What is wrong with Indian Retail Industry?

At a time when an unexpected tectonic shift is happening in the global Banking, Financial and Insurance industry, a much expected shift in the Indian Retail industry somehow has failed to materialize. When organized retail set its roots in India a few years back and a number of major Indian industrial houses laid out their plans to enter into the Indian retail industry there was expectation across the country that there will be a dramatic change in the way we shop. People across social strata waited with bated breath for an opportunity to shop in world class environments, and government administrators along with industry analysts anticipated that taking root of the organized retail sector would result in the streamlining of process for a farmer to store supply chain, that would in turn result in elimination of middle men and would ultimately lead them in getting greater value for their produce. However a few years down the line what we have seen is a number of industrial houses trying out various different international retail formats with varied degree of success. Many major retail firms have started reining in expansion plans and are looking at increasing the profitability of their existing stores. This truly brings out a pertinent point, as to what is wrong with Indian retail and where has the bullishness vanished?

In the supermarket / F&V retail, many point fingers to the fact that the mom and pop stores are deeply entrenched in India and retailers are finding it hard to compete with them. But if one goes back in time and reads quotes by various retail heads, one will learn that a number of them had always said that organized retail will coexist with mom and pop stores and the idea was not to replace them. Though the premise might have been right, retail firms are finding it hard to even survive against them. The reasons are many. Believe it or not one of the main reasons could be the fundamental premise of the operations. The word “organized” itself for that matter. F&V retail stores seem to lose out to mom and pop stores because of some of the stated reasons like, a mom and pop store provides home delivery with cash on delivery which is something that a middle class family is used to. Once a relationship has been built with a store they just call the store owner and order what they want and the same is delivered by a delivery boy at home. Very few organized retailers have this facility. The procurement systems and IT systems that make a retail chain efficient, make it tough for a retail store to deliver goods at home with COD (cash on delivery), because the delivery boy will have to get a challan, and then get payment and then enter payment in system. Billing without payment would be extremely difficult. It would complicate the supply chain and stock management systems a lot. Plus there is the employee risk. A mom and pop store is owned by a person who brings in 4 boys from his village, provides them accommodation, food and pays them a low salary. These boys stick around because they learn everything about running the store and 4 years down the line invariable leaves to start his-own store. Then the owner gets 4 other boys. In a retail chain, employee attrition is high and entrusting him with valuable goods is a risk!! Background checks during recruitment are extremely difficult because of the high rate of employee churn. Secondly if i were to walk into a mom and pop store and look for a product that is not available, the owner invariable will commit to get the same and either deliver it to my residence or call me once it arrives. He will procure the same from another store or from even another state. I recently went to a store looking for a kitchen knife that is typically available only in Kerala. The store owner promised to procure it in a week and give me a call. The same was indeed done. Expecting the same of an organized retail store is wishful thinking. The store manger would have to identify a vendor, get the vendor registered, roll out the order to the vendor, and get the price accepted by a local or central procuring team before he can even sell it. Its way too difficult and hence the answer that will be given is “sorry sir…not possible”.

The other forms of retail like discount stores, hyper markets etc…have been bogged down by extremely high real estate prices and these stores though they might have extremely high foot falls the conversion rates or sale per sq.ft is very less. This is typical of the Indian market place, Indians are value consumers. They generally buy stuff in smaller quantities. A parallel can be drawn with the telecom industry. Though India has one of the largest telecom subscriber base in the world, the average revenue per user is the lowest in the world. The same is the case with organized retail, the bill sizes are invariably low, though the urban middle class does buy weekly or monthly purchases, on an average things are still low compared to the global average.

Retail majors try differentiating themselves in terms of customer shopping experiences. That is the buzz word in retail these days. However, this comes at a tremendous cost, the prime locality store, the air-conditioning, the lighting, etc all of it adds to the overheads. This again makes it harder to compete with smaller stores. In fact, the higher overheads reduce wafer thin margins even further.

Then here has been what can be called the ‘anticipation-reality’ gap. The Indian consumers…when they heard of organized retailers entering had hopes high. People wanted international shopping experiences at rock bottom prices. But the reality has been that to get that shopping experience they yearn for, they need to pay a premium and this has led to the ‘anticipation-reality’ gap. A successful format for many retailers has been the consumer electronics chains. These stores give low cost with good customer experience. But the problem is the gestation period for the same to break even is far too long.

So what is the way ahead for Indian retail? Well most retailers have become circumspect. They have reined in ambitious expansion a plan…that is a start. The massive expansion plans led to dearth in availability of quality real estate, which led to a huge rental rate boom. Reining in investment plans and the turmoil in the global financial markets will definitely reduce the rental rates which will give dramatically increase viability.

Indian retailers need to focus on private labels, (store owned brands), this will definitely help increase margins. Increasing margins should be the objective. Loyalty programs do work. But that might not be the way forward as the cost of retaining a customer (greater discounts, rewards, maintaining the systems) could out way the benefits if the average revenue per user remains low. Loyalty programs need be linked to bill sizes.

Indian retails need to try reduce other overheads. A possible way could be going green. Redesign store for natural light to work its magic, stop using air conditioners, move towards jute bags at point of sale that can be used over and over again instead of using plastic, insist on customers bringing the same each time they shop.

Indian retails should also look at family packs. Small sized packages of all essentials a normal Indian family would need to cook for a week sold as a package to the customer. Some retailers are already trying this, and these family packs could attract a lot of the middle class.
But in the end, the real key to success is “empowerment of workforce”. Walk into any retail store today, the employees manning the store seem un-interested, display a lack of ownership, and turn to the store manager for the smallest things. They work long hours and are paid relatively low salary packages. Under such circumstances, empowerment can do a world of good. Retailers should try putting the nameplate of all store employees at the entrance, get them empowered, give them the freedom to fulfill certain customer wishes despite the system. Let them take ownership of delivery. Make them believe its their store, and even ask them to sign a partnership agreement that has given metrics, like store market share in the area, the profitability of store etc. Based on the same the employees could be rewarded for their great work.

In the end everything is about relationships, and to build relationship with customers for retailers, empowering even the lowest rung employee is the key.

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Karthik Ananth
Engagement Manager
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