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If you haven't read Part 1, I'd strongly suggest you read it before proceeding further. If you have read it, here's a quick recap of what happened:

• Founder Lata and Investor Raj got the board's permission to prepare for TinyPanda's IPO

• Banker Bala and 2 other investment banks were chosen to advise on the IPO

• Post the IPO kick-off meeting, due diligence was done and the S-1 was prepared over 4 months.

• Just one day before the S-1 was to be filed, Lata got an email that made her consider halting the IPO process.

Onto Part 2...

Emergency Board Meeting

There were 7 people seated in a conference room at the TinyPanda Office in pin-drop silence. It was late in the evening - an unusual hour for a board of directors meeting. Lata cleared her throat to break the silence and draw attention to herself. What she was going to say in the next 15 minutes were extremely important. It could change the course of TinyPanda's journey.

Earlier that day...

Lata had received an email from Guru, the founder and CEO of Gooli, making an offer to acquire TinyPanda. Gooli was a data storage company that sold its software to corporates. Like Dropbox or Google Drive, companies could store their data online on Gooli and pay based on the amount of data stored. Gooli was interested in acquiring TinyPanda, specifically their data compression algorithm, to make their offering more attractive to customers. While TinyPanda actually reduced the amount of data stored through compression, effectively cannibalizing the revenue of Gooli in the short term, it could help Gooli cut down prices and capture a larger market share than competitors in the long term.

Gooli Guru, as the tech industry called him, and his team had initiated the first acquisition conversation more than a year ago. Talks fell through as Raj, Lata and a few other investors felt TinyPanda was being undervalued. But this latest email from Guru offered 3 times more than what they were offering last time.

Lata was very clear that even a 3x higher offer did not make sense. TinyPanda could be a much bigger company if it continued to be independent. But TinyPanda wasn't a founder-led company anymore where she could single-handedly take the decision. She had to run this acquisition offer by the board of directors and then collectively decide to accept or reject the offer. Lata's only way ahead was to convince the board to choose an IPO over an acquisition.

There was another point that jumped at Lata. Tripling the offer seemed like a last-ditch attempt by Guru to acquire TinyPanda. This meant Guru had somehow caught wind of TinyPanda's IPO plans even though it was not yet public. Someone within the 'working group' had leaked the news to Guru. But Lata couldn't do much about the leak. At least not at this moment. There were more pressing matters at hand.

The email also meant Guru knew they are planning to file the S-1 tomorrow. If Lata pushed the date of the S-1 filing by even a day, Guru will know TinyPanda is considering the acquisition offer. And he might offer more attractive valuations making her job of convincing the board for an IPO tougher. Lata had to call for a board meeting today!

Typically if Lata had requested the board members for a meeting with just 6 hours notice, it would never have happened. But she knew when they heard the reason for today's meeting, they would make it. They had to.

Back to the present.

Lata had just finished giving a 15-minute passionate speech about why the best route ahead for TinyPanda was to IPO and not be acquired by Gooli. This was followed by a half-an-hour discussion and it was now time for the vote.

Lata had to get 4 of the 7 votes to win. She knew she already had 3 of them - her own vote, Raj's, and the other venture capitalist's votes. They had stuck with her all these years and believed in her larger vision. The problem was the remaining 4 board members. There were all independent directors hired recently.

Independent directors, typically business or industry experts, were members who weren't involved closely with the running of the business. A company adds independent directors on the board to give a more unbiased opinion on how the founders and executives were running the company and check for discrepancies in management. Lata and Raj had added these 4 independent directors over the last year as they prepared for the IPO. Having a majority of independent directors on the board (4 out of 7 here) sent a strong signal to investors ahead of the IPO that the company had proper checks in place to ensure there is no fraud (as discussed in part 1 - this is part of strengthening corporate governance before an IPO ).

As the voting began, Lata prayed that at least one of the independent directors voted in favour of an IPO.

Hello, Bala here. Did you miss me? Come on, don't act all cool. I know you did.

Quick trivia here. Swooping in and acquiring a company just before it IPOs is rare but has happened a few times. A famous example being Cisco's acquisition of AppDynamics just before it could IPO in 2017. Literally just before it IPO-ed. The acquisition was finalized and announced just one day before AppDynamic's shares were supposed to start trading.

In fact, a few companies follow a 'dual-track process' where the investment banks are helping the company prepare for an IPO while in parallel, they are also looking for potential acquirers. AppDynamics was not a dual-track process but they still chose an acquisition over an IPO when the offer came along.

Step 6: Filing the S-1

It was late in the evening and Lata seemed a bit relaxed. The S-1 had gone out a few hours ago as originally scheduled. A few leading media outlets had already picked up the news. It was still too early but the reception had been positive.

The IPO schedule was back on track after the board vote last evening had gone better than expected. 2 of the independent directors had voted in favour of an IPO giving her a total of 5 votes out of 7. There was no email from Gooli Guru but she knew he would be fuming in his office, figuring out another devious way to stop the IPO.

Now that the S-1 had been filed, the 20-day cooling-off period (30 days in India where you file with SEBI) had begun. The regulator would use this time to check the S-1 before permitting the IPO to move ahead.

During this period, Lata and the banking team would have to be on standby, ready to submit any additional information the regulator might ask.

Few additional points about the timeline.

Typically, Lata and her team have to respond to the regulator within 1-2 days and file the new information under the heading 'S-1 Amendments'. An important point to note here is that SEC/SEBI only checks if any key piece of information is missing in the S-1. They don't check for the factual accuracy of the information submitted. That check would have happened in the due diligence phase earlier in the process.

This 20 day period is also the minimum. Sometimes, the back and forth between the company and SEC could take longer.

Also, the company need not start the roadshow right after the approval is received for various reasons - the holiday season, sudden events like covid, market sentiment changes, etc. Although, it is advisable to start immediately.

Step 7: Pre-deal Investor Education (PDIE)

The next few weeks were going to be hectic for Bala. During the cool-off period, the company (ie, Founder Lata and the other executives) was prohibited from advertising the shares of TinyPanda to any potential investors and collecting orders for the same. However, the bankers were allowed to talk to potential investors and try to judge interest. This step is called the "Pre-deal investor education" or PDIE.

For this reason, Bala had asked the equity research analysts (the ones who wrote the ICRs) of all the 3 advising banks to assemble. A small equity sales team (2-4 people from the sales & trading division of the investment bank) were also to join in. Like the equity research team, the equity sales team had been crossed over the Chinese Wall by Bala after taking permission from JP Murugan's compliance team.

If you notice, 3 divisions of the investment banks are now fully involved in the IPO process. As mentioned in Part 1, this is why bulge bracket banks are preferred as lead advisors.

Bala had gotten the syndicate team (another team within the investment banking division) to prepare a list of potential institutional investors who would be interested in this IPO. The syndicate team were the investor facing side of the investment banking division. They regularly kept in touch with institutional investors and had in-depth profiles of them - who bought which recent IPO, are they the ones who place large orders, which sectors are they focused on, etc.

Over the next 2 weeks, the equity research analysts would have face to face meetings with a few of the institutional investors on this list and answer any questions the investors had about the company after reading the S-1 (which was public now). Bala's team had already prepared the detailed day-to-day schedule for each of these research analysts. Each analyst would meet a different investor so maximum ground can be covered.

In parallel, the equity sales team will follow up with these investors after the meetings to ask what they thought about the company and collect indications of interest (IoIs). IoIs aren't binding, ie, the investor can later say they are not interested anymore. But they are helpful for the banks to judge if there is enough interest among investors to buy shares in the IPO.

Another important bit of information collected from investors at this point is their valuation of the company. The indicative valuations from all these investors are aggregated by Bala's team and compared with the valuation that the bankers themselves had calculated. They then arrive at a middle ground and come up with a valuation range.

At the end of PDIE

After inputs from 2 weeks of PDIE, Bala's team arrived at a valuation range of $3.9 to $4.5 billion for TinyPanda.

The next step was to finalize how many shares would be offered in the IPO. Bala had to balance multiple interests here.

One was to meet the criteria of the stock exchange which typically revolve around 2 parameters. One - to ensure enough shares are listed (so that enough trading can happen). Two - to ensure the market value of the shares is high enough so that only decently large companies are listed. The NYSE, where TinyPanda planned to list, needed a minimum of 1.1 million shares to be listed with a collective market value of at least $100 million. (The BSE in India needs the shares offered in IPO to be valued at a minimum of ₹10 crores and the company's overall valuation to be at least ₹25 crores).

Every stock exchange has its own set of eligibility criteria for listing. It is also possible for a company to list on 2 stock exchanges in an IPO. In that case, it has to ensure it meets the listing criteria of both exchanges. Also, these stock exchanges can be in 2 different countries as well.

Another was to meet the demands of all TinyPanda investors who wanted to sell their shares in the IPO. Like Raj, VCs who invested early usually want to sell most or all of their shares. Later stage investors (either VC or private equity) and the founders will sell only a small part of their shares. In fact, it can send out a wrong signal to the market if founders and late-stage investors sell a lot of their shares in an IPO - that there's something wrong with the business and the people running/owning it are dumping their shares. Bala also had to take into consideration the shares a few employees might want to sell in the IPO.

The third interest Bala had to keep in mind was if TinyPanda wanted to issue any new shares in the IPO. The money from selling these shares would not go to any investor. It would go into the company's coffers to be used for growing the business. It was advisable to have at least a small % of the shares as new shares as a signal to the market that this IPO was not just about investors exiting the company.

Lata, Raj and the other investors already had a fair idea of how much % of their shares they wanted to sell. It was basis this along with their own valuation of TinyPanda that they decided 3 banks were enough to advise on the IPO. Bala just had to sit down with all of them and finalize the exact number. And he did that on the last of PDIE. In a meeting of the founder, investors and bankers, the following was decided.

TinyPanda currently had 30 million shares. 20% of them (6 million secondary shares) would be sold in the IPO. And another 1 million fresh shares (or primary shares) would be offered in the IPO, the money from which, will go towards helping TinyPanda grow even faster.

So the end result would be 31 million total shares of TinyPanda. And 7 million of them (22.5% of the company) will be listed on the stock exchange (these 7M shares are called free-float shares).

The valuation range of $3.9 to $4.5 billion divided by 31 million shares translated to a price range of $125 to $145 per share. And the expected IPO size would be in the range of $875M - $1B (7M shares multiplied by price range).

The standard lock-up of 180 days would apply to everyone. This meant anyone investor or founder selling their shares in this IPO could not sell any more of their shares for the next 180 days. This clause is a standard in all IPOs, again, to ensure someone does not go dumping all their shares in quick instalments over the next few weeks. Something that could send a negative signal to the market.

"Great! The S-1 will be updated with these numbers and the next stage could begin", Lata thought to herself, silently glad the meeting had ended. To her, selling her own shares was not fun to discuss. But her train of thought was broken by Bala who was saying

"One last thing. We'll keep the greenshoe at the standard 15%"

"Sure. I mean, do we have a choice?" Lata laughed and left the room.

Hey hey hey, Bala here. Time for an interesting topic - the greenshoe option.

And to understand this, we first need to understand the concept of 'underwriting' which means the act of taking on someone else's risk. So when an insurer sells you an insurance policy, they agree to cover for you when a 'risk' occurs (death in case of life insurance). Hence, they have underwritten you.

In the case of an IPO, the bankers don't just act as advisors but also underwriters. So when we say TinyPanda is offering 7 million shares in its IPO to investors, what is effectively happening behind the scenes is the bankers (3 banks in this case) are buying the 7 million shares from TinyPanda and selling it to investors. Bankers then collect the money from investors, take their cut (2-5% as explained in Part 1) and pass the rest on to TinyPanda.

We wankers, sorry, bankers do this as a way to show our clients that we are committed to selling every share in the IPO to the best of our abilities. Because if we don't, we suffer the loss.

Now coming to the greenshoe. Once a share starts trading on the stock exchange, if it falls below the IPO price, the SEC and SEBI actually allow the bankers to intervene and stop the share price from falling. Bankers do this by buying the said shares, thus increasing demand and stopping the price from falling further. It's like gaming the stock market but legal. But they can't do it whenever they want. They can only do it during the 30 day period after the share lists. This price stabilization mechanism is called greenshoe.

How does it work exactly?

Let's continue TinyPanda's example. There are 7M shares on offer in the IPO. This means the bankers are buying 7M shares from TinyPanda's shareholders and selling them to the IPO investors. The bankers then decide to sell additional shares, over and above these 7M shares - these are the shares they will buy back later if the trading price falls below IPO price. SEC/SEBI allow for the size of this additional lot to be 15% of the normal offering. So in TinyPanda's case, 1.05 million greenshoe shares (15% x 7M shares).

But where will the bankers get these additional 1.05M shares? They borrow (not buy) them from some of the existing investors who still have some shares left in the company even after the IPO. Bankers then sell all these 8.05M shares (7M + 1.05M) in the IPO at offer price, let's say, $150. This process is nothing but allocation and is explained later in the story.

The money received from these 1.05M shares is kept in a separate account. To the IPO investor, it doesn't matter whether they are getting a normal share or a greenshoe share. It's all the same to them. Once the share starts trading, there are 2 scenarios.

Scenario 1: Share price goes above $150
If the share price largely stays above $150 in the next 30 days, the bankers don't need to use the greenshoe. In this case, the money in the separate account is transferred to the investors whose shares they borrowed. And their shares are marked as 'sold' in the IPO.

Scenario 2: Share price goes below $150
Imagine the share price drops to $120 and continues falling. Bankers use the money in the separate account to start buying back shares. As they keep placing orders at increasing prices, they hope the price fall will stop and slowly bounce back. If they buy back all the 1.05M shares, they return them to the shareholders they originally borrowed them from. Since they bought these 1.05M shares at a lower price than $150 (which they received for the shares), any remaining amount in this account can be kept by the bank as profit. If they ended up buying only part of the shares before the price got stabilized and 30 days got over, only those bought back are returned and the remaining are marked as sold. Scenario 2 doesn't apply when the share price falls below $150 for a little time and then bounces back. It applies only when the price consistently stays below or keeps falling with time.

OK. Back to the story.

The S-1 was updated with the number of shares on offer (7M), greenshoe shares (1.05M), and the lock-up period. The only information missing in this version is the price at which the IPO shares will be offered (called, no prizes for guessing, "offer price"). Along with the S-1 update, a press release goes out announcing the price range for the IPO.

Step 8: Roadshow & Book-building

Lata took a deep breath and walked into the room. The roadshow booklets - printed versions of the 30 slides deck made by Bala's team - were already distributed to everyone present. Lata and her CFO spent the next hour presenting and answering questions to the team from one of the largest institutional investors in the US - BrownRock. Within 5 minutes of the meeting ending, she was in the car to her next meeting where the hour-long drill would repeat.

Lata was just 2 days into a 10-day roadshow and was already feeling completely exhausted. Speaking for an hour in 5 meetings every day was no joke. Add to this, the travel. Not just from one part of New York to another. She also had to fly to Boston and San Francisco for investor meetings.

The one thing that kept her going was the report that Bala's team sent her at the end of every day. It summarized the number of orders placed by investors till now and how much % of the IPO's shares were already subscribed.

You see, the book-building phase, where the bankers start accepting orders (or "building the order book"), had started concurrently with the roadshow and was going to last as long as the roadshow. After a roadshow meeting, institutional investors pinged the equity syndicate team with the number of shares they were interested in buying and at what price. And these orders were keyed into an application that bankers use to keep track of orders. Remember, at this stage, the orders are just collected. Allotment of these shares to investors happens later.

Also, the price at which orders came in had to be between the price range which would have been announced at the start of the roadshow, ie, $125-$145. And in a typical auction style, if an investor wants to increase their chances of getting the shares, they have to put in the order at a higher price. They can also keep revising orders (both the number of shares and price) until the book was closed. Given 2 days of the roadshow were already done, the book would close in 8 more days.

Orders could come in from any qualified institutional investor, whether they were met during the PDIE/Roadshow or not.

At the end of Day 2, TinyPanda's book had already crossed the 50% mark, ie, orders had been placed for more than 50% of the 8.05M shares. This was a very encouraging sign and showed that investors were very interested in the shares.

On Day 5, as Lata was in San Francisco meeting investors, she got a call from Bala with Raj conferenced in. The book had just crossed the 100% mark with most orders coming in at the upper end of the price range. Bala suggested they move the price range upwards to $145-$155, meaning the valuation would now be in the range of $4.5B-$4.7B Given the high demand, there was a good chance most investors would revise their orders to a higher price once the news of a price revision went out.

Lata did not have an objection obviously. This was excellent news. She smiled as she walked into her 3rd meeting of the day.

Step 9: Pricing & Allocation

Bala cleared his throat and then looked at himself in the washroom mirror. He had to speak a lot at tonight's meeting that was going to start in an hour. This was it. The entire IPO process boiled down to this one meeting.

Earlier in the evening, the 10-day roadshow had come to an end with Lata and her team meeting more than 40 institutional investors. There was a rush of orders in the last hour - a few investors adding more shares, a few of them increasing the price they were willing to pay - resulting in the book being subscribed 230%, ie, the demand was 2.3x times the number of shares on offer.

With the order book closed, it was now time for the allocation meeting that would run the entire night. Bala mentally ran through what he had to do in the meeting.

First, he had to finalize the offer price. This was the easy part. The orders received had to be sorted by price, from highest to lowest. Then the no. of shares from each row were added, starting from the top. The price in the row at which they reach a total of 8.05 million shares would be the offer price. The logic was, at this price, there were enough people willing to buy all the shares on offer.

Now for the tough part - allocation, ie, who gets how many shares. It never was "who bid the highest gets the shares". Bala. knew they had to consider the profile of the investor. There were largely two types of institutional investors → Long-only Funds (LO) and Hedge Funds (HF).

Long-only funds were investors who bought shares for the long term. They weren't the kind of people who bought and then sold immediately. Since they mostly only bought shares (buying a share is called 'going long' on the share), they were called long-only. Asset management companies like Vanguard and Fidelity in the US and a few mutual fund companies in India fall under this category. Even pension funds and insurance companies that have truckloads of money to manage for decades fall in this category. In India, LIC would fall in this category.

Hedge funds on the other hand are those interested in shares where they can make again as quickly as possible. They are speculators and typically try to take advantage of events like an IPO, merger, some major news, etc that could swing share prices. Citadel and Millenium are well-known names in the US.

Bala had to ensure a reasonable split between long-only funds and hedge funds. The reason being this - If all shares went to long-only funds, most wouldn't sell and the share would hardly trade on the stock exchange after listing. And if all shares went to hedge funds, there would be random buying and selling (because of the speculation) and the share would experience massive swings in price which is not good. Over time, bankers had figured out that allocating at least 60-70% of the shares to long-only funds and 30-40% to hedge funds was a well-balanced strategy that gave enough leeway for the shares to be traded (since many HFs would sell) but also ensure price stability (since many LOs would hold).

There was another interest Bala had to keep in mind. He had to ensure a few of his (or JP Murugan's) 'friendly' investors got the allocation they wanted. This was important because keeping them happy would ensure they would also place orders in future IPOs Bala would advise. Bala had to do this without making it obvious. The usual sell was 'that particular investor is a quality one - having them as a shareholder is a good signal to the rest of the market'. Usually, there wasn't a lot of convincing to do since the result would be the same for Lata, Raj, and the other VCs selling their shares in the IPO. All their shares would still be sold at the offer price and they would make quite a lot of money. But sometimes, there would be arguments if VCs like Raj and the other bankers on the IPO had some favourite institutional investors.

"Ok, this was going to be alright. After all, I have done this multiple times already", Bala thought as he made his way to the meeting room. Lata, Raj, and the other bankers on the IPO were already seated. This was going to be a long night.

In India, the IPO roadshow and allocation happen quite differently.

The roadshow happens and then the book is thrown open, unlike the US/UK/Europe where they both happen concurrently. Because of this, the book is also kept open for a shorter period - around 4-6 days.

The biggest difference is in how shares are allocated. In US/UK/Europe, all the shares on offer are allocated to institutional investors (LOs and HFs). Very rarely, a company explicitly decides to reserve a small % (usually 5%) for retail investors (you and me). Even then, most of the retail portion gets eaten up by super-rich people who have access to people who can help them get the allocation. There is a small change coming in the US though. Robinhood, an app that lets you buy/sell shares in the US, is working on bringing a small % of shares in US IPOs to retail investors.

In India, SEBI mandates that 35% of IPO's shares be reserved for retail investors (in the case of loss-making companies IPO-ing, the retail reservation is 10%). Another 15% goes to super-rich folks (who have to invest a minimum of ₹2 lakhs). And 50% is reserved for institutional investors (called qualified institutional investors or QIBs). While bankers and founders decide who gets the allocation in the institutional investor segment, they have no say in the retail investor segment. If the retail portion is over-subscribed, allocation happens on a lucky draw basis, ie, names are randomly selected and everyone is given equal numbers of shares. Because of this, the allocation also happens over a few days after the book is closed. Whereas in the US, the allocation happens the same night the book is closed.

As a retail investor, the more an IPO is oversubscribed, the lower your chances of getting an allotment. Also, if you didn't get allotted, there's actually still a chance you might have a piece of the IPO if one of the mutual funds you invest in or the insurance company you have a policy with have invested in the IPO via the institutional investor route.

Last point. If the book is not filled, the IPO is usually called off as the company is deemed not good enough to be a public company yet.

Step 10: Trading begins

The allocation meeting had gone smoothly the previous night. The IPO was priced at the top of the range ($155) making the IPO size $1.25B, among the largest that year. The SEC filing and press release about the final price and number of shares had gone out immediately late at night. The stage was set for the share 'TINY' to start trading today.

Founder Lata and a few members of TinyPanda's management, Raj and a few other VCs, Bala and a few other bankers were all assembled at the NYSE. In a few minutes, Lata would ring the bell to mark the opening of trading at the NYSE. This was a ceremony that IPO-ing companies typically did. It made for a good marketable and PR moment. It was Bala's idea and he had managed to reserve the slot for TinyPanda by paying a fee to NYSE.

Lata was excited and nervous at the same time. And surprisingly, it wasn't about all the cameras pointed at her face. It was about what price the TinyPanda shares would open at when the trading begins right after she rings the bell. The opening price could be higher (or lower) than the offer price ($155) based on how positively (or negatively) the market (the rest of the investors) viewed the company.

30 minutes after trading opened...

TinyPanda's share price was already 25% above the offer price and didn't seem to be slowing. Raj should have been happy given the positive reception but he wasn't. He looked at Bala and gave a forced smile. The bloody banker had once again managed to under-price the IPO. Typically, if the share price jumps very high compared to the offer price, it means the bankers could have decided on a higher offer price for the IPO but got too conservative. While the jump in share price is good for the company in general, it is seen as a loss by investors like Raj who sold their shares in the IPO. They could have gotten more money for the same shares.

Bala smiled back at Raj knowing very well what Raj's smile had meant. He didn't give a shit as long as he made money. What irked him a bit though was the way TinyPanda's trading price spiked and held at that high level. He had a feeling it was not going to drop below the offer price in the next 30 days. This meant they didn't need to buy back the greenshoe shares which would have made more money for Bala.

Having nothing more to do here, Bala began to make his way to the NYSE exit when his phone buzzed. It was a message from Gooli Guru.

"You should've pushed for an acquisition. Anyway, congrats on the IPO", the message read.

Bala was the leak.

*The End*

A few parting thoughts

The IPO is just one route among the three to take a company public. The other 2 routes are Direct Listing and Special Purpose Acquisition Companies or SPACS (In India, there's no other route apart from IPO).

The IPO route has its pros and cons. The pro is that you have bankers who will advise you throughout, take on risks, and use their investor connections to ensure the IPO shares are bought.

The con is it is pretty costly (we discussed the fee in Part 1). But that's the more obvious con. The subtler con is that the IPO route tends to underprice the company. That's because the bankers are trying to balance the interests of the company IPO-ing as well as the institutional investors putting money into the IPO. And bankers have a strong incentive to appease institutional investors since they will come back for the next IPO the bank is advising. So they tend to agree to a lower valuation the institutional investor suggests. Or try to include the investor during allocation. I am not saying this always happens but the scenario is conducive for this happening.

Take the example of Snowflake, a cloud services company that IPO-ed in the US in 2020. The share price on the first day of trading jumped 112% which meant the investors exiting the IPO left $3.8B on the table. This has been quite a common occurrence in the last few years resulting in prominent venture capitalists like Bill Gurley being very vocal against the current IPO process and pushing companies to consider direct listing instead.

In the direct listing route, bankers don't have a say in the valuation and allocation. Investors bid on shares like in an auction and are allotted on a first come first serve basis. Companies like Slack and Spotify are recent examples of companies that chose direct listing over traditional IPO. But the direct listing process again has its pros and cons. And hence few people prefer the SPAC route.

However, I will not go into details of direct listing and SPACs here since this piece is already too long (lol). I will take your leave with this short comic strip (meme strip??)

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Hi, Vivek here. Hope you are staying indoors. Covid is not over yet.

Few points before we jump into the piece.

1. This is a beginner's guide to IPOs. Like really basic. So feel free to jump out if you are a finance star.

2. I worked on 2 IPOs and a re-IPO (yes, this happens) during my time at Goldman Sachs which helped me add a bit more detail to this piece.

3. The IPO process is largely similar across countries. There are differences of course but only when you get into the finer details like registration forms, eligibility criteria, etc. I have kept the piece US and India centric but it applies to other regions as well.

Describing the IPO process normally can get really boring. So I decided to tell it through the lens of a fictional story. Here we go.

Step 1: Path to Profitability

Investor Raj walked to the elevator nervously excited. Today was going to kickstart the culmination of years of hard work and patience on one of his investments - TinyPanda.

Incorporated by Founder Lata after she created an exceedingly good file compression algorithm, TinyPanda built a compressor app to be sold to consumers. Lata spent all her savings and hired 2 developers to help her build the first version of the app. As the number of app users grew to 1000+, Lata had to hire a few more people - customer support staff, marketers, etc. She needed more money to hire these folks and turned to friends and family for help. When the app crossed 10,000 users, even money from friends wasn't enough. She needed a larger sum. It was time to raise money from an institutional investor (in this case, a venture capitalist).

It was around this time that Raj and his team first met with Lata. Impressed by the performance of the product and aware of the growing data storage needs for even a layperson, Raj decided to write a cheque.

The consumer app, however, plateaued in growth after 20,000 users. Raj realized that while Lata had a quality product in hand, she was selling it to the wrong set of people. Raj and Lata worked hard to pivot TinyPanda to a file storage software product (built on top of the compression algorithm) that could be sold to corporates. The revenue needle did move up a bit but they soon realized they were in a heavily competitive space which included giants like Google and Dropbox.

Back to the drawing board again, they pulled back the file storage product and decided to sell only the compression algorithm as a subscription service - a compression layer between the place where information is generated and where information is stored. The sell was simple - pay a monthly amount based on the amount of data compressed and save loads on data storage costs. It was a masterstroke. TinyPanda didn't need to compete with file storage companies anymore; it could be used along with them. And the more data corporates stored (which was bound to grow), the more TinyPanda earned. Growth exploded with the new model and TinyPanda was set on a clear path to profitability.

It was now time for Raj and all the other investors who had backed Lata during the tumultuous journey of all the pivots to begin thinking of their 'exit' - so they could en-cash their shares and make a good return for all the risk they took. With the kind of money TinyPanda was raking in, all the investors agreed that taking the company public was the best exit scenario compared to selling TinyPanda to another company.

It was for this reason that Raj found himself on this elevator heading up to the conference room on the 7th floor. The board of directors of TinyPanda were meeting to discuss when and how to take the company public.

Theory time!
Hello, this is Bala. You haven't met me yet but I am a character who appears later in the story. I will be jumping out of the story to explain certain concepts to you from time to time. Let's begin.

What does going 'public' mean?
It's when a company decides to offer its shares to a larger group of people - individuals like you and me (called "retail investors") and institutions like mutual funds, pension funds, etc (called "institutional investors") which are mandated to invest their money only in trustworthy public companies. Since it's the first time the company is doing such a thing, it's called "Initial Public Offering (IPO)". Before going public, the company's shares are largely held by the founders & their family and/or by venture capitalists and private equity firms. Going public is also called 'listing' since the share is listed on a stock exchange like the Bombay Stock Exchange (BSE) or the New York Stock Exchange (NYSE) during the IPO. Once listed, anyone can start buying or selling shares of that company via the stock exchange which wasn't possible when the company was private.

Are all the shares issued new?
There are two kinds of shares being offered in an IPO.

1. Existing shares held by current investors. These shares (called "secondary offering") just exchange hands during the IPO from current investors (who are "exiting" the investment) to new investors. The money raised from these shares goes to the investors' pockets and not the company's coffers.

2. New shares. These shares (called "primary offering") are created during the IPO process. The money from these shares goes to the company's coffers. If you are investing in the IPO, it wouldn't matter to you which share you are buying since they are all priced the same. Most IPOs have both kinds of shares on offer and secondary shares, typically, are the larger component. This makes IPO more of an "exit event for current investors" than a "fundraising round for the company". This is a very important distinction to keep in mind and look out for while evaluating IPOs. In TinyPanda's case, it's primarily going to be an exit event.

Back to the story.

Step 2: Board Resolution

Seated alone in the conference room, Founder Lata had mixed feelings. The board members, in this very room a few minutes ago, had voted to kickstart the IPO process for TinyPanda - the company she founded 6 years ago. Lata was both anxious and happy about the impending change TinyPanda was about to go through.

Anxious because the IPO process involved intense scrutiny of the company's business plan and financials. It would be the first time TinyPanda's value would be determined, not just by a handful of people like in previous fundraising rounds, but by a larger group of public market investors - a real test of the company's worth. This process was also going to be mentally and financially taxing coupled with the risk of falling through (like WeWork's IPO did) - a public relations disaster.

At the same time, Lata was also happy because going public did have its benefits. The intense scrutiny, while a source of anxiety initially, would also pave way for trust and transparency - foundations on which a long-lasting company is built. This trust would also ease their efforts to raise funds from banks (in the form of loans) instead of selling part of ownership (equity). The ensuing media coverage would strengthen the brand easing hiring and possibly attract new customers as well. And most importantly to her, it was an opportunity for all the employees of TinyPanda to get rewarded for all their hard work by exercising their stock options during the IPO.

This decision to take TinyPanda public wasn't a sudden move. Things like this don't happen on a whim. The vision of TinyPanda as a public company was set more than 18 months ago after the company cracked the right model of selling its product and profitability became a reality. Over the next few months, Lata spent time readying the company in anticipation of a potential IPO. This meant figuring out the right organization hierarchy and structure, hiring key management personnel (hiring a stellar person to head sales, a chief financial officer with a solid track record that future public investors could trust, etc), putting legally required checks in place (called "corporate governance"), rechecking if all the legal registrations are in place, and creating a solid growth plan for the future.

With the board now having given a green light to start the IPO proceedings, it was time to choose an investment bank that would advise and lead the process.

Step 3: Choosing the Investment Banker

Banker Bala smiled, clearly pleased with himself (yes, it's me, the same Bala you met earlier). He was sitting in the corner office on the 18th floor of JP Murugan, a large investment bank. A decade spent here and he was now the managing director of the equity capital markets division. And he smiled the same smile every time his plan worked to perfection. He had just gotten news that TinyPanda had chosen JP Murugan to advise on their IPO.

Analyst Anil was sitting at his desk observing Bala's office through the corner of his eye. Boss seemed to be in a good mood. Great! Good time to have a chat with the boss. Anil’s summer internship was coming to an end soon and he wanted to maximise his face-time with the boss. Apparently, that would help him score brownie points and hopefully convert this internship to a full-time job offer. Anil walked over to Bala's office and peeked in.

“Hey Bala, good time to chat? Thought I will catch up and check how my internship is going.”

“Hey Anil, come in. Great timing actually. You remember the TinyPanda RFP that you worked on for the last 3 weeks? We just got the mandate.”

“Oh that’s great to hear. Seems like our RFP pitch did the trick".

Anil remembered that the RFP or “Request for Proposal” that Bala was referring to was an invitation TinyPanda sent to investment banks. The banks got 3 weeks to prepare & submit a pitch to TinyPanda about why they should be chosen to advise on the IPO. Around a dozen banks had gotten the RFP. And 6 were shortlisted to present in person at TinyPanda's office based on which the final advisors were chosen.

Bala laughed loudly at Anil's innocent statement.

"Anil, tell me what did we include in the pitch deck we sent them?"

Anil excitedly started listing down what had gone into the RFP (brownie points, remember?)

"Well, we included our understanding of the data compression market and how TinyPanda's product fit into the market. And why we thought it is such a great business. We also included what we thought TinyPanda's valuation should be. Post that, it was mostly about us - our past experience of advising on other software IPOs and how we are global leader in IPO advisory, the details of the team who would we involved in TinyPanda's IPO, and lastly, our strategy on marketing TinyPanda's IPO and the support we will extend them even after the IPO."

Bala listened patiently, nodding his head at every point.

"Ok Anil, what do you think the other banks would have pitched?"

"Umm, I guess the same things??"

"Exactly! The services offered by investment are what we call 'commoditized'. There's hardly any difference between what each bank offers. It's not like our advice is better than Citibank's. Most of the big banks have been around so long that most of this process is figured out and set as a template. So the RFP pitch, while necessary, doesn't actually influence the end result much. It is just a task on the checklist that we have to tick."

More than surprised at what Bala had just said, Anil was thinking about the long nights he had spent on the RFP pitch and cursing himself for wasting his time. He quickly pulled himself together and asked

"So what actually helped us get the mandate?"

Anil noticed the same smile spread across Bala's face that he had seen before entering the office.

"Investor Raj and I were in the same MBA class years ago. I had been building a relationship with Raj for a while now so I have first preference on all his investments that would go public. For clients like Raj, knowing that a familiar face is advising on the IPO helps a lot. Remember, in investment banking, the hands you shake are more important than the things you make. This is the reason why we hire from elite universities. As you and your peers climb up the ladder, you have access to an invaluable network."

Anil was surprised. Bala must be in a really good mood to be spilling out trade secrets like this. But he was glad this was happening. His plan to get face-time with his boss and build a relationship with him did seem to be on the right track. Anil prodded further

"I see. So because of this relationship, JP Murugan is the only one that got the mandate"

"No no no. We are not the only ones. Those pesky idiots at Silverman & Silverman (S&S) and Bakarwaleys also sneaked into the deal."

"Wait, so how does that work? Won't there be clashes if multiple people are advising?"

"No. It is typical for more than one bank to be chosen. One bank will be the lead advisor (also called "Global coordinator/GCs") which is us. The others (2-3 banks) will play a supporting role (called "Joint Bookrunners/JBRs"). Since we are the lead bank, we will drive the process. The JBRs will come in where we need them, usually towards the latter half of the process when we are marketing the IPO to many institutional investors. So the number of JBRs on a deal depends on the size of the IPO. A larger IPO size means marketing to more investors and hence needs more manpower/banks. The oil company Saudi Aramco for example hired more than 9 banks when it was planning its $100B IPO. TinyPanda is expected to be a billion-dollar IPO at least. Hence the need for 2 other banks."

"So isn't that a good thing for us? Our work reduces because of the division of labour"

"Nah. Because even the fee gets split between the banks. So you know already that the IPO fee is around 2-3% of the IPO deal size. That % doesn't increase when there are more banks. It just gets split among the banks. We as the lead bank get the largest share but it still sucks to lose some share to those idiots at S&S."

Anil was taking a mental note of all the things he had just learned when Bala's desk phone rang. He knew the meeting was up. Anil excused himself and walked out of the office to the grunt work that awaited him now that they had got the IPO mandate.

Theory time. Bala here again. I already bored that useless Anil with a lot of gyaan (he's definitely not getting a full-time offer). But I want to bore you as well.

Understanding the structure of investments banks and what all services they offer is critical to understanding the IPO process better. So here's a quick explainer.

Investment banks fall into two buckets.

1. The really big investment banks called “bulge-bracket banks”. Goldman Sachs, JP Morgan, Citi, and Barclays are global examples. In India, you have the investment banking arms of banks like SBI and Kotak.

2. The smaller investment banks called “boutique banks” like Cantor Fitzgerald in the US and O3 capital in India.

Bulge-bracket investment banks are typically preferred in an IPO because of the broader range of services they offer compared to boutique banks. This is also the primary difference between the two. Bulge-bracket banks have a suite of offerings that broadly fall under 4 divisions.

1. Investment banking division - While they are called investment banks, technically, investment banking is one division inside them. This division offers advisory services when a company want to buy or sell itself to another company (mergers & acquisitions) and when a company wants to raise funds from the market (capital markets). An IPO falls in the latter category. The teams here mostly work on valuing companies, creating pitches (like in RFPs) and executing the deals (IPOs, mergers, etc)
2. Sales & trading division - The sales part of this division are mostly on the phone trying to convince institutional investors to buy shares of a company they think is good. If a client ends up saying yes, the trading part of the division comes in. The traders actually punch in the order on the computer and execute the buy or sell order. Zerodha and Robinhood are for retail investors like you and me to buy/sell shares. Institutional investors and hedge funds use the trading division of these banks to execute large buy/sell orders.
3. Equity research division - This division publishes the reports on companies that rate the companies' stock as either buy or sell or hold.
4. Asset management division - This division typically takes money from very very rich people and invests that in different places with the aim of maximizing returns. They are managing the assets of these rich people and hence the name.

There are more services offered by each of the divisions but I have covered only the most important ones.

In contrast, boutique banks usually have only the investment banking division. An IPO requires the services of the first three divisions and hence the preference for bulge brackets. So bulge-bracket banks also include details like the global reach of their sales division and the depth of experience of their equity research division in the RFP pitch. These matter for the IPO.

In our story, you can see that the investment banking division has already come into play - they are the ones who deal with the RFPs. We will see the role of the other divisions later as the story progresses.

Before we jump back into the story, another quick point about the IPO fee.

2-3% of the IPO deal size as fee might seem small but actually are a money-maker for banks. 2% of a $1 billion IPO translated to $20 million. And given a team of around 5-6 people from a bank work on it for around 3 months (cumulatively across different weeks of different months), it comes to around $1 million per employee per month.

This obviously gets lower when there are multiple banks involved. The lead bank could get 50% of the $20 million while the 2 JBRs get 25% each. The % share is different for each deal based on how much work is allocated to each bank. But say, even at $500K per employee for just one deal, it is profitable for the bank.

Geography too determines the fee. IPOs in the US cost anywhere between 2-5%. Europe is around 1-3%. Asia (including India) costs as low as 0.75% to max 2%. The stock exchange where you are listing will determine the geography - best to choose a bank that has a strong presence there. However, you can market the IPO share to investors across the globe and not of that country alone. So you will also need a bank that has a global reach. Again, another reason why bulge-bracket banks are preferred.

Oooh, this is getting long. Take a break. Get coffee. Popcorn. Whatever. Just come back quick because I am insecure about you leaving the piece mid-way. Really, please come back.

Step 4: Kick-off Meeting and Due Diligence

There was a lot of bustle in the TinyPanda office that day. More than 20 people had crammed into the conference room for the official IPO kick-off meeting. There was Founder Lata and her CFO, the investors and the bankers from all the banks involved. There were also the auditors and lawyers who had just been chosen.

Only the 20 odd people gathered in this room knew that TinyPanda had officially started preparing for an IPO. No one outside this room knew. No one else was supposed to know. This was a highly confidential process and everyone was covered by non-disclosure agreements. The term for such a group working on a confidential IPO process is, and clap for the creative name here, the "working group".

3 hours later...

Lata yawned as she walked out of the conference room to get a cup of coffee. She could have asked the assistant but she needed a break. This meeting was taking forever. They had been discussing the potential timelines of the IPO, what registration forms to file with the regulators and deciding who does what. As soon as they would settle on a timeline, one of the bankers or lawyers would point out a problem and the discussion would start all over again. It was frustrating but Lata also knew this was necessary. The kick-off meeting, however, would end soon. It was what came after that Lata was dreading - due diligence.

During the due diligence (DD) phase, the bankers, auditors and lawyers would dig deep into the company - to check if everything is as they say it is. Over 4-6 weeks, Auditors would pour over the financial statements of the company (profit & loss statement, balance sheet, cash flow statement). Bankers call customers and do reference checks. Lawyers check if all the necessary corporate governance systems are in place as required by law for a company going public. And Lata would have to be available at all times to answer questions and fix any gap that might be uncovered during the DD phase. And she had to do all this while continuing to run and grow the company. The next few months were going to be hard but she had weathered much harder times. She was going to get through this. She had to if taking TinyPanda public would help create a foundation for the company to last decades.

With renewed enthusiasm and a cup of steaming coffee in hand, Lata headed back to the conference room.

Step 5: Preparing the S-1

Due diligence began right after the kick-off meeting. No time to waste if they had to meet the timeline of listing within the next 6 months as decided in the meeting. In parallel to the DD, the bankers and lawyers got to preparing the S-1.

Hey hey hey, your boy Bala here. Sorry for breaking your flow but need to give a quick bit of info about S-1 here.

A US company planning to list its shares on a US stock exchange has to file the S-1 form with the regulator SEC or Securities Exchange Commission. The S-1 is a 300-600 page long document that covers various bits of information about the company like what it does, the risks it faces, its financial statements, management details, the IPO details and company ownership structure. The format of the S-1 is pre-defined by the SEC so that the company discloses all information that is necessary for future investors to take an educated call on whether to invest in that company. The SEC gives a nod to the company to go ahead with its IPO plans only after thoroughly checking the S-1.

Here is Uber's S-1 if you want to take look at what the document looks like.

The S-1 filing is also the first time the company's plans to IPO are made public. You and I, the media, anyone can download the S-1 from SEC's website. The company is also legally required to follow up the S-1 filing with an official press release stating its intention to IPO. Up to the S-1 filing, only the working group, as mentioned earlier, are aware of the IPO plans (unless the founders announced the plans in public beforehand which happens sometimes).

A foreign company listing its shares on a US stock exchange has to file the F-1 form., which is like the S-1 but with additional questions around taxation and litigation since the company is from another country.

In India, the SEC equivalent is the SEBI or Securities Exchange Board of India. And companies wanting to list on an Indian exchange have to file the Draft Offer Document. The content is more or less the same as the S-1. It just goes by a different name.

It is the S-1/Draft Offer document that eventually becomes the prospectus.

Back to the story.

Lata was swamped with work as she had expected. Over and above the time she has to put into DD, Lata also had to work long hours with Bala and Raj to figure out the narrative, ie, how best to explain the company and the industry in the S-1 to make it exciting for investors. The rest of the details to be filled in the S-1 had been split between the lawyers, bankers and TinyPanda's finance team.

Lata was also in for a surprise when Bala one day told her to be prepared for the Analyst meeting. They were 2 months into the S-1 preparation and was confused about this new step. Bala explained that public companies generally have reports published about them by analysts from the equity research division (remember the 4 divisions of investment banking). For example, the analyst of Snapchat at JP Murugan's equity research division published a 2-3 page report every quarter when Snapchat releases its financial performance for that quarter. And at the end of that report, they have a 'buy the share' or 'hold the share' or 'sell the share' recommendation. But when a company is going public for the first time, there are no such reports about the company available. So the equity analysts like to do an Initiating Coverage Report (ICR) which is a bit more detailed (70 to 100 pages). Unlike the S-1 which is created by TinyPanda itself, the ICR is written by the analysts. It is their own opinion of TinyPanda and they are free to rate TinyPanda's shares as a buy or a sell. This is important going forward in the IPO process since investors can also look at a 3rd party's opinion about TinyPanda apart from reading TinyPanda's S-1.

Hey, Bala again. A small bit of trivia here.

Getting these analysts involved in the IPO process is actually a huge legal process. The investment banking divisions in all banks work inside what is called a 'Chinese Wall'. They are cut off from the rest of the 3 divisions since they deal with highly private and confidential information like who is going to IPO soon and who is acquiring whom. This information cannot be passed on to colleagues in the other 3 divisions since they can use that confidential information to game the stock market (which is a criminal act called 'insider trading'). So all banks have legal & compliance teams who ensure no emails are exchanged between investment banking and other divisions without prior permission.
For TinyPanda’s IPO, I had to separately apply for permission with the compliance team at JP Murugan specifying exactly which research analyst I want to cross over the Chinese Wall. And post permission, all the emails and calls between me and the research analyst are mediated by the compliance team.

Lata understood Bala's point about the ICR report providing a 3rd party opinion. It was more work for her but this was too, like everything else, important. So an 'analyst day' was arranged and the research analysts from all the 3 banks JP Murugan, S&S, and Bakarwaleys came down to question her and the CFO about the company's performance and future plans. This Q&A session would lay the groundwork for their reports. It was a gruelling 4-hour session. The analysts were ruthless but Lata was glad at the end of it. One because it was over and two, because the analysts seem satisfied with her answers.

4 months since the kick-off meeting. A day before the S-1 filing...

Lata was sitting at her desk in an upbeat mood. This was it. The S-1 had taken 3 months to complete. And it would be uploaded on SEC's website tomorrow. This also meant the media and the public get to officially know about TinyPanda's IPO plans tomorrow. Lata was looking forward to the burst of PR that would follow the next few weeks. It would be good for the company.

Technically, the S-1 was not entirely complete. While most of the sections were filled, few important details related to the IPO were not yet finalized. Like how many shares of the company would be offered in the IPO and at what price. They also were yet to decide how many shares Raj and the other investors would sell in the IPO. But that was okay. SEC/SEBI allowed a company to file the S-1/Offer document and add these details later. This was the general practice since the final number of shares and price would only be decided a day or two before the share actually started trading on the stock exchange.

What was decided in the S-1 though was that TinyPanda would list on the New York Stock Exchange (NYSE) with the stock label "TINY" (called the ticker). Lata was very clear from the beginning that they had to list on the NYSE. She also liked the ticker TINY since it was a play on what they did, ie, compress data. Luckily the label was available and she hoped SEC would approve it.

As Lata smiled at herself, feeling clever for coming up with the ticker name, the computer screen in front of her lit up. A new email had landed in her inbox. As she read the email, her smile disappeared. It was from a familiar name. And this email was sent as a continuation of a conversation that was more than a year old. Fumbling, she pulled out her phone and called Investor Raj. He too had received the email. In an urgent tone, she said "Let's call for an emergency meeting. I think.....I think we might have to put the IPO plans on hold. Or maybe even call it off."

<insert suspense music>

Read Part 2

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Onto today's Simplanation...

The year is 1986. Dietrich Matescchitz, an Austrian entrepreneur is nervously watching participants in a focus group taste a new energy drink. [Focus group is a research exercise where a company makes people try out a new product to gather feedback before launch]. Dietrich has already committed his life savings in bringing this Asian drink from Thailand and rebranding it for the European market. And hence, he desperately wants a very positive response from the focus group. The participants however didn't like the distinctive taste of this new yellow drink. Actually, they were disgusted with its taste. And worse than that, they were stunned when told that this drink would cost 2.5 times the normal soda cans available in the market. The focus group turned out to be a big failure. Any sane person would have dropped the idea then and there. But, Dietrich Mateschitz persisted and launched the drink in the European market.

Fast forward 35 years and this drink called Red Bull sells 7.9 billion cans per year - that's close to 1 can per person on Earth. Not only is it the best selling energy drink, but it is also considered the most exciting and adventurous brand across the globe. In today's Simplanation, we will look at how Red Bull, an almost unwanted product, got its wings.

Birth: The Thai Connection

Red Bull finds its origins way back to 1976 in Thailand. Chaleo Yoovidhya, born in a poor family, worked hard as a pharma salesman before starting his own company - TC Pharmaceuticals in the 1960s. It was business as usual until 1970 when he came across a life-changing business opportunity. Chaleo noticed that most of the energy drinks sold in Thailand were imported from foreign countries. Even the highest-selling energy drink called Lipovitan-D was imported from Japan. Most of these energy drinks focused on marketing only to the affluent residents of Thai cities.

But Chaleo realized that the affluent class were not the ones who would need the energy drinks anyways. Instead, it should be the middle and lower class working in tiring jobs who would really need these energy drinks.

After this realization, Chaleo set out to create his own energy drink. He used similar ingredients present in existing energy drinks: Taurine, Caffeine, Vitamin B and sucrose. He however made one tweak. Most of the energy drinks had a medicinal taste. Chaleo made the drink a little sweeter to suit the local taste. With the product ready, Chaleo turned his attention to branding.

Chaleo wanted to pick a symbol or logo which depicts energy and strength. So, he chose the Wild Gaur, a large and powerful bison found in South East Asia to be used in the logo for the brand. The finalized logo had two Red Gaurs charging against each other with a yellow disc in the background. He named the drink 'Krating Daeng' which means Red Gaur in Thai.

Finally, the drink was launched in 1976 and gained popularity because of its Thai name, affordable price and eye-catching logo. Besides targeting the large urban centres, Chaleo also took the drink to smaller towns well where the competition lacked presence. To improve the visibility of the drink, Chaleo started sponsoring Muay Thai (Thai martial arts) events. Muay Thai is the national sport of Thailand. This helped Krating Daeng become a household name in Thailand soon. In just one year, it became the second-most popular energy drink in Thailand, just behind Lipovitan-D. In 1978, two years after its launch, it snatched the No.1 spot and has never looked back since. Krating Daeng went on to become so popular it almost became like the national drink of Thailand.

Childhood: Taking Krating Daeng Global

Chaleo was very happy making money off Krating Daeng in Thailand. He had no plans to take it to other parts of the world till he met Dietrich Mateschitz. Dietrich Mateschitz was an Austrian salesman working for Blendax, a toothpaste company. He happened to visit Thailand for a business trip in 1982 (6 years after Krating's launch).

To recover from the jet lag, he bought a can of Krating Daeng. In no time, his jet lag was gone and he felt energized. Dietrich became an instant fan drinking many more cans during his stay in Thailand. He saw an opportunity to start importing and selling this drink in Europe. He returned home with a lot of Krating Daeng cans and approached investors with the business plan of selling Krating Daeng in Europe. But no investor showed any interest in betting money on Dietrich's plan.

Dietrich was undeterred. He reached out to Chaleo directly in 1984 offering him a partnership to distribute Krating Daeng in Europe. He managed to convince Chaleo that they could scale Krating Daeng to be a large global brand. Dietrich managed to raise $500K from savings and loans, betting everything on this partnership. Chaleo agreed to the plan where both were supposed to get a 49% stake each in the partnership. Chaleo's son got the remaining 2% stake. In this arrangement, the production would continue to be done by the TC Pharmaceuticals in Thailand. And Dietrich would manage only the marketing and distribution in Europe. Even to this date, Red Bull has its manufacturing and most of the other operations outsourced. It focuses only on marketing and distribution.

However, there were few changes that Dietrich made in the product positioning. He decided that the product when launched in Europe would target the young party crowd (ages between 18-30 years). Also, unlike Thailand, the drink would be positioned as a premium product. The price would be almost 2.5x the price of a normal soda. He also replaced the medicinal bottle of Krating Daeng with a new flashy can. For the English name, he chose Red Bull which came closest to Krating Daeng (Red Gaur).

The arrangement and the plan were set. Now, it was time to execute.

Adolescence: Bumpy Start and Growth Hacks

Dietrich wanted to start selling the drink in Germany and Austria first. But since it had chemical ingredients, the sale of it required approval from the authorities. However, due to the high level of Taurine in the drink, German authorities did not grant the drink approval. Dietrich decided to start with Austria alone in 1987.

But as we saw at the beginning of this post, the customer feedback he got from focus groups was utterly disappointing. The research agency helping Dietrich with the focus group exercise told him that probably a market for such a drink in Europe didn't exist.

Dietrich instead decided that if the market doesn't exist, he would create one.

He was clear that he first wanted to go after the party crowd. But, didn't have the budget to advertise Red Bull using traditional TV and print media. So, he focused on coming up with some creative and inexpensive growth hacks to make the drink popular. He started with hiring students to serve as brand managers who were supposed to popularize the drink in their respective circles. They were paid to organize large parties where free red bull cans were distributed to promote the brand.

To make more people aware of Red Bull, he paid students to paint their cars with Red Bull logos and attach large Red Bull cans on top. Dozens of customized cars driving on the roads introduced the Austrians to Red Bull for the first time. Given that it was the 1980s, such a type of campaign was very rare and caught everyone's attention.

Another crazy idea that Dietrich resorted to was "Littering". To create an impression that Red Bull was selling like crazy, the team started planting empty cans on the busy streets, night clubs and other public places. All these creative hacks worked wonders for Red Bull. And a drink which people hated during market research suddenly had a crazy demand. Red Bull sold close to 1 million cans in Austria in its first year.

By the way, whatever Red Bull was doing would classify as "guerilla marketing". It is an advertisement strategy in which a company uses surprise or unconventional techniques to publicize a product or service.

Bartenders started creating popular cocktails like Vod Bomb, Jumping Jack Flash and Liquid Cocaine mixing Red Bull with other alcoholic beverages. Word-of-mouth spread across the borders soon. And Germans started smuggling Red Bull in from Austria as it was banned by the German authorities. The demand was so strong that the container manufacturers couldn't supply the ever-increasing demand for cans in time. A lot of copycat brands started emerging as well. But none of them was a match for Red Bull's popularity.

Instead of basking in the early success of the drink, Dietrich decided to invest even more in Red Bull's branding. With the help of a close friend, he came up with the famous tagline: "Red Bull gives you wings". He wanted Red Bull to embody adventure and thrill. To further strengthen that image, he decided to start organizing fun, adventure events which Red Bull continues to do to date. The first one called 'Red Bull Flugtag' was organized in 1992 in Vienna. Participants were supposed to create funny manual flying machines which were then launched off a platform into a river. Many more such events were conceptualized and organized across Europe over the next few years.

Red Bull was on a roll. In 1994 (7 years after the Austrian launch), it made its way to neighbouring European countries - UK and Germany. By 1997, it was selling close to 1 million cans per day. Around this time, it entered the US market as well. In between all this, Dietrich quietly (well, not so quiet actually) became the richest person in Austria. However, he was not yet done. In fact, he was far from done.

Adulthood: Build a Business Empire

After kickstarting its global journey in Europe, Red Bull has moulded itself into a marketing machine. As mentioned earlier, all production of the drink is outsourced and Red Bull's sole focus is on marketing. It earned $7.4B in revenue in 2020 of which it spent a whopping 33% on marketing activities. In comparison, advertising majors like Coca-cola and Pepsi spent only 8.4% and 4.4% respectively of their revenue on marketing.

Side note - we don't have a lot of publicly available financial data on Red Bull since it is still a privately held company (not listed on a stock exchange). This means they are not obligated to disclose detailed financial statements like their public counterparts (companies listed on stock exchanges).

Red Bull has created an empire by investing that huge marketing budget into various entities that act as a channel to market their brand.

1. Sports Teams

In sports, Red Bull is most famous for its involvement in F1 racing where it owns two teams: Red Bull Racing (which had star driver Sebastien Vettel on the team in the past) and Scuderia Alpha Tauri. Red Bull Racing has performed really well in F1 over the years making many podium finishes.

Red Bull also owns five football clubs and three stadiums across Europe, the US, Asia and, Brazil. Besides these, they also own few hockey, sailing, motorsports and e-sports teams across the globe. All these give Red Bull strong visibility to various sports lovers.

While all these mean big costs, Red Bull also makes money off them by offering advertising space in its football stadiums and racing circuits. This is over and above the Red Bull drink sales generated from these events.

2. Events

While other brands compete to get sponsorships for major events, Red Bull organizes over 40 adventurous and competitive events every year. The events include the flagship Flugtag, Soapbox races, paragliding, kayaking, mountain biking, cliff diving and road rage to name a few. These events help the brand sustain its adventurous image.

The investments in these events also result in grabbing a very high number of eyeballs on digital channels. One such example was the Stratos project in 2012 where Austria's Felix Baumgartner was recorded jumping from an Air Balloon 39 km off the earth surface. The video went viral on Youtube with 46 million views to date and other social platforms as well. Notice the Red Bull branding everywhere in the video (below).

3. Sponsorship deals with athletes

In an attempt to make its presence felt across all the major sports, Red Bull signed up top athletes from different sports and across the globe. Few notable signups include Footballers - Neymar, Alexander Arnold; Cricketers - KL Rahul. Ben Stokes; E-sports - Tyler Blevins; Basketball - Blake Griffin; F1 Racing - Verstappen; Tennis - Dominic Thiem. Red Bull went one step further than the traditional brands by establishing athlete performance centres. These centres train athletes to improve their performance.

4. Its own media company

With dozens of sports teams and events organized that garner millions of eyeballs across the globe, Red Bull has prime advertising space available for brands. So they run a TV channel (Red Bull TV) and a magazine (Red Bulletin), available on both traditional (printed books, cable TV) and digital platforms (website, youtube, etc), where they sell advertising space. They also produce tons of content from these events and games which can be reused by video creators across the globe. Their subsidiary company Red Bull Media House, set up in 2007, sells all this advertising space available across the entire Red Bull ecosystem to potential advertisers.

5. Miscellaneous

Finally, they also have also invested in a set of unrelated businesses like a fashion line called Alpha Tauri, a personality assessment website called Wingfinder, and an adventure vacation booking site called Destination Red Bull. Well, to be honest, they are not completely unrelated. You do see a connection that they are all about adventure or making a statement about an adventure which ties back with Red Bull's brand image.

Mario Gabriele's break-down of Red Bull's strategy in this excellent twitter thread perfectly sums up the Red Bull empire in a picture.

Red Bull's story only proves what is fast becoming more and more important today in business. That brand and storytelling can help differentiate you from your competition. Even in a space that hardly has any differentiation between products like energy drinks. It is no wonder Red Bull has the highest market share globally at 43%. Monster energy drink comes in a close second at 39% but there's no one else close by.

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This is the story of Dogecoin - an internet joke that became a reality. If you think Trump becoming the US president was a joke that went too far, you haven't heard Dogecoin's story. Multiple new trends in the internet economy built upon each other to make this joke become worth $85 billion at its peak this year. So here's the story of Dogecoin in 3 chapters - each chapter for a trend that helped make Doge what it is today.

Chapter 1: Memes

In 2008, a puppy mill (a place where dogs are bred) in Japan shut down abandoning 19 pups. All the 19 belonged to one breed, the Shiba Inu - a hunting dog breed that originated in Japan 3000 years ago. These pups were rescued by an animal shelter shortly and the kind volunteers began naming the pups. One of the Shiba Inus, a female one was named Kabosu, after a Japanese citrus fruit because her face was round like the fruit. Sometime later, Kabosu was adopted by a kindergarten teacher Atsuko Sato. Sato liked the name Kabuso and kept it. Kabuso, as Sato would narrate later, loved being photographed. It was perfect because Sato ran a blog where she posted pictures of dogs to raise awareness about the dangers of puppy mills. Kabuso began to feature regularly on Sato's blog and soon found an audience. On Feb 23rd 2010, in a turn of events Sato could never have imagined, she would post a set of Kabuso's photos on her blog that would blow up 1000s of miles away in the United States. Not immediately but years later.

In parallel to Sato's adventures with Kabuso, two other things were happening.

One: In October 2010, a Reddit user would post a funny image corgi breed dog titled "LMBO LOOK @ THIS FUKKIN DOGE" kickstarting the phenomenon of using "doge", a misspelling of dog, for silly images of dogs shared on the internet.

Two: In September 2012, a Tumblr blog named "Shiba Confessions" would launch. The only purpose of the website was to share funny pictures of Shiba Inu dogs with multi-coloured text on them in Comic Sans font style.

There is no specific date or event as to when these three things - Kabuso, doge and Shiba confessions - collided. But they did and sometime in early 2013, online searches for the "doge meme" began to rise. The meme, as we all now know, was Kabuso's face with rainbow-coloured comic sans text on it, usually two-word phrases like "such wow" and "much respect". It shot into the mainstream limelight in late 2013 when it was picked as the year's top meme by Know Your Meme and also picked up by MTV in its list "50 Things Pop Culture Had Us Giving Thanks For".

Doge, the meme, had arrived. But this was only the beginning.

Chapter 2: Money

In January 2009, bitcoin was launched by the still anonymous Satoshi Nakamoto kickstarting the concept of "cryptocurrencies" - a form of digital money that operated on the principle of decentralization.

A quick, over-simplified explanation of what centralized and decentralized money means.
The currency we use today (rupee or dollar) is controlled by one entity, the central bank (RBI in India) - hence centralized. The central bank decides how much money to print and what the value of a note is, ie, a ₹10 is worth ₹10 because the central bank says so. In the case of cryptocurrencies, there is no central body that controls them. Each cryptocurrency is governed by a set of rules ("protocols") that are made before the currency comes into existence. This set of rules decide how many units (coins in the case of Bitcoin) can come into existence each year and how they can be created. Anyone can create the currency if they follow those set of rules - hence decentralized. The value of the currency is decided by the collective market, ie, buyer and sellers.

The idea of decentralized money caught on. And given that the protocols of Bitcoins were open-sourced computer code, anyone with decent programming knowledge could launch their own cryptocurrency. So quite a few people, geniuses as well as fraudsters, began to launch their own coins (few legit currencies that were launched at that time include Ethereum, Ripple & Litecoin). These cryptocurrencies were mostly variations of how bitcoin operated - the founders either tweaked the rules around how many coins could be created or how they could be created. Few like Ethereum were a bit more different and involved genuine innovation (but we won't go into the details here). These alternatives to bitcoin were called altcoins.

By 2013, there were more than 60+ altcoins in existence and "cryptocurrency" was a buzzword slowly finding its way into mainstream media. If you remember from Chapter 1, 2013 was the also year the doge meme was blowing up on the internet.

By the way, there are more than 4,000 cryptocurrencies in existence today.

On 28th Nov 2013, after observing both the trends rise simultaneously, Jackson Palmer, an executive working with Adobe joked on Twitter "Investing in Dogecoin, pretty sure it's the next big thing".

Palmer was just joking and had no intentions of creating a cryptocurrency like that. But the tweet got a lot of attention. Just for laughs, Palmer went on to buy the Dogecoin.com domain and put up a picture of a coin with the doge meme on it. He also added a note on the site: If you want to make Dogecoin a reality, get in touch.

Bill Markus, an engineer at IBM, came across Palmer's Dogecoin website and found the idea funny. Bill already had some experience building cryptocurrencies. He had created one called "Bells" as a fun side project but it never took off. He decided to get in touch with Palmer.

Making Dogecoin a reality

As per Bill's recount later, it took him just 3 hours to develop Dogecoin. All he did was tweak the open-source code of another altcoin called 'Litecoin" which itself was a variation of the code of Bitcoin.

Bitcoin had a limit of 21 million coins that could ever come into existence. And only a fraction of these coins would be made available every year through a process called "mining". Billy made more than 100 billion dogecoins available for mining at the time of release. He also added a rule that 5 billion new dogecoins would be made available for mining every year for perpetuity. Finally, keeping up the spirit of Doge, Billy also changed the word 'mine' to 'dig' and the font to the one used in the Doge memes.

Explaining mining in detail will take an entire post. For now, think of "mining" as the process by which a really advanced computer runs some bits of complex code to bring more coins of a cryptocurrency into existence.

Now anyone serious about launching their own cryptocurrency mines a decent number of coins for themselves before making a public launch. This activity is called pre-mining. For instance, it is believed that almost 72 million Ethereum coins (60% of the total supply available) were pre-mined before its launch. In the case of Dogecoin, since the creators were doing it as a joke and never expected any financial returns, they pre-mined only 10,000 dogecoins for themselves. After this small pre-mining exercise, the coin was made live on the website in December 2013.

Adoption of Dogecoin

To Palmer and Bill's surprise, dogecoin took off. Within just 30 days of launch, there were over a million visitors to the website. Reddit turned out to be the origin for a majority of the visitors. A dogecoin subreddit had cropped up and was buzzing with users helping each other mine and transact dogecoins.

The price of dogecoin around this time was close to $0.0008, almost negligible. Given such a low value, you would expect it didn't really mean much to people. However, Redditors had created an interesting way to use dogecoins - a Reddit tipping bot. A Reddit user could use the bot to tip a fellow Redditor as a token of gratitude for their contribution to the discussions on the platform. It turned out, the currency being a joke was what made it more attractive. Dogecoin felt more accessible and likeable to users. And they felt gifting these coins was a cool way to show appreciation for others.

In a further boost to this friendly image, Dogecoin began to be used to support noble causes. For example, in Jan 2014, the Dogecoin community raised more than $36,000 for the Jamaican team which had qualified for, but could not afford to go to, the Sochi Winter Olympics. In another cause, the community raised $30,000 (40 million dogecoins) to help Kenya which was struggling with a water crisis. Members tipped towards the cause through the Reddit tipping bots.

The tipping bot and fundraisers were major drivers in increasing the number and value of dogecoins trading. Soon, other major community platforms like Twitter, Slack and Discord added a tipping bot. This further increased the number of dogecoins in circulation. In 2014, the trading volume of 1-year-old Doge surpassed Bitcoin and all other cryptocurrencies combined.

Doge, the currency, had arrived. But even Dogecoin's users had no idea about the storm that was coming.

Chapter 3: Moon

Post-2014, Dogecoin's price crawled over the next 6 years, very slowing 10x-ing from $0.0002 to $0.0020, but still at negligible levels. However, towards the latter half of 2020, few interesting incidents began to happen.

In July 2020, a trend started on Tik Tok became where influencers started asking viewers to invest in Dogecoin and take its value to $1. And no prizes for guessing - viewers actually listened. Dogecoin price doubled and crossed the $0.0040 mark. The "Doge at $1" vision caught on and internet forums, mainly the Dogecoin and WallStreetBets subreddits, were soon abuzz with discussion about how to achieve the $1 price.

The biggest push however came in the form of Elon Musk. In a series of tweets that started in Dec 2020 and are still going on, Musk began to hype Dogecoin as the future currency of the earth. As Musk tweeted, people thronged to buy dogecoin sending the prices soaring. He called himself the "DogeFather". The price went further up. He changed his bio to "The CEO of Dogecoin" and more people thronged to buy.

His tweet about taking "Dogecoin to the mooooooon" soon became the war-cry for the community. Fans made songs, GIFs, memes about dogecoin to the moon! People even coded bots to buy Dogecoin when Musk tweeted about it.

Other celebrities joined in on the fun. Singer Snoop Dogg tweeted about Dogecoin. Mark Cuban, the owner of the NBA team Dallas Mavericks, got his NBA team to start accepting dogecoins as payments for tickets and merchandise sales.

This whole frenzy resulted in Dogecoin rising 9,940% this year (Jan - May 2021) and touching the peak price of $0.73 in the first week of May. Its market capitalization (no. of coin x price of coins) increased from $1 billion in January 2021 to touch a peak of $85 billion.

The craze was so much that the platforms that enabled crypto trading - Robinhood, the leading discount broker from the US and WazirX, India's largest crypto exchange both crashed that week unable to keep up with the traffic and trading volumes.

The frenzy culminated with a 40% crash in prices (down to $0.45) on May 8th when Musk appeared on the comedy show "Saturday Night Live" (SNL). During the show, Musk agreed with the show's host that Dogecoin was a hustle immediately leading to a slide in prices. But Musk tried making it up to the community the next day by announcing that SpaceX is literally going to put a dogecoin on the moon, with the mission too being funded by dogecoins. The move seems to be working for now as it has arrested the slide in price. At the time of writing this piece, the price was hovering around $0.5.

Epilogue: Dogecoin's future

Will dogecoin exist in the future? We don't know. Will its price go up further? Honestly, we don't know. There is certainly no saying where Musk and the Doge fans are going to take Dogecoin to. At least going by the recent history.

What we do know for certain is that Dogecoin, going forward, will face a problem of abundance. Let us explain.

As mentioned earlier, Dogecoin's supply was around 100 billion coins when it launched in 2014 (late Dec 2013 to be exact). And 5 billion coins are added to the supply every year, ie, around 10,000 new coins every minute. As of now, there are more than 128 billion dogecoins in circulation and increasing by the minute. In comparison, Bitcoin has only 18.7 million coins in circulation. And it will never cross 21 million coins - because that's the rule with which it was created.

Using the simple concept of supply and demand, we know that the unlimited and ever-increasing supply of dogecoins will ensure its price remains low. Now, why does this matter?

A cryptocurrency at the end of the day is money. And money has 2 functions - store of value (investment) and medium of exchange (payment). In simpler words, I can either use my money to buy some asset that can give me some return and ensures my money's value doesn't reduce over time. Or I can use the money to buy things I like or need.

Crypto-currencies are yet to find their way into the use case of "medium of exchange". Not a lot of merchants accept them as a payment method. Mainly because of how their value swings up and down. As of now and at least for the foreseeable future, most people are using cryptocurrencies for the other function - "store of value".

Bitcoin, because of its limited supply, is considered scarce and has seen its value only rise over time. Very similar to how Gold and Diamond's prices have risen over time because of scarcity (a man-made scarcity in the case of diamonds). So Bitcoin is seen as a viable option to use as a "store of value". It is definitely riskier than investing in mutual funds or fixed deposits. But it can be considered as an investment option nonetheless.

Dogecoin, on the other hand, is abundant, not scarce. With the addition of 5 billion coins every year, the purchasing power of a dogecoin will only do down. And so will its price. This will make it very difficult to use dogecoin as a "store of value". Few people might have made millions from dogecoin in the last few months but they are more an exception than the rule. Certain exceptional events made them possible and these might not happen time and again in the future.

This leaves only one possible use case for Dogecoin - as a "medium of exchange", ie, as a payment method. Whether this will happen in the future - we can only wait and watch. And probably sing "dogecoin to the moooooooon"

DISCLAIMER: This is not financial advice. And we are not registered financial advisors. So please do not buy any cryptocurrency based on this post. Please do your own research before buying or selling.

If you enjoyed reading this post, please share it with your friends :)

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References

1. Origin of the doge meme - The Verge

2. Shiba Confessions

3. The original doge photo - Sato's blog

4. Dogecoin: The origin story - CNET

5. What is dogecoin - Binance

6. All doge tweets by Elon Musk - CNBC

7. Dogecoin rally numbers - The Hindu Business Line

8. The truth about Dogecoin - Graham Stephan (Youtube)

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Over the past few decades, there have been quite a lot of changes in the way people invest. A couple of decades ago, people preferred to invest only in bank deposits which offered low but safe returns. In the late 2000s, more investors started pouring money into equity mutual funds and stocks. These did offer much higher returns but were prone to high fluctuations if the market or a stock crashes. Also, the timing of investment in equity markets can have a huge impact on the returns generated. In the past few years, cryptocurrency has been the buzzword. These novel investments can offer unimaginable returns but they can be extremely volatile. And finally, the latest trend in the form of NFTs when people decided to buy flying cat memes for 600,000 USD. 

In the midst of all these publicly discussed options, people generally tend to miss out on another option: Debt instruments. These instruments typically offer a little higher return (8-10% per annum) than bank fixed deposits and are considered safer than equity and of course crypto.

In today’s post, we will try to simplain how debt instruments work.

So, what exactly are debt instruments?

All organizations like government bodies, PSUs, banks, infrastructure finance companies, regular corporates and Non-Banking Financial Companies (NBFCs) need capital to finance new projects and operations. To raise this new capital, companies issue debt instruments called bonds.

A bond is a financial instrument that represents a loan made by an investor to a borrower (government or corporate body in this case). Think of it as a document that includes all the details of the loan and the payments to be done. So, assume a company named ‘Repro Home Finance Limited (RHFL)’ wants to raise 10 crore INR from investors via bonds. It decides to issue 1000 bonds worth 1 lac INR each for a duration of 5 years with a coupon rate of 9%. Don’t worry about the terms for now; we will come to them later. If an investor likes this opportunity, he/she can become a bond holder by investing a minimum of 1 lac INR or its multiples for one or more units of the bond on offer.

Now after the bond holder has provided the loan to the bond issuer, let’s see how the repayment is done. The coupon rate is the interest rate paid by the bond issuer to the holder every year for the entire duration. So for 1 lac INR investment at a 9% coupon rate for a period of 5 years, bond holders get paid the interest amount: 9000 INR in this case at the end of every year for the entire duration: 5 years in this case. And at the end of the bond duration, they also get paid the principal which was 1 lac in this case. So ideally, a bond is a loan that an investor gives to the bond issuing organization with pre-defined payouts throughout the duration of the bond.

Below is a snapshot of some bonds available for purchase online. There are two things in the image that should catch your attention.

One - The minimum investment mentioned for all these bonds is around 10 lacs INR which is pretty high for a retail investor. In fact, over 90% of the bonds issued in India have such high ticket sizes and hence see minimal participation from small retail investors, ie, common investors like you and me.
Two - You’d have seen a term called “yield”. For now, let’s assume it’s the same as the coupon rate (interest rate). There is actually a nuanced difference between the two but I will explain that in detail later.

But why do companies need to “raise debt”, ie, “issue bonds”? Don’t they have other ways of arranging for money?

Valid question. Companies do have other alternatives - like take a bank loan or raise money from an initial public offering (IPO). Let’s look at each of these alternatives one by one.

Large organizations typically need more money than an average bank can provide. Also, extremely large bank loans come with a lot of terms & conditions as well as collateral - the security you give to a bank (like a house or vehicle) when you take a loan. Finally, the interest rates on bank loans tend to be higher than what companies need to pay when they raise by issuing bonds.

A lot of companies raise money through IPOs i.e. by selling their ownership in the company in return for funds from investors. But not every company might want to dilute its ownership every time it needs money. Also, government organizations like municipalities might not be suited to be listed on a stock exchange as they are not traditional business entities looking to maximize profits. Finally, NBFCs whose business model is to raise money and lend them out as loans cannot sell their stake every time they want to raise more capital.

Therefore, debt offers an effective means for companies to raise funds at a cheaper interest rate than bank loans without diluting their ownership.

Understood. But what happens if a company is unable to repay the money they got by issuing bonds?

When a bank gives out a loan it asks for some security called “collateral”. Even NBFCs that give personal, vehicle and home loans require security or a claim on the asset for which the loan is being given. For example, gold loan companies like Muthoot and Manappuram take gold as collateral from customers for the loans issued. On average these companies have an LTV (Loan To collateral Value) of 60-70% which means if a customer pledges gold worth 100 INR, then a loan of max 60-70 INR can be disbursed to the customer. This allows the NBFC to extract the money from the collateral if the customer defaults without incurring losses.

In a similar way, when bond investors loan to companies via bonds, they also get a claim to certain collateral against the loan. For most companies, it’s a pool of assets (like factories, machinery, office buildings, etc) on their balance sheet. And in the case of financial companies like, say an NBFC, the loans that the NBFC has given out are provided as collateral (loans given out by an NBFC are assets on its balance sheet since they generate regular income in form of loan repayments). 

So when a company defaults (does not pay) on its bond payments, the assets (“collateral”) are sold (“liquidated”) and the money is paid to the investors. The process is painstakingly long and involves court proceedings.

This brings us to another question. 

What if the defaulting company does not have enough assets on its balance sheet to pay back the bonds?

Then it's highly likely that the bond holders would not receive their complete investment. This risk of not getting back the entire money you lent via bonds is called credit risk. However, there is a process bond investors can follow to maximize the amount of money they can recover in such scenarios.

In a recent example, Dewan Housing Finance Limited (DHFL) had raised close to 45,000 crores INR from investors through bonds and fixed deposits.  They were supposed to use these funds to offer home loans to customers at a higher interest rate than the coupon rate of the bond and make the profit on the interest differential. However, allegations about the company owners later came to light - that they had redirected 33,000 crores INR into their personal pocket. The company then started defaulting on its interest payment to the bond holders.

The lenders, both the banks and bond holders reached out to the NCLT for repayment in 2019. NCLT stands for National Company Law Tribunal and is a special court responsible for settling such default or bankruptcy cases. Currently, the NCLT has invited bidders to buy out the business assets of the company: in this case home loans given out by DHFL (home loans given out by DHFL are assets on their balance sheet). Once the buyer and price are finalized, the company will be sold and the bondholders will be paid back. 

However, it’s been 2 years of waiting for the bond holders and they are likely to get back only a small % of their money. This is because most of the money was siphoned off by DHFL’s founders which meant few home loans were given out. So the assets on their balance sheet are not enough to pay back the bonds.

Now, not every company runs a Ponzi scheme like DHFL’s scam with your money. But there is still some bit of credit risk associated with all the bonds. It can be high for some bonds and low for others depending on who is issuing the bond. So how do you know which bond is good and which one is bad before investing your hard-earned money in it?

Enter Credit Rating Agencies

Just like individuals are assigned credit score basis their repayment history, companies raising debt are issued a credit rating too. CRISIL, ICRA and CARE are a few of the major credit rating agencies in India.

Rating agencies are independent entities that assess the creditworthiness of a bond by auditing the company issuing that bond. They do this by assigning a rating to the bond which conveys the probability of the money being paid back to the bondholder. 

The rating scale used by CRISIL, one of the largest rating agencies in India, is shown below. AAA rating means the bond is extremely safe (very low chance of the company not paying back) and D rating means a high chance the company will not pay back the money. All bond issuing companies rely on credit ratings to signal their credibility to potential investors.

Most of the bonds issued by government agencies are rated as AAA and are considered to be the safest. The lower the rating of the bond, the higher the coupon rate the company needs to pay its investor. For instance, Power Finance Corporation, a public-sector company has an AAA-rated bond and hence can offer a lower coupon rate than L&T Finance which has an AA-rated bond. The difference in coupon rates is to account for the difference in risk.

Important note: Credit ratings do offer a certain level of safety to investors. But that doesn’t mean that they are completely accurate in all cases. Credit agencies can be wrong at times. Going back to our DHFL example, CARE maintained the highest rating of ‘AAA’ on DHFL’s bonds from 2016 till 2019. And in only a span of 3 months after DHFL started defaulting on its payments, they downgraded its rating to D. Ideally, the rating agencies should be smart enough to identify the possibility of a company defaulting on its payments before it actually happens. 

In short, credit rating agencies do help you filter your choices and thereby reduce your credit risk but history has shown they are not 100% bankable.

Hmm...anything more I can do to reduce credit risk?

Yes. Investors have two other options to reduce credit risk in bond investments: Debt Mutual Funds and Covered bonds.

1. Debt Mutual Funds

Like any other mutual fund scheme, Debt Mutual Funds manage and invest client’s money in a portfolio of bonds. Debt mutual funds solve two problems for investors. Firstly, they help investors reduce credit risk by diversifying the investments across bonds of different companies. Secondly, they allow investors access to a lot of highly safe government, public-sector, and large corporate bonds which typically have a very high ticket size (minimum investment of INR 10,00,000).

Below is a snapshot of the holdings of one of the debt mutual fund schemes run by ICICI. As we just learnt, the investments are spread across multiple bonds. So even if this mutual fund had an allocation (say 2-4%) in a company like DHFL that defaulted, their returns would not be severely impacted. Also notice that a very high percentage has been invested in the government bonds (AAA rated). A lot of the government bonds mentioned here would have a minimum investment requirement of close to 10 lakhs INR. But debt mutual funds enable you to invest amounts as small as Rs.5000 into these safe bonds. 

Important note: Whenever you are looking to invest in a debt fund, don’t look at the return of the fund alone. Instead, look at the bond holdings in their portfolio. A fund generating a high return can also mean they are investing in bonds with high coupon rates, ie, riskier bonds. This can mean a lot of trouble for the fund and you.

Take the case of Franklin Templeton fund house which had to close 6 of their debt mutual fund schemes last year. Franklin Templeton invested a good portion of their investments in lower-rated bonds (A and B rated bonds) from companies like ADAG (Anil Dhirubhai Ambani Group), Essel Group, and Vodafone India. They hoped that these higher risk bonds would deliver good returns. But when these companies ran into financial troubles and couldn’t pay the interest, Franklin Templeton and its investors lost money. Crores of it. 

To conclude, investing in debt mutual funds is definitely less risky than investing individual bonds. But as the Franklin Templeton debacle shows, it still carries an amount, however small, of credit risk. But there is one more category of debt instruments called Covered Bonds which will safeguard your investment completely, even if the bond issuing company defaults. Thus eliminating credit risk entirely. The icing on the cake - it doesn’t even require the investors to wait for the NCLT to find buyers for collateral assets to get back the money. So how do these work?

2. Covered Bonds

Covered bonds have been in the west for a few decades now but gained popularity after the global financial crisis of 2008. The total covered bonds in circulation globally are $2.9 trillion (EUR 2.4 trillion). In India, covered bonds are a very recent phenomenon. In 2019, Kogta Financial India Limited, an NBFC, became the first Indian company to issue covered bonds. This was followed by a larger issue of 125 crores INR by another NBFC, Muthoot Finance, in 2020. These bonds are likely to become more popular in the coming times because they solve the credit risk problem - a problem plaguing the Indian bond markets currently.

Time to understand how these bonds solve credit risk.

Let's say there’s an NBFC “Hera Pheri Lending” (HPL) which gives home loans. HPL wants to raise 100 crores INR from investors via covered bonds. To do that, HPL needs to keep aside collateral (security) for these bonds. In this case, the collateral would be a pool of home loans issued by HPL in the past to its customers (as we learnt earlier, past loans given out by an NBFC are its assets because they generate regular income in the form of repayments). 

Now, this is where the difference comes in. In the case of a traditional bond offering, the collateral (HPL’s home loans) will continue to remain on HPL’s balance sheet. But in the case of covered bond offering, HPL will first have to sell the collateral to another company. This company is newly formed specifically for the purpose of buying this collateral, meaning it is a Special Purpose Vehicle or “SPV”. This SPV is an independent body approved by the regulator (Securities and Exchange Board of India/SEBI) to act as a trustee of the collateral sold by HPL. So the collateral (HPL’s past loans) is no more on its balance sheet. Instead, it lies with the SPV whose ownership rights lie with the bond investors. 

Suppose HPL goes bankrupt and cannot pay back the bond investors anymore, the bond investors have access to the collateral (HPL’s past home loans that are generating income) via the SPV. They don’t need to wait for the NCLT proceedings to get their investments back. Instead they earn from the repayments made on HPL’s loans that lie with the SPV, ie, HPL’s customers who are paying back their home loans. This extra protection is a unique feature of covered bonds and makes them much safer than traditional bonds. And since the risk of covered bonds is slightly lesser, the return they generate is also a little lesser (1-2% less) than the traditional bonds. And because of their safer nature, they get a higher rating from credit ratings agencies as well.

Important note: For covered bonds, the value of collateral to be kept with the SPV is typically 20-25% higher than the amount of bonds being issued. So HPL, which is raising 100 crores INR, has to sell 125 crores INR worth of home loans on its balance sheet to the SPV. This extra money provides a margin of safety for bond investors and increases the likeliness of them getting back their entire investment.

Another important note: Say HPL has issued 5-year bonds, ie, they will pay interest for 5 years and then pay back the entire amount. Over these 5 years, the value of collateral lying with the SPV will fall. This is because HPL’s home loan customers will continue repaying their loans (only the amount yet to be paid by a customer is an asset for the NBFC and this obviously decreases over time as customer repays). So the 125 crore INR collateral coils become 90 crore INR in 2 years time which is lesser than 100 crore INR of bonds that HPL issued. To account for this, HPL needs to keep adding to the SPV new home loans it gave out. They need to do this every month (or quarter) and ensure the value of the collateral lying with the SPV doesn’t fall below 125 crore INR. At the end of 5 years, once HPL has paid the 100 crore INR back to its bond investors, they can transfer the collateral from the SPV back to HPL’s balance sheet.

Phewww! This has become a really long post and I still need to cover a few more points. So there will be a sequel. In Part 2, we will explore strategies for investing in bonds, the impact of interest rates, and the term “yield”.

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References

1. Debt Mutual Funds for Beginners - ETMoney

2. Franklin Templeton Debt MF fiasco - MorningStar

3. White Paper on Bharat Bond - NSE Archives

4. A pool of vehicle backed loans - WintWealth

5. How the value of underlying vehicles increases over time - WintWealth

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Today, the Indian soft drink market is dominated by Coca Cola followed by Pepsi. But the evolution of this industry in India has been very interesting. From the 1950s, local and foreign players have competed for market share. There have been lawsuits, acquisitions, companies leaving India and even the introduction of cola created by the Indian government. In this SNAP, we would revisit the history and evolution of the Cola industry in India.

Parle vs Coca Cola

In the year 1950, Parle became the first company to launch a cola drink in India at a national level. Parle was famous for its Glucose biscuits: Parle G and hence named the drink as Gluco Cola. Its print ad (below) was designed by the famous cartoonist: RK Laxman. On the other hand, Coca Cola had already registered its trademark in India but was yet to start selling. It objected to the ‘Gluco Cola’ name and asked Parle to change the name. Parle changed the name to ‘Parle Cola’ but Coca Cola was adamant to get the ‘Cola’ word dropped. To avoid the legal battle with Coke, Parle dropped the product.

By 1952, Coke had started production in India. But Parle didn’t want to give up on its soft drink ambitions. Avoiding a direct rivalry with Coke, Parle launched an orange-flavoured drink, Gold Spot. The brand was focused on kids as the target audience. It was received well and gained a lot of popularity in few years.

In the 60s, Parle expanded its distribution network across the country. And in 1970, it launched one more drink with lemon flavour and named it Limca. It had a unique taste that became popular especially among the female crowd.

In the 70s, Coca Cola was the clear market leader with no other major cola competitor. Meanwhile, Parle was happy with its No 2 spot. But, things were about to change very fast.

Coca Cola leaves India

In the year 1977, Congress lost the national elections and was replaced by the Janata Party at the centre. Right from the day it came into power, Janata Party was hell-bent on nationalization. As part of the Foreign Exchange Regulation Act (FERA), the new government asked Coke to reduce its foreign holding to 40%. They were also asked to share Coke’s secret concentrate formula. Coke decided to leave India over this unacceptable demand of revealing its secret formula. Now, there was a big void left with no large cola player in the country.

And hence, the government decided to intervene. They tasked Modern Foods Industries, a PSU company to develop a replacement for Coke. Modern Foods created a product with lesser caffeine and named it Double 7 (77) after the year in which Janata Party came into power. After Double 7 was launched, it failed to get much success in the market. The primary reason was that its taste was not as good as Coca Cola.

So, the void still existed while two players were planning to take advantage of the situation.

New Desi Players

Pure Drinks was a bottler for Coke in North India. When Coke left in 1977, it decided to create its own brand. In 1978, they launched Campa Cola, which had a very similar taste and branding to Coca Cola. The logo also seemed like a rip off from Coke. But since it felt more like Coke, the customers liked it much better than Double 7.

But Parle was in the best position to capitalize on this situation with existing products and a strong distribution network. After a lot of thought and research, Parle created a drink that used Indian spices like cardamom, cinnamon, lemon oil, etc. This gave it a different and stronger taste than the other drinks in the market. Parle decided to name the product Thumbs Up. But it removed the B later to ensure that the name is not generic. In 1978, Thums Up was launched with heavy advertising and the tagline ‘Happy days are here again’. The ads positioned to have Thums Up with Indian food items which would later become a habit for Indian consumers.

In just 2 years, Thums Up became the preferred choice to fill the gap left by Coca Cola. The unique taste and aggressive advertising helped it overcome competition from other players like Campa Cola. They kept spending to increase brand awareness by roping in cricketers like Sunil Gavaskar, Ravi Shastri and Sandeep Patil for TV ads.

In 1982, Campa Cola decided to cut the price on its 200 ml bottle to capture market share from Thums Up. Thums Up reverted with something completely unexpected. Instead of reducing prices, it increased the bottle size to 250 ml at the same price. And labelled the larger bottle as Maha Cola. Maha Cola made Thums Up even more popular. In 1983, its market share was around 60% with Campa Cola the distant second.

Coke Returns with Pepsi

In the late 1980s, India’s financial condition was no so great. There were discussions to open foreign investments into the country. This meant that Coke and Pepsi can enter India. In 1990, Pepsi arrived in India with its three major beverage brands: Pepsi, Mirinda and Seven Up. It heavily promoted Pepsi among the Indian consumers by distributing free coupons and advertising on billboards.

In 1991, Pepsi conducted a survey in Bangalore to gauge people’s preferences in soft drinks. The results were shocking. Only 10% of the people surveyed preferred Pepsi over Thums Up. Pepsi decided to use its financial muscle and ran extensive ad campaigns on TV with Juhi Chawla, Aishwarya Rai, Sachin and Shahrukh Khan in coming years. In response to Pepsi’s ads, Thums Up changed its tagline to ‘Taste the Thunder’ and ran many campaigns around it. It is probably the longest-running tagline for a brand with ads made with stars like Salman Khan, Akshay Kumar and Ranveer Singh over the years.

In a lot of its ads (like below) Thums up downplayed Pepsi by calling it a drink for kids. And positioned Thums Up as a drink for grown-ups. These campaigns helped Thums Up control the loss of market share to Pepsi. Pepsi remained No 2 in market share behind Thums Up.

In 1993, Coke finally made a comeback and was hell-bent on getting back its No.1 position. It decided to buy out Thums Up and other soft drink brands of Parle. Legends have it that Coke even told Parle executives that if they don’t sell Thums Up, they would supply free Coke to the entire country for a year. Under a lot of pressure, Parle sold Thums Up, Gold Spot, Citra and Limca to Coca Cola for 60 million $ in 1993. Coke discontinued Gold Spot and Citra later.

After the acquisition, Coca Cola reduced its focus on Thums Up. It wanted Coke to become the number one brand in India and pumped money into pushing it across India. But the demand for Thums Up remained strong and it continued to rule the market ahead of both Pepsi and Coca Cola till 2012. Only in 2013, it was overtaken by Sprite in terms of market share. But, even today it clocks around 6500 crores INR a year in sales and is on its way to becoming a billion-dollar brand for Coca Cola.

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References

1. How Thums Up stole Coca Cola’s thunder - Livemint

2. The brand that refused to die - Business Today

3. Images source - Google images and oldindianads.com

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Author's Note
Today's SNAP is about the interesting turnaround story of Tanishq, which was close to being shut down by Titan. This piece was possible only because of the must-read book: ‘Titan: Inside India’s most successful consumer brand’ written by Vinay Kamath.

Titan, probably the most popular Indian lifestyle company is worth close to 19 billion $ in market capitalization. The company which started with producing and retailing watches has forayed into jewellery (Tanishq), eyewear (Eyeplus), sarees (Taneira), perfume (Skinn) and a lot of other lifestyle products (Fastrack) as well. Today, it’s the crown jewel of the Tata business empire generating close to 2.8 billion $ in revenues through 1700+ stores across the country.

But Titan would not have scaled such heights without Tanishq, its jewellery business. Today, Tanishq accounts for close to 80% of Titan’s revenues and profits. Things were not all that rosy in 1996 when Tanishq was first started. Sales were low, losses were mounting, and Titan was considering shutting Tanishq down. But, then, a couple of crucial changes saved Tanishq.

Setting up a new business

Started in 1984, Titan had managed to get a lion’s share of the Indian watch market by the mid-90s. As a logical next step, it started looking at other relevant industries to expand. Indian households hold close to 1 trillion $ worth of gold in the form of jewellery which is equivalent to 11% of the total global deposits. Titan decided to tap into this huge love for gold jewellery and launched a brand called Tanishq.

Till then, Gold jewellery was a highly unorganized business sector where families bought from their trusted local jewellers. There was not a lot of focus on variety in designs. Tanishq decided to challenge this status quo by using 18 carats gold jewellery instead of the more popular and common 22 carats gold jewellery. The 18-carats gold, though lesser pure, allows creating better designs, lesser expensive and scratch-proof jewellery.

The first Tanishq store was opened in Chennai in 1996. Tanishq kept pushing the 18-carat products but the sales were low. Titan kept adding more stores, but things didn’t change. Very soon, they realized their mistake. Gold jewellery in India was not just an ornament. Instead, it was considered an asset: a store of value and wealth. Hence, Indians always preferred the purer 22 carats over the 18 carats products.

Despite that, Titan didn’t give up. They hoped that they would be able to make Indians fall in love with the 18-carat products. Till 2001, Titan tried absorbing Tanishq’s losses which had mounted to 150 crores INR in the past 5 years. The constant erosion of money impacted Titan’s stock badly which hit lows of 2 Rs in 2001. The Tatas have had enough of it and couldn’t let the company continue losing money.

Turning things around

In the year 2002, McKinsey was engaged by Titan to run a study of Tanishq. After McKinsey’s presentation to the board, Ratan Tata left the decision with Late Xerxes Desai, the then CEO of Titan. Xerxes decided to continue with the jewellery business but introduced a slew of changes. The first thing that he did was to accept and correct the mistake of selling 18-carat jewellery. They quickly introduced the 22-carat jewellery in all their stores. This helped Tanishq gain more traction in the market.

But they had another major hurdle to cross. Most of the Indians preferred to buy gold jewellery from their trusted and known local jewellers. They didn’t trust other players because of the fear of getting impure gold. To tackle this, Titan introduced a major innovation that changed its fortunes forever. They introduced a device called Karatmeter in all the stores. It was a gold purity testing device imported from Germany at a cost of 10 lacs INR per piece.

The Karatmeter campaign

Armed with the Karatmeters, Tanishq ran an ad campaign (video below) where it offered its customers to bring their old jewellery and get its purity tested for free in their stores. This campaign received a huge response from the customers and the stores started getting a footfall. At the same time, there was a lot of resentment from thousands of local jewellers. But Tanishq stayed put.

This campaign opened doors to a lot of new customers who had never been to Tanishq. They got to experience the service and product variety of Tanishq. But the overall experience was a sad one for the customers. Almost 60%of the jewellery tested in the Karatmeters came out to be less pure than what the local jewellers had promised the customers. This hurt the trust that these local jewellers enjoyed.

But wait, the sales at Tanishq were still not going up despite getting so much footfall. Jacob Kurien, then COO tried to dig deeper by talking to some customers. And he realized that all Tanishq did was make the customers feel bad. They were making the customer aware of the problem but we’re not solving it for them.

After a lot of internal deliberation, Tanishq added a solution to the problem by introducing the ‘Impure to Pure scheme’. If a customer brought jewellery that was lower than 22 carats but higher than 19 carats pure, he/she could exchange it with Tanishq’s 22-carat jewellery by just paying for the making charges. For purity below 19 carats, the customer would need to pay out the difference as well. This scheme worked wonders for Tanishq. A lot of stores started doing almost 1 crore INR in daily sales. In the process, Tanishq created a large customer base who trusted the brand now. And after that, there was no stopping Tanishq.

Rise from Ashes

Tanishq sales kept rising YOY and soon it surpassed the revenues of the watch division. In the coming years, Tanishq expanded its portfolio by adding sub-brands: Mia for working women, Rivah for wedding jewellery and Raga – watch designed as a jewellery product. Later in 2016, they also acquired Caratlane, an e-commerce platform for jewellery. A loss-making entity till 2003, Tanishq today clocks close to 16000 crores INR (2.2 billion $) annual revenues, which account for 80% of Titan’s total revenues. Even the stock has given phenomenal returns (41% CAGR) rising from Rs 3 in 2003 to Rs 1465 at present. And that’s how Tanishq survived and thrived despite all odds against them.

That’s all for today. See you all in the next post 😊 . Don’t miss the like button and do share if you liked the story !!

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References

1) Titan: Inside India’s most successful consumer brand by Vinay Kamath

2) Titan’s 2020 Annual Report

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Indian detergent market is intensely competitive with both local and global brands vying for market share. It can be divided into 3 segments: premium, mid-range and mass. In the present times, Ariel and Surf dominate the premium market. Tide, Rin and Henko rule the mid-range. And finally, Ghari, Nirma and Wheel compete for the mass segment. In terms of revenue split, mass segment is the largest accounting for 45% of total detergent revenue. Mid-Range & Premium segments account for 40% and 15% respectively.

But before 80s, the competition was less intense. HUL’s Surf held the title of No.1 detergent brand followed by Nirma. While these large brands from HUL, P&G and Nirma competed for dominance, Ghari, a small family owned business toppled them to become the market leader. Today, it clocks close to 5000 crores INR in revenue and has retained the No. 1 spot with 20% market share in the detergent segment.

HUL’s monopoly and challengers

In 1960s, HUL’s Surf was the largest branded player in the Indian market. Surf targeted the premium segment whereas mass and mid-range segments were catered to hundreds of unorganized players. In 1969, Nirma was launched as a cheaper alternative to Surf. The price point was kept low to focus on mass and mid-range segments. With no large competitor in sight, Nirma became the No.1 detergent by market share in 1985.

HUL realized that it was missing out on these segments and launched Rin and Wheel for the Mid-Range and Mass segments respectively. Wheel and Rin managed to gain the lost market share from Nirma. And by early 2000s, Wheel replaced Nirma to gain the No.1 spot.

Ghari: The Gamechanger

In the 80s, Muralidhar and Kumar Gyanchandani ran a small family business of selling oil soap in Kanpur. In 1987, the duo launched a new detergent brand called Ghari (Clock in Hindi). Despite being a new entrant, it priced the product above Nirma, the industry leader back then. Nirma and Surf were the major players back then and Wheel was yet to be introduced. They had a clear focus on the mass segment. In 2012, Ghari dethroned Wheel from the top position and has retained it till date. Here is how Ghari managed to win the top spot competing against much larger brands:

a) Reading the consumers’ mind: The consumers (female housewives mostly) associated more foam in a soap/detergent with the quality of the product. More foam meant good quality product. Ghari leveraged this insight and advertised that their product generates a lot of foam reflecting higher quality than the competitors. In its advertising, the company used the tagline: “Pahle istemaal karein, phir vishwas karein” (Try before believing). This confident claim helped in getting the customers curious to try this new product.

b) Leveraging the gap in the brands: Surf was a premium high-priced quality product. On the other hand, Nirma was the cheaper alternative which was considered to have lower quality. Ghari positioned itself as a better-quality alternative than Nirma leveraging the “More Foam” insight. This made Ghari a preferred choice in the mass segment despite of pricing slightly above Nirma.

c) Focused growth: In the beginning, the founders knew that they could not afford to distribute the product at a national level. Hence, they decided to focus solely on their home state of Uttar Pradesh (UP). They started gaining good traction and became a famous brand in UP in just a few years. Only after establishing itself in UP, the company started to expand to the neighboring states of MP, Bihar, Punjab, and Haryana. Even today, it has strong presence and North and West Indian states. But it is highly likely that people from Southern states might have not heard of it at all.

d) Innovative marketing: The company spent only 2% of its sales on advertising. Ghari never hired any celebrity from its early days till 2000s. But it used very innovative means for advertising. They sponsored the popular Mahabharat show on TV which was watched in millions of households. Also, they advertised on the exteriors of major trains like Pushpak Express and Swarna Jayanti Express in the North Indian states. These campaigns increased the brand recall of Ghari in the mind of consumers.

e) Cost savings: 20 manufacturing units and depots have been set up very close to the core markets which reduces the transportation costs. Unlike other large players who outsource parts of their operations, Ghari has kept all the process from manufacturing to packaging and distribution in-house. Even the fleet of 500 trucks which delivers the products is owned by the company. This means lesser expenses for Ghari compared to its competitors who outsource their operations. Because of this cost advantage, Ghari can offer higher profit margins to the dealers who in turn, push the products to the customers.

Ghari’s success has changed the fortunes of the owners who renamed the company as RSPL (Rohit Surfactants Private Limited) in 2005. RSPL is a diversified conglomerate today which generates over 6000 crores INR in revenues from different businesses. Ghari still contributes to more than 80% of the group’s revenues. But in recent years, RSPL has also launched many other brands like Xpert (dishwash bar, powder, and gel), Venus (bathing soap), Proease (sanitary pads), Red Chief (Footwear) and Namaste India (dairy brand). Apart from that the group has also started Real Estate and Renewable Energy ventures.

That’s all for today. See you all in the next post! If you enjoyed reading this post, please share it with your friends :)

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REFERENCES

1. https://www.nextbigbrand.in/how-ghari-challenged-the-detergent-giants-and-emerged-as-a-market-leader/

2. https://bloncampus.thehindubusinessline.com/columns/brand-basics/standing-the-test-of-ghari/article24154953.ece

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Who is India's 2nd largest retailer?

First, let's address the elephant in the room. India's largest retailer is Reliance Retail. At a revenue of ₹1,30,566cr ($17.9B) and 10,900 stores, it is definitely an elephant.

But who comes in second? Is it D-Mart? BigBazaar maybe? No.

India's second-largest retailer is TASMAC. At a revenue of ₹31,157cr ($4.3B) and 7000+ outlets, it comes a distant second to Reliance Retail. And ahead of D-Mart which is at ₹24,930cr ($3.5B).

What's interesting though is it retails in only one state in India - Tamil Nadu. In fact, TASMAC stands for Tamil Nadu State Marketing Corporation. And you can guess by the name, it is a government-operated company.

What's more interesting though is it sells only one product - alcohol.

How is it that a company which sells only one product in only one state the second-largest retailer in the entire country? The answer is more 'politics-driven' than 'business-insight-driven'.

The birth of TASMAC - the wholesaler

Prohibition of alcohol is an age-old topic in Tamil Nadu. It was first introduced pre-independence in 1937 and stayed that way for the most part till 2001. Many elections were fought on this topic, with promises oscillating between lifting or resuming the ban. This resulted in the ban being lifted thrice during this 60 year period - between 1971-74, 1981–87 and 1990-91.

One of the reasons often cited for lifting the ban was the consumption of spurious liquor in absence of legal alcohol sale. So in 1983, when the ban was lifted for the second time, two corporations were set-up - Tamil Nadu Spirit Corporation to manufacture liquor and Tamil Nadu Marketing Corporation (TASMAC) to sell liquor.

Tamil Nadu Spirit Corporation would be shut down a few years later when prohibition was brought back in 1987 but TASMAC would go on to survive the prohibition years.

In 2001, at least 100 people died in three separate incidents involving methanol consumption. Methanol was a dangerous liquid being used in place of alcohol to create spurious liquor.

The government came out all guns blazing after this spate of tragedies. Prohibition was lifted across the entire state. TASMAC was made the only entity (monopoly) for wholesale of Indian made foreign liquor (IMFL), ie, buy liquor from the manufacturer and sell to retailers, the shops and bars from where you bought liquor.

IMFL refers to all types of liquor other than indigenous ones. So beer, whisky, scotch, etc come under IMFL while toddy, fenu and arrack come under indigenous liquor.

The birth of TASMAC - the retailer

The prohibition lift of 2001 was here to stay. The state government would auction licenses to run liquor shops and bars. Those who won & set shop would buy liquor from TASMAC.

But another problem cropped up. The retailers apparently were ganging up (also called 'cartels') and under-reporting revenue numbers. The state was losing significant revenue since tax on alcohol was a major contributor to the government's coffers.

So in October 2003, the government made TASMAC sole retailer of alcohol in the state. By 2004, all private outlets selling alcohol were either shut down or taken over by the company. TASMAC became a monopoly with no other player left, controlling entire wholesale & retail.

It's because of this monopoly that TASMAC, despite selling in only one state, is in the league of Reliance Retail & D-Mart's revenues which sell across India. There are other Indian states that sell equal or larger amounts of alcohol but they are split among many retailers.

TASMAC - the organization

In typical public-sector fashion, TASMAC is governed by a board comprising of IAS officers which is chaired by the Minister of Prohibition and Excise. To ease management, they have divided the state into 5 regions: Chennai, Coimbatore, Madurai, Trichy and Salem. Each region is governed by a regional manager. The regions are further subdivided into 33 districts run by individual district managers.

TASMAC has over 30,000 employees and manages 7000+ retail outlets across the state. Retail shops don't have any names. Instead, they have a unique number called the "TASMAC Shop Number".

TASMAC's Scale & Growth

TASMAC revenues have grown at a rapid pace since it's inception rising close to 20% year-on-year. In the fiscal year 2018-19, TASMAC clocked ₹31,157cr in revenue ($4.3B). Hard liquor like whiskey, rum, brandy and vodka account for about 80% of sales. Beer accounts for the remaining 20%.

As you can see from the table above, sales have tripled in the last decade (good or bad thing??). TASMAC has come under criticism in recent years with discussion centering around few of the shops being situated close to educational institutions and children under the age of 18 being found in an inebriated state.

While calls for prohibition cropped up again around 2015-16, it is difficult to imagine the state government relenting to the demand. TASMAC sells close to 19.2 lakh bottles of hard liquor and 9.6 lakh cans of beer daily which translates to almost ₹90cr ($12.3M) of daily revenue for the state.

This was one of the reasons the government rushed to re-open TASMAC shops post-Covid lockdown creating a mad rush among the citizens (facepalm!).

TASMAC is an example of the role government (or regulation) can play in the growth of a company. Despite not having any other business advantage (better product or price or distribution), they have grown tremendously over the last two decades.

That's it for today. See you again next fortnight! Till then, let us know what's the size of alcohol revenue in your state.

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REFERENCES

1. Prohibition History of Tamil Nadu

2. About TASMAC

3. Reliance Retail

It started off as a whim in May this year. Work was relatively light due to business slowing down. And I had been locked up in a studio room alone for more than 45 days. I was writing threads on Twitter, and so was Azhar, when a Twitter friend suggested we start a newsletter. Why? Because everyone else was.

A week later, our first post went out. Within a week, we were at 200 subscribers. Four months later, we had crossed 4,000 subscribers.

Our hypothesis that there was a dearth of business writing in simple, no-jargon language was validated. More importantly, we learnt long-form content need not be laborious to read. With the right combination of engaging narratives & visual support, you can make long-form, as one of our readers put it, “a breeze to read”. The fact that our most-read pieces are also our longest pieces supports my point.

Our most-read pieces

1. What makes Jio different?
   17 minutes read | 37,500 views

2. How VC works - A Beginner's Guide
   14 minutes read | 26,400 views

3. How did Dream11 become India's first gaming Unicorn?
   14 minutes read | 9,400 views

In comparison, all our other long-form pieces averaged 5,400 views for an average read time of 8.5 minutes.

The big blow.

But enough of the positives. We had our fair share of lows too (who didn’t in 2020!!). We lost our momentum in September, after 4 months of sprinting. Burnout is real. Being unable to whip up even 100 words after an hour of screen-staring is de-motivating and surprisingly exhausting.

We learnt that consistent long-form writing is difficult. Putting in 20+ hours after office every week can get really tiring. So we put a hold on writing for 3 months before picking it back up (slowly) this month.

What was heartening to see though, was the engagement on our website despite not being active for 3 months. During the inactive period (Sep-Nov), we gained 2,000 subscribers and registered 27,000+ page views.

The big promise.

The reward that we get out of churning out a well-researched post plus all the reader love that we got the last few months is too good to leave. Burnout slowed us down but definitely did not stop us. We have a few exciting pieces in our drafts and we cannot wait to send them to you in 2021.

However, to keep things sustainable, we will be pinging your inboxes (email/whatsapp) every fortnight, instead of every week.

We wrote 16 posts this year (10 long + 6 short) and are closing 2020 at 6,800 subscribers and 142,000+ cumulative page views. We hope to better this in 2021.

Thank You and Happy New Year :D

One last thing.

A lot of our readers also call us “Simplinations”. No complaints. We love it! So we ended up buying the domain and setting up a webpage. Do check it out here.

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Author's Note: Ok so, before we get into today's post, we have two requests. If you like the post and learn something new from it, do click on the heart icon. Second, do share the post with your colleagues, friends and family to help us grow 🙂

In India, close to 76% of the people in workforce are working without any employment contract. And approximately, half of these are daily wage earners earning anywhere between 150 INR (2 $) to 1000 INR (13.5 $) per day. Hence, unlike the more fortunate ones, they buy products of daily use (food items, toiletries, etc.) very frequently (either daily or after every 2-3 days). And to reach to this underserved customer base, FMCG companies introduced sachets. A daily wage earner cannot afford to spend 300 INR (4 $) on a bottle of shampoo but can buy a 2 INR (2.5 cents) sachet which would last him for 2 days. And that's why almost every FMCG product in India: toothpaste, shampoos, detergent, hair oil and even coffee has a SKU which is sold in a sachet.

But close to 40 years back, most of these FMCG products were sold in large packets and bottles. Hence, they were only limited to those who were well off. There was no concept of sachets back then. But, a small entrepreneur from Tamil Nadu introduced the concept of sachets to the entire country forcing even the large MNCs to follow suit. In the process, he ended up building a 500 crores INR shampoo brand called Chik. And today, almost 70% of the shampoo sales in India happen in sachets.

In today's Simplanation, we would go through the growth story of Chik, its effective marketing and sales strategy.

The Beginning of Chik

In 1978, Chinnikrishnan, an agriculturist also ran a small pharmaceutical business in Cuddalore, Tamil Nadu. In an attempt to innovate packaging of products, he created the concept of sachets. First he packed talcum powder into small sachets and started selling them to nearby shops. After sometime, he also thought that liquid could also be packed in sachets. And that's when he started selling shampoos in sachets as well. His vision was to make affordable products which could be used by coolies, rickshaw pullers and other daily wage earners. But, he couldn't market these products well. He passed away in 1982.

The small business was overtaken by his sons who started a small regional company called Velvette shampoo which sold its products in small parts of Tamil Nadu. The youngest brother, CK Ranganathan decided to part ways with the brothers in 1983 and started his own cosmetics business with savings of 15000 Rs. He started manufacturing shampoo sachets in a small shed and hired two chemistry graduates to work on formulations. He named the shampoo Chik, priced at 0.75 INR which was affordable for even the poor daily wage earners. His primary target was the south indian rural market. In its first month, Chik sold 20k sachets.

In its second year of operations, Chik became profitable and started gaining good traction. After becoming a common name in the rural markets of TN, the company shifted base to Chennai in 1989 and named itself Beauty cosmetics Pvt Ltd. By then, few other players like HUL and Godrej had also entered this segment but Chik was still much ahead of them in the sachet segment. Unlike his family business which was slow to grow, CK Ranganathan deployed multiple marketing and sales tactics which helped Chik become a famous brand in the state of Tamil Nadu.

Marketing and Sales strategy

The success of Chic shampoo lies solely in understanding the needs and behavior of their customers well. And all their marketing strategies reflect a great empathy for their consumers.

Firstly, to attract and educate rural customers, a lot of whom had never used a shampoo in their life, Chik sales staff started running free movie shows in the villages of southern states of India. With limited access to any kind of entertainment, these free shows drew huge crowds. Between the movies, they played ads and showed live demonstration of using a Chik shampoo. They also gave free sachets to audience to try. This helped them gain a great brand awareness to the extent that the name became synonymous with the shampoo category.

With bigger FMCG players entering around 1988, Chik adopted an innovative scheme where a customer could return 5 sachets of any shampoo to a retailer and get a Chik Sachet free. The scheme was later altered where they started giving a free shampoo in exchange of sachets of only Chik Shampoo. The price sensitive customers started buying only Chik Shampoo. Though the scheme was discontinued after 10 months, the habit of the customers continued. This scheme worked wonders for the company with sales almost doubling to 10 lacs sachets per month in just an year's time. The turnover crossed 1 crore INR in 1989.

In 1990, the company launched two variants with floral fragrances: rose and jasmine. In the southern part of the country, women typically decorate their hair with jasmine flowers. This move again worked very well for Chic and they tripled their sales to 30 lac sachets per month by 1991. All these efforts bore fruit and Chic became the number one shampoo brand in South India.

Expanding to other parts of the country was a tougher challenge given that Chik was famous only in the southern part of the country. So, it wanted that the distributors push their products more to the wholesalers and retailers and the retailers display Chik in more prominent parts of the store and ask the customers to buy this new product. Hence, they started offering the distributors and retailers 1-2% extra margins compared to the competition. The competition brands didn't want to give up on their margins and hence decided to stick to the older structure. This helped Chic grow some good traction in other parts of the country as well. By 1992, the annual revenue of the company had reached 12 crores INR.

In 1998, the company's name was changed to Cavin Kare (Cavin means beauty in Tamil) from Beauty Cosmetics. In 1998, the company had a market share of around 6%. The shampoo sachets from most of the companies used to cost between 1 and 2 INR. Basis the consumer research, they found that still a good segment of customers were not buying shampoos because they found the price point costly. So, they launched a 0.50 INR shampoo in 1998 which became a blockbuster hit. By 2003, Chik had become the second largest national brand in India with 22% market share, just a little below HUL's Clinic Plus. The revenues had reached close to 200 crores INR by 2003.

Positioning Handicap

Chik was always known for being a low cost shampoo. With more demand for premium shampoos like Sunsilk, Dove, etc, Chik also tried to upgrade its positioning by launching Chik Satin as a premium product. But given the associated brand image, it was very difficult to extend the same into premium shampoos as well. Hence, the new product was a failure. With this handicap of positioning, Chik's growth plateaued and other brands started growing through premiumization. One more trend that Chik couldn't catchup on was the introduction of anti dandruff shampoos which went on to become 25% of the total market size by 2011. Chik did not introduce any anti dandruff shampoo. Chik's market share had gone down from 22% in 2003 to a mere 5% in 2011.

But even today, Chik is a famous brand in the rural parts of the country which made sachets so popular that almost every FMCG product has a sachet version today. Today, it clocks close to 500 crores INR in revenues every year & is the biggest brand of the 2000 crores INR Cavin Kare group. Apart from the shampoo, company launched some more interesting products like Spintz perfume sold in 10 INR bottle and Fairever cream with Kesar (saffron) which also became big hits. Today, the group has over 100+ products in F&B and personal care space. Chik did manage to introduce sachets on a large scale making daily use products affordable for millions. But, at the same time, these sachets have been one of the major causes for pollution of rivers and landfills. And that's something that both the company and the society should have been thoughtful about.

Ok, before I finish, I got to know one more interesting point that I never really noticed. The per unit price (per ml price) in a shampoo sachet is always cheaper than the per unit price in a shampoo bottle. And, the same hold true for other products as well. Ever thought why is that the case ? Do share your thoughts in the comments 🙂

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REFERENCES

1. https://bloncampus.thehindubusinessline.com/columns/brand-basics/long-lasting-gloss-of-the-chik-story/article24895953.ece

2. https://m.rediff.com/money/2008/sep/17cavin.htm

3. https://www.livemint.com/Companies/LIANw0QeehKTyU9DJvt6eP/Instant-recall-CavinKare-style.html?facet=amp

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Author's Note: Before we get into this, we are sorry that we disappeared for close to 3 months with no new posts. Though we were trying to write the pieces, we felt that writing a piece every week was taking its toll on us. It was getting very difficult to balance things. So, we thought of taking a break which got further extended due to some personal and professional commitments. Going forward, we will now send our posts fortnightly to be able to manage the load without compromising on the quality. And again, sorry to make you folks wait this long.

Though there are hundreds of successful products that we use in day to day life, very few of them go on to achieve a cult status and die-hard fan following. Royal Enfield, the most loved bike company in India has managed to achieve that status in the past 2 decades.

This iconic brand has close to 95% market share in the Indian mid-size bike segment (250cc to 750 cc) and sells close to 8 lac bikes every year. Not only in India, Royal Enfield also has the highest market share in the UK mid-size bike market as well.

In the stock market as well, Royal Enfield's parent company, Eicher Motors has been among the top performing stocks in the past 2 decades rising from 19 INR in 2001 to 28400 INR in 2017. That's a staggering 57% CAGR growth in the stock price for 16 years.

But things were not always so great. Back in 2000, the brand was close to be discontinued because of its dismal business performance. So, how did Royal Enfield's fortune change in such small time ? That's what we would try to understand in today's snap.

But before we get into that, let's first quickly understand the different segments in the bike market.

The Motorcycle Industry in India

Like other sectors, the motorcycle market can also be divided into mass segment, mid segment and premium segment. And, goes without saying that in a country like India, the mass segment is the largest followed by mid and premium segments.

In India, the mass segment of the motorcycles consists of commuter bikes in the range of 100 to 200 cc. These bikes are generally cheaper in the range of (50,000 INR to 1,00,000 INR). Some of the popular bikes in this segment are Hero Splendor, TVS sport and Bajaj Pulsar. In the period 2012 to 2018, this segment has been shrinking at an annualized rate of 2%.

Coming to the mid size segment where Royal Enfield competes, consists of bikes in the range of 250 to 750 cc, which are more aspirational and stylish than the functional mass products. Some of the popular bikes in this segment are models from Royal Enfield, KTM Duke, Yamaha, Bajaj Dominar and some models from Harley Davidson as well. The price of these bikes range anywhere between 1.25 lacs INR to 5 lacs INR. In the period 2012 to 2018, this segment has been growing at an annualized rate of 3%.

Finally, the smallest premium segment which consists of the costliest bikes mostly above 5 lacs INR. Greater than 750 cc, some of these high performance and luxury bikes are Triumph Street Twin, Kawasaki Z900 and some models from Harley Davidson. In the period 2012 to 2018, this segment has been shrinking at an annualized rate of 2%.

In all these segments, Royal Enfield chose to play only in the mid size segment which is growing at a decent pace. Also, it allows Royal Enfield to straddle the position of being functional for commuting and being stylish and aspirational. Ok, so let's go back to the history of Royal Enfield.

The Beginning - World War connection

Though Royal Enfield is presently owned by Eicher Motors, an Indian company, its story began in 1891 in the UK. Two entrepreneurs, Bob Smith and Albert Eadie bought out George Townsend & Co, a needle manufacturer from past 50 years which had recently started manufacturing bicycles.

After two years in 1893, the company won a contract to supply parts to Royal Arms Factory of Enfield. To celebrate this order, the company was renamed as Enfield Manufacturing Co and called their first cycle "Enfield". Later in 1894, the bicycles were renamed as Royal Enfields with the associated tagline: "Made like a Gun" used even till date.

In 1901, the first Royal Enfield motorcycle was produced with an engine mounted in front of the steering head. It kept improving the model in next few years. In 1914, the company supplied motorcycles to the armies of Britain, Belgium, France, US and Russia for world war one. Fast forward to 1932, the legendary Bullet motorcycle was launched for the first time with 250, 350 and 500 cc models. In 1939, Royal Enfield supplied large quantities of military motorcycles, bicycles and generators during the second world war.

Entry in India and the downfall

Back in India, KR Sundaram Iyer started Madras Motors in 1949 to import British Motorcycles including Royal Enfields. In 1952, Madras Motors received an order of 500 Enfield bullets from Indian Army for patrolling. The order was supplied in 1953 and received good reviews from the army. To cater to the rising demand, Enfield UK partnered with Madras Motors to form 'Enfield India' and set up their first factory in Tiruvottiyur near Madras in 1956. Parts were received from UK which were then assembled in the new factory.

In 1970, Enfield UK closed its facilities and shifted the entire production to the Indian entity which supplied the bikes to all parts of the globe for cost advantage. In India, their 350cc bullet had become a big hit commonly used by Policemen, Army Men and even Milkmen.

During the 70s and 80s, people had to wait for 6 months to 1 year for getting a scooter or bike after placing the order. There were only a handful of bike companies with restrictions on the number of bikes they could produce. The Indian government had strict regulations in place due to which meant the Japanese firms which were technically more advanced could not enter India. This reduced the incentive for the Indian companies to innovate and they hardly tried making any improvements in their products.

In 1983, Escorts India got licensing rights of a bike from the Japanese company, Yamaha and started selling it under the name of Rajdoot 350. This was primarily aimed as a competition to the Bullet 350, the most selling model of Royal Enfield. Another bike called Yezdi from Javas India was also becoming popular in the same segment. Both these players started eating into the market share of Royal Enfield.

In 1991, when the economy was opened up for foreign investment, many new brands with Japanese technology started production and selling bikes in India. These bikes had much better mileage than Enfield bullets. These new and cost effective alternatives reduced the sales & popularity of Royal Enfield. By 1994, Royal Enfield was running huge losses and was close to bankruptcy. This was when it was bought by Eicher Motors, a tractor and commercial vehicle manufacturer.

Rise from the ashes

After the acquisition by Eicher Motors, things really didn't improve much. The younger generation was more attracted to the new 150 cc bikes from Yamaha, Hero Honda and Bajaj which had better looks compared to the Enfield which was going out of fashion. There was an image problem as well since bullet was looked at as a bike for the older men.

By 2000, sales had hit an all time low (only 2000 bikes sold per year) with only 30% of the production capacity getting utilized. There were regular issues and complaints from customers regarding engine seizures and oil leakages. Eicher Motors board wanted to discontinue Royal Enfield bikes as the losses kept mounting with no signs of improvements. But, Siddharth Lal, son of the CEO Vikram Lal asked the board to give a last chance to Royal Enfield & took control of the ailing unit. Siddharth who was only 26 years old back then was a big fan of the bullet.

The first thing that Siddharth tried to address was the mechanical issues with the bike. The team tried to strike a balance between retaining the rugged old looks and getting rid of the issues. They changed the position of the gears, designed a new engine and added an electric starter. This helped in reducing the complaints from 5% to 0.2% in few years.

The second was the image problem among the youth which considered bullet old fashioned and preferred the Bajaj Pulsars and Hero Karizmas. To attract this large market, the company launched a new bike 'Thunderbird' in 2003. This new bike had a fairly modern look compared to the older bullet models.

The company ran ads with the tagline leave home and tried to position Thunderbird as the exploration bike for the youngsters. Thunderbird took the market by storm and Royal Enfield was selling 32000 bikes annually by 2006. To build further on its new image, the company also started biking events like Himalayan Odyssey which promoted biking culture in India.

With improving demand and a new stylish image, Royal Enfield launched the Classic 350 cc model in 2009. This was big success as well. And Royal Enfield sold 50000 bikes in 2010, 25 times up from 2000. From a point where it was considered old fashioned, Royal Enfield had now become an aspirational brand with a cult like following. Royal Enfield bikes would also feature in many big movies especially when the lead actor played a military officer or a police officer. This subtle product placement also worked in favour of the brand giving it an aspirational image.

The company also revamped the in store experience for customers giving it a modern look. They also started retailing headgears, gloves and other related merchandise in 2009. All these strategies helped Royal Enfield combat the problems at hand and make a comeback.

Return to Glory

Today, Royal Enfield has 95% market share in the Indian mid weight bike segment. From 2010 to 2017, the company sales numbers went up from 50,000 bikes per annum to 6.6 lacs bikes per annum. In the last financial year, it sold close to 8 lac bikes.

It has 5 different products with traditional Bullet and Classic, Thunderbird for travelers, Himalayan for adventurers and the latest stylish Continental GT. By 2020, the company had 425 studio stores and 850 dealership stores throughout the country. In the UK as well, Royal Enfield's Interceptor 650 is the highest selling bike in the mid weight segment. The company already has presence in close to 15 countries and is looking to expand in USA big time. In the next 7 years, the company has plans to launch 28 new models.

Given that the company has established a loyal customer base and an aspirational brand image, it is expected to continue on the growth trajectory in India. In western markets, it plans to beat the foreign companies by offering better value for money to customers.

If you wish to read further about the story of Royal Enfield, you can check out this book "Indian Icon: A Cult called Royal Enfield" by Amrit Raj.

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REFERENCES

1. "Indian Icon: A Cult called Royal Enfield" by Amrit Raj

2. Eicher Motors Investor Presentation FY 19-20

3. History of Royal Enfield

4. Solving the mechanical challenges in Royal Enfield bikes

Mahabaleshwar, a hill station near Pune, Maharashtra contributes to around 85% of the total strawberry production in India. Mapro Garden, a strawberry farm, is the central tourist attraction in Mahabaleshwar.

More than a million tourists frequent it every year on a quest to see strawberry and other flowers bloom. But very few of them know that behind this tourist spot, is a large consumer enterprise generating around ₹500cr ($68M) in sales every year. Mapro Foods (short for Mahabaleshwar Products), a 60-year-old company that produces fruit jams, squashes, syrups and confectionery products is the enterprise behind the garden.

Strawberry farms, tourist gardens, a ₹500cr brand you (probably) haven't heard about - how did it all come to be?

The Beginning - Selling jam on a Vespa

Mapro Foods was started over 60 years ago with a small investment of just ₹800. Kishore Vora, a pharmacist by profession, observed that strawberries had a short shelf life. Due to this, farmers had to sell their produce at lower prices at times just to clear up the stock before the strawberries go rotten. He saw it as an opportunity and began procuring fresh strawberries from the local farmers to produce jam - a solution beneficial to both himself and the farmers. In 1959, he set up a small processing unit in an 8x12 feet room with two kerosene powered stoves, four vessels and a thermometer.

He started packing the jam in glass bottles and labelled them as 'Vora Jams'. Other competitors like Kissan typically had 25% fruit content. To stand out in the market, Mr. Vora ensured that his product had 45% fruit content. He would go from door to door on his old Vespa scooter selling the jam besides selling at his pharmacy. Soon, Vora Jams started getting traction and Mr Vora expanded his production base to four different houses. He also gave up his pharmacy career to focus full time on Vora Jams.

Jams aside, Mr Vohra also added dozens of new fruit products including crushes and squashes to the portfolio. To expand the company further, he got into a partnership with a friend in Mumbai in 1978. It was during this partnership that the name of the company was changed to Mahabaleshwar Food Products and Mapro was chosen as the brand name. Though the partnership got dissolved soon after, the brand name stuck. In 1983, a proper production facility was set up in Panchgani (20km from Mahabaleshwar) which would later go on to became the famous Mapro Gardens.

Change of Guard - A slew of new initiatives

By 1983, Mr. Vora had expanded the portfolio to around 300 products. But the reach of the products remained restricted to Mumbai and Pune. In the same year, Mr. Vora handed over the operations to his nephew, Mayur Vora. Mayur was a freshly minted business graduate from one of Indias top B-schools, IIM Bangalore. He had also just completed a short stint with Voltas. Under Mayur, Mapro began to transform into a company with a grander vision and sharper focus on profitability.

Among the first of Mayur's initiatives was to cut down the bulgy portfolio of 300 products. Only the best-selling ones were identified and doubled down upon. Today, Mapro sells around 70 products only.

The next was to open the Panchgani production facility to the public visitors (reminiscent of Willy Wonka and the chocolate factory). Taxi drivers in the surrounding areas were incentivized to bring Mahabaleshwar tourists to Mapro's facility - probably creating a first-of-its-kind 'referral program' where drivers received gifts based on the number of customers they brought in. With an increase in visitors, the production facility had to be expanded and a cafe was added to. Currently, close to 40lakh (4M) people visit Mapro Gardens every year. For comparison, the Eiffel Tower in Paris receives 70 lakh (7M) visitors a year. Opening up the production facility helped Mapro in three major ways:

1. Increase in brand recall without much advertising spend

2. Create a strong image of 'product made from fresh & natural fruits' in customers' minds

3. Create a testing ground for new products (a genius move in my opinion)

Mapro Garden

Finally, Mayur also identified opportunities for 'forward integration' for certain products. Forward integration is when a company that is producing raw materials (say milk) for a certain product (say cheese) also got into producing the final product. The reason companies forward integrate is because it results in better profit margins. Amul is an excellent example of this - a co-op of dairies that also began selling ice-creams, chocolates, cheese and other milk-based products. Similarly, Mapro which supplied strawberry syrup to ice cream companies (including big names like Kwality Walls) began to produce ice-creams under the Mapro brand resulting in higher profitability.

Strokes of Luck - Better financials

By the late 90s, Mapro had expanded distribution to most of the Western region of the country. Production needed to be increased to keep pace with rising demand. So in 1998, Mapro decided to build another production facility at Wai (near the Panchgani facility). The company reached out to multiple banks for a loan (to build the facility) but its application was never approved, due to some complication or the other. Seeing no other option, Mapro decided to slowly save up cash and build with its own money. It turned out to be a blessing in disguise. 7 years later in 2005, Mapro not only had a functioning second facility but also the rare debt-free balance sheet.

Another stroke of luck came in 2005 when the modern trade format (the large grocery stores like Spencers, More, Big Bazaar) was picking up steam. Stores were being set up across the country and standard practices from the west were being followed. One of the practice was to stock the stores with a leading brand and second-in-lead brand for every product category. In jams, Kissan was the obvious category leader. There was no other national player making Mapro the second-in-lead. Without an additional push, Mapro found itself on the shelves of all major retail chains across the country.

The final stroke of luck came in 2006 through a tax reform. Till 2005, consumer companies had to incur a huge tax expense - 16% as excise duty (tax on producing goods within a state), 15.3% in sales tax (tax on selling goods within a state) and 7% as Octroi (tax on moving goods from one state to another). This obviously had to be changed and it did. In 2006, excise duty was reduced to 8% for food products and sales tax was replaced by Value-added Tax (VAT) which was just 4% for food products. 2 years later, excise duty was completely removed for food products. This brought down tax expense for Mapro from almost 40% to a mere 10%, boosting its profitability.

The Future - Bigger, better, faster

With their jams and confectionery product lines performing well, the company has continued adding production capacity, setting up units in Satara (2006), Pune (2012) and Pathankot. Their distribution network now boasts over 400 distributors across 17 Indian states and also countries like USA, UAE, Fiji and Russia.

Sales have grown at an annual rate of around 25% for the last 15 years (🤯 ) on the back of constant innovation and product launches. A good example of this is when the company launched a pulpy fruity chewing candy "Falero" in 2008. Falero was a completely new product, becoming such a hit with consumers that even Nestle, Parle and Perfetti launched their own versions of it. Today, Falero contributes close to 50% of Mapro's revenues. Mapro also found success in the premium chocolate category through "Mazaana", a chocolate-coated nuts & dry fruit product.

With an aim to hit ₹1000cr ($136M) in sales by 2025 (double its current sales), Mapro is well on its journey to becoming an Indian FMCG giant.

REFERENCES

1. Mayur Vora's address at Entrepreneur Social (audio is not very clear)

2. Mapro's history

3. ‘Mapro spreads the Jam’ by Business Standard

Cafés are a pretty old business. The first café was set up in 1550 in Constantinople, kickstarting the concept of a place where people came and drank coffee (sounds weird when you describe it like that). The concept rose to prominence across Europe in the 17th century and spread across the globe over the next 200 years. It is no surprise that the coffee retail chain is a massive $60B business. And our love for coffee doesn't seem to be going anywhere since the market is growing at a healthy pace, well-poised to reach over $140B by 2025 (pre-CoVid-19 estimate; pretty sure this will be revised lower).

Starbucks is the most famous name in this space. Seeded in 1971, Howard Schultz built Starbucks into a behemoth with over 31,000 stores across 80+ markets. The immediate competitor to Starbucks is Costa Coffee at 4,000 stores (almost 1/8th of Starbucks). With $25B in annual sales (15x of Costa which is at $1.6B), Starbucks sits comfortably at the top. However, it shouldn't be sitting comfortably.

Because there's another player slowly eating into Starbuck's pie (cup??). The interesting part - it isn't even a coffee company. It's a burger company - McDonald’s!

McCafé - A caffeine boost to McDonald’s

McDonald’s launched McCafé first in Australia, in 1993, but it was not before 2001 that they started its expansion into the US. The idea was pretty simple but genius. You already have stores selling burgers. And these stores are generally situated in prime locations (meaning a lot of footfall). Why not use a portion of that as a café? More people will walk in for a coffee (higher sales). Might end up even buying a burger since they are already there (even higher sales).

Out of the 38,000 outlets that McDonald’s has globally, ~15,000 currently have a McCafé. This makes McCafé actually the second-largest coffee chain in the world by no. of stores, only behind Starbucks. Not just no. of stores but also by revenue. Roughly 15% of McD's total revenue comes from McCafe amounting to $3.5B. This is twice that of Costa Coffee who has been in the game for much longer.

In India, there are more McCafé outlets (~190) than Starbucks (~130). And McDonald’s plans to make all its 300+ stores in India have a McCafé by 2022. Starbucks will never be able to match this pace of growth. Even if it does, it will come at a cost much higher than what it will cost McDonald’s (because they have to rent new locations, etc while McDonald’s doesn't have to).

McCafé - a feature for McDonald’s?

There's a concept called 'featurizing' in tech. When a company takes an entire product (Product A) and adds it as a part to its existing product (Product B), this company has essentially featurized Product A, ie, added Product A as a feature in its own product. This is pretty common in the tech space. A good example being Google Duo (mobile video calling) being featurized by Whatsapp. Whatsapp just had to add a 'call button' to its existing messaging app. Another one is Slack (messaging for corporate teams) being featurized by Microsoft. Microsoft added 'Teams' (its messaging service) as an additional offering to customers already using Microsoft Office Suite (Excel, Outlook, etc).

Mind you, adding that 'call button' or creating 'Teams' is not as easy as it sounds. There is obviously a lot of work behind the scenes that goes into building them. So featurization is not about less effort, it is about distribution, ie, these companies already have a large group of customers using their existing product...so why not add one more product (as a feature) in their offering.

Through McCafé, McDonald's featurized cafés. Cafés, an entire product by itself, was included like an add-on to McDonald's existing product (restaurants selling burgers).

CIAO!!

References:

1. https://www.restaurantbusinessonline.com/financing/mcdonalds-hurting-starbucks-dunkin

2. https://www.businessinsider.in/retail/mcdonalds-mirror-of-starbucks-is-creating-a-nightmare-for-franchisees/articleshow/61120357.cms

3. http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MCD_2019.pdf

4. https://www.mashed.com/150643/things-you-didnt-know-about-mcdonalds-coffee/

5. https://www.moneycontrol.com/news/business/companies/every-mcdonalds-outlet-in-india-will-have-a-mccafe-by-2022-4149931.html

6. https://www.prnewswire.com/news-releases/global-coffee-shops-industry-300934636.html

7. https://qz.com/india/416670/this-indian-coffee-chain-is-beating-starbucks-at-its-own-game/

8. https://mcdonaldsblog.in/2019/09/mccafe-secret-behind-10-million-cups/

1. We are launching a referral program! If you like our work, refer your friends here to rack up a high score and win some exciting stuff (not to be revealed now :P). We are going to be tracking this through a soon-to-be-launched public leaderboard. Shoutout to Bharath and Sainath at Nodal for setting up our referral program in 5 minutes. 5 minutes!!!!

2. We got featured in Substack's newsletter yesterday. We are one of the 3 newsletters from India that were highlighted in the post. Yayyy!

On to today's piece...

“Imagine a world in which every single person on the planet is given free access to the sum of all human knowledge”

This is what Jimmy Wales says when asked what's Wikipedia doing. Wales, Wikipedia's founder, is not claiming tall things. Wikipedia is the most sought after destination online to learn about anything under the sun. It has over 54M articles published in 285 languages to date. It receives close to 1.5B unique visitors per month making it the 14th most visited website on Earth ahead of Amazon, Netflix and Instagram.

If you are one of those 1.5B visitors and are based out of India, you'd have seen the following message on almost every Wiki article you visited in the last month or two.

All of us knew Wikipedia offers its content for free but not many of us wondered how they made money. Thanks to this, many readers (at least in India) now know that Wikipedia is run majorly on donations from both individuals and corporations. Wikipedia, in fact, is owned by the Wikimedia Foundation which is a non-profit organization. And they run fundraising campaigns like this every year.

Interestingly though, Wikipedia never planned on taking your donations when it started. They actually wanted to earn through ads. Why did they not go down that path? The answer lies in Wiki's origin story.

Origins of Wikipedia

Jimmy Wales took up the job of an options trader after completing his PhD in Finance in 1994. This was around the same time internet startups were springing up. Realizing the growth potential that the internet promised, Wales left his job to start Bomis in 1996. It was a website for erotic photographs and soft pornography offered via paid subscriptions for users. Due to the internet boom in the late 90s, advertisers paid good money for the ad space on Bomis.

It was while running Bomis that Wales began to experiment with a side project called Nupedia, sometime around 2000. Nupedia was a free online encyclopedia for scholarly peer-reviewed articles on a variety of topics, a reflection of Wales's love for the Britannica Encyclopedia during his childhood days. It was launched as a for-profit venture under the Bomis group with a $100,000 investment. Nupedia would sell ad space in its articles to make money. (So Bomis had 2 types of content sites to sell ad space - soft porn and scholarly articles).

Nupedia relied on highly knowledgeable authors (preferably PhDs) who were experts in their fields to write the articles. It coupled that with an extremely strict review process. There was a strict 7 step review process set up to ensure the accuracy of the content, with the articles reviewed by multiple scholars and professors in the process. This obviously took a lot of time. In fact, it took so much time that only 21 articles were approved and published on Nupedia in its first year. The extremely bureaucratic process made no business sense and resulted in Nupedia shutting down in 2003.

Luckily for Wales, the team at Nupedia had started another side project called Wikipedia in early 2001. The name came from the Hawaiian word "Wiki" which meant fast. And that was the idea behind the project - allow collaboration of different users on an article to push it out faster. Eligibility rules and review process were simpler than Nupedia's. Anyone could contribute instead of just PhDs. And their contributions would be monitored by other community members or contributors, hence ensuring accuracy doesn't take a hit.

The entire Nupedia community quickly transitioned to Wikipedia. And in just a matter of 4 years, Wikipedia had a repository of 2M articles.

Just like Nupedia, Wales initially wanted to make money from Wikipedia by placing ads on the website. Because that was what Bomis was about. Create content to attract users & show them ads (what news websites do as well). Even the web address for Wikipedia was www.wikipedia.com indicating commercial interests.

This however met resistance from their Spanish users who felt commercial advertising would harm the sanctity of the site's content. The Spanish contributors, in fact, left Wikipedia in 2002 to start an independent ad-free project 'Enciclopedia Libre' as a form of protest. Wales quickly reacted to this development by making Wikipedia also ad-free. In the same year, he also changed the domain from Wikipedia.com to Wikipedia.org.

But that isn't the end of the story. In 2003, a few of Wikipedia's servers (remote computers on which web pages are stored) went down creating the need for a replacement. This needed significant money which Wiki didn't have because...well, no ads. It was then that Wales ran the first donation campaign, targeting to collect $20K in a month from the community of users. Instead, he collected $30K in just 2 weeks. This infused confidence about the possibility of donations as a continuous stream of income hence making it a regular affair.

This raises an interesting question though. Initially, Wikipedia shifted to a no-ad model out of pressure and fear from the possibility of an alternate ad-free online encyclopedia being created. However, 2 decades into existence, Wikipedia is so big that it is almost impossible to create another one. So, what stops Wikipedia from doing ads now?

There are three reasons for this, Wales says.

1. Higher ad rates in developed countries
   When a website wants to show display ads (those irritating ads on the side of news articles), it generally uses an ad network (like Google's) which provides it with ads. And the website gets paid basis two metrics: Cost per Click (CPC) and Revenue Per Mille (RPM). CPC is the amount the site is paid when a user clicks on an ad. RPM is the amount of money the site is paid when an ad gets 1000 views (called impressions). Taking the example of the largest ad network, Google Adsense, both CPC and RPM are much higher for developed countries than in developing countries. For example, the average CPC and RPM rates in the US are 4 times that of India.
   Now consider for a moment that Wikipedia earns only via ads. It would want to receive more traffic from developed countries because of the higher CPC and RPM rates. Which means there would be more articles on places, events, personalities, companies, etc. from the developed world only. The bias would be so strong that they would prefer an article of insignificance from the developed world (eg: a page on Kim Kardashian's dog) vs. an article of significance from the developing world (eg: a page on Indian elections). This goes directly against Wikipedia's cause of 'sum of all human knowledge for everyone'.

2. Tending towards commercial topics only
   The second form of earning through ads is affiliate links in articles. Websites can generate and embed a personalized Amazon link of a product in their related articles (eg: link to OnePlus phone in a phone review website). And if a visitor makes a purchase by clicking on that link, the website receives an affiliate commission from Amazon. Amazon is just an example. A lot of other e-commerce run affiliate programs too.
   The obvious problem here is that few types of articles are much better fit for affiliates than others. For instance, an article on Air Jordan shoes is a better fit than an article on Schrodinger's equation (what do you sell on this page?).
   If Wikipedia starts including affiliate links, they are incentivized write more on commercial products like iPhone, Tesla or a credit card vs writing on history, literature and maths. Just like the previous point, this will result in biased content.

3. Loss of community
   This last one is pretty obvious. Wikipedia works because of its community of over 250,000 editors. Given that it is not-for-profit, the users consider it honourable to contribute to this entire mass of the knowledge for free. If Wikipedia were to switch to a commercial model, there is a high chance that the majority of its community will stop adding/editing information for free. Without this highly engaged community, a lot of content will become outdated after some point in time reducing the value of Wikipedia.

These points make a lot of sense (and are noble too) but put Wikipedia in a position of risk. It is solely dependent on donations as an income stream (kind of like us :P). But it has expenses to pay, like employee salaries and hosting expenses for its millions of web pages (think 'storage expenses'). So, does Wikipedia receive enough money to cover all its expenses and then some? Or is it really at the brink of death like the donation request at the beginning of this piece made us feel?

Let's find out!

As per the 2018-19 audited financial report of Wikimedia Foundation, Wikipedia earned $120M in donations from both individuals and corporates. Few of the corporate donors include Google, Microsoft, Apple, Salesforce, Bloomberg, Adobe, and Cisco - many of them regular donors.

Total expenses were close to $91M with nearly 50% of this going towards salaries of a 400 member strong team. This means Wikipedia netted a neat $28.6M in profit. Not very bad, sorry, extremely good for a company that depends only on donations. In fact, Wikipedia has managed to post a profit every year since 2006 thanks to the generous (and deserving) donations.

Being profitable for such a long time has allowed Wikipedia to amass a sizable asset base of $176M, held either as cash or some form of investment. With liabilities of only around $10M, Wikipedia has a cushion of 2 years even if donations stop completely (highly unlikely though).

On top of all this, the organization also launched a Wikimedia endowment fund in 2016 to ensure the continuity of its existence. The idea of an endowment fund is to collect a huge sum of money and invest it somewhere. And then use only the money you make from returns to meet all your expenses (the initial amount invested stays intact and continues generating returns). The goal of Wikimedia's endowment fund is to raise $100M in the next 10 years. The fund has already received multi-million dollar donations from Amazon, Facebook, Google, billionaire George Soros, etc.

Given the yearly profit, large asset base, and a growing endowment fund, I'd say Wikipedia is in a pretty comfortable position financially. That said, donations are still its bread & butter, and that drying up would mean pulling the rug out from under Wikipedia's feet.

I'd have normally ended the piece here but thought we can do an interesting thought experiment instead. So here we go...

How much would Wiki earn if they actually did ads?

We did a few back-of-the-envelope calculations, obviously assuming the user community continues to contribute articles to Wikipedia.

1. $567M from display ads in a year
   How did we arrive at this? By multiplying the following numbers

   • No. of page views Wikipedia gets in a year: 263B

   • % of users without ad blockers: 80%
     Around 11% of the world's internet-connected population use adblockers. We took a higher number of 20% to be conservative.

   • No. of ads per page: 3
     Like other prominent ad-based news/content websites, Wikipedia can place up to 3 display ads per page - on the top, left and right. In mobile devices, it can choose to display ads in the middle of the page as well to remain at 3 per page.

   • % times an ad is actually shown in a spot that is available (called "Fill Rate"): 30%

   • Revenue per 1000 ad views (RPM): $3 ($0.003 per ad view)
     RPM rates are higher for developed countries and for certain niches like finance, real estate, & tech vs. music & books. For simplicity, we took an average of $3. We also assumed an equal proportion of visitors from developed & developing countries.

   Summary
   263B x 80% x 3 x 30% x 0.003 = 567M

2. $131M from affiliate sales
   As seen earlier, affiliate links in articles would be the second obvious form of monetization. We arrived at $131M by multiplying the following numbers, most of them being global averages.

   • No. of page views Wikipedia gets in a year: 263B

   • No. of articles with an affiliate link: 20%
     There was nothing to benchmark against. So we took a conservative estimate.

   • % of users who will actually click a link after seeing it (called "Click Through Rate" or CTR): 2%

   • % of users (from among who clicked the link) who will actually end up buying (called "Conversion Rate"): 5%

   • Average value of the item purchased: $50
     Okay, this is a tough one. The value of a purchase can range from something as small as $1 for a chocolate to $1000 for an iPhone. For simplicity, we assumed a conservative average of $50.

   • Average commission earned by Wikipedia on each item purchased: 5% of the purchase value

   Summary
   263B x 20% x 2% x 5% x $50 x 5% = 131M

Just these two sources put Wikipedia at potential annual revenue of ~$700M. It can top these by adding a premium membership (read without ads), a daily curated newsletter, and merchandise (cups, t-shirts, etc) which will take it closer to revenue of $1B. It's pretty incredible that Wikipedia/Wales has left this much money on the table to chase a nobler cause.

That's it for today folks. Ciao!

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More reads on the topic

1. How Jimmy Wales built Wikipedia - A podcast episode
   Guy Raz does an excellent job of eliciting Wikipedia's story from Wales. One you should definitely listen

2. Wikimedia's annual report

Author's Note
Huge thanks to Harish Udayakumar for patiently explaining how telecom technology works to me. I ate his head for 2 hours straight but he was very nice about it. He's a treasure-house of knowledge on the telecom & microprocessor sectors.

I'll be honest. The original version of this piece was about why American tech companies were interested in Indian telecom players. I had started writing this when the news doing the rounds was Facebook & Microsoft are investing in Jio, Google was in talks with Vodafone-Idea, and Amazon was interested in Airtel.

Fast forward to the present and all of Facebook, Microsoft, Google and Amazon have either invested or are in talks to invest in Jio/Reliance (I say Reliance here because Amazon is in talks to invest in the retail arm of Reliance and not Jio exactly). In addition to this, we all know Jio has gone on a fundraising spree raising more than $20B in less than 3 months.

Why are all these companies and investors lining up in front of Jio?

The most obvious answer is the promise of the Indian market. India now has more than a billion mobile subscribers. But more importantly, the number of internet users has been exploding. From just 22% internet penetration in 2015 (internet users divided by total population), India has seen it almost double to 41% in 2019 (463M users). The country is expected to cross 800M internet users in 2021. Taking into account both the high growth rate in internet users and the pending growth potential (at 800M users, India will be at only 60% penetration), we can safely assume that India will be adding the largest number of new internet users in the world in the next 3-5 years.

This obviously makes the Indian market very attractive to global tech companies and investors. But it only partly explains the interest in Jio. Because then, we would have seen investors lining up in front of Airtel, Vodafone Idea & BSNL too. Okay sorry, not BSNL...lol.

So what makes Jio different from the other telecom players?

I believe the answer lies in 2 advantages Jio has.

1. The tech advantage

2. The business advantage

1. The Tech Advantage

The architecture of Jio's mobile network technology is quite different from that of its competitors which gives it certain advantages. To understand it better, we have to dig into the basics of networking technology and its evolution

The 2G era (2002-2011)

How did calls work in the 2G era? What was the technology used? Let's view this through an example. Re-introducing Bala. Remember Venture Capitalist Bala from our previous post? He is in Bengaluru and wants to make a call to his friend Lata in Mumbai.

When Bala presses the call button on his phone app, a digital signal is sent from the antenna on his mobile phone to the nearest Cell Tower (also called Base Station). From there, the signal is transmitted to a Switching Center (imagine a small office building with lots of telephone wires).

This Switching Center is not a standalone office. It is actually part of a network of switching centers spread across the world. This network is called the Public Switched Telephone Network (PSTN). There's another option called the Integrated Services Digital Network (ISDN). The call you make from your mobile phone could use either of these networks depending on your telecom provider (basically whose SIM card you use).

So Bala's Switching Center contacts other centers in the PSTN/ISDN network to identify the center closest to Lata. Once Lata's Switching Center is identified and notified, it sends a signal to the Cell Tower nearest to Lata, which then transmits it to Lata's phone. It's at that point that Lata's phone rings. If Lata answers her phone, a connection is set up between Bala's and Lata's Switching Centers.

What do I mean when I say 'a connection is set up'? As we saw earlier, the Switching Center is part of a larger worldwide network (PSTN/ISDN). These centers are connected with each other via cable wires buried under land and oceans. One of these cables that runs between the Bala's and Lata's switching centers is reserved for the duration of the call. Because whatever Bala speaks is transmitted over this cable (in the form of electromagnetic waves) to Lata and vice-versa.

Now, Lata's Switching Center is situated 100s of kilometres away from Bala's Switching Center meaning there might not be a direct cable between them. So how do Bala's words reach Lata's switching center? The message actually gets transmitted in relay style, going via other centers in-between (Eg: Bengaluru → Tumkur → Hubli → Satara → Pune → Mumbai). For every call made, a different path could be used depending on which cables are available.

You could call this path a 'circuit' since it is essentially a closed path over which information flows from point A (Bala) to point B (Lata). And this process where the switching centers keep changing the paths/circuits for every call is called circuit switching.

The interesting point is the circuit switching network (PSTN/ISDN) actually pre-dates the 2G era and has existed for over a century. It was the network behind our landline telephones as well. In the era of landlines, there was a wire from your home phone to the Switching Center (carried over those scary-looking telephone poles). In the era of mobile phones, this connection between your home phone and the Switching Center became wireless while the connection between switching centers remained wired (so mobile communication is not entirely wireless!). This wireless technology that was built over the circuit switching network was called the Global System for Mobile Communications (GSM).

There was a competing tech that was built later called Code Division Multiple Access (CDMA). The difference between the two is too technical to explain here and it would suffice to say both did the same job but differently. GSM, along with CDMA, ushered in the 2G era.

But they had one major problem. Both networks worked only for voice calls. Mobile data (your internet, basically) could not be transmitted on this network. To tackle this, telecom operators then built another network parallel to the circuit switching network which transmitted data.

This 'network for data' works similarly to the 'network for voice' but only up to the Cell Tower. So if Bala is messaging "Hello" to Lata over WhatsApp, this information is transmitted over from the mobile antenna to the Cell Tower exactly like we saw earlier. From then on, the process is different. From the tower, the data is transmitted to a router (just imagine a scary-looking box). This router, like a Switching Center, is part of a network of routers. The router closest to Bala figures out the router closest to Lata. Again, routers that are far off might not be directly connected. So the information from Bala's router is routed (hence the name "router") via various other routers in between till it reaches Lata's router. From there, the information is transmitted to Lata's phone via the cell tower. And Lata's phone buzzes with a notification "Message from Bala".

However, there's one key difference between how the network of routers (the data network) works vs how PSTN/ISDN works. Like we saw earlier, PSTN/ISDN uses circuit switching to set up a connection and transmit voice. But the data network uses a process called packet switching. The message "Hello" that Bala is sending across is broken into pieces called 'packets'. These packets are sent from router to router till they reach the destination router. But they don't need to travel together. Each packet takes its own route to the destination router depending on the traffic on a particular path. Each packet has two bits of information - the destination id and a sequencing id. Destination id ensures all the packets reach the same and correct destination, ie, Lata's phone. Sequencing id ensures the packets are rearranged to the right order, ie "Hello", not "Ohlel"

Because voice calls use circuit switching, which involves reserving a cable between 2 switching centers, you pay based on the amount of time you reserve the cable for (₹X/minute). Because mobile data uses packet switching, which involves sending packets across routers, you pay based on quantity of packets send (₹X/GB)

The first version of this 'network for data' was called General Packet Radio Service (GPRS). GPRS enabled data speeds of up to 64 kbps. And few people called GSM (voice) + GPRS (data) combination 2.5G. Someone then developed a faster data network called Enhanced Data Rates for GSM Evolution (EDGE). EDGE + GSM was referred to as 2.75G and achieved data speeds of 170 kbps.

Do you remember seeing a G or a E near those network strength bars at the top of your old phones? Those stood for GPRS and EDGE respectively.

The 3G era (2011-16)

There was no major overhaul of the network architecture in 3G. The voice network (PSTN/ISDN) remained the same. What evolved was the data network. A new data network called the Universal Mobile Telecommunication Service (UMTS) averaging download speeds of 300 kbps was built for the GSM-based phones. In parallel, the Evolution-Data Optimized (EVDO) network was developed for the CDMA based phones.

3G data networks were later replaced by a new 3.5G tech called the High Speed Packet Access (HSPA), averaging download speeds of 1.5 mbps. This too was soon replaced by HSPA+ (3.75G tech) that achieved speeds of 4 mbps. Again, you would have seen these on your phone as 'H' or 'H+' near those network strength bars.

3G was essentially just faster 2G. The voice network was still a legacy one and data network was just marginally better. Telecom players had to operate both networks to provide a complete service. We were heading to a future that involved streaming heavy HD videos, office work being completely online, online gaming, etc. Data speeds required were significantly higher and to achieve that, network architecture had to be completely re-thought.

Enter 4G (2016-)

It was in 4G that the network architecture was reimagined from ground-up. If you look at 2G/3G architecture, voice network was the core and data was an afterthought. In 4G architecture, data took centre place. The voice network was removed making way for a single evolved network built just for data (the one with routers). This was called Long Term Evolution (LTE) and enabled download speeds of 12-15 mbps. Over time, it has now reached speeds of 60 mbps.

The beauty of 4G is that voice is also treated as data hence removing the need for a voice network. Basically, if Bala says "Hello" on the phone, the voice is broken into packets and transmitted over routers as it happens with WhatsApp messages. Since voice is carried over the data network, ie the LTE network, it is called voice over LTE (VoLTE). This works very differently from the PSTN/ISDN networks in 2G/3G and was the reason for the huge hullabaloo during its launch.

In 2G & 3G, because 2 different networks are used for voice and data, you cannot use one while using the other. When you used to browse on your laptop using a mobile phone hotspot, did you ever notice your internet stop working when you got a call? Its was because of this. Pretty uncommon now since most of us have shifted to 4G where both voice and data use the same network and can work simultaneously.

I know you must be thinking "Hey, all this is interesting (or boring) but I came here for Jio". We're almost there. Here's a quick summary before jumping into Jio.

So how does Jio have an advantage?

The advantage that Jio has over Airtel and Vodafone-Idea is that it is a purely 4G/LTE network. It was important to understand the weight of this sentence and that is why I spent some time explaining the technologies above.

Jio has to maintain only one network (the one for data) while others have to run one network each for voice and data. Equipment needed is much lower for Jio hence lowering their cost. Also, the voice networks that others have to run are old (decades-old tech!), energy inefficient, and occupy a larger real estate footprint. This really shoots up their cost, a cost that Jio entirely bypasses. Nokia, which now focuses on building and managing these networks for telecom companies estimates cost savings of 50%+ on shifting from a 2G/3G architecture to a data-only 4G architecture.

Even though Airtel & Vodafone-Idea have launched 4G services, they still operate their 2G/3G networks because they have a significant subscriber base still using 2G/3G sim cards (you need a new 4G enabled sim card if you want to use the 4G network). 56% of the overall mobile subscribers in India are still on 2G/3G. And since Jio offers only 4G, all these 2G/3G subscribers are split between Airtel, Vodafone-Idea and BSNL. In fact, 3/4ths of Vodafone-Idea's subscriber base was still on 2G/3G towards the end of 2019.

Airtel & Vodafone-Idea even use the voice network of 2G as a fallback option when VoLTE (calls over the data network) don't work. Airtel has confirmed that while they are trying to phase out 3G, they will continue offering 2G (the voice network) along with 4G. So Airtel & Vodafone-Idea have a higher cost structure than Jio despite offering 4G.

There's another advantage that pure 4G play offers Jio. Both 2G & 3G use the PSTN/ISDN network for their voice calls. Like we discussed earlier, these networks use circuit switching which, if you remember, essentially involves a cable between 2 switching centers being reserved entirely for a call between two phones. If every phone call blocks a cable each, after a while, you will run out of cables. This is when 'network congestion' happens and new calls don't get connected. In the case of Jio, voice behaves like data, ie, it is transmitted using packet switching. If you remember packet switching from earlier, voice is broken into packets (just like data) and each packet takes its own fastest route to the destination. Packets are distributed evenly across the network routes and there's no concept of a particular route being blocked off for a call between just 2 people. This essentially means Jio can accommodate a significantly higher number of calls on the network. Probably even infinite calls since packets keep getting delivered freeing up space for new packets in a continuous manner. This ensures more efficient utilization of the network for Jio.

Since Jio doesn't run a separate network for voice like others (so...no additional cost) and voice calls generate very few packets to be transferred unlike an HD video or song (so...very low network usage), they can essentially offer voice calls for free. Only 10-15% of Jio's network is used for voice calls, and the rest is used for data. The little bit of network bandwidth that voice calls will use is a tiny price to pay for the kind of marketing buzz they will get for offering free voice calls.

4G was a pretty bold bet Mukesh Ambani took in 2010 when most other telecom operators were busy building 3G. And this bet is paying off pretty well.

BREAK!

This is turning out to be a long piece. So let's take a break.

Ready now? Let's move to the second advantage.

2. The Business Advantage

To appreciate this advantage better, we first need to understand Jio's game plan.

For this purpose, I am going to quickly change Bala's job. Bala wants to start a telecom company now. But to even start providing services, Bala has to set up an entire network of routers, put equipment cell towers, print sim cards, and also pay a huge licensing fee to the government. All this accumulates to at least a few billion dollars in investment. For example, Mukesh Ambani spent $32B (₹2.3 lakh crores) before he could launch Jio. But here's the kicker. Bala cannot charge more than a few hundred rupees ($1-3) a month from subscribers. Simply because they will not pay. Why? Because voice and data services provided by telecom players fall under the bucket of 'utilities'. Utilities are basic, undifferentiated services like electricity. You don't care whom you get electricity from as long as you get something that works. Same with the internet. So price becomes the only point that matters during purchase, meaning the internet provider cannot charge a high price. Of course, all this is assuming there are at least 2-3 players in the market. If there was only one player (monopoly), they can get away with charging a high price for voice and data.

Being a utility hence increases the time it will take to recoup this huge investment Bala has to make. But Bala wants to make a return on his investment as fast as possible. Simply because Bala doesn't know when the next technological innovation will come and he will be forced to upgrade the entire network equipment (costing billions of $ again) to keep up with the new standard (say, 6G or 7G).

Bala is scratching his head. He's thinking about the future already...

"How can I increase what I can earn per person that uses my network? (also called Average Revenue Per User or ARPU). Hmm, well I am providing them a pipe through which they access the internet. I am charging them for using that pipe but there's only so much I can charge them ($1-3, remember?). Oh wait, what if I can provide some service (websites or apps) through this pipe that I own and charge them for those services as well? There are enough companies that have made loads of money by just delivering services through this pipe of mine (eg: Google, Facebook, Spotify). I too can do that. Moreover, I can push my service more since I own the pipe - offer it at a discount to people who already use my pipe or bundle it with my internet plans."

Bala smiles at himself with satisfaction. He calls his friend Lata to narrate how he came up with an excellent plan to solve the 'telecom ARPU problem' only to be told that he isn't a very original thinker. Because almost every telecom company has tried to sell services through the pipe they own to increase ARPU and accelerate their path to profitability. Here's a quick look at what Airtel does in India and what Verizon did in the US.

And Jio is no exception. Jio's game plan from the beginning was to attract users with cheap data (cost of <$1/GB vs competitors' average of $3.5/GB); then introduce entertainment apps to keep users hooked - JioSaavn for music, JioCinema for movies and JioNews for news (users needed to spend all that GB somewhere!). And finally, make money off these users by selling them key services - online shopping, education, healthcare, etc. According to Global research firm Sanford Bernstein, Jio is planning to offer up to 10 key services addressing an overall potential market of $2 trillion.

This whole plan of telecom companies selling services via the pipe they own sounds like a great plan. But history has shown that most telecom players have never been successful at expanding beyond their core service. For example, Airtel's Hike has been posting losses for years. Verizon had to shut down their video streaming platform Go90. Airtel's music streaming app Wynk is probably the only outlier, having found a decent amount of traction among users.

So...can Jio be an exception here?

I think yes. But I say yes with a caveat. I don't think Jio will be successful in selling all the services it has planned - many of their apps have already bombed (Eg: JioChat) - but it has a high chance of succeeding at one particular service. And that's online shopping or retail. Luckily for Jio, retail, with a market size of $1.3 trillion, is the largest of all the services Jio has planned.

Why will Jio be successful in retail?

This is where we have to step back and look at the parent company of Jio - Reliance. As per at its latest annual report, Jio accounts for only 9% of Reliance's revenue. Almost 70% of revenue comes from its primary business - petroleum refining and petrochemical products. But it is its second-largest business that I want to bring your attention to - Retail which contributes 21% of Reliance's revenue.

Reliance Retail is a behemoth with 10,000+ stores across 6,700+ cities in India. These stores are broadly split across Reliance Fresh (groceries), Reliance Trends (fashion), and Reliance Digital (electronics & home appliances) - each category humongous by itself. Reliance Retail accounts for a 45% share in India's organized retail & e-commerce. In comparison, Amazon India comes at a distant second with 22% share.

When you change your frame of reference from Jio to Reliance, suddenly, you don't see a telecom operator attempting to do online retail (low chance of success) but an offline retail giant try to go online via its telecom arm (higher chance of success).

It's this retail arm of Reliance that is Jio's advantage. One of the toughest things about doing online retail is to get things to users very quickly. Someone like Amazon actually built warehouses storing products in various locations across the country. So when a user orders a product, the nearest warehouse quickly dispatches the product to the user. For Jio, Reliance Retail's 10,000+ stores, while continuing to operate as shops, will also double up as warehouses. So when Jio launches its online stores, you can expect that latest phone or t-shirt you ordered to reach you as quickly as a day or even lower.

This is an important reason Facebook decided to invest in Jio and not other telecom players (another reason being Facebook can get regulatory approvals quickly with Ambani's help). While Facebook's Whatsapp can be used to place orders (demand), Reliance's huge network of stores will be used to fulfil those orders (supply). In high probability, there is no other telecom company in the world that has a ready retail supply chain & a network of stores (acting as warehouses) to be able to pull off e-commerce. Jio has both. Whatsapp integration is actually a bonus for Jio's retail plans.

However, it is easier said than done. Reliance/Jio will have to figure out how to integrate their offline and online businesses seamlessly. They have the idea and all the ingredients in place. Execution is the only thing remaining, meaning, they can either do a fantastic job or a superbly botched-up job of integrating their online store with their offline network.

Going by the journey of JioMart - Jio's online grocery store (Reliance Fresh in the back end), it seems like Reliance has done a good job of execution. In just 3 months since launch, JioMart has become the country's largest e-grocer with 400K orders delivered a day which is significantly higher than the 280K orders a day delivered by BigBasket, the previous leader.

With JioMart, Jio's business advantage has begun to materialize 🙂

CIAO!!!

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More reads on the topic

1. From Oil to Jio
   A brilliant narration of Reliance's shift from petrochemicals to digital solutions by my new favourite writer - Vedica Kant. Highly recommend.

2. Jio is in the endgame now - The Ken [paywalled]
   A nice illustration-filled explanation of Jio's full-stack play by The Ken

3. India, Jio, and the Four Internets
   A Simplanation from me is never complete without a link to Ben Thompson. This is his piece on how Jio is taking India's internet on a different route. This piece sparked my interest in telecom network architecture and today's piece.

4. COAI Annual Report 2019-20
   If you are a numbers person, this report by Cellular Operators Association of India (COAI) is binge-material on the Indian telecom industry

Author's Note
Happy Raksha Bandhan and Bakrid everyone 😀 . Hope you had a great weekend. This SNAP is going out to 2,498 subscribers. Ooooh you see, we need that little push from you. Please do tell your friends about us. But only if you like it. No pressure :P
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India is a tea-drinking nation

For many Indians, every day must start with a hot cup of tea. As per Euromonitor, an Indian consumed 176.6 cups of tea on average in 2015. This is 10x more than coffee which was only 16.6 cups (lol). The total weight of tea consumed in India was over 1 billion kgs in 2019. 🤯

The packaged tea industry in India is worth over ₹12,000 crores ($1.6B) with leading players being Tata Tea and HUL (Brooke Bond and Lipton). Both the companies hold around 21% market share each by the value of tea sold. But there is another lesser-known regional player which gives these brands a run for their money, especially in the western parts of the country - Wagh Bakri.

Wagh Bakri is the third largest packaged tea player in India. Despite not having a national presence like Tata and HUL, it has grown its market share from as little as 3% in 2009 to 10% in 2020. Primarily because of its stronghold in the few states it is present in. For example, it commands over a 50% market share in Gujarat.

The journey of this David growing into a Goliath is a very interesting one.

Gandhian beginnings

The origins of Wagh Bakri can be traced back to 1892 when Narandas Desai moved from India to Durban, South Africa. He leased 500 acres of a tea estate there and started managing it. During his time in South Africa, he became close to Mahatma Gandhi, who had a big impact on Desai’s business and personal ethics.

In 1915, Desai was forced to flee South Africa because of apartheid. He came back to India with a letter from Mahatma Gandhi vouching for his skills and honesty in the tea business. He was able to get a large loan which he used to establish the Gujarat Tea Depot in 1919. The first store was set up in Ahmedabad and sold loose tea. It was a decade and a half later, in 1934, that Desai started selling the tea under the brand “Wagh Bakri” for the first time.

The name “Wagh Bakri” might sound strange when you hear it for the first time. And the logo looks even more strange. But there's a lot of meaning behind it.

The logo shows “Wagh” (Tiger) and “Bakri” (Goat) drinking tea from the same cup. The tiger symbolizes the upper class of society and goat, the lower class of society. And both are drinking tea from the same cup communicating the Gandhian values of social equality and non-discrimination. At the time of launch, the brand was a protest against what was happening in the country (pre-independence era). Though I'd say the brand values are still very relevant even today.

Fun fact - the logo and the values it stands for has caught the eye of many marketing experts and even finds a mention in the book "Principles of Marketing" by Philip Kotler which is considered the Bible for marketing by MBA grads across the world.

About the business

Wagh Bakri is very selective when it comes to expansion to new regions in the country. The brand invests a lot in research to check the commercial viability of entering a new region. They also understand the consumers’ tastes and preferences to offer different blends of tea for every state.

Due to this, they are present only in 13 states, mainly in the western and central parts of India. The brand is strongest in the states of Gujrat, Rajasthan, Madhya Pradesh and Maharashtra. They have recently started to expand to a few southern and northern states.

The brand is known for its high-quality tea and competitive pricing. And it shows in their revenue numbers which touched ₹1500 crores ($200M) last year. They also export to over 40 countries (5% of their revenues) to cater to the Indian diaspora abroad.

The company doesn’t own any tea estates to avoid the costs and problem of maintenance. Instead, they focus on only processing and packaging the tea. This has allowed them to stay asset-light (helps a business be nimble), cash-rich and debt-free.

About the products

At present, the company has four brands catering to different customer segments.

1. Good Morning Tea: Started in 1944, it is positioned for the super-premium segment. It is priced at around ₹550/kg.

2. Wagh Bakri Tea: This is the most popular product of the company and is positioned at the premium segment. It is priced around ₹430/kg. It contributes to 70% of the company's revenue. Under the Wagh Bakri brand, the company has also recently introduced products like Green Tea, Lemon Tea, Iced Tea and Premix coffee.

3. Mili Tea: This product is positioned for the middle and lower-tier segments. It is priced at around ₹280/kg. It accounts for 20% of the company's revenue

4. Navchetan Tea: This is aimed at the economy segment and is positioned against the unbranded tea in the market. It retails around ₹200/kg.

All these products are promoted via ads on TV and print campaigns. The company spends nearly 10% of its revenue on advertising expenses.

Other business units

1. Tea Cafes
   Much before Chaayos came into the picture with the concept of 'tea cafes', Wagh Bakri launched its first tea lounge in Vile Parle, Mumbai in 2006. An attempt to ride the café culture, these lounges offer a host of beverages including Ice Cream Tea to customers. Today, there are 15 such tea lounges across Mumbai, Delhi, Ahmedabad, Pune and Goa.

   

2. Direct-to-consumer
   In 2015, Wagh Bakri also launched an e-commerce site (www.buytea.com) to order tea online.

   

The future

Adored by millions, this 100-year-old company is still young at heart. The revenues have almost tripled in the last 10 years and it continues to give a tough time to the competition. It will be interesting to see how Wagh Bakri expands in coming years to become a national brand. Till then...

References

1. Chai as it might, coffee can’t topple tea in India

2. Wagh Bakri Tea brews expansion plan with wider product range, greater volume sales

3. Where tea is the great leveller

4. Wagh Bakri Corporate Website

Author's Note
We are introducing a new format called SNAPs by Simplanations. Apart from the usual long-form Simplanations, we will be intermittently sending shorter pieces covering brand stories, business concepts, and analysis of recent events. Read time will be around 3-5 minutes. On to the first Snap! 😀

Rooh Afza, one of the oldest Indian brands, has a legacy of more than 100 years. The concentrated drink is most sought after in summers and the month of Ramzan. Apart from the traditional way of serving it with cold water or milk, it is also used in a variety of food and drink items like falooda, fruit salad, shakes and lassis. In today's Snap, let's revisit the story of this iconic brand.

Humble Beginnings

The story dates back to 1906 when Hakim Hamid Abdul Majeed, a Unani medicine practitioner started a small shop by the name of "Hamdard" in Old Delhi. In this very shop, Rooh Afza was formulated for the first time in 1910. It was a concentrated drink made from fruits, herbs and rose intended to be used as a remedy for hot summers. Hamid named it Rooh Afza which literally translates to "Soul Refresher".

In the beginning, Rooh Afza was sold in used wine bottles. And the labels were designed by an artist named Mirza Noor Ahmad. The colourful labels could not be printed in Delhi. Hence, they were printed by the Bolton Press of the Parsees of Bombay. It became an instant hit thanks to its great flavour and smell. Within a decade, the brand began distribution at a national level. It even started advertising in newspapers. One such ad (shown below) stated: "when the motor car was on its way in and the horse buggy on its way out, Rooh Afza was there."

The Partition Play

During the partition, the elder son of the founder, Hakim Abdul Hameed stayed back in India. Whereas the younger one, Hakeem Mohammad Said migrated to Pakistan and started a separate Hamdard company in Karachi. Said also started a branch in East Pakistan (now Bangladesh).

Post-independence of Bangladesh, Said gifted the Bangladeshi subsidiary to a local entrepreneur who went on to run the company under the name of Hamdard. The drinks taste similar in all 3 nations since the companies in all 3 countries essentially use a similar formula for making Rooh Afza.

How big is Rooh Afza?

Hamdard clocks close to ₹1000 crores ($134M) in revenues. A major chunk of it comes from their two main brands: Rooh Afza and Safi (a tonic that helps in purifying blood and reducing acne). Apart from that, the company has a huge gamut of products in well being and nutrition.

Rooh Afza sells close to 40 million bottles every year in India. It has 3 bottling plants in Manesar and Ghaziabad. And the company is looking to add more production capacity.

But, Hamdard operates in a slightly different way than a normal company. It is registered as a ‘Waqf’ which is a non-profit organization under Islamic law. They only reinvest 15% of the profits in the business. The remaining 85% is transferred to Hamdard National Foundation (HNF) which then disburses it for charitable organizations.

Rooh Afza’s Future…

For more than a century, the brand Rooh Afza had just one product: the concentrated liquid. But, there has been a rapid change in consumers preferences with so many carbonated, ready to drink beverages coming into the market.

In Pakistan, Hamdard was cognizant of this change and launched different variants - the low calorie and sugar-free variant, Rooh Afza Go (carbonated drink) and Doodh Rooh Afza (ready to drink beverage).

The Indian counterpart was slow to adapt to this change. But, this year, they finally decided to leverage and extend the brand to new product lines: Rooh Afza Fusion fruit juices and milkshakes. We might see more product lines getting added with time.

Rooh Afza’ Strength: Fans, not Customers

Around last year, there was a shortage of Rooh Afza in the Indian market because the supply of few ingredients was affected. This led to a huge uproar on social media. Unable to procure it from regular stores, people were actually buying it from Amazon at thrice the normal market price. So much was the uproar that even the Pakistani branch of Hamdard offered to supply to India during that period.

Though things went back to normal in a few months, the incident reflects the popularity and emotional connect the brand has established with customers over the last century. Despite other players launching similar products (Eg: Sharbat-e-Azam by Dabur), Rooh Afza continues to dominate in both market share and mind share.

Till the next Snap or Simplanation, ciao 🙂

Image sources: Scroll.in, Hamdard website, Google

Author's Note
A lot of the analysis in the article is a simplified understanding of what Harsh (Co-Founder, Dream11) has said across different interviews. Few of the calculations in the article also use the numbers shared by Harsh in an interview.

When a cricket match is on in India, it is common to hear "I think Sehwag will hit a century today" or "If I was the coach, I would have played Bhajji instead of Ashwin". India is full of cricket pundits who love to share their opinions and then brag about it if they get it right. It is this behavioural insight that fantasy sports (where you create a team of your own liking) build upon. Give a platform to such 'pundits' to pit their strategy against millions of others and win money + bragging rights.

In India, the popularity of Online Fantasy Sports (OFS) has gone through the roof in recent years. The number of OFS platforms in India like Dream 11, Halaplay, FanFight has gone from 10 in 2016 to 140+ in the present day. The user base of these platforms has also grown from a mere 2M in 2016 to 90M in 2020. Even the money that is bet on these platforms (called 'Contest Entry Amount' or CEA) almost tripled from ₹6,000cr ($800M) in 2019 to ₹16,500cr ($2.2B) in 2020.

What makes this growth even more impressive is that the industry was close to non-existent in India a decade ago. The earliest form of fantasy sports in India was "Super Selector", a no-money-involved fantasy cricket game run by ESPN in 2001. But despite good traction, it was shelved in 2003. And fantasy sport was killed in India even before it could take off. Things would stay that way for 5 years until 2 fresh college graduates, Harsh Jain and Bhavish Sheth, would resurrect the category through Dream11.

Over 10 years, Dream11 built the category from scratch in India and reaped the benefits of it. Today, Dream 11 is the largest and most recognized OFS player in India with over 70M users (a little more than 75% of the users of all other OFS players combined 🤯 ). In 2019, Dream11 generated a revenue of around ₹775cr ($103M), a 250% growth over 2018 revenue of ₹224cr ($30M).

Along their journey, the company was backed by marquee investors like Tencent (WeChat owner), Kalaari and Steadview Capital. In Apr 2019, Dream11 was catapulted into the 'Unicorn Club' (privately held companies valued greater than $1B) when Steadview Capital invested $60M. In early 2020, there were speculations of investments from more marquee investors like Tiger Global and Chrys Capital that would value Dream11 at $2B+.

In today's simplanation, let's explore what did Dream11 do to emerge as a leader in the OFS category and of course, bag that unicorn tag. But first things first...

How exactly does Dream11 work?

For a given match, there are many contests. Few free, meaning you can participate in the contest without putting in any money (you don't win any money as well). And few paid, meaning you put in money to participate (and win money as well). For every contest you enter, you create a team (you can enter multiple contests). The entry fee for a paid contest usually ranges between ₹30-60 ($0.4-0.8). Given you have the chance to win prizes from ₹2 lakhs ($2,600+) and above, you don't really mind paying the low entry fees. Also, Dream11 lets 50% of the participant pool win prizes, with the largest share of the cash prize going to the top-ranked and a smaller share going to lower ranks. Unlike a lottery, your odds of winning on Dream11 is 50% (though the last few ranks win an amount lower than the entry fee). Higher odds of winning means more participation from users. Good move Dream11, good move.

If you win, the money is deposited into your Dream11 wallet. You can withdraw this amount into your bank account whenever you like. Only one catch - there's a minimum withdrawal amount of ₹200. Another clever strategy by Dream11 to keep the user coming back. Because you will try to play more contests until you can get your balance up to ₹200. Again, good move Dream11, good move.

When a contest is over, not all the money pooled from entry amounts is distributed. Dream11 keeps 15% of this amount as "platform fee" and the rest is distributed as prize money. This is how Dream11 pays its bills.

From the above, it looks like Dream11 had it all figured out. But it wasn't always the case. There was a time when the company was struggling to stay alive until a complete revamp of the business saved them from extinction. Let's have a look at that journey.

The Initial Struggle

It all started in 2008 when Harsh Jain returned to India after completing his graduation from UPenn. He was an ardent follower of premier league football and played fantasy football regularly with his friends in the US. After coming to India, Harsh was surprised to see that there was no fantasy sports platform for the IPL (cricket) which was the hottest sports event back then. With millions of cricket fans and increasing internet penetration, Harsh saw this as an opportunity. And that was how Dream 11 was born.

Though the idea was to develop a product for fantasy sports competitions, the team ended up creating a complete platform with umpteen number of features like feeds, blogs, profiles, chats, social media and polls. Expecting a lot of users to join this new platform, they decided to keep the platform free for users to play and earn money from ads. When a certain number of users saw an ad or clicked on the ad, Dream11 would make money.

But there were two problems they faced.

1. Dream 11 had tournament-long fantasy competitions only. The user had to draft a team at the beginning of the tournament and commit to playing with the same team throughout the tournament. He/She was allowed only a limited number of substitutions over the course. The player with the highest points at the end of the tournament was the winner. This format needed much more commitment from participants (sometimes, months long). And users not at the top of the leaderboard lost interest and stopped playing mid-way.

2. Dream11 expected to earn revenues from ads but the traffic to their website was minuscule. To add to that, the rates paid for ads (called cost per 1000 impressions or CPM) shown to Indian audiences were very low (around $1-2). Dream11 was supposed to give out cash prizes to winners from this money. Obviously, it never sufficed.

With meagre revenues and low user interest, the company lost money for the first three years (2008-11). To keep the business afloat, the founders started a brand servicing agency on the side. That business managed to generate some cash and keep Dream11 alive. During this time, the founders also got back to the drawing board to rethink Dream11 from ground-up. What followed was magic.

Getting it right

For its new avatar, the company made 3 fundamental changes in its strategy.

Firstly, it adopted the format of daily competitions. This solved the commitment problem they faced earlier (we don't like to commit, right? :P). Winners were declared after every match instead of the entire tournament. So a user could create a team before any match of the tournament and compete. Even if a user didn't perform well in one match, he or she could always hope to win the next. This meant much faster results, more winners and thus the number of active users started skyrocketing.

Secondly, the company pivoted to a freemium model (a combination of free competitions + paid (premium) competitions). So now there were 2 types of competitions. One type was where users put in money and won money (real money, not the cash that Lenskart credits in your account). And the second type was where users competed without putting money and won....well, let's just say bragging rights. Like we saw earlier, Dream11 kept the entry fee for paid competitions pretty low at ₹30-60 ($0.4-$0.8) while promising a high reward (₹2 lakhs+ or $2,600+). This is one of the reasons the number of paid users as a % of total users for Dream11 is at 15%, much higher than the average of 3% for other freemium apps.

The freemium model solved the biggest problem that Dream11 was facing - generating revenue! A quick comparison below shows how the freemium model brings in 10x the revenue of the Ad model (assuming the same number of users).

In addition to the above, Dream 11 got rid of all the extra features like chat, blog, timeline, social media, polls, etc. They decided to keep a sharp focus on fantasy cricket competitions only (they expanded to other sports later). This made the product both lighter and easier to use. And also allowed Dream11 to make any changes quickly (agile!!).

It wasn't easy

The shift to cash-based competitions came with its fair share of problems.

The first and most damaging problem was that many considered OFS a form of betting. In fact, multiple pleas were filed against Dream11 in Indian High Courts alleging that it runs a gambling operation. Dream11 got these pleas overturned in its favour by proving OFS is a 'game of skill' rather than a 'game of chance' (betting). While Dream11 got the courts on its side, it still had to win the general public. Even though OFS was ruled as a legal activity, cultural views around 'betting' still prevented many from trying the service. To break this image, Dream11 ran campaigns across TV and social media with the tagline "Khelo Dimaag Se" (Play with your mind). The onboarded MS Dhoni, the then Indian cricket captain as their brand ambassador. Dhoni wasn't just a popular face but also had the image of a cricketer with a brilliant strategic mind (he really is!). As you can see, every move was made to drive home the point that Dream11 was a game of skill and reduce people's apprehensions. This campaign not only helped Dream11 but actually accelerated the growth of the entire OFS category in India. Talk about category creation!

An example of the "Khelo Dimaag Se" ad

The second problem for Dream11 was the Android app store. Google doesn't allow mobile apps offering cash contests on the Play Store. This was quite a big blow for Dream11. To give a physical world example of this problem - how do you get users to find a soap if the soap isn't allowed to be put on shop shelves. While Dream11 got the first set of users through ads and search engines, they decided to bank on these initial users to drive their growth (hence removing the need for the Play Store). How they did it was by using a 'referral hack'. If an existing user referred a friend to the app, both of them got ₹100 in their Dream11 account as a gift. The genius of this was not the referral scheme but the cash gift. The biggest friction point for a new user was to pay cash to compete. Now with ₹100 coming into their account for free, they were very likely to compete in cash-based competitions. And the experience (or exhilaration) of winning a game might push an unsure user to an active user (and active referrer as well).

The third problem was competition. To be honest, this was a good problem for Dream11 to have. This was also proof of their marketing campaign's success 😁 which led to a number of me-too OFS players popping-up (with almost the same app interfaces). A user could choose any of the OFS services since the offering was exactly the same. And this was a problem. Dream11 negated this by establishing partnerships with sports bodies to be their official fantasy league partner or sponsor. And this it did ruthlessly by partnering with almost every major sports league in the country. The biggest prize was that of the Indian Premier League (the domestic cricket league) which clocks 400M+ viewers every season.

So was all this fight worth it? Is Dream 11 profitable?

No, it is not profitable. For 2019, Dream11 posted a loss of ₹132cr ($17M) on revenue of ₹775cr ($103M), a 17% net loss.

But my view is that it will be profitable soon. Why?

In a business like Dream11, the major expense is advertising & promotion. In fact, in 2019, they spent ₹785cr ($104M) on ads alone which is 84% of their overall expenses. Their remaining expenses are office rent, salaries of their tech team and accounting - expenses which will not grow much as they increase their number of users.

Their main objective of spending so much on ads was to attract new users. The ₹785cr ($104M) they spent on ads in 2019 got them 33M new customers. So we can say Dream11 spent ₹237 or $3.2 ($104M÷33M users) to attract a new user. To jargonize it, this is Dream11's customer acquisition cost or "CAC".

The first step towards profitability for Dream11 would be to achieve positive unit economics, ie, make some profit per user (who is the "unit" here). This means the revenue they earn per user (called average revenue per user or "ARPU") has to be more than the cost they spend on attracting a new user ("CAC" as we discussed earlier). Dream11's ARPU in 2019 comes to ₹155 or $2.1 ($103M revenue÷50M users) which is lower than the CAC. In other words, their unit economics is negative.

However, there is an important point to note here. The ARPU has been calculated using the 2019 base of 50M total users. But like we discussed earlier, 33M of these users were added over the course of the year which means 2/3rds of Dream11's users in 2019 did not play the entire year. Hence their contribution to revenue was much lesser than the existing users (17M) and this dragged down the overall ARPU of the company. From next year, the revenue generated from these 50M existing users will be achieved without spending an additional pie (besides the fixed costs) - this is pure profit. Essentially, an existing user is profitable for Dream11 while a new user is not. As Dream11 reaches a stage where the inflow of new users in a year becomes less than the existing users, ARPU will surpass CAC and it will achieve profitability.

One more thing...

There is another advantage that Dream11 inherently has that will accelerate its path to profitability. Dream11 has a network effect baked into its business model (a concept investors love!). When a business has network effects, the value of its product or service increases as the number of users increases. The best example is Whatsapp. I don't have much reason to use Whatsapp if only a few people use it. But if everyone around me us using it, it makes more sense for me to use Whatsapp as my primary messaging app. The value of Whatsapp increases as more people use it.

Similarly, the value of Dream 11 increases as more users join it. That's because more users mean a larger number of participants in contests. And a larger number of contest participants means larger prize sizes. A chance to win larger prize sizes makes Dream11 more attractive to a user than other OFS platforms.

So when the platform is small (and hence lower prize money), the cost of acquiring a user will be pretty high. But as the user base rises (and the prize money too), the cost of acquiring a new user will fall as the large prize money contests will be enough to attract new users. In the case of Dream11, CAC has already come down from ₹5000 ($67) in 2012 to ₹237 ($3.2) in 2019. And this number will only fall further.

This network effect will also act as a barrier for users to switch to other platforms which will have lower prize money competitions. And as Dream11 grows further in size, most new users will prefer to join only Dream11 (as its prize money will grow further) hence making Dream11 a winner-take-all business.

Ciao!

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More reads on the topic

1. INSIGHTS Podcast Series - INSIGHTS#33 Harsh Jain on building Dream11- India's biggest fantasy sports platform
   The story of Dream1 narrated directly by Harsh Jain, its co-founder.

2. "50M users, is just product-market fit"- Harsh Jain, Dream11
   An excellent note on Dream11's ambition by Vani Kola, an investor in the company

3. The evolving landscape of sports gaming in India
   For the nerds - a 40-page report on the Indian OFS industry by KPMG

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Author's Note
The analysis is my simplified understanding of what Jaydeep (Co-Founder, Rebel Foods) has said across different interviews and forums (not my original thought). Also, I am a big fan of their Chicken Tikka wrap, so my opinion might be biased 🙂

The Internet has made significant changes in the dynamics of multiple industries. Amazon changed retail. Airbnb re-imagined hospitality. And Netflix changed video-on-demand. Jaydeep Barman believes that Rebel Foods, the restaurant company he co-founded, will change the restaurant industry. How? By building the world's largest 'internet restaurant company'.

A quick snapshot of Rebel Foods

Rebel Foods was founded in 2011 with a single brand under its hood - Faasos. Over time, the company has grown to different 11 different food brands spread across different cuisines. Faasos and Behrouz are its most famous brands.

The company is backed by marquee names like Sequoia, Goldman Sachs, Go-Jek and Uber co-founder Travis Kalanick. And has raised a total of $330M over the course of its existence.

Rebel-lious Streak

In just 9 years, Rebel claims to the largest restaurant chain in India with 2200 restaurants. In comparison, Dominos is the second largest chain with 1300 restaurants and it has been in India for 25 years!

A bulk of this growth has come in the recent past with Rebel adding over 2000 restaurants in just the last 4 years. They also went global during this time launching in UAE and Indonesia and are looking to enter the UK, Brazil, and Saudi Arabia soon.

Now that's a dream run! But a certain pivot in its strategy was instrumental in helping Rebel unlock this unreal growth. In today's piece, we will explore what was that pivot & why did they do it. But to understand that, we first need to look at the business model with which Rebel started.

Rebel 1.0 - Physical Restaurants

Faasos (Rebel) started as a chain of fast-food restaurants (jargonized as Quick Services Restaurants or QSRs). They set up 90 restaurants in a span of 4 years with initial funding from Sequoia. These restaurants typically ranged from 500 to 800 sq. ft. in size with a small cooking area and some space for seating (see pic). They sold wraps and biryanis mainly targeting customers in the age group of 20-35. And were doing annual sales of ₹30cr ($4M) at that point in time.

But with this large network of physical restaurants, Faasos started facing 2 challenges which a lot of other restaurant chains also face:

1. Location underperformance
   In a restaurant chain, not all the locations perform equally. There are chances that some location will not attract enough customers to run profitably. And since all the outlets are typically present in central locations, the rent is pretty high (around 15% of the total sales for Faasos). So any underperforming location meant quite a big loss for the company.

2. Slow growth rate
   Finding and finalizing a high-visibility location takes a lot of time (sometimes even up to 6 months). This limits the rate at which a restaurant chain can expand.

Eureka moment

Exactly around the time Rebel founders were grappling with the above issues (c.2015), online food ordering was taking off in India with the help of Swiggy, Zomato and TinyOwl (RIP). Faasos itself was catering to around 50,000 online orders every month from their own mobile app and website. In terms of share, the founders realized that around 70% of their total orders were actually coming from the internet. And these orders were growing irrespective of the number of stores. That's when they decided to wrap-up (pun intended) all the physical outlets and pivot to a 'cloud kitchen' model.

What is a cloud kitchen?

Ordering food online is now a normal thing. We all know how convenient it is compared to the alternative of going out. Due to this change in our behaviour, the food delivery market is growing at a rate of 15% year-on-year and is expected to reach $12B by 2023. Cloud kitchens aim to capture only this food delivery demand.

Cloud kitchens, as the name suggests, is just a kitchen. There's no storefront and seating area for customers. Orders are received online through an aggregators' app (Swiggy/Zomato) or the restaurant's own app. The food is then cooked, packed and sent out for delivery.

Cloud kitchens are much cheaper to operate when compared to traditional restaurants. Because they are not serving customers at location:

• They don't need to be in a great location. They can be set up anywhere → savings in rent.

• There is no requirement for customer-facing staff (waiters, receptionist), furniture, or interior decoration → savings in running expenses.

All these savings result in a higher profit margin for a cloud kitchen (as illustrated below). The only area where a cloud kitchen spends more than a traditional restaurant is the delivery commission to be paid to Swiggy or Zomato.

Compared to a traditional restaurant which might take 3 years to reach profitability ("break-even"), a cloud kitchen can recover its investment within 1 year. It is no wonder Rebel Foods decided to pivot to a cloud kitchen model.

Apart from Rebel, many other Indian companies are also adopting this model for its merits. Poncho hospitality (runs Box 8 and Mojo Pizza brands) and Freshmenu have also been operating with a cloud kitchen model. Food Delivery giant Swiggy also set up its own Cloud kitchens called Swiggy Access in 2017. And in recent developments, Jubilant Foodworks which operates Domino's and Dunkin Donuts in India and Kishor Biyani's Future Group are also planning to enter this space.

Rebel 2.0 - Internet Restaurants

In their second avatar, Rebel set up cloud kitchens with separate cooking sections (called "stations") for each of its brands. Every station in the kitchen essentially shows up a separate restaurant on a food ordering app. If they need to add a new brand, they just add one more station the kitchen, not open another kitchen.

Orders are received are via the Faasos app or ordering apps like Swiggy/Zomato. Each kitchen is led by a Chief Delight officer who is responsible for running the entire kitchen like a CEO.

This model resulted in significant benefits for the company.

1. Savings on costs
   With the need to set up shop in high visibility locations gone, Rebel's rental cost fell from 15% of its sales to a mere 3%. Of course, they also saved more by eliminating the need for waiter staff and furniture.

2. Rapid expansion
   With a relatively lower upfront investment required and less time needed to finalize locations, the company was able to expand at a much rapid pace. As we discussed at the beginning of this post, this allowed them to create 2000+ restaurants (stations) operating from 300 cloud kitchens in just 4 years. Setting up a similar number of traditional restaurants would require decades (remember the Domino's example?).

3. Scaling up new brands
   Starting with Faasos as its main brand, the company identified foods habits and needs of Indian consumers and developed a brand to fulfil each of those needs. The below image represents the different needs their brands meet.

   

   They were able to add so many brands largely because of the flexibility offered by cloud kitchens. The new brands could be tested quickly in a similar fashion to A/B testing (a method used by software companies to test new features by exposing them to limited users). At first, brands were introduced in a limited number of kitchens and customer feedback gauged. If the brand performed well, Rebel then spent on advertising and expanding it nationally. The best part - operationally, just another station had to be added in an existing kitchen.

   This quick ability to scale up (and down) allows Rebel to cater to regional demand for specific time periods. For instance, they sell Haleem and Navratri meals only during the period of Ramazan and Navratri respectively.

The way forward

For the financial year 2018-19, Rebel's revenue stood at ₹300cr ($40M) which is a 10x growth over 2015. The company is still loss-making, primarily because it investing aggressively in marketing its new brands and expanding to more locations. But we can expect it to reach profitability soon. There are multiple avenues Rebel can look to explore for growth:

1. Adding new brands ("Brand expansion")
   Given the variety of cuisines and food habits across India, Rebel can add even more national and regional brands. There is still opportunity in categories like street food, salads and keto meals for instance.

2. Entering new geographies ("Market expansion")
   As mentioned earlier, Rebel has already started expanding to other countries, namely UAE and Brazil which are ripe markets for cloud kitchens.

3. Franchising opportunity
   With brands like Faasos and Behrouz becoming a household name, Rebel can let other entrepreneurs (a 3rd party) open cloud kitchens that sell one or more of Rebel's brands in return for a licensing fee (for using Rebel's brand name) and a defined % share of annual sales (revenue-share). These 3rd party cloud kitchens ("franchises") will be a provided training for its staff and a Statement of Operating Procedures (aka "SOP" which is a list of step-by-step instructions to run the kitchen which these 3rd parties have to follow in order to be a franchise).

4. Partnering with local and global brands
   Many global brands find it tough to launch in India. It's a huge risk since there is a lot of upfront investment needed (setting up restaurants, marketing) but they do not know if the brand will work. A possible way to mitigate them can be to use Rebel's cloud kitchen to launch the brand in limited regions and test it - all at a fraction of the cost it would otherwise have cost them. Similarly, local brands (say a Murugan Idli or Kababi's) too can expand to states they are not present in by setting up stations in Rebel's cloud kitchens rather than setting up their own (very similar to what Swiggy does with its Swiggy Access cloud kitchens). Such partnerships will also help plug the gaps in Rebel's brand portfolio while creating new revenue streams.

With this insane speed of growth and cost-saving business model, Rebel Foods seems to be on track to become India's 3rd food-tech unicorn after Swiggy and Zomato.

Ciao!

That's it for today. If you liked the article, please feel free to order a Behrouz Biryani for me 🙂

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More reads on the topic

1. How to build 1000 Restaurants in 24 months - The REBEL method
   Jaydeep talk about his entire playbook for building Rebel Foods. Excellent read.

2. Brownian Musings
   The story behind the inception of Faasos, again by Jaydeep

3. Sequoia-backed QSR chain Faaso's raises $20M in funding round led by Lightbox
   Rebel funding news