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In the Headlines-April 10th, 2015

In The Headlines

India’s Increasing Appetite for U.S. Fast Food

McDonald’s entered India in 1996, against the backdrop of a market that was hesitant to try fast food and was still dependent on the “tiffin” lunch boxes many Indians still lug to work. Two decades later, things have changed. India’s fast-food industry is expected to double in size to $1.12 billion by 2016, according to the Economist Intelligence Unit. And demographic trends mean it could become the next mega-market for international fast food firms.

The country’s fast-food market today is only one tenth the size of China’s, said Ajay Kaul, CEO of Jubilant FoodWorks, a company that grants franchises in India for Domino’s Pizza and Dunkin Donuts. But unlike China, which saw a decline in fast-food sales last year, India’s market is expected to grow, thanks to changing consumer preferences and the largest youth population on earth. “I would think it’s a revolution waiting to happen,” Kaul said. India’s population stands at 1.2 billion, but it has only a little over 2,700 chain fast food outlets, leaving most people unreached, according to Euromonitor International. Fast food has yet to broadly expand beyond the largest cities. India also has a new prime minister, Narendra Modi, who has been a vocal advocate of increased foreign direct investment.

“The quick-service restaurant market is still very nascent, and there is ample space for more and more brands to come in and coexist,” said Amit Jatia, vice chairman of Westlife Development, a firm that operates McDonald’s restaurants in western and southern India. Jatia plans to establish 175 to 250 McDonald’s restaurants in the next five years across west and south India.

McDonald’s altered about 70% of its menu for the Indian market, according to Euromonitor. That meant staying away from beef in a country where cows have religious significance, and appealing to a population that tends to enjoy spicy food with options like McSpicy Paneer and Chicken Maharaja Mac. They have also opened some 100 percent vegetarian restaurants. (That said, contrary to popular American perceptions, nearly 70% of India’s population is non-vegetarian.) “We have localized our menu and due to this, we are not just seen as an international brand, but one which the people of India feel comfortable with,” said Jatia. KFC, owned by Yum! Brands, had a slight edge over McDonald’s because of its chicken-centered menu, which has worked well in India, said Arvind Singhal, chairman of Technopak, a management consulting firm in India.

While the U.S. chains have “Indianized” their menus, Singhal said that only partly explains the rising appeal of fast food in India. The country has 356 million people between the ages of 10 and 24, giving it the world’s largest youth population, according to a United Nations report. With more young people entering the workforce daily, growth in the economy, a rising female work force, and increased mobility among consumers, the traditionally difficult Indian market has become hungry for a more diverse menu, Singhal said. A challenge for America’s fast-food restaurants in India has been to maintain the cohesion of the global brand while still appealing to the local market, said Kaul of Jubilant. “There is an extent for localization,” Kaul said. “You can’t tamper with the global brand; it has to be same as anywhere else in the world.”

Kaul emphasized that a market like India, long dominated by homegrown businesses, can be targeted through strategies other than just customization. Domino’s introduced its 30-minutes-or-free delivery in India, for example, despite the country’s famously difficult traffic jams. Today, Domino’s has more restaurants in India than any Western competitor does, with more than 850 locations. McDonald’s runs only 369 locations. Domino’s now generates more than 17.2 billion rupees ($277 million) in revenue, compared with $222 million for McDonald’s. Domino’s, which is valued at $1.6 billion in India, has tried expanding its business by getting Indian consumers to view pizza as a meal replacement, and not just a snack, Kaul said.

When it comes to the fast-serve coffee industry, most Indians still refrain from the American habit of daily, morning drinking before and during work. To get around the cultural challenge, Dunkin Donuts entered the food market, offering fast-food sandwiches—the only country where the chain does so. “What’s important for an American brand to understand is that the Indian terrain is atypical—consumers are clearly most demanding, and there is too much focus on food,” Kaul said.


Airbnb Prepares for Growing U.S. Tourist Travel to Cuba

Airbnb operates in 190 countries and 34,000 cities around the world, but its latest addition could be a momentous one. The online lodgings marketplace said today it now offers properties for rent in Cuba, becoming one of the first U.S. companies to establish itself there since President Obama and Cuban President Raúl Castro announced in December, 2014 that they would restore diplomatic ties after more than 50 years.

Expanding an Internet service to Cuba means overcoming a host of challenges, including spotty Web access, limited payment options, and the still-ongoing U.S. embargo. So Airbnb is starting small. U.S. travelers can choose from about 1,000 listings throughout the country, mostly concentrated in Havana. The company says its model—stay in somebody’s home, pay less than a hotel would charge—will help it facilitate travel that will not pave over Cuba’s unique character, forged by decades of isolation from its northern neighbor. “Think about the big hotel chains coming in, with mass development,” says Nathan Blecharczyk, Airbnb co-founder and chief technology officer. “The idea here is to support growth in travel that isn’t disruptive, that actually celebrates and preserves Cuba as a distinct destination.”

The Cuban properties displayed on Airbnb’s site, their photos sprinkled with glimpses of the nation’s famously ancient cars, show off a broad range of colonial architecture and are available at extremely low rates. The Home Lunass offers a private room and bathroom a five-minute walk from Old Havana for $34 a night, including free breakfast. (Dinner is extra.) Next to the double bed is an old cassette player. “Hello to my potential guests,” writes the owner, who gives her name as Yamilee. She says she rents rooms to foreigners full-time and used to practice medicine.

Like other U.S. websites, Airbnb had been forced to block IP addresses that originate in Cuba, in accordance with federal law. On January 20, when the U.S. relaxed restrictions on Cuban travel, Airbnb initiated talks with the U.S. Department of State and the Office of Foreign Assets Control, which enforces trade sanctions, to clear its expansion into the country. In February and March, the company sent employees on trips to Cuba to meet with potential hosts and learn more about the existing network of casas particulares. That is the local term for vacation rentals by homeowners like Yamilee who have long done business with tourists from countries such as Canada and Spain, typically relying on word of mouth and, sometimes, a borrowed Internet connection from a local business. In Cuba, “the Airbnb style of travel was already thriving,” says Molly Turner, the company’s head of civic partnerships.

Only about 4% of Cuban homes have Internet access of any kind, so Airbnb had to find local intermediaries to help manage listings and connect hosts with customers. That led to the problem of paying hosts, most of whom asked for cash. That’s not how Airbnb works; travelers pay online, and the site takes a 3 percent cut and transfers the rest to a host’s bank account. So Airbnb had to contract a licensed money remitter to make payments on its behalf. The company chose Florida-based VaCuba, which specializes in sending cash and gifts to families in Cuba. “What Airbnb has done is quite creative,” says Collin Laverty, founder of Cuba Educational Travel, which organizes U.S. exchange programs. “Cuba is really a dirty word in the banking world.”

As Airbnb tries to expand its Cuban network, it is likely to find some hosts unaccustomed to American travel standards—among other things, many homes do not have hot water. The company also remains limited by U.S. laws. It cannot show Cuban properties to users outside the U.S. or directly help Cuban hosts design ads for their rentals. And although the U.S. has relaxed travel requirements for people visiting Cuba for reasons such as professional research, educational activities, and “support for the Cuban people,” it still bans visits that are explicitly for tourism.

Airbnb’s first step into Cuba is likely only the beginning, says Dan Restrepo, a former adviser to President Obama on Latin America and the Caribbean who has consulted for Airbnb on its Cuba expansion: “So little has happened between the U.S. and Cuba for so long, I don’t think anyone really knows how this will develop.” But, he says, “This creates connectivity between two peoples in a way that is outside the reach of government on both sides.”

Citations
1. http://www.cnbc.com/id/102557486 – CNBC
2. http://bloom.bg/1amwnCP – BusinessWeek


The Good News Is . . .

• The U.S. trade deficit in February fell sharply to its lowest level since 2009, likely as a labor dispute at one of the country’s main ports depressed both imports and exports. The Commerce Department said the trade deficit narrowed 16.9% to $35.4 billion, the smallest since October 2009. When adjusted for inflation, the deficit narrowed to $50.8 billion in February from $54.6 billion the prior month.

• Red Hat, Inc., a leading provider of enterprise operating systems, middleware and cloud computing services, reported earnings of $0.43 per share, an increase of 10.3% over year-ago earnings of $0.39. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $463.9 billion, an increase of 15.9%. Management attributed the company’s results to growth in its subscription revenue as well as strong demand for its hybrid cloud technologies.

• A unit of the UnitedHealth Group has agreed to acquire the Catamaran Corporation in an all-cash deal worth nearly $13 billion. UnitedHealth will pay $61.50 a share for Catamaran. The acquisition represents a further consolidation of the pharmacy benefits management business. Catamaran, which is based in Schaumburg, IL, will be combined with UnitedHealth’s pharmacy services business, OptumRx. Catamaran manages more than 400 million prescriptions each year on behalf of 35 million people—or about one in every five prescription claims in the United States.

Citations
1. http://bloom.bg/1D8BRvz – Bloomberg
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://red.ht/1bZJFWz – Red Hat Inc.
4. http://nyti.ms/1bZJGtz – NY Times Dealbook


Planning Tips

Tax Tips When Buying a Vacation Property

Many Americans who find a desirable vacation rental often consider the possibility of purchasing a similar property in their favorite vacation spot. If you are thinking of buying a vacation property, here are some tax tips to consider. Be sure to consult with your financial advisor to understand how such a purchase fits with your personal financial situation.

What qualifies as a vacation home – The Internal Revenue Service considers a vacation home or a second home one that is permanently in place (even though it could be moved) and offers sleeping, cooking and toilet facilities. This would include not only a home but a condo, co-op, mobile home, RV, house trailer, or even a yacht. It need not be fancy to take advantage of available federal tax breaks. It does, however, have to have a structure: bare land does not count.

Mortgage interest deduction – For tax purposes, you can deduct qualified residence interest on a mortgage secured by a vacation home–that is in addition to interest that you pay on a mortgage that is your primary residence. It also applies to additional loans on your vacation home including a second mortgage, a line of credit, or a home equity loan. If you itemize your deductions on a Schedule A and you have a mortgage on a qualified home in which you have an ownership interest, you can deduct the interest you pay on that mortgage. The total amount of debt that you can use for purposes of calculating the home mortgage interest deduction for your main home and second home cannot be more than $1 million ($500,000 if married filing separately); some exceptions apply for grandfathered debt.

State, local and personal property tax deductions – Local and state real estate taxes paid on a second or vacation home are also generally deductible. You can also deduct personal property taxes payable on the value of personal property at your vacation home. Personal property taxes are imposed by state or local government on certain kinds of property like your cars or boats. In some states, it might also be imposed on recreational vehicles like snowmobiles, ATVs and jet skis; if so, those may be deductible. Note, however, that only personal property taxes are deductible on these items for federal income tax purposes and not your registration fees.

Home improvement expense deductions – If you rent out your property, you may be able to deduct some home improvement costs. To qualify, you must not personally use the home for at least 14 days or 10% of the number of days you rent it out at a fair rental price. Assuming that you meet the criteria, you do not take the deduction for home mortgage interest on a Schedule A but rather you claim the expenses related to the property together with rental income received on a Schedule E. Those expenses may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation – the total of those will reduce the amount of rental income that is taxed.

Tax treatment on gains and losses from selling your vacation home – When you sell your vacation home, you will likely be subject to capital gains tax. There is an exception if you convert your vacation home to your primary home. Remember, however, that you must have owned and lived in the vacation home as your primary residence for two of the five years prior to sale. The years do not have to be sequential. You can live in the house in year one and in year five and still qualify. You can only claim the capital gains exclusion for one home at a time. So if you sell your primary home and move into your vacation house for two years, you can take the exclusion on a subsequent sale. Whether to make that change solely for tax reasons may depend on a number of factors including the amount of the gain or loss. If the market turns sour, you can never claim a loss for the sale of a personal residence, no matter how much of a drop in value you suffered. You may, however, claim a capital loss on investment property (assuming your vacation home qualifies as a rental).

Citations
1. http://1.usa.gov/1GfgZVZ – IRS
2. http://bit.ly/1wI6YJI – Investopedia
3. http://onforb.es/1mvricl – Forbes
4. http://bit.ly/1IhHwCS – ValueYourMoney.org
5. http://bit.ly/1Cy46T1 – HowStuffWorks.com
6. http://bit.ly/1yNHsSP – Bankrate.com

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

In the Headlines-April 17th, 2015
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