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ARE WE PAUSED OR POISED?By Andrew Levermore

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could only be achieved by as many as four layers of distribution companies handing the steadily diminishing truck load of soap bars one to another. The final delivery to the little shop very often on a bicycle by a gentleman whose understanding of ‘demand forecasting’ ‘stock turn’ and ‘return on inventory investment’ was finely attuned not by a computer or sophisticated learning but by simple human experience. Add the fact that our various tax laws have forced the split-up of manufacturing to multiple state locations and we had another complex dimension. The only way we could have been managing this complexity was by being very organised indeed! The more likely translation of “unorganised” was perhaps “not resembling the West” What we undoubtedly had and still have is massive cost in this system.

SIMPLE AND EFFICIENTBack in 2004 our consumer was

enjoying a very simple but highly efficient shopping experience. A quick phone call to the Kirana produced a delivery at the door within minutes. “Sorry Madam, out of stock” was never heard. If the Kirana was out of stock he simply bought it from his competitor next door and made the delivery anyway. What was missing for

When I look around me now, I am tempted to cast my mind back to the retail scenario as it was when my family

and I landed in a very wet Mumbai back in July of 2004.

UNORGANISED?About 98% of retail was referred to as

“unorganised” Such blatantly incorrect labelling should have had our friends at the department of legal metrology grasping for their penalty certificates. India’s “Kirana” or “Mom and Pop” store to our Western audience was, and is very organised. My early experience with shopping at these stores was astonishing to me. A request for children’s swimming goggles, playing cards, furniture polish and shoe laces was met with a practiced reach under a shelf or through a trapdoor in the ceiling, all at the same little shop. Billing did not involve standing in a queue or waiting while a nervous youngster tried to scan a non-existent or unreadable bar code. Hand written at speed with a modicum of polite negotiation and we were on our way in minutes.

Supply chain…Let’s consider the supply chain

behind the experience in those days; A handful of large FMCG manufacturers delivering to 12 million small shops. This

The last four years have been a tumultuous and somewhat revolutionary period for Indian retail. How very different things are from four years back! Yet, how many things are still the same?

our consumer was the entertainment, the excitement and the experience. What was missing for the retailer were the impulsive purchases induced by a shop visit.

A liberalised economy and democratic rule had brought about a strong and fast growing market place. A more well off consumer was demanding a richer shopping experience. The handful of “organised” retailers and I still wonder about this term, were enjoying profitable success on well planned, steady growth in store numbers.

And then someone lit a fire…. A fire that raged through

boardrooms all over the country as retail suddenly became the new clarion call. Owners of large plots of land turned their unpractised hand to malls, Hotel architects became mall architects overnight. Big business with no prior experience in the sector became retailers overnight. Carried away by the euphoria, banks fell over themselves to lend money, investors rushed into retail stocks and the fire began to fuel itself.

The consumer loved it. New modern shopping environments were a welcome relief from congested roads and lack of alternative leisure pursuits. New choices from wide assortments and new


INDIA RETAIL REPORT 2009460

categories made shopping at modern retail destinations an exciting option for the superior numbers in our youthful population.

The smoke from the fire reached foreign shores as the world’s retail brands turned their eyes towards India and the perceived low hanging fruit of its 1 billion consumers.

Loud announcements of unprecedented retail expansion demanding thousands of new store sites set fire to rentals which exploded upward in a shower of sparks.

However, somewhat ominously the same fire did not burn in our infrastructure, our legislation, our government bodies or our supply chain. They simply overheated

HOW MANY FARMERS?.Some began to throw money at

supply chain issues hoping that this would unravel the result of decades old policy. Policies that were so good for India in an era gone by have hampered us recently and unnecessarily raised consumer prices. The much maligned APMC or central fruit and vegetable markets where farmers are forced to sell their produce is one example. It is necessary to explain this issue with some simple mathematics. One Hypercity hypermarket requires an average of 6 tonnes of fruit and vegetable per day to meet its’ sales demand. The average yield of an Indian farm is one and a half tonnes per acre every ninety days. To deliver 6 tonnes daily, each Hypercity outlet therefore requires 4 acres X 90 days = 360 acres of productive farming land. Previous policy has resulted in the average size of farm in India being 3 acres. I am reliably informed that I am being optimistic on this number, it is actually smaller. For the sake of simple mathematics let’s use that figure; 360 acres would then involve 120 individual farmers to ensure the minimum supply per Hypercity outlet. If we add the much

talked about 40% wastage en route to this figure the number of farmers directly required goes up to 200. In order to “go direct to farmers” and bypass the Mandis, four Hypercity outlets in one city would therefore need to be dealing with 800 individual farmers. Scheduling 800 farmers to plant our required fruit or vegetable variety at the right time in the right quantity would be difficult enough. Persuading hundreds of individuals to plant potatoes in line with our demand when they believe tomatoes will give them better returns is too many discussions to bear thinking about.

The APMC or central selling warehouse is the only viable way India can get its’ millions of small farmers’ produce to market. Rather than throwing money at commercial farming ventures which will not benefit the small farmer anyway, we could be putting money into the central markets and improving the lot of our existing citizen farmers. Most of the wastage happens in transportation. A substantial portion of this wastage could be eliminated by providing stackable plastic crates that would prevent the produce from being crushed. The cost of these would be recovered in a single month against current wastage. Air conditioning of the markets to ensure a semi refrigerated environment would add days to the shelf life reducing wastage still further. Some very simple mechanical automation would bypass the current rough treatment of manual

loading and unloading -some would call it throwing, thus reducing damage and a substantial portion of labour cost. Having invested in these relatively cheap and simple first steps, the ultimate would be refrigerated vehicles from farm to APMC. As we stand, the farmer gets a very poor price, the consumer pays way too much. The money in the middle drowns in the inches of juice from crushed and putrefying produce that covers the floor of the average mandi.

APPROPRIATE LEGISLATIONAs the fire spread, our wealthier

consumer began to demand better quality product and new experience from previously unheard of product. Imports began to flow in as consumers revelled in the choice offered by foreign food brands for example. The fire overheated our legislation. Let’s consider a hypothetical example. Lemon Curd was a product known in past decades and therefore gets a mention in the decades old import tariff book. The modern variant of Orange Curd however is not listed and therefore gets taxed as citrus, the next most sensible but much more expensive interpretation. Explaining to a bemused consumer that Orange Curd is 50% more expensive than Lemon Curd because orange flavour is citrus and lemon is not, is not a conversation that many retailers would relish.

Legislation that was great decades back in providing our consumer

In India, we are forced by law to reveal private labels suppliers to our competitors.

What easier way to find far-flung, experienced suppliers than to peel the label

off the competitors’ products?



VISIONS & VIEWS

with comfort and safety is becoming increasingly less applicable in modern retail. Our various legal acts’ ensured that consumers got 1Kg when they paid for 1Kg of rice. It also ensured that the packaged product was not beyond its’ expiry date. In another hypothetical case a plastic hair comb if packaged could need an expiry date affixed. I guess that, hypothetically, if anyone was planning to eat the plastic comb they would want to know the expiry date. In the case of a non biodegradable plastic, I guess an expiry date of 1.8.4025 would suffice?

Go fetch the labels…An interesting by-product of our

Indian labelling requirements threw up some surprising but entrepreneurial (my tongue is firmly in cheek) behaviour by some of the newer entrants to the Indian retail game. A substantial portion of Hypercity’s general merchandise is imported. The law requires the labelling of such product with the name and address of both the manufacturer and the importer. One of the fundamentally most guarded secrets by retailers all over the world is the source of their product. These supplier relationships are built up over many years and have involved much trial and error in achieving the right product at the right price. The competitive advantage of having an exclusive source is substantial. In India, we are forced by

law to reveal this to our competitors. What easier way is there for a new retail entrant to find far-flung, experienced merchandise sources than to peel the label off your competitors’ product on their sales floor?

The mall is not ready…The fire that consumed our property

development community saw the country littered with broken promises of timely delivery of developed retail space. Two year delays were not uncommon. This was for more than one reason; the building boom across multiple industries led to a shortage of qualified personnel. Many developers held out on delivery in the hope that later retail entrants would pay a higher price than that offered by their current commitments. They were partly right. Many developers with no experience joined the game with complete guesswork involved in their promised delivery date. In other cases the legal and licensing infrastructure simply overheated. The same gentleman of government authority that was dealing with one license application per week a few years back was now completely hidden behind piles of files representing hundreds of new applications for approval per week. He has not become ten people, he remains one. The overheated system cannot cope and approvals are inevitably taking longer and longer.

Retail teachers…Education institutions also caught

fire. There were well publicised forecast demands for hundreds of thousands of new retail employees that were going to be soaked up in our flourishing retail industry. Overnight, scores of institutions added a retail faculty to their offer. Professors of retail appeared from nowhere. In some cases, youngsters with one year of practical retail experience were giving lectures on best retail practice. For our part we had a particularly embarrassing experience of sending some of our mid level management to one of these institutions. They ended up being “taught” by one of their former juniors who knew much less about the subject than the managers themselves. The course did not last long.

There is simply too much learning still going on in our industry for anyone to be sufficiently expert to teach anyone else about retail just yet.

WHICH FORMAT?The decision on format and size of

outlets for the rapidly expanding retail base was interesting over this period. Lack of large size space and a desire to penetrate as rapidly as possible led to small format stores being the vehicle of choice for rapid expansion. In the enthusiastic rush our own Hypercity boardroom caught fire at one point and we also climbed into this small store format. Fortunately it was an experiment we were able to exit fairly quickly with minimal losses. No-one really thought about what it was that the customer wanted. When we looked back on what we had tried we felt like kicking ourselves and vowed never to be caught up in the fire again. Our analysis was quite simple. Indian consumers have the most convenient retail purchasing process in the world. The retailer comes to them. Everything but everything is delivered free of charge at the cost of a phone call. Our most enthusiastic small retailers even



deliver without a phone call if they see a gap! In our middle class households, the biggest retail spenders, we even call someone if we need a nail hammering in the wall. What was exciting these consumers was the whole experience of going out for shopping; Big malls and big stores with multiple reasons to visit, multiple category choices, a restaurant, a cinema and gaming. Shopping was pure entertainment and it was very exciting. A small format store simply cannot replicate this excitement. What we had done was build a small store that would never be a destination and fill it with a limited assortment of everyday food and grocery.

What was different about us versus the kirana? We had fancy floor tiles, fancy fixtures, bright lights and staff standing around. What was different was that all of this cost money. We did not deliver, the customer had to come to us. What was different was we had no personal relationship with the household. We did not know when their Birthdays were, when the anniversaries were or what Papa ate for breakfast. What was different was, we enticed the housewife out of her house to look at our fancy, shiny little store once. After that there was nothing more to look at and she went back to shopping for daily items over the phone or via the maid and visiting the big formats where there was something exciting for the whole family. What we had done was offer a far less convenient shopping option at a much higher operating cost than the kirana. We should have known. We put that fire out quickly and went back to what was working well – 120,000 sq ft of 26 different categories of merchandise that kept the whole family busy and impulsively spending for hours. 26 different categories that together ensured maximum reasons to visit and delivered a margin mix that kept us in profit. What we learnt was – keep your eye on your customer and less on what your opposition is doing. There is now a fire extinguisher in our boardroom in case we ever go crazy again.

“I’m calling about a fantastic new job opportunity….”

The fire also caught hold of people working in the industry. Job hopping became the norm. Head hunters have thrived with a profit opportunity that they may never see again in their lifetime. At one point we measured that 16% of calls coming into our office were from head hunters! Expectations of an impatient and very young workforce were fuelled by constant media reports of the lack of retail experience. Many of the managers in the retail industry today have worked for more than three retail companies in the space of as many years. They have not stood still long enough to learn anything or develop a track record of success. The strength and positioning of Hypercity as a brand, our style of working and our commitment to expose young talent to world retailing has meant we have suffered less than most.

Start at the bottom…Retailing is not an easy game that

can be learnt in a boardroom. It is some science, but mostly art. There is absolutely no substitute for starting at the bottom. There is no substitute for knowing through personal experience how your boardroom decisions will affect the back end of the store or the cashier who has to interact with the customer every day. The rapid growth plans of all retailers have not given any

of us much chance to adequately equip people. At Hypercity, we have taken the risk of rapidly promoting our own people from within rather than take someone from outside who will take time to understand our business and live our values. This has worked for us and also resolved attrition. We have a General Manager of a Rs 200.crore (US$ 50 Million) business unit who began his career with us two and a half years back as a cashier supervisor. The next Rs 200 Crore unit will be managed by someone who started with us as a management trainee three years back. The key was to provide the right background support to ensure the talent survives the challenge. Hypercity’s board room is occupied by a team who started at the bottom, albeit not a long time ago. For my part I still clearly remember the valuable lessons I learnt 25 years ago in the store rooms and sales floors of my first retail job. It has proved invaluable over the years.

Batch mates…A unique blight inflicted on us

by a history of massive civil service employment in India is the batch mate syndrome. Decades of large batch intakes into the civil service were all promoted to a new grade at the same time, given titles at the same time and pay rises at the same time and rate. This has created something of an expectation amongst the parents of our



VISIONS & VIEWS

Retailing is not an easy game that can be learnt in a boardroom. It is some science,

but mostly art. There is absolutely no substitute for starting at the bottom.

budding young retailers. When you are a 40 million strong organisation and you are not held accountable by consumers or shareholders this is possible. When you do not have to compete with others for a profit this is possible. When you do not have to identify talent who will grab the next business opportunity this is possible. In private enterprise and particularly in retail this is simply not possible. Humans may be created equal but we all develop differently. We all have specific talents, strengths and weaknesses. We cannot all reach the same level of competence in a particular subject at the same time. Some people develop great leadership skills, some develop great technical skill. I have not met many heart surgeons who would make great retailers. I have not met many retailers who would make great astronauts. Some people in retail make great store managers others make great buyers. Our most talented marketing executive would make a horrible HR manager. Likewise there are some who take to retail like a duck to water, others who take a little longer. If you promote those who take a little longer too quickly they will drown. If you don’t promote the ducks your business will drown. We need both however. In our business you are only batch mates on the first day.

Architectural splendour….Enthusiastic architects with no

previous retail design experience have developed the most aesthetically pleasing malls that are a visual wonder – on the first visit. After that the consumer is expecting a great mix of retail offer and we will only entice them with as many reasons to visit as possible. They are expecting an easy retail journey without too much upward or downward travel through the mall that makes it easy to find the category they wish to shop on their day out. They are expecting restaurants and entertainment to complete their

family visit. When the retail fire got lit many developers rushed into the game in the expectation of a quick buck. We even managed a world first here in India – Malls that sold the individual retail outlets to retailers much the same as they would have previously sold the apartment blocks they were used to building. The trouble is that a mall or shopping centre requires continuing skilful management of tenant mix, services, marketing and security. This is not something that the equivalent of an apartment block housing society can achieve. When the only food and grocery outlet in the mall decides to legally sell his property to an apparel retailer the mall is in trouble with future repeat footfall.

Too many floors…Under pressure of high real estate

prices we have built malls upwards to as many as five trading floors on small land footprints. This might be okay when it is the only mall in the vicinity. As soon as there are more mall options in the same catchment our consumer will do what consumers all over the world do – shop the ground floor with minimal travel to the first and second providing there is a compelling reason to do so. A food court or multiplex for example. Renting an outlet beyond floor 2 might be a lonely experience.

Today…And so we return to the present day.

The fire is burning less fiercely. For the consumer in big cities the novelty of “organised” retail and I still worry about that term, is waning. They now expect the glossy modern retail experience. It has become a hygiene factor. Anyone not delivering it is struggling to grow against last year. Much denser

competition has reduced footfalls for many. Reality is returning. It is no longer good enough to offer a modern store design with fancy brands. Our consumer now expects great product at better prices wrapped up in a great experience. They are no longer surprised by it. Large scale destination formats with multiple reasons to visit continue to do well. Small store formats competing with the Kirana continue to keep bank managers awake at night. The Kirana should be feeling a lot more confident. He will undoubtedly survive and prosper by sticking to his hands on, personal interaction with his customer and his stock.

New investors who entered the retail game expecting small early losses before large scale returns are less enthusiastic and more nervous. Those retail operations with no break even in sight through even long range telescopes are chopping and changing their previously perceived winning formulas. Retail space rentals are coming down. In Hypercity’s case several developers have recognised that having a hypermarket format that is sustainable with a more affluent consumer well into the future is essential to the survival of their mall. In these cases a long term rent free period is the order of the day. Interestingly, the case was similar in the South African retail boom of the early nineties. It was quickly recognised that the most appealing hypermarket format was essential to regular, repeat customer footfall and the best operators were not only given premises rent free but were also enticed with a capital allowance for shop fitting and set up costs. That scenario is in sight here.

Your brand, my brand…Most retailers are recognising the

value of private brands but somehow



the message is being twisted in delivery. Private brands should be just that – brands. Telling your customer that this is a brand created by you for the sake of margin gain is reducing its’ value as a brand. If we want to tell our customer that there is great value in buying product with the store name on it, then it makes more sense to call it a House label and market it that way. It will be easily understood and you don’t have to waste marketing rupees on another name. A “brand” is a vehicle for creating a position for the product, targeting a specific lifestyle or consumption habit or income sector. Developing desire for that brand which is only available at your stores is a marketing necessity and fully within the retailers control. Herein lies the true margin gain. Telling the customer that this brand is a creation of yours to occupy the lowest price point completely destroys any value the brand would have had.

Another first in the world for India is the conclusion by some retailers that their competitors would also like to sell the formers “private brands” There are only two guarantees with that plan; the brand is no longer “private” and the competitor will undoubtedly be paying some of his margin to the originator of the brand. When every retailer is striving for differentiation and maximum margin gain, why would he want to do that I wonder? Naiveté will continue to haunt our nascent industry for some time.

Keeping shop…The retail market place is saturated

with price messages. Every retailer claims to be the cheapest. There are very few who are intensely focused on delivering the right combination of wanted, quality product, presented well, by informed staff in an inspiring, hygienic and credible shopping experience – at good value prices. Basic standards of hygiene and retail discipline remain poor. Stores are generally untidy and

poorly laid out. Believing that this is the way the Indian consumer likes to shop is belittling their intelligence.

TOMORROW?And so to the future! A gaze into the

crystal ball. What will Indian retail look like in another four years? To be honest I don’t have a clue but here’s some guesswork.

Sustainable formats…Large formats will emerge as

the most profitable. Shopping will continue to be a preferred leisure and entertainment pursuit by our middle class and beyond as modern retail spreads out. Multiple reasons to visit will urge them towards the largest destinations. Difficult and time consuming travel will urge them towards a destination worth the effort. Multiple product categories will allow the large format retailer to maintain low margin and price advantage in the most sensitive categories whilst paying the rent with others.

True specialist retailers in small formats will compete strongly providing they are offering a wider range or much better service than the big format, multiple category retailers.

Don’t forget the real retail specialists…

The Kirana will continue to contribute significantly to the retail pie. They are absolutely unique in their ability to maintain individual customer relationships, keep their hands on their stocks and maintain the lowest possible operating cost base. These are the three simplest survival skills in the retail game. It is a model we should be exporting to the rest of the world!

Tidy up…Growing wealth will undoubtedly

demand a better experience from the modern retail visit. Pretending to be the cheapest won’t cut it forever. Those retail brands who focus hard on operational standards at store level to provide a credible, professional experience that respects the customer and his hard earned money will do well. Retailers who take accountability for their service and their product will thrive. Easy exchange and refund of unsatisfactory product will become essential for our more worldly consumer. Blaming it on the supplier will wear thin.

The MRP regime…Retail margins on basic food and

grocery will decline. Not just for the traditional reason you would expect of increased competition but because of India’s unique MRP (Maximum Retail Price) regime. Whilst many would believe that the MRP law is of benefit to consumers it is actually most beneficial to the manufacturers who have a free hand in determining it. Large FMCG players will face increased competition from three directions where they cannot control the MRP; Emerging local competitors, private brands and a wider range of imports. In order to maintain their sales volumes to end consumers they will ensure that the MRP’s they print will stay below inflation and their competition. To preserve their own margins they will simply pass on a lower retail margin. The retailer cannot raise his prices to survive as he is restricted by the MRP. No other industry has this restriction. Hotels charge what they like, Airlines and private schools too.

Kiranas will continue to contribute significantly to the retail pie. They are

absolutely unique in their ability to maintain individual customer relationships, keep

their hands on their stocks and maintain the lowest possible operating cost base.



VISIONS & VIEWS

Unfortunately we will not have any very large, powerful retailers to challenge this for at least another decade. Even our biggest retail player at present constitutes less than 0.3% of the largest FMCG player’s sales.

Having mentioned MRP as a possible future margin burner for retailers, it is important to discuss its’ continuing relevance. There are two significant developments mentioned in the example above that render the MRP law less meaningful; First is the continuing emergence of private brands. The retailer himself determines the MRP and specifically because he can control his margin this will become a preferred route. As our consumer demands more and more product choice and retailers look for differentiation our imports will grow. Here the MRP is again determined by the retailer, once again rendering it meaningless.

What may be more beneficial and maintain the original spirit of the law is to change it to a GRP regime. “Guideline Retail Price” In this way our consumer can easily determine if a retailer is expensive but at the same time it allows the small retailer offering all hours convenience to charge more if he needs to. The choice of when and where to buy remains in the consumers hands. The choice of how to price the product remains with the retailer. Simple market dynamics will then take over and regulate pricing as it happens throughout the rest of the world.

Foreign money…Foreign direct investment in retail

will continue to be a hot topic. In the end it comes down to some simple questions; What would be in the best interests of India’s 1 Billion plus consumers? Do they want the lower prices and wider choice that FDI in retail will bring? Do our hundreds of millions of farmers want a more profitable route to market? Do we need the substantial gain in tax collection that will come from massive formal retail presence? Do the 30 million school leavers annually without a university place deserve an alternative career option? Is forbidding FDI preventing local giants from setting up shop? Is forbidding FD keeping them honest? I guess you will all have your own answers.

Intelligent consumer…In the frenzy to open more

stores some retailers will forget to focus on product. With formal retail space multiplying at a much faster rate than the consuming population product will become more and more important. Great advertising, fabulous prices and inspiring tag lines won’t induce customers to buy rubbish. Underestimating the intelligence of the Indian consumer will be a tragic error for an arrogant few.

This school used to be a mall…Mall re-development will become

a new industry! We will have to either knock some down or find alternative

uses for the floors above number 2. Perhaps banking halls or doctor and dentist consulting rooms? Perhaps school classrooms even?

REMEMBER – I AM JUST GUESSING!

What I am certain of is that a few of our Indian retailers will go on to become world class companies that will compete powerfully on the global stage. In the process lessons will have to be learnt quickly, customers have to be respected unconditionally and staff trained, developed and equally respected.

Thank you friends..Indian retail has been on an exciting

journey and I consider myself very fortunate to have been a part of it for the last four and a half years. At the end of 2008 the time will have come for our family to return to our South African homeland with fond memories and much wiser for the experience.

As we leave India, Dear Reader please permit me the public medium of this report to thank the entire team at Hypercity who have made life so exciting for the last few years. What began as a few ideas on a piece of paper is now an international award winning business championed by many thousands of customers each day. Only the sheer dedication and passion of our Hypercitizens could have achieved this.

The Raheja family and our Vice Chairman Mr BS Nagesh have been an inspiration throughout our birth as a company. They have consistently provided the right amount of support from a distance that allowed the creative brains at Hypercity to go to work.

And finally, you my colleagues in the Indian retail industry. I have made lifelong friends and look forward to keeping in touch. Thank you for having me in your country! ■


ARE THERE CLOUDS IN THE INDIAN SKY?

By Geoff Hiscock

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VISIONS & VIEWS


speeding along billiard-smooth freeways as they transport farm-fresh produce to the shiny shelves of supermarkets and gourmet stores in the malls. There is a happy co-existence with “old” retail. The family-run kirana corner stores still survive, but they have modernised too, and cheerfully buy their wares from wholesale cash-and-carry outlets that bear such overseas names as Wal-Mart, Carrefour, Tesco, or Metro. Shoppers have the best of both worlds: lower prices, better quality and greater range at the supermarket, plus the convenience, service and customer-awareness of the self-employed vendor pushing a barrow, running a roadside stall or keeping open a tiny corner store. There are no goons smashing up the shop windows of large retail chains, no local politicians invoking store bans on public security grounds. There are no provocateurs whipping up communities to blockade the highways, no Naxalites swooping down from the mountains to hijack truck cargoes. There are no groups agitating against foreign investment, no boycotts

At McKinsey, specialists have pored over the income data and believe the Golden Bird from 1,000 years ago is destined to fly

again, as the great Indian middle class bulges upward into the consumption sweet spot. KPMG says Indian retail is “on the fast track,” courtesy of a richer, more aspirational population, in which working women have a greater role.

This is the positive outlook for India, based on relatively benign socio-economic circumstances, years of continuous high GDP growth and the demographic dividend that flows from having the world’s youngest population. In this scenario, modern retail’s future is typified by fleets of refrigerated trucks,

India is the mother of all consumer markets – the one place on earth where annual growth rates of 20, 30 or even 40 per cent in the modern retail sector are conceivable. For the forecasters at Lehman Brothers, India “has everything to play for.” At Goldman Sachs, its BRIC analysts believe that by 2040 India could well have an economy larger than that of the United States.

of imported goods, no middlemen determined to maintain their grip on community markets, no restless gangs of unemployed youth making mischief in dysfunctional megalopolises.

No one believes, of course, that all of India’s problems are about to disappear. There is plenty of recognition in the reports from Lehman, Goldman Sachs, McKinsey, KPMG and others covering the retail scene about the difficulties ahead. They focus primarily on India’s well-recognised deficiencies in infrastructure, education, employment and social cohesion. Without inclusive growth, without recognition of the links between urban and rural India, without a constant awareness of the plight of the poor, and without jobs for the many millions of young people who enter the labour pool every year, everything is at risk. In late 1855, less than two years before the Indian Mutiny, Lord (Charles) Canning marked his appointment as the new British Governor-General with a warning to the East India Company: “We must not forget that in the sky of India, serene as it is, a small cloud may arise,



at first no bigger than a man’s hand, but which, growing bigger and bigger, may at last threaten us with ruin.”

Are there clouds in the Indian sky? To joblessness, social injustice, urban and rural poverty, we could add a whole litany of catastrophes waiting to befall the Indian success story – from natural disasters (earthquake, flood, drought) and environmental degradation (air, water and soil pollution) to the social unrest that stems from corruption among politicians and bureaucrats; from poor health and welfare services; from an ill-equipped and inefficient police and judiciary; from the lawlessness of politicians and special-interest groups prepared to play on caste, creed, community, colour and language divisions; from the insecurity engendered by internal and external terrorism, and from fractious neighbors such as Bangladesh, Burma, Nepal, Pakistan, or Sri Lanka.

Yet, in the face of every possible dire event, there remains a palpable sense of optimism among the young people who will determine India’s future for much of the 21st century. They recogniae the trials and tribulations that come with India’s diversity, and, for the most part, they seem determined to do something about it. While nothing is certain in India’s future, we can be reasonably sure that consumption will grow rather than decline, in line with a population

expected to grow past 1.4 billion by 2025-27. Every extra rupee in the hands of the millions at the bottom of India’s consumption pyramid means another meal, another purchase, another incremental boost to growth – no matter how miniscule it may seem. That is what the retailers are counting on.

INTENSE COMPETITIONAll of the participants in the Indian

retail scene know that they face intense competition, both from incumbents and those yet to enter the sector. According to Arvind Singhal, chairman of retail consultants Technopak Advisors, at the top end of the market there is a competition crunch coming in 2009, as the footprints of retail heavyweights start to overlap in the major cities and towns. He says most of the action will be in the top 50 to 60 urban markets, where there will be consolidation and “hyper competition.” Margins will erode in the mainstream formats of supermarkets and hypermarkets, putting pressure on the supplying brands. The big retailers – by cutting out the middlemen, and then using their buying power and global sourcing

abilities – will potentially bring about price reductions in some categories.

Technopak says a typical monthly shopping bill is likely to reduce by at least 10 per cent, freeing up an equivalent amount of surplus disposable income. This trend to price deflation will put more pressure on the suppliers of consumer goods. Singhal expects the big retailers to become bigger, with the top seven holding more than 30 per cent of the total retail market in India’s 150 biggest cities by 2011. Singhal also says large retailers will promote their private labels aggressively, “Most major new entrants will start with a heavy proportion of private labels, and they will probably use branded goods to demonstrate the price-value imbalance between such branded goods and their private labels.” In its October 2007 retail outlook, Technopak elaborated on the private label surge, saying that by 2013 the volume and value of the top five retailers’ own labels would be comparable to those of the main consumer product companies. As a consequence, there would be limited opportunities for brands outside the top two. They would be forced to “buy” shelf space, thereby eroding their profitability. Only consumer durables, electronics and lifestyle brands were likely to be “somewhat immune” to the challenge from retailers’ brands. At the same time, there would be new opportunities for consumer product companies to develop exclusive or co-branded products for big retailers.

KPMG came to similar conclusions

We must not forget that in the sky of India, serene as it is, a small cloud

may arise, at first no bigger than a man’s hand, but which, growing

bigger and bigger, may at last threaten us with ruin.


VISIONS & VIEWS


in its 2006 Fast Track retail outlook, noting that private labels or “store brands” were a key strategy being adopted by retailers worldwide. It said that private labels, which then had a 17 per cent share of retail sales (and were growing at 5 per cent a year), gave retailers a higher margin “while simultaneously offering lower prices to consumers.” KPMG found an increasing acceptance of private labels in India, citing a survey by AC Nielsen in which 56 per cent of respondents considered private labels to be good alternatives to manufacturers’ brands. It said 20 to 30 per cent of goods sold by some fresh food and grocery retailers were private label brands, with the highest penetration being 50 per cent. In clothing, the figure went as high as 65 per cent for some retailers.

“The rapid growth of Indian retailers in the coming years will provide the necessary scale for many to launch an active private label program,” KPMG said. It noted that, in addition to managing the supply chain, Indian retailers “may have to augment their private label management capability as well.” Internationally, German retailer

Aldi is the prime exponent of private labels, with 95 per cent of the items on its shelves bearing its own brand. Whether the labels are private or not, all retailers must deal with “shrinkage.” Theft, either through shoplifting, or pilfering by staff in the store or along the supply chain, is a problem everywhere, but even more so in India. According to a November 2007 study, “Global Retail Theft Barometer,” India has the highest shrinkage rate in the world at 2.9 per cent, losing US$2.38 billion worth of goods in 2006. To counteract the shoplifters, more Indian shops are turning to the latest technology – Radio-frequency checkpoints and EAS (electronic article surveillance).

PROBLEMS AHEADOne area of concern for India’s

retailing scene is the fragmented nature of much of the supplier base. Most Indian farms are small holdings, and most Indian manufacturers are small scale. Technopak says supermarket and hypermarket chains “will find it highly challenging to identify sources of supply that provide them the benefits of economies of scale, quality and

consistency in offerings.” In addition, retailers must deal with various state-based regulations and an outdated set of laws governing products. In its ‘Fast Track’ report, KPMG pointed to the Weights and Measures Act, which requires all goods to be available in factory packed form in stores. “Similarly the Agricultural Produce Marketing Committee Acts consider even small volume purchases to qualify as wholesale deals.” There are also variations among states on matters such as store opening hours.

Another issue is finding the right space. Flick through Indian magazines such as Retailer or Images Retail and an astounding number of full-page colour advertisements leap out promoting malls of every conceivable shape, size and theme, across a multitude of locations. But given the massive investments being planned by a host of retail players – upwards of US$35 billion over the next five years – even with this mall boom, good space may be at a premium. Technopak says new retail space of about 500 million square feet will be needed across all formats, with almost half of it required in malls. But estimates of mall construction suggest there will still only be an extra 140 million square feet by 2011; 100 million square feet short of the target. “This is bound to create one of the biggest constraints in the growth of organised retail in India,” Technopak says.

Along with shortcomings in the supply chain, the slow pace of infrastructure construction continues to bedevil India’s outlook. One example: a new airport for India’s fifth-largest city, Hyderabad, opened in March 2008, but proper transport links between the airport and the city lag way behind. It will be years before an airport train or a dedicated expressway opens. For now, commuters must make do with buses, taxis or private cars for the 25 km trip, moving along already congested roads. In May 2008, Bangalore, too, opened its new airport, 40km north of the CBD, but again there

WORLD CORRUPTIONPERCEPTION INDEXIndicates the degree to which corruption is perceived to exist among public officials and politicians, based on expert & business surveys.

1. Denmark 9.41. Finland 9.41. New Zealand 9.44. Singapore 9.34. Sweden 9.317. Japan. 7.520. U.S. 7.272. Brazil 3.572. China 3.572. INDIA 3.5138. Pakistan 2.4143. Russia 2.3162. Bangladesh 2.0A score of 10 indicates a perception of no corruption, while zero means corruption is seen as rampant.Source: Transparency International, Survey of 180 countries, 2007.

INDIA’S HUMANDEVELOPMENT INDEXLife expectancy at birth: 63.7

yearsAdult literacy rate (age 15+): 61.0%Education – combined gross enrolment for primary, secondary & tertiary schools:

63.8%

Children underweight at age 5: 47%Probability of not surviving past 40: 16.8%Population living below $1 a day: 34.3%Population living below $2 a day: 80.4%Share of income/consumption,poorest 20%:

8.1%

Share of income/consumption,richest 20%:

45.3%

Public health spending as % of GDP: 0.9%Public education spending as % of GDP:

3.8%

Public education spending as % of govt. spending:

10.7%

Source: United Nations Development Programme, Human Development Report, 2007-08



is no dedicated high-speed rail link to ease the strain for travellers. This city of 7 million, known around the world as India’s first IT hub, is in danger of being slowly strangled by a lack of decent infrastructure.

Likewise, Mumbai visionaries produce report after report on how the city will create world-class facilities and high-speed links to its Navi Mumbai and Maha Mumbai hinterland, but there are endless delays and haggling over land usage and rights. Compare that with the infrastructure in China, where capacity precedes use, be it for airports, roads or bridges. In the same month that Hyderabad Airport opened for business, Chinese builders put the finishing touches on a 36-km, 12-lane road bridge across Hangzhou Bay, cutting 120 km and two hour’s travel time from the journey between China’s financial capital Shanghai and the emerging port city of Ningbo. The bridge took five years to build and cost about US$2 billion. India, with its multi-layered political power-sharing, seems incapable of matching that sort of determination; projects on a similar scale for Mumbai, Bangalore, and New Delhi have languished for years.

OUTSIDE THE MODERNISATION PROCESS

Perhaps the biggest problem of all in India is the fear of dislocation for those who see themselves as outside the modernisation process – be it by choice or circumstance. Groups such as FDI Watch, small traders’ associations, market middlemen and various political organisations raise the spectre of big organised retailers as the destroyers of jobs and cultural traditions. The response from the liberalisers is basically “no pain, no gain.” This is how economist Clyde Prestowitz,

president of the Economic Strategy Institute Think Tank, put it in a 2006 interview with Rediff.com: “It is going to be India’s century.” But, he noted, it was impossible to lift India’s poorest people out of poverty without economic growth. “And you cannot have economic growth without reform and deregulation. Of course, when there are dislocations, some efforts have to be made to smooth the pain of dislocation. But I think it is a false premise that people will be hurt by reforms. Because they are being hurt right now for lack of reforms.”

Amid all this confusion, Indian business leaders exhibit a remarkable optimism, with surveys showing them to be relentlessly confident about the future. PricewaterhouseCoopers’ 11th annual global CEOs survey in January 2008 found a remarkable 90 per cent of respondents in India are “very confident” about revenue growth over the next 12 months, compared to 50 per cent globally. The issues that worry them most are the availability of key skills, energy security, scarcity of natural resources, security of the supply chain, and inadequacy of basic infrastructure.

WILL THE KIRANA SURVIVE?On the ground, in the nooks and

crannies of Indian society, the question for 12 million corner stores is whether they can withstand the onslaught of modern retailers in the battle for India’s next 500 million shoppers and the $800 billion a year they will be spending, less than a decade from now. Arvind Singhal and other experts are confident the kirana stores will be around for a long time to come. Singhal says retailing in one form or another has existed for

5,000 years. “The kirana will prosper and grow for at least 15 years – unorganised retail will grow from $350 billion now to $600 billion by 2017,” he says, while noting that in 20 years the situation might be different. “Still, 20 years is long enough for anyone to adapt to the new environment.”

London Business School academic Nirmalya Kumar is another to have no doubt that the kirana stores will survive. Kumar, who is professor of marketing and co-director of the Aditya V. Birla India Centre at London Business School, says that retail always has four winners: cheapest, biggest, best, and nearest. The kirana score on at least the last factor, and sometimes the first. In an online chat via the Rediff.com portal in December 2007, Kumar outlined his expectations of India’s retail scene, five years hence. Many different formats would co-exist, he said. “The kirana stores will continue to be around as they have a value proposition, which is unique to them. However, besides being fewer in number, they will account for a smaller proportion of total retail sales.”

A paper released in February 2008 says kirana stores and organised retail can coexist, though their growth rates will be different. The paper, by Dr Thomas Reardon of Michigan State University and Dr Ashok Gulati of the International Food Policy Research Institute, says structural changes in Indian retail will start to affect large numbers of small retailers “at some stage.”

This could be after 10 or 20 years, but “especially when the overall share of organised retail in food reaches about 25–30 per cent.” The paper is part of a broader survey of retailing by the Indian

Demography may not always be destiny, but the free flow of money into young and youngish consumers’ hands over the next few decades is a powerful aphrodisiac for

retailers in search of a market.


VISIONS & VIEWS


Council for Research on International Economic Relations (ICRIER), which says corner stores so far have largely been able to adjust to the advent of big retailers, and most small shopkeepers plan to stay in the business. The ICRIER study also suggests that, far from being obliterated by big retail, middlemen will continue to exist and have a role to play in the supply chain. Reardon and Gulati argue that fear of modernisation and dislocation is unnecessary. “When India introduced computers in banks, railways, and other businesses during the mid-1980s, employees went on strike for days to stop it, fearing computers would lead to massive unemployment,” they note. Twenty years later, the IT sector is a big export earner and there are more jobs than ever in the financial services sector. Organised retail, they argue, is likely to follow a similar path.

CONSUMER FINANCE GROWINGThat sort of crossover is already

happening between retail and financial services.

India’s master retailer, Kishore Biyani, is well down the track in his plans to keep the consumption boom alive by lending money to customers. He believes consumer finance is the way to drive retail growth, and he wants his

Future Group to play a big part in that. Other business groups see the same rosy scenario, which is why financial services shares the “hot sector” honours with retailing in the late 2000s. Just as many millions of Indians are yet to enter an air-conditioned mall or supermarket, so too have they yet to open a bank account or seek credit from anyone other than the local moneylender.

Demography may not always be destiny, but the free flow of money into young and youngish consumers’ hands over the next few decades is a powerful aphrodisiac for retailers in search of a market. So, there will be no lack of demand; the shortcomings that do exist in India include a lack of good, affordable retail space; a lack of skills in jobs that range from management to merchandising to truck driving; a lack of reliable, good-quality suppliers; and a lack of logistics to get food and other products onto store shelves in time and on budget. Some may choose to be depressed by these obstacles, but for others, it is the sort of scenario that opens a mountain of possibilities for Indian and overseas investors and entrepreneurs.

The opportunities abound in everything from agriculture-related enterprises to transport, packaging, warehousing, air-conditioning,

refrigeration, IT systems, security, insurance, inspection services, store and mall construction, store design and fit out, cleaning, advertising, marketing, merchandising, staff training, market research, product testing, loyalty programs, banking, consumer financing, credit checks … the list goes on.

For the last word, we turn to India’s ever-confident Finance Minister, P. Chidambaram and his 2008–09 budget speech in February 2008. “The four years to 2007–08 have been the best years so far,” he told his parliamentary colleagues. “But may I say with humility that the best is yet to come.” Consumers and storekeepers alike will be hoping that his words ring true as the great battle for the hearts and wallets of India’s next 500 million shoppers unfolds.

Extracted from “India’s Store Wars: Retail Revolution and the Battle for the Next 500 Million Consumers,” by Geoff Hiscock, published by John Wiley & Sons, August 2008. ■


MAKING RETAIL LIFT THE TAIL: ENSURING COMPETITIVENESS WITH INCLUSIVENESS

By Dr. Ashok Gulati and Kavery Ganguly

10_MAKING RETAIL LIFT THE TAIL.indd 47210_MAKING RETAIL LIFT THE TAIL.indd 472 9/13/2008 12:41:06 AM9/13/2008 12:41:06 AM

VISIONS & VIEWS


retail on the livelihood opportunities of the unorganised players (small traders, kirana shops and local vendors) and smallholders to the forefront. It is quite evident that as organised retail grows, the impact of it will not be uniform; while some maybe affected positively others will have to face an adverse impact. However innovations and initiatives at the various levels of the agri-food system can help minimise the adversities, harness the potential gains and open up new vistas for mainstream participation.

In this process of growth and transition of the Indian food and grocery retail sector, the need to establish strong farm-firm linkages that can make up for the farm infirmities, and enhance income opportunities, is felt ever more strongly. In this context, it will be worthwhile to understand the emerging new initiatives

The retail revolution in India has been studied by experts to be distinct from that experienced by other countries in and around

the region (Reardon & Gulati, 2008). It is expected that the Indian organised food and grocery retail will be growing at a much faster rate overtaking other countries, the impact of which will be most profound when it accounts for a considerable share of the total market. The agri-food system in India is undergoing structural changes with the front-end (comprising of retailers, agro-processor, wholesale and logistic suppliers) escalating at a rapid pace while farmers at the bottom end are fragmenting. This has brought the debate on the impact of organised

The recent performance of the organised retail sector, particularly the food and grocery segment has been very impressive and this has resulted in unveiling a host of opportunities as also challenges before the agri-food sector. The primary challenge lies in steering this impetus to ensure growth with inclusiveness that is a policy priority and has enormous implications for a smallholder-driven agricultural sector.

and innovations with particular reference to backward linkage and open source intermediation. While the investments and innovations will be primarily driven by the private sector this is not to ignore the role of the public sector, which through its role of a facilitator can help create an enabling environment for greater investments.

CONSOLIDATING TOP AND FRAGMENTING BOTTOM

As observed, Indian agri-food system is fast transforming. The emerging agri-food system comprises of input suppliers, farmers, wholesalers, logistic suppliers, processors and retailers (see figure 1 on next page). The production basket is also diversifying in favor of high value commodities in response to changing consumption patterns, which require better handling,



storage and distribution networks. It is also observed that agricultural growth is at least twice as effective in reducing poverty as growth from any other sector (World Bank, 2007a). This has enormous implications for a country like India where a sizeable proportion (more than 58 per cent) of the workforce is involved in agriculture and nearly 300 million people continue to live below the poverty line.

CONSOLIDATING TOP- RETAILERS, PROCESSORS, LOGISTIC SUPPLIERS

It is definitely a very exciting time for the Indian retail industry, particularly the food and grocery segment. The top 10 organised food and grocery retailers have been growing at the rate of 72 per cent, albeit from a small base (Planet Retail, 2008). While total food and grocery retail accounts for nearly 60 per cent of the aggregate retail pie, organised food and grocery retail accounts for a little more than 10 per cent of the organised retail. What is more interesting is that it is not just the front end retailing that is expanding, other components of the agri-food system are also undergoing transformation giving rise to modern and compressed value chains with

identifiable stakeholders. The food processing sector has also received a fillip, where the growth rates have escalated from 7 per cent in 2002/03 to 13 per cent in 2006/07. According to an IFPRI study (Bhavani et.al. 2007), the share of organised food processing segment in the gross output of the total (organised and un-organised) food processing sector has increased from 64.3 per cent in 1984-85 to nearly 81 per cent in 2000/01 and is likely to have gone up in the recent years. The capital accumulation in the organised segment has also gone up and so has utilisation of the excess capacities indicating scaling up of activities. This provides a good platform to induce competition among the existing players leading to a virtuous cycle of growth, expansion, consolidation and modernisation. In this scenario, demand for advanced logistic facilities including warehousing, cold chains and transport have gained importance and finds relevance in restricting post harvest losses and ensuring better

value addition. The USD 100 billion logistic industry is likely to grow at the rate of 15 to 20 per cent to a USD 385 billion by 2015. This is likely to stimulate the growth of the organised segment, which is about 6 per cent to 12 per cent by 2015, which is still very low compared to other countries (Cushman & Wakefield, 2008). This tremendous growth and structural transformation from conventional storage to inventory management and value addition, bringing logistic and warehouse facilities close to the consumer markets can add to the value generated in the organised retail and processing segments.

While India has a sizeable production base of high value commodities (fruit, vegetables, milk, meat, eggs and fish), the levels of processing are miniscule in comparison with those of other countries. Lack of adequate infrastructural facilities and other means to adhere to stringent quality norms and food safety regulations result in low export competitiveness of Indian produce in global markets. Also, higher transaction costs at both domestic and international level render export uncompetitive.


VISIONS & VIEWS


A World Bank study on the export competitiveness of India’s horticulture states that “the average price at the farm-gate for a typical horticulture product was found to be only 12-15 per cent of the price at which the product is retailed in the destination (export) market” (World Bank, 2007b, italics added). Weak farm-firm linkage often results in farmers receiving a very small share of the consumer price and studies show that compressing the supply chain can lower this margin. Studies conducted by the World Bank (2007c) on value chains of mango, litchis and potatoes in Bihar show that a significant amount of the consumer price is lost in transport and wastage and the farmers receive 34, 42 and 16 per cent of the consumer price respectively. Logistics cost as a per cent of GDP at 13 per cent is higher than many other countries and this reflects the poor quality of warehousing and other logistic services, which is beginning to transform (Cushman & Wakefield, 2008). This has large implications for the fresh and processed food sectors as well. The idea of logistic parks, a one stop is gaining importance that aim to develop areas involved in both domestic and international trade with all facilities of storage, distribution, packaging and transport. By 2012, nearly 110 logistic

parks are expected to come up covering an area of approximately 3,500 acres at an estimated cost of USD 1 billion. This has huge implication in terms of the revenue and employment generation and also quality services provided that has a positive impact on value addition in other sector (particularly food and food processing industries).

Considering the fact that the organised food and grocery as part of the total organised retail

sector is growing at a rapid pace in consonance with changing consumption tastes and preferences fuelled by rising economic growth, income levels and demographic changes, there is a fair amount of repositioning and consolidation that is taking place among the front end players along the value chain. Given the rapid pace of growth of the organised players and expanding investment plans and a small base, opportunities of further expansion are quite robust. This has also set the trends of consolidation among the retailers; in 2007, Reliance took over Adani retail in Gujarat; Trinethra was taken over by Aditya Birla group under the More banner. Also Spinach located in Maharashtra bought out Delhi Sabka Bazaar and Home Store chains. There are reports of Bharti likely to take over Big Apple. The front end

thrives on economies of scale and this necessitates assured backend supplies, which is turn demands strong forward as well as backward linkages. Very recently, Future group has acquired 70 per cent ownership of Godrej Aadhar (part of Godrej Agrovet), which deals with the backend services to farmers will serve as a procurement hub for Future group and maybe other retailers too.

As the business unfurls, the need for tightening the supply chain, ensuring critical input services and information as also credit and insurance facilities to farmers have gained importance. Direct sourcing and open ended procurement services are being dovetailed with backward linkages which hold the key to sustainable ventures. Such instances of consolidation are also observed among the logistics players basically in order to reap the benefits of economies of scale. The concept of 3PL (third party logistics) is gaining importance as also individual firms foreseeing the future need for logistics and warehousing facilities are developing their own capacities. This is in sharp contrast to the players at the bottom of the agri-food system.

FRAGMENTING BOTTOM-DECLINING FARM SIZE

The farm sector in India is pre-dominated by marginal and smallholders (operating less than 2 hectares of land) vulnerable to production and price shocks. The average size of operational holding declined from 2.2 hectares in 1970-71 to 1.06 hectares in 2003.

The farm sector in India is pre-dominated by marginal and smallholders (operating less than 2 hectares of land) vulnerable

to production and price shocks. The average size of operational holding

declined from 2.2 hectares in 1970-71 to 1.06 hectares in 2003.



About 88 per cent of farmers with less than 2 hectares of land occupy more than 44 per cent of the operated area (see figure 2). Agriculturally important state like Punjab and other states such as Goa, Manipur and Sikkim are witnessing a turnaround, it will perhaps take a long time to see the turn around at the national level. Hence it is practically impossible to ignore the marginal and small farmers and the challenge lies in ensuring their participation in the growth process.

The inverse relationship between farm size and productivity still holds (Srivasatva, 2008) and it is true that small farmers are as efficient as the big farmers and sometimes more, at least at the farm level. Owing to surplus household labor and intensive cultivation practices, they are able to raise the production level per unit of land. This is seen in their high share (51 per cent) in the total value of agricultural output (Srivastava, 2008). It is only beyond the farm gate that the smallholders lose their competitiveness, which is a critical determinant of the net returns earned. Smallholders are crippled

by small marketable surplus, huge transaction costs, and low risk bearing capacity. For the farmers engaged in high value agriculture (horticulture, livestock and marine products), minimum support price and assured markets for grains render it difficult for them diversify. Unlike the large farmers, they have small investment capacities; inadequate market information and crop knowledge (due to low educational levels) which again adversely affect the final returns.

THE CONCERN, THEREFORE, IS: HOW CAN THE RETAIL HELP LIFT THE TAIL OF THE AGRI-FOOD SYSTEM?

Significance of backward linkage in a changing agri-food system

At present the front end is rolling out very fast and the focus on streamlining the backend is perhaps at a much nascent stage, the importance of which is beginning to set in. While higher returns, partly due to higher incomes and low transaction costs attract farmers to join the foray, high uncertainty related

to production and prices and lack of risk mitigating instruments have a dampening effect. This draws the rationale for strong backward linkage which serves as a mechanism of risk mitigation. Modern retailing and food processing are quite sensitive to changing consumer preferences and also have stringent quality and food safety considerations. In such a scenario, it becomes important to develop a transparent supply line that adheres to the quality demands and is traceable. Backward linkages, whereby farmers receive critical inputs, extension services, market information, credit and insurance facilities can be very useful for the farmers as well as the retailers and processors. It is more in the interest of the latter to ensure regular supply of quality produce. The other major issue is how to enhance outreach, particularly with millions of small farmers? It is almost impossible for each individual farmer to enter into a contract with the processors or retailers and likewise it is also not cost effective for the latter to cater to the needs of each and every farmer singularly. Herein cluster approach, cooperative, farmers’ groups or lead farmer approaches are worthwhile to consider. It also holds for the farmer who has multiple input requirements and has to run around to assemble them, thereby spending a lot of time and money. Accessibility of credit and insurance facilities from formal sources particularly by the marginal and small farmers is critical- farmer households with less than 2 hectares of land accounted for 80 per cent of the indebted farmer households, and availed nearly 50 per cent of their loan requirements from non institutional sources. What aggravates their plight is that nearly 38 per cent of it is acquired at a staggering rate of 30 per cent (GoI 2007). These are the areas where the emerging initiatives and innovations can help farmers and improve their access to formal sources.


VISIONS & VIEWS


ROLE OF OPEN SOURCE INTERMEDIATION

Of the many approaches of linking farmers to markets, open source intermediation is one. The prospects are promising and scope is enormous but it will require some policy reformulation and innovations at the ground level to make it work in the interests of the front end players as also the farmers at the bottom. The idea of open source intermediation is to improve the supply as well as the access to input resources which in turn help develop profitable business opportunities for both firm and farmer. The model works on providing critical agri-inputs, information and buyback opportunities to the farmers. All these work towards developing viable business opportunities in the agricultural sector. It is recognised that there is a huge unmet demand for rural service particularly rural agri services. The demand supply gap has widened owing to a weak institutions that lack innovation and coordination amongst

various other stakeholders. This necessitates putting in place an extension network that facilitates dissemination of information about markets, prices, technology, provides or facilitates credit and insurance, and other key agri inputs at the farmers’ field.

There are many variants of open source intermediation, differing in the content of input supply as well as buyback arrangements, rural business/agri hub being one of them. Although there isn’t any ‘one size fit all’ formula, existing and new players are trying out different models; the scale of operation is still at a very nascent stage and given a considerable unmet demand for rural/

agri services has ample scope for scaling up. The idea is similar to the input provisions in a contracting farming arrangements but the nature and scale of provisions is quite different.

The rural/agri business hubs designed as “one-stop-shop” for the rural consumers (largely farmers) provide agriculture inputs such as seeds, fertilizers, pesticides, advisory services and at times credit and insurance and also daily household

goods, FMCG (see figure 3). These services if filtered down to the farmers by the retailers, processors or large input suppliers save the farmers from running around for the services. Also, a single store with multiple facilities can minimise the cost of reaching out to individual farmers. These services are at times coupled with buyback arrangements wherein the farmers have the freedom to sell their produce to these private players and bypass the government regulated wholesale market yards or the mandis. Together with this, presence of a gas station and food joint are very popular among the rural masses (Gulati and Gupta, 2008).

The venture into rural/agri services started in the late 1990s, with Tata Chemicals setting up Tata Kisan Kendras now popular as Tata Kisan Sansars. This was followed by other private sector led initiatives such as e-Choupal and Choupal Saagar by ITC, Mahindra Shubh Labh (Mahindra & Mahindra), DSCL led Hariyali Kisan Kendra, Godrej Aadhar and a host of other similar ventures at both national and regional level. It is not just the private retailers or processors who are laying out the backend services but also the Panchayati Raj Ministry has joined hands with Confederation of Indian Industry (CII), what is known as the 4-P model of Public Private Panchayat Partnership to develop the rural areas into business clusters. Agriculture is one of the identified clusters and the intervention is geared

As the share of organised food and grocery retail increases, the unorganised segment

will generate enough opportunities to enable mainstream participation and this

may happen through franchise, branding of pushcart vendors, and the like.



to develop rural business hubs through both backward and forward linkages. On one hand, farmers receive the critical inputs, knowledge and information essential to undertake production and on the other hand have access to assured markets. This is definitely an innovation in linking the farmers with the markets and also developing business potential through the initial backup of investment and input services. While this has enormous scope in reaching out to millions of farmers, the involvement of the panchayats at the village level can be very instrumental in ensuring service delivery and good governance at the local level.

THE WAY FORWARDThe growth of organised food and

grocery retail in India has a definite positive impact on the overall growth and also on employment but the apprehension lies in what happens to the unorganised sector (the parallel front end) and of course the farmers at the backend. As the share of organised food and grocery retail increases, the unorganised segment will generate enough opportunities to enable mainstream participation and this may happen through franchise, branding

of pushcart vendors, and alike. Like Mother Dairy, which has several franchise outlets, the big organised retailers/processors can go the same way with the local kirana stores. The concept of branding the pushcarts as floated by ITC and ACME can be revolutionary as this has the potential of providing gainful employment on a large scale. Organised retail is not just big box malls in India but also discount and neighborhood stores, which are very competitive amongst themselves (Reardon & Gulati, 2008). Also, the consumers of various income groups benefit the most in terms of fair price and better quality. A recent IFPRI study showed that the prices of vegetables were 33 per cent cheaper in organised outlets as compared to traditional and that of fruit was 15 per cent (Gulati & Reardon, 2008). A sound economic policy that encourages rather than puts brakes on this rapidly expanding sector can bring about a win-win situation for various stakeholders, particularly the farmers and other smaller players in the agri-food system. ■

A sound economic policy that encourages rather than puts brakes on this rapidly

expanding sector can bring about a win-win situation for various stakeholders,

particularly the farmers and other smaller players in the agri-food system.

References

Bhavani, T.A., Ashok Gulati and Devesh Roy. 2007. Structure of the Indian Food Processing Industry: Towards Scaling Up and Consolidation. Unpublished paper. International Food Policy Research Institute, New Delhi.

Cushman & Wakefield, 2008. ‘Logistics Industry Real Estate’s New Power House.’

India Report. A Research Publication. Cushman & Wakefield, August 2008.

Government of India. 2007. ‘Report of the Expert Group on Agricultural Indebtedness.’ Ministry of Finance, Government of India. July 2007.

Gulati, Ashok and Kavery Ganguly.2008. Beyond Grain Security: Agriculture Tomorrow. The Business Standard 2008. The Business Standard, New Delhi.

Gulati, Ashok and Kanupriya Gupta.2008. Rural Business Hubs: Making markets serve the “Bottom of the Pyramid”. Unpublished paper. International Food Policy Research Institute, New Delhi. May 2008.

Gulati, Ashok & Thomas Reardon, 2008. ‘Organised retail and food price inflation – Opening the ‘Black Box’.’ Business Line, 24 May 2008. New Delhi.

National Sample Survey Organization. 2006. ‘Some Aspects of Operational Holdings in India 2002-03.’ Report No. 492. National Sample Survey Organization, Ministry of Statistics and Program Implementation, Government of India, New Delhi.

Planet Retail. Official website www.planetretail.net. Accessed June, 2008.

Reardon, Thomas & Ashok Gulati, 2008. ‘The Rise of Supermarkets and Their Development Implications: International Experience relevant for India.’ IFPRI Discussion Paper 00752. IFPRI New Delhi Office.

Srivastava, Ravi, 2008. ‘Prospects of Small holding Agriculture in India.’ Presented at a workshop titled ‘Exploring Alternative Futures for Agricultural knowledge, science and Technology (KST) organised by NCAEr and IFPRI at India Habitat Centre, Amaltas Hall, New Delhi. 01 July, 2008.

World Bank. 2007a. World Development Report 2008, ‘Agriculture for Development’, The World Bank, Washington D.C.

World Bank. 2007b. ‘From Competition at Home to Competing Abroad, A Case Study of India’s Horticulture” by Aaditya Mattoo, Deepak Mishra and Ashish Narain. Published in India by Oxford University Press, New Delhi.

World Bank. 2007c. Bihar Agriculture: Building on Emerging Models of “Success” Agriculture and Rural Development Sector Unit. South Asia Region. Discussion Paper Series. Report No.4. The World Bank. Washington D.C.


CHALLENGES OF EXECUTING MODERN RETAIL IN INDIA

By B S Nagesh

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I would like to define the “Modern Retail Format” before we set on to look at the various challenges. In my opinion the modern retail formats should be looked at from the consumer’s convenience. For e.g. in the car industry modernising gave then choice, range, efficiency, value for money and enhancement of lifestyle. Similarly in the telecom business, the consumers got reach and penetration with choice and convenience at a great value. Therefore to me any retail format which is able to create an experience, provide choices, enhances consumer lifestyle, delivers great value for money, has information systems to respond to consumer and the authorities for maintaining good “Corporate Governance standards” should be termed as a modern retailer.

With this background in mind let us look at some of the many challenges:

Challenge of setting up the business In the pre set up or the initial stages

companies require the following:Secondary data on the market, ●

market size, by city by location, consumer data on demographics or psychographics etc.Require start up team of managers ●

who understand the country,

Actually when I am writing this piece on challenges in today’s context, most of the challenges are being faced by the new entrants

of the last decade. The earlier entrants and the traditional large format retailers are selling profitably.

Since I am addressing challenges, I would like to fore-warn my readers that India story is very strong in the medium to long term, especially for players who have long term vision, patience and tenacity to focus, concentrate, hold and pursue the course. India’s GDP growth of 7-9% will ensure that by 2020-25 the retail story is very significant. Raising concern and challenges should not be seen as pessimism towards consumption or consumers or the future of retail industry. In fact facing such challenges and overcoming them at an early stage will make many retailers reach and achieve high share of the Indian retail pie.

Modernising retail emerged as a new-found terminology at the IRF 2007. Until then we all were creating a divide in the Indian retailing environment by distinguishing the new from the old by calling the new industry as ‘organised’ and the old retailing as ‘unorganised’, although the case was really not so. consumer, rules of the game and the

retail business.Authentic market information of ●

performance of retailers, category, consumers etc so as to make an informed decision.Funds apart from the equity of the ●

promoters.Unfortunately we are lacking on

all the above fronts. Our information available is not authenticated to the extent that three agencies in the country give three different figures for the Indian retail market size and they vary by tens of billions of dollars. Information gathering and information authentication is best left to the judgment of the startup companies. Many a times the first step in the direction becomes the biggest and the costliest mistake made by all new entrants into modern retailing.

We are at a very nascent stage of the retail development and hence most of the senior and experienced resources in India are either part of the promoters of the earlier businesses or are committed for long terms. Even if they are available you cannot even count up to a number of 50 CEOs with more than 10 year of hardcore retailing experience. Even if they are available the



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resources have become very expensive and not affordable for a startup company. In any case the current cost of a start up set up in this country for human resources ranges between 100 million to 150 million INR. Options of getting ex-pats have been used not very successfully (In the Shoppers’ Stop group we have had a 4/7 success rate on ex-pats) due to high cost and the adjustment time required by the individual and their families, difference in the style of working of Indian managers and the promoter families, and of course the pains of setting up and the administrative hassles of starting a company takes a toll on the ex-pats.

As the industry is nascent and very few players are listed, there is a lack of authentic retail sales and profit figures. Most reference figures are the sales of the top performing stores. For e.g. everybody quotes South Extension sales for their stand alone store figures, Forum and Inorbit malls as reference for India’s potential, Big Bazaar at Phoenix and Hypercity at Malad are used to determine the sales of the country.

Very few startups can get funded by the banking system, the VC and the stock market route is not there for everybody to use up and set the business. Retail startup or retail business is now only for people with deep pockets, patience and long term vision.

In the operating stages of the business the challenges are multifold. In this article, I would like to concentrate on, Positioning, Property, People and Profitability

Positioning and deciding on the geography is the biggest challenge for

all retailers. All retailers want to cater to everybody in every segment with every product category. This strategy itself becomes self defeating and extends the viability of the project by years. When you compare market entry strategy for retailers in Europe or China, one would note that they have entered country by country or region by region and have focused on their core assortment and their core customers.

In India many retailers have ●

expanded vertically and as well as horizontally to capture all benefits of the value chain as well as total share of consumer wallet. This strategy is yet to be proven; we will see the outcome of such strategy by 2011-12 when the size and scale will be achieved by such large retailers.Launching the concept, brand and ●

brand building is a very expensive exercise, especially for retailers with national ambitions. Start up cost of an office infrastructure, added with national brand launch takes away 250 to 300 million INR.Property decision in the country was ●

very easy and affordable till 2005, however 2006 onwards the game has changed. Property prices have become very expensive and not anymore affordable for most retailers in many categories. In the absence of credible, transparent and publicly held companies, there are very few retail rental deals on revenue sharing. Most real estate players do not have long term holding plans for their property and therefore their interests are not aligned with the consumer or retailers interest.

Human resources are an integral ●

part of any retail setup. Human resources cost is amongst the top three operating costs in the P&L of any retailers. Retailers in India have had to pay very high salary for the managerial staff thus squeezing on the money available for the front end associates. This has lead to big in-equality in the standards of associates thus leading to high level of attrition and poor quality of service.Even when all these parameters ●

match, it is important to ensure the sales throughput is big enough for the retailer to get profitability at the store level. Ironically in India as of today the rental and operating costs have reached 3/5th of European levels. Whereas the revenues are still at 1/5th or 2/5th of such sales standards, thus making retail unviable in the short term.After discussing the four Ps I would ●

like to touch on the ‘G’ factor. ‘G’ can be GOD or GOVERNMENT depending on who impacts you when and where. The fact is as a retailer our balance sheets are highly influenced by the ‘G’ factor. Rain in the western region takes away a few days in the year, trade unions and strikes takes away a few more days in the East, Fanaticism takes away a few days in South or for that matter any other part. Governments introduction of service

tax, without introducing GST regime, changing of tax laws every time, bringing in new legislation on electricity tariffs are such acts of the ‘G’ force for which the Indian retailer has to be prepared.(In the last 2 quarters the ‘G’ force has impacted retailers by1-2% on the profitability)

Before I conclude, I must confess that Indian retailing opportunity is a great opportunity with everything in excess, whether opportunity, challenges, ’G’ factor, market PE, valuation, employee compensation or the hopes. I am one of those optimists who has high hopes on the “Future of Indian Retailing” ■


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GROWTH PLANNING FOR THE RETAIL INDUSTRY

By Tim Eynon

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less than mature economies. Retailers are unable to sustain prices that will cover these high rentals. The growth of organised retail will be hampered until rentals are available at prices that retailers can manage.

As more supply of retail space comes online we should expect some supply and demand corrections, but government could encourage a better match for retailers by granting special FSI regulations for retail related real estate which could offset the high costs of land, construction and utilities that developers must face.

Infrastructure and supply chain Lack of general infrastructure is

hampering development of modern retail environments, such as shopping malls, and slowing accessibility both for suppliers of goods and services, as well as, the consumer. Partly for this reason, amongst others, India’s organised retailers face supply chain costs almost four times higher as a percentage of retailers in the USA for example. This squeezes margins, inhibits growth and drives need for higher working capital

According to the recent reports, 59 per cent of GDP is driven by private consumption and of this the retail sector in

totality – organised and traditional combined – is driving 60 per cent of private consumption. Within retail, the organised sector is growing at more than 30 per cent CAGR and is developing significant direct and indirect employment opportunities.

Initial development in the Indian metros is now spreading to tier two and three cities and has the potential to significantly enhance the lifestyles of people across the country.

FACTORS AFFECTING GROWTH

Retail Real Estate costsOn average India’s retail space

rentals are almost equal to the USA, yet our consumer’s PPP is significantly

We must recognise that the organised retail sector, whilst important for the growth of the overall Indian economy, must co-exist with the traditional sector if we are to succeed in the overall goal of improving the standards of living of everyone in India.

requirements in a market where liquidity is tight and interest rates are high.

Training and the WorkforceRetail is an ideal entry level

employment opportunity for many family members and demand for trained retail staff at the store and mid management levels is very high. Lack of training facilities is a problem. Perhaps the government could encourage the establishment of private sector training facilities around the needs of modern retail through special schemes and incentives?

SUMMARYThe organised sector is forecast to

growth four-fold in the next five years to almost USD 90 billion. This will require investments in real estate alone of over USD 50 billion, much of which will be FDI spurring the balance of trade.

This optimistic scenario may be set back without the governments’ careful consideration of initiatives that could ease and speed the development of this sector which is a prime driver of the economy in new India. ■

VISION AND VIEWS

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CHANGING DYNAMICS OF THE INDIAN RETAIL SECTOR

By Anshuman Magazine

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in the country that apart from expansive market penetration plans of Indian retailers, a multitude of international brands and retailers have either already established themselves in the market or are aggressively securing a presence through joint-ventures, franchisee and other arrangements.

A prerequisite of modern retailing is the availability of quality space in key locations to support the roll-out plans of retailers. Till some time back, the considerable gap that existed between supply and demand of Grade A retail

According to AT Kearney, consumer spending in India has increased by an impressive 75% in the last four years and will

quadruple in the next twenty years. So compelling is the opportunity and potential presented by the retail sector

The retail sector in India is witnessing unparalleled growth. Unmatched demographics, rising income levels, shifting lifestyles and changing aspirations of the burgeoning middle-class has unleashed a retail revolution in the country. Fresh retail geographies are emerging, innovative formats are being introduced and retailers are tapping new customer segments with prolific product offerings.

space in India had led to spiraling of mall rentals. However, over the last two quarters a contrasting picture has come to the forefront. Completion of many pending mall projects at a time when expansion plans of retailers has been put on hold in view of the subdued global economic scenario has impacted the retail rentals. While the mall rentals in some of the micro-markets of the cities remained stable, certain pockets of Delhi and Gurgaon in NCR and Bangalore registered a decline between the first and the second quarter of

MALL AND HIGH STREET RENTALS FOR NCR, MUMBAI, CHENNAI AND BANGALORE



VISION AND VIEWS

this year. The above, combined with the fact that consumer spending has suffered a setback due to compounding inflation and that close to 100 million sq.ft. of mall space is in pipeline, has led to talks of retail space surplus being created in the country. The fear is not unfounded. The situation of over-supply and saturation resulting in subsequent correction of rentals may occur in certain pockets and micro-markets in the short to medium term. But on the whole there is significant demand

to cater to and well planned malls in established locations are not likely to witness change in demand or values.

As we move ahead, some distinctive trends are likely to emerge on the Indian retail scenario. Domestic retailers and mall developers will be moving into the smaller towns and cities with alacrity in order to respond to the growing consumers markets there and to capture the rising demand for branded products. As the existing formats make way for the modern ones and

the national footprint of the retailers expands, efficient supply chains will be set up and consolidation of the logistics function will take place. Last but not the least, the market for luxury retail will gain critical mass and this segment will witness substantial growth in the next few years. However, to enable this sector to realise its full potential Foreign Direct Investments (FDI) restrictions in retail will have to be relaxed further and retail rentals will need to undergo some degree of rationalisation. ■


By Damodar Mall

GREEN HABITS RETAILING: A MODERN TRADE OPPORTUNITY

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VISIONS & VIEWS

We give all these activities space in our homes and time and attention in our lives. We do these things without thinking, we do them because that’s how we’ve always done them. They are our way of living. We don’t call them reducing food waste, segregating trash for recycle and reuse, reducing our carbon footprint, green living and so on. We don’t give these activities any name because they aren’t separate from the rest of our lives. They are a part of it. These terms have emerged from the West where hugely wasteful societies are struggling to change habits and practices as the realisation dawns that we are living on a gradually warming planet where resources are getting scarcer.

Waste and modernity are almost synonymous, as the West has proved. Modernity is accompanied by convenience, which almost always is derived from habits that are wasteful. Time is money, and therefore anything that takes up time or effort has to be discarded if it isn’t of immediate benefit. Thus, modern thinking would weigh the cost of saving up the old newspapers with the benefit of those two hundred rupees, and find the cost too high. Cheaper to put them in the garbage bin. Fortunately, in India, we are still not fully ‘modern’. We still believe in simple and thrifty living, and don’t mind putting

Last Sunday, we ate delicious parathas at lunch which, I then discovered, were made from the leftovers from the Friday dinner party. At the

dining table, we exhort our children to finish what’s on their plate even if they aren’t hungry. Everyday the old newspapers and magazines are neatly stacked in separate heaps in a corner of our apartment designated for this purpose, and at the end of the month, these stacks are diligently sold to the ‘raddiwala’ for a couple of hundred rupees.

At the bottom of my children’s wardrobe, there is a large drawer. It is used to store old clothes and plastic shopping bags, collected from the various stores around the city and even abroad, to be reused when the need arises. In the pantry next to the kitchen, there is a large plastic carry bag in which we stuff plastic pouches of varying sizes and plastic grocery bags. These are used as trash bags or for anything that needs to be stored in a plastic pouch. Fresh plastic bags are seldom bought.

in effort to propagate such a lifestyle. Not our children. With the onslaught of Western influences, they are becoming more and more distant from habits of thrift, and consider them old-fashioned and ‘fuddy-duddy’. These habits are not seen as being ‘cool’, chic or modern. Many times, they don’t make sense in their current form.

In the last ten years modernity has wrought many changes in India. Entertainment, telecommunications, holidaying, fashion, retail have all entered a new phase. The old way of doing things in all these sectors have been discarded. For better or for worse, all these services have undergone a radical change, and have achieved international standards. Will waste management also follow suit? Will the traditional ways of handling waste be discontinued as our children enter the modern age? If so, will it not be a calamity for India? Already pollution is rising to dangerous levels. Discarding the natural tendency towards thrift in favour of a more ‘modern’ lifestyle will increase it even further, and the damage to both our society and environment will be irreparable. Signs of change are already there. Gated communities, which are proliferating in the metropolises, prevent the entry of small vendors including recycling specialists like the ‘raddiwalas’ and the



utensil sellers who exchange new steel utensils for old clothes.

So while India has no choice but to embrace modernity, and sometimes, as in the case of telecommunications, take it to a level unseen even in the West, there is a choice we can make to retain some traditional good practices. All it needs is for some modernising force to pick up these old habits as an opportunity, and change, modernise and market them in a manner that is relevant in today’s urban environment.

Modern retail in India has been a catalyst for change. It has transformed many things urban Indians are doing, rapidly. The way we discover fashion, buy clothes, toys, even the humble cauliflower, has changed dramatically. Behind this transformation is the change and remodelling of retail spaces, the supply chain, warehousing, last mile services etc. In short, we in the retail sector, influence customer habits and modify supply chains. I believe there’s an opportunity in this very trait of modern retail to retain traditional values while modernising their form.

Unlike in the West, we have a headstart on this activity. We don’t need to reinvent anything or think up recycling models ab initio. The entire gamut of ‘good and green’ customer habits is already woven into the fabric of our

society. They just need to be rekindled, protected against obsolescence and adapted to the way in which society is emerging.

For instance, the raddiwalas are part of a viable traditional supply chain that buys trash, aggregates and sells it for recycling. If modern retail can transform other traditional formats, why can’t it address this as well? All we need to discover is the way to scale and modernise this, exactly the way we did fashion stores and supermarkets. It should not be too difficult. And with a large enough customer base, the stage will be set for redefining what is considered cool by the urban Indian, while at the same time kickstarting an entirely new way of conserving.

There are many ways of moving ahead on conservation. Can we, for instance, incentivise our customers to sell their old clothes, newspapers, CD players, CPU’s, and make it look like the ‘in’ thing, thus turning it not just into a one-off promotion but a habit? Can we lead the way in making the use of jute and cloth shopping bags become chic and a sign of modernity? Can we find a medium by which our customers can say ‘no’ to plastic without any major inconvenience to them?

At the back end, can our delivery trucks be used to carry back newspaper bundles, plastic waste, old clothes and other recyclable items to our distribution centers on their return trips, thence to be shipped to recycling factories, at a profit?

There are many such ideas waiting to be actualised by us. Unfortunately, in this instance, there is no model from the West that can be copied. So while we have copied generating waste, we must develop our own ‘social technology’ for conserving it! The West is teaching us how to prevent our farm produce from rotting. That’s useful. But if we are not careful, we might also learn their bad habits. In many western societies, after preserving it through cold chains and value-addition, they then trash a third of the processed food in homes and restaurants! Surely, that’s not where we want to go.

By now, India has learnt that its development will not be a replica of the West. The telecom sector is a shining example of this. It has leap-frogged many stages to be a unique example of industry becoming a vehicle for social change. Modern retail is following in the footsteps of telecom. There is certainly an opportunity to skip many stages of the evolutionary cycle here as well. In fact, as we grow, modernise and consume more, we can retain and encourage green habits and transmit them to the rest of the world as “next practices”. Our parents practised these habits as a matter of course. They used traditional avenues that were freely available. All we need to ensure is that these avenues are equally freely available to our children in a format that they appreciate. And that’s a modern trade opportunity! ■

Modern retail is following in

the footsteps of telecom; there is an opportunity to skip many stages

of the evolutionary cycle here as well.


WHO’S CARING FORTHE CUSTOMER?

By Jayant Kochar

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experienced somewhere. The more practical entrepreneurs understand that they need to differentiate their retail venture, and generally propose to do so based on price, product design, merchandise range, location etc. It is an unfortunate testimonial to the state of Indian retail sector that no one seems to see the obvious opportunity to differentiate themselves on the basis of customer service standards.

It would be so easy to establish a reputation for outstanding service in India after all, in the kingdom of the blind, the one-eyed man is king. Most people agree that they do not get good service in Indian stores, yet our business managers are largely caught in the denial trap. They will rattle off all the reasons why it is difficult to deliver excellent customer service, apparently not realising that it is their own refusal to accept reality and manage it that is making it impossible for their organisations to improve.

It is an unfortunate fact that few retailers ever use their own services as consumers. If they did, they would quickly realise that many of their

Such is the hype about the Indian Retail sector that everyone and their favourite cousins are making a beeline to start

their own retail ventures. Being focused on assisting retailers with their entry strategy, our retail consulting practice interacts with many of these prospective retailers. Unfortunately, most of them are attracted to retailing by the hype about high growth and lucrative margins. Few of them have a differentiated offering, usually choosing to ape an apparently successful model that they may have

Is modern retail losing its focus? Are the huge management teams too busy in meetings about rising rents, unproductive teams and unmanageable infrastructure to remember that retail success can come only from understanding, engaging and retaining customers? In this no-hold’s barred article, I urge business heads to get out of their conference rooms and onto the shop floor, facing customers instead of laptop screens.

employees and systems are only serving to drive their customers away to other brands. I often ask CEO’s of retail chains why they are paying people to antagonise their customers and drive them into their customers’ stores, but since they don’t visit their own stores, they usually are unable to understand what I am talking about.

Again, every retail CEO will vehemently challenge my contention that they don’t visit their stores, arguing that they do so regularly. However, these store visits usually consist of walking into a store with a flurry of managers anxiously buzzing around, pulling up a sales clerk for a bit of dirt here, telling another to straighten up a sign there, and then breezing out with a sense of well-being after a brief pep talk to the troops about smiling for their customers and pushing up sales. I have witnessed many of these high level store visits, and apart from their complete pointlessness, what strikes me is the reluctance of most CEO’s to go anywhere near real customers. In fact, their managers form a protective cocoon around them, making it impossible for even an



VISIONS & VIEWS

accidental encounter with a real, money-paying customer. What’s worse is that these ceremonial parades through a store usually inconvenience customers, obstructing and delaying them.

WHAT IS GREAT CUSTOMER SERVICE?

Practically, it is a shopping experience that is better than you expected, that will make you want to return to that store. I have experienced outstanding customer service around the world, and it is always refreshing and exciting to find it. Yes, you are more likely to get delighted when your expectations are lower. That is why I rank Nordstrom and Disneyland (or its many variants) as outstanding examples, because most people go to these places ‘expecting’ fantastic service – and yet they delight us.

The stories about Nordstrom are legendary – particularly the one about them exchanging tyres for a customer even though they had never stocked or sold the brand that she claimed to have bought from them. My own experiences were not quite so amazing, but delightful and surprising nonetheless – including exchanging a pair of golf shoes that I had bought a year before and worn once, and getting a store credit because the replacement model was less expensive.

How do some retailers deliver excellent service? Sometimes, it is because of the evangelical motivation, background or prior training of an

individual. Sometimes it is because the entire system is customer oriented and responsive. If you get great service in one store of a chain, but awful, indifferent service in another store, you know that the good service was an accident, the result of one persons initiative, rather than an organisation wide effort. On the other hand, there are many chains or brands where you will find a strong emphasis on service throughout the organisation – not just on the sales floor, where it will be noticed and appreciated most, but, in some rare cases, all the way up to the CEO’s office.

I called the corporate office of eBay India to register my complaint about a breakdown in their systems. After three days of calls, I had spoken to various people who did nothing to solve my problem. I tried to speak to the head of customer service, but she was always busy in corporate meetings to speak to a customer. I then tried for another two days to speak to the CEO, making more than ten calls but he was also too busy in meetings to take my calls or to call back. I expressed my surprise to his colleagues that he considered these meetings to be more important than talking to a customer, but they reacted as if I was insane to imagine that he would give a customer more priority than his internal meetings. I guess these meetings must have been to discuss theoretical strategies to improve customer relations! When I finally got through to him, it was because an office peon transferred my call to him without

checking with him first. He listened patiently to me, told me how important and useful my feedback was, and promised to call me back within two days. It has been a month, and I have not received that call! What hurts most is that I ‘know’ this would never happen if I were to call eBay in the United States, Japan, etc.

I hesitatingly signed up for the mobile phone within a month of it being launched in India. In spite of the exorbitant rates and limited coverage at that time, I immediately became a huge fan of Airtel because of its excellent customer service. I quoted positive examples about how customer oriented the organisation was, at conferences not just in India but around the world, and did everything I could to convince everyone to switch to Airtel. That continued till about three years ago, when I started noticing a huge drop in their service levels, which I feel have continued to plummet. Today I do everything possible to avoid having to call their so-called customer service help-lines, even if it means paying incorrect bills, accepting charges for services I no longer want, managing without services that I would have liked to have, etc. I am filled with anxiety and dread by the very idea of having to deal with badly trained, unresponsive and obstinate people who have been conditioned to behave like automatons and will go through extended phone conversations without making any effort to understand why the customer has called them. Today, the ‘only’ reason I still use Airtel is because I do not want to change the number I have had for about 15 years. The very day that the telecom authorities enable number portability, I shall change my carrier – I believe even the government run services will be less objectionable.



I guess that the sheer magnitude of calls that Airtel has to deal at their call centres will serve as their excuse. However, that is certainly not valid. This should in fact have prompted them to make their website more interactive and useful, which unfortunately it is not. I have no doubt at all in my mind that if Sunil Mittal were to call his customer help Line once a month, and understand for himself how frustrating it is, things would change almost overnight.

Frankly, it’s not a couple of isolated companies who are driving customers away by investing more and more in customer help lines and call centers. Every one of my interactions with the sales help line of Apple Computers India has been equal ly depressing and disappointing. I say this with deep sorrow and regret, having been an obsessively devoted Apple loyalist since before I bought my first Apple Computer was back in the early 1980’s. I always refused to hear anything negative about the brand – and rarely had to, since every Apple customer was apparently as fanatically devoted as me. While I still get excellent product service support from the dealer and from the service helpline, I find the sales support is appalling. At the new Apple Stores in India, and particularly on the sales call centre, I find untrained, unknowledgeable and unhelpful people, and had it not been for the incredible products that I am irrevocably addicted to, I would have given up on the brand a couple of years

ago. This is all the more tragic, because at each of the Apple stores I have visited in New York, San Francisco, London and Beijing, the service has been as insanely great as their products. No one rushes you, no one tries to sell you anything, yet if you need anything, there is someone who will have a solution, or will get one in the shortest possible time. It is no surprise to me that Apple Stores in the USA generate the highest sales per square foot across all retail brands across all categories. And it is depressing to know that even this iconic brand offers abysmally poor service to Indian customers.

Jet Airways was one of the first companies in India to set high standards of customer service. I was sure it would remain that way because every time I saw Naresh Goyal taking a flight on one of his aircraft, he went through the process like every other passenger – unlike ministers etc, who have a bevy of hangers on rushing around taking care of their luggage, check-in formalities, and so on. The only thing that put me off about Jet Airways was that they did not seem to want to interact with their customers - none of their feedback forms asked for the passengers contact details, so you never knew if your feedback had been acted upon. In spite of this, they maintained a high standard for a long time. Fortunately, when they started slipping, Kingfisher came along and raised the bar. To their credit, Jet was quite quick to raise their service standards again, demonstrating

the benefits of competition for progressive, responsive organisations.

GOOD SERVICE DOES NOT HAVE TO BE FULL SERVICE

Does good service have to be full service? Or in other words, should we assume that only full service/full fare airlines can deliver good service? No. I recently took an Air Asia flight, with a great deal of trepidation. In fact, it turned out to be a delightful experience. Firstly, the fare was so absurdly low, that I had no expectations in terms of service at all. Secondly, it was repeatedly made clear to me that I would get no meals/blankets /seat reservation etc. However, they also let me know in various ways that I could very easily, and for very small amounts, get priority boarding, refreshments, extra baggage allowance, etc. After choosing all these very affordable options, it was still one of the cheapest flights I have taken. More importantly, the check-in was quick and efficient, the ground and in-flight staff were extremely friendly, the aircraft was new and in perfect condition except for the size of the seat and the legroom, there was absolutely nothing else I could have asked for. Considering the fare and the low build up of expectations, I feel I got a wonderful service experience - much more than I paid for.

Over the years, every time I have been asked about my favourite restaurants in India, there are two that have consistently made the list. One is the Zodiac Grill at the Taj in Mumbai – where the brilliant food and impeccable service is well worth an average cheque of a few thousand per head. The other is Sagar – a south Indian fast food dive in Defence Colony, New Delhi, that serves tasty, hot food in an incredibly short time, delivering value that is far greater than the average cheque of a few hundred for a family. What’s the point? Simply that great service is not restricted to places that charge a bomb.



VISIONS & VIEWS

THE WORLD’S WORST CUSTOMER

Some people are allergic to dust, some to cold weather, some to cats. I am allergic to bad service. There are many stores, restaurants, hotels etc around the world where I have been branded the world’s worst customer. And then, there are companies that I complained to that invited me to come and talk to their teams, and (after I started consulting), engaged me professionally to help raise service standards.

Actually I am convinced that everyone hates bad service as much as I do. It’s just that most people tend to tolerate a lot more – and in doing so, become part of the problem. When I was still a teenager just out of school, at a drug store in New York (where everyone – even way back then – was always complaining about the lack of customer service). I picked up a couple of things I needed and was second in line at one of the two check-out lanes. Suddenly another customer came up behind me and started screaming at the check-out clerks - “Can’t you people see how many customers are waiting? There are two of us waiting at each of your lanes. Do you really think we have nothing better to do than wait here to pay for our purchases? Don’t you understand that we are ‘customers’?”

I was stunned. I had recently come out into the real world from boarding school where we placidly waited in lines to brush our teeth, bathe, get breakfast, get in and out of assembly hall and class, get a chance to bat in cricket, get punished by the teachers. In fact all we seemed to do all day was wait in line. To me a line, with less than five people

in front of me, barely qualified as a line. I expected a reaction to the tirade in the drug store, and there was one, but not the one I expected. Another sales clerk came rushing out of the back room, and with profuse apologies, another cash counter was opened within a minute.

Sometimes queues cannot be avoided. In that situation, take a tip from Disneyland, where the queues on busy days can be staggering. First, they have dynamic signs at various places, telling you how much longer you are likely to wait. It is always a pleasant surprise to find that the actual wait was less than they had mentioned – the well-known but little used principle of under-promise and over-deliver. Secondly, while you are waiting in line, you have Mickey Mouse and his brethren coming along regularly to mix with and delight the kids, helping the time to pass even faster. Finally, you have the option of skipping the line and picking up a coupon for a fast track entry at a later, fixed time. None of these solutions would ever occur to CEO’s who are not out there, sharing the retail experience with real customers.

Someone who I shared this example with said that it was easy for Disney to do this, because they are really in the entertainment business, and all their employees understand that they are playing a role. My message for retailers is that exactly the same thing applies to you.

PRACTISE WHAT YOU PREACH?Having pontificated to so many

retailers about improving customer service, was I able to deliver excellent service in the various retail ventures I have managed? Regrettably, the answer

is no. I believe excellence is a journey without end. Yet I believe we set high benchmarks, which were critical to the success of these ventures. When Lacoste was launched in India, we were certain that the product was way better than anything that had been offered in India. So we had an unconditional, no questions asked returns policy. And, in case, that was not sufficient, we also sent anyone who returned a product (for any reason, at any time), a letter thanking them for contributing to our product improvement programme – along with a gift voucher for Rs 250.

However, it was easier to formulate this policy, than to practice it. I was amazed that our zealous, loyal store managers kept trying to ‘protect’ the interests of the company, by subtly dissuading our customers from returning products, pointing out for example that their shirt was two-years-old, and still there was no apparent defect, etc. Even our franchisees, who were not expected to bear any part of the cost of these returns, tended to obstruct customers. I got constant feedback from store managers about how customers were taking advantage of this liberal policy. I responded that we were aware that there would always be a few people who would do this, and if it went on happening, we were prepared – in very extreme cases – to write to these individuals saying that since we were unable to meet their quality expectations, we would not be able to serve them in future. One such case was a well-known and very affluent society lady, who told a group at a party that included my wife, that she regularly changed her husbands’ shirts every year for the latest colours, even though there was nothing wrong with them! It took a long period of guidance before our store managers were able to appreciate that the cost of these few returns was negligible compared too the

Actually I am convinced that everyone hates bad service as much as I do. It’s

just that most people tend to tolerate a lot more – and in doing so, become part of the

problem.



loyalty that the policy elicited from the bulk of our customers. (Note: In case you are tempted too try ‘renewing’ your wardrobe; I understand that regrettably, subsequent managements did not endorse these economics of customer service).

The fact that your own team is often the obstacle to improving customer service is something that must be accepted and resolved. It highlights the need for better communication, greater transparency and trust – which are again anathema to many companies. Companies hire front line staff at absurdly low salaries, neglect to train them, will not share store profitability information, and therefore base incentives – where they exist – on complicated parameters with the benefits accruing only some time in the distant future. This is presumably done because it is assumed that these people will walk away from the job as soon as they get a slightly higher offer. The reality is that people leave because of the very policies that are implemented, assuming that they will leave. This fact would be revealed (far more convincingly than any exit interview) to any CEO who walked the talk, and went out into the stores and interacted with his front line team.

Unfortunately, the wonderful philosophy promoted a couple of decades ago of MBWA (Management By Walking Around), has given way to MBSE (Management By Sending Emails) and MBHM (Management By Having Meetings) and MBBS.

WHAT DO CUSTOMERS REALLY WANT?

I don’t know. You need to get out there and ask them or pay me to do that on your behalf! What I can tell you is some of the general things I look for in any retail space:

Something to attract me to go in. ●

No barriers to entry – the most ●

prominent barrier being the completely unnecessary, obnoxious, sweaty, smelly security guards demanding to feel my private parts and look into my laptop bag. Lack of convenient parking is another big barrier.Sales assistants who make me ●

feel good. They should be polite, pleasant, well-dressed, free of body odour, happy. The only way to do this is to train, motivate, pay and treat them well. If you can’t do this, create a self service environment and cut your payroll – and my prices.A clean store – not just the aisles ●

and counters – the trial rooms and toilets too.A shopping bag or cart when and ●

where I want it (which could be anywhere in the store – not just at the entrance.I want to read, hear and sense the ●

word yes, not no. So don’t tell me something is not available. Get it for me. Don’t put up signs that say no exchanges / no refunds / no outside food. Because what you will get is no customer. A quick check-out. As long as I ●

am browsing around, I have all the time in the world. When I decide to leave, I want to be able to do so - immediately. If you make it difficult, I will dump my purchases in the aisle and walk out.Delivery. Give me what is promised - ●

whether explicitly or implicitly. Don’t try to do what you promise. Don’t plan to do what you promise. Don’t think about how to do what you promise. Like they say in Beaverton – Just do it.

Give me a little something extra. ●

Everyone likes to get gifts. Is there anyone old enough to remember that Binaca toothpaste used to give tiny little plastic animals in every pack? No kid that I knew ever used another brand – till they stopped the gifts. I remembered that because last weekend, a friend proudly and happily showed me a little plastic ball mark and divot repair tool (approx cost Rs 20) that he got when he played at a resort golf course – and did not mind at all that he paid US$ 280 (Rs 12,000) for that round!Quick problem resolution. In spite ●

of everything, I will probably find something that needs a manager’s intervention. Make sure that he is not so busy filling out reports that he does not have time for me. And make sure that he understands that it is me and not you who pays his salary – so that he is more likely to help.Listen to me. I will try to tell you ●

whatever is good or bad about your store. Make it easy to give feedback – and let me know what you did about it.That’s not a lot to ask for, is it? Ok,

now walk out into your store, and see how many of these you deliver.

To sum it up, customer service is the greatest sustainable advantage that a retailer has and the sooner you learn this, the greater will be your potential profit. It is contagious, and it always flows from the top. So expect your cashier to treat your customers the same way that you choose to treat your staff. And lastly its addictive. Once you get it, it’s practically yours for life! ■

The reality is that front-end people leave because of the very policies

that are implemented, assuming that they will leave.


NEW EMERGINGSEGMENTS & FORMATS

By Bijou Kurien

497-500_10_Bijou.indd 497497-500_10_Bijou.indd 497 2008-09-14 22:162008-09-14 22:16


There now exists a uniquely Indian model which paradoxically embraces its diversity and is yet homogenous. Marketers

who have appreciated the differences and its uniqueness have prospered. Retailers who have spotted the opportunities in these subtle differences have created unassailable forts of customer loyalty.

Today, we have a more prosperous and educated India than the past. The lessons of the past have allowed us to create a new order for the future. New paradigms are being constantly created. Through a combination of Government policies and private enterprise, new markets have been founded on new technologies. Or fetters placed on old markets have been unshackled. Many of us enjoy a quality of life which our forefathers coveted. And aspire to give our children a better quality of life than ours.

The demographic profile of India is changing, with a large proportion of young Indians. The economic profile, characterised by frugal spending and limited choice in the past, has given way to looser purse strings, availability of aspirational symbols and an acquisition drive. Joint families are getting replaced by nuclear families. The entry of women into the workplace has led to dual incomes, more exposure and brought about significant changes in the food consumption habits of Indians. And what we have noticed amidst all these changes is that there no longer exists a traditional family model; but an amalgam of tradition and modernity, big city and small, contemporary and old fashioned, Western and Indian.

All economies go through a developmental phase, before they can claim to be truly developed. And during this development phase, the focus is on basic needs such as food, shelter and clothing. When these needs have been served, higher order needs creep in. And these are more lifestyle centered and driven by aspiration. Brands creep into the lexicon, symbols become important, uniqueness and distinctiveness are as important as quality and finish. And where you buy them is as important as what you buy.

There are several new categories which are emerging in today’s India. Toys which indulge and educate the children, beauty products which make you feel and look good, sporting goods and fitness equipment which sculpt a more youthful and fitter you, auto accessories which turns your car into your living room on wheels; are just some examples of new product categories which have emerged



VISIONS & VIEWS

recently. And the focus is not just on product. It has extended to the retailing of these products or services. So you see the flourishing presence of gyms, beauty salons, spa services, automobile accessory fitment services, complementing the presence and demand for the products.

While tomes can be written about all these categories, let me dwell on two categories which to my mind exemplify the customer of tomorrow.

Toys are the envy and joy of every child across the world. All parents want to indulge their child. Many toys have now progressed from merely being attention pacifiers to entertaining, educational and skill building. The range is immense and diverse. Retailers in India have never been able to create enough space or drive enough attention and excitement to this category. Toys or Toy stores are the first priority on a foreign shopping trip or the first port of call when a family with young children goes abroad. And fuelling this category is guilt spending by young parents who cannot seem to find time to spend with their children or indulgent grand parents who spend time with them. While the market is not very large (variously estimated between

Rs.2,500-4,500 crores), the pent up demand seems huge. Children are spell bound or enthralled by the sheer range of products, when they enter the portals of a Hamleys or Toys R Us store. And with a market of 350 million children, which exceeds the population of the USA, we have the base on which this category can be built. Albeit, a large number of these children are still struggling to satisfy their basic needs of food, clothing, education and health. But there still exists an urban demand amongst the SEC A/B consumer, the famed Indian middle class.

However, there are several challenges in the retailing of Toys. The space required is disproportionate to the sales generated and with the high rentals or capital costs of retail space, this is a formidable challenge. The domestic organised brands are a small contributor to the market and for any large toy store to run successfully, domestic brands have to be complemented by a large range of indigenously and internationally

produced toys. Coupled with rapid changes and new introductions, the retailer’s ability to remain on top of relevant product range is severely tested.

If there is an inherent belief in the growth of this market and a capacity to invest and wait patiently for returns, Toy retail is format which can rapidly scale up. The growth and presence would probably be relevant in the top 8-10 cities in the next five years, but over time, the presence can become ubiquitous.

Another category that is poised to flourish is Beauty products. For long, the industry was focused on the basic skin care and personal hygiene needs of Indians. But over the last 3 years, we have seen the emergence of more solution specific skin care products, growth in colour cosmetics and fragrances, supported by the spread of beauty salons, spas and skin clinics, cosmetologists and skin care specialists. The driver for this is the new Indian woman – more aware, likely to be working, more conscious of her looks and wanting to appear better groomed and more confident. The metro-sexual male is not far behind – driven by the need to look and dress better in a more demanding world. Increasing urbanisation and a growth in the number of office workers in India has resulted in a strong focus on grooming. Grooming is increasingly associated with professional and social success,

Other cities that hold great potential for the global luxury brands are Chandigarh, which

has a growing cosmopolitan population, and Jaipur, where the purchasing power is

growing rapidly.



and taking care of one’s appearance regarded as a virtue rather than vanity. In today’s India, an increasing number of women in age group 22 to 45 are becoming independent, have disposable incomes and the decision-making power to buy what they want. All these socio-economic changes have spurred the growth of the Indian Cosmetics and fragrances market and driven it beyond basic skin-care and hygiene products.

This emerging category has caught the attention of leading global luxury brands, with most in the process of either setting up or expanding their presence in the market. Most of them have very accessible and visible counters with trained beauty consultants with tester stands, to offer high-quality service to customers. Promotional activities include in-store makeover sessions, associations with women-oriented events, mall promotions to introduce the look of the season and new products. Bridal makeover

sessions are also becoming common. On-counter promotions to offer value-additions to customers are available during the festive seasons. Many brands invite international make-up artists to conduct customer events and interact with customers in the Indian market.

There is an obvious excitement in the Indian retail sector. Besides expanding the floor area of their shop-in-shop concept, the retail companies are also tying up with the big beauty brands to promote stand-alone branded beauty stores. Department stores for long have been the main retail channel for cosmetic and fragrance brands. Newer retail concepts such as exclusive Cosmetic & Fragrance stores, modeled on the lines of international retail concepts, as well as a combination of Health & Beauty have started creating a presence in the market. With several malls coming up, sales of luxury cosmetic brands are expected to grow significantly in the coming years.

Until now the major luxury brands have focused on Delhi and Mumbai since these two cities have the maximum purchasing power. But of late, tier II cities have emerged as potential markets. Other cities that hold great potential for the global brands are Chandigarh, which has a growing cosmopolitan population, and Jaipur, where the purchasing power is growing rapidly.

Another channel which has emerged silently in the last few years has been the Direct Sales channel. Companies such as Amway, Oriflame and Avon have replicated their international business models, introduced well tested international products and developed indigenous products, to capture the market amongst the homemakers who don’t venture out so often into the market. This has worked quite effectively since there is considerable word-of-mouth and sales push.

So while I have focused on these two categories, there are several more which I had mentioned earlier, which have to potential to scale. For a rapidly evolving country and retail sector, India needs the presence of several niche product categories and retail formats, to make it an exciting place for the Indian shopper. ■

Companies such as Amway, Oriflame and Avon have replicated their international

business models and developed indigenous products, to capture the market amongst

the homemakers.


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