Everyone loves a good discount

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Buy one and get one free. ‘20% off on one, 30% on two and 40% on buying three shirts,’ screams another hoarding in a large store. This is not an end of season sale or even a festive discount. Rather, the advent of modern retail has ensured that discounts are a year round affair now.

While stock crashes may erode wealth of many and create panic, MRP (maximum retail price) crashes are always welcome. “Globally, discount retailing is big and is the fastest growing sector. Given the value consciousness of the Indian consumer, it is likely that discount will become a big part of the retail sector,” predicts R Subramanian, managing director, Subhiksha Trading Services. Adds Rajesh Seth, vice-president, marketing, Brand Factory, “In many ways, discount is a starting point. It helps in creating a buzz and excitement, and ensures higher footfalls in a store.”

Discount retailing, a post-war phenomenon, is an established market practice in countries like the US. However, the concept is new to India because till recently, MRP was the be all and end all as far as pricing went. In the West, discount stores were conceived to serve consumer needs of baby boomer families. Designed to operate with low-price mark-ups and basic service levels, these formats achieved higher sales volumes and faster merchandise turnover. This pricing strategy enabled the likes of Wal-Mart, Kmart and Target to have a wide presence in the US within a short span of time. Deals, freebies and bargains have redefined shopping experiences in these countries and now the same tactic is being deployed across retail formats in India.

There are various avatars of discount retailing emerging in the country. While first movers like Subhiksha have pioneered EDLP or every day low pricing, Chandrababu Naidu-promoted Heritage Foods has adopted ‘high low pricing’ at its Fresh@stores. Consumers walking into Fresh@ stores can expect selective deals and discounts on the products on display. Heritage has also adopted a bill buster scheme wherein consumers are rewarded for purchases above a certain value. “While we may not offer a discount on our normal merchandise, we offer substantial value by way of a free gift, which is extremely useful,” explains Santhosh Unni, operations and marketing head at Heritage Foods (India) Ltd.

Some others like Brand Factory (part of the Future group) and Megamart (part of Arvind Mills) have taken the concept of factory outlets to a new level. Earlier, manufacturers used to offload their surplus stocks at factory outlets and shopping hubs like Sarojini Nagar in New Delhi and Fashion Street in Mumbai, which acquired sobriquets as export markets, where one could get the latest collection at reduced prices.

But, now shops like Arvind Mills’ recently launched Megamart Outlet promise to be on sale all 365 days. The first Megamart Outlet centre was launched in Chennai in January this year. “Most merchandise in our store comes under some scheme or the other,” promises KE Venkatachalapathy, business head of Megamart. The discounts vary between 10% and 30% and the festive season is marked by higher price cuts.

Traditionally, discount has worked very well with apparel and factory outlets located in suburbs of many Indian cities. “That’s because styles keep on changing and the shopper is also keen to buy stuff that is fashionable and trendy. Moreover, every time he walks in and sees something new in branded apparel, he is bound to make repeat visits. Sale and discounts also help in clearing stock which would otherwise tend to accumulate,” stresses Venkatachalapathy.

While retailers have started offering lower prices on food and grocery, it is still limited because gross margins here are extremely thin. Some corporates are also experimenting with discounts in other categories like home items and appliances. “These are frequently purchased categories and are known value items where market comparisons are possible,” justifies Samar Singh Sheikhawat, vice-president, marketing, Spencer’s Retail Limited.

Some others like Megamart have adopted a double-pronged strategy. While merchandise at Megamart stores would be sold at MRP, bargains and other deals would be offered at Megamart Outlets. Moving forward, Megamart plans to open eight such stores in the next year. Kishore Biyani promoted Brand Factory also plans to open 50 such formats across India in the next two years. Similarly, Aditya Birla group owned More is working with manufacturers and suppliers to promote special offers. In fact, More started a below MRP campaign across its 355 stores in India last month. “We’ve had a good response from consumers and our sales have gone up substantially,” says Sanjay Badhe, senior vice-president.

In fact, a few months back, Big Bazaar launched its ‘Sabse Saste 3 Din’ offer coinciding with the Republic Day weekend. This campaign was spread across 80 Big Bazaar and 29 Food Bazaar outlets in India. Other standalone formats of Pantaloon Retail like Furniture Bazaar, Electronic Bazaar, Navaras (the 22-carat jewellery store) and Loot Mart stores were also part of the campaign.

Similarly, Megamart Outlets have designated ‘marketplace zones’ within the store where non-moving merchandise is accumulated and offered at a discounted price. Moreover, these zones are located at strategic areas so that they catch the eye of the discount seeking consumer.

While discount retailing is in its infancy in India, the model is matured abroad. US retail biggie Wal-Mart has been successful in discount retailing because it was able to negotiate good deals with domestic suppliers such as Coke, Nestlé and P&G. Wal-Mart effectively procured goods from such majors and the cost advantage was passed on to the consumers. “Everyone looks for value whether he is rich or poor. Discount retailers lead markets in wealthy nations like the US and Germany,” says Subramanian.

Wal-Mart is now aggressively looking at foraying into markets such as India. Last August, the company joined hands with Bharti Enterprises to start wholesale (cash-and-carry) and back-end supply chain management operations in the country. The reason behind the entry is that countries such as India offer big platform for growth because of low per capita income.

But being a discount retailer is not easy. From initial scepticism from consumers to pressures on pricing, it’s a tough call. Subramanian of Subhiskha recounts his early days, “Consumers always thought about the reasons behind discounts? Was our product substandard or was this a temporary gimmick? There have been backlashes from other retailers who were worried about losing business and they tried to put regulatory roadblocks in our way. It’s been more a thorn ridden path than a rose ridden one.”

Moreover, discount retailing is not about price play alone. “It is cost play. Once we get the cost right, then we work to get the volumes so that efficiencies start kicking in,” says Subramanian. Retailers also have to ensure higher productivity per sq ft and with pricing being market driven; major chains have limited control over it. “A value format ensures serious buyers. While the normal conversion rates in large malls is 40%, in value format this would be 10% more,” says Venkatachalapathy of Megamart.

In a nutshell, the crux in value retailing lies in generating huge volumes and building up efficient economies of scale at every level, starting from an efficient supply chain. Volumes apart, discount stores can also help consumers move up the value chain as far as their mode of shopping is concerned. “Once the consumer sees the benefit of buying goods in an organised environment, malls would be the next obvious choice for him,” says Seth of Brand Factory.

While discount works for certain goods, it may not produce the desired result for others. “Our experience has shown that value pricing does not work well for footwear and luggage. Consumers tend to get suspicious about the quality on offer. On the other hand, they flock to the store even when you offer steep discounts in apparel,” observes Venkatachalapathy.

The adage of ‘one size doesn’t fit all’ applies to discounts too. It may be interesting to point out that Wal-Mart has experimented with different store formats for China. As the per capita income of the Chinese was lower than their US counterparts, Wal-Mart had to rework its discount format so that it was accessible to a lot more Chinese. The chain also had to consider the Chinese tendency to buy in smaller quantities while devising its strategies for the market.

The bigger question is whether year round discounts bode well for the nascent retail industry in India. “Year round discounting is a reality that the industry has to face as competition hots up. It is an expensive proposition for the retailer because modern retail is not expanding at the same pace as the number of outlets and therefore for sometime the same pie has to be shared by more retailers. Retailers who can hold firm to their positioning and are able to last out the churn will eventually become winners,” says Unni.

The bottom-line is that discount retailing in the country is here to stay. Says Rohit Malhotra, operations head, South Zone, Pantaloon Retail (India) Ltd, “Hypermarkets cannot be restricted to top urban locations alone. These formats have to be expanded and there is a huge potential in smaller cities and towns. This is where aspirational India lives and young Indians across class and incomes have a strong desire to sport branded stuff.”