Though the blame game is on the downturn, experts opine that there were inherent flaws that came to fore with shrinking wallets. As Akash Gupt, Executive Director, PwC explains, Most domestic retailers in the initial years adopted the western retail models. Revenues in India are one fourth of what they are in the West and operating expenses are nearly 60% more than in the West. This model was inherently flawed.
Experts advocate that such models can survive only in buoyant economic conditions or in the absence of serious competition. As Pankaj Gupta, Practice Head, Consumer & Retail, Tata Strategic Management Group reasons, Most domestic retailers are struggling as they have a food & grocery retail model that focusess on packaged groceries and staples. They are squeezed at one end by FMCG companies limiting their gross margins and by increasing rentals at the other. This coupled with an undifferentiated value proposition, inefficient business processes and lack of trained manpower has made their business model very weak.
A fact corroborated by Nupur Chakraborty, Executive Editor, IMAGES Retail, In the past five years, modern retail had been populated by a host of me-too companies who clearly had no experience of retail and are only now beginning to appreciate the ground realities. Fashion and lifestyle are not as affected as food and grocery retailers are. She avers, As food and grocery retailers need to build scale to leverage economies of sourcing, expanding top line growth is critical for survival. The problem is that in their hurry to open stores, most retailers have made strategic errors in ignoring bottom line health and have lost control of cash flows. Also, in the name of differentiation, most retailers appear to know only one tool of discounting. They forget that customers are looking for differentiation in merchandise and service as well.
According to news reports, FMCG sales from modern formats, which recorded a growth of over 30% in the past two to three years, have been almost flat since January 2009. Given the spate of stores closing down, FMCG companies have renewed their focus on kiranas to spur up sales, with reports of Hindustan Unilever and Godrej Consumer Products raising their trade margins for some brands to traditional retailers. Experts opine this is a cutting edge move. As brand-specialist Harish Bijoor suggests, It is a great way of battling the blues during a slow-down at large. There has been an overt focus on big organised retail. The reality however remains that there are only 2,670 big retail outlets in the country. And 14.6 million small retail outlets at last count. Add another 1.2 million paan shops, and these are numbers that are truly bewildering in size, spread and possibility. Organised retail is far way in real Indian terms. If you need to reach the hinterland, it is still through the kirana shop. Real consumption resides there, it happens in trickles, millions of trickles. A sentiment also echoed by Gupta, This move is borne out of the fact that currently 95% of their business is from this channel and in even in 2015 it is expected to be 85%. Thus realising its importance, companies are focusing on this channel and looking at developmental initiatives, for example, Super Value Stores by HUL.
A push towards kiranas is also coming from retail chains private labels (PLs). As Shushmul Maheshwari, Chief Executive, RNCOS E-Services, who recently released the Booming Retail Sector in India report, opines, The increasing focus by retail chains to promote PLs has forced thes FMCG companies to target local kiranas stores. While dealing with kirana stores, FMCG companies have high bargaining power and margins in comparison to catering to large retail chains. Thus kirana stores will continue to be important partners of FMCG companies for a long time. However, Chakraborty, adds, that though the modern trade channel is still trying to get its act together, but there can be no doubt that modern supermarkets and hypermarkets have much to offer to manufacturers - in terms of high visibility for products, width and depth of choice to the consumer, and allowing opportunities for targeted in-store activities. Although, K Venkataraman, MD, Mahindra Retail opines, In the current slowdown and the resultant contraction mode in supermarkets and hypermarkets, this move would be unavoidable, and will prove to be important. However, in the longer term, when organised FMCG retail gets back to its expansion mode, this time with better learnings and favourable real-estate conditions to virtually assure its success, the FMCG companies will have to reorient their strategies,and increase thrust through organised retail.
Given the interdependence of brands and retail chains, what sure emerges is their love-hate equation. As Venkataraman affirms, In the case of FMCG products there would be a competing-collaborating relationship between organised retail and FMCG companies. As retail cannot do without the power of the big brands, and the brands will require big retail for both volumes and brand salience; but the specter of PLs, and the conflicts on pricing, placement and promotion between brands and labels will provide an underlay of distrust, which cannot be wished away by either.
Given that India is an extremely under-branded market, there is a huge opportunity which exists for creating brands. As Atul Takle, Head, Corporate Communications, Pantaloon Retail points out, We believe the term private label is used by the FMCG companies. For the customer, it is a brand which is being purchased. In the case of retailers like us, we have built consumer equity and initial rapport with customers by our formats. In India, Chakraborty states, some retailers offer PLs in categories like spices and condiments because many Indians buy loose or unbranded spices. Here, the PLs have the opportunity to grab the market share, because it offers the psychological benefits of a hygienically packaged product and at a lower price.
However Bijoor explains that since DOBs (dealers own brands) or PLs are small in number and sell brands within their organised retail store formats, it will take time and will be a tough task for them to achieve mass scale. The core competence of such PLs is largely the private space for the store that spawns it. He adds that given a multi-brand situation, retailers go by a scientific temperament to provide shelf space. They stock and provide display space to brands that actually move and sell. Given the magnitude and penetration of the Indian market, experts opine that a brand will need different strategies to sell in the rural and urban space. As Pinakiranjan Mishra, Partner and Industry leader, Retail & Consumer Products Practice, Ernst & Young. points out, The communication strategies have to be different. The product pricing and packaging strategies have to be different. Moreover brands need to understand the paying capability of such rural consumers, their earning cycle is different from people in paid jobs. As Gupta states, rural and urban space requires distinct strategies. And this would straddle across the marketing mix. Brands would need to develop products specifically for the rural masses at distinct price points. Also with the large costs attached to rural distribution, cost efficient models would be the key here.With 100% FDI being allowed in cash-and-carry wholesale trading and three international retailers Wal-Mart, Carrefour, and Tesco announcing their plans for the Indian market, Mishra is optimistic that it will have a limited impact on Indian retailers. Most of the wholesale cash-and-carry companies have planned for modest and measured growth and are still understanding the Indian market.
Given the slowdown, the franchise model is tipped as a viable option. Gupta states that it will work well for some categories and formats. For others, having control over the franchisee in terms of quality of service delivery, branding etc is a challenge and will have to be managed effectively. But, considering that retail is capital intensive, this would be an important model to develop for future expansion plans however, having systems and processes to manage the franchisee is important.
A concern expressed by Chakraborty too. Franchising is a great tool to build scale and reach new markets, but there are many dangers to franchising. There is a reason why a global brand like Starbucks chooses never to franchise. The lack of transparency, franchisors inexperience in retail, and lack of understanding of consumers can greatly harm a brand looking to build a market. Losing control of a brands value is always a danger that accompanies franchising.
Given the market dynamics there is an ongoing demand by retailers seeking industry status. Sajjan Jindal, President, Assocham believes that this move will be extremely beneficial for retailers. They will be entitled to certain tax benefits and holiday schemes. With conferment of industry status, the small retailers will convert themselves into large ones and India will be producing its own Walmarts instead of awaiting arrival from overseas. He elaborates for its growth and penetration the organised sector will have to establish integral contacts with smaller retailers and if the bigger and smaller retailers are able to establish a sound value chain system, both will co-exist and consumers will stand to gain.
A model also supported by Maheshwari, organised retailers can act as distributors to these local stores and promote their private label products. This will help to strengthen their retail network indirectly and will help them to penetrate in the unorganised retail segment. Also, they can offer these local stores to become their franchisee where the organised retailer will just act as supplier and these local stores will be identified with their brand name.
Given the current retail slowdown, Shyamak Tata, Consumer Business Leader, Deloitte observers, Despite low confidence, the retail sector will indeed emerge and find its natural place it is undergoing its evolution cycle. Remember the 1990s when the IT sector was finding its feet, after the bubble burst, it became the sunshine sector of Indian economy. Retail too shall find a similar course. Amen.