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Saturday, August 2, 2008

Retail Industry in India and Modern Trade Formats….FMCG1

I was talking with a friend few days back, formerly a CEO of a well reputed IT training school now in consultancy and recruitment. He was saying that, India Inc right now having huge demands in retail and banking sector for manpower, previously which is being only seen in the IT & ITES sector. It’s the boom time right now. Like any other supply and demand graph the IT and ITES demand is right now slowed down, moreover US slowdown squeezed that job market down in India. Well, its true for the banking segment in US too, then why is such demand is seen in banking sector in India, he couldn’t answer this question properly, but one thing for sure, India has got enormous emergence of consumerism and more than 1 Billion populations could become its potential buyers.

“No power on earth can stop an idea whose time has come” Dr Manmohan Singh, then Finance Minister of India, quoting Victor Hugo while presenting the Union Budget 1994-95, making a reference to the Indian economy's unlimited potential. If Dr Singh were to use the quote again today, he would probably apply it in the context of the promise contained in the Indian retail industry, and in particular, organized retail in India in the days to come. Retailing in India is currently estimated to be a USD 200 billion industry, of which organized retailing makes up 3 percent or USD 6.4 billion. By 2010, organized retail is projected to reach USD 23 billion.

India is witnessing an unprecedented consumption boom. The economy is growing between 7 and 8 percent and the resulting improvement in income dynamics along with factors like favorable demographics and growth in aspiration consumption are the drivers.

Retailing in India is currently estimated to be USD 200 billion, of which organized retailing (i.e. modern trade) makes up 3 percent or USD 6.4 billion. Organized retail is expected to grow at 25-30 percent p.a., and is projected to attain USD 23 billion by 2010.1 At these levels, organized retail would constitute up to 9 percent of overall retail sales.

Indian retail – The right enablers are falling in place. There are multiple factors driving Indian retail growth. With roughly 60 percent of the total population below 30 years of age, favorable demographics are expected to drive consumption across categories. The purchasing power of a young consuming middle class has been talked of considerably since the time of economic liberalization in 1991. However, it is only today that we are witnessing the spending power associated with this consumer segment. For example 50 percent of the cellular phone purchases in the past year were by the under-30 age group2. This consumption is expected to continue due to the aspirational nature of spending associated with this consumer segment. Most of the retail malls in India are not yet urbanized and not profitable yet, struggling to get stabilized. Buyers are yet confused about the benefit of a specific mall format and value of a brand and special deal for a special mall. The footfalls are huge though, especially in week ends and malls are slowly becoming meeting points, but conversion is not yet that great proportionate to the entire footfalls. Certainly there’s a huge change came into the taste of people and consumer behavior though.

Role of Formats:-

In modern trade retailing, a key strategic choice is the format. Innovations in formats can provide an edge to retailers. A study of evolution of the largest retail market in the world, the USA highlights how formats evolved there. Till the 1940s, American retail was primarily centered around the city 'high street' or downtown areas, with an array of independent stores such as department stores, drugstores and coffee shops1. Post-World War II, the key demographic trend was migration away from the city-centre towards the suburbs. This led to the emergence of the 'shopping centre', a cluster of outlets in a location offering a range of merchandise catering to most needs of the immediate suburb,

offering a range of services from saloons to cafes, newsstands and grocery stores. The 50s saw the emergence of the 'enclosed' shopping mall, providing an end-to-end shopping and entertainment experience from food courts, theatres to shopping outlets.

The last major development in the American retail landscape was the discount stores along the lines of Wal-Mart and Costco. Discount stores are large stores with more than 100,000 sq ft of space situated at a distance from the city-centre or the suburb. Typically these discount chains gain significant market share in a relatively short span of time, and cater to the entire spectrum of household requirements such as grocery, apparel, household goods, do-it-yourself stores, books and even banking services.

Can Indian retailers learn from such experiences and leapfrog to the most successful formats abroad is a key question on everyone's mind. In the Chinese market, modern format stores such as hypermarkets and convenience stores have proved to be extremely successful. One of the key enablers for this popularity has been the high level of urbanization in the country.

Another unique factor in these hypermarkets is that they predominantly stock food. They also stock 'fresh produce' alongside groceries to cater to local consumer tastes.

An AC Nielsen survey across seven leading Chinese cities in July 2005 pointed to the popularity of modern formats in China. Up to 46 percent of respondents stated that hypermarkets/ convenience stores made up a significant part of their overall grocery expenditure, and 66 percent stated that they 'often' visited hypermarkets and convenience stores. In my next article I would discuss about that more vividly.

Format choices by Indian retailers:-

The respondents of the KPMG retail survey in India felt that specialty and supermarket format have the most potential for growth in India followed by hypermarkets. Understandably, with poor internet infrastructure (in terms of PC penetration and internet connectivity), e-tailing was identified as a channel with the least potential by most respondents, though personally I feel this would be another emerging area would evolve in India in some time ahead. Similarly, with traditional grocery stores offering an undisputed 'convenience' proposition till now, by virtue of malls these stores are also becoming their customers and still making good margin because of volume discounts, convenience stores may not grow as fast in the Indian context. The war is in-between the manufacturers to reaching end consumers via conventional channels v/s these malls reaching directly to consumers as well as road side grocery stores, sometime with higher mark-ups because of their volume discount facilities with the manufacturers.

Here, the interesting calculation I’m explaining. Suppose a manufacturer sets up some product with maximum retail price is Rs.20. The manufacturing cost is Rs.8, plus other charges ends up Rs.10 at the manufacturing point, which is the distributor buying price. Distributor keeps Rs.2 as margin and forwards the materials to the dealer points at the price of Rs.12. The dealer/retail point would purchase the item at Rs.18 and sales it at Rs.20 keeping 10% margin. So, the Rs.6 is the cost of the manpower, promotion plus some deals in the entire supply chain. Now, suppose a mall buys the item with the distribution price @Rs.12 and sells it to the retailer at the price of Rs.18 and the retailer at the price of Rs.16 it extends value of money in both the points with a discounted pricing. Hence, a grocery shop owner is making more profit and the buyer is also saving Rs.2. The mall owner is making more margin and controlling both the retail point pricing and MRP and manipulating buyer’s with the value deals because still he’s having volume margin at his hands from the manufacturer.

In India too, it may be difficult to transplant a successful international format directly and expect a similar performance. Local conditions and insights into the local buying behavior have to shape the format choice. A good point to note in the retailing industry today is the level of experimentation happening locally in terms of formats. Players like Subhiksha and Metro with Margin Free Markets are providing convenience with discount on goods, while internationally convenience formats typically charge a premium over the market prices.

Similarly, ITC is experimenting with a model which brings together a two way flow of goods in the retail outlet - farmers sell their produce and purchase goods to fulfill their consumptions needs. While the experience of these retailers as they scale up beyond their current geographies may provide new insights and lead to modification or fundamental re-engineering of their formats in future, such experimentation and identification of an appropriate format for the local conditions would differentiate winners from losers in Indian retail market of the future.

The retail supply chain in India – The weak link

The key imperative facing retailers in India is to have a robust and scalable supply chain that would facilitate rapid growth. One measure of efficient operations is the inventory turns ratio. The US retail sector has an average inventory turns ratio of about 18. The best global retailer like a 7-Eleven has over 50 turns of inventory.

Most Indian retailers KPMG surveyed have inventory turns levels between 4 to10. Another metric of efficient supply chain management is the stock availability on the retail shelves. Global best practice retailers achieve more than 95 percent availability of all SKUs on the retail shelves (translating into a stock out level of less than 5 percent). The stock out levels among Indian retailers surveyed ranged between 5 to 15 percent. Looking at the inventory turns and stock availability metrics, retailers in India clearly need to augment their operations. Clearly retailers in India have a significant catch-up act to do both in supply chain management and adoption of IT. The good point is that retailers can leverage the experiences of international retailers like Tesco, 7-Eleven and Wal-Mart to leapfrog to the latest practices in managing their supply chain and leveraging information technology.

Ref:

1. KPMG, 'Retail Outlook for China 2005'

2. KPMG, 'Trends in Retailing - Germany'

3. HSBC, 'Jumbo retailing - Organised retailing in India gets hyper'

4. Fitch Ratings, 'Indian Retailing - Investing for Growth'

5 comments:

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