Vistara and Indigo

Earlier today the Air Traffic Controller of Bangalore tweeted that Air Vistara had a 100% on time performance in Bangalore.

My immediate reaction was that this was because Air Vistara is positioned as a premium service, and hence their schedule is more “sparse” and has greater “slack”. That, I mentioned, has a direct consequence on their on-time performance.

The Directorate General of Civil Aviation puts out monthly reports on the performance of airlines in India. The data they dispense is very interesting, but the format is horrible. It’s a PDF embedded into a 20th century web page. If you can parse the above link there are a number of insights to be gleaned.

Firstly, a full 63% of flight delays in India (for the month of June) have been classified as “reactionary” (not cutting and pasting the image here because I don’t want to desecrate this blog by putting a pie chart on it). This is what airport announcers term as “delay caused due to delay in incoming aircraft”.

In other words, what happens is that airlines try to over-optimise their schedules too much leaving little slack between two consecutive flights for a particular aircraft. And so any delay in any flight cascades through the length of the day for that particular aircraft. My hypothesis (haven’t found data to back this up) is that Vistara has a more relaxed schedule than other airlines and hence has better on-time performance.

It is also pertinent to mention that Vistara has a much lower passenger load factor compared to other airlines. The average Vistara flight in June was only about 60% full, comfortably putting it in last place. Perhaps the premium pricing hasn’t been attracting the kind of passengers as hoped for. Or they’re not marketing well to the right kind of people.

The other airline which merits mention here is Indigo, which seems to be literally running away with the market. Not only is it comfortably number 1 with a consistent 37% market share, it also has the lowest proportion of cancelled flights, a pretty high passenger load factor (86%) and better on-time performance than any of the other large airlines.

Airlines is an industry where there are significant positive feedbacks – if you are on time, not only do more people want to fly you but you can also have a more efficient schedule. And so forth. And there are definite economies of scale in maintenance and schedule density and so forth. Indigo is taking advantage of all of those.

It may not be a particularly profitable industry, but the airline industry is surely interesting to watch!

No dosa on Saturdays and Sundays

Back when I was a student at IIM Bangalore a decade ago, I had tried to run this series on this blog (its predecessor, to be precise) on “delivery mechanisms in South Indian Fast Food restaurants”. I had half a mind to do a project on that, too, but then worse sense prevailed, and I did some random shyte on post offices.

Anyway, given that I’ve been living alone for a year now, I tend to frequent South Indian Fast Food Restaurants fairly often for breakfast (and tiffin, sometimes), and thought I should resume this series.

So this morning I went to “duplicate Brahmin’s” for breakfast. This is a place in Jayanagar 4th Block (next to the 560041 post office) and should not be confused with the “original Brahmin’s” in Shankarpuram. I don’t know if this Brahmins has anything to do with that Brahmins, though I’m pretty sure people would have outraged about a restaurant with a (upper) casteist name in these times. Some hypotheses go that this restaurant was started by disgruntled employees of the “original” Brahmins. Anyway, it doesn’t matter since the food here is pretty good (though not as good as at the original Brahmins).

This restaurant has aped a large number of features from the “original” Brahmins. The first is a limited menu – there are only some five or six items made daily. This is usually a good feature of fast food restaurants since it results in aggregation of demand and lower wastage, resulting in lower costs. It also results in significantly quicker service since there are only so many “lines” that need to be maintained in the kitchen.

The other feature this has aped from the “original Brahmin’s” is that there is no sambar. While this might shock Tamilians and North Indians, it’s a fairly normal thing in Bangalore. In fact, Sambar with breakfast is not normal for Bangalore, and most “traditional” restaurants only serve chutney. The advantage of this is (as Pavan pointed) that people can hold their plates in their hands (chutney is cold, unlike hot sambar), so you don’t need that much table space!

There are normally six items on the menu in the duplicate Brahmin’s (apart from beverages) – idli, vada, kesribhath, kharabhath, “ricebhath” (a redundant term like Avenue Road, I know; and this is only served during lunch. It’s a catchall term encompassing “tomato bhath”, “veg pulao”, puLiyOgare, chitrAnna, etc.) and masala dosa. And the odd man out is the last one for the rest are “made to stock”. Masala dosa is usually “made to order” since its quality “decays” quite quickly after it’s made.

It was pleasantly surprising to see a board saying “no masala dosa on Saturdays and Sundays” when I went to duplicate Brahmin’s this morning. The restaurant was already fairly crowded when I went, and there was a queue about five people long at the cash counter. The restaurant is designed in a way that there is this one not-so-large counter across which everything (coupons, food, beverages) is served, and there was a crowd today at every part of the counter (only the cash counter had a queue, at the rest of the places people just crowded around).

That’s where the “no masala dosa on weekends” board makes sense. With the dosa being made to order, people have to linger around the  counter once they’ve handed in their order until they have received their dosa. And given the rather small size of the counter and the weekend crowds, this simply leads to unnecessary crowding and shoving. It also seems like the demand for Masala Dosa at duplicate Brahmin’s is not high or predictable enough to warrant making it to stock. And hence, it’s a rational decision to ration the supply of dosas (to zero) on weekends.

The question is why the restaurant makes dosas at all (on weekdays), given that the original Brahmin’s doesn’t. The answer to this lies in a cost-benefit analysis. On weekdays, the supply chain is not tight and there are no people crowding at the counter. This means that the strain imposed on the system by people waiting around for their dosas is not too high.

Studying fast food restaurants can be a fascinating exercise.

 

Barriers to entry in cab aggregation

The news that Reliance might be getting into the cab aggregation game got me thinking about the barriers to entry in this business. Considering that it is fundamentally an unregulated industry, or rather an industry where players actively flout regulations, the regulatory barrier is not there.

Consequently, anyone who is able and willing to make the investment and set up the infrastructure will be able to enter the industry. The more important barrier to entry, however, is scale.

Recently I was talking to an Uber driver who had recently switched from TaxiForSure. The latter, he said had lost “liquidity” over the last couple of months (after the Ola takeover), with customers and drivers deserting the service successively in a vicious cycle. Given that cab aggregation is a two-sided market, with prominent cross-sided network effects (number of customers depends on number of cabs and vice versa), it is not possible to do business if you are small, and it takes scale.

For this reason, for a new player to enter the cab aggregation business, it takes significant investments. The cost of acquisition for drivers and passengers is still quite high, and this has to be borne by the new player. Given that a significant number of drivers have to be initially attracted, it takes deep pockets to be able to come in.

Industry players were probably banking on the fact that with the industry already seeing consolidation (when Ola bought TaxiForSure), Venture Capitalists might stop funding newer businesses in this segment, and for that reason Uber and Ola might have a free rein. Ola had even stopped subsidising passengers in the meantime, reasoning (correctly for the time) that with their only competition being Uber they might charge market rates.

From this perspective it is significant that the new player who is entering is an industrial powerhouse with both deep pockets and with a reputation of getting their way around in terms of regulation. The first ensures that they can make the requisite investment (without resorting to VC money) and the second gives the hope that the industry might get around the regulatory troubles it’s been facing so far.

I once again go back to this excellent blog post by Deepak Shenoy on the cab aggregation industry. He had mentioned that what Uber and Ola are doing is to lay down the groundwork for a new sector and more efficient urban transport services. That they may not survive but the ecosystem they create will continue to thrive and add value to urban transport. Reliance’s entry into this sector is a step in making this sector more sustainable.

Will I switch once they launch? Depends upon the quality of service. Currently I’m loyal to Uber primarily because of that factor, but if their service drops and Reliance can offer better service I will have no hesitation in switching.

The ET article linked above talks about drivers cribbing about falling incentives by Uber and Ola. It will be interesting to see how the market plays out once the market stabilises and incentives hit long-run market rates (at which aggregators need to make a profit). A number of drivers have invested in cabs now looking at the short-term profits at hand, but these will surely drop with incentives as the industry stabilises.

Reliance’s entry into cab aggregation is also ominous to other “new” sectors that have shown a semblance of settling down after exuberant VC activity – in the hope that VCs will stop funding that sector and hence competition won’t grow. After the entry into cab aggregation, I won’t be surprised if Reliance Retail were to move into online retail and do a good job of it. The likes of Flipkart beware.

Reverse auction platforms

Before my recent trip to Indonesia, I used this website called Cash Kumar to buy my foreign exchange. It was rather simple to use. I posted my location and my requirement for foreign exchange. I had to provide my phone number (and verify it by entering an SMS code; I think this was to make sure only genuine buyers asked for a quote) and then a message went out to all foreign exchange dealers in this part of town, and a few of them responded to my request with quotes.

One of them was significantly cheaper than the other, so I chose him, and CashKumar connected us up. This dealer sent the foreign exchange home. It was an incredibly smooth process.

This is one example of a platform that conducts “reverse auctions”, where a customer states his preferences and you have providers who bid (in a competitive fashion) to provide the said product or service. This results in significant ease-of-use by the customers (though not for service providers since they need to have someone monitoring the requests and bidding for them).

There are several other websites that follow this model. TaxiForSure used to operate like this (I haven’t used it in a while so not sure if it still does). Your request would be broadcast to all taxis around and if one of them accepted it, a match would be made. The difference there was there was no bidding, just matching.

Then there is this AirBnB clone called TravelMob where you can post your requirements (rather than selecting an existing posting), and providers will start responding to that.

One of the “hot” sectors currently in India is hyperlocal delivery, where you request for a product, which a provider procures and delivers for you. In this context, I was thinking of reverse auctions for grocery. You upload your shopping list which goes to nearby grocers (with infrastructure to deliver to you). Since it’s all commodities, the platform can solve some kind of a set covering problem to determine which grocer has to sell you what for you to get the goods at the cheapest rate (after accounting for transaction costs). And in the next couple of hours, more than one delivery can come in to deliver the goods, which you’ve paid for on the platform!

And this multiple delivery thing reminds me of the time when I was doing my MBA (a decade ago), when Dell’s supply chain was widely hailed in Operations Management classes. And the beauty of that supply chain was apparently that once you specified your requirements, the Dell supply chain would get to work and within the next few days different components of the computer would land up at your door!

On startups, headless chicken, trend following and execution

So I recently told someone, “I don’t like your business idea. It’s too brick and mortar for me”. By publicising that I said this, I’m probably ruling myself out of a large number of possible job openings, if I want to get interested in those things. For the buzzwords nowadays in the Indian startup world are implementation, delivery, execution and getting one’s hands dirty. By professing a dislike for “brick and mortar”, I’m basically declaring myself to be a sort of a misfit for the Indian startup world.

Traditionally, things like what I’ve mentioned above – implementation, execution, delivery, etc. have never been sexy. They’ve basically been the necessary work that has had to be done to get full mileage out of one’s sexy work. The sexy work has traditionally been getting ideas, solving problems, negotiating, cutting deals and all such. And in the traditional model the unsexy work has gotten outsourced to the underlings and the less capable and to “Bangalore”.

But then this model wasn’t very sustainable. A bank I used to work for insisted that quants code their own trading algorithms, arguing that the transaction cost of explaining the algorithm to a specialist coder was significantly higher than the cost of coding it themselves. Recently, an interview with Jay Parikh of Facebook revealed that they’ve stopped bifurcating employees as those that do “day to day work” and those that work on “breakthrough ideas”.

Basically, companies started figuring out that the necessary but unsexy work was actually much more critical than they had imagined, but it was hard to motivate people to do a good job of them. So the next natural step was to play up the roles that had traditionally been unsexy. So execution became part of the mantra. Corporate leaders and gurus would talk about how they were successful due to an extreme focus on “rolling up their sleeves and getting their hands dirty”. And it seems to have worked.

Rather, I think it has worked too well. Implementation and execution has been played up so much that nobody can talk much about the kind of work that used to be sexy. So people don’t talk about ideas any more – the consensus seems to be that ideas are cheap and anyone can generate them, and what matters is only execution. Venture capitalists talk about execution, too, and of investing in companies based on the execution capabilities of the founders. And having invested, they drive their investees to simply “execute away”, and get things done.

I don’t have too many closely observed data points to corroborate this, but my reading of the Indian startup scene is that it is full of headless chicken. The focus on execution is so extreme, and the push from founders and venture capitalists in that direction so strong, that it appears that people have stopped thinking any more. And (again, this might appear speculative, and it is, for I don’t have much data to back this up) it appears that such sectors are headed for a kind of equilibrium where extreme execution is the norm, and people who like to deliberate and think before acting are getting weeded out.

I’m not saying that we should not execute, or give execution its due. All I’m saying is that we’ve gone too far in that direction, to a state where thinking might actually be penalised. And it is this bit that needs to be kinda “rolled back”. But then who will execute this roll-back?

Why VCs continue to fund me-too startups

In a previous post, I had written about how a large number of startups in India are “me-too” companies, and that a sector, once it becomes hot, gets overcrowded. I had also expressed incredulity at the fact that Venture Capitalists continue to fund such “me-too” startups despite knowing that they are copies of companies that exist.

Thinking about it, however, there is one reason that makes the decisions by VCs to fund me-too startups worthwhile – mergers and acquisitions. And this hypothesis is based on M&A activity in the “hyperlocal delivery” (one of those “hot” buzzphrases) space.

Nowadays, due to activity in the sector, the hyperlocal delivery sector has become the equivalent of Pets.com from the turn of the millennium. At a conversation a month ago, for example, a bunch of us weren’t able to fathom how something like Swiggy is valued at what it is, given its decidedly low-tech business of taking packed food from restaurants and delivering it to customers. A couple of months before that, TinyOwl, which is in a very similar business, had raised similar money.

But then two events in the recent (and maybe not-so-recent) past have indicated why VCs continue to invest (and heavily ) in such sectors. Firstly, in February, Foodpanda acquired the Indian operations of Justeat. Both companies are in the business of delivering packed foods from restaurants to people’s homes. And last week, grocery retailer BigBasket acquired Delyver, yet another company in the business of transporting packed food from restaurants to homes.

There is this Panchatantra story about a Jackal and a dead elephant. Basically a jackal comes across a dead elephant, and wants to eat it. But for this, he has to fight off other competitors, and also get the elephant’s skin torn in the process. The story involves how he uses different strategies to outwit different animals. Here is a youtube video, not very well made, of this story:

This is the cover of the  Amar Chitra Katha edition where I first came across this story.

And this link has a good summary of the story, all you need to know. Exactly like how it’s in the Amar Chitra Katha story.

The moral I derive from this story in this context is that there are different ways to deal with opponents/competitors. Some opponents you just fight off and finish. Others you learn to coexist with. Yet other you simply “swallow” or acquire. Each of them has its own set of payoffs.

Based on the deals described above, what we notice in the “transport-of-packed-food-from-restaurant-to-homes” business is that companies are preferring to swallow each other (and coexisting with some others) rather than fighting. And when one company acquires another, investors in the target company get a “soft landing”, and don’t lose all of their investment (though it is well possible that the acquisition happens at a valuation lower than that when the investors invested, but ratchets might take care of that).

Apart from investors not losing too much, the advantage of acquisitions is that existing infrastructure of an erstwhile competitor can be leveraged. And when companies are in growth mode and profit and cash are not as important as growth, an acquisition works really well in generating significant inorganic growth. It is a win-win for multiple reasons.

The fact that mergers are the preferred way of getting rid of competition in the startup world puts a cap on the losses an investor might have to bear on an investment (and there are ratchets in any case). And since the downside is now limited, the risk of investing in a me-too startup is significantly lower. In other words, investors invest in a me-too startup since they believe that in the near-worst case it will get acquired rather than shut down. And as a further consequence, there is more incentive for entrepreneurs to set up me-too startups (assuming they can get funded) rather than venturing into virgin territory.

Uninspiring startups

The other day I suddenly wanted to check out what the “startup scene” is like in India, and so went on to VC Circle, looking at companies that have raised (Series A or B) funding in the last few months. I looked at the last 20 such companies, and quickly got bored. Most of them were in businesses that seemed absolutely uninspiring and banal.

A week ago I was mentioning this to a friend, who chided me for wasting time on VCCircle doing such “research” when Tracxn has it all in one place. And so yesterday, when I was once again in the frame of mind where I wanted to see what’s going on in the startup world. I logged on to Tracxn.

So I couldn’t log on immediately. The site asked me for my “work email” before I could see anything, and when I supplied an email ID that can pass off as a work ID, I got a mail saying it will take some time before I can actually log on. That time turned out to be five minutes, after which I got a message asking me to log on, and I started browsing the section on Indian e-commerce companies.

The experience wasn’t very different from what I had on VCCircle the other day, though evidently this was much quicker and more organised, meaning I could browse more companies with fewer clicks. So I probably got past a hundred startups, not all of them funded (VCCircle reports funding events, so it is biased that way). The tracxn database contains name of company, sector, what their business is, who the founders are (including background), any funding and so forth.

I’m unaware if any biases have crept in to the Tracxn database in terms of listing, but after some cursory viewing, there was a dominant pattern that emerged. And I must admit this is not a pattern that I might have fully appreciated.

So what I found based on the Tracxn database is that most of the startup founders are very young, aged less than 25 (guessing based on their school graduation year). Not too many of them have much in terms of academic pedigree (a few recent IIT graduates here and there, but more the exception than the norm), and not much in terms of work experience (obvious, if you’re starting up before you are 25).

Again the Tracxn data might be biased, but I didn’t find too many technology companies. Most seemed to be of the on-the-ground-getting-things-done kind of businesses. And then there were copycats.

It is not hard to believe, but every time a particular sector gets established or becomes “hot”, it attracts all and sundry. And justifiably so, for the company that might ultimately make money from the sector need not be the pioneer. In fact, there might be a last mover advantage, since the later entrants can learn from the mistakes of the early entrants and set themselves up to succeed better. In that sense the copycats are justified.

But the thing to note is that a large number of such “copycat” companies are getting funded. Some of them might have raised from angels, or small investors, rather than from established Venture Capitalists, but they have obtained financial backing for sure.

Anyways, after my session of looking at startups and analysing them yesterday, the one big insight was that the market is currently rewarding risk taking ability at the cost of all other kinds of abilities. Hot money is chasing startups, so anyone willing to work with a remotely viable idea is able to raise money. How these companies will fan out going forward is anybody’s guess!