Adding this news article to the post below : Future Group has again stated that they will continue to expand the convenience format. They are looking at adding 1000 stores in 2 years !So will the retail revolution finally arrive ? Only time will tell…
This week’s Google alert made for grim reading. I believe that what is currently a trickle of articles questioning the policy reform process and viability of modern retailing in India – is likely to become a river in spate within the next three months. But on to the agenda for the day…
Today’s pieces cover the modern retail story in India from 3 different points of view.
Those of the analysts , the industry pundits and the activists.
The analysts believe that India’s retail revolution is on the verge of a fizzle out – see the Chicago Tribune article here.
Putting things into perspective is Mr Amitabh Mall of the BCG, arguing that it is the food and grocery retailers who are in soup, because they haven’t been able to crack the right store format for growth.
The industry pundits believe that India is a huge market with great potential in the business, but profits are down.
Meanwhile, Mr Biyani’s selling the Pantaloon business continues to make news. The reasons behind the sale are a pointer to the evident stress within the system.
Another piece which showcases the views of a cross section of industry leaders talks about the clear and present challenges before the industry, and the possible evolution of business in India.
The activists are convinced that the so called benefits of modern retail are over hyped – they will cause job losses and bring down the shutters on our home grown entrepreneurs.
Quite a lot of action !
I believe that the truth lies somewhere in between…
Indian Modern retail has been through three distinct phases of evolution.
Phase 1 was the Great Boom of 2005-06 – fuelled by enthusiasm looking at the market size, demographics and the unorganized structure of the markets, retailers went overboard with store expansion.
Phase 2 came soon after – Streets with 4- 5 stores of each chain – these stores, which never had started making profit, soon went bust – and consolidation, operational efficiency, store profitability etc became the name of the game (reminds me of the scene in the Asterix book – The Mansions of the Gods – where every villager opens up a fishmonger or a metallurgist’s shop)
Phase 3 followed – Cautious expansion, through large formats, largely into Tier 2 cities –
Pune got a Spar, a Spencer, and even a Star Bazaar !
Phase 4 is on right now – Cash and carry is into relentless expansion mode (backed by investment from their parent companies). None of the players in the retail business is making money, there is no sign of respite on the policy front, and profitability is likely to be further challenged given rising inflation and changing consumer behavior – & only two players have the wherewithal to ride over this wave.
It is this phase which is being talked about through the various points of view in the articles mentioned above.Organized retail does not seem to be a happy place to be in and all is not well.
But that does not mean India’s retail story is over. Far from it. I believe that the end of this phase will see the pretenders out of business – leaving the contenders behind.
The contenders will emerge with a much better understanding of reality, and a more realistic assessment of where they would want the industry to go. They will be the ones who will eventually crack the right model for our nation, and not merely copy paste the ones from overseas.
I harp upon the right “model” piece because I tend to agree with the observations made in Mr Mall’s piece. Indian food retail has till now focused on short term gains and not on sustenance. Getting in FDI will again provide a short term solution to the problem – monies will start flowing in, store expansions will start and the madness will be back. In all fairness, I think that retailers should view the policy paralysis as a blessing in disguise – it will force them to relook at their model and strategy, reduce debt (as in the case of the Future Group), evaluate innovative solutions, and generally firm up their operating principles of business.
I’d like to believe the next phase of retail evolution would be based on the following trends likely to emerge –
1) Even with rampant inflation, the stress on convenience will not reduce. Focus on home delivery of services (including grocery and food items) is bound to go up. Home delivery could be enabled through technology, accessible through mobile, tablet or any other form (ref to the Araamshop model).
2) This would also mean that the convenience format would never go away – one chain which is doing a spectacular job of this is the Needs Supermarket group – which has a small outlet in every high rise residential society in Gurgaon – more on this later.
3) The investments made by the chains into large formats would start paying off – consumers would be attuned to buying a wide range of assortment (an indicator being the large number of international/ gourmet food formats opening up) from the hypers. Thus, monthly purchase baskets would become bigger.
4) The ever adapting and innovative kirana guy will continue to thrive – because urban India would suddenly not start living in high rises. This kirana guy would by now be a fully self service, air conditioned modern store – of course, his really high margins would be a thing of the past, but the increased volumes would make up for it. This is something which has started to take off, especially in western and southern India.
5) The small vendors / hawkers would possibly die a slow death – unless they could be recruited and trained by the large retailers into doing F&V procurement for their supply chain. This is something that they are already adept at doing, because they buy from larger wholesalers and hawk items door to door / in small residential markets.
Besides winning hearts and minds (and reducing opposition to organized retail), it will ensure steady employment, an upgrade of skills and the chance of a better lifestyle and hence better social respect to this set of people, who, as was learned from the job losses article, have already started feeling the effects of Big Retail.
I imagine a franchisee led expansion happening post the current gloomy phase – this will help the smaller retailers to upgrade, do away with opposition to modern retail, and give a large footprint to existing retailers. How I wish Nilgiris to be at the forefront of doing this – but I think Mr Biyani would drive it through the KB’s Fairprice format – he’s pretty much stated that in his interview.
So, while the short term seems fraught with uncertainty and risk, the future will be bright after all !
