The Changing Kiranawala!

80 Lakh Kirana outlets have been a number constantly quoted in various studies as the first consumer choice for shopping across India. They have distinct advantages that are obvious now; convenience, extension of credit, home delivery & leveraging personal relationships. But threats from outside & inside have ensured that they have evolved rapidly over the last 5 to 10 years.

Outside-threats are of course, the imminent opening up of the retail sector by the Government, with the introduction of 100% FDI in this sector. Opposition or not, perception is that the sheer size of the wastage our supply chain faces currently, will reduce once foreign players are in full-on.

Now, coming to the changing face of traditional retail, there are two aspects to it. One is the adaptation of the Kirana stores in light of organized competition & changing consumer preferences, and the other is the importance with which companies have started treating this traditional channel.

I feel the first aspect is a no-brainer; new Independent self-service formats within Kiranas, computerized billing, stocking niche & imported products, the health angle, a cold storage unit are few of the areas where they have evolved. But the next step is ‘Collective bargaining’ – i.e. when groups of big Retail outlets start creating a semblance of an ad-hoc DC (Distribution center) & start procuring centrally from every big company. They’ll ask for better margins, differentiated service, more visibility solutions; the list will become endless. I’ve seen instances of this concept being tried in a few key metros across India.

Now, lets us examine how companies are approaching this channel. Every FMCG company has realized that if Modern Retail is growing at a phenomenal growth rate, so is traditional trade. The projected numbers from various 3^rd party agencies are quite mind-boggling. Hence focus towards garnering a higher share from within this channel is soon becoming one of the biggest challenges faced by the top marketing minds in this country. 

In my previous article I had mentioned that HUL had already started treating its key Kirana outlets with the same service pack that they are offering Modern Trade. This is one big step towards acknowledging the importance of the oldest channel in this country. Other companies have also started offering differentiated service packs & levels to the top contributing outlets within each market.

Studying visibility as a separate section throws a lot of light on the importance of this channel. Decisions are made at Point-of-Sale; & companies are letting no stone unturned in capturing premium real-estate within these outlets. Shelf level Displays have become an essential part of any company’s strategy, whether they are for a launch, a re-launch, a new communication message, a new variant etc. This fight for this space has automatically made the retailer smarter, whose bargaining power has thus increased significantly. 

But, I still agree that such an important medium for communication is still under-leveraged at this current juncture.

 
To ‘end’ this small anecdote on the Kiranawala, it is very obvious that he/she is a constantly evolving & adapting entity & will continue to co-exist with other formats in many a years to come. The differentiation across outlets within this channel will soon become starker over the coming years, with different clusters of outlets getting formed basis the speed of evolution that each outlet undertakes.

Gift Cards - The talking point in Organized Retail

Retailers in India have already started the concept of co-branded credit cards. A current example would be the aggressive salesperson in any Spencer’s store showcasing the HSBC-Spencer’s offering.

Another vivid example would be the Future Group credit card which had TV ads across channels for quite some time. The response though had been lukewarm.

With organized retail sales looking downward over the last year, especially in Q3 and Q4 of 2008-09, these offering had disappeared from the table. But, Q1 & Q2 of 2009-10 have been particularly good, with around 15% growth in the sector on the back of a successful festive season.

The new buzz word that is coming up in Retail circles is the Gift card, which is basically gift vouchers/certificates in the form of smart cards.

They will be profitable for retailers as it will breed loyalty through repeat purchases. There will also be a significant portion of card value (10% in America: Economist) which are never redeemed.

Retailers in India are still nascent when it comes to maintaining a comprehensive customer database, and this will be a small, yet significant step towards the same.

The future for gift cards will yield many innovatively packaged offerings similar to the trends in America.

A few examples from the Economist:

1) Target: Gift cards that double as wind-up toys

2) Gift cards through email

3) Best Buy: multiple people can contribute small amounts for an expensive gift card to be created

4) Time based gift cards during the day. E.g. Happy hour shopping times for Gift card redeemers

Expiry dates in gift cards will foster consumers to buy within a specified period and this will always help the retailer waiting on the other end. If not redeemed this goes directly into the company’s kitty. But a lot depends on how the retailer will handle consumers who arrive at their store with expired gift cards. A balanced act will go a long way in establishing the customer friendly side of a retailer.

Another interesting trend in America would be the auctioning of such gift cards online. E-bay is estimated to sell 100,000 gift cards every month through the second-hand route. Consumers give up gift cards that they are unable to redeem online at almost half their price.

All this leads to a overall healthy trend for the gift card concept.

Manufacturers are already present in India for smart cards, who are currently in advanced talks with retail biggies.

The advantage for consumers is pretty obvious; a gift card would be the ideal choice for any wedding, birthday and other such occasions.

The Great Indian Shopping Festival

A target of 700 crores during the 2 week period from Dec 13th '08 to Jan 4th '09, this was how much the Future Group had anticipated. It's true that Big Bazaar is one of the best Marketing success in India, but this festival took it a tad too far.

The number of press ads released were unprecedented. 'Times of India' carried a separate supplement with only Future Group ads, with every page & line screaming discounts. If these didn't get to the consumers, I don't know what will.

e-Zone, Pantaloons, Food Bazaar, Big Bazaar, Collections,Central etc all had % offs. But after a point the Retailer forgot about his customer. I strongly believe in maintaining a distinct identity that each retail brand should maintain because the primary base of customers visiting each of them are different. Future Group created 'Central' and its success was riding on the fact that it was a lifestyle fashion brand. The money rolled in as future group placed it's brands like 'John Miller' near much bigger players and earned higher margins on the same.

Now consumers have started associating 'Central' with the Future Group, whose primary success has been 'Big Bazaar', a discount retail brand, because of the umbrella advertising by Future Group as a whole.

From the Retailer's perspective, creating a property like the 'Indian Shopping festival' would have been a monumental task, whereby the back-ends of various other retailers would have been linked.

This similar to the 'Future group' Credit card which is years ahead of its time, but a concept that would surely pick up in the coming years as consumers realize actual hands-on benefits. This is nothing but credit from the retailer through an indirect route.

Future group may not be the best process oriented organization according to other retailers in the market who might comment that a time will come when Future Group's bubble might burst because of inventory, obsolescence etc, but the fact remains: no one else has managed to hit it big in Retail, at least from the customer's perspective.
They still remain the most flexible retail organization in India. Let us see if the trade-off works.

Big Bazaar footprint explodes all around

Kishore Biyani does not subscribe to the view of a global meltdown. His Future Group's strategy is paying off in numbers and his outlets seem to have more and more goods to offer.

In effect, he is increasing the real estate that has been leased out to his company for more and more retail outlets. 
One wonders whether people are buying more things if they enter a pretty looking showroom or a mall such as Pantaloons or Big Bazaar. To put it in John Donne's language , "Wasn't the customer weaned till then?" 

For one, the Future Group's retail chain Big Bazaar is itself is planning to have 300 hypermarkets in the country by 2010-11 . 

The company may also increase its annual turnover to Rs 13,000 crore by 2010-11 , up from Rs 3,600 crore last fiscal on the back of its expansion. They had reported begun with their first store in October 2001 and till date have crossed the 100-store mark. This was capped with three stores that opened recently in Pune, Cuttack and Delhi. The company's top brass plans to increase the number of stores to 300 by end of the 2010-11 fiscal. 

Big Bazaar chief executive officer, Rajan Malhotra has reportedly concurred on that figure. The company has also gone on record saying that it would have another 35 stores by the end of its fiscal in June 2009 to take the total number to 135. To achieve this they are targeting a turnover of Rs 5,000 crore in the current fiscal year and have formulated plans for reaching a figure of Rs 13,000 crore by 2010-11 fiscal. 

Malhotra has also reportedly concurred on such figures as well. 

Ror the expansion, the company would be looking at both the metros and Tier I cities, besides Tier II and smaller cities. 

The strategy seems to be perfectly on track as the Big Bazaar hypermarkets had a footfall of 11 crore last fiscal and the company is aiming for an increase in the numbers up to 14 crore this year. The average size of a Big Bazaar hypermarket is 30,000 sq ft to one lakh sq ft. 

The retail industry is the largest in India among the new and the old economy industries. It employs around 7.93 per cent of the total workforce in this happening economy and also contributes to over 11 per cent of Indian's GDP. 

The retail industry in India will keep growing as it is not yet targeting even one per cent of the potential customer base and their day to day needs. 

The industry as a result is expected to rise by 25 per cent yearly growth being driven by strong incomes, mutating lifestyles, and a young and spending populating compared to an aging one in other parts of the country. 

It is widely believed that by 2015, the burgeoning retail industry in India will be worth $175 - 200 billion. Incidentally, it seems that India's retail industry is one of the fastest growing with revenue to touch $320 billion in 2009. It may also be growing at a rate of six per cent every year. 

A still higher increase of seven to eight per cent is expected owing to growth in spending in urban areas, rising incomes, and a parallel rise in consumption in rural areas.

Slowing economy may offer respite to retail sector

Inflation may be eating into consumers’ wallets, but domestic retailers are not giving up just yet. Retail rentals are showing signs of fatigue after soaring multi-fold until recently. A slowing economy, hardened home loan rates and liquidity crunch indicate rental rates will soon fall in a manageable range. As of now, rentals have dropped by 5-10 % and are set to see a further fall of 15-20 % in the next few months. Even older deals are being renegotiated towards lesser per sq foot cost. 

Currently, lease rentals account for 15-25 % of retailers’ revenues in India and constitute the second-largest cost head, next only to merchandise cost. Salaries & wages and energy bills are next in line. Given the fact that operating profits of major retailers range from 5-10 % of their net sales, small savings on lease rentals can have a dramatic influence on their profitability. 

For instance, Pantaloon Retail’s rental cost for FY07 was Rs 209 crore, which was 6% of its net sales. The 80% growth in rental costs, compared to the 73% increase in sales, has hit operating margins. Though a part of the rise in rentals can be attributed to the company’s rapid expansion, the effect of soaring realty prices last year can’t be ignored. 

However, one cannot help miss the savings in the total operating cost. Even if we were to consider that rentals will stabilise at current levels, it will help Pantaloon Retail’s operating margins as the company continues to grow its revenues. 

The scenario is quite similar for Shopper’s Stop with rentals bills at Rs 101 crore for FY08, comprising 8% of the company’s turnover. Here also, the rental growth has doubled vis-a-vis the increase in retail sales. If rentals were to decline by an average of 10% at the current sales level, the company would have ended FY08 with a positive bottomline. 

EMERGING TREND: 

The domestic retail industry is following in the footsteps of its international counterparts. Having attained a decent geographic reach, players are experimenting with various formats to suit their respective business models. This is done keeping in mind the needs of the catchment area as well. 

Another important trend that has emerged from this drop in rentals is the co-existence of the revenue-sharing model in the domestic retail sector. In this system, there is no fixed monthly rent. Instead, there is a minimum guarantee amount, plus a revenue-sharing percentage between the landlord and the retailer. 

For instance, a typical co-existence deal will consist of the minimum guarantee of Rs 20-25 per month per sq ft with about 5% of revenue, compared to the Rs 70-110 per month per sq ft rent for an anchor tenant. 

In the current scenario, this model works well for the bigger players rather than the smaller players, as it is difficult to keep track of their ,sales. Big Bazaar, Shopper’s Stop, Provogue and Vishal Retail are going ahead with their expansions as planned. Some of these players have already worked out deals on a revenue-sharing basis. 

Online retailing or e-tailing is another format which is fast catching up with the conventional brick and mortar form of retailing. The fact that products can be delivered anywhere makes it a seamless form of shopping. Retailing through mobile phones, though a very recent phenomenon, is also catching up. 

GLOBAL VS INDIAN: 

Typically, international retailers pay just 3-4 % of their sales as rentals. Moreover, it is during similar downturns that global retail majors like Wal-Mart , Carrefour and Tesco increased their store presence, as rentals were low. Till not too long ago, real estate developers in India were not ready to negotiate prices, as there was ample demand for any mall located in a good catchment area. 

As retailers went on an expansion spree to attain geographical reach, it was a seller’s market. However , things have changed now. Not only have these organised retailers realised the importance of a sizeable reach, but they also know that good mallmanagement is important for a thriving business. 

Internationally, good facility management seems to be the key differentiating factor for the success of any mall. In India, too, it is now being recognised as an important deciding factor. As they say ‘customer is king’ ; it will be the customers who can make or break this entire euphoria about the retail industry’s success.

Organised retail to form 18% of overall retail pie: McKinsey

This may be good news for leading global retail players waiting to enter the Indian retail bazaar scene: the organised segment of the retail industry is expected to grow from the current 5 per cent of the total market to about 14-18 per cent of the expected Rs 18-lakh crore market by 2015. But a report by leading management consulting firm McKinsey and Co cautions global players waiting to enter the great Indian retail bazaar that a ‘cut and paste’ format of their stores elsewhere would not work here.

“They need to have innovative formats based on where to participate in the retail value chain, which geographies to play in and what price points to offer. They also have to craft a customer-insight driven merchandise strategy and create an efficient retail operating platform,” suggests the report.

Indian shopper
McKinsey’s retail report also talks about the uniqueness of the Indian shopper vis-À-vis the rest of the world: least loyal to a single retailer, dislike for pre-packaged fresh foods, willingness to pay more for convenience and services but not a premium price for a brand and demands ethnicity in apparel accessories. And, in the absence of quality control, information about the product and trust in retailers, brands serve as a proxy for all these factors.

Of the current 204 million households in India, the report estimates that only about 13 million households have the income to patronise organised retail. The great news is that this relevant consumer segment will grow five fold from 13 million to 65 million households in the next eight years but mom and pop stores would continue to be relevant across the country, in both small and large towns.

The report, titled ‘The Great Indian Bazaar: Organised Retail Comes of Age in India,’ also suggests retailing in India would require an approach that is distinctively different from the rest of the world. To achieve leadership position in the sector, players would have to integrate real estate into the business model, create an effective and scalable supply chain, increase basket size by shaping consumption, develop and retain talent, influence regulation to ensure healthy development of the sector and to de-risk margins.

“Given the nascent state of organised retail and the rapid evolution of the industry, it is imperative for retailers, manufacturers, real estate developers, logistics providers and partners along the value chain to work in a collaborative spirit,” says Mr Laxman Narasimhan, Director, McKinsey & Co and leader of the Consumer, Retail and Media Practice in India.