COMPANY PROFILE OF SCHWEPPES :

BRAND HISTORY:

In the late eighteenth century, Johann Jacob Schweppe, a German watchmaker and amateur scientist, developed an efficient process to manufacture carbonated mineral water. He founded the Schweppes Company in Geneva in 1783, but later moved to London in the year 1790 to develop the business there. Schweppes was named after Schweppe. In the early 1800s, the firm continued to establish itself on a national scale. During this period it faced challenges from many competitors and imitators but Schweppes managed to retain its position. The firm continued to establish itself on a national scale. By 1831 Schweppes had become the suppliers of Soda Water. The business then extended to include new products called Flavored soft drinks such as lemonade .Their product range continued to expand in 1870’s with the inclusion of Tonic Water .The company witnessed unprecedented growth over the years. By 1957, it had increased its reach and introduced bitter lemon to their product range .In 1969, the Schweppes Ltd, merged with the Cadbury group Ltd, to create Cadbury Schweppes plc.In 1999 the Schweppes brand was sold in some countries to the Coco Cola company.
Over the few years Schweppes have broadened its range to cover not only bitter and mixer products but also fruit flavored soft drinks with exciting blends of different fruit.

PACKAGING HISTORY:
Schweppes had its unique packaging history. It used three different types of bottle during the period 1791 to 1831:
1. The first launch in the market was a half pint Hamilton bottle in olive green glass, embossed as 'J Schweppes & Co, Genuine Superior Aerated Waters, 79 Margaret Street'.
2. Then a sort of similar shape bottle was brought into the market, but in salt-glazed, brown stoneware.
3. After that a flat-bottomed egg shaped, stoneware ginger beer bottle, in brown salt-glaze, appeared in the market.
At the beginning of 1831, J. Schweppe & Co moved to 51 Berners Street. The Berners Street egg-soda was the principal bottle used by the company until the turn of the century.

By the year 1987, flat-bottomed egg-soda bottle, which could stand upright, was introduced. This remained in use until about 1925. Around 1910, crown corks were replaced by wired-on corks.

Ginger Ale was in a straight-sided, dark green bottle, with wired-on cork covered in silver tinfoil. There was a label on the body and on the neck. All bottles either incorporated the Royal Warrant or had the word 'Schweppes' embossed vertically on the side.With the war over, Schweppes decided to standardise all its bottles, other thanan Ginger Beer and Seltzer. There were two sizes only: 10 ounces and 6 ounces. All bottles were pale green, except for Ginger Ale, being dark green in colour. In 1922, a third size was added, for Soda Water only. This was a small bottle that became known as a 'Schweplet' .

In 2003, Schweppes introduces a new bottle shape, a contemporary rendition of the traditional Schweppes 'egg soda' bottle.
ADVERTISING ACTIVITIES OF SCHWEPPES:

Since 1900’s, humour sophistication and maturity have been the main hallmark for Schweppes’s advertising activities. But its advertisement first appeared in London newspaper’s when it started producing mineral water. From 1920 onward’s it started expanding it’ s advertising ranges through glossy magazines, in theatres.Over the years their advertisement were accompanied by several promotional activities.1950’s was the post war era which brought successful campaigns such as “Schweppervescence”.During 1960 it developed its first tv campaign. Over the years, its advertising campaigns witnessed its creative use of brand names.Examples appear even in the early slogans, such as 'Thirsty-take the necessary Schweppes', 'Schweppervescence', 'Schweppshire' and 'Schhh... You Know Who'.And it still continuing its advertising campaigns with lots of creativity and campaigns.


Currently Schweppes is manufactured by Dr Pepper Snapple Group in the USA.In the European countries it is manufactured by the Coco Cola company.
The 'Schweppes' product range now includes: its classic
· 'Schweppes' Lemonade; original
· 'Schweppes' Bitter Lemon;
· 'Schweppes' Indian Tonic Water;
· 'Schweppes' Ginger Ale; 'Schweppes' Soda Water;
· 'Schweppes' Russchian (perfect mixed with Vodka) and a
· Variety of juices and cordials.

Book Review -- A Thousand Splendid Suns

The mention of Afghanistan conjures images of gunfire, bloodshed, fuzzy power struggles and refugee conditions in a hot desert country, conveyed by world media reports. A Thousand Splendid Suns authored by Khaled Hosseini is a welcome departure from sordid images, and tells us the story of Afghan citizens whose lives are disrupted, transformed and redefined by the state of affairs of their nation.

The protagonists of the story are two women, Mariam and Laila. Mariam grew up in an isolated village near Herat and had never been to school because her mother did not believe in it. She learnt Arabic from an elderly cleric who taught her at home. Laila grew up in Kabul and went to regular school. Her father doted on her. He believed that educated women would help lead his country to a glorious future. They come together as the two wives of Rasheed, a conservative man in his sixties.

The book reveals many interesting facts about Afghanistan’s ethnic diversity (Pashtuns, Tajiks, Uzbeks, Hazaras) and its history. The country was a monarchy under King Zahir Shah until the erstwhile USSR invaded the country in the late 1970s. The northern hill tribes sought to protect their territory and soon had support from the other parts of the country.

Hosseini has represented a wide variety of views about the political situation and this is what makes his story-telling brilliant. Laila’s father firmly believed that the communist rule was good for Afghanistan because it believed in education and equal work opportunity for all. He tells Laila during communist rule that it was the best time to be a woman in Afghanistan, because there were educated women holding high posts in government, education and just about every field.

The impact of war on the human psyche is described vividly through several episodes. Many families lost their sons to the war and Laila’s family was among them. Her mother mourned the death of her sons and vowed allegiance to the Mujahideen. The war was over in 1992 and the Russian troops withdrew. Laila’s mother put up a poster of her sons’ leader and hero Ahmed Shah Massoud in her room and celebrated his victory with a lunch party of her own.

Communist propaganda is illustrated through Laila’s teacher at school, Khala Rangmaal. She taught them that the USSR (along with Afghanistan) was the best country in the world because “it was kind to its workers”. She said their country would be the same once the “anti-progressives” were defeated.

The end of the war heralded a new power struggle. The Afghan forces consisted of several leaders, each with their own army and ideology. The armed factions found targets in each another and innocent civilians. Societal freedom was replaced with fundamentalism, and the worst victims were women. Pamphlets were distributed door to door by the Taliban, stating do’s and don’ts for daily life. Burkhas became compulsory and a woman could not leave her home, unless escorted by a male member. Education was restricted to boys. As Mariam’s mother put it, the only thing a woman needed to learn was tahamul or endurance and schools did not teach it. Rasheed had enforced these rules on his two wives before the militia did and he regarded the activities of the Taliban indulgently, as if they were spoilt children.

Most people fled or tried to flee to neighboring countries to seek asylum and a new livelihood. Laila and her family however returned from Pakistan to their native land believing that they could and would make a difference by being there. Pathos, humour, patriotism and the power of hope are woven skillfully together in this heart-warming narrative.

The book gets its title from a 17th century poem about Kabul which ran
“One could not count the moons that shimmer on her roofs,
Or the thousand splendid suns that hide behind her walls”.

A Thousand Splendid Suns is published by Bloomsbury. Hosseini’s other well known book is ‘The Kite Runner’. He is a practicing doctor and lives in California. Do visit www.khaledhosseini.com for reviews and the author’s comments on his works.

Unilever: Company Profile and History

By Prakash Reddy

Market share/importance:
“Add Vitality To Life” – with this mission, Unilever, a multinational, has a huge and expanding global reach. Unilever proudly declares that every day 150 million people across the world choose from among 400 of its brands to meet their family needs. Unilever is one of the world’s top makers of packaged consumer goods and moves countless products like deodorants, fragrances, soap, margarine, tea and frozen foods all over the world. The corporation has its business in over 150 countries with annual sales of approximately US $ 62 billion (£40bn). Unilever controls subsidiaries in at least 90 countries and employs nearly 180,000 people. Unilever is one of the world’s top three food firms -after Nestle and Kraft- and the world’s second largest packaged consumer goods company –behind Procter & Gamble.

However, in spite of Unilever’s huge presence worldwide, the actual visibility of the company is surprisingly low. Anonymity hides the company’s importance. Unilever does not retail under its own name, preferring brand names to create the illusion of diversity. Who does not know brand names like Magnum, Omo, Dove, Knorr, Ben & Jerry’s, Lipton, Slim-Fast, Iglo, Unox, Becel, and Lever2000? They’re all part of the ‘Unilever group of brand names’. To make sure the brand names do not go unnoticed, Unilever spends huge amounts of money on marketing and advertising. Advertising has always been a keystone of Unilever’s businesses. Unilever is well known for memorable advertising around the globe like Lynx/Axe click advert with Nick Lachey, Knorr Chicken Tonight, 'I feel like chicken tonight', and the list goes on. The Dutch-Anglo company is likely to be the world’s number one advertiser. Very recently, Unilever was honored at the 59th Annual Technology & Engineering Emmy Awards for Outstanding Achievement in Advanced Media Technology for Creation and Distribution of Interactive Commercial Advertising Delivered through Digital Set Top Boxes for its program Axe: “Boost Your ESP”.

Unilever and India

Hindustan Unilever Limited (HUL), Unilever's main operating business in India, is generally acknowledged to be one of India's best-run businesses. It is the country's biggest consumer goods company, and far and away the leading advertiser. The company headquarters is in Mumbai and employs nearly 41,000 people in over 40 locations throughout the country. The HULs total income is Rs 14,180 crores for the year 2007, with a net of profit of Rs 1,925 crore, up 3.8% compared to 2006.

Strategy

During 1999, Unilever made it clear to focus on fewer, stronger brands to promote faster growth. Unilever’s growth strategy, called ‘The Path to Growth’, was designed to accelerate top line growth and step up the rate of margin improvement in five years time.

Unilever has started selling off any subsidiary businesses which are making less than average profits, and ‘decentralising’ control of subsidiaries, by monitoring profit levels and making sure they are maximised.

Another key component of the growth strategy is e-commerce, to improve brand communication/marketing and on-line selling & to simplify business-to-business transactions throughout the supply chain. Unilever committed £130 million to e-business initiatives in 2000 and hopes to create a ‘mall that never closes’.

In its bid to concentrate on fewer, core brands, Unilever sold 27 businesses in 2000 and at least 19 in 2002. During 2000, Unilever acquired several high-profile companies, including American based Bestfoods, which strengthened Unilever’s market position remarkably. The acquisition of Bestfoods made Unilever's foods business the world's second largest after Nestle. Brands that are here to stay include Hellmann’s mayonnaise, Bird’s Eye, Persil, and Ben & Jerry’s ice cream. On these brands Unilever will focus its tremendous advertising efforts.

History

Butter & Soap
Unilever was created in 1930 by the merger of British soapmaker Lever Brothers and Dutch margarine producer Margarine Unie, a logical merger as palm oil was a major raw material for both margarines and soaps and could be imported more efficiently in larger quantities. Both were competing for the same raw materials (e.g. oilseeds) and were involved in large-scale marketing of household products using similar distribution channels.

In the 1930s the business of Unilever grew and new ventures were launched in Latin America. In 1972, Unilever purchased A&W Restaurants' Canadian division but sold its shares through a management buyout to former A&W Food Services of Canada CEO Jeffrey Mooney in July 1995. By 1980 soap and edible fats contributed just 40% of profits, compared with an original 90%. In 1984 the company bought the brands Brooke Bond (maker of PG Tips tea).

In 1987 Unilever strengthened its position in the world skin care market by acquiring Chesebrough-Ponds, the maker of Ragú, Pond's, Aqua-Net, Cutex Nail Polish, Pepsodent toothpaste, and Vaseline. In 1989 Unilever bought Calvin Klein Cosmetics, Fabergé, and Elizabeth Arden, but the latter was later sold (in 2000) to FFI Fragrances.

In 1996, Unilever purchased Helene Curtis Industries, giving the company "a powerful new presence in the United States shampoo and deodorant market". The purchase brought Unilever the Suave and Finesse hair-care product brands and Degree deodorant brand.

In 2000 the company absorbed the American business Best Foods, strengthening its presence in North America and extending its portfolio of foods brands. In a single day in April 2000, it bought, ironically, both Ben & Jerry's, known for its calorie-rich ice creams, and Slim Fast.

Today the company is fully multinational with operating companies and factories on every continent and research laboratories at Colworth and Port Sunlight in England; Vlaardingen in the Netherlands; Trumbull, Connecticut, and Englewood Cliffs, New Jersey in the United States; Bangalore in India (Hindustan Unilever Limited); Pakistan; and Shanghai in China. Its European IT infrastructure headquarters is based in Unity House, Ewloe in Flintshire, Wales.

CONSUMER ADOPTION

By Vijay Ramaswamy

Background:

Faced with recent supply and cost pressures, orange juice manufacturers have been challenged to maintain a positive bottom line. To compensate for the higher cost of oranges, in 2007, every OJ brand raised its base & promoted price by more than 10%. Given the already high price sensitivity among OJ consumers, it was expected that most OJ brands would take a loss in volume.

Considering the fast moving nature of the OJ category, it is presumed that consumers will get adapted to the 10% increase in price and the volume sales will exhibit a similar pattern after a few weeks.

Business Question and Research Objectives:

Tropicana is interested in understanding the time required by consumers to get adapted to the price increase. In technical terms, the pattern of volume sales before the price increase is similar to the pattern of volume sales post price increase. We can drill down to do the analysis at the state level or market level or the client desired region level. The methodology remains the same for all levels.

Recommended Methodology:

The scope of the project can be narrowed down to understand just the average time taken for consumers to adapt to the price increase.

The analysis will be split into two parts. Firstly, it will utilize a regression model, controlling for own and competitive price/promotion/distribution. This will be the fixed effects model similar to any price and promotion or marketing mix model. Marketing inputs will be added to the data based on the client input.

We can either model on the individual pack sizes or on the total Tropicana as a whole. In either approach, we will need approximately 5 years of data to observe the volume sales pattern. With 5 years of data, we assume that there will be pattern related to both the old and the new price.

Also, a strong brand will have a stable elasticity i.e. beyond a certain time point; the brand volume will not be affected much due to the increase / decrease in price. We know that the entire OJ category has experienced an increase in price which means the brand elasticity would be unstable for certain time period and then considering the brand equity, it should come back to normal over time.

We will follow the same standard IRI process (Price-Promo / Market Mix) for building a regression model on the 5 years of data controlling for advertising and coupons. This will give us the estimates for all the variables at the TUS level. The base price elasticity in this case will take into account both the price increase and the old price. So, intuitionally, with 5 years of data, we assume the brand to be inelastic
The next step will be to understand the model fit. We will run the simulation program for the obtained fixed effects model and use the aggregate week level file (the output of simulation which is volume due to) as a base for further calculations. The structure of this file is attached for clarifications.

In the fixed effects model, our endeavor is to try and capture as much of variability in the data as possible. In practice, it is possible that the target / competition would have run some special events on a week to week basis plus some extraneous information which is captured by the error term. It is practically possible that the unexplained variation captured by the error term helps us draw reasonable insights due to the price increase. It will isolate the effect due to any other control variables viz. promotion / advertisement / competitor activities etc.

Residual Way of Modeling:

Therefore, as a second stage of analysis, we will calculate the residuals from the first model; and model for residuals with base price as the only independent variable. This will help us understand the impact of base price on the brand’s volume more accurately. From the week level aggregate file, we will calculate the residuals (See Appendix). This will be done for the entire 5 years of data and then residuals will be used as the dependant variable.

Our objective is to understand the impact of price increase on the brand elasticity and how much time do the consumers take on an average to get used to the price increase. The elasticities we have are short term elasticity’s. For capturing the impact of price increase on a long term basis, we will need to estimate the long term elasticities.

For calculating long term elasticities, we will create a moving window for the entire 5 years of data. This concept is based on one of the research papers published in the marketing science journals written by Mela, Lehmann and Gupta titled “the long term impact of promotion and advertising on consumer brand choice”.
E.g. we have 260 weeks and we will roll up the data for each 12 week period. Suppose we have data from week 1 to week 52. We create data sets from W1-W12, W5-W16, -------, W41-W52. Empirical research in marketing science says that this window is called the moving window. Instead of 12 weeks which is practiced for understanding the long term Ad effectiveness, forecasting etc we can choose some other number but for consistency sake, we can go ahead with the number 12.

For implementing the above logic, we will need to aggregate the residuals and the entire movement data at the quad week level (as explained above). We will do it only for the target variables and in our case it will be only the base price. Hence, for 5 years of data, we will have the movement data at the quad week level i.e. 66 data points at the quad week level instead of 260 at the store week level. In our case, we will sum up the residuals at the quad week level and average the base price at the quad week level.

The next step after this data preparation will be to model for residuals at the quad week level with base price as the independent. The model form will now be

Residuals = α + Base Price

The model procedure will be a standard Proc Mixed in SAS at the quad week level which will give us 66 estimates. Once we get these estimates, we will calculate the elasticities and use them appropriately.

It is likely that the plot will have high kinks (both upward and downward). In that case, it will be difficult to read a pattern. If this exists, we will use a survival analysis to fit the decay curve and smoothen out the kinks for easy interpretation.

Interpretation:

The last step in the analysis will be to plot all these 66 base price elasticities across weeks along with the base price and observe the pattern change. We expect to see a stable pattern for a long time frame due to the old price, then a sudden increase / decrease in the pattern for some time period and lastly a stable pattern which indicates that there is a rebound in the volume sales.

As a diagnostic, we can also compare the new elasticities with our TUS fixed effect elasticity value. This will help us explain the impact of change observed over 5 years of data. When we say TUS fixed effect elasticity value over the 5 years of data, our assumption is that that the consumers have already got adapted to the new price; hence it should not be quite a high number based on the OJ category standards.

If we do not observe a significant change in the pattern of elasticities, we will get a direction that the overall decline may not be just due to the base price but it can be due to the decline in promotional activity, increase in the competition promotions etc.

Appendix:

The scope of this project could be scaled to as high a level as possible. Empirical research in marketing science considers many variables to find a solution to this problem. The variables considered can be location of the store, population of the state / region, average income of people in that state / region etc. If we model for all of these variables, we will arrive at a solution which will classify the important variables that lead for consumer adoption. This will require us to get to the consumer level data i.e. panel data. If we try to scope it this way, it can grow as big as we want it.

Residuals = Actual Volume – Volume due to promotions.

Expanded Scope:

This approach is a special case in Marketing Science and involves a lot of criteria. Ideally, it would be useful to have fast moving products to be able to see a pattern, a significant price increase which will help the client fix the best price for their product depending on the average length for rebound etc. With this analysis, the client will not only be able to know the average length for rebound but depending on that length, they would be able to decide on the % increase / % decrease they would want to fix.

If the clients are interested in knowing the effect of Increase / Decrease at a granular level viz. Region, CORP RMA etc, we can very well use the Randomization approach using PROC MIXED in SAS.

The scope of this approach could be used to help the client understand the average length taken for the advertisement effect / campaign to decay. This will be very helpful to the clients since they could utilize their advertisement expenses better.

The Sub Prime Financial Crisis

By Abhishek Sen

On 6th of May 2008 the CNBC website reported Mr. Martin Feldstein, a Harvard University professor and president of the National Bureau of Economic Research, United States, as saying that the US economy is steadily slipping into a recession. Looking at the economic indicators noteworthy are the facts that from March 2007 to March 2008, the unemployment rate jumped from 4.4% to 5.1%. In February, the manufacturing capacity use rate was 78.7, down 1.4% from its peak in July. (Source: www.marketoracle.co.uk)
The Federal Reserve has cut down its rate from 4.75% in September’07 to 2.0% in April’08. If we look at the quarterly percent change in the GDP (based on constant $ value) of US, the levels prevailing for 2007 and for the first quarter of 2008 resembles the levels that prevailed during the earlier recession of 2001. The real estate market plummeted after years of soaring values and foreclosures has gone up sky rocketing beginning from the later half of 2006.

The preceding paragraph hints to the well known fact that US is now in the midst of a financial meltdown called the Sub-prime Crisis, whose ripples are felt all over the global economy. Academicians and administrators around the world are trying to gauge how far reaching impact this crisis may have and how long it may last.

The roots of the present crisis may be traced back to the Dotcom Bubble burst and the subsequently ensuing recession in the United States in the year 2000. During mid 1990s, internet based companies became the buzz word in the US. The web-based technology projected itself as a new paradigm which caught the imagination of people and the companies operating in the domain were thought to have huge potential. Since the domain was comparatively new, it had the entire international market before it to tap. The companies could raise huge capital from the market easily and in no time their capital base soared as people showed much eagerness in investing with them. Many of the companies had huge capital bases even before the first dollar revenue entered their balance sheets. Each of the companies tried to out-compete the other and monopolize the market. In the bid to do so they raised huge capital and spent lavishly. But as always, in a competitive set up, only few emerge winners. So when the time came to open up the balance sheet to the share holders, many companies came up with dismal performances, far below what have been expected out of them. Their share prices crashed and many of the players in domain declared bankruptcy. There were 457 IPOs released in the domain in 1999. In 2001 there were only 76. Billions of dollars vanished in the wind and the economy started looking down the barrel. To compound the situation, the twin tower blast happened on September 11, 2001 forcing the economy to into a recession.

To tide over the situation, Allan Greenspan heading the Federal Reserve then, started cutting the fed rate drastically and on June 25th , 2003 the rate came down to 1% from a peak of 6% in January’ 2001. This was intended to inject more liquidity within the system, so that people have more money supply at disposal and thus can spend more. Spending was seen as a national duty so that the aggregate demand gets a boost and thus the economy comes back on trail once more. The policy worked well and the economy got the requisite boost.

As the interest rate was deliberately kept at drastically low levels, the cost of borrowing was much reduced. Around 2002-2003 the interest rate on a 30 year fixed mortgage was lowest in preceding 40 years. This worked very well for the real estate industry. As the cost of borrowing decreased people started borrowing and invest in real estate. The prices of houses started soaring and so did the demand for it. It was the cheapest source of equity around and since the price of the houses was perceived to go up and up, the belief was that loans of any amount can be paid back easily by liquidating the equity and even then a surplus can be made out of it. People started buying homes they can barely afford and the terms of the loans encouraged them even more to do so.

Till this far it was only a problem of excess demand and slow supply. So prices went up. If this were allowed to remain so, it could never have spiraled into a crisis. The other side of the story began as we bring the lenders into the picture. The real estate agents were earning profits out of this and so were the home owners. The financial institutions and banks as lenders also decided to join the bandwagon through creation of certain innovative financial tools. It is in this point that the root to the crisis lies. This is so because these very financial innovations in effect precipitated the crisis that we are currently in.

The business of financial institutions is to lend money at an interest. The more they lend, the more is their interest income and hence their revenue. The constraint in this case is the “creditworthiness” of the borrower. The JP Morgan rule of lending was lending to entities that are known to repay back. In this case the credit history of the entity was taken into considerations to judge the credit worthiness. This was in addition to the income or economic status of the entity. In the US the financial institutions and the banks, in order to expand their lending net, started lending to people with not so stellar credit history. This was not totally an uncalled for exuberance on the part of the banks. The economy was going up and up. The spending power of the people was increasing so long as they were able to liquidate their equity as and when needed. So there was no default as such. Though other economic factors could have indicated a rejection of loan application, the expectation that was created by timely repayment of earlier loans rendered lending to this group of entities a feasible option. So the banks started to include these groups in their lending net and but they did so typically in exchange of a higher interest rate since the risk of default was more here. This phenomenon of lending to entities with less than stellar credit history in exchange of a higher interest rate is known as Sub Prime lending. The amount of sub prime lending went soaring high in the US during this time. As on the second quarter of 2007 sub prime loans accounted for 14% of all outstanding mortgages in the US. This was just the beginning of the financial innovation.

Next the Financial Institutions innovated upon the concept of Asset Backed Securities (ABS). Asset Backed Securities is a type of security which is backed by a pool of assets which are otherwise illiquid in nature. They may also be based upon cash flow receivables from underlying assets. For example a credit card issuing bank may securitize its credit card receivables and sell that off to any investors. The bank is thus able to raise its capital and the investor in turn shall get the amount promised on the security. This concept was acted upon and a new instrument called Residential Mortgage Backed Securities (RBMS) was innovated. These securities typically consists of several mortgage loans bundled together wherein the residence of the borrower is kept as collateral. Within this pool of loans, the sub-prime loans are also included. These securities are then given various ratings by the credit rating agencies and based on this rating the investors purchase the securities. The advantage for the investor is that he or she can hold diversified portfolio by buying these securities. The RBMS were classified under various “trenches”. The higher trench of securities was promised the first dollar that would come in course of repayments. The lower trenches carried the risk of default and to compensate that they these securities carried higher rates of return for investment. The lowest trench carried the maximum risk of default but maximum return.

This enabled the banks to shift the burden of even sub prime loans out of their balance sheets. So they became more aggressive in widening their credit net. They loaned indiscriminately and also with clauses that enabled them to provide loans of greater amount. The clauses of down payment were overlooked, even they loaned more than value of the property. The argument was that the rate in which the home prices were rising, the borrower could finance it easily at future periods. By 2005 the home prices were rising by almost 14% every year. The credit rating agencies were also providing the securities with high investment grades and thus the banks or other financial institutions were having no difficulty in selling these loans off.

Further innovations came into the market in the form Collateralized Debt Obligation (CDO) which is nothing but a type of RBMS in which the existing mortgage loans were repackaged with other forms of securities (not necessarily the mortgage backed loans) like pension funds, hedge funds etc. In this way RBMS of lower trenches, consisting of sub prime loans as one of the components, could be bundled with other securities and could earn higher investment grade. The CDOs are also typically classified into several trenches and the same trickle down financing methods is applied here. Thus CDOs played the role of distributing the risk of the loan to broader number of investors in the economy as this typically can also include pension funds and other forms of security.

The CDO and RBMS together thus disconnected the lender of sub prime loans from the borrower of such loans in terms of risk of default which afforded the financial institutions the luxury of being reckless in lending loans. And amidst all these the housing prices continued to soar and people continued to speculate in them. The banks came up with more innovative schemes where the initial repayment was very low but after the expiry of a specific period the payment would sky rocket. These schemes were called Adjustable Rate Mortgage (ARM). People took these loans eagerly in the hope of making huge profits out of increasing home prices and thus the late repayment was perceived to be fairly easy.

This phenomenon continued through 2005 and 2006. In late 2006, due to the rising fear of inflation, interest rate was increased. As the rate of interest increased, the cost of loans and hence the amount to be repaid to the lender, increased suddenly. Also the repayment of the ARMs began to start. Default increased suddenly. As the default rates went up sharply, the so called innovative financial instruments, CDO and RBMS suddenly became just a paper’s worth. They were highly illiquid as the cash flow backing them stopped. The lenders of mortgage loans could no longer sell their sub –prime loans to other agents. Many of the large financial giants such as Bear Sterns which was later on brought by JP Morgan Chase, JP Morgan Chase themselves, Citi bank were hit by high defaults. They were also holders of many CDOs which also hit their revenue sheet. Many of the players declared bankruptcy and had to close down which declared the onset of Sub prime crisis. Banks and financial institutions became much alarmed and disbursing loans and thus liquidity crunch ensued. The contagion effect has worked in this case and institutions across the globe have been hit by the sub prime crisis.

To overcome this impending crisis, the central banks across the globe are cutting down the interest rate to inject money into the system and thus to boost up aggregate demand. The government of the United States has started lending generously to the financial institutions to maintain their viability. The fed rate cut also has the impact of providing the banks to borrow from the fed at a low rate of interest to maintain their capital base. In addition to that the US government has also started a project called “New Hope” wherein they are talking with the lenders and the borrowers of ARMs so that the lenders freeze the initial low repayment rate for another five to six years, in which time the borrower can approach the loan repayment in a more methodical manner. Also the government is providing tax relief to the affected population. But the crucial factor is the downward spiral of the home prices. The sooner that stabilizes the better it is for the US and the global economy. More and more the home prices drop, more is likely to be the equity loss of the people which will aggravate the situation even more.

Source:i) Various Articles from http://www.investopedia.com/

ii) Definitions and concepts have been defined following http://www.econlib.org/

Measuring Competitiveness in an Industry with a special focus on the Retail Industry in India

by Shatanjoy Ray

Introduction
Competition for market share and in the process the eagerness to capture a major chunk of the revenue is the central objective of all firms. Thus to measure competitiveness and thereby obtain an idea of the industry, has been the focus of many a economist. This has led to the development of many measures to capture the magnitude of competitiveness in the market. The following essay uses the various measures used to capture competitiveness in an industry to obtain a fair idea of the nature of industry. It focuses primarily on the retail industry and uses the example of Bangalore to illustrate the concept.

Competition
Competition is an intrinsic feature of any industry. Competition in business is best described as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms." Seen as the pillar of capitalism in that it may stimulate innovation, encourage efficiency, or drive down prices, competition is touted as the foundation upon which capitalism is justified. According to microeconomic theory, no system of resource allocation is more efficient than pure competition. Competition, according to the theory, causes commercial firms to develop new products, services, and technologies. This gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

Retailing in India

Let us now focus on some key indicators of the Retail Industry in India
· Total Consumer Spend in the Year 03-04 – INR 9300 billion ( USD 375 billion) growing over 5% annually
· Retail sales – 55% at INR 280 billion (USD 205 billion)
· Organised Retail – Only 3% but growing at 30%
· Organised retail to cross INR 1000 billion mark by 2010
· INR 200 billion investment in the pipeline
· Top 6 cities account for 66% of total organized retailing.
· Overwhelming acceptance of modern retail formats.
Fashion drives organized retail.
2004 figures :
Organised retail : Rs. 280 billion Clothing, Textiles & Fashion accessories: 39% Footwear 9% Jwellery & watches 7% Mobile hand sets & accessories 3% Health & Beauty (including services) 2% Food & Grocery 18% Durables 13% Books, Music & Gifts 3% Home 3% Pharma 2% Entertainment 1% Five Reasons why Indian Organized Retail is at the brink of Revolution :
· Scalable and Profitable Retail Models are well established for most of the categories
· Rapid Evolution of New-age Young Indian Consumers
· Retail Space is no more a constraint for growth
· Partnering among Brands, retailers, franchisees, investors and malls
· India is on the radar of Global Retailers Suppliers

Looking Ahead

Many strong regional and national players emerging across formats and product categories Most of these players are now geared to expand far more rapidly than the initial years of starting up Most have regained / improved profitability after going through their respective learning curves Malls in India

A decade ago – not a single mall 3 years ago – less than half a dozen Today – 40 malls 2 years from now – 300 malls

INDIA RETAIL BY 2007-08

50 million sq ft of quality space under development

7 major cities to account for 41 million sq ft development

300 malls, shopping centres and multiplexes under construction

To open 35 hypermarkets, 325 large department stores, 1500 supermarkets and over 10,000 new outlets
Thus we observe a lot of activity is taking place in the Retail domain, with a lot of foreign players entering the market through strategic alliances. And with Walmart poised to enter the market through a JV with Bharti Group of India, and Reliance entering the market in a BIG way with its Reliance Fresh concept, the scene is sure to get hotter by the day. This naturally leads us to the question of competitiveness in the retail domain, more so in the grocery space. We conclude by using the measures of Competitiveness to illustrate the state of retail (grocery) in the city of Bangalore. Before we proceed to the Case study, let’s review the various measures of competitiveness.

Measures of Competitiveness
There are two widely used measures of Competitiveness: 1) Concentration Ratio 2) Hirschman-Herfindahl Index. We would briefly analyze the various measures before proceeding further.
Concentration Ratio
This is a widely used measure which is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry.
Market forms can also be classified based on the concentration ratio. Listed in ascending firm size, they are:
· Perfect Competition: a very low Concentration Ratio
· Monopolistic Competition : below 40 % for the 4 firm concentration ratio
· Oligopoly : above 40% for the 4 firm concentration ratio
· Monopoly : with a near 100 % concentration ratio
Hirschman-Herfindahl Index
The Hirschman-Herfindahl Index or HHI, is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 1 moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the HHI generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.
The major advantage of the HHI when compared to other measures of Competitiveness such as the Concentration Ratio, is that the HHI attaches more weight to larger firms.
Take for example an industry where the top six firms produce almost 90% of the total output. Now let us consider the following scenarios:--
1) All the six firms produce 15% of the total output
2) The first company produces 80% and the subsequent five firms produce 2% of the output
In both the cases, we consider that the remaining 10% is divided amongst 10 equally sized firms.
Now for some computation:--
The 6 firm Concentration Ratio in both the cases is 90% but it fails to capture the nature of the market. The HHI gives proper weight to larger firms.
The HHI in Scenario 1 : 6 * (0.15 2 ) + 10 * (0.01 2 ) = 0.136
The HHI in Scenario 2 : (0.8 2 ) + 5 * (0.02 2 ) + 10 * (0.01 2 ) = 0.640
The HHI thus is capable of capturing the nature of the industry. The first scenario is more representative of Perfect Competition, while the latter captures to a great extent the Monopolistic powers of the single firm.
Notatively the HHI is represented as :

Here Si denotes the market share of firm i in the market, and n is the number of firms.
The Hirschman-Herfindahl Index (HHI) ranges from 1 / N to one, where N is the number of firms in the market. Equivalently, the index can range up to 10,000, if percents are used as whole numbers, as in 75 instead of 0.75. The maximum in this case is 1002 = 10,000.

Case Study
Now let us consider the city of Bangalore. It is the capital of the state of Karnataka, and was one of the first cities to taste the fruits of the Retail Revolution. Moreover with the IT boom in the city, the city has witnessed over the last decade a substantial increase in per capita income and subsequently disposable income. The cosmopolitan demographic feature of Bangalore does make it an ideal choice for big retailers to set up shop.

Over the past few years a lot of retailers have set up chain of food and grocery stores. Reliance was the latest to enter under the Reliance Fresh brand name.

We now use the concept of the HHI to calculate and measure the degree of competitiveness in the country. This measure in the context is entirely dependant on the extent of presence in the city. Number of shops present in the city has been considered to arrive at the measure.

Thus the HHI obtained indicates that there is still humungous scope of growth. Moreover, there exists almost perfect competition in the market. Although Foodworld is market leader with almost 27 % market share. It is due to its first mover advantage. In the years to come, it is sure to face a lot of competition from Reliance and Spencers who have lined up a string of new projects. The HHI also indicates, that it is still an open market, and the perfect competition will drive costs down, improve efficiency, and improve the shopping experience of consumers. At the end of the day, consumers will benefit by obtaining better bargains on products across categories. The market might also see consolidation with major players strengthening their presence through M&A s. There would also be efforts on part of the retail chains to capture niche markets.

Limitations and further Extension of this Approach
The limitation of this approach to gauge the nature of the grocery retail market is that it uses number of stores as a determining factor. However a better measure to capture the share of market for each store/retailer would be a ratio of turnover to floor space. This would appropriately capture the revenue per unit of space and would give us a fair idea of the health of the retail chains. However this measure was not considered due to the paucity of data. In future, when the market becomes mature enough and we do have access to secondary data, this study can be extended to incorporate the same.

Another line of extension of this study could be inter city, inter region comparisons. However for this, the retail chains need to extend to Tier II cities and there should come about a change in the way Indian consumers shop. Subject to availability of data the concept can also be used to compare the nature of the organized retail market in an Indian city (such as Bangalore) vis a vis a foreign one such a London, which has an extensive network of retail chains.

Conclusion
The above essay demonstrates that using measures of Competitiveness, particularly the Hirschman-Herfindahl Index, we can analyze the nature of the market for individual products, categories or industries. The future of Retail in India is extremely bright and is experiencing tremendous growth in the past few years. The Retail industry ( Grocery) in Bangalore shows that there exists a lot of competition among retailers and it is more akin to a situation of Perfect Competition. The market is slowly maturing and will soon see consolidation and segmentation.

References
i) “Fast Moving Consumer Goods”—a report by PricewaterhouseCoopers for IBEF
ii) The 2005 Global Retail Development Index—a report by ATKearney
iii) “8 steps to India; helping Australian food companies export to India”—a report
iv) State of Competition in India: An Overview—a CUTS report, 2005
v) ICICI Bank presentation on “FDI in Retail”
vi) CMIE report on Market Size and shares, 1999 and 2005
vii) Various Online Retail Industry magazines for facts and figures

Disclaimer

Facts and Figures stated in this essay have been collated from various Reports of Institutions and online Retail Industry trade magazines. The accuracy of the same has been taken for granted.