THE NEED FOR METROPOLITAN CITIES

 

With more than 136 crores, India has only eight metropolitan cities, namely Delhi-NCR, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, and Pune. Delhi-NCR and Mumbai have a population excess of 2.4 crores each which is more than the total population of the continent Australia. In contrast, U.S.A has a population of 33 crores approx. and has 51 metropolitan areas defined by the U.S. Census Bureau. This clearly shows that for the required people, India needs more metro cities.

Why Metropolitans Cities are Important

Metropolitan cities offer more employment and education opportunities, along with access to better healthcare, connectivity, and housing facilities. With the intent to make a fortune and change the course of their lives, people from rural areas migrate to metro cities. Metropolitan cities are the centres for innovation, development, education, trade, and commerce. They have the potential to absorb a large amount of the population with the potential to uplift their living standards. Metro cities are considered fortune making centres. These cities help in the development of the public and are essential for the country's economy.

Crumbling Metropolitans of India

As urbanisation and development gained momentum in India, people started moving to big cities to earn more. Cities like Mumbai, Kolkata, Chennai, and Delhi were more developed than other cities, and most industries and educational institutes were located here. Hence, these cities attracted a large amount of population. Later Hyderabad, Ahmedabad, Pune, and Bangalore also become important centres of employment and education.

Presently these eight cities are carrying the excess weight of the population than they were initially designed for. These cities face congestion, traffic management, poor sanitation, overcrowding, crumbling healthcare system, income disparity, inadequate residential facilities, rising crime rate, poor infrastructure, and inflation. The metros, instead of providing better lifestyles with improved employment, education, and healthcare facilities, and crumbling under the weight of population. They cities are not able to meet the expectations of the migrants. Slums are increasing in these areas and prices for basic necessities of life are soaring each day.

With the influx of population in large numbers, the demand for residential space has overgrown in big cities leading to excessive demand resulting in rising prices. Similar trend is observed in every sphere. Prices for healthcare, food, education etc, all has shot up rapidly. With more concentration of workforce in a particular area, the competition for securing employment is very tough, as a result of which crime rate is also high in these cities.

Pollution levels are very high in these cities, and clean drinking water is in short supply. In the past decade, Delhi-NCR has been ranked as one of the most polluted cities in the world, Chennai despite having floods in 2015, faces water shortages, Mumbai faces problems of congestion, crumbling infrastructure, high prices and increasing slums, while in Kolkata, poverty has reached to every high level. The same issues are faced by other cities as well.

What can be done?

Major decongestion programs across the metropolitan cities are the need of the hour. The population needs to be moved out from the Tier 1 cities to Tier 2 and Tier 3 cities. Presently, India has 104 Tier 2 cities, and the remaining towns are classified under Tier 3 cities. The government needs to focus more on Tier 2 and 3 cities. It should improve the infrastructure in these cities. Connectivity should be strengthened by linking these cities with expressways, railway stations and international airports. Purvanchal Expressway, Ganga Expressway, Delhi- Mumbai Expressway, Jewar International Airport are significant projects that will help develop Tier 2 and 3 cities. Similar projects throughout the country should be undertaken.

It is also essential that the industries are distributed across various unlike concentrating them in select few areas. Like in the U.S.A., the drives are spread across numerous cities, which is why it has more metropolitans. In India, the metropolitan cities have Service, I.T., Entertainment, Manufacturing, Banking, and other industries. As a result, they have become centres for all economic activity, but their infrastructure is crumbling under this immense load. This load needs to be distributed. Northern and North-Eastern areas of the country where it is difficult to set up the manufacturing sector, I.T., and service sector should be relocated there. Each industry should not be concentrated in one city but should be spread across multiple cities. This will help in reducing the economic disparity among various regions and would help in urbanisation.

India needs to reduce the size of its cities but increase the number of cities.

About the Writer

                                                         Ashwik Sharma                                                                    Pursuing PGDM at IMT Hyderabad

An Automobile enthusiast and Cricket fanatic, intending to make a career in Finance explain the reasons why more metropolitan cities are needed.

WHY CRED HAS A BRIGHT FUTURE?

 

Adversity is the catalyst to any innovation; Cred, introduced in 2018, was such a company that took advantage of the pain points of the credit card holders like high-interest rate, high hidden charges and forgetfulness of customers in paying credit card bills which attracted a higher cost to the credit card users and made an application which would help the credit cardholders in solving the problems.

Cred in 2020 got a valuation of $2 billion, which made it the youngest Indian start-up to hit that valuation. On the contrary, it is constantly incurring losses. In 2020 alone, it incurred a loss of rupees 360 crores. It spends about ₹727 rupees per rupee of earning it has, which makes it pretty disadvantageous for the company.

So, what should we believe in, Cred a unicorn because of its valuation or Cred a failure because of its constant losses and such high costs? The answer to this lies in their business model, which is pretty similar to the business model of many start-ups.

Cred is initially focusing on making a customer base for itself. It is aiming at altering the behavioural design of the society which stays in the community even after a company providing the services shuts down, creating an opportunity for other such businesses just like iPod left a mark in the music streaming revolution giving apps like Spotify, Amazon Music, etc. its business idea. Cred is focusing on the credit card users and building a customer base of people with good credit scores (CIBIL score of above 750) so that they have the cream of the population using credit cards which is approximately 50 million out of which only 30 million are active users and Cred has 15% of these in its customer's list.

Cred is following the four-step business model starting from "cash burn". Providing services to solve the problem of credit cardholders with such huge discounts and offers would attract customers and make them a good customer base. Then comes the stage of "habituation", wherein they focus on making people habituated to their services to have customers who are loyal to them and don't leave. Cred has accomplished this stage by altering the behavioural trait of people who have gotten used to the new and easier way of paying their credit card bills. Next comes the set of "Irreversibility", where Cred stands now as it is making the habituation stage irreversible. Just like with the advent of Netflix and Amazon Prime, it has become irreversible for people to go back to CDs and DVDs for watching a movie or a show.

Then comes the final stage for which all the entrepreneurs work for is "profitability" because after making customers and changing their behaviour to stick to the services comes the point where we can make profits just like JIO started with making the services accessible and eventually has a gain of about ₹3508 crores in the fourth quarter of the FY 2021.

The Cred business model has been able to attract many customers who have a decent amount of money, so it can have future expansion plans as well, which will make it even more profitable. They can expand to make a bank by having the customers save their money and give them a loan to their customers, which it already does but on a smaller scale.  It can also expand into global markets because of its high potential there as the population having a credit card in foreign countries is much higher than in India. It also shows that Cred has enormous potential to grow its customer base by focusing on making more and more people adopt credit cards in India by providing such attractive and easy solutions to problems surrounding the adoption of the same.

Since Cred has such a vast customer base and has access to their data of spending, they can use this data and share it with big companies, which will help them target customers better; it can also expand into data distribution business later on so that the information is used for the right reasons and is not left unused.

Cred is sitting on a gold mine which is its customer base and future expansion potential; if used correctly and strategically, it can create history by being one of the youngest start-ups in India to be successful and earning fortunes of money and set an example just like Jio did earlier.

                                                       About the Writer

                                                            Ashwik Sharma                                                                   Pursuing PGDM at IMT Hyderabad.

An Automobile enthusiast and Cricket fanatic, intending to make a career in Finance write about the future of Cred.

(Special mention to Surabhi Sinha for helping with this blog.)

ITS HIGH TIME THAT INDIA SHOULD DO AWAY WITH MRP

 

India is the only country in the world presently that follows Maximum Retail Price (MRP).  Standing out of the crowd does have its advantage in certain aspects, but this should not come at the cost of economic growth and development. Following the practice of MRP is one such uniqueness that India should do away with it quickly.

The Origin Of MRP

Maximum Retail Price (MRP) was introduced in India in 1990 by the Ministry of Civil Supplies, Department of Legal Metrology through an amendment to the Standards of Weights and Measures (Packaged Commodities Rules) Act 1976.  Before introducing MRP, if Retail Prices were printed on the goods, the retailer could charge more than the locally applicable taxes. Retailers could also hoard the commodities to reduce the supply and increase the price of the goods. To stop these unfair practices to generate more profits, Maximum Retail Price was introduced.

The Problems with MRP

When it was introduced, MRP was of great help in protecting the consumer's rights and ensuring that an appropriate amount was charged for the good. However, it must be noted that MRP is only applicable to packaged goods only. If in case the packaged item is opened and sold, any amount could be charged for that, e.g., a bottle was water is sold for Rs.20, but when it is opened, and a glass of water filled by that bottle, the glass could be sold at any price.  Services, Non- packaged essential items, and packaged items in cinemas, hotels, airports, flights and tourist locations are often sold for more than MRP. Hence, MRP is not followed religiously everywhere in the country, and there are loopholes or flaws in the system.

The major drawback for MRP is that it does not consider the value-adding service or the convenience the retailer provides. The retailer gives cooling services on beverages and milk products or adds comfort by providing goods near to homes, but no extra price could be charged for these services. Like for a chilled bottle of water whose MRP is Rs 20, it cannot charge Rs 25, Rs.5 extra for the cooling services.

In India, where there are very remote areas with poor connectivity and accessibility, the retailer does not get any advantage of providing goods in these far-off locations. This results in reduced profits and discourages the retailers. The only exception to this case is the Andaman Islands, where everything must be airlifted from the Indian mainland, and hence commodities are sold for more than the MRP. Thus at least the retailers cover their transportation cost and get rewarded for their convenience.

MRP is also fundamentally against the concept of a Free Market and Capitalist Economy as it limits the price at which the commodity could be sold. India, which wants to grow and develop as a Capitalist Nation, is going against the fundamentals by controlling the price through MRP. Commenting on MRP and India's stance on it, Kunal Shah, the Founder, and CEO of Cred, in one of his interviews, said that "India is playing the game of Capitalism, with the blood of Socialism." He said the on one side, India wants capitalists to invest and grow in the country. On another side, the socialist approach of the policymakers hampers the playing field for the capitalists. The MRP hinders the process of profit-making. The point is wealthy enough and does not mind paying extra for the convenience or the additional service provided should be charged more. There will be options for the poor or the budgeted class to buy commodities at a lesser price. Just as our taxes are more for the richer, the prices should also be more for the richer. Even foreign multinationals doubt the efficacy of MRP. Companies like Decathlon, H&M, Adidas, Nike, etc., are exempted from printing MRP on every product. These companies enjoy the advantage, but the MSMEs and multi-brand retailers still are subject to the law.

MRP is also not consistent. As soon as the packaged food is opened and its contents are sold openly, any price could be charged for that. The MRP becomes irrelevant. Also, in 2017, an amendment was passed in the law. Hotels, Restaurants, Cinema Halls, Flights, Airports, and even Tourists Spots have the privilege of selling items more than MRP in the name of service or convenience offered. That itself implements MRP, a debatable topic.

In cases like fire-crackers and automotive parts, the manufacturers set extraordinarily high MRPs than their costs. After that, these items are sold at huge discounts, in some cases even at 90% off on MRP. This discount varies from place to place and time to time, and hence the concept of MRP is lost.

Market without MRP

Without MRP, many of the complications mentioned above would be solved. The people favoring the MRP system are always concerned that if MRP is removed, retailers could charge as much price as they want, and low-income groups will have to bear the brunt. This will not be the case as the manufacturers, instead of Maximum Retail Price (MRP), can print a Suggested Retail Price (SRP) or Recommended Retail Price (RRP), which will be inclusive of the cost taxes, and his profits. This will not be the final selling price, and the retailer could charge more for the service or convenience offered. Also, the retailers would not be able to capture extraordinarily as the forces of demand and supply and surrounding competition would make the prices competitive. The laws of economics will start functioning, and things would be available at many prices according to the incomes and the convenience of the buyers.

Removing MRP will also help improve the Ease of Doing Business Index of the country, as many companies have listed it as one of the hurdles when they plan to start operations in India.

Also, people who oppose the removal of MRP say that the government would have to invest more in infrastructure or mechanisms that would inform the buyers about the correct prices. The counter-argument for this is that nowadays, Internet and Digital Platforms are more than sufficient to educate the consumers. Buyers can check the different prices for the item they want and make an informed decision.

India is the only country left to do away with the practice of MRP. It can learn from developed countries how to remove it and make a smooth transition. It no longer benefits India in continuing with MRP. Doing away with it will help get more capital investments from abroad and domestic investors, especially in the retail sector.

 About the Writer

Ashwik Sharma                                                                        Pursuing PGDM at IMT Hyderabad.

An Automobile enthusiast and Cricket fanatic, intending to make a career in Finance explain the reasons why MRP should be done away with.

ACE THE SPACE

India, a country with lots and lots of people, from the street of a village to express-way of cities this country is packed with humans and where people exist, their need and want is an evident trait that stays with them. With the need and want, one more idea comes into the picture: the concept of fulfilling those desires with the best of efforts or, in the general term, the idea of, “Marketing”. India is the home of 1.3 billion people, but it is also known as the world’s most diversified country in terms of people, language, taste, preference, region and what not; this diversity makes it too difficult for organisations to formulate their marketing strategy and sustain in this environment of assortment. To be successful in India, a brand needs to be dynamic, adaptive, and flexible with its market tactics and strategy. Some notable brands have overturned the marketing pinwheel and set the record with their approach. Let us look at three prominent brands for their distinctive marketing approach, which helped them to establish themselves as a household name for every Indian.

AMUL

In 1946, established as Gujrat Cooperative Milk Marketing Federation (GCMMF), Amul is India’s most significant milk and milk product manufacturer and seller. The brand is one of the most successful brands in the FMCG industry.

Apart from its quality products, the brand has connected with Indian people by doing something that most businesses refrain from performing, “Stand out for social issues”. Amul has always been vocal for every sort of social event or causes irrespective of their territory with the help of brands’ evergreen Amul girl. By doing this brand pulled out exceptional branding amongst its consumers.

The brand is exceptional in one more marketing method, and that is communication. It has made an emotional connection with people with its interactive content. The brand focused more on bringing its opinion on social issues and events rather than focusing on its products. This strategy of the brand got them massive consumer engagement across all channels and all age groups. Their viral marketing campaigns helped them build an exceptional standard in the market, and over the years, the brand excelled in quality and brand awareness, taking its voice to the young and old likewise.

Asian Paints

Mumbai- based India’s largest and Asia’s third-largest paint manufacturer and seller, “Asian Paints”, established its bastion in Indian territory by focusing on one of the purest emotions and dreams of nations almost all individuals “Home”. The brand successfully humanizes the concept of home amongst the consumer and has come a long way from independence to becoming the market leader overpowering all foreign competitors.

The brand always portraits itself as a consumer-friendly brand up above its industrial product image. The brand brought up an iconic creation of legendary RK Laxman’s “Gattu” as the brand mascot and attracted the nation’s middle-class population. Mascot helped them to gain loyalty amongst the masses that eventually increased their market share and revenue.

After creating brand loyalty, the brand enhanced its consumer-centric approach by humanizing the home concept. The brand came up with its infamous tagline, “Har Ghar Kuch Kahta Hai”, which became an instant hit and influenced people in the home décor space.

Apart from its content marketing and communicative strategy brand, it also initiates an innovative campaign that integrates closely with its various stakeholders such as Painters, Decorators, Architect, and interior designers to provide customized decoration and equipping. All its marketing strategies helped the brand spread across India, and it assisted them to expand over 65 markets globally. Its diverse product portfolio improved the brand to establish itself as the world’s 9th largest paint seller.

Pidilite

Pidilite is the company that produces a couple of unique brands that are the synonyms of all sorts of bonds in India. If you are an Indian, you often hear the phrase “our friendship bond is like Fevicol/Feviquick”, and that is the power of branding. Fevicol an adhesive that is the synonym of its core competency; most Indians do not know what adhesive is. Still, they are aware of “Fevicol”.

The brand has successfully taken over adhesive industries since 1959 and has never looked back ever since. Their initial day’s founders of the brand approached directly carpenters instead of retail stores or distributors for selling the finished goods. This bold plan helped them gain trust and outscore competitors.

Apart from its brilliant selling strategy, Fevicol emerged as a champion brand when it comes to Advertising. The brand has used all sources of communication to gain the share of the heart of Indian residents. From its brilliant graphical content to its infamous taglines to its funny but thoughtful Television advertisement to its content marketing campaigns with social media, the brand excels in all brands communicating strategy and an inspiration for other marketing companies.

The brand has traveled Kareena Kapoor dancing to the tunes “Fevicol Se” to the nation prime minister defining the India-Japan relationship as “Fevicol se Bhi majboot jod”. This is the popularity Fevicol gained with its branding strategy. The two-elephant pulling a ball together with a yellow background always comes to mind when you think about Fevicol.

In recent years, the brand has also vocalized social issues and aware citizens of several problems through its content marketing on various social media channels. It has emerged as a creative genius by showcasing its art on social media and other platforms.

From its “Dum Laga Ke haisha” to its social media content mastery, Fevicol is the prime example of how to formulate a promotional strategy to boost engagement towards the consumer and become a household name in your business market.

There are other brands that are performing significantly well in Indian territory with a “4P” strategy and every day gaining their market share strength to strength. Technological advancement and transformation lead the markets towards a new arena and throw new challenges to the firms every day. Still, ultimately marketing is a way to connect with your consumer and understand their need in no time; as long as organizations do that, they always overpower their competitors. Leaving you all with the famous quote of “Seth Godlin”, I am bidding adieu until next time.

“Marketers make things better by making change happen”.

About the author 

 

 Piyush Ranjan Jha 

(PGDM, IMT Hyderabad)

A constant learner, interested in equity research, business research, and marketing intelligence. 

DOMINO'S: DOMINANCE IN THE PIZZA WARS

 

Until 1996, Pizza in India was synonymous with only a bready dough base slathered with some ketchup. However, 1996 saw a considerable change in the pizza experience; all of which started with the entry of international pizza chains.


Domino's and Pizza Hut, the two big US fast-food chains, entered India in 1996. Each was trying desperately to create brand loyalty on unchartered grounds. Domino's and Pizza Hut - tried to grab as large a slice of the pizza as possible.


About Domino's

Domino's started out with just one store in 1960. However, by 1978, the 200th Domino's store opening was being celebrated. By 1983 there were 1,000 Domino's stores and 5,000 in 1989. Today, there are over 17,600 stores – including more than 11,000 outside the United States. Its mission is to establish itself as the best pizza delivery company in the world.


About Pizza Hut

Pizza Hut, founded in 1958 by brothers Dan and Frank Carney in Wichita, Kansas. Its brand has enjoyed a long history of firsts – the first national chain to offer online delivery ordering, the first pizza delivery to outer space, and even the first world-record-setting delivery to the summit of Mt. Kilimanjaro. Pizza Hut is always looking for ways to innovate processes and deliver an even more exceptional service and product.


While Pizza Hut relied on its USP of "dining experience", Domino's USP was a 30-minute delivery frame. To penetrate the market, both the players redefined their recipes to suit the Indian tastes.

It would be more accurate to explain the Pizza Wars as the positioning wars.


Thirty-minute Delivery

Domino's had several hoops to jump through to turn up as the winner in these long brand wargames. The first being the popular sentiment of "Easting Pizza Fresh", there was no point in eating a cold pizza, so there was no reason to have a pizza delivered home. In fact, Dominos was not even the trendsetter to pizza delivery when it came to India- it was Nirulas in Delhi, 1994 to have begun this process. However, all of this was history when Domino's captured the pizza delivery market swiftly and ruthlessly. For its thirty-minute delivery promise to work, Domino's had to follow an eleven-minute schedule: one minute for taking down the order, one minute for Pizza-making, six minutes oven-time, and three minutes for packing, sealing, and exit.


Pizza Hut never entered this race, as it followed a very different positioning of providing a family dining experience, which did not confer with speedy deliveries.


2. Localizing the Menu

The vast Indian sub-continent had preferences that could not be generalized; Domino's, in an attempt to capture the market - decided to localize its flavors. Thus, Deluxe Chicken with Mustard Sauce' and Sardines was confined to the East, Mutton Ghongura and Chicken Chettinad to the South, and Chicken Pudina to Mumbai. Whereas, Butter chicken, Makhani Paneer, and the Chatpata Chana Masala were confined to the North.


Pizza Hut was not one to be left behind. It introduced an entirely vegetarian menu in its outlet in Ahmedabad, a one-of-its-kind worldwide. It also offered customized Spicy Paneer and Chicken Tikka toppings, Jain pizzas, Halal meat, and so on.


At last, it cannot be clearly determined whose strategy is successful, as both have been able to carve out a niche for themselves with a dedicated fanbase, but yes the fact has to be acknowledged that Domino's currently has more outlets and revenue than Pizza hut and is clearly dominating the industry.

   About the Writer

 

 Avani Phatak                                                                                                                                                                                     PGDM, IMT Hyderabad                                                                                                                                                                   A keen researcher and creative enthusiast!

STARBUCKS' RARE FAILURE

 

                                                                                                                                                                   "We can never reach a stage where we can say, "I know everything, and I have nothing more left to learn".

Above quote from Pooja Agnihotri's book "17 Reasons Why Businesses Fail" appropriately suits a brand that has rejuvenated the refreshment behavior and destination of people worldwide with its excellent customer-satisfaction policy, innovative products, and bulls-eye marketing strategy. The brand spread across more than 75 countries and 28000 locations with annual revenue of approximately 23.51 billion USD (wall street journal). The brand is covering the world from Shanghai to Guantanamo Bay. According to CNBC, brand growth is so rapid that it opens one store every fifteen hours in China.

We are talking about Seattle, the USA, based on the largest coffee chain globally, "Starbucks Coffee". The brand is growing strength to strength worldwide and provides some very innovative strategy to the business world, which will work as a cornerstone for brands that are planning to thrive in the market and their customer segment; if everything about Starbucks is so impressive, then why I have used the quote as mentioned above, let me solve this enigma.

Yes, there is a large part of the world for Starbucks becoming a part of their lifestyle. Still, one continent seems uninteresting towards the world's most attractive and biggest coffee brand, and that continent is Australia. A continent that consumes 37 million kilograms of coffee in a year. A brand that is known for its consumer satisfaction, market STP (Segmentation, Targeting, positioning) method and market growth strategy how failed itself in geography where 75% of the population (around 19 Million) drinks coffee and 28% of those have three or more cups of coffee in a day. Let us decode a rare failure of a global brand with the below-mentioned points.

· The need and want determination failure.

The Australian coffee market industry has grown-up with a CAGR of 11% in the last 20 year, and in 2018 revenue generated from the sector was 5.5 billion USD. In 2017 the consumption of coffee per capita was 1.91 kg. The data has shown exhilarating figures and can attract a significant player like "Starbucks". Starbucks opened its first outlet in Australia in the year 2000, and in its first seven years brand accumulated 105 million dollars in losses with its more than 70+ (a big mistake that we will discuss in further points) stores. The root cause behind this is the strategic failure of management in understanding the consumers' needs and desires. If you ask any random person on the Australian street "Why Starbucks failed", they will tell you- we have taste sprouts; after ordering a coffee, we expect a delicious black coffee or creamy latte, not a half-liter of flavoured quaff. The consumers were already formed due to a century-long coffee culture of the country, and most of them are prefer small cafes; this hit hard the Starbucks as they could not be able to compete with local vendor due to consumers taste and preference which also works as an entry barrier for the brand.

· A needless aggressive expansion policy

Scarcity enhances the value of any brand or resource. Starbucks' biggest strategic mistake in Australia is that they never keep itself scarce in the region and opened too many outlets in no time. Though the southern hemisphere continent was known for its affection for coffee, the Coffee giant did not allow consumers to develop their brand's appetite by its rapid expansion policy. Its growth strategy backfires since the brand cannot exhibit any difference from local coffee shops by making itself readily available for consumers. Ultimately, due to severe losses, they had to shut down 61 out of 87 outlets in 2008.

· Competitive Rivalry

As already mentioned, Australia is one of the biggest Coffee markets in the world with 5.5 billion USD revenue and fully engulfed with café culture since 1900. The continent has many players who have grown exceptional Australian brand coffee, such as Australian macchiato or flat white. The local vendor acquainted with the Australian business model and is very much loyal amongst consumers; on the other hand, Starbucks started its operation in Australia with the same business model as the American continent. Starbucks' rival in the region has a competitive advantage over the brand since they understand the consumer psyche and deliver a consumer-oriented menu in which Starbucks failed. Also, to create a point of difference, the coffee chain brand keeps its product price higher than available brands in the market, which worked adversely for the brand.

There might be some more reason for "Starbucks failure" in the Australian continent, such as the "2008 Financial crisis", "Smart consumers", and "Australian people sentiment towards their products". And it is also correct that marketing relies on gut instincts. Still, it is vital for the organizations, before implementing any strategy, they need to understand the most crucial aspect of business--- Customer.

To know more strategic implications, follow our blog until next time.

About the Writer

                                                                              

Piyush Ranjan Jha

PGDM, IMT Hyderabad

A constant learner, interested in equity research, business research, and market intelligence.

"e                                                    

IS APPLE ON THE RIGHT PATH?

Apple Inc, the technology giant from the USA, warned its investors in February that the company is set to miss its revenue forecast and a drop in sales is expected because of the Global Pandemic. The company said the pandemic affected its manufacturing processes, and with a decline in people's disposable income, sales will be well short of the target. Apple gave a similar warning last year before the pandemic. Then the company issued a statement saying that it would cut its profit forecast by $9 billion because of a sales drop attributed to the pricey iPhones. Indeed, the decline in revenues and profit cannot only be attributed to the pandemic. There is more to the story.

Despite a drop in sales, Apple is not a company in crisis. The company's current valuation is more than $2 trillion, which is more than the GDP of Italy, Brazil, Canada, South Korea, Russia, Australia, and Saudi Arabia, to name a few. Its revenue stood at $64.7 billion at the end of September Quarter last year with $38.02 billion cash in hand. With such strong financials, the company is the technology space leader and holds a strong market standing and competitive advantage. The drop in sales and revenue has not affected the company much, but this must be rectified soon, or the company could quickly follow Nokia's way, from being a market leader to a company struggling for survival.

What is Apple doing wrong?

To start with, the sales of the iPhone is constantly falling for the last few years. For the past few years, Apple had to cut down its Sales Target frequently. iPhone sales are dropping at a greater pace in China than in the rest of the world, which is alarming since China is the biggest market for Apple. Even Tim Cook, the Apple CEO, acknowledged this fact and wrote in a letter, "In fact, most of our revenue shortfall to our guidance, & over 100% of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, MAC, and iPad." Apple's revenue in China declined by 29% in October last year, the lowest since 2014. A similar pattern is observed across the globe for Apple.

According to many experts, this was bound to happen and was a long way coming. There are many reasons for this. Customers are holding up their phones for more extended periods, and the replacement rate has fallen. People do not find any incentive to upgrade their devices regularly as often the subsequent generation of the devices is more of an evolution than a revolution. With prices rising with each new generation, customers do not find any value in regularly upgrading as they would get caught in the vicious circle of EMIs whereby they are paying for a device whose value would depreciate fast. Even with luring bank offers and online schemes, there is hardly any value in upgrading to the next generation when the older one is more than capable for daily usage. Most people prefer to upgrade with an alternate generation to feel a more revolutionary upgrade and a mere evolutionary one.

People now prefer to repair than replace their devices. Tim Cook told the investors in 2020," That people bought fewer new iPhones because they fixed their old ones." With people holding onto their devices, the sales are bound to drop.

Apple's focus has been to defend its turf, not to conquer new lands.

"I skate to where the puck is going to be. Not where it has been"-Wayne Gretzky. Steve Jobs loved this quote, but somehow after his demise, Apple has diverted from this philosophy. Apple also lacks innovation. It has been more than a decade since Apple launched a new business vertical. The iPhone, iPad, App Store were ground-breaking innovations that expanded Apple's business and lured people towards it. These devices created a solid fan base for Apple that has remained loyal to them since then. Ever since Tim Cook has been at the helm of affairs at Apple, it has followed the evolutionary path, not the revolutionary one it was once famous for. The company makes minor incremental changes to the devices in each new generation. The improvement is more of a technical increment which is not noticed by the public at first glance. Under Tim Cook's leadership, the company as focussed more on the computing power of the devices. Apple has made good fundamental changes in its software and improved the processing capabilities. With the launch of the M1 chips, the company has started making processors for its laptops and desktops. All these efforts have given Apple a technical competitive advantage but have raised its devices' prices, causing a fall in sales. With Samsung launching foldable devices, notch free displays, and flagship devices having cameras equally good as iPhone, Apple is facing the heat in the market. To validate this fact, here are some of the numbers

·       According to figures released in Q2 2020, Apple spent nearly $4.8 billion on R&D compared to Microsoft's $5.2 billion and Alphabet's $6.2 billion.

·       Apple has only spent 2% of its cash flow on mergers and acquisitions, which is less than industry standards.

Since both mergers & Acquisitions and R&D are integral to a company's growth and prospects, it is more important that Apple focuses more on these aspects.

Lastly, Apple's move to remove charging brick from the iPhone boxes has not helped the companies cause. Apple charges high prices for its devices which is referred to as Apple Tax, and despite this, if it does not provide the essential accessories, the customer's satisfaction is bound to get a hit. The competition is offering fast chargers at no additional cost. The Verge magazine, along with other industry experts, have criticized this move by Apple. Even the customers are annoyed.

To improve its sales, Apple should focus on providing value to customers by reducing the prices and making value money package. Lastly, Apple should get back to its roots of making ground-making innovations for which once it was famous. The earlier Apple does this, the better it will be for it; otherwise, it would get lost in the crowd of Korean and Chinese tech giants.

See you next soon with some more exciting content.

                                                          About the Writer

                                                         

Ashwik Sharma 

Pursuing PGDM at IMT Hyderabad.

An Automobile enthusiast and Cricket fanatic, intending to make a career in Finance explains the reasons behind the dwindling sales of Apple in this blog.