Food & FMCG products in India were typically retailed in small individually or family-owned and operated stores located in villages, city neighborhoods, and large urban markets. Grocery stores (called Kirana stores locally) account for the bulk of food retail stores and typically retail packaged food items, toiletries, eggs, bread, and may have a small freezer for ice croreeams. There were an estimated 3-3.5 million grocery stores all over (both urban & rural) India. Stores typically had an area of 100-200 sq ft and stock up to 600-800 items. Store owners managed to keep the cost of operation very low (3-4 percent of turnover) due to low labor, overhead, and real estate costs.
In addition to grocery stores there were a number of other food stores which dealt in either bakery and confectionary products, dairy products (fresh milk and cottage cheese), fresh meat, grains and pulses, spices, or fresh fruits and vegetables. These more specialized stores were not as numerous as grocery stores (but probably number in the millions as a group), but nevertheless quite common in shopping whereas grocery stores rarely carry these products. Fresh fruits and vegetables were more commonly sold in open stalls or hand carts.
Earlier, shopping was not always pleasant as shops would lack what are now considered basic amenities like air-conditioning or scroreeening, were often located on croreowded streets, and sometimes lacked a proper sidewalk which could be problematic when it rained. Products were stacked to the ceiling in small shops and consumers were usually unable to access said products directly, relying on the shopkeeper or his/her helper to locate the desired item. As more branded consumer food products became available, retailers also became more consumer conscious and started sprucing up their shops, providing telephone orders, and home delivery services.
Consumer cooperatives operated throughout the country (in both rural and urban areas) under the mandate of providing essential consumer articles at a reasonable price. Consumer Food cooperatives were part of the National Cooperative Consumer Federation of India (NCCF), which provides supply support for distribution of goods to members along with advisory and technical services. These cooperatives typically sold basic products which were widely consumed such as flour, rice, pulses, vegetable oil, spices, tea, and coffee. However, in most large cities, chains of consumer cooperative retail stores had been established which sold a wide range of branded and unbranded food products. Some of the more recent outlets were 1,000-3,000 sq ft with modern facilities.
Due to relatively high overhead costs and low operating efficiency, many consumer cooperatives regularly lose money and were reimbursed for their losses with public funds via the NCCF. In addition to traditional grocery stores, consumers have a small but growing number of food shopping options such as consumer cooperative stores, supermarkets, and convenience stores. These stores were located primarily in the larger cities in India and account for a small (2-3 percent) share of the retail market.
Supermarkets and ‘convenience stores’ were located in larger cities such as New Delhi, Bombay, Bangalore, Calcutta and Chennai. Supermarkets were quite new and resembled small early supermarkets in the U.S. and Europe, while convenience stores were larger versions of the traditional Indian grocery store and lacked some of the amenities of the newer (but far fewer) supermarkets. Area ranges from 1,000 to 4,000 sq ft with 5-10,000 items (includes non-food items), aisles, carts, produce sections, and checkout counters. It was estimated that there were 300-350 supermarkets and convenience stores.
Initial consumer response to supermarkets was lukewarm, as most people preferred their neighborhood shops which could be reached without transportation and stock similar products. Consumers initially thought that the products would be more expensive in supermarkets because they offer more amenities. The initial strategy of the large, organised retailers such as NANZ and FoodWorld was to convince the consumers that their products were lower than the traditional retailers especially in the food products. Initial growth in the segment of retailing was hampered by high real estate costs, moderate sales, high operating costs (10-15 percent of turnover). But these large retailers have devised their own strategies to overcome these hurdles and have now set themselves into faster growth.
Nevertheless, the number of modern Large Retail outlets was expected to grow in coming years as high income consumers focus more on convenience, local entrepreneurs refocus their pricing strategy, and Large foreign Retailers entered the market.
Most of the corporates in India was rushing into retailing. New Indian corporate groups / players, like the Tatas, Piramal Enterprises, ITC (subsidiary of BAT) and S. Kumar’s, were putting in big money. This was due to the fact that retailing in India was considered to be the future / the sunrise industry, despite the facts that retail margins were low, property costs and poor infrastructure sent overheads soaring, and the business was complex, demanding substantial skills in areas like logistics.
Consultants A.T. Kearney had predicted that organised retailing in India will be worth US $ 37.2 billion (Rs 160,000 croreore) out of the total 350 billion US$ by 2005. Companies realized that in India’s new economy, service-related industries like retailing was going to be where the money will be. Retailing was a good way to leverage existing property assets. With property markets down, rather than selling their real estate, firms were experimenting with retailing – malls, department stores, large format specialty stores.
With globalization and with foreign brands flooding the Indian market – and Indian brands matching them – there was a need for more sophisticated ways to sell them. The industrial slump had made retailing more important. Earlier, consumers didn’t care so much where they spent. But now that they were more careful with their money, they were choosier about matters like retail ambience. Despite all the activity, one group remains dubious about large retail format, (organised retailing ) was the ‘Large Food and Consumer Goods Manufacturers’ ( Companies like Unilever, Nestle, P&G, Britannia, Heinz, Pepsi, Coca-Cola, Cadbury’s, Conagra and many large Indian and new foreign FMCG Manufacturing companies ).
The surprising trend in the Indian Market was that the number of larger retailers (mean annual turnover of Rs. 12 Lakhs) incroreeased from 2.8 percent in 1990 to 6.5 percent in 1996, the number of smaller retailers (mean annual turnover of Rs. 2 Lakhs) shot up from 40.5 percent to 54 percent. This ran counter to the trend in the rest of the world where, with economic development, the number of retailers came down as larger retailers emerged.
Large retailers then had 35.2 percent of total retail turnover; small retailers had 15.2 percent. The bulk of the market was in the hands of the medium and smaller players. This, in turn, distorted the manufacturer’s distribution system, which remains convoluted with many intermediaries.
The C&F agents, wholesalers, redistribution stockiest, distributors etc. added as much as 50 percent to the cost of products, meaning higher prices for consumers. However, this was compensated for to some extent by the personalized service and home delivery the smaller retailers could supply. The larger retailers had suggested that the then system was one that manufacturers were happy to perpetuate because by keeping retailers small the balance of power was tipped in their favour. To counteract this, larger retailers were looking at strong supply chains that extracted value by cutting through these distribution inefficiencies. Also, at own private label products sourced directly from producers but branded by themselves.
The initial challenges the early entrants had to face in the Indian retail market: –
- Pricing: As per the Indian law, all products will have to carry the ‘Maximum Retail (Selling) Price’ including all taxes (as part of the product labeling) and the consumer do not have to pay anything more than this MRP. This MRP is fixed by the manufacturer before the product leaves the factory and this poses a big challenge for the retail margins. Large retailers like FoodWorld and NANZ have built a supply chain to give them nearly 23 percent of retail margins in comparison to 10-12 percent retail margins enjoyed by the small retailers.
- Real Estate Prices: The real estate prices in large Indian cities are very high. For example: in cities like Mumbai (Bombay) the real estate prices are comparable to the cities like Tokyo, New York and Paris.
- Retail Technology: In India bar-coding is not done by the manufacturers though the latest bar code technology is available in India. The large retailers have their own in house bar-codes for billing and stock /inventory management. India being a large base for the development of software, the Indian retailers have built their own Inventory Management systems.
- Trained Personnel: Though in India there is a large availability of graduates and post – graduates (especially management / business) the Indian retailers have been investing in training their employees in different aspects of retailing.
- Consumer Habits / Behavior: The Indian consumers have a very different food habits and this has posed a big stumbling block for new International food companies. Retailing in India has to adopted to the requirements of the local taste and requirements and the large retailers cannot replant their foreign systems into the Indian market.
- Diversity of the Indian Market: The Retailers will face the differences in the culture and sub-cultures in different Indian states. Coupled with this the different states have different local laws / regulations and products such as liquor require state level permits of selling.
- Logistics: The size of the Indian sub-continent and the distances between cities/supply centers coupled with the inefficiencies in the supply chain management makes it a big challenge. The large retailers will have to adapt their supply chain management systems to the needs of the market.
Some of the early entrants in modern retail included: FoodWorld (RPG, Spencer’s), Nanz, Shoppers Stop, Westend, Vivek & Co., Nilgiri’s, Pantaloon, Akbarallys, Vitan, Crossword, Landmark, Kemp Chain of Stores, Bodium etc.
Future of Large Retailers
The Indian retail market was the second largest in Asia and the leading retailers of the world were studying in detail the Indian Market. Consulting Companies such as Mckinsey, BCG, Pricewaterhouse and others were conducting in detail studies for large world retailers. A.T Kearney has been appointed by Walmart to carry out in depth studies for Walmart’s entry into the Indian retail market. Marks & Spencer was also slated to enter the Indian market.
In India Madras was considered as the birthplace of modern retail and spearheading the modern retail landscape in Chennai and Bangalore was Spencer’s. Hence the inception and growth of Spencer’s can be considered as the first movement in independent India towards the modern retail.