Recent economic woes—sparked off by rising oil and commodity prices earlier in the year, then sustained by the ongoing Wall Street crisis—would suggest that retailers should be a worried lot today. But accounts from across the world offer a mixed bag of good and bad news. In the US, with the holiday season standing around the corner, the National Retail Federation has said that sales growth will be down to the worst in six years. Other forecasts are even gloomier, with TNS Retail Forward predicting the worst holiday showing in 17 years. On the other hand, China, where economic growth has slowed for the fourth straight quarter, is yet seeing retail sales growing at close to the fastest pace in at least nine years. As for India, although some headlines have been focusing on organised retail taking a hit, most analysts remain upbeat about future prospects. A Northbridge Capital report released late last month finds that this segment is growing at 40% a year. Organised retail is currently valued at $300 million, with only 7.5% of the total retail pie, but this share is projected to grow to 20% by 2010. There are other reports offering other figures, but what they all have in common is 1) a certain bullish tone on growth projections and 2) a certitude that a big chunk of this growth is going to take place in the country’s hinterlands, which extend from tier II and tier III towns to rural India.
By some accounts, the rural market puts away almost 50% of the goods consumed in the country and about 35% of the offtake for FMCG products. And the affluent sector in rural India is growing faster than the urban one, with per-households spending in rural India forecast to reach current urban levels by 2017. The news is good even on the employment front, with an Icrier study showing that the 3.93 million jobs added in rural retail during 2000-05 put the urban growth of 0.51 million to shame.
Recently, the Rural Marketing Agencies Association of India and Francis Kanoi Marketing Research conducted a study of the retail habits of rural India. According to Francis Xavier, managing director of Francis Kanoi, “the main finding from the study is that the number of retail outlets in rural areas is booming, with nearly 45% of them set up in the last five years, and the rural folks seem to be favouring the retail outlets in their villages to meet most of their daily needs.”
All’s under one roof
ITC, which has already scripted a great success story with its groundbreaking eChoupal initiative, whereby local internet kiosks link farming communities with global markets by providing information on everything from comparative crop prices to weather forecasts, is now creating a physical version of the same concept with Choupal Saagars. These are being set up at the hub of every 40 eChoupals, to facilitate all the material transaction needs of farmers, ranging from the sale of produce to the purchase of household goods. From one in 2004, the Choupal Saagars have now grown to 23, with ITC shooting to scale these up to 100 in the near term. Guiding mantra: Jaruratein Anek, Jagah Ek.
The one-stop shop idea is integral to DSCL’s Hariyali Kisaan Bazaar (HKB) initiative as well, which has also been on an expansion spree, with the five projects set up in 2002 having grown to 203. Their motto: Ab har kisaan ho kamyaab. As for the future, HKB president and business head Rajesh Gupta says that the company has an all India plan, but location decisions for each new unit are based on intensive microanalysis of whether the demographics and spending ability of a given catchment area suits the HKB business model: “This includes factors like literacy, receptiveness to new ideas at the agricultural level and even TV penetration.” This data dynamic is also critical to determining the product mix being carried at different stores. HKB’s merchandise list is made up of 60-70% core commodities, with the variables being determined by local brand and price preferences.
In the last three years, according to Xavier, the strongest growth in the number of retail outlets has been in the North zone at 38% as against an all-India growth of some 30%: “Notwithstanding the popular stereotypes, the prosperity levels now seem to be growing the most in the North.”
The entry of such enterprises has transformed product choices. With the rapidly expanding outlets offering both branded and non-branded versions of consumer goods, electricals, durables, kitchen appliances, construction materials and, of course, agri-inputs, Xavier says: “Even the infrequently bought products are entering villages rapidly.”
S Sivakumar, who heads the international business and agricultural division of ITC, points out: “The buying and usage habits of consumers in villages and small towns are changing rapidly with increasing incomes and greater exposure to media. They have started experimenting with newer products and also at higher price points. The demand for the products that were not available earlier through normal retail channels is also growing.” Here, he gives the example of how ready-made garments now comprise 95% of his apparel sales, in sharp contrast to how 80% of these are in fabric form as far as traditional rural retail channels are concerned. Another fast growing category Sivakumar points to is that of products that provide innovative solutions to day to day needs, “where organised retail has taken the role of a market maker”. A good example: the BP Oorja stove that uses biomass pellets as fuel.
Too much , too soon?
Still, at a time when retailers’ shares are going South along with the rest and when various players are paring down their headcounts and expansion plans, shouldn’t rural retail be a worried sector as well? Was the bugle sounded too early on this frontier? Gupta says that there is no question that a shakeup is on the way, and we will see some players fall by the wayside in the next few months. This, he predicts, will be as much on account of faulty business models as of failures in the due diligence processes propping up these models. HKB, however, seems to be on a strong wicket so far because of its traditional agri-strengths, which complement a robust and efficient supply chain in a sector where the cost of servicing the markets is very high.
Vishal Retail chairman Ram Chandra Aggarwal, who opened his first hypermarket in 2003 and now oversees 135 of the same spread across tier II and III towns, explains that his company’s strength lies in its foresight: “We want to be among the top five companies in Indian retailing, and any company operating in the retail space today has to recognise that a major chunk of consumers is in the hinterlands. This is where the masses are located and all the players are eyeing them. In these virgin markets, our first mover’s advantage will reap exponential returns.”
For a sector that predominantly relies on farmers and agriculture as a source of business, the future is also dependent on the government. As of now, Sivakumar says that the laws restricting agricultural produce marketing, procurement of essential commodities and futures trading constrain companies in significant ways. If theAPMC, Futures Trading, and Essential Commodities Acts were to be reformed, this would help the players procure in large quantities, hedge against risks and so on.
Sivakumar also identifies two factors as critical for any player’s future in the rural sector: First, every market has to discover its own ideal model and this discovery process involves experimentation. What is also natural in this process is that some formats wind down over time while others, the more prescient ones, move on and on. Second, in contrast to the FMCG goods for which there is a well laid out map for moving brands through the country’s interiors, stores have to sort out supply chain issues, delivery formats and reaching out processes for many other goods from scratch.
His final word: “There is no question of the rural retail revolution having been mistimed. Even if it had occurred five years later, we would still have to go through a process of consolidation and shakeouts. But as for whether the rural Indian is ready for this format, he always has been.”
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