Future of Retail in India

chillibreeze writer — SM

Out of the Classroom
2009 was a learning experience for India's retail industry that saw most retailers pausing their store-opening frenzy after growing square footage in double digits in 2008. Instead, they focused on expense controls and renegotiated leases wherever possible. There are estimates that as much as 40% of retail stores got renegotiated, remodeled, renamed, or closed down in 2010.

The difficult business environment took its toll as dozens of emerging retailers disappeared. The pain wasn't reserved for the smaller guys only as giants like Subhiksha were forced to shut down and Vishal Retail struggled as its owner - an ambitious Marwari from the dingy lanes of Burrabazar in Kolkata - was forced to sell off to private equity partners.

2010 and beyond would see the industry growing again albeit in a more sensible way. "With the downturn, the companies have geared themselves up with better systems and procedures, and restructured their growth. The next decade will be the best decade for the retail community", said B.S. Nagesh, Shoppers' Stop vice-chairman.

Shifting away from being market share driven to profitability driven, the retail industry is expected to put its best foot forward in coming days. “Retailing is passing through a transformation phase following a reality check”, says Gaurav Marya, President, Franchise India. Here’s a look at the key trends that retailing would see in coming days.

Franchising
"Till about 2008, 15% of those companies who are into retail were into franchising and by the end of 2009, a good 85% have opted for the franchising model”, Marya said. Apart from the obvious advantage of not requiring investments in assets, cost savings via higher efficiency is the other key reason why retailers are increasingly looking at the franchise model. "If you compare an outlet owned by a company vis-à-vis one owned by its franchisee, we see 7-8% higher efficiency." The savings come in the form of lower shrinkages and sticking to bare minimum overheads. In every retail business, there is about 2-3% shrinkage (the industry lingo for stock loss, damages or even theft), which almost gets eliminated if a franchisee is running that. "A franchisee also never overstocks as he or she always tries to optimize capital."

Telecom
While telecom hardware retailing would continue to be a difficult proposition for a franchise-led business model, the real action would happen in telecom service retailing as garnering subscribers and then enticing them with more and more value-added services becomes the key survival strategy.

“One big opportunity in retailing will be in Telecom,” Marya said In Andhra Pradesh, Uninor, one of the latest entrant in the telecom service space, recently appointed 40 franchisees in one week. Russian brand MTS has an equally ambitious plan which would drive fresh rounds of investment in the telecom space.

Private Labels
What is the highest selling shirt brand in the world? It's US retailer Wal-Mart’s in-store brand. “As large retailer starts moving towards private labels, their margins would improve to a more sustainable level,” Marya said. And this trend would also catch on in food and groceries. "Private label is an important lever for growth for us even as we keep focusing on exclusive tie-ups with well-known international apparel brands," says Sajeev Goenka, vice-chairman of CESC Ltd., which owns Spencer’s Retail.

Making private labels successful is difficult in categories where there are generic brands like Colgate or Tata Salt but it's easier in products like sugar, where there are no dominant brands. “Till the time Reliance Fresh starts selling its own brands of flour, pulses or salt, the business is not going to look good,” Marya said.

Pantaloons, which has already tested success with their private label in apparel with John Miller, recently tried a private label in FMCG (fast moving consumer goods) space with the launch of toothpaste under the brand Sach, purportedly developed in consultation with cricketer Sachin Tendulkar. Brand extention of Sach to include dairy products are on the offing, it has been learnt. “The whole game is to first acquire a customer who is then sold equally on the product, the private label and also the larger brand that he walks into,” Marya said.

Private label would also be a key survival strategy for mobile retailing as handset preferences moves beyond the Nokias and the Samsungs of the world. “A bunch of hitherto unknown brands have come in, and with substantial investment in airtime, they have already concerned 20% of the handset market,” Marya said. Case in point is The Mobile Stores which has come out with their own label that are being sold through its network of 1100 outlets.

Birth of Specialized Retailing
The retail industry reached adolescence transforming from unorganized to organized over the past five years. It would now progress towards specialized retailing. “Earlier we used to go to a consumer hardware store; then came E-zone or Croma; we will now see birth of single-brand outlets,” Marya said. Outlets selling only Apple or Blackberry products would be better placed to offer evolved customers the full brand promise and there customer care executives won’t be at a loss explaining high-end product features. Though not a specialized format, retailing to people on the move – or ‘travel retailing’ as Marya puts it -- would be a trend to watch out for. “Every new metro station that comes up and so many airports being planned across the country could be the new retail hubs.”

Sharing of Logistics
Reckless investments in setting up own telecom towers by every service provider that were seen in the early days of mobile revolution has now been replaced by sharing of infrastructure and letting specialized tower companies take over the job of managing them. The large format retail store would do well to follow in the footsteps. “Retailers should learn from what happened in the telecom industry and immediately consolidate their back-ends,” Marya said.

FMCG major Unilever appoints modern retail distributors having its own warehouse infrastructure that caters only to large retailers like Big Bazaar who has its own centralized warehouses from where products are sent to individual stores. Product manufacturers and the retailers can well share warehouse space, something which is yet to happen. “There have been informal talks between major retailers about sharing of back-ends and logistics and things haven't moved beyond discussing the idea,” Goenka said.

Realty in Retail: Revenue Sharing
As the success of any retail business lies largely in identifying the best possible location at a competitive cost, getting a win-win deal with a real estate developer is winning half the battle. Apart from the minimum guarantee rental that retailers have to pay, developers are taking a 5% cut of the retailer's revenues. Marya has his own benchmark for rentals that a retailer can afford to stay in business.

“Food and beverage won’t be good enough if rentals go beyond Rs. 50 a square feet; fashion won’t be interesting if you pay beyond Rs. 100-150 and any large format store is uneconomical beyond Rs. 30. Our early mover advantage has enabled us to lock in key locations for our stores at competitive rentals in various cities in India, including the eight tier I cities," according to Kishore Biyani, managing director of Pantaloon Retail (India) Ltd. A few of the Johnnies-come-lately weren't that lucky as Vishal Retail found out when it got trapped in unsustainable rentals.

Future Survivors
So who's going to survive the future? “In large format stores, there would eventually be three to four retailers; every developed market has a clear leader like Wal-Mart in US or Carrefour in UK,” predicts Marya. The retail space is evolving fast enough to keep the leading players guessing about the shape of things to come. Tomorrow's winners would be those resourceful integrated firms that straddle manufacturing to services, exploiting opportunities in cross-selling and offering bundled products and services.

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Chillibreeze's disclaimer: This is a contributed article and was published on Chillibreeze in May, 2010. The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article. The relevance of the facts and figures cited (if any) could change after a period of time.

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