Future of Indian Retail Industry

Challenge:
Organized retailers are recently gaining grounds in India, mostly by capturing the market in large cities and spreading from there. Obviously they are expanding at the expense of scores of mom-and-pop grocers (aka "Kirana" store) that Indian consumers have been used to for centuries. Retail is a relatively simple business model which depends predominantly on 'Economy of scale'; gross margins and operating expenses are relatively low in this sector.

It is interesting to ask the existence question here; why the retailers should be in the market? In the absence of retailers, customers would have to visit multiple so called CPG providers to complete their weekly/monthly requirement. In other words, customers have to visit a P&G store for soap, a Nestle store for coffee and so on. Hence retailers aggregate the availability and provide the convenience of 'Single window'; this is fundamental value-addition of a full service retailer. However this by itself is not something which can demand a strong margin; very few customers will willingly pay significant premium for these benefits alone and hence the margins are rather small in the entire industry. In order to obtain a significant profit, they often try to scale up and when they are large enough, they try to squeeze their CPG and other vendors by buying in bulk. Moreover large retailers often spread their operating expenses over huge amount of goods and generate leverage which are otherwise difficult for mom-and-pops to duplicate. When some of these benefits are shared with customers (in terms of lowering the price of commodities), the later get attracted to the market and that's where the relationship is established. Walmart has perfected this model and it's bargaining power with P&G has been well publicized in media in the last 2 decades. And in the process Walmart significantly improved its supply chain operations and passed a portion of the benefit to the customers, there by acquiring market-share rapidly at the expense of Kmart, Target and other competitors.

Focused Solution:
So what should be the primary focus of big-box retailers in India? We need to investigate this general retail model and figure out how the new Indian players with limited competition from foreign suppliers can successfully survive and grow in this market. Here is what I believe should be the primary focus of the retail vendors in India.

(1) Customer focus: Figure out why a customer would visit you instead of the next door kirana?How can we make his experience pleasant so that he would visit you often and become loyal? It may be the availability of parking lot (incidentally Walmart used this to beat Kmart), the friendliness of the employees or the freshness of the vegetables. Retailers must figure this out and create incentives for the entire organization to pursue this objective religiously.
(2) Supply Chain efficiency: How can we take the cost out of the retail supply chain so that you become more efficient at selling the same goods and there by maintain your margin. I understand that SCM is a upcoming area for most managers and often not a priority. Managers must understand that implementation of an ERP or Advance Planning system is not a panacea to every challenges in SCM.
(3) Bigger Scale: How can you grow and become large enough to be able create scale related efficiency and a portion of which than can be passed to the customer. You need to be large enough so that you have an upper-hand vis-a-vis P&G and that would allow you to procure a Dove soap at a lower price compared to what any kirana store can get. This would be the fundamental mantra for your success and must be pursued even if it means sacrificing the margin in the short run. Profitability will definitely come back once the scale become large enough.

Unless retailers are able to focus there strategies on these lines, consumers would window-shop in the air-conditioned retail store and return to the friendly neighborhood kirana for the grocery. And this would never bring efficiency into the retail business and consumers would continue to pay high-price to support the inefficient operation. This may be very similar to the Walmart which is very successful in gaining huge market share and turning out positive growth figures quarter over quarter.

What about the Kirana store guys?
What will happen to these kirana shop owners and employees? This is more of a social and political question? What they know of course is the local taste and that would differ very widely in different parts of the country. Hence as their business would slowly perish they can get employed as "merchandiser" and provide the insights to the national players about what should be the key items to store in a specific locality. India being such a diverse country, an excellent knowledge of local taste would be a hot skill to have and the major retail should acquire their skills and use it extensively.

This would be relatively difficult in the short run. But that is where the retail business is heading world-wide and it would not be very different in India. Sooner we accept this reality and adjust accordingly, better it is.

Comments are welcome!
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