India – move early, advises expert

By V Rajesh*

 The Indian market is a strong attraction for any marketer simply because of the vast consumer base.

 It has a population of one billion plus, of which approximately a third live in urban areas. This is expected to grow to 40 per cent by 2030, enough to make retail – and especially food retailing – very attractive.

 But there is a flip side to the story – the intricacies of Indian Retailing. This is not written about often and is often lost in the debate surrounding the Foreign Direct Investment .

1.Competition: Apart from the thousands of corporate chain stores that now dot the Indian Retailscape, there are approximately 12 to 14 million conventional outlets. Of these, 60 to 70 per cent are grocery stores and one third are in urban centers. Taking into account the geographical spread of India, this simply means that there are far more stores in the cities and they continue to offer a compelling value proposition, fronted by convenience. Also, the conventional stores operate with a significant cost structure advantage and generate far higher sales per square foot because of their smaller size. This is indeed formidable competition in spite of their lack of sourcing strength.

 2.Indian cities: Barring a few newer cities, most have grown and morphed over the years. A substantial part of this development happened without zoning laws and therefore the cities have residential areas interspersed with commercial development. It is only in the past few years that well defined residential suburbs have come about and even that has not completely removed residences from city centers. As rentals are a big chunk of any retailer’s cost, this is of utmost importance in defining a cost structure. Assuming a higher ticket size will compensate for this might not be viable.

3.Supply chain: The sheer physical spread of the country makes for a challenge with regards to supply chain. Compounding this are the current levels of taxation and levies which do not allow for a distribution center network that can be planned based on distance alone. However, the intent of the government to implement GST is a step in the right direction, although when it will actually happen is not clear.

4.MRP: Although there are many instances of price regulation in the retail sector across the world, I don’t think many countries enforce the Maximum Retail Price (MRP) rule. This price is printed on product and is applicable on all packaged products. This price is used to calculate certain taxes and manufacturers peg the margin structure with regards to this. As a corporate entity, any chain store does not have the luxury of selling above this price and hence it acts like a glass ceiling. Even in high cost locations where the catchment might not be particularly bothered about the price, a retailer can sell only at MRP, whereas in price sensitive areas one is forced to discount, especially for KVIs.  

 By now readers may have concluded I have a secret mission to deter any international retailer from entering the Indian market. That is not the case! My intention is to portray a realistic picture that balances the huge market potential of Indian Retail with the ground realities that one would have to manage.

My suggestion to any international operator watching the Indian retailscape would be to plan an entry at earliest and to do so in the Cash & Carry route. Apart from being allowed by regulation, this would enable any retailer to build a ‘game changing’ back end infrastructure.

Take the food segment for example. It is no use focusing only on distribution centers, transportation, etc, as an entry strategy. This would address only 60 to 70 per cent of the household consumption in terms of CPG/ packaged products. Also, given the MRP scenario, there is a limit to how much value can be generated by focusing on the supply chain of these categories.

 Between 30 and 40 per cent of Indian consumption is of basic staples and grocery items as also fresh produce. Significant work needs to be done in this sphere to extract value from the supply chain. Being dependent on the same wholesale/ semi-wholesale chain with marginal infrastructure at the tail end will not help.

 Paradigm changing initiatives like end to end cold chain, cooperative/ corporate farm, etc, should be explored and indulged in to extract the value that is present, but is now lost due to damages and intermediaries.

 The APMC act not withstanding, such initiatives are possible and would provide a competitive edge to any retailer. In that context a cash & carry entry would help the retailer prepare the ground work which can be a viable business proposition by itself.

 The game changer for a new entrant would not be setting up yet another store with maybe better facilities but in offering a significantly better value proposition. And for that, the key would be the back end.

 * V Rajesh is a well known Indian retail commentator and thought leader, who has pioneered many retail concepts and innovations. His website is – http://bit.ly/vrajesh. Connect with him at www.facebook.com/retailsme

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