HSBC to exit India retail broking; 300 jobs to be cut

HSBC, one of the three biggest foreign banks in India, is also said to be in talks to sell a stake in its life insurance joint venture in India.

London-based HSBC said on Thursday it will exit its retail broking business in India, the latest global bank to scale back operations in the country.

About 300 jobs will be cut as a result, a spokesman said.

A source involved in the process said the bank decided to exit the business due to stiff competition in retail broking and low earnings potential.

"HSBC will cease opening new retail broking accounts with immediate effect," the bank said in a statement.

HSBC, Europe's biggest bank, has exited about 50 businesses globally since Chief Executive Stuart Gulliver took over at the start of 2011, including recent profitable sales of a $9.4 billion stake in Ping An Insurance and its $2.1 billion Panama business.

HSBC, one of the three biggest foreign banks in India, was also said by sources to be in talks to sell a stake in its life insurance joint venture in India.

Global banks have scaled back non-core operations, including in India, where the economy grew last year at its slowest in a decade. Royal Bank of Scotland recently sold its Indian commercial and retail operations, and Morgan Stanley sold its private wealth management business in the country.

India's brokerage industry is fragmented and competitive, with low commissions and sluggish business, and several smaller brokerages have closed up shop in recent months.

"Thousands of small brokers have exited and many are exiting everyday," said Sudip Bandyopadhyay, CEO of Mumbai-based brokerage Destimoney Securities.

Apurv Bhansali

apurv15@ediindia.org

McDonald’s forays into the coffee shop market in India through McCafe

The American fast food chain plans to open 100-150 McCafe outlets in the country in three to five years.

The world's second-largest fast-food chain McDonald's has launched  McCafe brand in India and aims to have 100-150 McCafe outlets in the country in three to five years. Hardcastle Restaurants PVT Ltd, a master franchisee for the south India operations of McDonald’s announced the launch of the first McCafe restaurant at the McDonald’s outlet in Mumbai on Wednesday. The Café will start functioning from October 14, it mentioned in a BSE disclosure. 

“We believe McCafe will drive our beverage and food business to unparalleled heights and solidify McDonald’s in the Indian QSR restaurant arena. We plan to launch 100-150 more McCafe outlets in three to five years across key trading areas in metro cities of west and south India,” said Amit Jatia, vice chairman, Westlife Development Ltd.

BL Jatia Group runs the master franchisee for the QSR chain McDonald’s in southern and western India under public-listed Westlife Development. A subsidiary of the firm, Hardcastle Restaurants runs the McDonald’s franchisee. Hardcastle Restaurants is one of the two franchisees for the McDonald’s chain in India. The Jatias had acquired their foreign partner in the JV, making it their own venture with a development licence agreement. The other unit, which runs McDonald’s restaurants in northern and eastern regions, was managed by former MD of McDonald’s in India, Vikram Bakshi. He headed Connaught Plaza Restaurants Pvt Ltd (CPRL), which is still a joint venture with McDonald’s.

“We see huge potential in the Indian marketplace. Customers have a strong taste for coffee in India; the speciality segment is growing and we really believe we have found a great place for us to be able to offer quality espresso coffee. We see an opportunity to continue expanding our beverage platform and efforts to gain a greater share of the very sizable beverage market,” said Jatia.

According to Technopak Advisors, the organised café market in India, which grew almost six s in the last five years to $230 million currently, is likely to hit $410 million by 2017.

Worldwide, McCafe operates within McDonald's stores, with a separate section dedicated for itself. Typically, the seating and menu are different from that for McDonald's.

A cappuccino at McCafe will starts at Rs 90. Globally, McDonald's has 10,000 McCafe outlets, with the company deriving significant revenues from the business. Coffee will be the third line extension for McDonald's in India after it added breakfast and dessert items in the last two years.

Hardcastle Restaurants has the sole responsibility to get McCafe into India as of now. This could also be because of the  disputes between Bakshi and McDonald’s Global. Bakshi had submitted a petition to the Company Law Board (CLB) against the American fast food chain last month.

The petition alleges that McDonald’s is trying to take over the control of the equal equity joint venture CPRL in a coercive manner, according to media reports. Bakshi has demanded CLB to allow him to have exclusive management and control of the company. 

Bakshi's term as managing director in the firm expired on July 17, 2013. Now the firm is run by the board, which includes Bakshi besides other representatives of McDonald’s. Bakshi had said he is looking at a legal recourse.

Companies Bill redefines how foreign companies carry out business in India

It remains to be seen as to how foreign entities sans any physical presence in the country will comply with the provisions.

The long-pending Companies Bill finally received the approval of both the houses of the Parliament and the presidential ascent recently. Of the 470 sections included in the Bill, a large number of sections are dependent upon rules, which are yet to be finalised. Accordingly, it was expected that the Bill will be notified in a phased manner and that it will take some time before it entirely replaces the more-than-five-decade old Companies Act, 1956 (Old Act). The Ministry of Corporate Affairs (MCA) notified the Companies Act 2013 (New Act) in the official gazette the next day after receiving the presidential ascent.  Further, in a flurry of other announcements, the MCA released a set of draft rules in respect of some of the provisions in the New Act, followed it up by notifying additional 98 sections of the New Act and then released one more set of draft rules for some other provisions in the New Act.  These clearly indicate the desire on the part of the government and MCA to implement the New Act and to replace the Old Act as soon as possible. The New Act is progressive and inclusive. It considers needs of the business and includes concepts like One Person Company and Small Companies. It inter alia includes provisions for social welfare activities, encourages appointment of women directors, casts significant obligations on independent directors and auditors and empowers investors against any frauds committed by promoters. It is clear that the New Act will change the way business is undertaken in India, be it for stakeholders or regulators.

As regards foreign entities undertaking business in India, the subject of our discussion, the New Act contains provisions to regulate their activities in India. While at first read it may appear that these provisions are similar to the ones contained in the Old Act, these provisions are expansive in the New Act.

The New Act expands the scope of these provisions to a larger universe. These are expanded to apply to other entities like foreign limited liability partnerships incorporated outside of India. Further, these provisions will now apply to foreign entities establishing even a virtual presence in India either through electronic mode or through an agent.

The provisions related to presence through physical office and the applicability of the associated compliance are similar to the Old Act and hence, clear; however, there is a significant level of ambiguity as to the applicability of these provisions to foreign entities establishing a virtual presence. It is unclear as to what kind of agency relationship in India or what type of presence in India through electronic mode will constitute a place of business in India.

Literally read, these provisions could get triggered where a foreign entity appoints a service provider who in performance of its services acts as an agent of such a foreign entity and such a foreign entity could be liable to comply with the above provisions. This will be so, regardless of whether the Indian agent acts in similar capacity for multiple clients and is legally and economically independent of its clients. For example, shipping/airline companies that operate through their booking agents in India could be subject to the above provisions.

Further, the provisions also include companies carrying on business in India through electronic mode. These provisions could extend to foreign entities that operate online selling portals, search engines, data subscription portals, etc so long as these have any Indian customer, even though some of these may be targeting customers primarily from other countries and not from India.

Given the intention of the government to regulate all foreign entities that undertake business in India by establishing a place of business in whichever way and given that with the advent of technology there are several newer ways of doing businesses, the provisions had to be broad; however, the current provisions are extremely broad and can cover within their ambit unintended foreign entities as well as discussed earlier.

Where a foreign entity qualifies as a 'foreign company', it will be required to undertake prescribed compliances and will be subject to other provisions in this regard.  The compliances under the New Act including seeking registration with the RoC, maintaining books of account and submitting audited accounts periodically are largely similar to the ones prescribed under the Old Act.  Similarly, the provisions relating to registration of charges, investigations, etc as applicable under the Old Act will continue to apply. 

Under the New Act, entities incorporated outside India (as companies) are permitted to invite public in India by issuing prospectus to subscribe to their securities (the Old Act permitted issue of shares and debentures only), subject to prescribed conditions. Further, like the Old Act, the New Act prescribes penal consequences for non-compliance for the foreign entities. However, the amount up to which penalty could be levied has been significantly increased under the New Act. The New Act also provides for penal consequences as well as imprisonment for officers of such foreign companies. Further, the Old Act provided for some safeguards for the persons responsible for issuing the prospectus from being liable to penal consequences arising out of non-disclosure/non-compliance – these have been omitted in the New Act.  The New Act extends the applicability of the ‘winding up’ provisions to closure of place of business in India for foreign entities - accordingly, closure of the place of business in India by any foreign company would require a prior approval from a Tribunal.

There was an expectation that the draft rules will provide some clarity on the above; however, it appears that the draft rules don’t throw any light on any of the above issues.

However, it remains to be seen as to how foreign entities sans any physical presence in India will comply with the above provisions and associated compliances.

In summary, though the New Act intends to be more effective by ensuring strong hold of the regulators on the foreign entities undertaking business in India, the same also has the potential to cause hardship and unnecessary inconvenience for the foreign companies which until now have not been subject to such stringent regulations in India.

Apurv Bhansali

apurv15@ediindia.org

Capitalising on opportunities in local commerce

It is challenging to build and scale up a local commerce platform, especially in emerging markets such as India. However, the opportunity is large and worth the effort.

The retail commerce market in India is estimated to be worth nearly $500 billion per year. Despite several years of rapid growth, e-commerce still constitutes well under 1% of the retail market. The remaining 99% of retail is still offline and mostly local, which represents a large business opportunity. As a larger number of consumers in India are getting digitally connected, they are making use of online platforms like mobiles, smartphones and tablets to influence their offline purchase decisions, opening up massive new market opportunities.

Global disruption in local commerce

Globally, significant value has been created in the local commerce space by platforms that help buyers connect with local sellers and service providers. The last decade has seen the rise of B2C local commerce companies such as Angie's List, Yelp, Groupon, Zillow, Trulia, RetailMeNot and Opentable - each a public company with over $1 billion in market capitalisation. These platforms help small merchants get discovered or chosen by consumers using various models such as listings, reviews and recommendations, deals, deep information and table reservations. Each of these models succeeded by aggregating a large number of local merchants on one side, and consumers on the other.

Over the last few years ubiquity of mobile, local and social has enabled a new class of collaborative consumption platforms, exemplified by AirBnB and Uber. These models have successfully opened up new forms of supply beyond traditional local merchants as well as transformed consumer behaviour meaningfully via the use of a social layer to create trust, the use of mobile, better UX and analytics to increase convenience as well as reduce information asymmetries between buyers and sellers. Innovative companies in this genre are beginning to disrupt large existing industries such as car rental and sharing (GetAround, RelayRides), local services (Thumbtack, TaskRabbit), ride sharing (Zimride, Ridejoy), car repair (Your Mechanic), local freelance work (Gigwalk), local experiences (Zozi, Sidetour) and even food consumption (Grubly). While the collaborative consumption space is still young, several of these companies will transform the way people discover and consume local services and products.

Local commerce in India

In India, the local commerce space is starting to see meaningful traction. JustDial has gone public and commands an impressive valuation. redBus built a valuable business by painstakingly aggregating numerous small bus operators to give the consumer a unified platform for bus bookings. BookMyShow and Zomato are growing rapidly with their vertical specialisation on entertainment and F&B industries. At NGP, we focus on this space and are investors in Quikr, a leading classifieds platform, DealsAndYou, a local deals and couponing platform, and several other companies globally.

The local commerce space in India is large and its digital intermediation is still in an early phase. The rapid penetration of internet and mobile internet along with consumers’ increasing propensity to transact online enables rapid future growth. There are 45 million small merchants in the country, of which under1% are estimated to currently have an online presence beyond basic listings. A growing number of merchants are looking to leverage online platforms in order to get discovered more effectively by consumers. Local merchants, especially those that sell higher margin services, spend a significant percentage of revenues directly or indirectly on various forms of marketing and customer acquisition. A substantial part of that spend will move online over the next several years.

Opportunities come with challenges

A brief way to summarise the key challenges in the Indian local commerce space is that there are limited barriers to entry, but tremendous barriers to scale. Creating a basic local commerce platform and getting it to market is not very hard. But getting and retaining a large number of merchants and consumers onto the platform in tandem is. Let’s summarise some key challenges and decision points associated with scaling local commerce platforms.

1. Developing a clear value proposition

There are already many types of digital platforms that help consumers connect with local businesses—search advertising, social pages, listings, classifieds, merchant websites, mobile apps, vertical specific content sites, deal platforms, ticketing and booking engines and much more. It is increasingly harder and more expensive to get consumers’ attention with yet another local commerce platform—unless it solves a large unmet need, enables a new experience, saves money or significantly reduces friction in an existing activity. Similarly, urban local merchants are confused by the large variety of platforms that they could potentially promote their businesses on. They may not typically understand technology or complex marketing terms, but implicitly look for good, demonstrable ROI on their spend and repeat business.

It is imperative to have a clear, compelling and ideally measurable proposition for both consumers and merchants. Eventually, for a local commerce business to sustain, there needs to be a natural pull from both consumers and merchants for the service. Aggregating merchants via large sales forces and aggregating consumers via marketing are otherwise likely to be ineffectual.

2. Creating the sales machinery

In India, convincing small local merchants of the value proposition of a new platform often involves multiple face-to-face meetings with the right decision maker, typically the proprietor. Moreover, small businesses are notoriously hard to collect payments from. Self-serve models are ideal, but will only work once the market reaches a higher level of maturity. Telesales and channel sales, which predominate in Western markets, only work in selected cases in India and often only in combination with own feet-on-the-street sales.

Creating and managing a well-oiled feet-on-the-street sales force is thus one of the key challenges to scaling a local commerce business in India, especially in the near to medium term.

For instance, JustDial has a team of thousands of sales people, and spends a significant percentage of its revenues on selling activities. The local sales infrastructure is one of the key barriers to entry for its competitors.

It is important to get the dynamics and unit economics of the sales team right. This involves careful, continuous planning and refinement around key areas such as: what type of sales persons to hire, which localities to focus sales efforts on, how to incentivise sales persons, what the up-selling strategy is, how to improve cash collection cycles, what the right target for ROI on sales costs is, and much more.

These questions don’t have any stock answers and each organisation must evolve its own set of answers.

3. Customer acquisition

On the other side of the demand and supply equation is customer acquisition. Getting consumers onto a platform is a slow and hard process—organic methods typically call for a great product with strong value proposition, and a long baking period for network effects, high search rankings and social virality to kick in. Trying to scale platforms any faster than the natural viral/SEO growth process entails higher spends on customer acquisition which is capital intensive.

Many local commerce models have strong network effects (i.e. scale provides disproportionate value to both buyers and sellers), and are consequently “winner-take-most” businesses. Therefore, unless a business has the luxury of limited competition for a long period of time (like what Craigslist did in the late 90s and early 2000s in the US), there is a compelling argument for ramping up customer traction rapidly.

The key is ensuring visibility into the right unit economics before investing heavily in customer acquisition. That is, can the customer acquisition costs be realistically offset by the customer lifetime value? It is here that many daily-deals oriented models faltered when they indulged in expensive marketing too soon.

4. Balancing marketplace dynamics

In local marketplace businesses, demand and supply need to be scaled in lockstep, locality by locality. The marketplace needs to have sufficient liquidity at the locality level in order for it to be relevant and valuable to both consumers and merchants.

The key questions then are: Given finite resources, do you go deep in a few localities (and risk leaving other markets to the competition), or do you go after a wide footprint and risk low liquidity and poor customer/merchant experience? Do you focus on one vertical or do you enter multiple verticals in an effort to expand more quickly? What metrics and proof points do you need to see in order to trigger expansion to additional cities?

Here, different platforms have taken varying strategies. Yelp grew organically for a number of years. It initially focused on a few cities, developed a set of processes for starting and scaling a new city, and then methodically rolled its platform out market by market, with a clear model to reach critical mass within a few months of entering a new city. Groupon, on the other hand, expanded across markets rapidly via heavy spending on its sales force and marketing, and additionally made a number of acquisitions in markets it hadn’t already entered.

5. Scaling operations and customer experience

Local commerce businesses can range from being purely informational to highly transactional. Typically, the closer a platform is to the transaction, the deeper the monetisation potential and ability to ‘own the customer’, but the more operationally intense it is.

For many local commerce businesses, the transaction (or merchant discovery/selection) happens in the digital layer, but the fulfillment happens offline, often by a merchant who may not directly own the customer. The presence of multiple parties in the transaction chain makes operations challenging. Moreover, customers tend to implicitly expect a higher level of customer service from online/mobile platforms than from local offline merchants. The online taxi dispatch and food delivery spaces are examples of local commerce businesses with high operational complexity due to the above reasons.

It is imperative to invest early in creating the team, culture and processes to put in place an operations function that not only supports the business, but also becomes a source of differentiation by creating customer delight.

It is challenging to build and scale up a local commerce platform, especially in emerging markets such as India. However, the opportunity is large and well worth the effort. Businesses which are able to overcome the aforementioned challenges create natural barriers to entry and are hard to replicate once at scale with defensible margins.

Apurv Bhansali

Bharti and Wal-Mart to split retail JV; Wal-Mart to buy local partner in wholesale retail unit

For Bharti, this comes amid a string of such marquee global deals starting with Vodafone for telecom and AXA for insurance and asset management, which came unstuck.

Wal-Mart Stores Inc is buying out Bharti Enterprises in their equal equity wholesale retail joint venture Bharti Walmart Pvt Ltd, marking a split in their retail venture, as per a joint statement issued on Wednesday.

The breakup of the venture means that upon receipt of required clearances, Wal-Mart would acquire Bharti’s stake in Bharti Walmart, the joint venture between Bharti and Wal-Mart, giving Wal-Mart 100 per cent ownership of the Best Price Modern Wholesale cash and carry business.

Bharti Walmart presently operates around 20 wholesale stores in India under the Best Price Modern Wholesale brand. FDI up to 100 per cent is allowed in wholesale retail business.

Rajan Bharti Mittal, vice chairman and MD, Bharti Enterprises, said: “Bharti is committed to building a retail venture and will continue to invest in Bharti Retail across all formats. We believe that with our current footprint of 212 stores, we have a platform to grow the business.”

Bharti independently operates neighbourhood retail chains under the Easyday brand spread across the north India region besides states like Maharashtra in the west and Karnataka in the south. The Bharti-Wal-Mart JV currently also manages the backend of Easyday chain as a logistics partner. It is not clear if that arrangement will continue after the two partners decided to end the alliance.

Scott Price, president and CEO Wal-Mart Asia said, “Given the circumstances, our decision to operate independently will be beneficial to both parties. Through Wal-Mart’s investment in India, including our cash and carry business, supply chain infrastructure, direct farm programme and supplier development, we want to serve India. Wal-Mart is committed to businesses that serve our members and provide good returns for our shareholders, and we will continue to advocate for investment conditions that allow FDI in multi-brand retail in India.”

Simultaneously, Bharti will acquire the compulsory convertible debentures (CCDs) held by Wal-Mart in Cedar Support Services, a firm owned and controlled by 

Bharti-run Easyday. The firm has been under government scanner for possible violation of FDI norms. While Wal-Mart did not own stake in the firm as FDI was not allowed in multi-brand retail till recently, it held convertible securities to buy a stake.

The government recently opened up the retail sector to foreign investors allowing FDI up to 51 per cent in multi-brand retail and 100 per cent for single-brand retail.

For Bharti this comes amidst a string of such marquee global deals starting with Vodafone for telecom and AXA for insurance and asset management, which came unstuck.

Vodafone, which picked a minority stake in Bharti Airtel years ago, later decided to go ahead and buy controlling stake in Hutchison Essar.