Retail loyalty program

In the United States, self service retailing boom started in the mid twentieth century. This enabled the customers to pick and choose all the goods they require off the shelf. The evolution of modern retailing started here. Since then, the concept of SKUs, pairing of goods such as coffee and sugar close together, display of items to please customers picked up.  These concepts can easily be copied across different retail chain. Hence, the customer experience among different retail chain was narrower. Therefore, the incentive for the customer to stay with a particular retailer was less and the switching cost for the customer was close to zero.

With such low switching cost, the retailer had to compete predominantly on price. When the concept of loyalty program, in which the customer can collect points on each purchase and then can spend the points for free purchases on the store itself, was introduced, the concept of customer retention came into picture. When a customer enrolls in a loyalty program and starts to collect points, the cost of switching becomes a little higher. This helped the retailer to understand the needs of the customer to serve them better than the competitors and at the same time compete on price as well.

The traditional loyalty program should be enhanced further to understand the needs of the customer better, provide unique customer experience both on and off the store and increase the switching cost of the customer by engaging with them closely. With the help of Information technology, the retailer can achieve enormous business benefit. The key points for this transformation are discussed below.

Household loyalty program: The purchases made off the loyalty card do not always reflect the actual need, wish and desire of the customer. Especially in a multi member family in which purchases are made by different members of the family at different points of time, the retailer loses information about the needs of the family. Either one card is shared by the family members or some purchases of the family go unnoticed due to unavailability of the loyalty card with them at the time of purchase. Either ways, the retailer fail to gather key information about the needs of the family as a whole.

I propose a household loyalty scheme in which all members of the family register for a club card and form a household group. All the points collected from the purchases goes to the group, which can then be redeemed by either head of the group or any members of the group based on the preferences set by the head of the group.

This allows the retailer to gather complete information about the needs of the family and also the needs of the individual members of the family. This, in turn, helps to target a family and selected members of the family for promotion and marketing. For a retailer, who already has a loyalty program up and running, the changes needed for implementing the household program is minimal. This is because the household program simply links two or more individual loyalty accounts and forms a group. However, the benefits the family gains are enormous.

Loyalty tier level: For any retailer, not all customers are the same. Some customers bring more business to the retailer than many others. A single loyalty program for all the customers may not work. Customers must be rewarded both for longevity and purchases they make. The retailer must define loyalty levels in a way that a new customer would join the program at the lowest level and earn promotion based on their purchases and longevity.

Customers at the higher tier level may get more points for the same purchases. This serves as an incentive for the customer to earn a promotion to higher levels. Also, the retailer may create rules for customers to stay at a tier level. For example, if a customer reaches the next tier level, a target should be set to maintain the same tier level for the next year and a target to earn promotion to the next level. For the retailer, this increases the cost of switching immensely. Tier level promotion along with household accounts helps the retailer to engage a family closely, understand their individual and collective needs and serve them better.

Mobile application: Mobile application is one of the fastest growing fields. People use apps for almost everything. Retail chain can use this facility to engage the customers in the following areas

Loyalty – View tier level and points purchased, Teaser on which of the favorite items of the customers their points can buy, Teaser on how many more points needed to complete their wish list.

Point of Sale – Mobile phone apps are currently used as POS terminals. Instead of issuing a loyalty card, a bar code on the app can be used for detecting and updating the points for a loyalty member real time.

Savings – The app may also show how much they have saved in every shopping based on the number of promotional purchases and purchases made on customized marketing.

Preferential treatment: Loyalty customers bring sustained business. Therefore, these customers deserve preferential treatment when compared to others. Some ideas such as a separate lane for highly loyal customers, similar to business class check-in desk in airlines industry. Using the mobile application, the customers could register for a new product, such as XBOX game, that comes to the market. If a loyal customer booked the product, preference may be given in allocating the product.

Loyalty program is slowly dying in many markets due to relentless focus on the costs. Loyalty program, which used intelligently, can create a better customer engagement, understand the needs of the customer as a whole.

Enhancements to the existing loyalty program is the key to engage customers and hike their cost of switching.

Can airlines use social media to grow?

Social media allows like minded people to come together to achieve a common goal. Similarly, the social media gives organisations tremendous potential to connect with its customers. For the airline industry, the potential for engaging with the customer is enormous.

From the airline’s perspective, the social media gives them the platform to showcase their brand image. Superior brand perception helps to win customers over the rivals. Advertisements sent through social media connect with the customer very easily and the cost of delivery is virtually zero. Hence, the airline can create as many adverts and deliver to millions of customers free of cost.

On top of this, the airline can push cheap fares, advertise flights that are low on load, give pictorial information about holiday destinations and so on. There are more than 500 million users in Facebook and more than 150 million users in Twitter. The continuous engagement with the customers will ensure that the brand remains in the mind of the people all the time.

However, if social media is not handled properly, it could create a huge problem for the airline. Some years back when Qantas tweeted that passengers in delayed flight can get unlimited alcohol in its lounges, it created a strong criticism from most of its users. A bad message can spread fast as all users can communicate with each other more easily through the social media.

Also, unimpressed customers can cause a stir. Brand perception can go down badly. When Indigo flight attendant refused to handle a wheel chair patient, the social media ripped its image. The airline has to be very careful when responding to tough times via the social media.

Airline tickets are not an impulse purchase. If a beverage is advertised all over the social media and on other forms of media frequently, a customer can make an impulse purchase on the shops to try it out. However, a customer may not be tempted to buy an airline ticket that impulsively. Still, majority of the customers world over look for cheap deals rather than sticking to a particular brand.

Social media, if used intelligently, can create hundreds of thousands of fans for an airline. But, fans turning into regular customers is not a guarantee.

Scoot airlines

Singapore airlines launched a low cost medium and long haul airline Scoot today. Scoot will be initially operating to Sydney and a couple of other holiday destinations. It is believed that Scoot will compete with Air Aisa X and JetStar in the APAC long haul low cost market.

Scoot starts with four 777-200 aircraft inherited from its parent, Singapore Airlines. Scoot will use the same airport as SIA and will fly to main airports in destination. All the 777 flights operate in a two class structure.

Now, what is the difference between Singapore Airlines and Scoot? Both use the same airport and similar aircraft for its operation. Labour market is quite flexible and productive in Singapore already and hence Scoot may not be able to make further savings from the labour market. One of the major differences is the way Scoot is marketed. The official colours and the cool nature of the official adverts are refreshing. Also, Scoot, like any other low cost airline, has debundled its entire product. Customers without hold baggage and those who are ready to starve for the duration of the flight are rewarded with lesser priced ticket.

The two class configuration also allows to carry 15% extra customers in each flight. Will these minor differences entyce travellers to take Scoot? At the moment, Scoot is targeting leisure travellers. These kind of travellers do have check-in baggage and hence have to pay for it and most people would prefer to have something to eat during long flights. Therefore most of the passengers would use the full service, that is, seat bag and food.

Even after paying for bags and food, if the fare is cheaper than Singapore Airlines, will it attract regular Singapore Airlines customers? In such a case wont Scoot cannibalise its parent company's revenues?

During economic downturns, people generally cut back on their holiday expenditures, especially on the long haul holidays. Scoot is positioning themselves to cater for a segment which is diminishing. On top of this, as long as Scoot competes with JetStar and Air Asia X, it will be a healthy competition. But, if it starts eating SIA's market share, it will pose an interesting dilemma for its parent company.

Will the idea of Scoot take off? Even if it does, will it cannibalise SIA? Only time will tell.

Improving air travel efficiency in India

Most of the airports in India operate on single runway. Even Mumbai airport, which has two operational runways, operate on one runway most of the times. Two operational runways, when used simultaneously, supports more aircraft movements as one runway can be dedicated to take offs and one for landing. However, the secondary runways in Indian airports, if present, are either small to handle all kinds of aircraft or intersects with the main runway thereby restricting its size for usage (like the one in Mumbai).

Hence, it is important to think of achieving operational efficiency using a single runway. To put it crudely, the Indian airports must think about ways to reduce the time the aircraft uses the runway for take off and landing. By some means, if the time taken by an aircraft in a runway be reduced, more number of aircrafts can be handled per given time. This, of course, must consider all the safety and separation standards.

Gatwick airport, based in London, is the busiest single runway airport in the world. It handles 52 aircrafts (take offs plus landings) per hour at peak time. Even though the mumbai airport is running on 100% capacity, it only handles 36 aircrafts per hour and Chennai airport can only manage 27 per hour. It clearly means that the runways in India can be utilised even further without making major changes to the existing physical infrastructure. In Gatwick, take offs and landings occur one after the other in a pre-decided sequence. One aircraft lands and exits the runway and while the next aircraft approaches the runway, another aircraft would use the runway for take off inbetween. This operation is deemed to be safe and is well within the rules of operation.

This mode of operation is viable in Gatwick mainly because of two factors. The technology they use to schedule the aircraft arrivals and departures and the rapid exit taxiways. The technology is provided by a company named NATS, which manages the air traffic control for the airport. The software can schedule the aircraft well in advance so that it allows the controller to control the take offs and landings from the single runway. Enormous amount of fuel is wasted when the aircraft is sent to holding patterns before getting a slot to land. NATS software would enable to controller to delay the aircraft from the origin rather than sending it in holding pattern.

Another feature of Gatwick airport is the rapid exit taxiways. With these exits, the aircraft don't have to slow down completely before leaving the runway. In most of the Indian airports, rapid exit taxiways do not exist. Hence the aircrafts have to completely slow down before exiting. This, in turn, means that the aircraft had to spend more time than required on the runway. Indian airports should explore the options of creating rapid exit taxiways to improve their runway efficiency.

Also, after exiting the runway, only a limited number of gates are present in some of the airports in India. Baring the newly constructed airports, almost all the older ones only have a handful of boarding gates. Hence boarding is forced into stands. This is an inefficient way of boarding passengers as the airliner have to use buses or other modes of transportation to board and de-board passengers from/to the terminal. For the airlines, this is time consuming and not cost effective. Some of the major airport terminals are being refurbished and so this problem should disappear in near future. However, this is an important factor for damaging the efficiency of an airport.

On top of all these, to sustain the growth levels that are seen in the past decade, airlines must reach out more to its customers. One of the reasons for the airlines' growth story is the number of lower income group migrating into middle class in India. These are the future customers for the industry. Airlines must do whatever they can to lure these middle income group to take the air mode of transport. It is true that the airlines are luring this section of people with low fares. That is not enough. Airlines could possibly think of using a road transport service, like easy bus in Europe, to transport customers near their home at a low cost. Sometimes, it takes more than 50% of the air fare to travel to the airport. That has to change. Air travel should be made swifter and easier for the masses because air travel is not just for the elite. We are entering an era in India where air travel will be for everyone. The airlines and the airport authorities must start preparing now.

Propping up Air India

The Indian civil aviation ministry has announced a plan to save the ailing national carrier Air India, by injecting 5.7 billion dollars of tax payers' money through 2020. This will enusre that AI's commitments with boeing for 27 787s will be paid for. Also, the ministry is injecting 1.3 billion dollars now to pay for its working capital and also to pay the dues to its employees and to its suppliers. The ministry has also decided to postpone the decision on letting foregin carriers to invest on Indian airlines.

The decision is a huge blow for Kingfisher, one of the privately held airlines in India. Kingfisher is struggling to pay for its operation and is only operating less than one fourth of its normal schedule currently. It has also suspended almost all of its international operations. Kingfisher is banking on much needed foreign capital investment for survival and this news should be a huge blow for its survival. (Though it is hard to see who would invest on an airline which was losing money even during the boom years)

In a model where state owned airlines are operating alongside privately held airlines, there must be a level playing field to ensure fair competition. Air India is a less productive organisation than most of the private airlines in India. Injecting money into it without a proper roadmap to repair the structural inefficiencies is a huge mistake. Without proper structural changes, it will only be a matter of time before Air India needs another bail out.

On top of all this, the civil aviation ministry is unfair to private business by denying a bail out to Kingfisher and now bailing out Air India. The private airlines has to mandatorily serve a proportion of its flights to poorly connected patrs of the country. With the number of privately held airlines and the connectivity they provide and that too with better efficiency and productivity, Air India found it very difficult to survive. AI is an organisation that lived most of its life as a monopoly and hence letting inefficiency as a part of its business.

Air India is not too big to fail. If Air India fails, it is not going to create a major catostrophy in India. Privetely hald airlines have enough capacity and coverage to fill up the void. The civil aviation ministry should have tried to make Air India lean and efficient by cutting capacity on unprofitable routes and by cutting inefficient jobs and by outsourcing non core part of the business. Instead, the ministry is buying time by injecting more tax payers' money into a failing organisation without a proper road map. That is a mistake!

Problems facing Indian carriers

The aviation industry in India is facing a very difficult time at the moment. Air India has received government support whereas Kingfisher is struggling to even pay their day to day bills. All other airlines face some difficulty in an extremely uncertain environment due to higher oil prices, euro zone crisis and a near stall in global economic recovery.

Are the uncertain environments the only problem for the Indian aviation industry at the moment? On a closer inspection, it looks like there are few other factors that could influence the profits of the airlines. Here are a few

Fuel taxes:
If an airline purchases fuel in India, then it has to pay central and state fuel taxes. The central excise duty on aviation turbine fuel is 16% according to the Central excise website. This is significantly more than any of the developed nations. Hence, if an airline is operating an international route, they are at a competitive disadvantage with all foreign carriers on its operating cost to begin with. Hence, the Indian Government has failed to ensure a level playing field for Indian carriers.

On top of this, all domestic flights within India have to pay state fuel duties. Some states charge upto 30% tax on the fuel purchased in their state. The success of the Indian aviation is largely based on luring first class train passengers to take the air for a small premium. For this model to sustain, the higher fuel duties are not helping. It could be one of the reasons for airlines to be squeezed for profits.

When the cost of fuel is more, it implies that the airlines have to maintain a higher load factor to break even. If the load is weaker, it implies that the airline is bleeding money quickly.

Infrastructure:
India has seen a phenomenal growth in the last decade. However, the same level of growth has not happened in the airline infrastructure such as airports and runways. A new airport was constructed in Hyderabad and a new terminal in New Delhi, but this level of growth in Infrastructure is not enough to sustain the level of growth the airlines enjoyed.

The country's busiest airport in Mumbai is running on near full capacity. Also all other airports in the Metros are over utilised. It means that the aircrafts have to make a longer wait for take off and landing. This increases the fuel consumption, which adds heavily to the operating cost, and had to wait for the gates and other facilities provided by the airport. For example, the international terminal in Chennai airport (4th largest city in India) has only 6 gates. Hence, the turnaround time is naturally longer. As a result of this, the aircraft utilisation is lesser.

The Government of India should have planned airport expansions that keeps up with the pace of growth and should have thought about creating secondary airports for the low cost aviation market to flourish. In most of the airports, even the public transportation is not good enough.

Airport charges:
As a result of the squeeze on the airport infrastructure, the prices of using the facilities has gone up. Due to higher demand for the airport services such as usage of runways for take off and landing has increased over the years. These charges may not be completely transferred to the customers as the higher charges may put of millions of price savvy customers from not taking the air for travel.

Hence, the airport charges, along with higher fuel cost has put an upward pressure on the operating cost. To offset these costs, the airlines sometimes have to keep the fares artificially low to fill up the seats. With these low fares, they make losses, but without the low fares, they would have made even more losses. Again, the policies of Government of India is not helping the airline industry to thrive.

Preferential treatment:
Air India would have gone bust if not for Government's bail out every now and then. Air India should have been allowed to fail. If a state organisation is not making profits - especially due to structural deficiencies - then the organisation should be allowed to fail instead of using tax money to prop it up artificially. While Kingfisher is currently having the same problem, it does not get any help from the Government. This preferential treatment from the Government is not creating a level playing field for all the carriers. In a free market environment, all airlines must be treated the same way.

Mandatory routes:
All Indian carries must operate to the remote North Eastern states to ensure connectivity. Even though the demand is less from this part of the country, all carriers are forced to run a certain percentage of their flights to remote places in India. This is a 'Red tape' imposed on airlines that are already struggling to make any money. While the intention of the Government is correct in a way, its policies should ensure that these airlines don’t lose a lot of money by taking these unfavoured routes in its schedule.

Foreign ownership:
Foreign organisations can invest 49% in Indian airlines. However, foreign airlines are not allowed to invest in Indian airlines. Most of the Indian carries are relatively new to the business and need the in-depth knowledge of the established carries of the west. Indian carries need the IT systems that western carriers use to minimise costs. Also, foreign carriers can infuse money to expand the operations to realise the economies of scale. However, in the current climate, nobody is sure on how keen the foreign carriers would be to invest in India.

Still, the restriction on foreign ownership is blocking the Indian airlines form the technology and business experiences of the established airlines of the west.

Kingfisher airlines’ misery is partly due to the policies of the Government of India. However, when other airlines are keeping their head above water, Kingfisher's track record since the year it was founded is poor. By not making a profit for six consecutive years - which coincided with the biggest boom years in Indian aviation history - Kingfisher has let itself down.

India has a huge potential for aviation business. Statistically, on average even if Indians travel 15% of how much Americans travel, it would create a market that would be half as big as America. For that to happen, the Government of India should get its policies correct and should invest heavily on the infrastructure development. Until then, the sustainability of all Indian airlines is in danger.

The multi brand retailing story

The scene at the Indian parliament was very chaotic - even by its own standards - in the first nine days of winter session last year. The reason was to block one of the far reaching reforms; allowing 51% FDI investment in multi brand retailing. The government had to give up this proposal due to vociferous demonstration by the opposition in the parliament. It was hard to believe the same BJP led NDA government, that opposes the current reform, accelerated the pace of economic liberalisation between 1998 and 2004. It looked as though the opposition would oppose anything that comes to debate.

Some of the comments and observations were absolutely stupid. Some parties claimed that it would accelerate farmer suicide. Anna Haraze compared these international companies such as Wal-Mart and Tesco to the East India Company. He also spoke about how they would rule our country if we let them in.

To understand economic liberalisation, we must go back to 1991. Preceding this period, brands like Nike, Pepsi, and Sony etc were unheard of. On a normal weekend, an average Indian living in cities would watch a regional movie on a Doordarshan channel in a Solidaire TV sipping a bottle of gold spot purchased from local kirana shop. Maruti 800 was considered a luxury car. The richest had telephone. However, the usage is limited as not a lot had telephones at their homes.

Fast forward to current times. An average Indian living in cities goes to a mall, watches ESPN on a Sony television, sipping a Coke and talking on a Samsung mobile using Vodafone spectrum. Such is the quantum of change due to the liberalisation. Some people still say that the pace of liberalisation is too slow and more reforms need to be done to maintain or enhance the growth rate.

In the late eighties, there was a severe strain in the Indian balance of payments. India almost went bankrupt and was expecting IMF to bail out by providing soft loans. India had to pledge several tonnes of gold. IMF also enforced some economic reforms in exchange for the bail out. Indian politicians were so reluctant to make changes to the economic policies until this time. A lot of people in India believe that economic liberalisation is one of the biggest achievements of the congress government. That is not true. The changes were enforced on India in exchange for money. Indian politicians never had the will to reform in a large scale until a deep crisis hit normal life.

The fruits of liberalisation is still can be seen in India. The average GDP growth rate more than doubled and almost 300 million Indians (More than the population of USA) came out of deep poverty. However, one big problem remains. Managing food supply chain. For the most part of previous year the food inflation was well into double figures. India has a few inherent problems in terms of infrastructure and technology. More than 20% of fruits and vegetables rot before it even reaches the market, which puts a lot of pressure on the supply side of economics.

The retailers and middlemen that serve India do not have the money to invest in technologies and infrastructure to move fruits and vegetables to market before it rots. Food value chain in India is one of the worst in the world. From farmland to household, the value chain is long. In such a scenario, the farmer is unable to sell the products directly to the market and hence was paid lesser by one of the bigger middlemen who are a part of the value chain. Almost all the middlemen in the value chain do not add any value to the product. These middlemen do not have the expertise and technology to preserve the food items from rotting. Most of the food inflation in India is due to these structural inefficiencies. Without addressing these inefficiencies, manipulating supply and demand would only give temporary relief. For most of last year, RBI was using monetary policy tools to contain inflation rather than reform the food value chain structure.

This is exactly why the entry of multi brand retailer is essential. They have the money to create infrastructure and the technical expertise to preserve the food until it reaches the market. Multi brand retailers deal directly with the farmers and hence time to market reduces and structural efficiency increases. Therefore, the accessibility of food items to common man at affordable prices increase.

In rich countries, such as UK and EU, multi brand retailers play a crucial role. Also, many small retailers also co-exist. Hence the fear of Wal-Mart and Tesco trashing all small retailers is not true. Multi brand retailers increase the efficiency of food value chain, provide more jobs, provides technology and better price for farmers, and most importantly reduce the cost to end customers. The only people to lose out is the middlemen who made a lot of money without adding any value.

The government of India must decide whether they support shoppers and farmers or they support the middlemen who have served the country and its people poorly over the past decades. Or, they should wait for another deep crisis to push more reforms.

The EU and aviation emission

Aviation business was brought into the EU Emission trading scheme (EU ETS) from the New Year. This essentially puts a cap on the amount of fuel the airlines can burn in a given time and if they want to burn more fuel, then the airlines have to buy carbon credit from other companies that managed to save from their carbon emission limits. While there are certain questions still being asked about emissions allocation and carbon pricing volatility in the past years, the inclusion of aviation industry was largely debated in the courts of law and was finally given an approval.

Even though, aviation accounts for less than 2% of world carbon emission, the economics of this emission is little different to that of others. Carriers from other continents that are forced to pay for carbon emission within EU are not happy about this extra cost for their operation. But, for this writing I would like to argue for the case of EU carriers only.

Aviation business is unique in a few ways from other business as it is very high fixed cost intensive and fuel is the biggest cost for running the business. Also, the type of fuel required for running the business is one of the most expensive ones. Hence, whether EU laws are in place or not, airlines must control their fuel cost to stay competitive. A thermal power station can control the coal input to create electricity based on the forecasted demand. In other words they can convert all their fuel into money. However, in aviation, no matter whether the flight is full or almost empty, the fuel cost remains almost the same. Hence, the amount of fuel burnt is not tightly coupled with the revenue made from the flight. This may not be true in other participating industries in the EU emission trading scheme. Hence, this gives added incentives to airline industry to reduce their carbon emission naturally without any EU emission laws.

The cost of creating one ton of carbon from aviation fuel is far greater than cost of creating one ton of carbon from coal powered business. Also, the revenue earned by burning one kilo of aviation fuel is different to that of revenue earned by burning one kilo of other fossil fuels. In such a scenario, how can a single price for carbon across all industries using different fossil fuels work? Surely, the emission trading scheme would favour one industry over other.

Also, the basis of carbon allocation for industries is flawed. All emitters are given same amount of carbon emitting licenses that they emitted in the previous years. This favours large emitters and cripples small emitters from expanding. When the same is applied to the aviation industry, it would surely cripple small airlines from expanding due to high emission costs. The emission trading scheme should stop this 'Cap and Giveaway' scheme and should study the carbon reduction potential of each industry and also the carbon reduction potential of each fuel type. With a single code across the continent, the business landscape would be tilted with aviation industry in the wrong side of it.

Another flaw from the previous years was the over allocation of the carbon credits. However, EU claims that the carbon allocation problem is sorted from the 2012 period; there are two possible scenarios. If the carbon were priced lower in the market due to over allocation, then the industry would prefer paying lower for carbon emission instead of investing in carbon reduction. If the carbon were priced higher in the market due to under allocation, then the companies which wants to invest in carbon reduction would find it difficult to fund it. In either ways, the emission trading scheme is not encouraging companies to invest in carbon free technologies. Instead of paying for carbon emission, the airline industry could do better by investing in low emission aircrafts and technologies. It is inevitable for the airlines to move in that direction due to the cost of fuel and prevailing competition. EU ETS is a major distraction for the airline industry.

On top of all this, there is another severe danger. The danger of moving quickly towards bio fuel. Bio fuel emits very less carbon than the kerosene based aviation fuel. However, it has many other consequences. The population of the world has reached 7 billion last year. We do not have enough land and fresh water resources to feed all people three times a day. If Bio fuel picks up, then farmers might be forced to use their farming land to create bio fuels. This will cripple the health and safety of people, especially to those living in poor countries. The cost of malnutrition and other human costs should also be factored into, in the pricing of bio fuels. Again, EU ETS is a major distraction. It encourages the usage of bio fuels, instead of encouraging investing in genuine technologies that reduces carbon footprint.

Investment in renewable energy such as wind and solar is the way forward for most of the industries. It is a very long distant dream as far as aviation industry is concerned. Aviation industry should invest in technologies and aircrafts that reduces carbon emission. Any other laws or treaties such as EU ETS is a distraction towards that path.