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Indian Retail - The Road Ahead

with Janat Shah

JS: Retail has been present in India since time immemorial, though organized retail is a more recent phenomenon. India has a well-established low cost distribution system that is suited for bulk products but may not be the best for variety goods, which is an area firms like Walmart specialize in. Also, the packet sizes for FMCG goods in India are moving from big to small, in order to increase the number of price points so as to widen the consumer base, as opposed to a reverse flow in the US.
Local vendors remain the preferred choice for perishables like fruits, vegetables, grains etc. despite the presence of organized players. Moreover, high rentals make the low cost strategy an unviable option for Indian players. A very significant factor, which makes Indian Retail scenario different, is the unique concept of MRP (Maximum Retail Price) which is not present in the US. Therefore, retailers in US can afford to charge a premium on their products while Indian retailers do not have this option.Hence there is not much difference between the price points of convenience stores and discount stores in India.

JS: In my view, the role of SCM in retail has been hyped beyond proportion. It is true that the Indian retail distribution channels have a lot of catching up to do in terms of efficiencies but the amount of cost advantage that can be gained through this improvement will not be very significant and neither will it have a huge impact on the consumer. The margins are simply not there to pass on. High rentals and regulations like MRP compel the retailers to operate on thin margins, which cannot be shored up very significantly by SCM alone. Current retailers are actually bearing part of the costs.
However, it is also true that whatever little improvement can be achieved through efficient SCM practices has not been achieved yet, partly because they are still figuring out the format and store issues. I think they should go after these issues first since these kinds of market issues are more important than supply chain issues.

JS: When organized retail started in India, the focus was on making a quick buck by capturing the largest possible market share through the right format. It was wishful thinking on the part of the retailers. Issues like rentals and shifting brand loyalties were not considered. Efficiencies in SCM were therefore not a major consideration point for these players as they believed that once they were established in the market, they would be able to shore up the efficiencies. This has however not happened.
With any new model, you have to first figure out the market, which organized players have been struggling to do. For the next couple of years, focus will be on finding the right model.

JS: Walmart has had unsuccessful forays into countries like China & Japan. Its failures in these countries were due to its inability to adapt to consumer needs as it was blinded by the success of its practices in the US. Most of its top management hailed from the US and hence could not understand the local needs. Players like Tesco were much more successful as they could adapt better. However this time around, Walmart has been intelligent in choosing, intentionally or otherwise, a partner that, despite being in another sector, knows the Indian consumer very well by virtue of its nationwide consumer reach.
It has realized that slow and steady is the way to go if it wants to create a long term and sustainable value proposition. It is trying to first understand the market which is the right approach. Indian retailers can take a leaf out of its book in realizing that grabbing market share is not very significant in a sector where customer loyalty is a rare proposition. They should be open to experimentation and must realize that being late to the market but efficient might be better than being early but inefficient. They should also realize that in its current format, organized retail in India is not sustainable. It grew too rapidly and is now facing problems like high rentals and low footfalls. The discount model can work but mostly through private labels. In Europe, about 45 percent of sales in organized retail is through private labels and this is the right model. Overall, it will be a slow process. Also, retailers may find more success in Tier II and Tier III cities due to low rentals and other factors.

JS: Indian retailers need to be wary of blindly aping their practices. Due to MRP and rental constraints, low cost FMCG products are not a sustainable proposition for them. More scope lies in commodities like fruits and vegetables and in privately labeled products due to the absence of the MRP constraint. Also, insufficient depth in product categories makes it difficult for Indian retailers to have enough variety for filling up the numerous shelves of a hypermarket.
Counterfeiting is also a major problem in India and Indian retailers can cash in on this by making genuineness as a value proposition rather than cost. Consumer experience is another area where organized retailers can differentiate themselves. The verdict for Indian retailers is: Keep adapting the format, keep working on private labels and work on improving back-end inefficiencies.

JS: I believe that both unorganized and organized players would be able to coexist in the Indian market. Some small individual players may get adversely affected but by and large, unorganized retail would remain at the same level, at least in absolute terms. The bulk of the growth in the coming years, however, is expected to come from the organized sector.
Players in the unorganized sector can learn valuable lessons from the organized sector in terms of enhancing their presentability and improving efficiencies of stock keeping. One response which was expected was unorganized players coming together and putting pressure on suppliers. This has however not happened. Manufacturers too have realized that they need to work with retailers instead of viewing them just as customers. We should also not forget that retailers are entrepreneurs and they are learning constantly. Interestingly, there are lessons to be learnt for the organized sector as well. They need to figure out ways to match the auxiliary services like home delivery and credit that are offered by the unorganized retailers.

JS: Gaining bargaining power through scale was one of the primary motivators for Indian retailers to push for greater market shares through an early entry. However, the lack of depth in terms of the number of quality suppliers took the bite out of their bargaining power. As it stands, retailers can only bargain with smaller suppliers for deep discounts and long credit lines. With the larger FMCG players, they do not have this liberty because a large proportion of their sales is dependent on these players. Hence it is difficult to extract discounts from these players.

JS: You are absolutely correct when you say that the potential for efficient supply chain practices is much greater in this area. However, the challenges are also much more. Historically if you see, worldwide organized retail has touched this area last because the supply chain management here is quite complex -especially the perishable part of it. It’s not only about money. It also becomes difficult to solve due to the decentralized nature of production. Supply chain of milk in Gujarat is a good model but a lot of effort went into making it a success.
For instance, if you see Reliance, they are facing problems. There are a whole lot of procurement and packaging issues like dealing with small farmers and quality standardization. Also, the reforms on this front have been slow paced. According to me, these are longer term issues which will take time to fix.

JS: I have already mentioned about reforms like the APMC act which has been in the docks for quite some time now. One role that the government can play could be more in terms of tariffs and infrastructure. But I think you need to grow slowly in this direction. There is no point putting in a lot of cold storages one after the other which are not used. If you see the cold storage capacity that we already have, it is only now in the past 4-5 years that we have started using it. Also, cold storage is not the whole answer with a bigger problem being how to reach the customer. We have still to figure out whether the problems that are there are due to infrastructure only or due to other reasons.
In my mind, there are other areas apart from physical infrastructure where the government can have a greater impact. For instance, coming up with standards for food products in consonance with the industry, training & educating personnel to break the vicious circle of unhealthy practices like pilferage are some of the measures the state can initiate. A lot can be done to generate and distribute knowledge on farm management and harvesting management practices. Also, current cost structures do not take into account the demand peaks that occur at the beginning of the month and on weekends. The government can put structures in place to enhance the flexibility of the cost structures in tune with the demand. This is the soft infrastructure the government should concentrate on.
Current tax structure tends to create separate markets in various states. The proposed GST legislation may help SCM become more efficient because it will act to unify these markets.

JS: Outsourcing is a good model only if there are competent players in the market to which these operations can be outsourced. Unfortunately, there is a dearth of such players in the Indian retail market. Big Bazaar did try the outsourcing model in its initial stages but had to soon give it up as it did not find the services good enough.

JS: I see the problems as temporary and largely for those who do not have deep pockets. For instance stores like Subhiksha among others. These stores have been stretching themselves on the fronts of both financial, as well as managerial resources. In my opinion,these two are becoming constraints and suddenly when there is a financial downturn restricting credit availability,they are getting hit. Cost cutting is going to be an area of concern, but again you need to realize that cost cutting will occur in two areas – the store as well as the supply chain.
The impact of the downturn has also been seen more in urban areas and in high-end, financed goods. The effect has not been seen much in Tier II cities. As such, demand also depends on optimism levels which have revived in the last few months.

JS: We have to first identify what is the base from which online retailing is growing and what are the areas in which it has proved to be successful. It is more likely to work only in specialized kinds of goods, private labels and moderate to high priced items. It is likely to be more successful in smaller and niche markets.

JS: It is actually a very tricky question! In my view, not only India, but the entire global landscape for the retail sector will undergo a change in the coming years. The current low cost model was established when crude prices were low & transportation costs were not restrictive, allowing consumers to travel long distances for their weekly shopping.
With the issues of higher crude prices and carbon footprint coming into the picture, the current hub-and-spoke model has become unsustainable and would have to change. In the Indian context, I see an improvement in SCM efficiencies and a shift in focus from offerings with a low cost proposition to branded and private labeled products.

Conclusion

Indian retail differs from the US retail industry in concepts like MRP, wider price points and a low cost distribution system. Organized retail is fast gaining space in the mind of the Indian consumer, but leaves a lot to be desired when it comes to operational efficiencies. Indian retailers must not look at blindly copying the US model but must focus on shoring up efficiencies, both at the front and the back end and building leverages on private labels and branded products.
The state also needs to play a proactive role in terms of providing proper infrastructure and minimizing tariffs. With these measures in place, the Indian retail industry could be poised for the next quantum leap.

Profile

Janat Shah is a Professor in the Production & Operations department at Indian Institute of Management, Bangalore. A Fellow from Indian Institute of Management, Ahmedabad, he also holds a B. Tech. In Mechanical Engineering from Indian Institute of Technology, Bombay. Earlier, he has worked with industry for five years and taught at Institute of Rural Management, Anand for two years. He was also a visiting scholar at the Sloan School of Management, MIT and visiting faculty at the Logistic Institute at National University of Singapore.

• Uniqueness of Indian retail setup
• Addressing the inefficiency issue

• Helpful role of SCM for Indian retailers
• Role of power in supply chain negotiation process
• SCM practices for agricultural commodities
• Role of the state in introducing efficiency

• Impact of global entry and replicability of global models
• Challenges in introducing global models in India
• Impact on unorganized retail players

• Impact of economic crisis on retail sector
• Outsourcing of back-end operations
• Potential of online retailing in India
• Changes in the next decade