Unmindful expansion strategy
This one seems to be the biggest demon of all. “This is a factor that has impacted all retailers. It is just that some have been impacted more and some less. The fact is that almost everybody has grown far too soon too quickly. The growth is far much more than they could have managed,” says Sinha.

Till recently discount store Subhiksha, which is currently neck-deep in debt of more than Rs 750 crore, was reportedly planning to add two million sq ft by the end of the fourth quarter of 2009. On the contrary, the company has closed its 1,600 stores across 110 cities, with R Subramanian reportedly saying that his company owes Rs 45 crore to suppliers, Rs 20 crore to employees and Rs 24 crore as rentals for various stores! Subhiksha’s troubles started when it began expanding at a rate of 800 stores a year on debt capital. The situation is not very different with Reliance Retail, with rumors afloat that a number of stores have been shut and several employees have been sacked.

Sinha says, “Everybody is trying to give a good value to customers. However, the cost that is incurred in the process takes time to be re-couped. The market may not grow at that rate. What has happened is in the wake of growth is that players have focused on opening more stores than consolidating the older ones.” The process of expansion has to be supported with adequate funds, inventory, and service, which was clearly lacking in the case of Subhiksha. Does this mean that other retailers are also following the footsteps of Subhiksha in unmindful expansion?

Customers unprepared?
Vijaylakshmi Menon, a housewife who prefers to purchase grocery from the kirana store says, “I do go to organized retail outlets, but not that frequently. I am aware that these stores do provide some discounts, but I do not mind spending one or two rupees extra at the nearby kirana store where I have been a regular for almost the last three years.” One of the reasons behind the attractiveness of kirana stores over organized retail outlet is the nearness of these stores and this supports unplanned and sudden purchases. Also, the rapport that customers develop with mom-and-pop stores also plays an important role in affecting consumer behavior.

“The customers take time to migrate from these stores. Retail does not merely mean distribution. A lot of work has to happen before customers start patronizing the stores. And it takes time for customers to understand a lot of things like whether they are getting the right deal or not. You cannot ask customers to shift by giving them the lure of better environment. It is the value that one delivers overtime that drives consumers. That ensures whether the customer will stick to you or not,” says Sinha.

No localized approach
The business of retail (food and grocery) is very localized. The consumer behavior in a particular area, for example Delhi, may not be the same as those of consumers in another city such as Chennai. Thus, the consumer needs differ widely across the country. Therefore, distinct strategies should have been adopted for different regions. “What one must keep in mind is that if you are opening a store such as a grocery store then you have a catchment area. It is a very localized business that has to be built bottom up. It is not a business that can be pushed from top to down. So, macro strategies may not work all the time. You need customized strategies,” says Sinha.

Freshness: A concern
For most of the customers DARE spoke to, freshness of the commodity was a major concern. Unlike the West, Indian consumers lay huge importance to the freshness of food especially milk, vegetables and fruits. Even loyal customers of organized retail stores purchased these items from traditional stores, street hawkers and mandis. Their recent purchase pattern indicated that even though they bought pre-processed food, pulses, spices etc from the organized retail stores, perishable items such as milk, curd, vegetables and fruits were bought from the local stores. Says Vijaylakshmi, “I buy fruits and vegetables from the local market. This is because they are fresh and I can negotiate prices.” Moreover, these items are bought in small quantities and therefore for many consumers, traditional stores, street hawkers and mandis make more sense because of convenience.

Home deliveries
There are some services that are provided exclusively by kirana stores that drive consumers to these stores, such as home-delivery. In India, groceries are purchased in bulk mostly at the beginning of the month and home delivery facilitates this. Also, selling on credit has long been the forte of the kirana stores. This ensures that customers stick to with them for long.

In-house brands vs private brands
For customers like Monica Chawla, who prefers retail chains over the nearby mom-and-pop store, it is the availability of branded goods that matters the most. Unlike the kirana stores, the organized stores stock up a number of brands of a single product. However, these stores also have a generous supply of in-house brands. On an average, in-house brands come at a discount of up to 30 to 40%, which is due to the absence of advertising and distribution costs. However, this also means that these private labels lag behind the branded products in terms of visibility and hence, sale. Moreover, when such products are placed vis-à-vis branded items, consumers may opt for a branded product than a private label. The discounts caused a major hit at profit margins.

Comments (4)

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written by Vasudev, November 03, 2009

Hi,

For Branded Items the retail-chain stores may be giving discounts but not in the case of in-house brands / unpopular brands.

For example, I was purchasing in Spencers/Reliance Fresh/Heritage stores, but for items like sugar, oils, some not-so-popular company items are priced more than my round-the-corner super store.

It is really foolish to go for these super stores thinking that we get discounts.

Once I saw a reliance fresh guy throwing out two/three sack full of vegetables as all of them got perished out and was a stock being received. This clearly tells the freshness of the vegetables/fruits being sold. and their understanding of the products/preservation requirements.

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Wise customer
written by yadav chandna, November 01, 2009

Yet another tribute to the wisdom of the India's Aam Aadmi.

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Big retail can never flourish without efficient infrastructure and logistics
written by M A J Jeyaseelan, October 31, 2009

Efficient distribution which includes retailing is an essential requirement fur upping the productivity bar. Nothing can eventually survive unless the concerned new activity results in a corresponding rise in the productivity of the economy

What the world is yet to understand the fine difference between a market opportunity and an economic opportunity. It is the lack of understanding of this basic concept that had plunged the world in to the abyss requiring so much of taxpayers money to pull the economies out of trouble.

What most consultants, business associations, bankers, and venture capitalists have been focusing on in the retail sector is the market opportunity it offers. Consumers do want better retail services. That certainly presents a huge market opportunity.

But the ultimate question that begs an answer is whether the big retail is able to provide these better services at a lower cost. Can the market opportunity be translated in to an economically viable opportunity. I do not see that happening yet.

There are two parameters that do not at all permit any favourable forecast for retailers. 1) The land cost and the resultant commercial space cost. Both remain artificially high, thanks to the massive imperfections in the real estate market. The real estate market is being so unscrupulously manipulated by all and sundry making marginally more efficient services to cash in on any market opportunity. 2) Logistic quality and costs make cost efficient retail services almost impossible. There is no assured power supply. There is no cold chain infrastructure. Transportation remains a huge bottleneck.

Most retailers are attempting adopt models that have worked in good quality logistics and low commercial space cost environments. Unless the government removes the imperfections in the real estate market and undertakes a crash program to improve logistics, the retail dream is only going to bleed.

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Hmmm..
written by Mahadevan Sundarraj, October 31, 2009

Very well written, but should have been timed earlier. I spoke about this in 2007, and found very few takers. A link to that presentation written in Dec 2007 titled "Myths in Food retailing" is available at http://www.collabrant.in/content/Overseas Management Partners in India.htm

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