'Tesco UK model shows organised retail will buy out 'kirana' stores in India'

Few have approached marketing as a science like V Kumar. “My significant contribution to marketing is bringing science into it. Bridging science and practice,” says the IIT Madras alumnus, who has been greatly inspired by Philip Kotler. VK, as he is better known, is the Richard and Susan Lenny Distinguished Chair Professor of Marketing, and executive director, Centre for Excellence in Brand and Customer Management, Robinson College of Business, Georgia State University, in the US. He was recently ranked amongst the top five marketing scholars worldwide, based on his research productivity. He is also the recipient of eight lifetime achievement awards (in various areas of marketing), which is a record and a consultant to some of the biggest companies in the world. In this interview, he speaks to Vivek Kaul. Excerpts:

One of the core areas of your work has been customer loyalty. Can you talk about that?
Fourteen-fifteen years ago, the universal metric was that if somebody is loyal, he is the most valuable customer. We questioned that linkage. Why is loyalty equal to profitability?  Maybe in contractual relationships it is so. But most of the transactions between a firm and a customer are non-contractual. I am free to go and buy a shirt anywhere, a computer anywhere, a phone anywhere. Very few things are contractual. Your monthly subscription to your wireless plan is contractual. Maybe your internet connection at home and utilities, like electricity, are. Given that, we started to empirically test the relationship between loyalty and profitability and found it to be a very weak relationship. We went to the companies and said that if you want to engage customers, then don’t use loyalty as a metric. 

How was customer loyalty defined?
Loyalty was defined as how long a customer has been shopping with a company. How much money out of the total wallet size he has been spending with the company. How frequently he is coming and buying from the company. But there was nothing about profitability or whether the company is making money out of the relationship. Banks were the first ones to start looking at how much profit a customer was bringing in and that too, they were looking backwards, that is, how much profit the customers gave in the past and not how much profit they were likely to give in the future.

And you challenged that notion?
Yes. This prompted us to come up with a metric to value the customer. How much profit a customer is likely to give in the future? And we went to companies, got their transaction database of what customers are buying, how much the company is spending on them in direct marketing costs, and accounting for all this, we calculated the gross margin for each product sold. With these three pieces of data, we were able to put together a customer lifetime value (CLV) metric. We did this in 2003-2004 and one of the first companies to implement this was IBM. In a pilot study, we tested the CLV model  and they made $20 million instantly. Then that became the mantra for them for becoming a customer-centric organisation and allocating resources to those customers where the most bang for the buck is. In India, we worked with ICICI Bank. We worked with the Wells Fargo bank in the US. We worked with the HSBC Bank in the Middle East. In telecom, we worked with AT&T for six years. Then, in the retail environment, we worked with Polo Ralph Lauren, Gallery Furniture, etc.

So the focus was on profitable customers and not necessarily the loyal ones…
Yes. In 2007 what happens is that suddenly there is a headline that the telecom company Sprint fires 1,000 customers because they were unprofitable. So was it the right thing to do? The media came to us and said, ‘you said profitability is the metric to chase and they are doing that and they are firing unprofitable customers’. I said, ‘if they are unprofitable what can you really do? It’s better to fire them, so that they will go to competition and make them unprofitable.’ It’s good for the company. But what if these customers spread bad word of mouth about the company, I was then asked? Who will listen to them, I replied. Because they are bad customers and hence they were fired. So if bad customers go and say they were fired, the response they will get is that of course something must have gone wrong in the relationship.

How did the company handle the situation?
Sprint also wrote about it saying that these customers were calling the call centre eight times a month. At the rate of three minutes each time, it amounted to 24 minutes. Each cost call Sprint three dollars a minute. So the total cost was 72 dollars. And Sprint was making 15 dollars on them. So net-net, Sprint was losing 57 dollars a month on them. Over a year the company was losing over 600 dollars on a single customer. Sprint communicated to the customer base and told them that if they had not fired these customers, then the rest of the customers would have had to subsidise them.

Could you give us other examples of companies firing people?
After Sprint fired 1,000 customers. the internet service providers Comcast and Verizon and all started putting a hold on the bandwidth. If people were hogging internet usage by constantly downloading movies and so on, then they said I am not going to service you or I am going to slow down your speed. Proactively, they tried to ensure that they did not lose money on somebody. They also fired a few consumers.

Some of your more recent work has been in the area of trying to figure out who is influential in the social media and using that insight in marketing. Could you take us through that?
This is the new wave. In 2008, me and my team developed this model. We basically wrote a software  that could track everybody’s Twitter and Facebook conversation. Therefore, when you put something on Facebook and others like it, then my software will see it. My software will also capture the tweets. You can ask if all this is legal? They had an open gate system at that point of time. Anybody could monitor anybody. Now they are putting plugs.

So how did the software work?
My software could crawl and track who is on Facebook and Twitter, what they are saying, who is tweeting to whom, etc. Not only that, if I tweet something, you forward it to somebody else, they forward it to somebody else and they again forward it to somebody else, so we could  find out how far your tweet spreads. How far your Facebook like spreads?  So when I tweet you it spreads to 10,000 people. But if I tweet to someone else it only spreads to 200 people. So I then try and I figure out, why in a two-week period your tweet spreads to 10,000 and the other person’s goes to only 200 people. And I find that you have more followers on  Facebook and Twitter. And you are pretty active in the social media world and you are talking about multiple subjects or even a single subject but more of it. And whenever you say something to somebody, they also reciprocate to you. We come up with eight measures like that. With the help of this we can pretty much say something like that if I use you as a seed to plant a message then it will reach 8,500 people. That is what we have done.

Could you take us through a real-life example on this subject?
An ice-cream retailer from Mumbai  approached us and asked us to help them to promote this ice-cream. Our target group is college students and young adults, they said. They are the ones who are going to spread the word. They are active in the social media. So we want to use social media. We have a very limited budget.

So what did you do?
We created a stickiness index. Of all the conversations happening, we tried to figure out who are the people who have a high degree of category relevance. So in this case who is talking about ice-cream related products on Facebook or Twitter. People could be talking about milkshakes, or gelato. It could be just ice and, of course, ice-cream. We applied the stickiness index on the influencers that is if there are 10,000 people with a high customer influence effect, meaning those who can spread the message the farthest, applying the stickiness index we narrowed down the number to 300. So we brought these 300 to the ice-cream parlour and got them to taste the ice-cream. We also asked them to create their own ice-cream and give a name to it.

And what happened after that?
After this we asked these guys to spread the word about the ice-cream. So in the next step, they put it up on Facebook. Tweeted about it. Other people who saw this on Twitter could take the hashtag associated with the tweet to the ice-cream parlour and could buy the specific ice-cream created  by the person tweeting. The parlour boy registered the hashtag. At the end of each day our computer read from each ice-cream parlour of this chain and related it to the person who sent the message on Twitter. So what is in it for the person sending the message? Each week we had a competition where  the winner got a t-shirt, tote bag, etc.

Which chain was this?
This was the Hokey Pokey ice-cream chain.

So there are varying things that companies get their customers to do for them…
Yes. If I am a customer and you are the firm, then I can buy from you. If not buy, I can refer customers to you through incentives. If not, then I can write about you on my social media. If not, I can give you ideas to improve your service quality. Introduce this product. Add this feature to your product. When I give an idea to you, you take that idea, commercialise it and then whatever profits you make you give a share to me.

Can you give some examples of that?
Many women when they are getting married in the US hunt for the right bridal wear and often don’t find the one they like. So they create their own design and send it to the bridal wear company which can post it on its website and say here is a design which one of our prospective customers created. How many others like this? If 200 others like it and are ready to buy it then the company can produce 200 dresses of that design at the stated price and share profits with the person who came up with the design. Another good example is IBM. They put up the Linux operating system as an open source software. So you and I can create an application for IBM that runs on Linux code, give it to IBM, they will market it and share the profits.

Any other examples?
A fast food chain got into trouble when on a You Tube video somebody caught two of its employees picking their nose and then putting their fingers into one of their products. This was a challenging situation. The company decided to have a competition and let the customers design the ingredients. They had a competition. And two people won. The product the winners had designed entered the menu of the fast food chain and the profit was shared.

Can organised retailing compete with mom and pop stores in India?
Organised retailing at best in India could be at 9%. My prediction is this that mom and pop stores, or kiranas, as we call them, will become more and more sophisticated. Today, the store owners know people by their names, as the number will grow they will have to start building a database, but they don’t have the capabilities. So organised retailing will start buying mom and pop stores individually. And then they will put all of them  under one banner. It will be like how Tesco is operating in the UK with different store formats. You have Tesco supermarket, convenience store, street corner store, express, etc. So that is the way in India you will see this evolving, because otherwise there is no growth for them.

What is the evidence from other emerging markets?
If you look at evidence from China, organised retailing has got more traction. That’s because they did not have many mom and pop stores to begin with. They were cultivating their own things, which was locally, community-based. But with more cities coming up and migration of people from rural areas to cities, it has given more scope for organised retailing in China. Also, space is not an issue in China. In India, space is a constraint. Look at China and India. China is much bigger than India but the population is pretty much similar. Look at Brazil, it is as much bigger than India but the population is maybe one sixth that of India.  So they also have space.

Any other factors at work?
There is another major factor on which it depends whether they will survive or not, it is the homogeneity of the population in consumption behaviour. Does the country as a whole consume common things or there are regional biases?  In a country like Brazil people eat similar foods that every retailer can sell. In India between South, East, West and the North, there is so much heterogeneity that you need localised catering and marketing. So consumption behaviour varies; therefore, unless you are willing to carry heterogeneous products in each of the locations it is tough. But the organised retailers  have a choice now. Do they invest capital and build their own infrastructure or should they buy out these kiranas and build them up? And clearly I see the latter as a more viable strategy than putting up their own real estate.

Should we allow the likes of Wal-Mart into India? 
Wal-Mart is a value-conscious store. Even if Wal-Mart is there in every place, they are typically located outside the city limits. So only people with time, motivation and a vehicle will be able to go and buy things. And the combination of these three things is very rare. Therefore, their ability to grow organically in a country like India by systematically expanding the number of outlets is going to be difficult. There will be a market if they are content with not being the largest retailer. If they say in India that I am one among many, they will have a presence. Maybe at some point in the future, things might change, like Wal-Mart buying other retailers and that’s the way they can expand. Their specialty is supply chain and turning inventory over multiple times than other retailers. They cannot turn it over multiples times here. Each time if they make a 1% margin they get a higher margin due to turning the inventory over multiple times. Here I don’t see them turning it over as many times as in other markets. It’s very difficult to do that.

Interviewer Kaul is a writer.
He can be reached at vivek.kaul@gmail.com