The supermarket chain Subhiksha perished because it was growing way too fast, the supply chain was weak and there was virtually no back-end. The story was pretty much the same with TruMart; with the shopshelves bare, the stores stayed empty. Vishal Retail started out well but didn?t know how to keep the footfalls coming and ended up with R700 crore worth of debt. Chains like the Birla Group?s more. are also finding the going tough and even Pantaloon, which is one of the more profitable food retailers in the country, barely breaks even. Spencer?s, which started out nearly 15 years ago, still doesn?t make money. The RPG group-promoted chain is, however, not willing to throw in the towel just yet. Spencer?s isn?t wrong in hoping because, without doubt, there?s money to be made in modern retail.
But the story in India so far hasn?t turned out quite the way people believed it would, particularly in the food and grocery (F&G) space. While the penetration of organised F&G in China has moved by at least three percentage points to about 5% in the last five years, in India it?s moved from 1% to 2%, according to a study done by the Boston Consulting Group. That?s not hard to believe because there?s a strong bond with the neighbourhood kirana who?s friendly enough to deliver at your doorstep and even give you credit for it. Actually, it?s the cluster of kiranas within a radius of one kilometre, which, between them, stock almost everything that make the supermarkets almost superfluous.
What may speed up the switch to convenience stores or supermarkets eventually are the ambitions of second generation kirana owners, who may not want to stand behind the counters. But retailers will tell you that as consumers become more affluent, they will worry about hygiene and will demand variety that smaller kiranas simply won?t be able to stock. This is probably true. But, in the meantime, there?s really no need for retailers to rush with the rollouts, unless rentals are really affordable and the catchment is large. Given that the biggest cost for retailers?at 60-70% of the total expenditure?is the cost of the goods, there isn?t too much economy of scale to be gained by putting up more stores. Since private labels still account for a very small fraction of total merchandise, and since FMCG suppliers are stingy with margins (modern trade accounts for just 6-7% of trade) this cost
isn?t going to come down in a hurry. Until the cost of goods comes off meaningfully?perhaps through an increase in the share of private labels?it doesn?t make sense to run up a large rentals bill.
In particular, smaller stores, because they are competing for space with banks, pharmacies and so on, end up forking out rents of R65-70 per sq ft per month whereas a larger store located in a mall has more bargaining power and pays R40-50 per sq ft per month. So, the way to go about it would be to probably penetrate a region and follow the cluster approach rather than spread the chain across the country. That way the administrative costs can be kept in check. Spencer?s, for instance, may have done better had it stayed put in the south and snapped up the Trinethra chain before the Birlas did. Way too much time has been spent by retailers closing down stores, whether it?s Spencer?s, Big Bazaar, more. or Bharti, which shut down a couple of its outlets within months of opening them.
In fact, the cash should have been channelled into the back-end and the supply chain been made more robust so that inventories could have been leaner. It?s also true that retailers in India are at a disadvantage because inter-state taxes compel them to have more in-state distribution centres and so to stock higher than necessary inventories. Moreover, since order fulfilment rates from vendors are 75-80%, stores tend to stock more. That?s why, as Citigroup points out, the working capital management of retailers in India has been a structural concern; at an estimated $30 per sq ft, it is higher than formats in Asia, where it ranged between $3 and $7 per sq ft.
Some of this can be addressed, as retailers have greater control over merchandise?especially the low margin food and beverages categories?and that?s why retailers like Aditya Birla?s more. are betting on private labels. Although store brands may not have taken off as expected, they clearly have a future, if the price differential between them and established brands is substantial and the quality comparable. Pantaloon believes that private brands can be about 27% cheaper than FMCG brands because retailers do not spend on media to build the brand, which is a huge saving. However, studies done by IRIS reveal divergent trends. While in categories like packaged sugar, the private label offering, in north India, is available at a discount of around 12%-17% to the branded product, for a 10 kg pack of wheat flour, the prices are more or less the same. Nonetheless, Citigroup rightly points out that retailers need to get going on their private label strategies because the competition will be fierce, given the attractive margins. For a player like more., store labels account for 17-18% of sales but that could go up if it offers the customer a distinct product proposition.
As of now, where the private label approach has worked really well is in the high-margin apparel space, with chains like Westside turning out winners in womenswear. Shoppers Stop, on the other hand, has struggled, perhaps because it was a little ahead of its time and also the group chose to venture out into too many formats without understanding them. Also, it?s not enough to be the early entrant, the proposition too needs to be good; this has been proved by Croma, which may not have been the first to enter the niche consumer electronics piece but has clearly walked away with the honours. And it doesn?t play the price game. Again Titan, with more than 500 stores, has done exceptionally well in a highly competitive space by not compromising on quality. To sum up, the market?s huge but don?t be in a hurry; slow and steady wins the race.
shobhana.subramanian@
expressindia.com