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RETAIL SPECIAL | BRAND BEHAVIOUR

By Saumya Roy, MINT (Partner to the Wall Street Journal)
9 December 2007

Jay Goradia, a 25-year-old engineer, walked into a hypermarket in suburban Mumbai looking for shampoo and some other personal care products. A little while later, he walked out with an expensive cellphone, along with the shampoo.

"The disadvantage of malls is that you end up buying more than you intended to. Things are displayed in such a way in a mall that you tend to get tempted," he says with a grin. Goradia says he loves hanging out at the new branded retail outlets which are changing the landscape around his home in Mumbai’s western suburb of Kandivli.

As organized retail spreads, shoppers such as Goradia are lapping it up. It is changing the way they live, and the way they spend their time and money. Shoppers do not look at organized retail as a cheaper alternative. They do, however, love the convenience these outlets offer them-they can buy everything they want, eat and be entertained at one place.

Currently, organized retail forms just 3% of India’s retail industry, roughly estimated at $330 billion (approx. Rs13 trillion), but it is set to grow to 16% by 2015, according to estimates by Technopak Advisors, a New Delhi-based retail consulting company. To tap this market, major players such as Future Group, Reliance Industries Ltd, Tata Group, Aditya Birla Group, K Raheja Corp., and Mahindra and Mahindra Ltd have announced mega investments in the sector. The success of these plans, however, depends on the response of the Indian consumer to the organized retail format.

Mint, in association with Pitch, a monthly marketing magazine published by Adsert Web Solutions Pvt. Ltd, a Delhi-based media organization, and Synovate India, the market research arm of Aegis Group Plc., conducted a survey to track consumer response to organized retail.

The survey findings are based on interviews with 2,787 women shoppers in Mumbai, New Delhi, Hyderabad and Indore over August and September, and indicate the retail brands people like, as well as their shopping preferences.

Mint’s survey shows that shoppers are shifting from traditional retail to branded retail outlets because of the variety, and what they perceive as better quality and fresher produce.

"Traffic congestion and commuting difficulties that are prevalent in India drive consumers to the best single destination for shopping. This is the single biggest reason for the success of one-stop shops," says Andrew Levermore, chief executive of HyperCity Retail (India) Pvt. Ltd, a hypermarket in Mumbai’s western suburb of Malad.

The survey shows that 45% respondents visit branded retail outlets once a month, and one-third of all their shopping happens in organized retail. The signs of growth are visible everywhere. Big Bazaar, the hypermarket chain from India’s largest listed retailer, Pantaloon Retail (India) Ltd, had around 55 stores in June; it’s aiming at around 120 stores by next June. Subhiksha Trading Services Ltd had around 670 stores in March; it expects this figure to cross 1,300 stores by March 2008.

The survey also showed how the creation of supply-more organized retail-is creating demand; the market is open for companies with ambitious expansion plans. At the moment, some of the stores that were most visited in one city are yet to find their feet in other cities.

Trinethra, which was the most visited in Hyderabad, doesn’t have a presence in any other city. Reliance Fresh is most visited in Indore; it is just in the process of opening in Mumbai. Like others, both Reliance and the Aditya Birla Group, which owns Trinethra, plan a nationwide chain of stores.

So, chains that manage to bag the best locations while keeping rental costs down could have an advantage. Retailers say they find Mumbai and Delhi the hardest cities in terms of finding space. This may be why organized retail is somewhat restricted in these cities, compared with Hyderabad and Bangalore. That may also be why just 19% of all consumer spends happen in Delhi’s organized retail outlets, compared with 45% in Hyderabad.

Despite the limitations, however, the buzz can be felt at organized retail outlets everywhere, with shopping carts virtually locked in traffic jams on weekends. More and more people are hanging out at these stores, where a growing range of products entice-leading to more sales for newer products and categories.

At Big Bazaar, which emerged as the most visited store in the Mint survey, electronics and mobile phone-categories that were introduced only last year-now account for about 6% of sales. At Crossword Bookstores Ltd, the 50-store chain which was the most preferred in its category, sales for non-fiction-traditionally considered a less-read category-rose 30% for the six months ended in September, compared to the previous six months.

Goradia visits Inorbit Mall at least every other weekend. He might go to see a movie or hang out with friends-but it often leads to temptation, and shopping. Around Diwali, he bought a washing machine, fridge, grinding machine, food processor, television, water purifier, DVD player and an air conditioner for his new home-all from one shop-in one day. While he had checked out prices at other stores, Goradia bought everything from one store because prices were competitive, and it was convenient. He also bought some things he had not intended to.

Consumers may be enjoying the convenience of one-stop shopping and entertainment, but they aren’t yet seeing the retail revolution drive down prices. Most consumers surveyed said they do want to see prices come down in organized retail.

In fact, pricing is one area many retailers are concentrating on as the number of retail chains grows. Several are competing to offer the steepest discounts. Vishal Megamart, a unit of Vishal Retail Ltd, offers discounts by stocking more products under its label-these are 30-50% cheaper, according to Vishal’s chief executive Ram Aggarwal.

Subhiksha, which is the second most visited store nationally, competes with Big Bazaar by offering branded consumer products and mobiles at lower prices.

"Our national footprint is one year old vis-a-vis Big Bazaar, which is five years old. They have two to three times our floor space. But, given the patronage and the USP that we have, it can’t be long before we become the largest-we could be (getting) there even as we speak," says Subhiksha’s managing director, R. Subramanian. The chain opened its first store in Chennai in 1997, expanding to cities across India much later.

Some things aren’t clear yet. For instance, shoppers said they would like to see better packaged and better quality products. But retailers seem divided over whether Indians like traditional, open displays of products, or whether they are taking to packaged food.

Sales volumes of packaged vegetables and other food have increased by 80% year-on-year at the nearly two-year-old Hypercity. At Big Bazaar, vegetables displayed in open baskets and bins do better than packaged ones. "Indian consumers respond to visual cues, such as touch and feel, to decide what they like and (what they) don’t," says Big Bazaar head Rajan Malhotra.

Shoppers are deterred by long billing lines and the lack of parking and shopping space. Goradia says he wishes malls had a centralized database, so consumers could get information on the prices at every store. Ridhi Kasurde, a 29-year-old beautician who lives near the Phoenix Mills mall in Mumbai, says she stopped shopping there because her local shop delivers her monthly groceries at home. "I don’t have to stand in queues for half an hour, and prices may be the same, or cheaper," she says.

Retailers are, in fact, grappling with issues such as how to deal with the growing crowds on weekends and evenings. Big Bazaar gets as many customers between 6pm and 9pm as it does between 10am and 6pm. Inorbit could get as many as 75,000 visitors on a festive weekend, such as around Diwali. On other weekends, there could be as many as 45,000 people at the retail outlet. It is no wonder, then, that Malhotra visits the stores between 11am and 2pm on Sundays.

Despite any reservations they may have, shoppers seem to love the deals and the buzz of organized retail. Mint’s survey indicates that consumers like advertisements which give information about new products and discounts.

"From a consumer perspective, advertising on national television does convey reliability and credibility," says Devangshu Dutta, chief executive of Third Eyesight, a New Delhi-based retail consulting company.

One indication of how things could play out comes from Hyderabad, home to some of the oldest organized retail stores. Mint’s survey indicates that 53% people go to branded retail outlets once a month in Hyderabad, compared to the national average of 45%. It also shows that 45% of their spending happens in organized retail in Andhra Pradesh’s capital city, compared to 33% nationally. Crossword opened its second bookstore in Hyderabad last year, and sales this November were 20% more than last November, says Aniyan Nair, Crossword’s head of operations and marketing.

"It’s not a surprise," says Malhotra. "Consumers there (Hyderabad) are comfortable with retail because organized retail started earlier."

Other cities are getting there. "Now, people don’t go to a store with a list and just buy off it," says Third Eyesight’s Dutta. "They don’t go to stores and ask for whatever shirts there are in their sizes to be taken out from closed boxes. Instead, they see everything on a shelf and may end up buying a tie along with the shirt they saw on the shelf."

SMALL TOWNS, BIG GAINS

By Vikas Kumar (The Economic Times – 26 November 2007)

Small is the new big. Small towns, that is. With demand nearly peaking in larger cities, companies are realising that there are plenty of untapped opportunities in the next level. And if you are small yourself, it could be the perfect alternative to taking your bigger competitors head-on or waiting until you are big enough.

A host of emerging companies in India are adopting this route to grow. They are starting small with tier II and III towns where the competition may not be as fierce, and entry barriers are lower. With rising real estate and manpower expenses, companies with limited resources have discovered that it’s a better idea to tap second and third rung cities because they offer lower operating costs and an audience that’s more ready to buy into their proposition.

Surya Foods and Agro, which started in 1993 as a biscuit manufacturing company is now a pan India foods player with an estimated turnover of Rs 400 crore this year. Founder and MD Ballabh Prasad Agarwala, who comes from a family business of biscuits manufacturing in Kolkata, chose smaller towns in North India to grow his network. From Noida, Agarwala tapped the UP market, later moving on to Punjab and Haryana, among other states. Today, the Priya Gold brand continues to be a North-centric brand with an estimated 30% share of the market according to Agarwala. However using its small town strategy, it has managed to establish itself in other metro markets like Delhi, as well.

Agarwal says the key has been in identifying gaps in the strategies of entrenched behemoths like Britannia and Parle: “Where they cannot reach, we have reached out to consumers with a more affordably priced offering, good quality and packaging. We launched our products with prices that were 30-40% lower than those of big brands.

Today, though we still don’t compete directly with them, we have established our presence in a significant way in the biscuits category,” he says. The company has since entered the packaged fruit juices category with its Fresh Gold brand, and very recently in the aerated fruit drinks segment with its Fresh Fizzy brand. Having filed the Draft Red Herring Prospectus with SEBI to raise Rs 136 crore from the markets, Agarwala is bracing for an IPO that could happen over the next couple of months.

Says Devangshu Dutta, CEO, Third Eyesight, a Gurgaon-based retail consultancy firm, “A number of companies and their founders are originating from small cities, unlike before. These players understand the socio-economic mileu better. There is also an underlying broadening of the consumer base due to improved socio-economic conditions.”

Another Kolkata entrepreneur who shifted base to Delhi six years ago has also been banking on small town India for business. When he launched his mass-market retail brand Vishal Retail in Delhi, Ram Chandra Agarwal was clear that his model would leverage the spending capacity and undertapped aspirations of consumers living beyond the metros.

So, nearly 80% of Vishal Retail stores – currently 70 and totaling 1.7 million sq ft under operation – are located in Tier II and III cities like Patna, Dhanbad, Haldwani, Ludhiana, and Bhubaneswar. “That has been our strategy from day one, as real estate and manpower costs are very reasonable in these towns and competition is less fierce, so we get the first mover advantage in establishing our brand,” says Agarwal, adding that smaller centres have been contributing significantly to the company’s revenues of Rs 603 crore (for 2006-07).

It’s not just in existing categories – companies in new categories are also venturing into the Indian heartland to capitalise on the business potential from small towns. Online DVD rentals company Seventymm.com, which was founded a year and a half back with funding from Matrix Partners, Draper Fisher Jurvetson and ePlanet Ventures, initially focused on the top six cities in India.

After fine-tuning its operations and acquiring the necessary learning from the metros, the company is planning its next phase of expansion into Tier II cities like Jaipur, Agra and Lucknow. Says its COO Subhanker Sarker, “Research shows that roughly 55% of C&S penetration in India is outside the top five cities. Since we are in the home entertainment business, a significant proportion of our consumers will come from those smaller cities.”

Earlier this year, Seventymm acquired Chandigarh-based competitor Madhouse Media, and Sarker says he’s now looking at a hub-and-spoke model to expand in new markets. So for instance, the Delhi hub will service cities like Jaipur, Agra and Lucknow, while Mumbai could cater to the Pune and Ahmedabad markets.

With a targeted turnover of Rs 100 crore from rentals within the next three years, Sarker says 25% of this is likely to come from Tier II cities. The company is investing in a robust delivery and collection mechanism, particularly reverse logistics – transportation of rented DVDs from customers back to the company – using its own trained personnel. While this infrastructure will help over the longer term, Sarker says there is one key difference in the way customers in smaller towns tend to transact.

"Based on our experience so far, we find that these customers are more skewed towards offline ordering and payment modes (as opposed to internet-based ordering and payment). So we’re exploring the possibility of setting up offline counters, possibly by partnering with modern retail chains, to address customers who are more comfortable with physical browsing and ordering of titles.” The home video market in India is estimated at Rs 600 crore annually, of which rentals presently contribute 50%.

Another beneficiary of this boom have been the real estate companies, which are making a beeline to smaller cities. Noida-based real estate company Assotech, which is building residential townships and commercial facilities for corporates in Ghaziabad and Gurgaon, is one such player. Its first hotel project— a 5 star —is coming up in Patna, in addition to several new projects in cities like Bhubaneswar and Gwalior. Chairman and MD Sanjeev Srivastava says, “We can’t compete with the entrenched players in the hospitality business in the metros. But in cities like Patna, they just can’t beat us.”

Even the aviation sector is taking wings in the newly opened regional routes that connect Tier II cities. And medium sized companies with little experience in aviation are entering the sector to tap this opportunity. In addition to the growing passenger traffic on regional routes, there are passengers who have to fly from smaller centres like Trichy or Coimbatore to Chennai to board an international flight. It’s this segment that new carriers like Air Dravida are planning to tap. Says Ramachandra Iyer, CEO, Air Dravida, “We are expecting the new international routes via the smaller cities to increase the international traffic by 20%, which gives regional players like us immense opportunities to operate profitably in the sector."

THE COLLARED, THE CUFFED, AND THE CHUFFED

THE ECONOMIC TIMES, 24 November 2007
Ashish Kumar Mishra & Irshad Daftari


On 15th November, an anxious group comprising 11 representatives of the textile & clothing industry of India and heads of four banks called on the finance minister, P Chidambaram. Every member painted a doomsday picture of the industry, outlining the fall in exports because of the appreciation of the rupee, infrastructure bottlenecks, cross-subsidy that the industry has to pay for power and delays in funding under the Technology Upgradation Fund Scheme (TUFS). That lasted for about 70 minutes, but it could have continued indefinitely, high as the group was on emotions.

A member in attendance says, “The minister gave us a very patient hearing.” That’s all the finance minister can do, unfortunately. As India’s economy becomes richer, its currency will continue to appreciate and put many industries “on the barge”. Jack Welch, former CEO of General Electric, once talked about ideally having “every plant you own on a barge”. His reasoning was that factories should float between countries to take advantage of lowest costs, be they due to under-valued exchange rates, low taxes, subsidies, or plentiful supply of cheap labour. Welch’s barge is a reality, thanks to globalisation. Whether anybody likes it or not, the textile industry is on the barge that can sail to Bangladesh, Vietnam or Sri Lanka at any time.

So is this end of the road for the textile industry? Yes—in the present form. But if textile companies can do what Bombay Rayon, Himatsingka Seide, Provogue, or Alok Industries did then it can crawl out of the hole it is in right now. Mind you, these companies haven’t got it all sorted out, but they indeed are the pick of the lot. They have followed a differentiated strategy and avoided the pain of the conventional textile manufacturers.

There are two things that can’t be denied. One, that the pain of the industry is real. Two, if the companies are willing to change their business model they can survive—not everyone will, but some will not only survive, but even thrive.

Consider the pain first. During April-May 2007, exports of cotton textiles declined by almost 20%. Exports to the US, which is the dominant market for Indian textile manufactures, witnessed a steep decline between January and September 2007, growing only 1.5%, compared to 12.5% last year. Industry associations are yet to study the total impact but predictions of huge collateral damage are rife. Says Prem Malik, chairman, The Cotton Textiles Export Promotion Council (TEXPROCIL), “Almost 45,000 jobs have been lost in Tirupur most of which are either badli or contract workers. We expect that during this year almost 5,00,000 jobs will be lost.” Several exporters say that they have already lost their shirt because of the rupee appreciation. After all, if the dollar appreciates 15% in value for a business that works on margins lower than 10%, it’s a recipe for disaster.

Stay away from the commoditised

But this is bound to happen if you are locked into a commodity segment with paper-thin margins. This means you are competing with really low-cost Chinese textile companies on one hand and negotiating with tough buyers like Wal-Mart on the other. But the companies that are willing to build a brand and compete in domestic market or select high-value export market segments can still make respectable margins.

Says Prashant Agarwal, managing director, Bombay Rayon Fashions, “The overall impact of the rupee appreciation is there but then a lot of it depends on the business model of the companies.” To their detriment, very few companies actually invested in improving productivity. The abolishment of quotas in 2005 and the subsequent spurt in exports lulled exporters into a false sense of security. Most firms focused on short-term gains. Says a manufacturer, “Though there was heavy capital expenditure in the last two years, a lot of it was in existing technology. Not many manufacturers have thought in terms of investing in completely new technology.”

A single-minded focus on exports and in a pure-play commodity environment, i.e. cotton textiles, meant that Indian manufacturers potentially neglected a domestic opportunity and one to add value.

Focus on the Indian market

Earlier this year, the IMAGES-Technopak Annual Apparel Report suggested that the entire clothing, textile and fashion accessories market stood at Rs 113,500 crore. If one were to work backwards and consider only clothing and textile, it alone stood at nearly Rs 101,000 crore and registered a growth of nearly 15% over the previous year. Add to this rising disposable incomes and declining share of spends of food. Adds Nikhil Chaturvedi, MD, Provogue, “Apparel retail in organised retailing has been growing over 30% annually.” The export market works out to Rs 72,000 crore ($18 billion in FY2007). Clearly, the domestic opportunity is much larger and growing really fast.

It would seem that many companies have hugely underestimated the opportunity in the domestic market by focusing entirely on exports. “Many companies felt there is more money to be made from exports when compared to the fragmented domestic market,” says a senior Trident Group official. Also, many exporters were simply not comfortable with the idea of selling small lots locally and dealing with many buyers. Says a consultant, “The local market is less transparent and requires a different mindset from exports, but not many exporters think they can actually make the transition to addressing the domestic market.”

Provogue was one of the early movers to recognise the potential of the domestic market, and got out of the export business many years ago. Today, after huge investments in brand-building, fashion and retail, it is one of the best known Indian apparel brands. The Classic Group from Tirupur, one of the biggest manufacturers of menswear, has launched a slew of brands under the brand-name Classic Polo for the domestic market. The Creative Group, another huge exporter from the South, has launched its brand Fahrenheit 109 in big retail stores. Sources also say that Gokaldas Exports, a company that has manufactured for everyone from Nike, Gap, Diesel and Old Navy, is in the process of finalising a foray into brands, after its retailing foray, The Wearhouse.

Premal Udani, chairman, Clothing Manufacturers Association of India, and managing director, Kaytee Corp, has also looked beyond exports after being one of the most vocal critics of the appreciating rupee. He says, “We are supplying some of our goods to Pantaloon and Shoppers Stop, and we are also thinking of setting up our own brand.” Mr Udani still believes that organised retail has a long way to go before it can really drive demand away from the export market.

Pick the high value export segments

However, there is no point in competing in commoditised export market, which is where nearly 70% of India’s exports fall. In this category, the Chinese and even the Pakistani and Bangladeshi exporters undercut Indian manufacturers. While labour costs would be at par across these countries, India lags on the scale and technical expertise.

In China, for instance, almost 1 million spindles operate under a single roof, compared to 600,000 spindles in an Indian manufacturing unit. Says Mr. Agarwal, of Bombay Rayon, “If the manufacturer is selling basic garments without any value-add, which are more like commodities, then he has absolutely no pricing power and that is a threatening proposition during unfavourable times.” In effect, Indian textile exporters have to look at growing the 30% value-added exports to a figure far higher.

Value-additions have had tremendous benefits. For Himatsingka Seide, a high-end silk textile manufacturer, it has meant a lot of buyers that would be willing to pay top dollar. Their products are often bought by luxury brands or high-end retailers. Explains Aditya Himatsingka, executive director, Himatsingka Seide, “With high-end, high value-addition in silk, a buyer has limited bandwidth. He can’t go to many buyers like he can with cotton textiles. We can work with margins as high as 30% compared to 10% margin that the commoditised textile manufacturer makes.” Of course, Himatsingka’s volumes would be comparatively lower, but the company makes up for both the rupee appreciation and low volumes through the margins.

Design, as Bombay Rayon has shown, can be a huge value-addition for a textile manufacturer. The company has design studios in London, Amsterdam and New York. As a result, says Mr Agarwal, “There is a huge amount of detailing and development that goes into our products. Our typical mark-up is almost 500-600% on the product. That is the pricing power that we command.”

Go green for greenbacks

Sometimes, it is just great value to do good for all your stakeholders. Two years ago, Alok Industries discovered that there was a latent demand from customers for organic cotton products. They jumped right in. Says Dilip Jiwrajka, managing director, Alok Industries, “We realised that the demand for organic cotton is huge. Now almost 20% of our products are made from organic cotton which has resulted in a real jump in our profits and topline.” In fact, Alok Industries has booked almost 1,80,000 bales of organic cotton for this year and there are more customers in waiting. Today, leading brands like Nike, Marks and Spencer, CO-OP, Patagonia, Timberland and Wal-Mart are already selling organic lines and the demand for organic cotton fibre is expected to grow to almost 100,000 metric tonne in 2008 from 40,000 metric tonne in 2006, more than double in just two years.

Yet, there is still further room for innovation and establishing further niches. Man-made fibres like nylon and polyester are slowly replacing natural fibres like cotton and linen globally. Yet, very little of the value-addition takes place beyond cotton textiles and silk. Says Devangshu Dutta, CEO, Third Eyesight, a consultancy that has worked with some of India’s leading textile companies, “Our competitive advantage over other countries isn’t in the manufacture of raw material. It is in design and product development, and if that means importing nylon and polyester to implement designs then companies shouldn’t shy away from the opportunity.”

Surviving the textile meltdown won’t be easy. Unlike the Indian IT industry, other countries in East Asia can offer a real alternative to India. Only if Indian firms can differentiate, invest in machinery that can help them raise productivity and improve speed to market (see box) can they compete. Otherwise, no amount of government policy changes will save them.

Executive Q&A – RETAIL DEVELOPMENTS IN INDIA

Source: American Shipper – Namaste, November 2007

Few analysts speak with more clarity and insight about a subject than Devangshu Dutta does about Indian retail supply chain logistics. Third Eyesight is a Delhi-based company that helps textile, consumer durables and perishable shippers set up their Indian supply chain. Namaste spoke with Dutta about a range of retail supply chain topics, including why retail can sometimes be a dirty word in India, and why India’s roads might not be as bad as you’ve heard.

Namaste: Retail is a word that evokes extreme reactions in India. Why is that so?

Dutta: Developments in retailing are no more or no less divisive than any other change that is widespread in society. The fact is that the retail sector touches each individual as no other does. So whether you are a consumer, a retailer, a vendor, a service provider or a policymaker, it is difficult to adopt a distant approach.

The last 10 years have seen a tremendous amount of investment in modern retail and its supporting infrastructure in the form of shopping centers in India, and they are possibly the most visible dividing line amongst all development. This is due to several reasons.

While the environment within a shopping center may be world-class, no similar investment is seen in the high streets where the traditional retailer makes his living — whether in terms of commercial or civic infrastructure.

While the shopping center developer is increasingly planning his center impeccably, there is little regard still to the surrounding catchment, whether in terms of merchandise mix, or in terms of integrating with the urban infrastructure and landscape. In many of the centers, there is minimal traffic planning with regard to the surroundings, resulting in chaos over the weekends.

Simultaneously, large retailers are beginning to emerge in the country and are counted as legitimate targets for pressure and lobby groups of small traders, farmers, residents, non-governmental and trade organizations. In this, India is actually no different from other countries — witness the anti-Wal-Mart feeling in many communities around the U.S. or the talk of "Tesco-poly" in the U.K., or the strict planning norms regulating the growth of large format retailers on continental Europe.

That may not be the case with other countries where similar debates may be suppressed or may have limited visibility.

Namaste: Would it be fair to say the emergence of the domestic retail sector in India seems to be pushing retail logistics as much as foreign logistics companies or retailers? If so, how will foreign companies benefit?

Dutta: Logistics and supply chain developments are certainly being pushed along by Indian retailers and brands as much as international ones. The larger Indian companies, especially in the food and grocery sector, are aiming at adopting best practices and adequate infrastructure to be able to compete effectively against the operational skills of their foreign competitors. Most of them can skip generations when looking at supply chain standards, and do not necessarily need to go through the same decades-long adoption and discarding or legacy systems.

Foreign companies would also definitely benefit from this. Any development in one retailer’s supply chain typically spreads in ripples or waves through to other retailers as well, since most vendors are not dedicated to any single retailer. For instance, even if a specific physical link (such as a cold storage) may not be available to more than one retailer, the process excellence leaks across a vendor’s organization to benefit his other customers as well. Similarly, the standardization of UCC/EAN bar codes will not just benefit the initial founding retailers, but also others along the way.

A foreign company stepping in after these developments have been initiated by Indian retailers would find the environment more conducive to its own processes and standards.

Namaste: What can Indian logistics services providers learn from the influx of foreign interest and expertise in India?

Dutta: Foreign retailers expect to upgrade from the current fragmented state of the Indian industry to norms that they operate under in other markets. This provides an opportunity to Indian logistics service providers to grow and develop, but is also a threat to their existence in case they fail to change their businesses to adapt to the new needs.

Indian service providers need to look at rapidly upgrading their physical infrastructure, skill sets and systems. There is significant interest amongst international logistics firms to tap into the booming Indian market, and Indian service providers can be their partners, to mutual benefit. The Indian companies would stand to gain from the technical know-how, and possibly even from customer relationships, while the international companies can quickly gain the local base and ride on the local know-how of their Indian partner.

Namaste: Infrastructure is the first word out of people’s mouths — in India and abroad — when the potential barriers to India’s success are mentioned. Is the country’s infrastructure, as it relates to cargo movement, really as bad as it’s made out to be?

Dutta: I would say that the infrastructure is a lot better than it is made out to be, and is getting better still. But this is one area where China stands in stark contrast to India, where China has an infrastructure surplus while India runs into severe deficit. Peak traffic, such as shipments of summer clothing at the end of the calendar year, make the bottlenecks painfully evident.

The second bugbear is documentation and regulatory process, which again has gotten simpler, but needs to be simpler still. VAT does not yet uniformly apply across the country, several check points exist between and within states that hold up cross-country cargo traffic. This not only adds time but also cost.

Namaste: Do you think the major retail chains who have been itching to get into India will find the success they’ll be looking for, and do you think they’ll have the patience it takes to learn the Indian market?

Dutta: In my recent experience, most major retail chains looking to enter the Indian market realize that it is a different world from what they are accustomed to. They are prepared to develop business plans cautiously, and with a long-term perspective. The chief executive at one of our client organizations said to me, while we were discussing its potential branding strategy in India: "I see India as a market that will pay off in the next 20 to 25 years, not just give us a quick buck in the next five years."

Some have also learnt from their bitter experiences in China, which also attracted companies with its billion-plus population, but proved to be a burial ground for many reckless projections and strategies imported from the West.

Namaste: Are Indian consumers — particularly those outside of the cosmopolitan urban areas — ready to embrace retail, and if so, what product categories are they most likely to embrace?

Dutta: The Indian consumer is more sophisticated than most people believe, and adapts new offerings at a very rapid pace. This is true across product categories. The growth of mobile phones amply demonstrates this. Not only have basic mobile services grown rapidly, but also value-added services.

However, the price/value equation has to be right. Just because a retailer has a swanky, air-conditioned store does not mean that he can automatically charge a hefty premium over traditional retailers. Again, mobile phone companies are a great example — with the correct pricing, their penetration of even premium services such as caller tunes, song-catcher, messages and calls to premium numbers, etc. are prevalent not just in the metros but in semi-urban and even rural areas.

Retail is similar, the only major difference being that due to the need to put down physical stores, the growth is more organic and looks staged rather than explosive. However, the growth of shopping centers anchored by the Future Group in smaller towns, or the aggressive launch of Reliance stores demonstrate the willingness of the Indian consumer to also constantly evolve, regardless of where they are based.

Namaste: What sections of the retail supply chain, specifically, need to be improved to make them as efficient as they’ll need to be to meet the expectations of foreign retailers and transportation and logistics companies?

Dutta: Roads, truck fleets, distribution centers all need to be upgraded, and are being. Some Indian companies — Reliance is a notable example — are even pushing this along and act as a domestic benchmark. Reliance has not only set up a logistics company, but is also looking to manufacture trucks in a joint venture with Volvo, to fulfill Reliance’s own requirements.

However, I believe foreign retailers will themselves evolve a different mix for India, rather than sticking to their home-base business models. I believe India, and possibly China, actually changes companies as well. We might well find that these companies will also carry back innovative practices to their home base from India, as much as they bring in.

Namaste: Could you give a particular case you’re aware of where improved supply chain efficiency from a retailer influenced that retailer’s competitors to become more sound logistically?

Dutta: ITC’s rural initiatives — contract farming, e-Choupal — have created copycat initiatives from other companies.

In the mid-1990s Spencer’s began pressing its FMCG suppliers to bypass the distributor channel but were only somewhat successful at that time. As they and other retailers have gained size and weight, the tables have turned, and FMCG (fast moving consumer goods) companies have even begun creating separate key account business divisions to service large retailers.

McDonald’s had to create its supply chain from scratch before launching in India in 1996, and it did so with its supply chain partners from other markets which it paired up with Indian companies. These companies have then gone on to service other customers such as Domino’s and Pizza Hut, and some have also created their own brand of products (e.g. sauces, baked goods) to distribute in the wider market.

Smaller Brands Jostle with Elite Goods on Big Retailers’ Shelves

Mint (partner to the Wall Street Journal), New Delhi – 8 November 2007

By Rasul Bailay

The shopping shelves of the Food Bazaar supermarket in Indirapuram outside New Delhi are stacked with well-known brands such as Britannia biscuits, Tropicana juices or Heinz ketchups. Sharing the shelves are a host of obscure brands such as Lancer biscuits, Chintamani namkeen and Fruitfil juices.

As millions of Indian consumers graduate from the traditional small mom-and-pop stores to the legions of emerging branded stores, modern retailers make sure that the consumers don’t lose out on small local brands that are relatively cheaper and are an integral part of the consumers’ grocery baskets. "It provides choice and value to the customers," said Arvind Chaudhary, chief executive of food business at Pantaloon Retail (India) Ltd, which owns the Food Bazaar chain. "Consumers need these products anyway and it completes their shopping baskets."

No wonder Food Bazaar and its hypermarket version Big Bazaar stock Prakash namkeen, Jade cookies, Manyos noodles, Nilon pickles, Garden farsan and Maniar brand of khakra (Gujarati snacks) among other local brands, constituting up to 15% of the hypermarket’s total processed food category.

Retailers say local brands are mainly targeted at price-sensitive customers. Sunil Jain, head of merchandising at discount retailer Vishal Retail Ltd, said local products are up to 20% cheaper than well-known brands. "We have all types of consumers, middle-class to lower-end," said Jain. As far as local brands are concerned, "we buy them at lower price and sell them at lower price."

Local brands also ensure better margins compared with the paper-thin margins by established brands. Vikas Srivastav, chief operating officer of Express Retail Services Pvt. Ltd, which operates 65 "Big Apple" grocery stores in the New Delhi region, said margins for local brands are 5-15% higher than known brands. Local brands constitute almost 12% of the firm’s product portfolio, he said.

Devangshu Dutta, chief executive of consultancy firm Third Eyesight, said the margins provided by local brands could be 15% more compared with a national brand, and it could be as high as 30%.

Mohit Khattar, president of marketing for discount retailer Subhiksha Trading Services Ltd, said in most cases the local products are "typically food products that are popular, but are not manufactured by the Hindustan Unilevers and the P&Gs of the world." He said low distribution cost and near non-existent marketing expense of local brands ensure better margins for retailers.

Pantaloon said the firm inspires local brands as part of a programme called Ethnic Food Development Programme. "We encourage them to put their products on our shelves, hand-hold them and ensure their products get visibility," Chaudhary said. The firm has even "adopted" some of the local brands as part of its private labels. There are even counters and shop-in-shop units for small brands in many Big Bazaar and Food Bazaar outlets.

Chaudhary said Pantaloon gives suggestions to small- and mid-sized firms on products, and help in their packaging by hooking them up with the Indian Institute of Packaging and other such groups.

DIG To Find Hidden Gold

BOOK REVIEW: HIDDEN IN PLAIN SIGHT: Erich Joachimsthaler

In the midst of extensive or frequent civil works, fluorescent high-visibility clothing contributes to the invisibility of the individual, and can serve as a superb disguise. Similarly, in the midst of extensive research and in-depth analyses, basic insights can go unnoticed.

Erich Joachimsthaler has plenty of examples in his book Hidden in Plain Sight to drive home the point that attention to stuff that is not so obvious to competition can lead to brilliant success such as Sony’s growth through innovative products (the WalkmanT, for one) that met unexpressed consumer needs. Conversely, an inability to spot this can bring even the leaders down, illustrated once again by Sony’s loss of leadership in mobile personal entertainment to Apple’s iPod.

The challenge for companies is to uncover the hidden opportunities by looking into their business from the outside rather than the usual inside-outwards view, and by accurately defining the ecosystem of demand. For most management professionals, this will be harder than it seems.

The exercise begins with the question, “Why didn’t we think of that?” This is intended to remind the reader of how the obvious escapes attention as we sink deeper and deeper into complex analysis and in developing ever more complicated scenarios. And Joachimsthaler sets out a framework that he believes can help larger companies to innovate in a structured way.

Of course, the reader may feel differently, and quote George Bernard Shaw who divided the world into two kinds of people, the reasonable and the unreasonable, and credited innovation to the latter. Or one may agree with Henry Ford who, apparently, felt that customers did not really know what they wanted. He is reported to have quipped: “If I had asked my customers what they wanted, they would have said, ‘A faster horse'”

Yes, at the cutting edge, innovation may seem to be more about the innovator’s creative desire to do something different, and less about “meeting customer needs”. Yet, it is the unmet and, more importantly, unexpressed customer needs, that offer the greatest source of competitive advantage.

This is why innovation seems to spring more from small companies, or companies that are started up around a specific idea that is unique or new. In such a small company or a start-up, typically the founder/innovator/inventor is drawn from the same pool as the target customer. Therefore, while they may be addressing a need they feel acutely, the innovators are unconsciously plugged into their customer’s unmet/unexpressed needs. There are seldom any silos; the whole team is generally focussed on the one problem to be solved.

However, as companies grow larger, functional specialisation emerges — division of labour based on skill-set is deemed to be a more efficient way of doing things. The design folk design based on “trends”, the marketing folk market as they know best, and the manufacturing folk produce to specification and the “demand” generated.

With this speciality of skills taking over, there is a growing disconnect between their efforts to dig for insight and the gold that is “hidden in plain sight”. While data is available in abundance, real knowledge is scarce, and insight just gets buried in well-structured processes and hand-offs between functional silos.

This trend has only accelerated in the past 15-20 years with pervasive information technology that enables the mundane operational process to the most strategic. Never before have management teams been so focussed on information and analyses. As businesses grow, data warehousing and data mining are defined as the competitive cutting edge, pushed along by interested parties (including IT solution providers, but that is another book!).

However, in reality, excessive information is increasingly passed off as knowledge. An inward focus on the management team”s own objectives is often disguised as insight gained on the customer or the market. Functional specialists analyse the market, the latent needs and the gaps in their own way, and if the company is lucky to have some generalists, some of those dots get joined to form a more complete picture.

It is in reminding management of this reality that Joachimsthaler’s book provides a tremendous service. It presents a well thought out model named, curiously enough, DIG – short for Demand-First Innovation and Growth. The three elements laid out sequentially begin with a framework for defining the demand landscape, identifying the opportunity space within it, and then creating a strategic blueprint for action.

Joachimsthaler’s process to define the demand landscape requires managers to put themselves in the customer’ shoes – a process demonstrated with examples from Proctor and Gamble and Pepsi”s Frito Lay. Using the customer’s goals, actions, priorities (there’s the “GAP”), needs and frustrations, demand clusters can be developed and filled out with additional research. The strategic fit between these demand clusters and the brand can then feed into the next steps of identifying the opportunity space.

The filters, or lenses, as the author calls them, are the “eye of the customer”, the “eye of the market”; and the “eye of the industry”. At every step, assumptions and presumptions need to be challenged. Using these lenses, the sweet spot or spots and the growth platforms can be identified, and extrapolated into the strategy. On the downside, the book is clearly about a framework, which may have been best detailed in an article, rather than being stretched over a book.

The author does stress at one point that it is not about “brainstorming”, but about structured thinking. However, he seems to do this in a tone that suggests brainstorming as something vaguely distasteful due to the lack of directional structure.

While examples from the companies studied keep the text alive, yet in places one struggles to correlate the examples with the framework. Indeed, there may well be too much structure to this book, and not enough examples of how inter-disciplinary thinking and functioning can actually produce sustained innovation.

Understanding the model itself can be a fairly involved process. The best way to tackle it may be to approach it as a project, and use the DIG framework as a how-to guide for a real problem. If you are a structured, methodical, sequential kind of manager and possibly work in a large company, the book could provide tools to put that thinking to work for innovation in a team. On the other hand, if you are more of a “people person”, you may want to leave this book alone. [For more, here’s the book on Amazon.]

A Discount By Any Other Name

A discount outlet store sells merchandise that is off-season (such as summer merchandise in winter or vice versa) or out-of-fashion (hence possibly two-three seasons old) or comprising of manufacturing over-runs.

However, in India discounts are prolific even in the high street market. In clothing as an example, a large chunk (estimates vary from 40% to 70%) of ready-to-wear stock is sold under discount. Some of it is sold in factory outlets, but a significantly larger proportion is sold throughout the year in regular high street stores under offers that run throughout the year.

There are also discount streets within the city (such as Fashion Street in Mumbai or Sarojini Nagar in Delhi) operating the year round. This reduces the benefit that a discount outlet specifically provides to the consumer.

Second, discount stores typically are based “off-locations” away from regular customer traffic. In markets such as the US and the UK, an “outlet village” may be located 50-100 km from the nearest suburban or urban centre but quite close in terms of drive time. In India currently, due to poor road conditions, the stores have to be in higher cost locations.

Most critically, a sustainable and sizeable discount outlet also needs a base of many brands that have built up high profile and that operate consistent price premium at full-price levels. The brands must have enough scale so a discounting outlet cannot damage its brand image. This enables not just standalone discount outlets, but entire “outlet villages” to be set up. These clusters can generate a much bigger and sustainable customer footfall, much like a shopping mall. That ecosystem of brands has been weak in the past in India but has recently accelerated, and we are likely to see critical mass emerging in future, which may allow the discount business to grow.

In the coming years, expect more action, with clustering of stores and brands, specialist discount malls, and possibly even innovative and India-specific models to come up. How about air-conditioned haats with proprietary bus connectivity to town centres?

Let the good, discounted, times roll.

A DISCOUNT BY ANOTHER NAME

By Devangshu Dutta (Column from The Financial Express- 16 October 2007)

A discount outlet store sells merchandise that is off-season (such as summer merchandise in winter or vice versa) or out-of-fashion (hence possibly two-three seasons old) or comprising of manufacturing over-runs.

However, in India discounts are prolific even in the high street market. In clothing as an example, a large chunk (estimates vary from 40% to 70%) of ready-to-wear stock is sold under discount. Some of it is sold in factory outlets, but a significantly larger proportion is sold throughout the year in regular high street stores under offers that run throughout the year.

There are also discount streets within the city (such as Fashion Street in Mumbai or Sarojini Nagar in Delhi) operating the year round. This reduces the benefit that a discount outlet specifically provides to the consumer.

Second, discount stores typically are based “off-locations” away from regular customer traffic. In markets such as the US and the UK, an “outlet village” may be located 50-100 km from the nearest suburban or urban centre but quite close in terms of drive time. In India currently, due to poor road conditions, the stores have to be in higher cost locations.

Most critically, a sustainable and sizeable discount outlet also needs a base of many brands that have built up high profile and that operate consistent price premium at full-price levels. The brands must have enough scale so a discounting outlet cannot damage its brand image. This enables not just standalone discount outlets, but entire “outlet villages” to be set up. These clusters can generate a much bigger and sustainable customer footfall, much like a shopping mall. That ecosystem of brands has been weak in the past in India but has recently accelerated, and we are likely to see critical mass emerging in future, which may allow the discount business to grow.

In the coming years, expect more action, with clustering of stores and brands, specialist discount malls, and possibly even innovative and India-specific models to come up. How about air-conditioned haats with proprietary bus connectivity to town centres?

Let the good, discounted, times roll.

(c) Devangshu Dutta 2007

The author is Chief Executive of Third Eyesight, a specialist consulting firm in the retail and consumer products sector. (More articles on www.thirdeyesight.in/insights/ )

Retail: A Barometer of Urban Health

By Devangshu Dutta


During India ‘s misplaced years post-Independence, business and commercial activity was treated as a ‘necessary evil’. Businessmen were labelled as rapacious, self-interested people who needed to be kept under strict control. And shopkeepers were possibly among the lowest on the social ladder according to the economic and governance pundits.

In the last 20 or so years, fortunately, that tide has turned significantly – the role of business in economic and social growth is publicly acknowledged. Inspiring leaders such as Narayana Murthy of Infosys, Sunil Bharti Mittal of Bharti, and Ratan Tata of Tata Group offer aspirational models for a new generation of Indians.

Yet, retail, for all the zillions of column centimetres and hours of airtime that it gets, is still seen as a slightly dubious activity.

For most planners on the government side, it has been and remains an afterthought. Often, a few poorly developed square feet are allocated when a new community or urban development is being planned. On the other end, a number of massive glitzy shopping malls are being set up by real estate developers that have no correlation to their surroundings and catchment.

To my mind, retail developments need to be seen as part of urban infrastructure and also, more importantly, as part of the social fabric of a town or city. Government at all levels, especially state, district and municipal level, need to understand that the presence of successful retail developments in their population centres are an indication of the social and economic health of their localities.

A well-planned retail centre not only creates income for the local population and the local government, but also provides a very important socio-cultural platform for interaction between the different segments of a community. The presence of successful brands and retailers acts as an attractive beacon for other businesses, small or large.

Internationally several examples exist – especially in Europe – where after decades of suburban growth, town planners are focussing on re-developing ‘inner cities’ with a mix of large and small retailers, in environments that are shopper-friendly in every way. They are rethinking public transport connectivity, planning in pedestrian-only walkways, greening and sheltering, effective lighting, open spaces, and cultural centres. And yet, this mix would be incomplete without food and shopping.

Government bodies also need to realise that it is not productive to simply hand off large chunks of land to private developers to put up concrete-steel-and-glass blocks in the form of shopping centres. One should be able to look back 30-40 years hence, and say that the development added something positive and organic to the urban landscape in that town or city and was truly beneficial to the local population.

Visionary shopping malls like the Kapaliçarsi (“Covered Market” or Grand
Bazaar) of Istanbul that was established in 1461, are obviously few and far between. Bluewater near London in the United Kingdom , and inner city developments on continental Europe offer more contemporary examples. However, India ‘s own traditional markets, at least until a few decades ago, also offer points of reference and inspiration.

I believe a rethink of the role of retail is highly overdue. If urban planners in the government and private developers can work together to plan and create more complete and ‘organic’ retail centres for the future, India ‘s urban centres will be far healthier and dynamic places to live in.


(c) Devangshu Dutta, October 2007

– Devangshu Dutta is chief executive of Third Eyesight (website: www.thirdeyesight.in), a leading specialist retail and consumer products consulting firm. Third Eyesight works with brand and market leaders from India and global markets through a variety of strategy and operational projects.

Slices of the Bread Basket

The sector of retail that has been attracting the most corporate interest over the last few years is the food & grocery market.

Quite logically so, since this comprises the largest slice of spending – well over 40% in urban markets and above 50% in the lower income towns and rural areas. It, therefore, offers the maximum opportunity for rapid scaling. Working in sequential logic, the nature of that large business would be highly capital intensive, and the large amounts of investment and large footprint should logically act as entry barriers for competitors. Size should also drive costs down through efficiencies of scale and raise margins by removing intermediaries.

By that reasoning, the bulk of the small retailers should be out of business very rapidly, as the well-capitalised corporates buy their way into the market, whether by opening their own stores or by acquiring many retail chains and mashing them together into one company.

This has led some commentators and consultants to predict that within the next 5-10 years, as much as 25-35% of the food and grocery market would be taken by the so-called organised retailers.

That, in my opinion, is a gross overestimation of the pace of change.

Fortunately for the smaller retail chains and the independent mom-and-pop stores, and unfortunately for the large corporates, scale and efficiency is not enough of a competitive advantage at the local level. Retail is a business in which you have the opportunity of growing or diminishing your business’ future prospects every time a customer buys at your store, or chooses not to.

And the food and grocery business is tougher still, since you cannot impose a product top-down in India, with a mix of cuisines and cultures that are as varied as different countries in Europe.

Yes, change is coming to the food business. Like other products, food retailing in India will convert more and more towards modern retail, but it will happen in slices of percentage points. It will happen only when the modern retailers understand and respect the cuisine boundaries rather than imposing a sea of sameness for consumers across the country. It will also need retailers to plan and manage the supply chain and vendors at micro-levels.

There are plenty of speed-bumps and potholes on the way – proceed with caution.