The French Disconnection

As the last day of 2011 drew to a close, employees of large retail chains like Big Bazaar, Spencers, Reliance Fresh, More and Spar were busy putting up notices near all of their billing counters.

They all said, "From 1st Jan 2012 we will not be accepting Sodexo/Ticket Restaurant vouchers for any purchases."

This sudden and seemingly coordinated decision by all retail chains to stop accepting these food vouchers has put the two French companies that offer these vouchers - Sodexo and Edenred - on the defensive. Though I could come by no official estimates, at least two experts who spoke on the issue to me on background estimated the size of the meal voucher market in India at around Rs.3000 crore annually.

And though both Sodexo and Edenred have other revenue streams in India like facilities management and in-premise catering,meal vouchers are estimated to account for a bulk of their revenue. A Business Standard story in Nov 2010 estimated that 65 percent of Edenred's India revenue came from vouchers.

These vouchers, originally a way for employers to offer employees a Rs.50 tax free meal(up to two can be provided per working day) outside office, over time became a parallel currency that could be used to pay for practically anything sold at a grocery store.

So from 1st Jan as the conversations started traveling around office water coolers and Internet forums, Sodexo and Edenred scrambled to email employees of client organizations, reassuring them that between 10,000-20,000 outlets across India still continue to accept the vouchers. With the exception of cafes and fast food chains like Cafe Coffee Day, Domino's, Subway and a few retailers like Nilgiris and 'In & Out', it's mostly a long tail of small stores on that list.

Most employees aren't convinced, because they're used to doing their food and grocery shopping in modern hypermarkets and supermarkets, not at the neighbourhood kirana store. Very few are going to change their shopping habits around voucher acceptance.

Uncoordinated Coincidence

In spite of the seemingly coordinated decision by practically all large retail chains to stop accepting these coupons from 1st Jan, they are very keen to suggest exactly the opposite.

The retailers maintain that this was not a coordinated move, and that their apex body - the Retailers Association of India (RAI) - was not involved at all. The stock answer being given out by each retailer is this: the administrative cost of accepting and processing the paper vouchers was too much for them. And hence, each of them independently seemed to have arrived at a decision to stop honouring them. From the same day.

But background chats I've had with experts suggest that the real reason is to put pressure on Sodexo and Edenred to reduce their commission rates.

The way the meal voucher market operates is like this: Sodexo and Edenred market their vouchers to employers, who then pay them the full value of vouchers procured for their employees.

The employees use them at stores, who have to then send back the vouchers to Sodexo and Edenred to get back cash. Except, retailers get back anywhere from Rs.94 (the smaller retailers) to Rs.96.5 (most large retail chains) of every Rs.100 that was spent by a customer. That too, after a credit period of 30 days.

When the meal voucher market kicked off in India, most retailers were concentrated primarily on growing their topline (i.e. revenue). But over the years as competition, and now a slowing economy, has taken a toll on their profits, the focus for them is shifting to the bottomline (i.e. income).

Paying 3.5 percent to Sodexo and Edenred while operating around gross margins of 7-8 percent is something that most retailers aren't kicked about. The next closest benchmark are credit card companies who charge around 1-1.5 percent.

The decision to stop honouring Sodexo and Edenred vouchers were hence a shot across the bow of those companies, pressuring them to lower commission rates.

But if just one retailer stopped accepting these vouchers, customers would merely shift to others who would still accept them. Hence the seeming coordination.

So why is everyone so eager to suggest that it isn't coordinated?

The three letter acronym that most likely explains this uncoordinated coincidence is the CCI, or the Competition Commission of India.

There's no doubt that consumers are being inconvenienced by this move by large retailers. It's also quite possible that if things don't change, many employees and companies might stop collecting meal vouchers altogether.

Collusion isn't something the large retailers want to be drawn up for, especially by an increasingly aggressive and proactive CCI.

It'll be interesting to see who blinks first in this stand-off. Will it be the retailers, under threat of collusion and anti-consumer behaviour? Or will it be the French giants, whose voucher business might start collapsing as companies and employees find them less useful for purchases?

I suspect it'll be the French.

So expect this situation to sort itself out in a month or two at best, with reduced commission rates for large retail chains. Will that lead in turn lead to a demand by smaller stores too? Quite possible.

The thoughts and opinions shared here are of the author.