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Corporate Jul 5, 2012

How the new Peter Principle caused Kingfisher's downfall

By Vivek Kaul

A few years back I had booked a ticket on an early morning Kingfisher flight from Mumbai to Ranchi, or so I had thought. I came to realise I was on Kingfisher Red and not the full service Kingfisher only once I was inside the aircraft.

Sometime later I came to realise that several people I knew had had a similar experience. They had booked flights thinking they were on the Kingfisher full service, only to realise later that they were on Kingfisher Red.

The airline clarified that it was not their mistake but the mistake of the websites that did not make a distinction between Kingfisher Red and Kingfisher.

But the question that cropped up in my mind was this: why would Kingfisher, a premium-upmarket brand, want to dilute its positioning by associating itself with Kingfisher Red, which was essentially a low-cost airline.

Vijay Mallya started Kingfisher Airlines in 2005. A few years later he tried to get into the low-cost airline business, which was the flavour of the season back then, by taking over Deccan Aviation which ran Air Deccan, a low-cost airline that was on the ropes financially.

He rebranded it as Kingfisher Red. By doing this he diluted the premier positioning that Kingfisher Airlines had acquired in the minds of the consumer.

To explain this a little differently, let us take the example of Hindustan Unilever Ltd (HUL). It sells Lifebuoy, which is targeted at the lower end of the market and goes with the line Tandurusti ki raksha karta hai Lifebuoy. The company also sells Lux, which is targeted at the upper end of the market and comes with the tagline Filmi sitaron ka saundarya sabun.

Mallya running a low-cost airline under the premium brandname of Kingfisher would be like HUL selling Lux soap under the name of Lifebuoy premium. Reuters

Of course, the positioning of Lifebuoy and Lux is totally different. And HUL tries to make this very, very clear in the minds of the consumer. First of all, both the products have different names. Second the pricing is very different. And third, the advertisements of both the products emphasise on the "different" positioning over and over again.

Now Mallya running a low-cost airline under the premium brandname of Kingfisher would be like HUL selling Lux soap under the name of Lifebuoy premium.

And it's not just about the brand name and the positioning in the mind of the consumer. The philosophy required to run a premium brand is totally different in comparison to the philosophy required to run a low-cost brand. Hence, Mallya buying Air Deccan was mistake. And then changing its name to Kingfisher Red was an even bigger mistake.

So in the end this did not work and Mallya decided to close down Kingfisher Red. He explained it by saying that "We are doing away with Kingfisher Red, we do not want to compete in the low-cost segment. We cannot continue to fly and make losses, but we have to be judicious to give choice to our customers."

Kingfisher might have just survived if it had not made the mistake of buying Kingfisher Red. World-over several airlines have tried running a full-service and a low-cost airline at the same time and made a mess of it. A company cannot run a low-cost airline and a full service career at the same time. The basic philosophy required in running these two kinds of carriers is completely different from one another.

But the bigger question is what was Vijay Mallya trying to do by running a liquor business, a real estate business and an airline at the same time? This was other than spending substantial time on his expensive hobbies of trying to run a cricket and an F1 team, and cheaper ones like commenting regularly on Twitter.

There isn't really any link among the businesses Mallya runs. Some people have tried to explain that the airline was just surrogate advertising for the beer of the same name. But then there are cheaper ways of advertising than running an airline and losing thousands of crores doing it.

Businesses over the years have become more complicated. And just because a company has been good at one particular business doesn't mean it will be good at another totally unrelated business.

Mallya is not the only one realising this basic fact. The period between 2002 and 2008 was an era of easy money. Businesses could borrow money very easily to expand as well as get into new business. And this is what finally got businessmen like Mallya into trouble.

The British economist John Kay calls this The New Peter's Principle. The original Peter Principle essentially states that every person rises to his or her level of incompetence in a hierarchy. Simply put, as a person keeps getting promoted he is bound to be appointed to a job he is not good at. The same is the case with companies which keep buying and diversifying into different businesses, until they land up in a business they don't really understand. And that drives them down.

Mallya was a victim of The New Peter Principle, his unrelated diversification into the airline business cost him dearly. The lack of focus has hurt Mallya's core alcohol business as well andUnited Spirits is no longer India's most profitable alcohol company. That tag now belongs to the Indian division of the French giantPernod Ricard.

An era of easy money got Indian entrepreneurs, including Mallya, to get into all kinds of things which they did not understand and had no clue about. Kishore Biyani brought the retail revolution to India, having been inspired by Sam Walton who started Wal-Mart. His retail businesses were doing decently well till he decided to get into a wide variety of businesses from launching an insurance company to even selling mobile phone connections.

When times were good he accumulated a lot of debt in trying to grow fast. Now he is in trouble in trying to service the debt and rumours are flying thick and fast that he is planning to sell Big Bazaar, his equivalent of Wal-Mart. This, after he sold a controlling stake in the cloths retailer, Pantaloons, and also Future Capital.

Let's take the case of DLF, the biggest real estate company in the country. It tried getting into the insurance and mutual fund business. It had to sell its stake in the mutual fund business and, if news reports are to be believed, it is trying to lower its stake in the insurance venture. It also tried unsuccessfully to get into the luxury hotel business and failed. Hotel Leela tried to get into the upmarket apartments space and failed.

Reliance Energy (the erstwhile BSES) was turned into Reliance Infra and now is into all kinds of things. It is building one section of the Mumbai Metro, the completion of which keeps getting postponed. It is also supposed to build the remaining portion of the sealink in Mumbai.

The days when businesses like Tata and Birla used to do everything under the sun are long over. In fact, those were the days of the licence quota raj with very little competition. Hence companies could get into a new space as long as they got a license for it.

An interesting example is that of the Ambassador. The car had the same engine as of the original Morris Oxford which was made in 1944. The same engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.

Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.

Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn't caused ripples. Same is true with the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.

Hence it's becoming more and more essential for businesses to focus on what they know best. Mallya has reached a stage where banks are now ready to sell his homes in Mumbai and Goa to recover a part of the debt that he owes them. And when it comes to airlines, it's time Mallya read what Warren Buffett told his shareholders a few years back.

"Now let's move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down. The airline industry's demand for capital ever since that first flight has been insatiable.Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy US Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid.But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt."

The bigger sucker saved Buffett. But Mallya may not have any such luck

Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com

by Vivek Kaul

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