Retailing evolution in India - an analysis.
RETAILING EVOLUTION IN INDIA
AN ANALYSIS
Module I
INDEX
What Is retailing? 3
2 Retail Industry: World Wide 4
3 Indian Retail: A Snapshot..............................6
4 Indian Retail: Changes in the air..................11
5 Environmental Analysis................................17
6 Indian Retail: Strategic Issues 27
7 Future Trends: 344
8 Exhibits 36
9 References....................................................39
What is retailing?
"Retailing consists of all those business activities, which are involved, in the sale of goods or services to consumers for their personal, family or household use."
Retailing involves
- Interpreting needs of the consumers
- Developing good assortments of merchandise
- Presenting them in an effective manner so that consumers find it easy and attractive to buy.
Retailers include street vendors, local supermarkets, department stores, restaurants, hotels, barbershops, airlines and bike & car showrooms and even the nearby 'kirana' stores. Still retailing may or may not involve the use of a physical location. Mail and telephone orders, direct selling to consumers in their homes and offices and vending machines - all fall within the purview of retailing. In addition to it, retailing may or may not involve a "retailer." Manufacturers, importers, non-profit firms and wholesalers are acting as retailers when they sell goods and/or services to final consumers.
2 Retail Industry: World Wide
Retail with total sales of $6.6 trillion1, is the world's largest private industry and is home to a number of world's largest enterprises. Over 50 of the Fortune 500 companies and 25 of the Asian Top 200 companies are retailers. The industry accounts for over 8% of the GDP of the western economies. In the last decade this industry has witnessed a lot of consolidation. Large chains have leveraged superior scales of operations and sourcing to capture share from the unorganized sector, while offering best price to the consumer. Traditionally, most retailers have had very localized operations, but this is changing as retailers face low rates of growth and threatened profitability at home. Expansion into new countries will help them in sustaining their top-line growth and as well as permit global sourcing. In fact, a few retailers are now aggressively targeting Asia - Carrefour has already grown to 22 hypermarkets in China in under 4 years and also has presence in Taiwan, Thailand and Korea, while Ahold has 40 stores each in Malaysia and Thailand.
Profits in retail have also been steadily rising and have generated more shareholder returns (18%) than banks (9%) and insurance (15%) in the last decade. Retail is also one of the world's largest employers, accounting for 16% of the US and 12% of Poland2workforce.
Scale in sourcing, merchandising, operational effectiveness and ambience have driven the spread of organized retailing. Grocery, Electronics and Do It Yourself (DIY) stores are examples of categories that compete on the strength of better pricing, which in turn is driven by superior sourcing and merchandising, and cost efficient operations. Wal-Mart, Carrefour, Tesco, Home Depot and Kingfisher are benchmark retailers in these fields. In apparel, home furnishings and furniture, the advantage is driven by the market's ability to provide better products in a comfortable ambience at affordable prices. In these cases, sourcing capability has to be backed by strong design capability and store management. Gap is a good example of this model of retailing. Over the past few decades, retail formats have changed radically. The new formats have been based on creating "killer" propositions through putting together unbearable ranges at unbeatable prices and with strong service such that buyers are willing to drive often up to half an hour for them. This has reduced the need for such stores to compete for costly city centre real estate, thereby boosting their cost-competitiveness.
The evolution of Internet has helped further broaden the scope of operations of large retailers like Barnes and Noble, Wal-Mart etc. The 'bricks and clicks' business model is emerging as a superior option to the pure 'clicks' model; both in terms of consumer acceptance and in terms of operating cost.
3 Indian Retail: A Snapshot
3.1 Large and Unorganized:
The Indian retail market is in sharp contrast to the global situation. Like the rest of the world it is large, sales amounting to $180 billion and accounting for 10 -11 per cent of the GDP. However it is also exceptionally fragmented and unorganized. With close to 12 million outlets today, India has the largest retail outlet density in the world. However many of these outlets are the basic pop-and-sons stores with their basic offerings, fixed prices, zero usage of technology, and little or no ambience. These are however highly competitive having the advantage of unpaid/cheap labor (family members), free land (traditional property or unregistered outlets) and zero taxes. There are four main formats in the unorganized sector:
* "Kirana" stores: Indian retail is dominated by these family-run counter stores that stock a range of branded/unbranded items. They are multi-purpose stores and sell items of essential need, both food and non-food.
* Kiosks: These small, pavement stalls stock a limited range of food and beverage items. Kiosks are convenient for impulse or emergency purchases, and are located in busy commercial and market areas.
* Street markets: Held at fixed centers in urban and rural areas on a daily or weekly basis, street markets comprise multiple stalls (often more than 200) selling a wide range of food and non-food products. These markets compete on both variety and price, and also sell counterfeit goods and smuggled items. Street markets have traditionally acted as a place for social gathering. The bazaars in Poland and open-air wholesale markets in Russia are the foreign equivalents of this format.
* Street vendors: These are mobile retailers, providing perishable food items (milk, eggs, vegetables and fruit) at the customer's doorstep. While their prices are higher than alternative retail channels, they compete on convenience.
3.2 Reasons for Fragmentation:
There are many causes for this low level of modernization of the Indian retail industry. The primary reason is the high restrictions imposed on the consumer goods industry till the nineties. The consumer industry was throttled by controls, production was paralyzed by licensing system and companies were either forbidden entry or denied scale. Lack of incentive led to withering investments in product development. Imports of foreign goods were also thwarted by high tariffs that often rose above 150 per cent. The inability to offer a wide range of products was further worsened by the marketer's inability to create economics of scale in sourcing. The high fragmentation in suppliers and the supply chain, the restrictions on inter-state movements and on stocking prevented development of scale.
The lack of consumer culture, along with low incomes, prevented the development of formats such as department stores that work on superior ambience and design to capture consumers. It also has to cope with the middle class psychology that the bigger and brighter a sales outlet is, the more expensive it will be. Limited products put consumers perpetually on their back-foot. The high tax regime and savings-based government programs led to low spending by the consumers. The tightly controlled television and radio media also shielded the population from the growing consumer-oriented culture sweeping the west3. But the good news is that lifestyles in India are changing and the concept of "value for money" is picking up.
Lack of regard for retail as an industry, leads to virtually no access to capital, land or people available to aspirant retailers. Constraint of FDI prevented the entry of most of the world's leading retailers. Very few banks were willing to invest in retail. Real estate restrictions put a heavy premium in accessing land of reasonable size.
Given the size, and the geographical, cultural and socio-economic diversity of India, there is no role model for Indian suppliers and retailers to adapt or expand in the Indian context. The key therefore is innovation or re-invention. Another major challenge facing the organized retail industry in India is: competition from the unorganized sector. Traditional retailing had been established in India centuries ago. It is a low cost structure, mostly owner-operated, has negligible real estate and labor costs and little with no taxes to pay. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector.
In contrast, players in the organized sector have big expenses to meet, and yet have to keep prices low enough to be able to compete with the traditional sector. High costs for the organized sector arises from: higher labor costs, social security to employees, high quality real estate, much bigger premises, comfort facilities such as air-conditioning, back-up power supply, taxes etc. Following table shows the different factors that affect current Indian retailing industry scenario.
Factor
Description
Implication
* Barriers to FDI
* FDI not permitted in pure retailing at present, can franchise as well as enter into technological alliance
* Players can enter wholesale trade
* Global players absent
* Limited exposure to best practice skills/technology
* Unavailability/high cost of real estate
* Pro-tenant rent laws
* Restrictive zoning legislation
* Non-availability of government land
* Lack of clear ownership titles: complex sub-letting arrangements
* Difficult to find appropriate real estate- location, size - especially in city centers
* High land costs owing to constrained supply
* Disorganized nature of transactions
* Supply chain bottlenecks
* Several segments e.g. food and apparels impacted by reservation of products for small scale units - legacy effects plus current restrictions
* Distribution logistics constraints- restrictions of purchase and movement of food grains, absence of appropriate cold chain infrastructure
* Limited product range, few brands in several categories e.g. groceries
* High cost and complexity of sourcing
* Complex taxation systems
* Differential sales tax rates across states
* Sales tax evasion by smaller stores
* Added cost and complexity of distribution
* Cost advantage for smaller stores through tax evasion
* Multiple legislations
* Stringent labor laws governing hours of work, minimum wages, payment of PF
* Multiple licenses/clearances required from different agencies
* Limits flexibility in operation - days stayed open, use of part time employees
* Irritant value in establishing chained operations, can add to costs
Following table shows details about some of the largest retailers in India3:
3 "Business World" 31st March 1999
4 Indian Retail: Changes in the air
According to a press release issued by Confederation of Indian Industry (CII) on May 4th 2001, the retail industry in India ...
This is a preview of the whole essay
* Stringent labor laws governing hours of work, minimum wages, payment of PF
* Multiple licenses/clearances required from different agencies
* Limits flexibility in operation - days stayed open, use of part time employees
* Irritant value in establishing chained operations, can add to costs
Following table shows details about some of the largest retailers in India3:
3 "Business World" 31st March 1999
4 Indian Retail: Changes in the air
According to a press release issued by Confederation of Indian Industry (CII) on May 4th 2001, the retail industry in India is expected to have a market size of US$ 300 billion by 2010, if it continues to grow as fast as the GDP say about 6-7%. Taking into account a situation, when the supply chain constraints have been eased, real estate markets made more organized and tax structure rationalized, retailing in India has the potential to grow as large as $450 - 500 billion by 2010, according to a CII-McKinsey report on 'Retailing in India'.
This certainly translates to a huge potential for the organized segment to grow and is seeing the onrush of a lot of players. The organized segment as of now contributes around Rs 50bn. Out of this Rs 6bn comes from food products retailing while the rest on contributed by non-food products retailing.
Studies done by KSA Technopak indicate that organized food and grocery retailing would spread from southern cities of Bangalore, Chennai, and Hyderabad to Mumbai, Calcutta, Delhi, Kanpur Patna, and Indore while organized non-food retailing would spread from top metros to other cities like Ahmedabad, Lucknow, and Ludhiana etc. The studies also point to the trend towards large stores increasing their share of contribution from 2% of the total organized retailing, to around 20% by 20054. So this study again paints an optimistic picture for the organized retail segment.
Considering all this data we need to analyze what is it that makes us look at this segment so optimistically. We see a number of patterns emerge which point towards a number of factors like the changes in the society, efforts undertaken by the government and last though not the least part played by the companies involved themselves.
4 KSA Technopak Survey
See Exhibit [2] for details on traditional versus modern retailing in various countries
The evolution in the last decade in India is depicted as below:
4.1 Contribution due to changes in society:
* Increasing growth in disposable income: This growth is most evident in urban markets, but has also impacted rural markets. This growing high-income population is triggering off the demand for consumer goods and will enable the penetration of higher quality/higher priced products.
* Changing life style: Concurrent with the rising income we are witnessing a change in the life styles of people. There has been a growth in ownership of key consumer durable assets such as two-wheelers, televisions, refrigerators etc.
* Better product and shopping options available with consumers: In the "license raj" consumers were not free to choose what they wanted to buy. The result was that Indians could buy a car as long as it was a Morris Oxford or a Fiat, any toothpaste as long as it was Colgate and any radio as long as it was produced by Philips. Post liberalization however the customers face an array of choices. Be it a car, they can now choose from a Mercedes Benz to a Maruti 800, or a toothpaste where they can choose between a Pepsodent, a Colgate, a Aquafresh or a Close-up.
* Increase in exposure to media: Over the last decade there has been a radical explosion in media. The movement was started by the advent of cable channels in the early nineties. The media bombardment has exposed the Indian consumer to the life style enjoyed in more affluent markets and raised their aspirations as well as demands from the shopping experience.
* Change in spending and indulgence tendencies: With reduction in interest rates and the easing of taxation norms, the consumers have started spending more on consumer products.
* Change in women and in family structures: An urban woman is typically more educated than earlier and in many cases working. Families have also drifted more towards nuclear units than joint structures. Indian woman is seen to being increasingly under time pressure, desirous of some time for herself and thus more prone to convenience options, more demanding on store ambience and looking for solution providers and external guarantors of quality and usability.
* Rural market charging up: The rural market is beginning to emerge as an important consumption area. It's now playing a lead role in FMCG and durables.
4.2 New Supply Chain is Getting Established
Over the last few years increased liberalization, manufacturing Sophistication, continuous reduction in customs duty and abolition of quotas has transformed the consumer goods sector. Along with the consumer durables sector auto and FMCG sector has also been in a explosion mode with increasing capacity, models and demand. Entry restrictions have been removed and FDI cap has been either removed or reduced in most of sectors. This has resulted in players like Samsung, LG, Sony, Kellogg and Perfetti entering the Indian market. This has increased the depth in brands and products and also given more sourcing options to any retailer who wants to open a chain. This also has resulted in better average margins. Along with this high quality sourcing options in Apparels have also become available. Also India has become a global outsourcing Hub for apparels and home furnishing retailers with companies like Gap, Tommy Hilfiger, Ralph Lauren, Crate etc increasingly sourcing products from India.
4.3 New Competition
Corporates are entering while established players are expanding. Over the last 5 years a number of large business houses like Tatas, RPG, Rahejas, Piramals have entered the retail business and setup chains/stores/malls. These include Foodworld, India's leading supermarket chain by RPG, Shopper's Stop, India's leading apparel multi brand outlet by Rahejas and Crossroads, Mumbai's first international class shopping mall by Piramals. Also Petroleum retailers like HPCL, IOC and BPCL are expanding their presence form fuel retail to grocery (Speed Mart, Bazaar) and convenience stores.
Also Chennai based consumer durables retailer like Viveks, Apparel store chain like Pantaloons and Bangalore's food retailer like Niligiri's, which are basically family owned businesses are expanding. The growing attractiveness of this has attracted new entrepreneurs with ideas and VC's with funds. Subhiksha, a discount grocery chain in Chennai has expanded to 50 stores in 3 years. VC's like ICICI, IL&FS are also willing to invest in this business.
4.4 Contribution due to government initiatives:
* Relaxation of a number of regulations by government: The government has over a period of time taken measures like lowering import duties, making labor laws uniform, moving towards decreasing SSI reservations and removing restrictions on food grain movement (so that it moves directly from farm to processors without going through intermediaries) which are a step in the right direction.
* Rethinking on existing real estate laws: The single biggest cost input surely needs some rethinking on part of government to make organized retailing attractive to the retailers and remove the artificial land market entry barrier.
* Restructuring in tax regime: This essentially calls for a uniform sales tax for all states so that locating a manufacturing unit to exploit the operational advantages is possible.
* Increased investment and focus on infrastructure by government: FDI has been a major factor in the development of retail worldwide and FDI should be permitted in pure retailing so that with coming of MNC's the Indian industry is exposed to the best practices of the West. The inadequate levels of urban infrastructure coupled with bureaucracy lead to smaller if not absence of retailers in places they would have liked to exploit.
The main requirements of the organized retail segment in order to establish a long lasting foundation and flourish are the following:
* Real Estate
* Proper sourcing arrangements (Economies of Scale)
* Proper logistics infrastructure
The contributions of government and the outlook of the society as such help in meeting the requirements of the organized retail segment.
The above mentioned factors coupled with the active promotion campaigns by the corporates involved is leading to an increased awareness about organized retailing among the consumers and a definite shift from unorganized to organized sector can be perceived.
5. The Environmental analysis
The environment in retail industry is presented by following two different environmental analyses. The first is the PEST Analysis where the political, environmental, social and technological aspects are taken. And the second is the Porter's Five Forces of the competitive environment of the industry.
I) PEST Analysis:
The environment in a particular geographic region affects the retailers in the region in various ways. Those effects can be studied under the following heads:
* Political environment
* Economic Environment
* Social (Socio-Cultural) Environment
* Technological Environment
a) Political Environment:
With the opening up of the economy during early 90s, more and more MNC's have pervaded the Indian Business arena, through joint ventures, franchisees or even self-owned stores. The very first MNC getting into the retail business in India was Spencer's, a tie up between the RPG Group and the Dairy Farm International, a $ 10 bn Hong Kong based company, and a part of the Jardine Mathenson group. Government uses regulation to prevent development of monopolies through laws like MRTPC, which results in restricted competition and fixed prices. Government also propounds price competition laws and unfair trade practice laws. So it becomes necessary for retailers to understand what rights they have in pricing merchandise, what provision they should make for customer relations, what rights and responsibilities they possess when making a sales, what rights their employees have and what liabilities they may face while selling products to the consumers.
b) Economic Environment:
The type of economic system (capitalism or socialism etc.) existing in a country has a direct bearing on the potential for and the development of the retailing industry in that country. A retailer cannot escape the effects of the factors in the macroeconomic environment, be it domestic or global that influences the local market. Inflation, unemployment, interest rates, tax levels, the GDP and the rate of real growth in GDP (Inflation adjusted) are some aspects of the economy which a retailer must cope with.
Real growth makes more income available to people who then tend to spend more, leading to higher sales and more profits for the retailers. However growth also leads to higher competition in the long run. As the economy expands, higher demand levels lead more firms into the market, trying to fulfill the consumers' needs. The inflation (i.e. increase in price) leads to less goods being bought at higher prices. As the retailers' cost of goods increases, they attempt to pass on this increase to the consumers. However, it is often not possible to pass on the entire amount to the consumer, hence resulting in cuts in the retailers' profits. With the increase in Purchasing Power Parity (PPP) and the disposable income of the Indian consumer, retailing is catching up at a very fast pace in the country.
c) Social Environment:
The retailer's strategy is largely decided by the demographic trend and lifestyle patterns, of the society that a retailer intends to serve. Demographic trends involving population size, the number of households, population mobility, its location and income dominate a retailer's strategic planning for the future. Also, life-styles represent the ways in which individual consumers; families or households live and spend time and money. The life-style trends, in correlation with demographic trends, do have a great impact on the structure of the retailing industry. Hence it is necessary to consider them while crafting a strategy.
Traditionally, children seldom accompanied their parents while grocery food shopping. Shopping for children was confined to that during festivals when dresses were brought for them. But, in the present day, due to scarcity of time, working parents prefer to spend as much time as possible with their children and this includes their shopping hours also. As the organization retail sector offers the option of entertainment along with shopping, the younger couples opt for these retail outlets for shopping. So the format of customer expectation has changed from just 'Quality at price' in 80s to 'Quality + Enjoyment + Entertainment at Price' currently.
According to a study done by KSA-Technopak all over India revealed the fact that the buying patterns do vary according to the customs and lifestyle of a region. In the south approximately seven hours are spent on shopping per week. This figure is the highest amongst other regions in India, which probably explains the more spurt of new malls and supermarkets in the south than in the other zones.
The study further reflected that, apart from quality and range of products, value for money and attractive displays, the human touch has a vital role to play. Smart, polite and courteous sales people might make all the difference for a store, which is like any other in terms of its product offerings. All these factors show the influence of social environment.
d) Technological Environment:
It can be said that the technology is probably the most dynamic change agent for the retailing industry. The computerization of the various operations in a retail store, including inventory management, billing and payments as well as database (of customers) management, widespread use of bar coding, point-of-sale terminals and Management Information System has changed the face of retailing drastically. Apart from providing the retailers with better and timelier information about their operations, the technology also does the job of preventing theft, promoting the store's goods and creating a better shopping atmosphere. These can be done with the help of closed circuit televisions, video walls, in-store video networks, kiosks and other forms of interactive applications ranging from CD-ROMs to virtual reality to let customers select and buy products.
They make the customer's life a lot easier by facilitating the use of developments like credit cards. Toll free 800 numbers have brought about a revolution in consumer's ordering and feedback mechanisms. These also have paved way for newer forms of retailing like tele-shopping and net-shopping. Emerging technologies will also facilitate just-in-time management of certain products within the store. These trends are already visible in the music and greeting card industries.
II) Porters Five Forces:
The above analysis of the retailing industry is in the context of the macro-environment - consisting of Political laws, Economic regulations, Social customs and Technical standards, in the land of a particular retailer. The analysis of the industry in the context of competition prevalent within the players of the industry is done as follows. This addresses the need to identify those factors in the environment, which influence 'the capability of a firm to achieve a competitive advantage and to position itself to such advantage'. Players at different levels of scale of operations have to confront different levels of competition posed collectively by the five forces- threats of new entrants, rivalry amongst the existing firms, and pressure from the substitutes and the bargaining power of buyers and suppliers. Different forces take on prominence in shaping the competition at and also across different levels.
. Threat of Entry:
The threats of entry in case of retail industry depends on the extent to which there are barriers to entry, which most typically, are one or more of the following six factors:
i. Economies of scale are not such a big issue in the retiling industry. The scale of operation might be small for a firm to begin with and it can, in its initial stages, focus on a specific target segment whose needs can be addressed by that scale of operations. But these surely gain importance once expensive technological advancements (which may be beyond the reach of small retailers) come into picture. For instance, it may be difficult for the small firms (or retail outlets or chains) to use fully automated inventory systems or toll-free 800 numbers or in-store video networks or other interactive applications. As a result, they might lose out on the grounds of efficiency, in competition with their larger competitors. So they must adapt by concentrating on providing more personalized services to the target segment seeking it. Hence this factor is mainly responsible for triggering competition between large and small retailers.
ii. Capital requirements again depend on the scale of operations. Franchisers have an edge over the corporate retail chains in this regard as they are able to form national / international networks without high investment of their own.
iii. Cost advantages independent of size (scale) arise due to the experience gained by early entrants and the relationship they have established over time with their suppliers, manufacturers and customers. These might also pose difficulties in handling market and operational problems. This is why absolutely new local entrant faces severe competition from the large retail chains operating worldwide who might want to plunder their regions, with the expertise that they have gained as a result of years of experience. In addition to that, they tie-up with the existing local players who know the area well with the help of lucrative offers. For example, Spencer's tying up with RPG to open Food World Dairy International.
iv. Expected Retaliation from the existing firms (at large scales) is rising over time or due to recent trend of foreign collaborations, they now have the financial muscle to combat any sort of competition relating to price or promotion. For small and local retailers, this is not such a big issue.
v. Legislation regarding location, prices, number of employees etc. affects the operations or even establishments of a new entrant - at large as well as at small scales. Today legislation has contributed towards increasing competition tremendously by allowing entry of foreign players, independently or as a joint venture with the local players. But it works towards keeping a check on entry by implementation of FIPB regulations.
vi. Differentiation: postulates that new entrants might have to spend heavily to overcome existing customer loyalties, which established firms are enjoying due to past advertisement and customer service or simply due to early entry into the market. To attract its target segment, a retailer will have to project some benefit that he/she is offering over and above the offerings of the existing players.
2. Intensity of Rivalry among Existing Competitors is high:
In case of tangible products in retailing industry as the existing feature in the consumer market is brand loyalty (i.e. loyalty to a manufacturer's product) rather than store loyalty. Consumers look for a particular brand which they have used/ consumed/ heard about, which might be available with a number of different types of retailers- big and small. Today big supermarkets or malls with specialized retailers do pose a threat to the neighborhood retail stores, which are now used for fulfillment of immediate and small needs only. On the other hand, large professional retailers face competition from more personalized retailers who might be more comfortable with offering facilities like credit on purchases, return and exchange offers, specialized, hard to get and better quality items and extended business hours in order to retain whatever customer base they have and not let it be lured away by competitors. They just have to niche around big retail stores and malls by improving customer service, tailoring selection to customer needs and not competing directly with their product lines. Big retailers cannot match small ones on value. They live on hype and not reality. E.g. Big retail stores (chains) like Wal-Mart create illusion that they always undersell the market, based on a handful of heavily promoted items at rock bottom prices, but the rest of their inventory is not as price competitive.
According to the research published in "Business World - 31stMay 1999", few large retailers do have large turnovers- 35.2% of the total retail turnover. But that still leaves a bulk of the market in the hands of the medium and small retailers. Mr. R Gopalakrishnan of Tata Sons has opined that- "In India, smaller retailers continue to grow contradictory to the normal economic development where small retailers decline in numbers with their emergence of the large players." Experts feel that the size of population and the high unemployment rate have contributed to their growth of small retailers. With so many looking for work, setting up a small outlet is relatively a simple thing to do. Lastly, high industry growth has turned competition into a market share game.
3. Pressure from Substitutes emerges mainly from two factors:
. Switching costs for customers to the substitute.
2. Buyer willingness to search out for substitutes.
Also the threat of substitution may take four different forms, each of which are discussed as below with reference to above factors.
i. Product-for-product substitution -
The growing popularity of traditional non-store retailing base of catalog mail orders, direct mailers, telephone sales, door-to-door selling, supplemented by recent innovations like vending machines, in-home video tape infomercials, on-line CD ROM systems, tele-shopping and net shopping poses a threat to store retailers. These media do provide the customers with ease of shopping, some entertainment and even more information about range of products. But still there are reasons due to which these media are not catching on quickly especially in India. E-tailing transactions are less than a quarter of a percent of the total retail business in India. Even in western countries, it accounted only for 20% of the total retail spending. In the US, store based retailers, altered by analyst's predictions that online retail could account for as much as 10% of the total US retail sales by 2003, are queuing up to the internet. However, the situation in India is little different. With limited penetration of computers and Internet, will online retailing (e-tailing) catch up is a big question mark. Retailing is expected to change with the rapid development of new online sales and distribution channels that can be used from anywhere but the extent to which it will grow in India depends on the shift in the mindset of Indians whose current state gives rise to many deterrents. As described in the section on challenges (e-tailing) these substitutes need to take care of these hindrances in order to grow in magnitude. Furthermore, instead of complete substitution, these media should be looking at possibilities of collaboration with the existing store retailers.
ii. Substitution of need -
Switching from one store or one type of store (e.g. small neighborhood retail outlet) to another (e.g. a big department store) can be taken as an example of this type of retailing. In this case, the buyers might be looking out for new experiences and might not mind the nominal switching costs (like longer distance to be covered).
iii. Generic substitution-
Generic Substitution or doing without is not possible in case of retailing industry. Retailing will definitely remain, in one form or the other, as long as the manufacturers manufacture and consumers consume. Retailing does not seem to become extinct even in the future. The issue that remains to be addressed is just - what forms it keeps evolving into. One most prominent form visible today is e-tailing.
4. Bargaining Power of Suppliers is high if:
i. There is high supplier concentration (i.e. few number of suppliers for the industry). In case of the retailing business, large numbers of manufacturers are competing for shelf space, resulting into low bargaining power of suppliers in this context.
ii. There are other substitute products for sale to the industry. With large numbers of firms manufacturing similar goods or providing similar services, differentiation is what gives a competitive edge to some suppliers over others. But again due to spade of brands in the market bargaining power of suppliers is low even in this context. But in one specific case of exclusive distribution or dealership bargaining power of suppliers may be high.
iii. The industry is not an important customer of the supplier group. This is not at all the case here. Today, apart from probably factory outlets, retailing is the only interface between manufacturers and consumers.
iv. The suppliers' product is an important input to the buyer's business. Generally, this is not the case with individual suppliers, hence affecting their bargaining powers adversely.
v. Switching costs from one supplier to another are high. This again is not the case in most of the categories of retail sales expect for the exclusive dealership of some firms.
vi. There is threat of forward integration by suppliers. This might be a threat in the long run. Signs are visible in the form of direct mailers, door-to-door selling, tele-shopping and e-tailing. Marketers across the FMCG category and the durable sector feel that the retailer is going to be a powerful influence on buyers. A primary reason for this is trust. Many families take goods on credit from the retailer and moreover, spoilt goods are taken back by him. With all these facilities thrown in, when he recommends a product, the consumer has no reason to doubt him.
5. Bargaining Power of Buyers is high:
Bargaining Power of Buyers is high for the retailing industry because of flux of retailers of varying sizes and types within the reach of consumers. Hence because of nominal or no costs of switching suppliers (for the final consumers), these retailers are fighting for the fixed budget of consumers. The customer in the past decade has become the key focus. The marketing strategies revolve around him. From shopping, the trend has shifted to shopping, entertainment and experience.
In certain cases, where retailers are providing highly differentiated products or services to the buyers, the buyers have low bargaining powers (e.g. Crossword in Ahmedabad).
6 Indian Retail: Strategic Issues
The modern retail formats not only raise the productivity of the retail sector, they also drive the restructuring of the upstream supply chain - leading to the rapid development of sectors like food processing. Furthermore, by transferring the efficiency gains to consumers through lower prices, they can stimulate demand in the economy and raise the standards of living.
Some of the common retailing formats in the organized sector are as follows:
* Supermarkets/Hypermarkets: These are large (20,000 square feet plus) self-service stores selling a variety of products at discounted prices. The best practice chains in this format are Carrefour (France), Wal-Mart (US), Kroger (US), Tesco (UK) and Metro (Germany). They tend to be located in key residential markets and malls, and offer competitive prices due to economies of scale in logistics and purchasing. This format is new to India and only three supermarket chains of note exist - Foodworld, Nilgiri's and Subhiksha. Indian supermarkets are smaller than those in other countries, with fewer cash registers and sizes that are at least a fifth of the global players' selling area (3,000-4,000 sq ft versus 20,000-25,000 sq ft).
* Department stores: These large stores primarily retail non-food items such as apparel, footwear and household products. They stock multiple brands across product categories, though some of them focus on their own store label (e.g., Marks & Spencer's St. Michael). Department stores are found on high streets and as anchors of shopping malls. Several local department store chains have opened shop in India in the past 5 years (e.g., Shoppers Stop, Westside and Ebony).
* Specialty chains: These retail outlets focus on a particular brand or product category, usually non-food items, and are located on high streets and in shopping malls. While most specialty chains compete on service, a segment called "category killers" offers price as an advantage (Toys 'R' Us is a good example of a category killer). Examples of specialty chains include Gap, Levi's and Benetton. This format has seen the highest levels of adoption in India, with several chains establishing a strong presence, typically through franchising, e.g., Lacoste and Benetton.
* Urban counter stores: These small family-run stores dominate food and non-food retailing and are found in both residential and commercial markets in towns and cities. The food stores stock a wide range of branded and unbranded food items. They typically have a loyal clientele bound to them by personal relationships and the convenience of credit and home delivery. Non-food counter stores typically stock multiple local brands. Even though urban counter stores have existed for decades, we have included them in the category of modern formats given that they have more organized systems and processes (than kiosks) and provide stable employment.
Productivity in the sector is low at present, largely because of the very low levels of penetration and a host of other reasons. Hence we need to reflect on the factors essential for running a successful organized retail store to increase their productivity.
6.1 Decide on the Sector and define market
The retail sector in India can be broadly classified into 3 categories. The first category comprises of the fast moving items. Such product categories are characterized by ease of sourcing and easy consumer acceptance. Such features help in high volume sales and exploitation of a wide range of the product categories. This sector includes dry groceries (grains and cereals, packaged foods, toiletries, and household items), electronics, and certain kinds of men's clothing, books and music.
The second category includes product categories where the retailer has to invest substantially to optimize the results of the supply chain and persuade consumers to change their buying behavior. This category may include fresh groceries, women's clothing, fashion, do-it-yourself products, fast food, furniture and other specialty stores.
The third category of retail segments comprises undeveloped sectors that provide no immediate opportunity for retailers. The operation of these sectors is strictly governed by complicated policies of the individual states. Product categories in this sector may include Pharmaceutical goods and branded liquor.
About 40 percent of India's high-income urban population lives in Mumbai, Delhi, Calcutta, Chennai, and Bangalore. Penetrating this market itself would be challenge enough during the first few years of operation. With time, and with popularity of the organized retail sector, the new comers should start attracting the other large cities (those with populations greater than a million). The possible product categories may include clothing, convenience stores, and financial-services retailing.
6.2 Location and size of the store:
Due attention has to be given to the real estate price and the income group targeted depending on the products offered while deciding on the location of a particular store.
Clothing stores, Convenience stores and financial service stores targeted at the high income group need not go beyond the 20-25 largest cities (those with a population greater than 1 million) while more basic categories such as groceries have to percolate down to the second tier cities where there is little existing competition. Retailers should develop a scalable model with different types of stores for each category of towns based on the volume of target segment. One example which highlights this issue is the story of Nanz. Nanz chose to open stores in the high-priced real estate zone of India - the north. In 1993, Nanz paid Rs 5 lakh a month in rent for its Greater Kailash outlet.5
Nanz's upscale ambience kept middle and lower middle class consumers at bay. The original target audience, SEC A consumers with high purchasing power, constitutes only10 per cent to 15 per cent of Delhi's population. Nanz's glitzy ambience may have been in keeping with the promoters' aim of providing an international shopping experience, but it failed to lure middle class and lower middle class consumers who would help generate the volumes to partially neutralize the high overheads." While SEC A consumers might feel at home in the upscale ambience, many others stayed away. They felt that their kirana store offered better bargains. At least, it wouldn't charge them for the air-conditioning," says a former senior executive of Nanz Food Products.
6.3 Type of staff and its training:
* One of the greatest challenges facing modern retailing in India is the availability of trained personnel. Trained manpower in this sector is a very important need for effective operations. This is mainly due to the fact that as they are direct link between the store and the customer who is also the end-user in the consumption chain. In this sector, it is of prime importance that the employees understand the customer needs and psychology. Employees in direct communication with the customer needs to nurture them as an individual, offer them quick, efficient and responsive service and build a long lasting relationship. Shoppers Stop. Cross Roads and Spencer have started hiring MBAs to manage their chains. However there still exists a gap between the
5 "Lessons from a shop floor", Business-standard 13th Feb 2001
supply and demand of professionals. In order to address the problem RPG Group has set up a national retail Institute in Chennai, which, offers a variety of courses in retail management for frontline, supervisory and managerial post. Ebony and shopper stop are planning to set up retail management institute in order to train people for various aspects of retailing
Retaining the human resources is also a major challenge for these big retailers. The bigwigs like Crossroads offer high compensation and create a cohesive environment that makes an employee proud to be a part of such big retail chains.
6.4 Varieties and choices available to the consumer
Depending on the investment made in a retail outlet attempts should be made to display the full range of products dealt by the corresponding retail chain.
E.g. Essel Group leased a store in one of the posh shopping malls in Delhi and displayed a very narrow range of products. With the kind of investment it had been making in retail business it would have made much more sense to take up a store in one of the cheaper malls in Gurgaon and show the entire range of products to the consumers preventing the company from a downturn in one particular product range.
6.5 Leveraging and gaining economic synergies across the locations
It is of paramount importance to provide the best possible shopping experience to the consumer at the price he is willing to give. The Indian consumer is typically highly price sensitive and the world over; retail chains mean lower prices for consumers. The reason: better cost management per square foot of retail area, cost efficiencies in supply management, bulk sourcing efficiencies, even own store brands, and better returns not through higher margins but through larger volumes. The need for huge scale of operations cant be overstated in this case as break even for a store boils down to how soon it can attain the critical volumes. It is also essential that high overhead costs are not passed on to consumers through higher prices
6.6 Industry Status
Today, retailing is not officially recognized as an "industry". This affects financing prospects and hence has a negative impact on the growth of the industry. Given an industry status, the retail sector can get easy access to bank finance and will also aid substantial growth of organized retail. Pressures are already being put on the Government by Industry associations and the likely effect is expected within a short period.
6.7 Retail and Tourism
Like many other Asian countries, it is important to link the retail industry with the tourism sector. Shopping festivals in major cities with retailer participation to attract tourists may be a major move towards popularizing both the tourist and retail sector in India. Example: Singapore, Dubai.
6.8 Seek local talent
The retail sector is highly dependent upon good quality human capital. In cases of retail outlets, it is important to understand the role of local people as the workforce of the outlets. Understanding the marketing behavior of the local residents is of prime importance. Recruiting local talent and then training them according the company culture and philosophy is often the key to success of the retail business.
6.9 Sourcing the right merchandise
This refers to the availability of the right kind of merchandise at the right time at the right place. Any fault in this policy is captured through the level of markdown to sales that store has to resort to get the inventory moving. The markdown percentage coupled with the frequency and duration of markdown sales is true indicator of wrong projections.
6.10 Developing a promotional plan and creating ambience
With a spate of retailers taping into the lucrative retail market differentiation is assuming prime importance to bring in the footfalls in the store. It involves various factors like ensuring area for moving around and browsing in the store coupled with the overall ambience of the store i.e. designing, building and fixturing the stores.
E.g. Barista's merchandising and promotional efforts are all tied to the store and the ambience for it is their belief that an experiential brand like theirs, connection with the brand comes only through the entire store.
Foodworld believes in opening up categories in the branded products. They rely on benchmarks to achieve branding for the store. It boils down to the fact that "Communication is the transaction itself"
7 Future Trends:
A look at the spending habits of the average Indian consumer will clearly shows that food and grocery along with apparels as the two largest components of money spent by consumers.6
According to a survey by KSA Technopak out of the Rs 50bn contribution of the organized segment Rs 6bn comes from food products retailing while the rest is through non-food product retailing. This 6bn is projected to grow to Rs 60bn by the year 2005 that is an amazing growth rate and a minefield of opportunity. We will now look into some of the prospective product categories where there is a great scope for organized retail to make its mark.
7.1 E-tailing:
The volume of commercial transactions online has increased with the increased PC penetration and spread of Internet culture throughout the world. The business transactions targeted towards the end consumers are referred to as B2C and form the e tailing concept. The popularity of plastic money has acted as a driver for increase in the popularity of these transactions. Businesses are typically using the medium of Internet coupled with their brick and mortar operations to derive the synergetic advantages. Some product categories wherein this is more prevalent are Books, Music etc.
Though it is limited to a very select segment of population who have access to PC and Internet it helps the retailers to save on one of the costliest input requirements for organized retailing i.e. real estate besides minimizing inventory costs.
6 Exhibit [3] for details on expenditure pattern of a typical Indian consumer
7.2 Other miscellaneous developments
Now we will look into some generic retailing concepts that may catch on in the days to come:
- Development of retail stores along with the fuel retail outlets. E.g. Reliance, BPCL.
These stores will typically be convenience stores charging a price premium.
- Development of retail stores in Watches and Jewellery section on the lines of Tanishq. Here the stores could specialize in silver, gold, diamond separately.
- Development of big shopping malls providing the promise of "shop-entertainment" on the lines of Spencer or Ebony
- Development of branded laundry retail stores.
- Development of branded saloons and fitness clubs.
- Development of a retail chain for dealing in second hand clothes on the model followed by Salvation Army. The various NGO's working in the country could bring this forward and contribute a lot to the society in times of need like some natural calamity.
8 Exhibits
Exhibit [1]: Share of retail in employment
Source: CSO (India), China statistical year book, US Economy census, MGI
Exhibit [2]: Percent of retail sales, by format, 1997
Source: Euromonitor International
Exhibit [3]: Average Expenditure pattern of an Indian Consumer
Source: KSA Technopak Survey 2000
9 References:
* Arvind Singhal, Why (or Why Not) FDI In Retailing The Economic Times, October 2000
* CII McKinsey & company ,Inc report 2000 p.15 -23
* http://www.ksa-technopak.com/ksaretailsummit2000.htm
* http://www.projectshub.com
* Indian retailing comes of age, Mckinsey Quarterly,2000 Number 4 Asia
* Kodandarama Setty, 2002 Regulatory issues that dog Indian retailing. Praxis ,the journal on management, Volume: 3 Issue: 3 p.6-10
* Lessons from a shop floor ,Business-standard 13th Feb 2001
* Vikram Doctor 1999, Rushing into Retail, Business world, 31st May
CII/McKinsey Report 2000
2 See Exhibit [2] for details on share of retail in employment for different countries
- 1 -
