Cap and trade policy

Governments cannot leave it to the companies to control their emissions as companies don’t have incentives to control their pollutants. Cap and trade is a regulatory system that is meant to reduce certain kinds of emissions and pollution and to provide companies with a profit incentive to reduce their pollution levels faster than their peers. The approach first sets an overall cap, or maximum amount of emissions per compliance period, for all sources under the program (across the industry). The cap is chosen in order to achieve a desired environmental effect. Authorizations to emit in the form of emission allowances are then allocated to affected sources, and the total number of allowances cannot exceed the cap.

How does it work?

  • Producers need a permit for every unit of production
  • Cap is equal to the total number of permits in the market
  • Permits are tradable (market price)
  • Leads to known quantity of pollution, unknown price

Cap and Trade has been very successful to reduce emissions overall at a regional and global level. While achieving significant reductions on a regional scale, cap and trade programs can deliver substantial air quality improvements. However, they may not be the solution to every problem. For example, eliminating localized concentrations of pollution is not their primary purpose. The cap and trade approach is best used when:

• the environmental and/or public health concern occurs over a relatively large area;

• a significant number of sources are responsible for the problem;

• the cost of controls varies from source to source; and

• emissions can be consistently and accurately measured.

A good cap and trade program has to include: an effective cap on emissions, accurate way of measuring the emissions without any ambiguity, and simplicity in operations. Markets function better and transaction costs are lower when rules are simple and easily understood by all participants, leading to effective implementation of such programs.

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Gross vs. Net

Gross:

The term gross refers to the total amount made as a result of some activity. It can refer to things such as total profit or total sales.

Net:

Net (or Nett) refers to the amount left over after all deductions are made. Once the net value is attained, nothing further is subtracted. The net value is not allowed to be made lower.

Gross refers to the total and Net refers to the part of the total that really matters. For example, net income for a business is the profit after all expenses, overheads, taxes and interest payments are deducted from the gross income. Similarly, gross Weight refers to the total weight of the goods and the container and packaging. On the other hand, net weight refers to only the weight of the goods in question. For most food products, manufacturers print the net weight on the packaging for the benefit of consumers.

In economics, gross means before deductions (brutto), e.g. Gross Domestic Product (GDP) refers to the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). Net Domestic Product (NDP) refers to the Gross Domestic Product (GDP) minus depreciation on a country’s Capital (economics) goods. (The NDP is thus, in effect, an estimate of how much the country has to spend to maintain the current GDP.)

In accounting, for a P&L (Profit and Loss) statement, Gross profit, or Gross income, or Gross operating profit is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. Net profit is equal to the gross profit minus overheads minus interest payable plus one off items for a given time period.

For a business, income refers to net profit i.e. what remains after expenses and taxes are subtracted fromrevenue. Revenue is the total amount of money the business receives from its customers for its products and services. For individuals, however, “income” generally refers to the total wages, salaries, tips, rents, interest or dividend received for a specific time period.

When income is represented as a percentage of revenue, it’s called profit margin.

Source: http://www.diffen.com/difference/Gross_vs_Net

Cash & Carry retail in India

Cash and carry is a membership based retail store selling limited SKUs in bulk packs. Cash and carry has a membership requirement. Customers are usually members of the club and pay an annual fee in order to continue their membership. It is not like any other retail outlet where in one can go and buy items. It is limited to only certain members like wholesalers, semi-wholesalers and retailers. For example, METRO Cash and Carry India & Wal-Mart Cash & Carry, which are well-known to most people, are a good example of this format. Some of the recent entrants into this format are Carrefour and Reliance Retail.

Cash and carry models are able to sell at lower prices because of the basic, no frills format of the stores, volume of sales, low cost location and lower inventory carrying costs. Cash and Carry offers private labels as well as branded goods. The first Cash & Carry format store was opened in India by METRO in 2003. Most of the Indian companies want to tie-up with the International companies, and vice-versa, as 100% FDI is allowed in this format. This helps the Indian companies to learn the international best practices and technologies. The German company, Metro was the first one to enter the country. If you want to shop in Metro, you need to have a sales tax number with you and it is meant basically for retailers and distributors and not for consumers. And, you cannot shop for less than Rs 1,000 and, in product offerings, you cannot buy two to three, you have to buy six or more pieces of one particular product. Currently, Metro is present in six cities, present in all the Agricultural Produce Marketing Committee (APMC) licensed states.

Indian retailers are interested in venturing with foreign retailers as we do not have capability to manage the operations for a cash and carry format. We do not have the expertise as developed countries do. Cash and carry format requires a strong backend support. Foreign players are looking for joint ventures with local retailers because they are interested in MBOs or retail outlet, apart from cash and carry format. Having an Indian partner gives them local support and they enjoy the chance to capitalize on a network, which is already established by the local player.

Most of the purchases for the hotels business happen through a network of purchase managers, who have long-term relationship with, let’s say, 200 suppliers. It is very unorganized. It is a challenge to convert that habit to a unified buying structure in large hotels. Now Metro supplies the Taj and Oberoi on a national basis. This means those guys had to change the entire system of purchasing and orient themselves to one particular supplier. It takes some time to get convinced of these changes. There are now dedicated supply-chains to these hotel chains from the Cash & Carry stores.

The Cash & Carry format in India is still in its infancy and will face a lot of changes. They need to develop new channels, and optimize their supply chains for more profits. Also, it is to be seen on how the Cash & Carry format business will be affected with the government keen to allow FDI so that the global giants can set their shops in the streets.

Thank you.

Impact of FSA on the FMCG companies

The new flagship programme from the UPA government is the Food Security Act (FSA). The scheme proposes to provide BPL families with 25kgs of grain (Rice & Wheat) per month at Rs. 3 per kg. This is a bold step towards right to food for the poor.

Two major problems with this act now are:

1. Definition of a BPL family

There is no fixed definition of a BPL family. Everybody has their own definition for their own stakes.

2. Delivery

We all know the efficiency of our Public Distribution System (PDS) with leakages, corruption, and with lesser capacities. There is little trust that the existing PDS can deliver this to the needy.

Impact of FSA on the FMCG companies

The Food Corporation of India (FCI) will need substantially more wheat to supply three out of four Indian households, meet the new buffer stocking norms that stipulate larger quantities, and also keep aside a strategic reserve for emergencies. Unlike rice, wheat cultivation is limited to less than a dozen states.FCI already buys one out of every two bags sold by Indian farmers. In Punjab and Haryana, it buys virtually every kilo for sale. To meet its new obligations, FCI will have to redouble purchases across Uttar Pradesh, Rajasthan, Madhya Pradesh and Bihar.

When a commodity is in short supply, a bidding war breaks out with simple supply-demand economics. Companies would bid for the supplies and will be ready to pay more than the minimum support price (MSP), which the govt pays the farmers. This is one of the things expected to benefit the farmers, but it has to be executed well. Overall, the price rise is guaranteed with our faulty PDS, corruption, leakages, pests, unfavourable climate etc. One may say, we could increase the wheat production. This is not easy as our National Food Security Commission is yet to achieve its targets for the year, and from the last few years productivity has increased only by a margin. The only hope for production increase is that the farmers when paid well will invest in high-yield seeds that can increase the productivity per hectare.

Meanwhile, FMCG companies that manufacture biscuits, atta, and other food FMCG are under tremendous pressure. With already existing food inflation hitting them hard, most FMCG companies made a price increase. Most of the consumers for these categories are price sensitive and are switching to alternatives and the volumes are going low. With this status quo,the FMCG companies will be forced to increase the prices once again. This means you’re biscuits, packaged atta, and other food FMCG is going to become costlier.

Companies that are more lean and have a value perception are more likely to come out successful. This is a big challenge for the companies and it is to be seen who will emerge out of this battle.

FMCG Distribution Network

The typical chain for a grocer store FMCG product will be:

Manufacturing plant -> Company Ware House -> Regional Ware House -> Regional Stockist or Depot -> Super Stockist or Depot -> Stockist/Depot -> Distributor -> Retailer

Main Godown -> C&F Agents/Super Stockists -> Distributors as per the territories -> Wholesalers/Retailers

So, the retailers either buy from the distributor or they buy from the local wholesaler. Each has its own advantages and disadvantages. Distributor provides you with better servicing, replacement of spoilt products, credit facility of 2 weeks, etc. On the other hand, the wholesaler will give you more margins, but no credit facilities, and you don’t have compulsion of storing a set of SKUs, etc.

The inventory is under the ownership of the company only until it reaches the distributors by the C&F agents. The stockists are responsible to distribute to the retailers. Each stockist may serve around 500-1000 retailers in a proximity. Also, all the stockists are not the same in their storage. Every stockist may have his own set of categories which he can store the best, like a stockist can store rice, sugar, tea powder, biscuits, and snacks. Some may be specialists in handling premium products, and some in frozen foods. The company generally categorizes the stockists based on their specialty and allocates different super-stockists. For example, HUL categorizes them as U1 and U2 stockists, where U1 is general products and U2 stockists handle only premium products. The distribution network for premium products is different from that of discount and popular as they require much deeper distribution penetration unlike the premium products. Company categorizes based on their storage capacities where company has some standards that every stockist and distributor should have 2 months and 3 weeks of stock.

The stockists appoint salesman who take the orders from the retailers, and the delivery is made on a van. Each stockist may have 6-10 vans, and 10-12 people for the delivery process. The link between the manufacturer and the stockist is maintained by the manufacturer’s employees Area Sales Manager, Territory Sales Manager, Activation Manager, and the Re-Stockist Salesman (RSSM) manages all the distribution, purchases, labor management, and supervises the delivery process.Every month the sales targets are set by the company to all its salesforce – TSM, ASM, Sales InCharge, etc. and they handle all the relations with the distributor and sometimes push the stock onto the distributor to meet their sales targets. Companies try to motivate the channel partners with workshops about business & marketing, good warehouse practices, and a lot of other incentives. They follow a strict rating mechanism with all its channel partners and evaluate them continuously on a set of parameters.

Internally, all the sales is reported at the ASM level and then it is aggregated in a bottom-up approach. Typically, a distributor receives a margin of about 6-8% and the retailer receives a margin in the range of 9-15%. There are also many trade schemes that run throughout the year. But, these numbers change from channel to channel as per the terms of negotiation. A kirana (general/grocer) store might sell about Rs.5000 to Rs.60,000 or more per day depending on various parameters such as the location, size of the store, SKUs stocked, number of salesman etc. Typically, the FMCG manufacturer has a gross margin of about 40-50%.

Sales Representatives <– Territory Sales Exec <– Area Sales Exec <– Territory Sales Manager <– Area Sales Manager

Among distributors, we have two kinds of distributors. Some of the distributors deal in products of your company exclusively, whereas some distributors specialize in categories e.g. cooking oil. These distributors don’t have the time and resources to focus on your own brand among many brands (especially if it is a new brand). So, the company appoints its own sales representatives who visit various routes and beats every day; they do 1 beat in one day and 6 beats on 6 days. Each route should have 40 stores atleast. These sales reps visit the stores and take the orders from them and then they report those orders to the corresponding distributor. This way we create and aggregate all the demand for a brand and help the distributor cater to that area effectively. Both the sales representatives and territory sales execs do the same job. TSEs are more experienced (~2 years) in doing this job. Sales Representatives visit one beat once a week. For example, they will visit Ameerpet area in Hyderabad on Wednesday every week and take the demand. This way each area is serviced regularly. Then, we have the ASE who is responsible for certain districts say Mehboobnagar and some other district. The TSM is responsible ASE sales at a higher level and they also manage the counter sales and the trader sales to big bazaars such as Begum Bazaar. ASM co-ordinates everything at a state level and the ASM along with TSM co-ordinates directly with all the traders and manages sales to the traders too.

Once the distributor receives the stock, it is up to him on how he manages the business. For example, the distributor bought some stock of oil at Rs.50 and now it is up to him about what he will do with that stock. He may sell it at any price that he deems right for his business. Let’s say the brand is not moving much, then he may sell it at lower price to get rid of the stock. Similarly, he may sell it to one retailer at 55 rupees and to another retailer at 53 rupees. It all depends what he deems profitable or appropriate for his business situation.

The sales from the company to the distributor are called primary sales and the sales from the distributor to the retailer are called secondary sales. Similarly, the schemes provided by the company to the distributor are called primary schemes and the schemes provided by distributor to the retailer are called secondary schemes. It is not very common for distributors to make their own schemes to the retailers. They generally pass on the schemes from the company to the retailer. For example, say a retailer scheme would be: if you buy two cartons of cooking oil, then you will get a one gm silver coin.

Distribution and credit

Distribution has a huge relation with credit period. Distributors get stock from the company on credit terms, some provide a credit period for 21 days and some 30 days etc. Similarly, distributors offer credit period to retailers. This is very tricky because if the distributor gives the stock on credit for some fraudsters, then he will run out of business by next week. For example, say a distributor met a retailer who is ready to take 50,000 rupees stock. The distributor might be very happy. But, after two weeks when he comes he finds that the shop is not there. The shop owner might have sold that stock in trading market for 20,000 rupees cash. Or when the distributor goes for collections, he would say I don’t have any money to give you. So, the distributor is in a problem. It is almost like lending. You have to be very careful whom you are lending to. The same thing happens from the company to the distributor level too. If you have an association with a bad distributor, then he may take your stock but not give you money on time. Both the company (to the distributor) and the distributor (to the retailer) are very careful about whom they are dealing with and their credit history. This is why distribution is linked with credit and is very risky if not done carefully.

Distribution push and Consumer pull (demand)

Some brands which are very powerful do operate on cash basis. You may think why would distributors encourage cash. Because they don’t have an option. If there is a lot of consumer pull for a brand, then even if the brand gives thin margins (they gain on volumes) the retailers want to stock the brand and thereby the distributors are forced to stock the brand. In such cases, the profit is gained from the volumes. This is why consumer pull is very important for a brand. If consumers ask for a brand, then retailers get worried and they immediately start stocking the brand. This is where advertising and other brand building activities help in creating the consumer pull for the brand and make it less dependent on distributor and retailer push.

Though each company has its own distribution strategy and flow, most of the companies follow the above distribution framework.

Big Mac Index

The Big Mac Index is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. It “seeks to make exchange-rate theory a bit more digestible”. The index takes its name from the Big Mac, a hamburger sold at McDonald’s restaurants.

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.

For example, using figures in July 2008:
1.the price of a Big Mac was $3.57 in the United States (Varies by store)
2.the price of a Big Mac was £2.29 in the United Kingdom (Britain) (Varies by region)
3.the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
4.this compares with an actual exchange rate of $2.00 to £1 at the time
5.[(2.00-1.56)/1.56]*100= +28%
6.the pound was thus overvalued against the dollar by 28%

Limitations:

The burger methodology has limitations in its estimates of the PPP. In many countries, eating at international fast-food chain restaurants such as McDonald’s is relatively expensive in comparison to eating at a local restaurant, and the demand for Big Macs is not as large in countries like India as in the United States. Social status of eating at fast food restaurants like McDonald’s in a local market, what proportion of sales might be to expatriates, local taxes, levels of competition, and import duties on selected items may not be representative of the country’s economy as a whole.

In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. The relative cost of high-margin products, such as essential pharmaceutical products, or cellular telephony might compare local capacity and willingness to pay, as much as relative currency values.

Nevertheless, economists widely cite the Big Mac index as a reasonable real-world measurement of purchasing power parity

Source: http://en.wikipedia.org/wiki/Big_Mac_Index