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    Taking Indian Retail to the Next Level


    V Rajesh, a retail SME consultant and trainer, talks about how to ensure a sustainable change for Indian retail, especially the mass merchandisers, in the coming years. He says shopkeeping should never be confused with retail which is all about aggregating volumes by leveraging scale and an efficient supply chain. Currently, there is only a marginal move toward actual retailing in India compared to shopkeeping.

    Supermarkets and self-service stores are actually not new to India, as is often made out to be in the public domain. Take the case of Spencer & Company, a South India-based chain whose stores were popularly known as Spencer’s. (Its legacy is being continued by RPG Retail now.) They were in operation from the 1860s and, at one point of time, their footprint stretched across cities spread all over the undivided Indian sub-continent. Their stores were operational in places as far flung from South India as Peshawar. Over a period of time, the company’s fortunes saw a decline.

    More recently, from the early ‘80s, India has been seeing some form of self-service stores emerge in various cities, especially the metros. However, most of them did not sustain and survive. The core reason for this was the lack of a clear understanding about what actually constitutes retail and the common mistake of confusing retail with shopkeeping.

    Differentiating retail from Shopkeeping

    Shopkeeping is simple enough to understand. One manages a shop, gets whatever product is available,  and sells the same. There are some efforts to align shopper preference to the products sold, but not to a great extent.

    Retail, on the other hand, is all about aggregating volumes. This is where the role of a chain of stores comes in. Obviously, there is precious little aggregation anyone can do with one or a few stores. Scale is required to manage one of the fundamentals of retail: aggregation of volumes.

    The second core foundation of retail is the efficient and effective management of supply chain. Needless to say, large volumes with improper supply chain will only lead to wastage and losses. The stores, or for that matter, websites, are the only customer-contact points which enable these two core basics of retail. They are a means to the end.

    In that context, let us examine the reality of Indian retail as it exists today:

    •• Conventional or traditional stores dominate the landscape. These operators account for almost 90 percent of the industry’s turnover. They are stand-alone businesses (with a few exceptions) and obviously cannot consider aggregating volumes or supply chain management by themselves.

    •• Modern trade in India is present in various categories. Lifestyle products such as apparel and furniture are engaged in some degree of volume aggregation and supply chain management. They have a more viable business model and therefore can grow in a more sustainable manner.

    •• The larger chunk of India retail comprises food and grocery – the supermarkets and hypermarkets. Although they have distribution centers (warehouses) and some amount of supply chain systems in place, they have not truly leveraged this by extending sourcing to the point of production or harvest. So, their volume aggregation does not yield the optimum benefits especially in light of their cost structure.

    Present State of Affairs

    As can be seen, currently there is only a marginal move towards actual retailing in India compared to shopkeeping. This has resulted in the margins being constrained to a large extent, while the cost structure of these businesses is significantly higher than traditional stores. The recent economic slowdown drove home this fact with brutality. As a shopper, one has seen many of these chain stores completely close down or resize their operations by exiting certain stores which are not viable.

    Also, these chains have realized that certain adjustments are required in the Indian operating environment with regard to space and size. One of the emerging thoughts is to operate with larger stores which follow the hypermarket model, as they are perceived to be more viable. This is largely due to two fundamental reasons. One, these stores have some space to receive and stock products. This eliminates or reduces the distribution center costs. The second is that their sales mix includes nonfood categories such as basic apparels and houseware, which offer much higher margins and thus help improve the margin mix.

    But will all this ensure a sustainable change for Indian retail, especially the mass merchandisers, in the coming years? Real-estate concerns regarding the rising cost and unavailability of suitable retail spaces need to be addressed. What will be the drivers that can propel Indian retail to the next level?

    The answer to the question is to obviously focus more on the supply chain. Here, the supply chain is not about non-food products or the FMCG category. It pertains to what constitutes as much as a third of any supermarket’s sales: groceries.

    Gaps in Operational Efficiencies

    The next round of the retail game will be won by operators who can backward-integrate successfully and extend the supply chain to the farm gate. Needless to say, this is neither easy nor cheap. It involves tremendous will, resolve, effort, and investment. Given the geographic spread of India, it is easy to fall back on the existing sourcing mechanism which seems to be working fine. Also, investment in logistics, cold chain, etc., will offer benefits only over the long-term.

    This is where the tier II and III towns of India come into play. These have not been on the radar screen of most retail chains, and the fewwho have ventured there have not made significant strides. Going into such towns with the existing business model will not generate adequate sales and margins. A rethink is needed. More important is the possibility of leveraging the infrastructure in some of these towns to function as sourcing points. However, this is easier said than done.

    Cash-and-Carry Model

    The major constituent of Indian retail (kiranas) can be leveraged in terms of volume aggregation and supplychain benefits by encouraging or even mandating cash-and-carry stores. This will help in delivering much better value to the ultimate consumers by being able to aggregate volumes and achieve cost advantage from supply chain management on behalf of the millions of stand-alone stores. However, these stores also have a constraint.

    The common challenge that both cash-and-carry operators as also mass merchandisers will face regarding the sourcing of farm produce relates to certain statute-based issues such as the APMC Act. There are limits to how much of the grocery products, especially staples, can any private business source and store at any time. More importantly, the direct connect with the farm producers is monopolized by the existing laws which have empowered only certain bodies with the sourcing capability. Without addressing these basics, announcing FDI in retail and also making it mandatory to invest 50 percent in back-end sourcing and logistics just does not make sense.

    Getting The Industry Status

    This leads to another important point: retail needs to be given an industry status. There are arguments for and against it. Many would say that an industry status would only result in more regulations drafted by bureaucrats who do not know anything about this sector. However, most players agree that industry status would benefit many components of retail by regulating the sector in a more efficient manner.
    One of the benefits of this would be to classify the retail industry along the lines of manufacturing into small, medium, and large groups, with operating guidelines for each. This will enable a more holistic perspective to the FDI issue.

    In India, state governments have the final say in granting trade licenses and many states have taken a tough stand against allowing foreign retail operators. In the fact of this reality, does the announcement about allowing FDI serve any purpose at all? Such a vague stand is largely because retail is not an industry and does not have any national guidelines, rules, laws, and regulations. So the debate should focus more on getting industry status for retail.

    The taxation issues are related to the industry status, which need to be addressed on a priority. One key reason why the supply chain in India does not leverage the geographic advantage of the country is due to the varied taxes and levies. Uniformity and clarity regarding this would definitely become a key driver. Given that the major component of any mass merchandiser’s sale is grocery-led, this would help link regions of growth and demand and enable price parity.

    So what should the chain stores do to sustain and grow in India, regardless of the above factors?

    Developing Sustainable Business Practices

    The most important thing for chain stores is to develop and implement sustainable business models. Take the point about the scale and number of stores, as an example. No doubt, this is a key enabler of volume aggregation but opening stores in a frantic manner is not the solution. This lesson was learnt the hard way and several chains resized themselves, with many of them now focusing on larger formats. However, even this is not enough. Every element of the business model should be well defined to deliver the optimum shopper value. A relook at the retail model will not only help the current stores, but also enable these chains to explore suitable variations toleverage the tier II and III markets.

    A related factor is developing and deploying sound processes and systems. This is not so easy in the Indian context where the operating environment is so very fluid and unstructured. However, it is a must. A strong word of caution is needed here. Systems and processes should enable the frontline staff to be more productive and efficient. If they end up making their jobs more painful and cumbersome, do not waste time even thinking about it!

    A common fallacy about defining a viable business model pertains to cost cutting, especially with regard to the store staff. This is nothing but a sure-fire recipe for disaster. The store staff are the face of any retailer. Store operations and customer satisfaction are directly dependent on staff motivation and morale. If they do not feel involved and empowered enough or are insecure, will there be any improvement to that particular store?

    A mind-shift is needed where the frontline becomes the most important element in the scheme of things.

    Last and definitely not the least is stronger customer connect. Over the past few years, there has been a trend of shoppers going back to the kirana stores, at least for a part of their purchases. This is driven by factors like higher motivation of the shop-owner, which results in better availability of products, and, more importantly, a better shopper connect. Obviously a chain store cannot match the personal connect that is possible by the owner-operator of a standalone store.

    However, these chains have access to technology which can facilitate other types of indirect connect with customers. Apart from the store staffrelated connect, there are a myriad ways for a business to engage with the customers. The obvious ones are social networking sites and online forums. However, the core issue again is staff. Of what use is the online presence of a store if one has not put in place people who will revert and interact with customers?

    In summary, assuming all environmental issues remain the same, can Indian retail grow? The answer: Yes it can grow, provided the modern formats realize that at the end of the day, what the shopper seeks is value. And experience is a very strong component of that value. Focussing on people, especially on the store staff, will enable the retailers to deliver a great experience to customers.

    *This article was originally published in January 2012 issue of Images Retail