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WAZIR INSIGHTS

Strategy : Alliances : Investments

wazir.in


TABLE OF CONTENTS

The new contraction strategy

December 2010

It’s time to catch the FDI bus

October 2010

Need for a Billion-dollar Indian Fashion Brand

October 2010

What India Prefers to Wear

June 2010

Understanding Consumer’s Perspective towards Malls

June 2010

Ever Evolving Indian Palate

June 2010




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opinion

opinion

The new contraction strategy!

By Harminder Sahni

ThE EuPhORIA AbOuT EXPAndIng quICkly – bOTh ThE sTORE sIzE And ThE PREsEnCE ACROss IndIA – Is gRAduAlly dyIng dOwn And RETAIlERs ARE REAlIsIng ThAT blIndly fOllOwIng ThE “EXPAnsIOn fIRsT, EffICIEnCy lATER” sTRATEgy CAn dO MORE hARM ThAn gOOd. As A REsulT, ThE fOCus Is RIghTly shIfTIng TO OnE MARkET And OnE sTORE AT A TIME.

Not too long ago, the euphoria in India’s modern retail market was about how many million square feet someone has leased; how many cities one is present in; and how quickly one is going to be a ‘panIndia’ retailer. The idea was that if resources are available, one should grab as much market share as possible. It was also supported by the notion that retailing is a business of encouraging consumers to buy the same stuff from ‘our’ stores and not from ‘others’. Hence, some Indian

groups went on a massive expansion of their fledgling retail businesses by launching multiple formats across a large number of urban centres. Future Group propounded the theory of “expansion first and efficiency later”, and this was taken to another level by Reliance Retail. 56 . images retail . december 2010

While Future Group, with its legendary leadership, and Reliance Retail, with its enviable free cash from parent company, could execute this strategy, not necessarily without facing serious challenges on the way, many others who tried to blindly follow them have been left severely hurt, only if they managed to survive. There are lessons for not only these survivors but also for Future, Reliance and the international retailers who are also making their presence felt in India.

The “bigness” idea has many dimensions and the most obvious ones are: Large size stores: Landmark is a case study in terms of how they moved from being only a books retailer to selling all kinds of consumer products when they leased a larger store at

Forum Mall in Bangalore for getting cheaper rentals. Large numbers of formats across categories: Future Group and Reliance Retail have competed to open a new format every quarter so as to offer every conceivable consumer product to their target consumers. However, many of these formats have either been closed or some are still present at only few locations. Various store formats within same category: As a complete contrast to one-size-fits-all, retailers have followed whatever size fits the available space. Large number of cities and towns under coverage: India’s large untapped consumer market is so attractive and tempting that going “pan-India” became the key word without anyone asking what it means to be a pan-India player. Does it

mean being present is all regions or all major metros or every town in India? A PAn-IndIA Presence? I wonder whether the idea of being pan India and trying to be everything to everyone was driven

by the fact that many promoters and professionals were looking at retail as any other consumer products business. Given the “relatively smaller size” of the Indian economy, most consumer products businesses have to be distributed all over India to have a decent size of business. And for most business houses, their growth ambitions could not be satisfied being in one industry, as the overall industry size generally was small and not growing fast enough. Hence, they had to look elsewhere and venture into new industries. The idea of being able to do any business in any area may have given the confidence to enter multiple formats of retailing and also going “pan India”. Anyhow, we all know there have been pitfalls in this whole exuberance and many companies have suffered badly, but overall the industry is much wiser

and saner. It has led to emergence of another trend that is quite healthy for the future of the robust modern retail sector. Instead of saying “why not?” to expansion to another category and another format or another city, most retailers are saying “why should we?”

Retailers are realising that a large store is not necessarily a draw for large sales. Every square foot of extra retail space not only means extra rent, but also more CAPEX, CAM, deposits, manpower, inventory and utilities costs.

InsteAd of sAyIng “why not?” to exPAnsIon, most retAIlers Are sAyIng “why should we?” The strategy to be in numerous categories is just not viable for everyone. On the contrary, each consumer product category offers enough opportunities in the Indian market now.

one mArket, one store I would give a lot of credit to Bharti Wal-Mart for focusing on one market and one store at a time. I expect they will now move into the next gear and grow their business much faster. Their entry, launch and growth path will be like a hockey curve – starting at a very slow pace and then picking up quite rapidly after a few years. Even players such as Shopper’s Stop Ltd in India have followed a similar path and kudos to their management for not getting drawn into “land grab” during the euphoric years of 2005-2007. Now, Shoppers Stop is expected to double its number of stores in the next two years. On the size of the stores, too, retailers are realising that a large store is not necessarily a draw for large sales. Every square foot of extra retail space not only means extra rent, but also more CAPEX, CAM, deposits, manpower, inventory and utilities costs. In a way, the spiraling costs of retail space have made retailers more conscious of the cost of space – direct december 2010 . images retail . 57


opinion as well as indirect costs. The larger size stores start getting attractive on rental economics only when the format is seen like an anchor by mall developers and offered unfair benefits on all commercial terms. But the stores in the middle – 5,000 to 15,000 sq.ft in area – are always in a very difficult position where they don’t have the advantages of a large store but have all the disadvantages of a small one.

plans with a clear objective of growing the business while actually reducing the geographical footprint. I wonder whether we should call it “expansion strategy” or “contraction strategy”. The basic premise is that when some businesses were launched a few years ago, maybe the NCR market did not have the potential to take more than a few stores or maybe didn’t have quality space (read malls) to open more stores or just the excitement of

over the country than managing the business. We got down to the analysis that whether it will be possible for a business to still grow to its projected numbers while shrinking it back to one or two major regions or clusters. It did require a bit of reformatting of stores, rethinking of location strategy and, in some cases, even the overall positioning was tampered with, but in all three cases we could suggest a plan under which the companies will

Most successful retailers are successful because of various reasons and one of the most important reasons is the consumer’s perception that they are dealing with the best in town – best in terms of range, price, service and overall experience. It is just not possible for many companies to position themselves as best on so many fronts even in isolation; and in presence of competition, it becomes almost an impossible task. Hence the strategy to be in numerous categories is just not viable for everyone. On the contrary, each consumer product category, be it food and grocery, consumer durables or fashion, offers enough opportunities in the Indian market now. With a growing economy, there will be more than enough room for growth for serious players.

management to go “pan India” took them to many other cities. The overall cost of management of these scattered stores was making it near impossible for a business to make money. Senior executives of the companies were spending more time travelling all

achieve their overall expansion targets and will also make money while actually becoming a regional or even only NCR player. I reckon that “slower and smaller” isn’t the right answer for every business just as “expansion now, efficiency later” may work only for few. All retailers existing or aspiring must recognise the DNA of their companies and their capabilities and constraints before choosing either of these strategies. I am certain whichever strategy you may choose, there will always be many winners and a few losers like in any other business!

Slower and Smaller Recently, we worked with three retail clients on redrawing their expansion 58 . images retail . december 2010

I would give a lot of credit to Bharti Wal-Mart for focusing on one market and one store at a time. I expect they will now move into the next gear and grow their business much faster.

ABOUT THE AUTHOR

Harminder Sahni is managing director of Wazir Advisors.




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• HarD TALK •

Need for a

Billion-dollar Management consultant Harminder Sahni analyses the highs and lows of the fashion retail industry. Covering a spectrum of topics, each month he looks at the need of the hour for India.

106 | October 2010 | IMAGES Business of Fashion

Indian Fashion Brand One of the most talked-about events in the Indian fashion industry has been the recent launch of Zara with a big bang. But the bigger bang has been the stupendous consumer response to the brand. If one is to believe the first week sales numbers being touted, it must be the biggest opening for any kind or any size of store in the history of Indian retail. This raises

Europe a couple of years ago. H&M had been holding that position for more than 10 years. Many turf battles had been fought during this decade-long war for supremacy. Finally, Zara came out on top and has since been holding strong. Zara is a brand created in Spain – a country not known for its fashion brands unlike Italy and France, or for mass

the all-important question: How and why has an international brand been able to achieve this in India where veteran Indian brands have failed? We are talking about Zara - a fashion brand that is truly global and probably the most powerful today. Zara replaced H&M as the largest fashion retailer of

retail businesses as compared to U.K. and U.S.A. Starting with the Spanish market, Zara’s dominance quickly spread to Europe and today, it seems poised to become the new global leader in fashion. This brings us back to the question: How did Zara do this? How did it not only dream but also achieve this


Zara - a fashion brand that is most powerful today was created in Spain – a country not known for its fashion brands...How did Zara do this? tremendous feat in one of the toughest consumer product segments that is fashion clothing? Moreover, how is it that no Indian fashion brand can boast a reasonable share in their own domestic market — a market that is one of the fastest growing apparel markets in the world? The answer probably lies in my query itself. I believe Zara dared to dream because Amancio Ortega, the ninth richest man in the world, with a net worth of USD 25 billion, had the courage to dream. Amancio Ortega has led his company from the front and continues to take active part in all design and related issues at Zara. A noteworthy point here would be that there’s an evident simple correlation between the GDP size of Europe and the U.S. (at USD 16 and USD 14 trillion, respectively) and the size of the largest fashion retailers — Zara in Europe at close to USD 10 billion and GAP in the US at around USD 15 billion. Hence, though it is probable that India at USD 1.0 trillion GDP may have a fashion retailer with sales of around USD 1.0 billion, in reality we don’t have any brand or retailer even in the ball park. What could be the possible reason for this underachievement of Indian fashion brands and retailers? The reason

certainly is not the market size or its potential. With more than USD 30 billion of domestic apparel consumption, there is certainly enough potential for a billiondollar player. And with an economy that is growing at an 8 per cent plus rate, the opportunity to create a big brand is far more probable as compared to a stagnant or mature market. We can analyse other factors such as consumer readiness, price sensitivity or even lack of quality retail space, etc., but I believe the problem is more fundamental. As I mentioned earlier, one of the biggest hurdles could be the lack of visionary leadership. India cannot boast of anyone who set such an ambitious target and then led the whole organisation to achieve this within a reasonable timeframe. We don’t hear, much less read, of any such plans or even intent from any of the players in the Indian fashion market. Another reason that comes to mind is the lack of attention to womenswear by most of the apparel companies. Women’s brands by leading companies are either addendum to their men’s range or are an extension of the men’s brand. There are very few large “women’s only” fashion brands that are successful. This is in complete contrast to the developed international markets where women’s

fashion dominates the scenario. Most big brands and retailers derive more than 65 per cent of their sales from womenswear. The situation in India is not only reverse but worse; men’s fashion contributes more than 80 per cent of the revenue. Over years this gender bias has become a self-fulfilling prophecy. The whole eco-system from designers, merchandisers, suppliers, store staff, brand managers and all other stakeholders have become quite proficient at managing men’s brand whereas there’s a complete vacuum in the women’s segment. Coming back to Zara’s blockbuster launch, it is quite evident that the majority of consumers in Zara stores are women, and therefore the sales are in the same ratio. So, if fashionable merchandise is available in a nice ambience, women are the best bet for any fashion player. What remains to be seen is whether any Indian fashion business house will pick up this gauntlet and have the courage to create a really fashionable apparel brand and retail business targeting a billion dollar sales from the domestic market, and then raise the bar to make it an international power brand like Zara has done. There’s ample reason for us to believe that it can happen, but there’s enough reason to doubt as well whether there’s any Indian company that actually believes that it can do it. In most likelihood, it will be a new entrant in the market. Someone who may not even be on the horizon today. Not unlike Koutons who have created India’s first Rs 1,000-crore men’s apparel brand whereas many old players have still not made the mark. The worst scenario will be if all Indian players choose to go with international brands and retailers successful in India rather than creating their own brand. A market with such huge potential, with significant history of textile and apparel, and with tremendous fashion sense and fraternity, deserves to not only create its own brands but also owes it to the world to offer yet another unique model as Zara has done. BoF October 2010 | IMAGES Business of Fashion | 107


JUNE 2010

UNDERSTANDING CONSUMERS’ PERSPECTIVE TOWARDS MALLS‘ Harminder Sahni

Strategy : Alliances : Investments

wazir.in


Understanding consumers’ perspective towards malls

Before we talk anything about a mall, I would try to first define a “mall”. I have over years debated this with many industry professionals and have conducted numerous consumer surveys to figure out what actually is a mall. Let us think at the absolute basic level and as a layman, and not be biased by our own learning and experience as professionals. A mall is a large building housing a lot of stores meant for convenient shopping for a certain target consumer. It also houses other services like parking, food and entertainment to complete the shopping experience package. If you notice, that other than being housed in a single building, all other elements are that of any other market or bazaar. With this basic definition, we can safely say that a mall is nothing but a covered and air-conditioned market place, with shop fronts opening to the inside of the building versus opening to the street as in case of a street bazaar or market. Hey, Grand Bazaar in Istanbul and Duommo in Milan may be the oldest malls that were designed for more comfortable and convenient shopping in all seasons for their respective customers. In India, it’s been in the last 10 -15 years only or so, that for majority of Indians the airconditioning has become affordable and available in almost all spaces that they inhibit. Initially, it was our office, then one bedroom, and then the car, followed by some stores and it was quite inevitable that all the markets will became air-conditioned, and that’s what necessitated the basic need to construct malls. Otherwise, there was no law required or policy that came in the way of constructing malls anywhere in India. If you ask another basic question that whenever an Indian consumer decides to go shopping, what do they decide? Whenever I have posed this question during formal or informal research, the answer invariably is that a consumer looks at her list of things to shop and thus the scoping of the shopping mission is done and she decides on which market to go to. Hence, most Indians go shopping to a market most of the time and not to a shop or store or to a particular brand. Due to the traffic conditions and overall lack of comfort during shopping, we are quite used to combining a lot of mini shopping missions into one big shopping trip so as to avoid frequent visits. Thus, the choice of the market becomes most critical for every shopping mission – and the market that offers most comprehensive shopping options becomes the most preferred choice. All major markets in India in all cities and towns offer myriad options to fulfil numerous shopping missions. And that’s where the new markets of modern India – the malls - seem to be failing the consumers’ expectations. Consumers did sign up for an air-conditioned and secured shopping environment when they entered the malls. However, they have been disappointed with the offers that are available in the malls – which initially offered only clothing, shoes and other apparel and fashion items. So, while malls promised to be all under one roof markets, they didn’t match up with the general consumer’s definition of all under one roof. Still consumers liked the overall experience of the mall, so even though they couldn’t fulfil their shopping needs, they kept thronging the malls in hordes and thus leading to lower and lower conversions for merchandise retailers; and higher and higher revenue for parking lots and for the food courts. Indian consumers found their own unique utility of these modern markets – the places to hang out, eat and entertain!

2


Understanding consumers’ perspective towards malls

The irony of this scenario is that while its the retailers who pay most of the cost of the managing and maintaining the mall, they are the ones who get the least out of visiting consumers. I expect that while the mall developers and retailers are figuring out ways to be more relevant to their consumers, even the consumers will learn over time to tone down their expectations from the malls in terms of shopping mission fulfilment. The consumers will learn the positioning of a particular mall and will also be well informed about the items that are available and the brands that are present in a particular mall - so as to plan their visit as they used to or still do for traditional markets. Some of the leading malls have also taken the initiative to communicate their positioning through media and not leaving it to the consumers to discover over many visits that what is available and what is not available in a particular mall. This discovery process can get quite frustrating for serious shoppers and they may form a negative opinion unnecessarily. This way malls and consumers have started meeting somewhere in between and I hope that the journey will be faster and smoother in the times to come. Another important aspect that mall developers need to keep in mind is that even at a size of million square feet, it’s not possible for a mall (read market) to be everything for everyone. Each mall needs to and should decide on the target consumers it wishes to attract and the specific mission of that set of consumers. Once that has been defined, then the location, the overall structure, the tenant mix, their adjacencies and the support services can be defined properly to match the relevant needs to target consumers. A mall is no different than any other consumer brand and needs to be handled like that. A mall manager needs to think like a brand manager and keep his/her eyes and ears open to stay up to date regarding the target consumers and their needs, and keep fine-tuning the mall’s tenant mix and services offered to maximise consumers’ satisfaction and that inevitably will make the mall a commercial success for all tenant retailers. One of the most important aspects of a mall as brand is the communication, and constant communication with the target consumers. To start with, at the time of launch of the mall, consumers need to be communicated about the overall positioning and brands and services available at the mall and then over a period should be communicated about the new brands and services coming in, and the promotional communication to attract consumers to revisit and come prepared to spend. We haven’t seen it yet but very soon we’ll see some of the malls being repositioned to attract a very different set of consumers with a completely new set of offers from new retailers. While entering towns beyond metros and Tier 1 towns, mall developers will have to work harder to make their mall relevant to the local consumers. One of the biggest issues is that there are only limited number of national retailers that are entering these markets even now, and even if they are its through franchisees and not directly. Also, the consumers have this perception of shopping in malls being more expensive than their local markets. May be

3


Understanding consumersâ&#x20AC;&#x2122; perspective towards malls

they are right as they see only big and premium brands in malls and not the affordable ones. Mall managers will have to keep this in mind to ensure that they offer a fair mix of local and national retailers, premium and affordable brands, daily and occasional needs to bring large number of consumers to the mall more often. One mistake that they should refrain from is to bring down the overall building structure and ambience standards as compared to malls in the larger cities. These smaller markets are the large markets of future and while a mall can change the tenant mix, it will be hard to upgrade the building itself to withstand the inevitable competition. It will be a good and pragmatic investment to create the best of class structure with excellent services to last for the next couple of decades if not more. We believe that every year in the last decade, we have seen one mall at least that raised the bar of the industry and if this trend continues, weâ&#x20AC;&#x2122;ll soon catch up with the world standards in terms of mall development and management.

4


JUNE 2010

EVER EVOLVING INDIAN PALATE Harminder Sahni

Strategy : Alliances : Investments

wazir.in


Ever evolving Indian palate

Recently there has been lot of debate and discussion about the origin and authenticity of “biryani”. Some believe that biryani belongs to the Mughal Darbar, while others reckon that it was the Awadh Durbar that gave old pilaaf (pulao) a twist to create biryani. Fans of Deccan food don’t even want to join the discussion, because for them anything other than Hyderabdai Kachhi biryani is not worth consideration. I am citing this example of mere biryani as a metaphor of complex evolution of some of the most popular Indian dishes and the reason for ambiguity about their origin. The heated and animated discussions about origin and authenticity also show that how strongly Indians feel about their food. My belief is that going forward the assimilation of various cuisines will be more pronounced and much more accelerated. Moreover, it will not be left to evolution but the creative chefs and processed food companies will invest heavily into research to create “new” out of the amalgamation of “old”. We have seen a lot of this stuff happening already. For example, MTR coming up with variety of quick service dosas and McDonalds and Pizza Hut, creating special meals for Indian consumers by taking cues from popular Indian street food. In the past, North Indian food was hugely influenced by the cuisines of myriad conquerors that arrived incessantly from the West. However, even till early 60s, South Indian food was available only at few places even in big cities like Delhi. By now, South Indian food is all pervasive and in 2009, a leading magazine has ranked Dosa as India’s most popular food. The availability of South Indian food really exploded in the last couple of decades. But most people in North India still believe that South of India has absolutely same cuisine and that is mainly Masala Dosa. Most will actually be shocked to know that there is something called South Indian Non Veg food! Such is the lack of knowledge and understanding of Indians about foods from other regions. With this background let us look at some of the developments at the macro level that will impact the emergence of Indian food over the next few years. I have culled out 7 most important elements that will possibly shape the food habits of Indians and thus will create trends that will have a major impact on the evolution of the Indian food industry, and these are: 1.

Younger Indian Population

2.

Increasing family income

3.

Accelerating urbanisation

4.

Unprecedented interstate migrations

5.

Inevitable time poverty

6.

Increasing percentage of working couples and decreasing availability of household help

7.

Cosmopolitisation of major urban centres

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Ever evolving Indian palate

These 7 elements may lead to major trends in development of new food categories, acceptance of regional foods on Pan India basis and acceptance of processed and packaged food over the next decade. I would like to cite 5 such major trends likely to emerge from these macro level developments: 1. Many more Indian cuisines will become available across India - Food courts and Specialty restaurants have already initiated this phenomenon and it is bound to accelerate going forward. When Indian families eat out, whether casually or formally, they are always looking for something different than what they eat at home, and they are at their experimentative best during such family outings. A look at the menu card of a multi-cuisine restaurant even in a Tier 3 town like Jabalpur gives a clear idea about the range that Indian consumers wish to have when eating out. The menu on an average will have more than 100 dishes and it could go up to as high as 250 dishes from myriad cuisines, some recognizable and some totally indigenous to the chef and/or restaurant. This is a huge opportunity for chains of multi-cuinsine restaurants or its different avatar that is Food Court. 2. Localisation of Indian cuisines say a Bengali dish modified to match Western Indian palate - a la Indian Chinese food, that has led to establishing local Chinese Food as a regular feature for urban India. While consumers are always keen to try new flavours and dishes, for any cuisine to become part of mainstream, a certain level of localisation is a great catalyst. We see a big role of packaged processed food industry to innovate and develop fusion food products that entice and rope in larger set of people as regular consumers. Increasing competition amongst Indian F&G retailers will encourage them to come up with unique food offers to not only differentiate but also to garner market shares. A Pan Indian retailer will be best placed to take specialties of one region to the other with necessary modifications. If retailers rise to the occasion, processed regional food could be the biggest private label opportunity for them in times to come. 3. Processed food – more than “ready to eat”, “ready to cook” becoming the norm in Indian kitchens. As Indian mothers and house wives juggle work life balance and still want to serve their own hand made food, the “ready to cook” will offer that in between acceptable path. This will also make the younger generation aware of the cuisines that are outside of their own community and will create wave for acceptance of processes and packaged food, when they leave parents home for work and subsequently to set up their own homes. Brands will play a major role in this, as consumers need to be educated about the processed food and break many a myths about the lack of freshness and usage of preservatives, etc. This transit generation – having grown up on ghar ka khana (home made food), made every meal time using fresh ingredients – has many questions about processed food but is also very open to try and adapt, if right assurances are provided.

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Ever evolving Indian palate

4. Eating out â&#x20AC;&#x201C; already a norm for lunch will extend to cover breakfast too. For most of the working urban Indians, lunch is either in the form of ordered tiffin food or a quick bite at the food court in office complex or a munch at the street food. The percentage of people carrying food from home has dwindled drastically and is close to zero already. We expect this trend to continue and extend to breakfast time also. As more and more people commute longer hours for work, they will tend to grab a breakfast either on the way to work or at the work place itself. Some quick-service restaurants (QSRs) are already offering special breakfast menus, and many Cafes will transform to become breakfast joints very soon. Some more food chains will position themselves as places for quick and healthy meals, be it breakfast or lunch or evening snacks. As Coffee chains dominated the scene during last decade, it is very likely that breakfast and quick meal restaurants will rule the market in this decade and probably beyond. 5. Indian consumers are experimenting a lot with international cuisines at mass level, still no international cousines other than Chinese have become a mass consumption meal item so far. There could be many reasons but Chinese food definitely gained from the fact that it was offered at street level first and exclusive restaurants were a much later arrival. Other international cuisines, be it Italian, Thai or Mexican have lost out in this due to their non-availability outside expensive restaurants. But things seem to be changing really fast and the massification game for Italian cuisine has already started. Recently, Maggi has entered the instant pasta market posing a direct competition to ITC Sun Feast pasta, which was maintaining monopoly in the segment. Consumers are ready not only to experiment but also to adapt International cuisines whole heartedly but it is the marketers who are slow in bringing value for money offers to the consumers.

In summary, we anticipate Indian food industry to evolve quite rapidly on all fronts, be it type of food or cuisines, points of sales, location of consumption, price points and branding. We also reckon that in the next decade, there will be emergence of at least 2 or 3 billion dollar plus food companies and these could be a retailer or a brand or a restaurant chain or even a food delivery company. It is a huge potential opportunity and its size and scale will only be limited by the vision and execution capabilities of entrepreneurs and professionals. I sincerely hope that the current players will keep investing in product innovation and market development, and new Indian players as well as international companies will join the fray to educate the consumers and thus expand the market.

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Ever evolving Indian palate

About Wazir Advisors Wazir Advisors is a management consulting firm focussed on consumer products, services and retail sectors covering Fashion, Food, Home, FMCG, Consumer Durables , Media & Entertainment, Health, Auto and Education.

About the Author Harminder Sahni is the founder and Managing Director of Wazir Advisors and can be contacted at harminder.sahni@wazir.in

Wazir Advisors Pvt. Ltd. Plot no. 115, Sector 44, Institutional Area, Gurgaon â&#x20AC;&#x201C; 122002 Tel: + 91 124 459 0300 www.wazir.in

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Wazir Insights