New guest post: An overview of the state of organized retail in India

GREC is delighted to introduce our newest guest blogger, Ramesh Sethuraman. Ramesh currently leads the Integrated Store Solution Business Advisory Services team and supports the Customer Experience practice at Wipro Technologies. In that role, he heads a team of consultants in the areas of in-store technology, e-commerce, mobile retailing, and social media. With 11 years of retail industry experience, and clients ranging from Wal-Mart to SAP, Ramesh brings a wealth of expertise and a unique perspective on retailing - particularly the Indian retail ecosystem - to GREC. And in his first blog post for GREC, Ramesh explores the dynamics of one of the world's fastest growing - yet most challenging - emerging markets.

Being the largest industry of the nation, contributing over 10% to the country's GDP, Indian retail industry is currently valued at USD 350 billion. It is estimated to grow to USD 450 billion by year 2015. Serving over 1.17 billion domestic consumers, it accounts for 8% of employment.

 So far, only 5% of the Indian retail industry is organized.  Though several leading Indian corporations such as Reliance, Aditya Birla, K Raheja Group and Future Group have entered into organized retailing with massive investments and bullish growth plans, they are still struggling hard with rapid expansion.

Demographics and psychographics of Indian retail consumers play a vital role in evolution of organized retailing in India. The major stumbling blocks that limit the expansion or rather explosion of organized retailing includes

1.   Limited consumer spending capability – As per Indian government standards, if a person earns over $10 a month is considered to be above poverty line. As of Jan 2010 India's per capita income is seen at INR 33,540 (Approx USD 720). Unfortunately, as per World Bank estimates, 41.6 percent of India's population lives below $1.25 per day and 75.6 percent live below $2 per day. This limits the consumer spending capability to a phenomenal degree. However, this segment of population significantly contributes to the retail consumption which is not being or rather cannot be tapped by large retailers entered / entering into the organized retail sector.
2. Micro-level bulk breaking - With limited spending power, the population with an earning below $2 per day is engaged in micro consumption significantly matters for retail industry.  For example, in western countries volume of Head & Shoulder shampoo sold per unit is 14.2 fl oz (420 ml). Where as in India most of the consumers (over 50%) purchase shampoo in small sachets (5 ml volume). Unfortunately large format retailers can’t sell at micro volume as otherwise cost of POS transaction and customer service against the average basket size will climb up significantly, pulling down retailers’ margins.
3.  Well established Mom and Pop retailers – With approximate floor space of 200 - 400 Sq Ft the neighborhood mom and pop stores (popularly known as “Kirana Stores”) have highest level of market penetration in India. These retailers sell grocery to the neighborhood consumers in unbelievably small volumes (e.g. 50 grams of sugar or a sachet of shampoo). With no technology investment (not even electronic scales or simple POS for generating sales receipts), these micro format retailers stands as a major challenge for the large format retailers. Consumers with less spending power neither can, nor do they want to travel 2-3 KMs of distance to purchase USD 1 worth of grocery and save 10 cents. Even if they do, probably they will spend the money saved towards transportation.
4. Shopping on credit - Over 50% of the working population in India work as daily laborers and most of them receive their pay on weekly basis. Local Kirana retailers have built trust and relationship over several years with the local people and give the grocery on loan. Once the customer gets salary, they settle the account with the retailer. This is not possible for large format retailers from organized sector due to obvious reasons.
5. Real estate and infrastructure cost – During past decade, Real estate cost in India has escalated significantly. Due to this, a major portion of retailers’ investments are directed towards real-estate and infrastructure development.  Large format retailers open stores in a prime location where the real estate cost will be at premium (at least 30%) when compared to near by residential areas. Also they spend significant amount for setting up store ambiance and aisles. Whereas this is not an issue for micro format retailers, as small commercial spaces are available on monthly rental across all residential areas and neither these retailers, nor their customers care about the ambiance, as the average time spent by customer per shopping trip in Kirana stores is less than 4 minutes.
6. Labor cost & Attrition – Though labor cost is cheaper in India, labor retention is a major challenge for large retailers in the organized retail sector. Minimum educational qualification for store employees of organized retail is 10^th or 12^th grade and these employees shift jobs within 6 months of joining. This indirectly adds more pressure on store manager and other existing store employees. Whereas Kirana stores are mostly run by individuals or families; even if there are employees, they are either school dropouts or illiterates. As the basic skill requirement for an employee in Kirana store is to pack the good and collect the money, they don’t worry about the employee attrition.
7. Technology cost – Population near the poverty line don’t care about loyalty schemes, Point of sale, Self service checkouts or any other retail technologies. Their primary focus is on lower price and value for money.  Due to this attitude, they feel satisfied with the Kirana store shopping. At the same time for organized retailers, technology ROI adds up pressure to increase selling price of the product. For installing basic POS system, mom & pop retailers need to invest at least USD 500 (Computer h/w + software) which sometimes is the total cost of the stock in hand for many Kirana stores.
8.  Value Added Services – While organized retailers try to provide best customer service to customers inside the store, still services like free home delivery or handling order over phone are not possible from their end. Where as Kirana retailers excel in these types of services. In addition, they sell services such as pre-paid mobile top up vouchers, cigarettes (individual unit or 1 count) and other small things such as chocolates (as single units).
9. Supply chain network – Supply chain of organized retailing is still in the initial phase of evolution. Unlike western countries, the Indian city roads where most of the large retail stores are located can’t handle large trucks and trailers. Currently the large retailers in the organized sector have tie up with third party logistic companies to move goods from their warehouse to their stores. These 3PL service providers use vans that carry only 15-20% of the trucks load. But on the other end the supply chain for Kirana stores are well matured and need only smaller amount of replenishment. Consumer products for each Kirana store are being distributed through local stockists in the urban areas and sub-stockists in rural areas. This enables faster and frequent replenishment cycle (almost daily) in a more economic way. Also from convenience standpoint, for Kirana retailers, stockists are just a phone call away. Where as for major organized retailers the system based inventory management and store order fulfillment is still a challenge.
10. Merchandising – While organized large format retailers are struggling hard to sell their private labels, Kirana retailers procure numerous non-branded / locally manufactured products and sell them to its customers without much difficulty as the merchandise mix in their store is limited to the preference of the local consumers.
11.  Support from CPG companies – Unlike western countries, CPG companies in India have dominance over retail industry and were able to succeed with the unorganized retail sector. While CPG companies want to sell their products through organized retailers, they also want to be sure that small retailers in the current unorganized retail sector are not being affected due to entry of large retailers in to the market, as Kirana stores are the biggest source of their revenue.  As a result, leading CPG companies such as Hindustan Unilever, Marico and Dabur launched initiatives such as Super-Value, Mera and Parivaar respectively aiming to activate the general trade channel by giving consultancy and support to Kirana store owners. Unfortunately, this initiative was not a huge success, as the Kirana retailers did not want the CPG companies to dictate guidelines for their business.

Retailers who are trying to get into the Indian Retail bandwagon need to understand these factors and devise their entry strategy to succeed both in short and long term.

Through Indian government has approved and gradually opening up the retail sector to FDI, global retail giants like Carrefour is still on wait and watch mode, as many of the existing retailers are still struggling to stabilize. As an organization understanding the above factors, the German retail giant, Metro has entered into Cash & Carry store format targeting small retailers as their customers.

Currently, Walmart has tied up with Bharti group and has entered into the Indian market. They have understood that the best way to succeed in Indian market is to focus more on the Kirana retailers and have decided to open up Cash & carry stores across India during the first wave. For next couple of years they would like to learn the market dynamics through experience and then would like to adopt other retail formats.

So far Kirana retailers are not having any negative impact due to entry of large organized retailers into the market. However, many of them started understanding the future threats such as government mandating implementation of basic POS system. To overcome these challenges, Kirana retailers are slowly trying to transform themselves to become future ready. This definitely could be the first step to make the Indian retail industry organized at micro level.

Indian government should encourage and support these Kirana retailers to become process and system savvy by creating awareness and provide subsidy for technology implementation. By simply imposing any laws over the industry, without understanding future implications would do no good to the industry.

 

References:

India’s Population 2010

http://www.indiaonlinepages.com

Economic Survey 2009-10

http://www.indiastat.com/news/271/statistical-highlights.aspx

India's per capita income seen at Rs33,540

http://www.domain-b.com/economy/general/20100208_capita_income_oneView.html

FMCGs sell more via large stores

http://www.rediff.com/money/2008/jan/07fmcg.htm

Kirana rules the retail pie

http://retail.franchiseindia.com/article.php?title=Kirana+rules+the+retail+pie

India's 'real' poverty

http://www.prb.org/Articles/2010

Budget2010 : Retail FDI, at last?

http://business.in.com/readconversation.php?id=10822

The opinions expressed here represent authors own and not those of his employer or the site where it has been published.

Comments

[Sree Vijaykumar]

Seems like the author is in awe of the kirana retailers. While the kirana stores indeed have the entrepreneurial spirit and the smarts to satisfy the local consumers; organized retail brings several advantages that will change things in the future. Number one is an assortment of products that consumers have never seen before. Let's not underestimae the power of choice brought about by self-service retail. Number two - let's remember that retail done right identifies what the local consumer cares for and does it in a scientific manner with scale - as is proven in poorer countries in Latin America and Asia.

[Ankur]

Very beautifully written ...

[Ezekiel the forex trading guy]

It gives us an indepth view on how india is doing for its retail organization. thanks

[Florida Refi]

Great post! Thanks for sharing your thoughts!

[Jim at home in Phoenix]

Wow I am shocked of the sheer size and reach of Wal Mart around the world.

[lovin live in Seattle]

I must agree this is very well written.

[Dubai Property]

Really a wonderful and nice info provided and this article is enough to provide an overview of overall market in India and also helpful for foreigners like me who are keen to discover more about Indian retail market.

[NJ Refi]

Wow... it's like the twilight zone. The way of life in India is so different than what we're used to, here in the states.

[Flight Simulator games]

Most people outside India may not know this... the retail trends in India are showing such huge growth that is staggering. The amount of money that an average person spends in India is probably at par with, maybe even higher than many other more developed countries. The other day, i say my driver's mobile phone.. probably worth about $200. Not a bad sign.

[Ranganaathan]

An excellent overview of the challenges which the Retailers will/are facing explained, this should as a warning to the biggies to u/s the art of co-existence, instead of replacement of traditional 'Kirana shops'..Very good points highlighted,hope you blog more frequently...Jai Bharat...Vande Mataram