The conventional view is that the bankers and lenders were greedy and in their attempts to get their bonuses, went on a lending spree to unsuspecting borrowers. The Wall Street has been accused of being corrupt, stupid and irresponsible. Obama and McCain ensure that the message is repeated in every rally and sound bite.
Is this true?
The root cause of this crisis is in the sub-prime mortgages. And the fact is that the US government policies have led to this fall. Right from the days of GI bill, the government has followed a policy of encouraging home ownership at any cost, blatantly flouting sound economics. The borrower had the options of refinancing a long-term loan at his convenience for times when interests went down but staying at a fixed interest otherwise. This threw the mortgage lender into a crunch in the interest-volatile periods. In order to manage the interest fluctuations esp. after the seventies, the financial system engaged in significant financial engineering through multiple instruments.
Later, the US system encouraged loans with low interest rates and poor credit checks precisely because the risk had been parceled off though financial instruments and the players like the loan originators, brokers and banks had no risk of any bad debts. This encouraged many individuals to stretch themselves thin with low down payments, high loans, long repayment periods and the party had to collapse after the increasing realty prices became unsustainable and started going down.
Now the government and the politicians want to subsidize the system through a bailout so that the individuals who borrowed indiscriminately actually get a reprieve for their follies. As in the earlier government interventions, the solution proposed is based on self-interest rather than solving the problem. This will only ensure that the system is not cleansed fully and we live to see another day.
Sunday, October 12, 2008
Global Meltdown and India
The financial meltdown has sent shockwaves throughout the world. For many Indians, it is their first exposure to how integrated the world economy has become. This is a novelty for them when the newspaper headlines are not about the shenanigans of ministers or rantings by a communal organization but what is happening to Lehman or Morgan Stanley or even ICICI.
The Indian economy remains fairly robust despite the shocks. The banking system is very conservative. There is practically no use/misuse of financial instruments which have sent the Western markets to a spin. The drivers of growth like increasing liberalization, demographic advantages, low cost skill arbitrages and technology-led productivity growth in several sectors continue as they are. The stock market of course is getting battered due to fear, panic and flight of foreign capital (which is increasingly wary of emerging market returns).The overheated sectors like realty or the businesses primarily dependent on the Western markets like IT or ITes will undergo sharp changes in their business models.
I foresee no major disruption in retail or FMCG sectors due to this financial crisis. The retail sector had anyway started undergoing its own adjustments for a few months now due to its own set of dynamics.
The Indian economy remains fairly robust despite the shocks. The banking system is very conservative. There is practically no use/misuse of financial instruments which have sent the Western markets to a spin. The drivers of growth like increasing liberalization, demographic advantages, low cost skill arbitrages and technology-led productivity growth in several sectors continue as they are. The stock market of course is getting battered due to fear, panic and flight of foreign capital (which is increasingly wary of emerging market returns).The overheated sectors like realty or the businesses primarily dependent on the Western markets like IT or ITes will undergo sharp changes in their business models.
I foresee no major disruption in retail or FMCG sectors due to this financial crisis. The retail sector had anyway started undergoing its own adjustments for a few months now due to its own set of dynamics.
Friday, September 19, 2008
What is the noise in the retail industry today ?
The India Retail Forum concluded recently in Mumbai with proclamations about the great future of the industry. Most speakers, from newspaper reports, agreed that the next five years are going to be much better than today.
However, the media also flashes stories about various companies cutting costs, restructuring and not able to pay vendors. There are reports of top management moving out and confusion about the pace of the industry.
What is happening?
The truth is that the retailers entered the markets with untrammelled optimism. The metrics were based on models from other countries and the growth curve was expected to replicate that of the South East Asian countries. The real estate market also entered into a frenzy in line with the trends all over the world. The people, already in short supply, switched jobs merrily with multiplying salaries every time. The infrastructure continued to be in a mess. The technology solutions were not in place. The customers did not migrate to higher consumption and evolved formats as fast as expected. The Indian consumer is unique in this – the five thousand years of civilization has its impact and she changes at her own pace, always a little slower than her Asian counterparts in embracing western ways of consumption.
But the fundamentals remain in place. The GDP growth will continue at seven to nine per cent for quite some time. The consumers keep migrating to global ways of shopping. The trust in modern retail is developing. The real estate market has started showing signs of temperance with prices falling by 25%. There is more slide to come. The pool of trained manpower is growing. The support industries around the sector like training, design, equipment are expanding rapidly. And there are a billion people!
So it is good that the sector is going through a much-needed introspection and course correction before the next stage of acceleration.
However, the media also flashes stories about various companies cutting costs, restructuring and not able to pay vendors. There are reports of top management moving out and confusion about the pace of the industry.
What is happening?
The truth is that the retailers entered the markets with untrammelled optimism. The metrics were based on models from other countries and the growth curve was expected to replicate that of the South East Asian countries. The real estate market also entered into a frenzy in line with the trends all over the world. The people, already in short supply, switched jobs merrily with multiplying salaries every time. The infrastructure continued to be in a mess. The technology solutions were not in place. The customers did not migrate to higher consumption and evolved formats as fast as expected. The Indian consumer is unique in this – the five thousand years of civilization has its impact and she changes at her own pace, always a little slower than her Asian counterparts in embracing western ways of consumption.
But the fundamentals remain in place. The GDP growth will continue at seven to nine per cent for quite some time. The consumers keep migrating to global ways of shopping. The trust in modern retail is developing. The real estate market has started showing signs of temperance with prices falling by 25%. There is more slide to come. The pool of trained manpower is growing. The support industries around the sector like training, design, equipment are expanding rapidly. And there are a billion people!
So it is good that the sector is going through a much-needed introspection and course correction before the next stage of acceleration.
Sunday, August 24, 2008
Which retail format is going to win ?
One of the big questions today is what kind of format is going to succeed in the country. Is it going to be the hypermarket or is it going to be the supermarkets? If it is the supermarket, then what is the right size?
The conventional thinking is that hypermarkets are going to wipe off the rest of the formats. This, however, is not true.
The Indian consumer is going to plug for the format which suits her needs. The primary drivers of this choice are access, price and range. The hypermarkets do score in price but the supermarkets, being located near the neighbourhoods are far more convenient. The range can be of quite a reasonable width in a smaller format also.
The Indian consumer for the modern trade unlike his counterpart in the west is hamstrung by clogging traffic, poor roads and lives in larger cities. The other factor in favour of a small-format store is the fact that she would prefer to buy in small quantities over the month and the average ticket size in India still remains low.
At the same time, the Indian customer loves a bargain and the only way she is going to go long distances is when she eyes the prospects of cheap prices and bargains. Big Bazaar has got it right here and so we are going to see massive price wars between large format stores. In order to win, the large-format stores are going to have to offer large price leverages to the customer.
The brands and the efficiency of the format also make substantial difference. In countries like England and France, the hypermarkets have a more than fifty per cent share of the formats because Tesco and Carrefour are efficient and strong. In most of Europe however, the hypermarkets have about one third of the market and the supermarkets (4000 sq ft to 25000 sq ft) have close to sixty percent of the market.
But the hypermarket story is just really beginning in the country and we are about to see serious excitement in the space.
The overall investments also bear this pattern of split between supermarkets and hypermarkets. Of the $40 billion investments in retail in the next five years, about one third is flowing into hypermarkets and one third to the supermarkets
The conventional thinking is that hypermarkets are going to wipe off the rest of the formats. This, however, is not true.
The Indian consumer is going to plug for the format which suits her needs. The primary drivers of this choice are access, price and range. The hypermarkets do score in price but the supermarkets, being located near the neighbourhoods are far more convenient. The range can be of quite a reasonable width in a smaller format also.
The Indian consumer for the modern trade unlike his counterpart in the west is hamstrung by clogging traffic, poor roads and lives in larger cities. The other factor in favour of a small-format store is the fact that she would prefer to buy in small quantities over the month and the average ticket size in India still remains low.
At the same time, the Indian customer loves a bargain and the only way she is going to go long distances is when she eyes the prospects of cheap prices and bargains. Big Bazaar has got it right here and so we are going to see massive price wars between large format stores. In order to win, the large-format stores are going to have to offer large price leverages to the customer.
The brands and the efficiency of the format also make substantial difference. In countries like England and France, the hypermarkets have a more than fifty per cent share of the formats because Tesco and Carrefour are efficient and strong. In most of Europe however, the hypermarkets have about one third of the market and the supermarkets (4000 sq ft to 25000 sq ft) have close to sixty percent of the market.
But the hypermarket story is just really beginning in the country and we are about to see serious excitement in the space.
The overall investments also bear this pattern of split between supermarkets and hypermarkets. Of the $40 billion investments in retail in the next five years, about one third is flowing into hypermarkets and one third to the supermarkets
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