Sunday, April 8, 2012

Cafeteria Lessons: Sodexo Coupons

Few months back we saw most of the retail giants in the country refusing to accept Sodexo coupons against the items purchased from their stores. This got a lot of media attention and led to some hot debates on the need of such coupon services. I won't  waste too much time repeating whatever has been already published on various websites and would rather like to share my personal opinions about this line of business. But for those who got out of hibernation today, I have included the information available in the public domain as well.

1) Rule governing the issuance of food coupons

The rule says that food perks provided by an employer to its employees will be exempted from tax. This perks can be given in the form of free food on company premises during working hours or through food coupons redeemable only at food joints. The maximum amount (in form of coupons) which will be exempted from tax is Rs 50 per meal. This means the maximum denomination of such coupons can be 50 Rs. It also means that if you work 22 days a month, the amount of coupons you are eligible for in a month is 50*2*22 i.e. 2200 ( Assuming two meals per day). 

2)  Benefits to the company

Companies started offering food coupons to their employees to make their pay packages more attractive. Since the coupons are tax free, companies nation wide promoted this as additional income to their employees. From being a 'good to have' differentiator, food coupons soon became a must have component as all companies started offering coupons to their employees. Employers do not gain or loose much in actual terms other than the administrative hassle involved.

3)Benefits to the employee

2200 of tax free component means a potential saving of 660 Rs if the employee is in 30% tax bracket. The fact that until recently most grocery stores were accepting Sodexo coupons for every purchase and not just food items meant that this was pure extra cash to the employees.

4) Benefits/Losses to retail stores

Now here is the big twist. Retail stores have to share 3-5 % of revenue received through Sodexo coupons with Sodexo. Which means, for every 100 Rs you pay to a retailer with your Sodexo coupons, retailer can claim 95 to 97 Rs from Sodexo depending on the mutual agreement.

Sodexo Money Cycle: Courtesy Kiran Dhanwada

Also, the retailer gets his money only after 20 to 30 days which is a clear loss of one month's credit. 
Now the big question is why do retailers agree to such harsh arrangement. Initially, a few retailers thought of accepting Sodexo coupons as a great idea to drive sales. Since employees all over were looking for places to use their coupons at, accepting Sodexo was a huge advantage for retailers. But gradually as every other store started to accept Sodexo coupons, the advantage is gone. Infact, now any retail store which refuses to accept Sodexo while others are still doing so stands the chance of loosing a good volume of business. 

5) Benefits to Sodexo

  • 3-5% commission
  • 30 days of interest free capital
  • Every Sodexo coupon comes with an expiry date. There is complex procedure to renew the coupons when you fail to use them before expiry date but this option is seldom utilized. So practically speaking, expired Sodexo coupons means a 100% gain for Sodexo.

 Government's stand

One can wonder why would govt allow someone to print currency alternates. Govt argument is that since Sodexo coupons come with an expiry date, they can not be considered as currency. Further they can be used only for buying food items. (We all know this is not true). Taxman further argues that its important that it is ensured that the tax exempted money is actually spent on food and hence the need of Sodexo cards. What I fail to understand is that as long as you know that an individual is spending 2200 Rs on food per month, how does it matter exactly which money is he using. Why can't the govt just increase the standard deduction by 2200 if tax exemption for food is what they want. It is fairly acceptable to assume that any one who has enough income to be taxable, spends at least 2200 Rs on food for his family. Further, when govt can give an exemption of 800 Rs for transportations without checking if its actually spent on transportation why can't they do the same for food. Now this is where I see Sodexo's expenditure - Lobbying cost for such policies.

Why are coupons popular internationally

Lets say the officials of a nation decide to run a program for the homeless people in which the govt would bear the cost of food for all such people. Since the govt wants to actually create income for these people and not just give tax exemption, they might want to give away the income in form of coupons. Coupons would ensure that the people actually spend that additional income on nutritious food rather that buying cheap food and spending left over money on drugs or liquor. In such cases I do see a limited sense in this system. But coupons could be of great use when trying to deal with optional expenditures like education or books (unlike unavoidable expenditure like food).

There is much more which can be discussed about this topic. But I will include that in my subsequent posts.