Honda could make a place in the Indian two-wheeler market, because it understood the pulse of the country, and not because it could make ‘powerful’ bikes. But it seems what Honda learnt way back about the mindset of Indian consumers, retail chains are yet to learn. It’s still not too Late…
No businessman visiting India for the first time could fail to notice that this country is different. The moment you leave the comparative calm of the airport, you are immersed in a dusty, vibrant and chaotic world with an insistent back-beat of car horns and the perpetual motion of 1.3 billion busy souls.
Every successful business in India – from East India Trading Company to Tata Steel – has embraced the unique challenges of the Indian market and used them to gain competitive advantage within the home market and overseas.
There’s no obvious reason why supermarket retailing should be any different from other industry sectors in India; yet, despite the heroic efforts of the major Indian business houses, the retail scene in India is still dominated by the small, independent kiranas, which represent 95 percent of the market. Even the entry of international supermarket juggernauts – Wal-Mart, Tesco and Carrefour – has not yet had any real impact on the traditional retail sector.
Currently, Indian company Future Group, with its Big Bazaar hypermarket, seems to have the most successful formula. While Reliance Retail has managed to create significant scale with a heroic new storeopening spree, Bharti Wal-Mart is also showing early promise, especially in the challenging area of supply Chain.
In the late 1990s, the commonly held belief among international retailers was that the streets of India, from Delhi to Visakhapatnam, were paved with gold. The statistics were compelling – 1.3 billion people, a growing middle class and almost no modern retail.
We all naively thought the only obstacle was the protectionist FDI law that prevented the entry of foreign multi-brand retailers into the Indian market. Now, after reviewing the early faltering steps of the firstmover modern retail ventures, we have realised the Indian retail laws were inadvertently protecting multinational retailers from making a huge loss in a market that few understand. But there are other industry sectors in India that have been showing healthy growth, undiminished by the economic slowdown that blew in from the West. Even the automotive sector, which has been devastated in most countries, has sprung back in India with recent sales figures growing close to 40 percent over last year. So, to get an indication about how new markets can develop in India, it’s worth looking at one segment of the Indian automotive market which is further down the evolutionary
road than supermarket retail.
Learning to Make a Bike
The Indian economic miracle rode onto the world stage on two wheels. India is the largest market in the world for motorcycles and up until the recent introduction of the low-cost car from Tata, they provided family transport for almost every household in India. Indian conglomerate Bajaj provided the first two-wheeler for the masses with the Chetak scooter, but the most successful manufacturer in India has been Honda, which entered the market 20 years ago with its Indian partner, Hero Cycles.
At the time of Honda’s entry into India, it was already the world’s leading motorcycle manufacturer and in its home market, the company was producing sophisticatedlarge-capacity sports bikes capable of outrunning a Ferrari. The intense competition in its home and export markets had driven the development of bikes that were now so powerful that there were calls for voluntary industry limits on their power output and maximum speeds.
With the highly qualified engineering expertise available in India, Honda could easily have set up production of its world-leading designs, and dominated the top end of the market. Locally produced Bajaj scooters and Royal Enfield Bullet, a motorcycle with a design dating from the early 1950s, would have been no competition for a modern 1000cc 150 MPH superbike. But Honda knew that such a bike would only sell to a handful of Bollywood stars and the children of Indian industry leaders; the company also knew the condition of roads in India was not ideal for a bike that was more at home on a race track than a dusty farm track.
To help it understand the market, Honda first formed a joint venture with a local scooter manufacturer, Kinetic, and then with a successful Indian cycle manufacturer, Hero Cycles, and developed a bike that satisfied the needs of the Indian majority. Their target customers were not motorcycle enthusiasts; they were people who just wanted a low-cost means to get to work, take products to market and ferry children to school, sometimes doing all these tasks simultaneously.
A vital lesson that Honda learned was that the first thing any Indian customer will ask when considering the purchase of a new bike or car is about the fuel economy. I was once standing outside the swanky Taj Mahal Hotel in Mumbai when a bright orange Lamborghini pulled up at the entrance. As the fashionably dressed young man with his Bollywood starlet arm-candy stepped from the car, I heard the doorman say to him ‘kitna mileage hai?’ India is an ultra-slim margin economy, which explains the obsession with fuel economy and the fact that the country has the lowest cost mobile phone service in the World.
Although Bajaj took an early lead with its top selling Chetak scooter, its venerable iron horse had a major weakness – it was not very economical. Hero Honda developed a more conventionally designed motorcycle with a small four-stroke engine that could deliver significantly better mileage.
Its first advertising strap line for Hero Honda Splendor was ‘fill it, shut it, forget it’ and they’ve managed to sell over 1.1 crore of these sturdy little bikes over the last 20 years, making it the top selling motorcycle in the world. By quantity, India is now Honda’s biggest market, accounting for 40 percent of the company’s total sales. But this was not the end of the Honda story in India. After developing the best selling motorcycle with Hero Cycles, it set up a standalone Honda operation and used all its accumulated knowledge of the Indian market to design and build another model that could sell alongside the Hero Honda motorcycle range.
Building a Better Bike
The Honda Activa scooter was launched in 2000. At first, the new model was dismissed as an error of judgement by the newly independent Honda India operation. Motorcycles had replaced scooters years ago, so launching a new scooter in the market seemed like a mistake. But its early sales success showed Honda had done its homework. An easy to handle, automatic scooter with a lower seat height than that in a motorcycle was exactly what Indian women wanted; many Indian men also appreciated its tough construction, good load carrying ability and most of all, decent fuel economy. Ten years after its launch, Activais selling over 30,000 units a month and there’s still a three-month waiting list in some cities.
Learnings for Indian Retail
1. Give your local customers what they need.
The first lesson is a strange one for international supermarket retailers who are famous in their home markets for a fanatical obsession with ‘listening to customers’. But just because you know exactly what a customer in Birmingham (England) wants to buy before she even steps into your store, does not mean the same understanding can be applied to customers in Bhubaneswar with equal success. All of the current modern retail formats in India are based on the European or the US Model.
In the Board meetings of Indian retailers, I have heard the top management asking their teams to recreate Tesco or Walmart stores in India. The foreign players are no different in this regard as they have tried to recreate successful formulas from their home markets in the hope that they will work in India. This strategy would be the same as a motorcycle manufacturer launching its top selling 1000cc sports bike into a market where the ability to carry four children and a crate of mangoes is prized above outright acceleration, top speed and race track cornering ability.
The predominantly male senior executives in the newly emerging Indian retail companies, with their international outlooks, engineering degrees and relatives in the UK, the US and the Gulf, had all experienced a modern supermarket first hand. Armed with a vision of glass fronted megastores with coffee shops, air conditioning and self scanning checkouts, they set about conquering India.
Meanwhile, their predominantly female customer base was haggling in an open air mandi, trying to save 10 paisa off the cost of a jack fruit.
2. Learn from your partner.
Your JV partner is more than just a legal necessity to circumvent the foreign investment rules while you are waiting for a change in the law. He will have been running a successful business in India for many years, although probably not in the retail sector, and he will have a practical working knowledge of how to run a business in an ultra-slim margin Environment.
As a successful international retailer, you will have portable skills and knowledge that can be applied in any market, but you always need to be aware of the limitations of these skills in a marketplace that is very different from your own. By using the knowledge of their JV partners, combined with their own engineering expertise, Honda was able to launch two best-selling bikes in India that were totally different from anything else they produced in other markets.
3. Don’t bet on the marketplace adapting to suit your preferred business Model.
There’s a compelling argument among retailers that if you can develop sufficient scale and launch enough private label products, you’ll have the volumes to tip the balance of power in retailers’ favour, forcing suppliers to offer better margins and allowing the conventional modern retail model to become profitable. There’s also an assumption that the Indian FDI rules will eventually change to allow 100 percent foreign investment in multi-brand retail and so allow the growth of wholly foreign- owned European and US style supermarket operations as in the retailers home markets.
If Honda had adopted the same strategy, it would have launched the Fireblade sports bike in India and hoped that the growth in the Indian economy would eventually create a new wealthy middle class with a taste for 150 MPH superbikes. Of course, by the time that happened, we will all be riding solar-powered flying bikes on Mars.
The harsh reality is that most of the current supermarket formats in India are not delivering. They will be out of stock of most top-selling lines, offer a lower standard of convenience and service than the kirana, they will have poor hygiene standards that do not reassure the customer that the quality of the products and they will be making a loss. So, what is the retailer’s equivalent of the best-selling Honda motorcycles that were designed specifically for the local market?
There are many unique facets of the Indian retail market, but the following are some of the most critical:
• Very low margins
• Comparatively low income per Head
• Unreliable supply chain with DC fill levels of less than 75 percent, resulting in poor on shelf availability of top selling products
• Multiple middle-men resulting in further margin erosion
• High levels of personal customer service provided by small local retailers
• Very pronounced monthly buying Cycle
• Customers who are experts in spotting good quality and value and who do not have faith in vendors
• Low brand loyalty but strong loyalty to trusted vendors
• Regular power outages resulting in loss of electricity for up to 60 percent of the time
• Strong tradition of buying from wet markets
• Pronounced festival cycles
• A monsoon season that will make or break the food production Market
• Expectation of home delivery
• Fears about food safety create a resistance to long life, preserved Food.
• Limited new product launches due to the low margin environment
• Significant proportion of shopping carried out by domestic Staff
• Low, but growing car ownership
• High shrink levels
• Foreign investment restrictions
A Supermarket Retail Format for India
Any successful supermarket retail format in India must address the unique factors of the market, while giving the local customers what they want. The format must also be able to generate a profit in an environment where the current gross profits in supermarkets struggle to cover the utility bills.
Here’s an overview of a format that could meet customer expectations and provide a profit in the current Indian market, and become the Honda Activa of the supermarket World.
a) Small supermarket, up to 20,000 sq.ft – current food range in India, together with essential non-foods, will only just fill this Space.
b) Large back room of around 30 percent of sales area – to allow higher stock holding than would be normal in Europe to provide a buffer to smooth out the poor availability and to cover high volumes needed for the monthly staples buying cycle.
c) Predictive stock ordering software, rather than ‘reactive’ sales -based, as in Europe – to predict monthly and annual cycles, festivals and weather impacts such as the onset of the monsoon.
d) Designed to operate with no air conditioning to cut electricity costs and allow it to be run on a generator. Window shades, ceiling fans, closed chillers and Freezers.
e) High-level racking to enable high stock holding of fast selling Items
f ) Locally appropriate ranges of loose staples
g) Motorcycle and car parking h) Home delivery with no minimum sales limit
i) Clean, simple and easy to maintain Design
j) Produce section franchised to local thela-wallah (hand cart sellers) – more efficient and higher standards then any modern retailer
k) Up to 40 percent private label to improve margin mix
A format designed for high stock holding will give most US and European retailers some heartache and a store with no air conditioning will be tough in the summer, but an Indian customer will choose availability and price over design concepts and cold air every time, and a clean store with good service levels will help to build confidence in the brand and the related private label products.
The hypermarket format is an attractive proposition for the four or five major metros, but outside Delhi, Mumbai, Hyderabad and Bangalore the typical customers will be ruthless value-seeking missile, wearing a sari and riding a motor-scooter.