in 2019) in the mobile handset category (Fig. 3) shares lessons for the automobile industry. The $118 bn automobile industry, contributing to around 7% of the Indian GDP, is expected to contribute over 35 million jobs to the Indian populace. Further, auto exports contribute to Rs. 1.0 lac Cr. earned in foreign currencies. This industry is facing disruption from green/energy-efficient technology, with Electric Vehicles leading the charge. The electric vehicles industry is estimated to grow to Rs.50,000 crores opportunity by 2025. Significant interest is noticed in this relatively nascent market, even as electric vehicles contributed to ~1.5% of the total vehicle sales in 2019. Avendus Capital, in its recent report, expects the contribution from 3W, buses, and 2W to drive adoption soon (Figs. 1 & 2).

Fig 1: Electric vehicles sales (units) – 2019

Fig 2: Key categories for EV sales by 2025

Fig 3: Mobile handset sales Year on Year

The migration to Electric Vehicles is currently slow but expected to disrupt players across the automotive value chain – Manufacturing and Sales & After-sales

Manufacturing includes Original Equipment Manufacturers (OEMs), their suppliers (Tier-1 OES), and their suppliers (Tier-2, Tier-3, and Raw Material manufacturers). Sales & after-sales include many players such as dealerships, energy infrastructure partners, financiers, authorized service stations, unorganized road-side mechanics, spare parts sellers, and branded/unbranded used vehicle network. Customers and regulatory bodies wield considerable influence on each of these players and accelerate or dampen the pace of disruption. In a 2-part series, Qwixpert will elaborate on the key trends, their implications across the value chain, and recommended responses for sustained business performance.

Portfolio diversification, capability development, and product innovation are critical for manufacturers to stay ahead in the EV revolution

  1. Technological readiness and upskilling are imperative for success in the EV era

Electric vehicles are much simpler than their Internal Combustion Engine (ICE) counterparts. As per Avendus’ research, a typical EV has 24 moving parts compared to ICE’s 150 moving parts. A comparison between the two technologies highlights four scenarios. (Fig 4)

Fig 4: Four scenarios due to changing automobile technology – ICE to EV

Firstly, several parts are expected to become obsolete. The injection, emission control, and fuel storage systems are no longer needed as batteries replace biofuel energy. Secondly, existing parts may undergo modifications, as multi-speed transmission systems as electric motors deliver power instantaneously. Conventional brakes are to be replaced by regenerative brakes. Tire manufacturers are modifying their designs to develop lower rolling resistance and noise generation. Thirdly, new parts’ requirements come up, such as the battery and electric motors to convert electric energy to mechanical energy. Finally, parts such as body frames, seats, etc., are applicable in both engine classes and will continue.

Fig 5: Impact of EV adoption for each of the auto components

Indian Government has an ambitious vision of ensuring 100% EV by 2030. The implications of these possibilities are currently minuscule due to the low contribution of electric vehicles to the overall automotive sector. The impact of even a 10% migration in vehicle sales to EV will be substantial as the automotive industry employs over 7 million people (2 million by OEMs, 5 million by component manufacturers). There are an additional number of people involved in service stations and dealership networks as well.

The projected impact is twofold. Primarily, product obsoletion will precipitate business closures. MSMEs involved in supplying to Tier-2 and Tier-1 vendors of OEMs will need to shut shop unless a technology migration path to EV is set-up. Secondly, new and modified auto components require new skills. Lower moving parts also indicate automation opportunities, leading to job losses among the semi-skilled or unskilled labour force. There is a compelling need for holistic upskilling to create a sustainable supply of high skilled labour. The Government must ensure new courses and upgrading existing syllabuses of colleges, institutes, and polytechnic centres. In the near-term, manufacturers must spend on upskilling their workforce to remain increasingly relevant.

Auto component manufacturers investing in upskilling and R&D to deliver cutting edge product innovation are expected to succeed in the EV era. Suppliers dependent on principals’ designs to operate a cost-efficient production unit will need to engage principals for business sustenance.

  1. White spaces emerge due to high import dependence; Co-opetition a must among manufacturers

Auto component suppliers must assess their portfolios on the extent of exposure of obsoletion. The suppliers must actively integrate product mix diversification into their business plans to ensure long term business solvency. Companies can also go aggressive in identifying white spaces and quick wins (products with greater synergy with an existing portfolio, good market size, a higher degree of import substitution, and low investment activity at present). The majority of the EV parts (>90%) are imported today due to a lack of manufacturing infrastructure and skill gaps. Products such as the battery, chargers, electronic controllers, power converters, electric motor, and transmission are mostly imported, and these contribute to more than 2/3rd of the cost of an EV. Such import dependency presents a massive import substitution opportunity, especially for early movers. Indigenous OEMs and OES can partner with global EV leaders to fill technological and skill gaps. The Exide-Leclenche JV and Amara Raja-Gridtential Energy partnership are examples in this regard.

Platform approach in passenger vehicle development needs to be extended to electric vehicles to drive down initial costs and encourage faster adoption. Volkswagen has created a 4W EV platform called MEB and has extended it across its subsidiaries such as Audi, Skoda, and Volkswagen. The CMF-EV platform is an extension of Renault, Nissan, and Mitsubishi’s partnership to its Electric Vehicle range. Cooperation among OEMs at a scale never seen before is expected. The platform approach will help faster implementation of technologies such as battery swapping. Anxiety among customers w.r.t adequate post-purchase support catalyzing the pace of adoption. Platform approach and co-opetition to standardize components (especially battery) also support adoption.

  1. New raw materials and battery technology present lucrative investment opportunities

Batteries can make up as much as 50% of the EV cost (Fig 6). Several studies link the lower-paced adoption of electric vehicles to the higher initial cost, and battery technology is intricately connected to the demand. The cost of battery has come down from > $1,100 / kWh in 2008-09 to $156 / kWh in 2018-19. The inflection point for widespread adoption is expected to be $100 / kWh—the experts time this between 2022 and 2025.

Fig 6: Cost of individual components in an EV

China, Korea, and Japan control ~95%+ of global battery production. Countries across the globe are encouraging investments with incentives and subsidies. Manufacturers setting up new facilities in India can expect incentives of up to $25 / kWh. 3 Li-ion battery units with a combined capacity of 10 Gigawatts are expected to be set-up in Telangana with a total investment of Rs. 6,000 Cr. A phased increase in import duties of battery components from 5% to 15% will hasten battery manufacturing indigenization.

Crude oil prices are seeing a declining trend and are expected to continue in a downward trajectory. Experts across the globe believe the coronavirus pandemic may have accelerated a global energy transition away from oil. Asset write-offs worth $22Bn from Royal Dutch Shell and $17.5 Bn from BP in Jul’20 highlight the hastening pace of decarbonization across the world. Mainstreaming electric vehicles will create massive spikes in demand for raw materials such as Lithium, Cobalt, Manganese, etc., integral to manufacturing rechargeable batteries. The global focus may move away from the gulf to the top Lithium producing countries such as Australia, Chile, and China (Fig. 7). Analysis of the known reserves indicates a prospective geopolitical shift from the Gulf to South America (Fig. 8), if and when Lithium becomes the new oil.

Fig 7: Lithium production across the world

Fig 8: Lithium reserves across the world

Another key trend is suppliers’ investing in value engineering to increase vehicle range by making it lighter using Fibre Reinforced Plastics (FRP) for chassis. Tyres are also undergoing redevelopment to lower rolling resistance without compromising safety and increase fuel efficiency. Disposal, however, is a concern. Less than 5% of all spent Li-Ion batteries are recycled. FRPs cannot be reused, and higher costs of Lithium recycling (vs. mining for new Lithium) has led to inefficient disposal (landfills) with potentially harmful environmental effects.

Further, recycling is essential to harness rarer metals such as cobalt to avoid shortages during widespread adoption. Companies such as Redwood Materials, set-up by Ex-Tesla employees, are hence building recycling and disposal solutions. Current regulations around Li-Ion battery recycling are nascent and do not put the onus on manufacturers, unlike the food packaging industry. If it develops in the future, such a scenario may increase the initial cost to the customer.

Conclusion

Electric vehicles’ impact in the automobile industry is expected to be similar to that of smartphones in the mobile handset industry. Despite Electric Vehicles contributing to only 1.5% of total vehicle sales in 2019, the manufacturing circles are abuzz. With a 50% reduction in moving parts, several Tier-1, 2, and 3 suppliers must assess and diversify their portfolios to future-proof their businesses. More than 90% of the electric vehicle parts are imported, creating massive opportunities in import substitution. However, technology partnerships and rapid upskilling are critical. Early movers are set to gain massively as the Government offers subsidies and increases duties to enable indigenization. Co-opetition through a platform approach for vehicle and component development will benefit the entire manufacturing ecosystem. As battery costs make up 35% – 50% of total vehicle cost, countries with natural Lithium reserves are set to gain. Value engineering to reduce costs and improve vehicle performance are expected to continue as customer anxiety over higher initial investment acts as a key barrier to migration. India must act fast to offer cost-efficient and high-quality manufacturing options to Electric Vehicle players across the world.

Authors: Giridharan Raghunathan, Maheswaran Ganapathy and Rahul Das

Sources:

  1. Kusnetz, Nicolas (2020) “BP and Shell Write-Off Billions in Assets, Citing Covid-19 and Climate Change”, 2-Jul. Available at: https://insideclimatenews.org/news/01072020/bp-shell-coronavirus-climate-change
  2. NS energy staff writer (2020), “Profiling the top six lithium-producing countries in the world”, 23-Nov. Available at: https://www.nsenergybusiness.com/features/top-lithium-producing-countries/
  3. Kohli, Pratati Chestha (2020), “Opportunities in EV battery and cell manufacturing in India”, 2-Jul. Available at: https://www.investindia.gov.in/team-india-blogs/opportunities-ev-battery-and-cell-manufacturing-india
  4. James Eddy, Alexander Pfeiffer, and Jasper van de Staaij (2019), “Recharging economies: The EV-battery manufacturing outlook for Europe”, 3-Jun. Available at: https://www.mckinsey.com/industries/oil-and-gas/our-insights/recharging-economies-the-ev-battery-manufacturing-outlook-for-europe
  5. PTI (2019), Government notifies phased import duty hike on electric PV parts, lithium-ion cells, 11-Mar. Available at: https://economictimes.indiatimes.com/news/economy/foreign-trade/government-notifies-phased-import-duty-hike-on-electric-pv-parts-lithium-ion-cells/articleshow/68363381.cms?from=mdr
  6. Kia official website. Available at: https://www.kia.com/dm/discover-kia/ask/do-electric-cars-have-transmissions.html#:~:text=Electric%20cars%20don’t%20require,RPM%20within%20a%20specific%20range
  7. SIAM website. Available at: https://www.siam.in/statistics.aspx?mpgid=8&pgidtrail=9
  8. India Electric Vehicle Market Overview Report, Indiaesa.info. Available at: https://www.indiaesa.info/media/downloadfiles/EV_Report_Brochure._234429529.pdf
  9. Electric Vehicles, Charging towards a bright future, Avendus. Available at: https://www.avendus.com/india/ev-report
  10. Bajwa, Nehal, InvestIndia. Available at: https://www.investindia.gov.in/sector/auto-components
  11. Craftech Industries. Available at: https://www.craftechind.com/fiber-reinforced-plastic-in-action/
  12. Michael Friesa, Mathias Kerlera, Stephan Rohra, Stephan Schickrama, Michael Sinninga, Markus Lienkampa, Robert Kochhan, Stephan Fuchs, Benjamin Reuter, Peter Burda, Stephan Matz, Markus Lienkamp, “An Overview of Costs for Vehicle Components, Fuels, Greenhouse Gas Emissions and Total Cost of Ownership Update 2017”. Available at: https://steps.ucdavis.edu/wp-content/uploads/2018/02/FRIES-MICHAEL-An-Overview-of-Costs-for-Vehicle-Components-Fuels-Greenhouse-Gas-Emissions-and-Total-Cost-of-Ownership-Update-2017-.pdf
  13. Linda Gaines, Kirti Richa and Jeffrey Spangenberger (2018), “Key issues for Li-ion battery recycling” 22-Nov. Available at: https://www.cambridge.org/core/journals/mrs-energy-and-sustainability/article/key-issues-for-liion-battery-recycling/F37D3914A1F5A8FD0ED3EF901664D126
  14. Dutta, Arnab (2019), “India’s handset industry may go past the 300-mn unit mark in 2019”, 10-Jul. Available at: https://www.business-standard.com/article/companies/india-s-handset-industry-may-go-past-the-300-mn-unit-mark-in-2019-119010401162_1.html
  15. Pathak, Tarun (2017), “Mobile handset market in India”, 29-Nov. Available at: https://indiaincgroup.com/mobile-handset-market-india/

How can the Indian API industry grow rapidly and compete in the global market?
How can the Indian API industry grow rapidly and compete in the global market? 931 616 qwixpertadmin

Executive Summary

The Indian Pharmaceutical Sector is expected to grow to Rs. 7,371 Billion by 2025 from the current Rs. 3,746 Billion (FY 20). This growth will be driven by both domestic needs and export commitments.

India exports to over 200 countries with a major share of the US generic market (40%) and the UK (25%). India also exports to countries in Africa, the EU, ASEAN, Latin America, and the Middle East. Both exports and countries exported to are expected to increase in the foreseeable future. Export of finished dosage forms (FDF) are projected to grow at ~ 8 -10% over the next decade. However, the API / intermediate sector has been stagnant for a while despite it being the starting point for the FDF sector.

The Indian Government’s healthcare expenditure has grown between 15 – 20% from 2016, currently valued at Rs. 3,316 Billion. The domestic market will remain significant as the Government boosts healthcare. Budget allocation for domestic healthcare is 1.6% of GDP and is expected to grow duet the various inclusive growth strategies.

While India’s Finished Dosage Form (FDF) manufacturing is very mature and capable, the API and intermediate sector have to regain its relevance and demonstrated capability of the past. The off-shoring of API / Intermediate manufacturing due to lower prices led to (a) the sector not keeping pace with the FDF sector, (b) low or no technology upgrades, and (c) idle capacities. Fortunately, people competence and capability are available in abundance, which can gradually but surely re-establish leadership.

The Indian Government has also set aside Rs. 100 Billion to achieve self-reliance for end-to-end development of the pharmaceutical sector and to ensure national health security for a country of 1.4 Billion.

This white paper explores a few ways to truly leverage our strengths and manage risks to realize the potential of the pharmaceutical industry (API + FDF), especially in the small and medium category.

Background

India, considered to be the pharmacy of the world, has seen an enviable growth over the last three decades and today caters to 20% of the global generics market

India has established itself as the pharmacy of the world by exporting to global markets. It ranks 3rd worldwide for production by volume and 14th by value. It supplies 20% of the demand for Generic medicines and ~62% of Vaccines.

However, the bottleneck in the Indian pharma industry is its heavy reliance on China for APIs. Following the API shortage due to Coronavirus and the subsequent supply chain disruptions, the Indian Government has announced incentives to manufacture API and KSM (Key Starting Material) domestically. We believe that the internal environment and global sentiments are perfectly aligned for India to emerge as a strong manufacturer of API for domestic and export consumption. In this white paper, we examine the API industry and recommend growth strategies for API manufacturers.

API’s are critical products in need of import substitution and restructuring measures The India pharma industry is valued at Rs. 3746 Billion (Figure 1). It consists of two complementary product segments: API and FDF. The finished dosages (FDF), which are the final products sold to customers, are prepared by combining the API with other ingredients basis the formulation. The Indian FDF industry is a highly mature segment, comprising 75% of the pharma industry and with a significant export presence.

Figure 1: Indian Pharma Market Structure (FY 20)

The global API market is valued at Rs. 12,470 Billion and India is the third-largest producer, preceded by China and the USA. India plays in the high value- low volume market comprising of high potency APIs for regulated markets. Firms like Divi, Jubilant, and Shilpa have product-level leadership in global markets for a few niche APIs.

Despite the domestic manufacturing set up, Indian drug manufacturers rely on China for ~70% of API requirements (Figure 2). China has established its dominance in the market due to its cost advantage (~25% cheaper inputs), infrastructure capabilities, and chemical technology strength.

Figure 2: API dependencies of India (FY 19)

During the COVID-19 pandemic, Chinese industries were mandated into a protracted lockdown, causing the API’s supply chain disruptions. Indian drug manufacturers faced severe API shortages, with costs increasing by more than 100% for critical drugs. This highlighted the pharma industry’s risk management approach leading to precarious positions for both the country and the industry. The overdependence on China highlighted the fragility of our national health security and the industry’s business resilience.

India is not alone in this realization. More and more countries are recognising this and are developing alternate sources or moving to a China+One import strategy, creating a huge opportunity for India, given her API leadership in the not too distant past. The Government of India has also identified 53 APIs for which India is dependent on China and has provided incentives to build self-reliance. The schemes include the development of three Bulk Drug Parks and a production linked incentive scheme of Rs. 6,400 Crores. With the favourable market and manufacturing landscape, the API business can be a profitable venture, and we highlight the growth strategies for pharma companies looking to develop a more resilient and sustainable API business.

I. Integration is a key to unlocking higher growth and increasing global presence

Pharma firms in India can be classified into 3 segments basis the share of API in their business.

  1. The pure-play API companies such as Divi, Solara, and Aarti Drugs generate more than 95% of their revenue from Generic and Speciality API’s sold as raw material to develop and manufacture finished drugs by local and foreign pharma companies.
  2. The second segment consists of firms with a 30-60% share of API, such as Granules, Laurus Labs, and Ipca. These firms had started in the pure-play segment and have gradually integrated across the value chains. Firms like Wanbury and Nectar also offer CRAMS services focused on developing APIs.
  3. The last segment consists of firms that earn most of their revenue from FDF business but have an API business for captive consumption and small-scale external sales; they include the likes of Cipla, Cadila, and DRL.

While the pure-play API segment has very grown rapidly at 25% CAGR (FY 17- 20), their profitability is low owing to the high raw material costs (Figure 3). On the other hand, FDF firms have modest growth but have remarkably high profit margins of ~21%. Vertical integration can bring the best of both pure-play segments and increase access to export markets.

Figure 3: Segment Wise financial comparison (FY 20)

API manufactures have gradually entered the formulation business. This forward integration of API firms requires initial capital outflow, but profits can increase by 200-300% and increase the scope of exports.

For instance, Laurus labs’ revenue share from the formulation business was 2% in 2019 and 29% in 2020 (Figure 4). While the industry’s median profit in 2020 reduced to 9% due to Coronavirus, the integration helped Laurus stabilise at 11%. Their export revenue increased from 53% to 65% in 2020. Market Cap of Laurus has increased by over 2x during this period.

Granules India has also gradually integrated across the value chain. The Market Cap of Granules has moved by almost 3x driven by the approach, among other changes in the portfolio.

Figure 4: Integration of Laurus Labs in Formulation Segment (FY 2018- FY 2020)

The pandemic has reiterated the importance of developing domestic raw material sources, and formulation manufacturers should venture into upstream integration. They can grow more rapidly by offering a combined product portfolio. The captive consumption segment accounts for ~70% of the industry demand. Companies like Cipla, Zydus Cadila, and Dr. Reddy manufacture API for internal consumption as it reduces costs, and products can be launched with greater technical certainty and better control on launch timelines. Cadila, Cipla, and DRL have lower raw material costs (26-30%) compared to the industry median of 38%.

We think the time is right for the Indian FDF companies to in-house manufacturing of portfolio critical APIs while entering into more long term, partnership-oriented (profit sharing) contracts with pure-play Indian API / KSM / ingredient players. In-housing, followed by local in-country manufacturing, will be the preferred approach going forward. This strategy will also lead to better risk management and advantaged financials for all the players.

The API and FDF industries are expected to grow even more rapidly due to the Coronavirus crises. We believe that this is an opportunity for the industry at many different levels. The global demand for paracetamols, immunity boosters, and even specialised drugs and vaccines are expected to sustain. Historically, nearly 85% of the antibiotics used in the USA are imported from China. The supply shocks from China has affected Europe and the USA, and there is potential for India to step in and export to global markets

There is scope to establish manufacturing clusters comprising of API manufacturers, Formulation manufactures and FDF manufacturers. While a cluster had been set up in Telangana in 2016, several other ventures of a much larger scale are needed in the life sciences ecosystem. Manufacturers should also enter partnerships and Joint Ventures to improve quality, widen product portfolio, and enter global markets.  For example, Zydus Takeda- a partnership between Zydus Cadila and Takeda Pharmaceutical (Japan) is a 100% export-oriented unit developing API’s and KSM’s and undertaking research in complex substances.

II. Investment in Research and Development of complex API’s will command higher premiums and provide better margins

Research and development spend is an important metric used by global customers to evaluate the performance and capability of a supplier. Indian firms with high importance to R & D makeup 46% of the overall FDA DMF approvals and received 336 ANDA approvals in 2019.

The investment in research and development can increase profitability and provide higher growth. Firms such as Dr. Reddy, Biocon, Cipla, Cadila spend 6-9% on R&D with 20-25% PBT (Figure 5).

Figure 5: Comparison of R&D Spend and Profitability (FY 20)

Firms that have invested in R&D have achieved a growth rate of 9% against a 4% growth rate of firms with low R&D investments (Figure 6). By investing in R&D and subsequently filing for ANDA’s and DMF’s, firms can secure their future revenue stream. Most of the firms with high R&D spend also have FDA ANDA filings for the Critical APIs (as classified by the Government of India).

Figure 6: Comparison of R&D Spend and Growth (FY 20)

But expenditure on R&D is heavily skewed towards firms making finished dosages. Pure play API firms spend just 1% on R&D, compared to ~5% by FDF manufacturers (Figure 7). By investing in targeted product development, API firms can earn higher margins and increase growth potential. 

Figure 7: Segment-wise R&D Spend, ANDA and DMF Approval (FY 20)

API industry consists of two segments: Generics and Branded/ Innovative API. Generics consists of API’s for pain management, diabetes, cardiovascular disease; they have dominated the market with a share of 80%.

Branded/Innovative APIs are complex APIs that target niche therapeutic areas such as oncology, autoimmune and metabolic indications. It has a higher retail price and offers more lucrative margins. For instance, the API for paracetamol is $4/ kg, whereas Efavirenz, a drug to treat HIV, is priced as $95/kg in India. The cost of API’s for Innovative Drugs is 10% of the retail price as compared to 40% for generics. The branded segment is growing rapidly, and China is not considered a credible player in this segment due to competence gaps. This is a sustainable business segment for Indian API manufacturers to target.

R&D is the engine of any pharmaceutical business as it creates new products, opens up new markets, encourages new partnerships, and enhances revenue/profit growth in integrated business approaches. We believe a more internal and external collaborative approach can leverage the strength of the different stakeholders for a better return on the capital/resources deployed.

API manufacturers can collaborate with Contract research and manufacturing players (CRAMS) to pursue complex products’ research and development. It is a cost-effective solution that can reduce capital expenditure by 20-25% and offer a trained workforce.

III. Improving the manufacturing ecosystem and operational efficiency will generate a competitive advantage

The share of Chinese Imports to India was 1% in 1991 and has grown to ~70% in 2020. This rapid domination of Chinese APIs is due to the lower production cost driven by support from the state and efficient manufacturing practices.

India lags China in most manufacturing parameters (Figure 8). The capacity utilization of India API units < 35%, whereas China is > 70%. All productivity parameters for India (People + Material + Time) are behind China. China has sponsored large API clusters with basic support like CETP, uninterrupted power, treated water, developed road/rail network, subsidies on utilities that reduce operating expenses. The cost of borrowing is almost twice in India, and regulatory approvals in India take ~3 times longer. The overall manufacturing cost in China is 19% less than in India.

Figure 8: Comparison of the API manufacturing ecosystem of China and India (FY 19-20)

Another concern is the availability of raw materials, lack of natural resources like Limestone, and the relative nascency of the Chemical industry that supplies raw materials to the API industry. For instance, to produce API Tenofovir, the KSM Adenine is not made in India due to high infrastructure requirements.

While India’s ecosystem has not been as conducive as China, the current Government incentives are addressing the issue. There are two aspects to the Government Incentive (Figure 9):

Figure 9: Government incentives to boost domestic API Production

The Government’s announcement towards self-reliant API and ingredient manufacturing is a great step, but implementation will be key.

There are two levers to improve profitability in the API segment: increasing utilisation rate and improving productivity.  Domestic production of key API was prevalent in pre-1991 India, and imports from China accounted for a mere ~0.3% of demand. Due to the reforms of 1991, cheaper Chinese APIs started dominating the market. There are dormant production units that can be revied and upgraded to meet the current compliance and automation standards. This can result in a 30-40% increase in the top line.

Analytics can play a significant role in improving productivity; for instance, the current rate of Raw material wastages is 20-25%; by using IoT and analytics, it can be reduced to 5%. Similarly, labour productivity and supply chain can be optimised. Firms can target a 100-200% increase in profit margins by improving operational efficiency (Figure 10).

Figure 10: Levers to improve operational efficiency and profitability (values as of FY 20)

We believe a structured and holistic approach to cost reduction and a system driven end-to-end delivery process can make the API industry (as it stands today with all the legacy issues and technology obsolescence) more efficient by ~15%. This can easily make up part of the gap with China until a more thought-through, company-specific, and the government encouraged strategy is implemented.

Furthermore, the pandemic had a direct impact on the pharma industry, throwing up gaps in markets. At the strategic level, firms can re-examine the market conditions and identify new geographies and product segments to venture into. 

Summary

As the pandemic established the importance of developing a domestic API source, the API business has high growth potential. With many countries seeking alternate API suppliers and government policies that encourage domestic manufacturing of APIs, the situation is ideal for manufactures to establish and grow in this segment. Three major growth leavers in the API market are: Integrating across the value chain, investing in research and development of Niche products, and improving operational efficiency to become cost-competitive.

About the Authors

Samiran Das, Pharmaceutical Practice Lead

Maheswaran Ganapathy

Vasupradha Sridharan

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/

Stay Connected

[email protected]

FPM Tower, 4th Floor, #32/1/1,
9th Main, 14th Cross Rd,
Sector 6, HSR Layout,
Bengaluru, Karnataka 560102

Follow Us

With by Euthemians - Premium Themes

Start Typing