Modern Retail – Advantage Consumer

Retailing is big business globally. 10% of the world’s billionaires are retailers and 46 of the largest companies are in retailing. Supermarkets, malls and departmental stores are a familiar feature in the West but are now growing in developing markets, particularly in neighbouring Asian countries. The share of modern trade to total retail sales in China has grown from a mere 1% in 1990 to 30% in the year 2000 and from 5% to 40% over the same period in Thailand.

Considering that in 1997 the total value of retail sales in India was US $110bn compared to only US$43bn in Thailand, is India ready to changeover to modern trade?
There is early evidence of it in Shoppers Stop, Foodworld, and others and indications are that it will grow in the next five to ten years.

There are two forces driving this change. One of these is what I would call – The Consumer Pull and the other – The Push Away from Retailing. The new age, demanding consumer will force the shift away from traditional ‘bania’ shops and ‘boutiques’. At the same time, traditional channels of trade will find it hard to meet consumer expectations making retailing an unattractive proposition. The process is likely to be kick started by grocery stores as they have the lowest margins.

Research on buying behaviour has shown that consumers can be divided into two broad segments:

i) The higher income segment- made up of those who do not shop themselves, have very low involvement in this activity and whose monthly grocery bill would be a very low proportion of their salary.

ii) The middle and lower income group – made up of those consumers for whom grocery shopping is high involvement and accounts for one half of the salary. This segment is highly value concious and constantly looking for the best bargains. I call them the active shoppers. Add to this seduction of a deluge of free offers and promotions on virtually every product. This is bringing to an end consumer loyalty. Further, the  ‘bania’ is no longer a trusted friend – “he is always trying to shortchange us by not passing on the promotions or cheating on quality or weight.” And finally, the pressures of urban living make hunting for bargains a time consuming and an expensive proposition.
Modern retailing, characterised by value, variety, convenience and service for the consumer will appeal to this second segment. Supermarkets will allow consumers to interface more directly with the products, read labels, compare prices, avail of promotions and offers etc.

At the same time, there will be a push away from grocery retailing. Most grocery shops are run at very low overhead costs by third generation families. The properties are either owned by them or are at very low, old rentals. Salaries are next to nothing as the whole family chips in and they operate on low working capital as they trade on supplier finance. Trade margins on groceries are very low ranging anywhere between 8% to 15%. Were it not for the extremely low overheads, the retailers would find it difficult to survive on wafer thin margins. In addition, inventory management is a challenge in the small spaces that they operate from. The younger generation, however, is far more aware of the opportunity cost of the real estate or indeed of higher margin retailing opportunities that also offer higher social status. They will want to move on to newer business opportunities as they face the heat of competition from organised retail.

An appropriate model for modern trade in India must be based on a few key aspects of consumer behaviour. Grocery shopping is of two types-there is usually one big bag of monthly requirements for which the active shoppers will make considerable effort to get best value- and then there are the top up purchases done on a need basis. Ideally, a retail outlet should be within easy reach, use lower prices to combat credit from the regular store and offer home delivery. However, shopping ambience, convenience and services offered will be necessary but not sufficient conditions for attracting footfalls

Organized retail will explode in India since there is a willing market from the ‘active shopper.’ Given the prohibitive real estate cost and the lack of FDI in retailing, it is worth mentioning three different models that have tackled this well; Subhiksha in Chennai, a chain of stores within a radius of one to two kilometers has a single SKU in the ‘shop’. The inventory kept in the warehouse behind the shop ensures low overheads. The model works well in improving margins and making the proposition viable. Giants in Hyderabad, has fewer stores and targets both retailers and large consumers. It operates on the principle of bulk sales and volume discounts. The HLL store in Mumbai has a different model- consumers are given a catalogue and they can place their orders that are home delivered only on the phone.

Grocery shops are already beginning to stock items other than groceries to improve their margins. As supermarkets become popular they will pave the way for departmental stores as the consumer experiences the benefits of organised retailing and even the small boutique shops will not be able to match the big stores in terms of customer satisfaction and ROI.

There is no doubt that the consumer gains from this changeover. For manufacturers, however, there will definitely be a shift in power to modern trade with cost of servicing also being higher. That retailing will take this course is now almost inevitable and manufacturers should start thinking of building partnerships in the long run.

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