Why Flipkart is not Amazon's competition

My former boss and CEO of indiaplaza.com K. Vaitheeswaran always used to say that the best business model on the internet retail space is perhaps without stocking inventory. In my short stint at this web company, which was also the pioneer of India's ecommerce business with the same name set shop in 1999, I added around 60 vendors in just 6 months who would list their wares-from designer clothing to everyday wear, from watches to wallets and so on. During the late 90s, internet cafes were coming up all around the country. To browse the internet on bulky 17" screens with a dial up connection that would take five minutes or more to connect would cost around Rs. 100/- an hour (and the prices subsequently came down due to increased competition and lower internet rates). Shopping online those days was a novelty - well it continues to remain so still I guess. The early 2000s saw a slew of players come and go and during the last part of the decade saw the emergence of the likes of flipkart.com, myntra.com and many others. These ecommerce companies or etailers stocked merchandise-large warehouses were set-up in the suburbs of cities and mostly internal logistics teams ensured last mile delivery. Most of them were venture funded and blew their investors money on advertising, PR and promotions. Some companies were spending as much as Rs. 1,500 for acquiring a new customer - while there is no global benchmark as such for this purpose, the sum would be recovered from the same customer when he/she spends atleast Rs.6,000/- over time assuming 25% Gross margins. Not an impossible task once the customer is habituated to the internet way of shopping. Sadly, of the 25% Gross margins, what remains is less than 1-2% and that too for smart and successful companies. Most of them, even today are reporting negative margins. Well, for any business it takes time to stabilise. Typically for product retailers, break-even happens between 15-18 months and much earlier for F&B retailers. None of the ecommerce companies in India of sizeable scale and repute are profitable as I write this article. And many of them are on the path to profitability. After burning millions of dollars. The good part is customers have taken up to e-shopping faster than they have taken to Organised Retailing. Retail Industry in India is about Rs. 400,000 crores approximately and less than 10% is fom the Organised Retailers. Led by apparel and fashion, the organised industry is seeing massive growth, at a CAGR of over 15% over the past 6-8 years. Not bad, while global retailers are seeing negative growth on same store growth year onyear. Amidst all this, the $61 Billion Amazon launched its India site in June 2013. Not much different than its previous avatar, Junglee.com which was launched with much fanfare in early 2012. Amazon.in is a marketplace, a business model where retailers, small or big can list their products and Amazon attracts potential customers to shop on its site with secure payment gateways and millions of items listed across its pages. The Amazon trust is expected to attract many more customers and in the short term, Amazon may also build large warehouses and extend direct sales to its customers, subject to Retail FDI regulations. And there has been speculation that sooner than later, Amazon would compete heavily with the likes of Flipkart. Within the online space, perhaps yes but not in the consumption space. The e-tailers have to compete directly with the physical Retailers, both Organized and Unorganized. They are the main competition for the ecommerce companies. Together, Amazon, Fipkart and hundreds of other sites would fuel up consumption using the internet. However, with low penetration of Broadband Internet and 3G on mobile phones, it is unlikely that this retail landscape would change drastically over the next five years. Afterall, half a decade is a long time in business...

Product Vs. Experience

A couple of days back, I was having a conversation with a colleague regarding Brand Experience versus Product specifications. He was of the view that a customer proposes to buy a certain brand or a product but the actual retail experience is utmost important to close the Sale. It got me thinking and the result of some intellectual head-scratching is this column. At the end of the day, it’s the product that the customer is ultimately going to use and may or may not remember the sales experience, especially for low-value items. In fact it may even qualify for certain high value purchases.

For example, Bose which manufactures some of the finest sound systems in the world  advertises heavily online these days (in India), about its products. They are usually banner ads and I find them all across – there is a certain way the online advertisers follow you (which I will cover in a subsequent blog later). But I wonder what kind of experience that Bose is driving while advertising its products online. For one, Bose is not bought. Bose is lived. In a sense that the experience of Bose is something that the consumer lives with during the lifetime of the product. Having said that, would a potential customer walk in to a Bose store after seeing the online ad? Probably yes. Bose banner ads direct the user to the Bose website. It is upto the customer thereafter to seek whatever information they need. And therefore, there is no closure of sale! Is Bose trying to popularise the brand or is it a sales technique? I guess it is the former.

On the other hand, Samsung advertises its most famous Galaxy range of smatphones online too. In this case also, the company is building the brand but the nodes (read Retail touchpoints) for buying the product are umpteen in number than in the case of Bose. For, a Samsung Galaxy is available at thousands of retailers across the country in comparison to a Bose.

While the online ad would build curiosity for a brand like Bose, it would convert more customers for Samsung. And these are just examples.

Read More: The Bose Experience

While at the Retail Store, when a customer intends to buy a mobile phone, irrespective of the store experience, the customer would choose from one of the four main Operating Systems – the Android, the BlackBerry, the Nokia OS and the Apple iOS. It probably wouldn’t matter whether the retail store is Croma or EZone or Reliance Digital or a regional Retailer such as Viveks or Girias or for that matter, small time shops that sell these types of phones. In this case, its just the product that matters and not really the experience. Ecommerce is playing an even more important spoiler for Offline Retailers in terms of snatching away customers. Is there a physical experience in online shopping? Not really. Indeed, there is a lot of science in designing a great website / webpages but that’s more technical. Playing with the layouts is a tried and tested way for online retailers to keep improving the shopping experience. But there is really no “customer experience” as such while shopping online.

There is no doubt that the customer would return to the Retail Store to buy a similar product the next time around if the experience at the store was extraordinary. Therefore it is indeed important for Retailers to ensure a consistent Consumer Experience at the outlets. At the end of the day, between product (availability) and experience, the customer would choose the product.

RIP Musicworld

It was a bright sunny sunday, June 24th 2001 to be precise. I landed in Kolkata in the morning by train at Howrah where my former classmate picked me up at the Railway Station. The smell of freshly procured fishes welcomed me as we passed by the Howrah Bridge over the Ganges in a yellow taxi – the iconic Ambassador which still runs in the city even now. After lunch and a short nap, I walked down Russell Street towards Park Street, the most popular shopping alley in what was then known as Calcutta. At the corner was an iconic orange and purple signage aptly named “music world” – the main branding purposely in small letters to convey the casual attitude of the brand. As I entered the store, I was in for a shocking surprise. Over 8,000 sft of space allotted to music – cassettes and CDs. There were separate areas for different genres of music. At the entry was Hindi and Bollywood – the Bengalis loved hindi film music as much as they loved their own. RD Burman and Kishore Kumar, were afterall local boys who made it big in Bollywood. And so was Amitabh Bachchan who used to roam around Park Street looking for a suitable career over 50 years ago. The influence of Western Music was notable on Bengalis – From Carpentars to Led Zep, from Michael Jackson to Madonna, people here listened to all forms of music. Regional Music – Bengali language was located at the far end of the store along with some titles from other parts of the country such as Tamil, Kannada and Telugu. Rabindrasangeet, the music compositions of Nobel Laureate Rabindranath Tagore sung by various artists had a separate section. This was the largest music store in the country.  And I was going to be managing the store from the next day onwards! Whoa! I was so excited.

Life at MW as it was called was pretty cool. The store would open for business around 10am and would close by 8.30pm as per local government norms. Customers would slowly start trickling in the morning, typically housewives and retired people and a number of NRIs who were on vacation in town. College goers and those who work in offices nearby would peep in during lunch hours before or after having a delicious meal at one of the restaurants on Park Street. Evenings would be college goers and music enthusiasts. In 2001, the store used to clock a sale of Rs. One Lakh per day selling music cassettes worth Rs. 35-55 each. DVDs were slowly growing then, and Video Games were starting to become a rage among the young and old slowly. Need for Speed was the most sold video game of those days. The RPG Group which was the company that owned musicworld launched with much fanfare “Hamara CD”, a kiosk which can create a customised CD of songs from across their extensive catalogue. The concept took off well though the prohibitive price of about Rs. 350/- per CD was too much of an ask and a deterrent to growth. Eventually, it died a natural death.  There were so many album releases and launches almost every other day. It was great interacting with the guests, notably of them included Sourav Ganguly who had come for a music album launch and Diya Mirza who had come to promote her film “Rehna Hai Tere Dil Mein” (RHTDM, which was originaly made in Tamil as Minnale). Artist visits and Launches would culminate with a High Tea at the Flurys next door, one of the oldest and most respected Cakes and Pastries shop in the country. I had a great team to work with and each member knew their job so well. In fact I am still in touch with a couple of them and one of them has stayed back with the same store till date – for over 14 years!

Even during those days, I was of the opinion that music would become free sooner than later. And to promote music, we had to promote music players and alternate sources which could play music. Early 2000s were the time computers were beginning to become a part of our corporate lives. Thick cardboard files were replaced by Floppy Disks carrying 20 times the data and which could fit in easily in a shirt pocket. CDs were just about to be gaining popularity. MP3 was a fairly unheard of format then. I remember discussing in various internal meetings that the company should sell music players along with music Cassettes and CDs. Naturally, as a freshly passed out Management Graduate from a Business School, my pleas fell onto deaf ears. I believed that unless we promoted CD players – the huge decks and portable ones, there was no chance that we were going to sell more CDs. I had already sensed that cassettes would see their end sooner than later and the next big wave was hearing music on computers and laptops. Almost every single senior that I interacted with laughed me off. I also suggested that we entered the Mall way of retailing – Rahul Saraf, the promoter of the first organized Mall in Kolkata, The Forum approached me to discuss a proposal to set-up a MW outlet within. My proposal was beaten down by the Management saying that Calcuttans would not shop at Malls and would rather prefer local markets at Ballygunge or Explanade. MW entered Malls much later but by then, music was already available in various other formats across devices. Sadly, the business declined slowly and it was recently announced that the curtains would permanently come down by the end of June 2013.

I don’t fully agree that piracy alone is the reason for the decline of the Music Industry. It is also because the industry failed to keep up with the technological advancements. I was recently reading on Forbes India about Alok Kejriwal of Games2Win and his Indian experiences when he tried to come up with wonderful ideas in the mobile telephony space. He was the one who successfully pioneered the concept of Caller Tunes in India – one could send an SMS and get a caller tune and have it stored in their mobile phone. As he painfully explains, the mobile operators wanted to charge a premium for the service and also a lions’ share of profits from the venture rather than making the concept popular. Similarly, the Hamara CD could have been a clear winner those days. But the opportunity and greed cost the company quite a bit. Over time, music world eventually started selling non-core items such as MP3 players and the like, but it was too late by then. The kiosk outside the store on Park Street was selling cheaper chinese made MP3 players for a quarter of the price. music world also failed to collaborate with other music labels in the country to come up with alternate ways of streaming music, mainly because they owned the domestic and international rights of the extensive HMV catalogue. In fact, initially HMV owned content would get more prominence in the store than that of other labels.

A couple of years back, I approached music world to co-opt with Café Coffee Day, India’s largest coffee chain with over 1,400 outlets across the country where I was the Head of Business Development and Expansion across the country. Instead of seeing it as a way to garner more footfalls and attract more music enthusiasts into the store, the folks at the company rather tried to charge a premium for space. Obviously the deal didn’t go through. Am sure, the team tried their best to revive the falling business, but what probably lacked was innovation and new ideas, not for the lack of it but for a lack of willingness, probably. It was one of the saddest days in my life when my former colleague informed me about its closure. I always knew this day would come, but it was earlier than expected. RIP Musicworld.

Inviting patrons for a great feast

The Hotel Industry in India is facing tough times ever since the global recession occurred a couple of years ago. In my current role at Royal Enfield as Head of Business Development, I travel atleast 2-3 days every week across the country. Whenever I try to book rooms in small and big cities, the room rates just surprises me. I was trying to look for rooms in Hyderabad for stay over the next few days and was surprised to find discounted rates at 5 star hotels for as low as Rs. 5000 (USD 90). The Leela and Grand Chola – both touted as 7 star rated properties in Chennai are offering over 40% discounts on printed rates, to as low as Rs. 7,000 (USD 130). Same is the case in Delhi, Gurgaon, Mumbai, Pune and is even worse in smaller towns. I stayed in Trichy, a city in central TamilNadu which connects a number of other towns of prominence in business and culture within a 100 km radius during the first week of May 2013. On the MakeMyTrip mobile app for the Apple iPhone, I could get a double room for three adults and two kids for as low as Rs. 2,500 (USD 55). The room was quite large to hold a King size bed and two single beds. I have stayed in cities like Coimbatore, Dehra Dun, Jammu, Patna and many others for similar rates in well maintained properties. The outlook for hospitality in India as such wears a glim look and with increasing inventory and competition, not to forget the choices that customers make, the pricing is aggressive at most of the properties. This is where ancillary income to Hotels are helping them.

Most of the hotels have in-house restaurants, mainly to cater to resident guests. Many of them advertise these restaurants quite heavily, thereby attracting visitors through the year irrespective of peak season or otherwise for room occupancy. While this practice has been there for long, its quite evident these days with a number of hotels including some premium Hotel chains advertising in the media. What caught my attention recently  was an ad (displayed above), by ITC Hotels, one of India’s largest companies in the hospitality space for their Cappuccino Restaurant at the erstwhile Park Sheraton (in Chennai) . They have advertised buffet options with prices! Do those patrons who visit these places really care for the price? I mean – everyone does. But then, do people care what the final bill is gonna be when they visit star rated hotels and restaurants? I really doubt. Restaurant incomes are an important source of revenue for Hotels. They contribute anywhere between 7-25% of total sales depending on how well these restaurants are positioned and popularised. Some of the restaurants in these hotels are even Michelin-rated – a rating by the Vehicle Tyres powerhouse Michelin which grades eating joints across the world and shares in a report that is published annually.

Suggested Reading: Franchising

Stand-alone restaurants are doing their best too, to woo potential customers. They advertise in leading newspapers regularly to attract attention and over a period of time become destinations. In some cases, they are located within hotels and Malls and in many cases they are located on High Streets. User reviews in sites and apps such as Trip Advisor, Zomato, Burrp! etc. help them gain more traction. Chains like McDonalds, Pizza Hut, Subway and Café Coffee Day advertise across the media regularly to pull customers to their outlets and many of them even offer complimentary WiFi as a hook to retain them.

Suggested Reading: Does Free Wifi help?

With inflation leading to peak rates of food items, it is becoming impossible to middle class families to venture out eating outside. But the upper-middle class seems to be slightly more insulated, fuelling the needs of these restaurants. While premium hotels and restaurants promise great food (quality) and a wonderful ambience, consistency is key. To retain existing customers and to attract newer ones. If you are planning a visit to a nearby restaurant this weekend, flip through the pages of newspapers or mobile apps and you may be in for a surprise at a hotel nearby you! Happy Dining…

Suggested Reading: Food Inflation

Shaswat Goenka–Hearlding new frontiers at Spencers Retail

 

After dabbling with various sectors in the Rs 14,000-crore RP-Sanjiv Goenka group for about a year, Shashwat Goenka, 23, son of group chairman Sanjiv Goenka, has taken charge of Spencer's, the retail chain, from April 1. In an interview with Namrata Acharya & Ishita Ayan Dutt of Business Standard, he talks about his personal mandate and the road map for the Rs 1,400 crore business. Edited excerpts:

What goal have you set for Spencer's?
I assumed the role of sector head from April 1. What is most important at this point in time is profitability; that's where we are all trying to go. That will be the focus for the coming year and the year after. Spencer's is aiming to deliver Ebitda (operating earnings) breakeven at a company level in the third quarter of 2013-14 and be Ebitda-positive on a full year basis in 2014-15. That's the overarching short-term goal.

Spencer's has missed its breakeven deadline quite a few times. What makes you think you would be able to achieve it?
Well, each time we have done better. We have achieved breakeven at store-level but company level is what we want to achieve.

How do you plan to get there?
We want to increase our footprint. We will go up to two million sq ft from 900,000 sq ft currently and will expand in the north, east and south over the next four to five years.
We will achieve it over the next few years. The other important thing, obviously, would be operational efficiency.
In terms of offering, we would look at increasing international foods and regional foods. Value-added fresh is one of the areas we would like to explore.

Doesn't the fresh segment have one of the lowest margins?
We have very good margins in the food business compared to our competitors. Margins in apparel are obviously much higher but our margins in foods are good.

Any new formats for Spencer's on the anvil?
We haven't thought of any. We want to grow in hypermarkets.

Is the rationalisation process for Spencer's over?
Last year was the rationalising and consolidation process. We have exited Pune. In the past two years, we have closed 65 stores. Now, we want to start growing and in the hypermarkets.
Earlier, we had hyper, super, daily and express stores. Now, we have hyper and dailies and a few of the old express stores are still functioning.

Why did you exit Pune?
We wanted to become stronger where we are. So, we wanted to focus on the north, south and east. After we get that strong, we will revisit the west.

Why do you think the response from foreign retailers has been muted, after FDI (foreign direct investment) has been cleared?
I think people are interested. They just want to figure it all out before they come in.

Do you see foreign retailers as a threat to Spencer's?
Walmart and its likes coming in will help us. We can learn a lot from them. Back-end infrastructure will improve. There are basic infrastructure issues in India, like roads. Also, cold chains or dairy chains, for instance, are not very well developed.

A lot of options were being explored at the back-end by retailers. Any progress on that front?
We are open to FDI at the back-end but we haven't been approached by anyone.

Spencer's was exploring the IPO (public share offer) option. When is it likely?
That's something we definitely want to do but right now, the focus is on profitability.

Would you look at getting into the cash and carry format?
We have not looked at it. We want to be profitable and then explore other things.

Royal Enfield rears into new realms...

The last few years have seen Royal Enfield rediscover speed, with the sales of its premium bikes rising quickly. Overwhelmed by increasing demand, the waiting period for some of the company’s models has risen to nearly 10 months. The Eicher group firm, which recently kick-started production at its second plant in Chennai, is looking to grow further in the ‘mid-sized motorcycle space’. As a custodian of this iconic brand, Siddhartha Lal, Managing Director of Eicher Motors, is determined to retain the best of the old while still pushing the envelope in terms of new products. In an interview to The Hindu, Mr. Lal talks on the journey so far, the road ahead, and the attributes that make Royal Enfield click with India’s urban youth. Excerpts:

Is your transformation plan going on schedule?

Absolutely. It has been many years in the making. Our inflexion happened with the ‘Classic’ bike in 2008, but a bike in itself can never make an inflexion. It happened because we had put in everything before that — the dealers, the service infrastructure, and so on. All of that went in, and then came the new engine platform.

The bike got us into an inflexion on our volumes. For the last 20 years, we sold between 20,000 and 30,000 units. It was flat at best. And then we hit the ramp. In the last few years, we have been growing rapidly. Our growth started from 2008, and it has been great since then. Since our product and distribution fronts are now up to speed, the market is on a positive cycle for us. The visibility of the brand is at a high point right now. We hope we will be able to stretch this type of growth for the next two years.

How much of your revenue or sales is linked to the overall market, which is performing poorly? Or, are you de-linked completely?

Well, clearly at this point, you can say we are de-linked. We are growing at 50 per cent. The two-wheeler industry, however, is not. That is because we are still a very small player in the overall motorcycle industry. If we were a 50 per cent player in the motorcycle industry, we would have a limitation of growth. Since we are a tiny player right now, we can still grow much faster than the industry and not be constrained by the overall industry pace.

Is being a niche player a blessing in disguise during downturn?

Our growth is really dependent on us. For 20 years from the mid-1980s till 2008, we were hardly growing. Meanwhile, the motorcycle industry went from a few lakh units a year to nearly 13 million.

We never grew during that time. What has happened now is that we are firing on all cylinders. We are able to create a value proposition for customers, and that is fuelling our growth. The main point here is that we were able to create a real desirability among the urban youth.

Are you only riding on the urban market though?

We always had a traditional and rural market, and that is still there. But it is the urban youth who mainly ride commuter bikes. After five and eight years into their jobs, they want something better. So, they have an option to go for a larger commuter bike or they look at us, and say this is also an interesting option. This happened because we removed a lot of barriers in the minds of the urban youth. What were these barriers? A lot of people were confused over the whole shifting from the wrong foot; everyone was worried about what would happen if they pressed the gear instead of the brake. So, we fixed that. Second was that the bike was too heavy, so we went and made the stand much easier. And then, of course, the finish and the paint job — they weren’t very great.

Fixing all of this has driven demand for us.

You have had a supply-demand mismatch over the last three years. Has this helped boost demand by creating scarcity or has it dampened sales?

Well, I believe we have actually lost sales because of that. Honestly, there is always a little aura around a product that makes you wait. People feel that there is something about the product, a lot of people are buying it, and, therefore, it must be good.

So, there is that element. However, on the other hand, we have discovered that at least 20 per cent of our customers are falling out because they don’t want to wait for a year. So, they move onto some other bikes. Net-net, if you put both these conditions together, we have definitely lost out. Our first objective is to reduce that waiting period now.

What is the brand message of Royal Enfield now, compared to 20 years ago?

Originally, it was about being big, and was about power. That has subtly changed now. The ‘Bullet’ still carries a lot of the values of what originally we had. But now that is restricted only to a particular model. Overall, the message now is what we call a pure motorcycle. Other bikes are really fast, or really heavy, and or really excess in one aspect. On the other hand, our’s is about simplicity. When you see our bike, there is nothing superfluous about it. Royal Enfield is about harmonising the rider, the bike and the terrain. When you go on the highways, you enjoy going at a medium pace on our bikes. The rider is able to enjoy thoroughly.

Do you intend to have a brand ambassador?

We will never have a brand ambassador! We don’t pay people to be seen on our bike. Every movie that uses our bike is because they want to use our bike. We don’t spend one rupee on all that. Our bikes still contain that genuine feel. We believe we have created a brand which is very strong. So, it is a pull strategy rather than a push strategy. We have stayed the course. Over 15 to 20 years, when we were struggling, we never said let’s bring about a commuter bike or do something that isn’t serious.

What will you do to ensure that your product stays its course of differentiation?

Our strategy, for me, is to continue to push the envelope of making products that are even more differentiated. People don’t buy our bikes on specifications.

Obviously, we have to invest in new products. We will have many more bikes coming on the line soon. There will be more players coming, no doubt. But, I think, there is enough market for everybody. As more players come in, the market will keep growing.

So, Royal Enfield will continue to dig more deep into its niche play? Can it not become a product for the masses at any point?

Well, we can grow five-fold. But that will still never make it a mass product! I guess we are going in for much more depth in what we call the mid-sized motorcycle space. Look at our next product, the Continental GT, which is extremely differentiated and attracts a totally different segment of customers. We will have more models that have that type of differentiation. Beyond that, our ambitions are global in nature. In emerging markets, which already have a commuter market, we see a vacant space between the commuter market and the big bikes. We will provide a compelling option there.

However, in developed markets such as the U.S., we see that people are trading down from big bikes due to the current economic conditions. Therefore, we believe we will be in a sweet spot for both emerging and developed markets. That is our strategy. We want to be a global player.

What are the external factors that could prove to be limiting for Royal Enfield? Why did you decide to locate your second plant too in Chennai?

The only limiting factor for us is our own imagination. We aren’t constrained by economic numbers or the market size. With this new plant, we have the ability to expand very quickly. Of course there are risks in having both plants in the same city, but we like Chennai! We did a very detailed study, and we looked across India. But we came to the conclusion that a second plant in Chennai would be better because our entire supplier base is here. I have no intention of developing a new supplier base right now! Chennai has a very strong ecosystem of every form. Right from a paint shop to vehicle assembly and measurement equipment—everything is here! We know this area very well. If you go to an out-of-Chennai market, we have to learn everything from scratch.

Right now, we have no intention of setting up a plant elsewhere. Of course, if taxation demands, we could think of a plant elsewhere to deliver on our global ambitions. Our effort to consolidate here is our growth strategy. We will stretch this place forever, like we did in our old plant.

How was it to completely overhaul the Eicher product portfolio over the last twenty years? Do you have any regrets now?

When we were doing a review of our portfolio in 2004, we had many big businesses. But we had a multitude of smaller businesses. We had got into the garments business, tools, merchant trading, agriculture product trading - all sorts of stuff! We did a full portfolio rehash. We should focus only on a few. So, we wanted to move from being mediocre to being great.

Let us be very clear about that. We were very middling in all of these businesses, including motorcycles. But for motorcycles, we did a leap of faith, as I was sure it would grow.

So we shut down the rest of the businesses, the most visible one being the tractor business which we sold. We have no regrets.

 

Article Credit:

 

jagannathan.kt@thehindu.co.in  and anuj.s@thehindu.co.in

The Third Place just got costlier!

 

On Monday, 29th April 2013, The Tamil Nadu Hotels Association (TNHA) observed a one-day strike to protest against the Central Government’s decision to impose Service Tax on their businesses. Speaking to the media, TNHA President M. Venkadasubbu said, “The TNHA had taken the lead to organise similar associations in all states in this regard and a federation, the Federation of Hotel Associations, had also been formed for the first time in the country.The announcement of Service Tax was made by India’s Union Finance Minister Mr. P Chidambaram in the Union budget and had already come into effect, beginning this month… (April 2013). The Service Tax of 12.36 per cent levied out of the 40 per cent of the sales proceeds is illegal and a big burden on consumers who are already forced to bear the brunt of price escalation due to inflation. While the hotels and restaurants were already paying VAT ranging from 2 to 14 per cent, the new Service Tax levied by the Central government would amount to double taxation,” he said. ‘This problem of double taxation was discussed at a meeting organised by the Federation of Hotel Associations (comprising office bearers and representatives of hotel associations from all states) in Mumbai last week and a unanimous decision was taken to launch a nationwide bandh if the Central government did not roll back the Service Tax.’

Eating out has become extremely expensive over the past decade. I remember, when I was in Graduate School, with pocket money of less than Rs. 300/- per month, we could meet most of our out-of-home expenses including filling fuel for our bikes. Not so these days. The purpose of having a meal outside home, The Third Place as it is called is not just eating. It’s all about building camaraderie and relationship/bonding with family and friends. Ray Oldenberg defined the third place as an alternative to Home and Workplace in his research paper in 1991. Oldenburg calls one's "first place" the home and those that one lives with. The "second place" is the workplace — where people may actually spend most of their time. Third places, then, are "anchors" of community life and facilitate and foster broader, more creative interaction.There were already numerous such spaces all over the world. Cafes, Restaurants and other Eating Spots are among the most sought after third-places. In India, cafes and eateries have burgeoned all over the country in the past few years. Café Coffee Day, India’s largest café chain has over 1,400 cafes across the country. Starbucks, Costa, Coffee Bean and Tea Leaf, Gloria Jeans, Mocha and many other such international and domestic café chains have their outlets spread across major cities, providing an opportunity to people to hang around and discuss everything under the sun – from personal banters to professional meetings to matrimonial discussions, one can find all of those out there. Apart from Coffee Shops, there are over half a million eateries of various shapes and sizes across the country which provide Food & Beverage options. For nuclear families, eating out is one of the biggest entertainment these days, what with very little time to spend with the family!

With the proposed new tax, food bills are expected to go up significantly to consumers. For example, on a bill of say, Rs. 1,000/- for a family of four, the Value Added Tax ranges from 2-14%, so lets assume its on an average of 8%. So, the bill goes up to Rs. 1,080/-. The service tax of 12.36% is applicable on 40% of the Sales, so that works out to Rs. 49.44, rounded off to Rs. 50/-. Hence the total bill to consumer now is Rs. 1,130/- just because this family chose to eat in an air-conditioned restaurant…where such a tax is applicable. The definition is quite clear – whether serving F&B in an air-conditioned area is a sale or a service. As per the recent amendment in the Law, its both. While food is cooked and sold, it is also served (by waiters) and hence considered a service. Also, the a/c facility is meant for seating and consumption, thereby making it amply clear that it is indeed a service. While this rule will bring about encouraging revenues to the Government, those that are meant to suffer are the middle-class consumers. For students and youngsters, visiting their favourite coffee shop or a fast food joint would get more expensive, thereby creating a dent on their pocket money. However, for the affluent and well to do, the proposed hike may not mean much, given that their spending power is relatively higher. In most cases, such individuals / families don’t even check the bill – probably pay (usually by a credit card) and sign-off.

While inflation and cost of consumption have gone up significantly, the income rates haven’t gone up proportionately. This has left the middle-class with fewer options for recreation. And Eating joints may not be the most preferred Third-Places anymore! For F&B Retailers, it means reduced number of visitors. And business too.