Indian retailing is poised at an inflexion point and is predicted to witness major changes in the recent years to come. Domestic major retail players have announced aggressive expansion plans and a number of multinational retail chains are making their entry through various routes. This competition is bringing in new innovative strategies to grab the maximum amount of potential consumers. The paper discusses the major developments taking place in the organized retailing sector in India and then goes on to recommend a number of innovative action steps for retail players which would contribute towards the achievement of their ambitious plans. Amongst the initiatives discussed are those in the area of supply chain management, assortment and variety of merchandise, retail formats and location, leveraging the power of technology, strategic alliances, shift in balance of power, localisation, home delivery, collaboration, private label and designing of store layout and lastly but the most important factor advertising.
The unorganised section of the Indian retail constitutes about 96% to 98% of the total retail market in the country. Unorganised retail comprises mainly small shops, handcarts, pavement vendors, paanwala, vegetable vendors and local, kirana stores. The retail trade in the country has traditionally low barriers to entry. The market is highly fragmented in nature, with the average size of retail outlets being about 50 sq ft and there is a rural bias to two thirds of these stores.
India's retail market has been evolving with time and is today considered to be at the point of revolution. Till the eighties, there were only a few organised retail chains like Raymonds, Bata, Liberty, Titan etc. Later on in 1990's, a new trend of pure retailers started with chains like Shoppers Stop and Ebony. The latest in the retail scene is the entry of large-scale Indian organisations and multinationals. Due to the ever changing Indian consumer mind-set the companies are facing a huge problem. The strategies which have been successful in other countries may not be successful in India because of diversity in the taste and preferences of the Indian customers. Over the next five years we may see the most impressive success stories within the worldwide retail industry. We are undoubtedly going to see a few dramatic failures as well .The opportunity that is represented by the current minimal penetration of so-called "organised retail" has created a whirlwind of enthusiasm.
Achieving success in modern retail is a complex blending of many key factors. It would be illusory to think retail successes in India would come easily. The retail industry in developed nations has learnt its lessons over decades of experimentation, failure and ultimately a few success stories. In India retail players will be trying to succeed in a compressed period.
India is a unique country with diversities on several fronts. To succeed in India, certain modifications in order to adapt to Indian consumers are of critical importance.
Indian Consumer Dynamics
First of all let us start with important indicators of the Indian population. Of the 1.10 billion population, 100 million individuals are in the age group 17-21 years. About 70% of the population is less than 35 years of age and 58% of the population is in the working age group of 15-59 years. (Refer Table 1)
Table 1: Age Distribution of Indian Population
|Up to 14 years||35%|
|15 - 34 years||35%|
|35 - 59 years||23%|
|over 60 years||7%|
The urban consumer is getting exposed to international lifestyles, and is becoming more discerning and demanding than ever. She/he is no longer involved with only need-based shopping. The consumer mindset is changing in terms of an increasing tendency to spend as the disposable incomes are increasing at a very rapid pace. Post liberalization children coming of age tend to spend more freely.
The following are the factors influencing the changes in the consumers
- Changing occupational structure;
- Environment induced aspirations;
- Dual Incomes and increasing affordability;
- Improved economic status of women;
Profiling the Emerging Consumer
- Life style driven;
- Stressed out â€“dual working families a trend and time-strained;
- Experimental and impulsive;
- Pragmatism and comfort with consumption;
- Weekend Syndrome - make up for the lost opportunity to "live during the week" by shopping ;
The income distribution, between the periods 1995 and 2006 is provided in Table 2.
Table 2: India: Income Distribution
|Annul Income of Household (in USD)||No. Of Household (in Mn.)|
|$ 500-1000–Rising House holds||48||78|
|$ 1000-4700–Consuming House holds||29||75|
|Over $ 4700–Rich households||1||6|
India is a consumption led economy
Private Final Consumption Expenditure (PFCE) is 60% of the economy (as against 42% of China and 55% of Japan)
Table 3: Spending pattern of the emerging affluent class
|Category (2004)||% Of Total|
|Food, Beverage and Tobacco||43%|
|Clothing and Footwear||5 %|
|Gross Rent, Fuel and Power||12%|
|Furniture, Fixture and Appliances||4 %|
|Medical and Healthcare Services||8%|
|Transport and Communication||15 %|
|Recreation, Education and Cultural||3 %|
Retail Industry Scenario
Number of studies has been carried out about organised retail sector. Some of major global research and consulting firms like A.T. Kearney, Ernst and Young, KSA Technopak and KPMG have conducted detailed studies of the Indian retail industry.
- The size of the Indian retail sector is approximately US$ 250 billion to US$ 300 billion;
- It is rapidly growing from a base of US$ 12.4 Bn. in 2006 & is expected to grow to US$ 45 Bn. by 2010, which is only 8% of its potential (Images India report-2007);
- Contribution to GDP by the retail sector has increased by 2.72 times in last 7 years compared to 2.4 times in manufacturing & 1.96 times in agriculture;
- The value segment is growing faster than the life-style segment with 72% of turnover being from the former;
- The net sales growth of the top 5 organized retailers is about 50%, while net profit has grown by 20% for the quarter ended Sept 2006;
- According to KSA Technopack, an estimated US$ 25 Bn will be invested in organised retail sector in next 5 years;
- Investments in retailing to be made by some of the large players in the next three years are as under
- Rs 9,000 crore by Birla Group;
- Rs 10,000 crore by Bharti group;
- Rs 25,000 crore by Reliance group;
- Large manufacturing groups were dictating the retail consumer market earlier but now the trend is shifting towards retailer dictating manufacturers;
- Store chains may account for as much as 35% of retail sales in Industry by 2015, up from about 4% (at present);
- Table 4 below gives the estimate retail density per thousand people in select countries;
Table 4: Number of Shops per Thousand Persons
|Country||Number of shops per â€˜000 persons|
|India||11 (Delhi 45 per thousand)|
Table 5 provides the estimated growth projections for the total retail sector in India and for organized retail for the next four years.
Table 5: Estimated growth of Retail Sector (Figures in US$ billions)
Shift in Balance of Power
Large manufacturers including fast-moving-consumer goods and durable firms such as HLL, P&G, Samsung and LG, for a long time used to setting the tone, working with fragmented and small retailers are bracing for a potentially permanent shift in the balance of power. As the new deep pocketed retailers enter the market and expand aggressively, it is inevitable that they would flex their scale-induced muscles and strive constantly to dictate terms. The FMCG giants are joining their hands with the retailers and thus the middle men are not getting the advantages which they were earning previously.
Need for Innovative Approaches
In order to achieve the ambitious growth plans that many of the retailers have set for themselves, innovations in approach would need to be undertaken on several fronts. Several of these aspects are discussed here.
Initiatives in Supply Chain Management
Wholesale system is under invested leading to 20%-40% wastage. Boosting their supply chain infrastructure and logistics support is going to be critical to the operation of retailers Supply chain, which has been a fragmented area, requires restructuring and consolidation. This is another area that is riding on retail boom, with retail expansion in an overdrive mode. The problems that retailers face revolve around infrastructure or lack of it. A large-scale hypermarket in the West might receive 8 large containers delivering per day, each scanned into inventory with one simple swipe of a barcode. Hypercity in Malad will take in up to 250 deliveries per day ranging from pushcarts to 3 wheelers In most cases the product is not "ready to sell" and require some treatment of grading , packaging and bar coding. Managing a return on these investments has no readymade lessons. Manually fixing bar codes, cold storage trucks, care of fruits & vegetables sorting through the delivery to rejecting the poor quality ones, grading them manually and packing them.
The players in the domestic market will also be competing with retailers abroad who are buying from India. Major categories where this competition is likely to escalate are apparels, footwear, leather, jewellery, home textiles & pottery. According to reports, the majority of world's top 20 retail chains in the world have plans to increase their volume of sourcing from India. This kind of competition would give the Indian companies a better chance, because knowing the typical mind-set they can implement the correct marketing strategies and the time advantage they have now should be used wisely to benefit from the "First Mover Advantage".
This is imperative for sustaining the growth of large-scale retailing. The government has a key role in infrastructure development and management and making it available at a reasonable cost to business enterprises. At the same time retail industry also needs to build long term associations with transporters, cold storage providers, warehouse owners & other parties in the logistics process. The companies can think of some performance based incentives for their partners, so that it would motivate them to continue for a life-long relationship.
Restructuring of the supply chain is needed. Cutting down the number of intermediaries or middle men between the farmers and retailer could reduce costs by almost 7% (as per the recent report by Enam securities).
Since supply chain infrastructure plays an important part in delivering cost efficiencies and maintaining quality, about 20%-25% of the proposed investments are estimated to go towards it.
A recent World Bank report on India's fruit and vegetable trade mentions that India produces 11% of world's vegetables and 15% of fruits at 53.63% of global prices, but its share in global fruit and vegetable trade is 1.7% and 0.5% respectively. This mismatch can be corrected with the help of better infrastructure and optimum scale of operations. It will reduce both cost and time delays in the supply chain and cut down on wastage. Retail entering into the area of contract farming and developing, owning and managing parts of the logistics chain are other options to be considered.
The location that succeeds best in the future will either be one stop destination or conveniently located small stores. Retailers will have to experiment with different location options depending on the buying habits of the target markets.
Localisation of Merchandise Variety and Assortment
It will be necessary for retailers to adapt their merchandise options to Indian consumer needs and buying habits. For example, Reliance fresh outlets in Hyderabad are selling puja flowers such as jasmine and chrysanthemums for these are item that the Indian housewife may be used to picking from the local vendor. Vegetable staples like potatoes and onions are being made available in three quality grades to suit. Cadbury India has over 100 SKUs in two categories. P&G sells over 320 SKUs across five categories while HLL has more than 700 SKUs in over 20 categories. For all kinds of customers to be catered to, a range of quality, especially in the case of price sensitive categories like grocery, food items etc. needs to be stocked to serve all wallet sizes. Volumes thus generated would go a long way on the road to success.
Region-wise differences are found in the purchase requirement of customers stemming from differences in eating habits, dressing traditions, kind of climate, culture, religion, festival etc. The retailer needs to take cognizance of such factors so as to be able to keep relevant stock. It can be an important factor in the success /failure of a store. A profitable merchandise assortment is a finely tuned combination of customer demand, fresh choice, in-stock position, space, number of SKUs, average price point, gross margin days of supply Achieving a profitable return on investment across many thousands of product lines is a retailer's most complex task.
Retailers can combine their retail concept with a direct-to-consumer approach by selling through catalogues, internet, and mobile phones & television.
These shops keep the range of main SKUs, which account for 70-80% of sales. This strategy can be effective in case other formats of retailing are being used or the category of goods is such that keeping all SKUs at all outlets is not an efficient strategy.
24 Hour Shops
For certain category of products such shops can go a long way in serving the customers. They may not mind paying little extra for this convenience.
Cluster Bombing- Getting Really Close to the Customer
Food items such as fruits, vegetables and groceries need to be available at outlets close to customer. The Indian consumer prefers to buy vegetables & fruits on a daily basis & cannot be expected to travel long distances for the same everyday. The Tamil Nadu based Subhiksha chain is following a strategy of identifying properties close to places, which being frequented by customers and trying to cover maximum possible locations. As per their strategy several stores are opened in a single day itself. The key word is aggressiveness in covering markets
Collaboration â€“The Way Ahead
Collaboration seems to be the way of the future. Data sharing is one such area of joining hands that companies are looking at. Data sharing between manufacturers and retailers helps improve the farmers' supply chain efficiency, e.g., retailers can log into data base of ONIDA & check what products of Onida are selling & replenish stocks accordingly. Other way is outsourcing after sales service of its private label appliances. Onida, Godrej have such arrangements with big retailers.
Rise of Masstige Category
In the marketing battle for the share of the middle-class wallet, the front runner is a new category of product and services-Masstige. It may also be referred to as premium-mass, that is, a combination of mass market and prestige brands. It is fast finding favour with consumers who have aspirational tastes but also down-to-earth value consciousness. It is behind the success of premium offerings from LG and Samsung LCD TVs. India is poised to see explosive growth for masstige for the bottom- end of high income and high-end of middle income. The companies are looking at this segment to increase their market capitalization and the huge volume of this category would give the companies a better position in the market. The only way to catch the attention of this segment is to capture their sentiments and creating an emotional bondage, which would give the customers an inner feeling with the company mission and vision.
The majority of organised retailers in the country today offer doorstep delivery only as value-added service and do not focus on it to build their business. Neighbourhood stores have been quick to drive home the advantage. The kirana store's Chottu runs much faster, and the minimum order can be as low as Rs 10. Spencer's provides this service within 3-5 km radius as does Subhiksha. Wal Mart, based on its market research is also considering offering home delivery services. If it does so, this would be a first for the world's No. 1 retail chain.
Fast food chains in India are also finding the share of home and office deliveries which are helping to augment sales. This is more so in the metros because of higher traffic congestion, lack of time as well working people wanting to stay home during weekends. Thus, for YUM! India the share of home delivery in total sales has grown to 40 percent in the last few years. However, this figure, though growing is only 15% in smaller cities. Home deliveries account for 20% of the sales of fast foods chain, Nirulas Adaptation is taken one step further by McDonalds, which employs a â€˜McDelivery on bicycles' models to negotiate o crowded lanes of Chandini Chowk in North Delhi.
Retailing Hubs for Smaller Towns
It can be an effective way of catering to a number of smaller towns around the hubs for purchase of certain items and for bulk purchases. It could be an efficient way of reaching out to potential customers living in the areas where delivery is difficult due to lack of infrastructure, small purchases and scattered customer base.
Online presence for 24 X 7 is another opportunity to be utilised optimally by the players. Besides offering various advantages to the customer, the data thus collected through this additional channel could be of major use for customer relationship management and database marketing programmes. Online sales make it possible for organisations to control their distribution channels without too many middlemen.
Private labels have come a long way over last three decades. Private Indian Brands/ Labels account for less than 5% of the market in India. Several motivations exist for retailers to promote private labels. Having private labels means that retailers can command better margins. Also, private labels provide a means of differentiation. In certain cases private labels prosper due to the consumer psychology of â€˜buy us, because we are cheap' in other cases, private labels are saying â€˜buy us because we are exclusive'.
Designing of Retail Stores
This aspect of retailing is in a nascent stage and store designing was case of personal likes & dislikes or creativity. In the present scenario, attention & investment is due for this dimension of retail stores.
Store layout definitely affects customer circulation in the store, time spent in the store, items in the purchase basket and customer mind-set of coming back for pleasant experience. Store designing needs to look into merchandise presentation that is convenient for locating and comparing the items by the customer. In store experience must result in the store getting an identity and a pleasant experience for the customer. For example, the store layouts of Westside, Music World make customers circulate throughout the store.
Retailers can use the latest technology and best talent to design display statements. When the costumer enters a store, he or she is in a receptive state of mind set. It is a valuable opportunity to be utilized by retailers. LCD screens, TV in restaurants can be used for showing new products promotional schemes. Shoppers stop has 301 screens in its 19 stores.
Technology is going to play a key role in determining the success of any retail endeavour. Retailers need to invest in technology and use it in areas such as market and analysis, understanding consumer behaviour, managing the supply chain & for costumer relationship management. As well as in managing the day-to-day operations of the organization.
Leveraging Strategic Alliances
The Future group and IOC have entered into an agreement whereby Food Bazaar outlets will be setup at IOC petrol pumps. Indian Railways is also tying-up with organisations for setting-up their kiosks. The same pattern is also in the pipeline for Metro by Mother- Dairy. Synergies results in terms of coverage and thus the advantages of this strategy would be too high to be ignored. But care needs to be exercised in selecting the partner according to the consumer purchase habits and the type of product.
The retail industry in India is clearly at a take-off stage. The volume and quality of competition is only going to escalate in the future. In order to realize their ambitious projections, retailers will need to utilize all possible opportunities for innovation in serving the Indian consumer. As is often the case, survival, and success, will depend not on who is the strongest but on who is the most able to adapt.
Kumar, V. (2007), Managing Colours, Economic Times, Corporate Dossier, April 11, p 3.
Levermore, A. (2006), Managing Retail Business in India, Hindustan Times, 1 November, p 5.
Mookerjee, D. (2006), Join the Bandwagon, Times of India 29 December, p. 9.
Pitalwala, Y. A. (2006), Reliance to make Rs.1000 crores Tech Investment in Retail Stores, Economic Times, 31 December, p.4.
Radhakrishna-Swami, M. (2007), Taking Stock, Business Standard January 3, p. 6.
Roy, S. (2007) It is important for global retailers to succeed in India, Mint, February 12, p. 5.
Thakkar, M. and Bhatt M. (2007), Mom and Pop in Reliance Family, Economic Times,
March 5, p 4.
ASSOCHAM Report 2007.
Deloitte's The Global Powers of Retailing 2007 Report.
Economic Times (2007), Big Retail Has Started Bleeding Mom and Pop Stores,
13 February p. 4.
Enam SecuritiesReport 2007.
ET Intelligence Group Survey .
ET Retail Survey January 2007.
Horovitz, B. (2006) McDonald's shapes up Image with mini - Gyms, Economic Times,
December 28, p. 4.
Jain, R. (2007) Nobody can replace small retailers here, Economic Times, 16 January, p. 4.
KPMG Report 2006-07
PTI (2007), Wal -Mart May Take Neighbourhood Store Format Style for India Roll-Out, Mint, February 12, p3.
The Franchising World Report, March 2007
Times of India (2006) Just Flying of the Shelves, 2 December, p. 3.
Times of India (2007), Politics May Slow Down FDI in Retail, March 31, p.7.