Month: July 2012

Retail’s Elves

Devangshu Dutta

July 30, 2012

The Indian retail sector’s sales are estimated at about Rs. 26 lakh crores. Of this, more than 80% of the product requirements are estimated to be met by small or mid-sized businesses. We don’t usually think about these myriad manufacturing and trading companies that make up the retailer’s supply chain. Large branded suppliers – multinational or domestic corporate groups – are still able to make their presence known, but most others remain largely invisible. Many of these fall not just into the small-medium enterprise (SME) classification, but in micro-enterprises, even cottage-scale. Not only do the large retailers source from SMEs directly, those small suppliers in turn work with other upstream SME manufacturers.

Chicken or Egg?

Most of us are inclined to view the growth of modern retail as a precursor to the growth of the SME sector. Actually the reverse is equally true, perhaps even more so. Without a robust base of suppliers having taken the initial risk of setting up better-organised manufacturing facilities and supply chains, modern retailers would not be able to set up their businesses in the first place. We may view modern retailers as the catalyst for this development; however, they are first beneficiaries of SMEs, and only after they achieve critical mass can they catalyse further SME growth.

For instance, through the 1950s and 1960s, as the American and western European economies grew with the baby boom, it was the growth of manufacturing entities and brands – most of them SMEs – that led the charge. As these SMEs consolidated their growth, modern retail chains actually rode upon this. Subsequently, of course, retail chains have put most of their suppliers in the shade in terms of overall size and profitability. Japan in the 1960s and 1970s, Taiwan and Korea during the 1970s and 1980s, and China during the 1990s and 2000s also saw similar manufacturing-led prosperity and consumption, although their growth was driven initially by exports to the west.

In India, too, the tremendous social and economic changes in the last two decades have encouraged a resurgence of the entrepreneurial spirit. The consumer sector is specifically attractive to entrepreneurs as something that is tangible, provides visibility of the business fairly quickly and can be communicated and positioned well within the entrepreneur’s family and social circle, an important driver.

The Rationale for Supporting SMEs

We tend to ignore the fact that India has a workforce estimated at over 750 million, and which is growing annually by 9-10 million. Most of these people will not be employed by the government, or in large organisations or in the much-feted service sector. Allowing for a declining active employment in agriculture, it is manufacturing, trading and retail by small businesses that is needed to keep the economic engine running.

It is also important to remember that growth of SMEs raises prosperity rather more equitably than other sectors. Widespread growing incomes lead to growth in consumption, supporting retail growth, which in turn can feed back into further growth of SMEs. There are enough significant examples of such economic growth worldwide, whether we look at economies such as Western Europe and Japan recovering from the ravages of war, or at the Asian tigers, China and others emerging countries who’s GDPs are not overly dependent on extractive natural resources.

Innovation is another reason to nurture SMEs. Consumer needs are changing more rapidly than ever before in India’s history, with rising incomes, and evolution of life styles and social structures. Small companies are better at foreseeing or at least reacting to rapid changes. Large companies compete on the basis of their sheer scale and aim to maximise returns from every investment made, but small businesses have no choice but to be innovative in some way simply to enter the market or to stay in business. Experimentation with products, business models, service level and commercial practices is what SMEs thrive on. Differentiation is what makes small suppliers attractive to retailers. With the technology and tools available today, we should expect ever increasing amount of innovation to emerge from small rather than large companies in the consumer sector.

Small suppliers also provide diversification of supply risk for individual retailers, as well as for the market overall. Concentrating on a few large sources has, time and again, proven to be a risky approach, whether it is due to the balance of power tilting unduly towards a specific supplier, or simply the risk of product not being available in case the dominant large supplier’s business is affected. A mix of small suppliers is more like a supporting cushion – a bean bag, if you like – which can be adapted and moulded more easily to changing customer needs.

The Role of Modern Retail

There are three areas in which modern retail can be a significantly more important partner for SMEs than traditional channels.

Firstly, modern retail stores are possibly the most effective route to launch new products, or even entirely new categories. As a platform they offer a more consolidated and effective way to reach a new product to consumers, and to gain visibility and acceptability quicker.

As a follow-on to this, due to their innate need to scale-up successful initiatives, a product and or a service proven in one store or region would typically get included in buying plans for the retailer’s stores across the country. This provides a quicker and more efficient scaling up opportunity than the small brand or supplier trying to reach myriad stores across the country on its own.

Third, whether it is quintessentially Indian brands such as Fabindia, or Indian products through international brands and retailers such as Monsoon, Gap, Mothercare, Ikea, Marks & Spencer, these are but a few examples of the access route for small Indian companies to major world markets. In fact, B. Narayanaswamy suggested in an article titled “Opportunity Lost is Gone for Good” (July 2012), that the Indian government should negotiate hard with retailers interested in investing in India to open supply opportunities to the retailers’ businesses globally, rather than putting minimum sourcing requirements for the small Indian business alone which only act more as a constraint than an enabler. The government has, in the past, used such opportunities to allow investment in the consumer sector while enlarging the playing field for Indian businesses – Pepsi is a case in point.

For some companies, modern retail is in fact a launch pad for wider ambitions, as they evolve into building brands themselves. Mrs. Bector’s has grown from a contract supplier to the likes of McDonald’s to launching its branded products not only in India but also in international markets targeting Indian expatriates. Genesis Colors went from being a Satya Paul licensee for ties to being the owner of the brand, and then further to being a partner for many internationally established premium and luxury brands who want to be part of the India growth story. Others become growth vehicles for larger businesses after being acquired by them, such as ColorPlus by Raymond, Fun Foods by Dr. Oetker (Germany) or Anchor by Panasonic (Japan).

Making Business Easier

India is one of the few countries to have a Ministry dedicated to SMEs. However, India’s SME sector is very far from competing effectively with SMEs in other countries.

The German Mittelstand employs more than 70% of Germany’s workforce and is acknowledged to be at the leading edge of technology and efficient business management. Other western European countries such as the UK and Italy also have vibrant SME sectors. All these countries have not only been competitive globally as exporters, but have also co-opted into the growth of industries elsewhere including the BRICs.

Three enormous obstacles stand in the way of the growth of India’s SMEs, as a huge amount of entrepreneurial energy is wasted tackling these areas. The government certainly has a large role to play in all, but one of these is also the responsibility of large corporate groups.

The lack of adequate infrastructure is arguably the most recognised obstacle, followed by compliances that can hold SME operations hostage under outdated laws, many of which have not been reviewed since India had an Empress! Entrepreneurs and businesses lose millions of manhours annually managing these two areas.

However, the one area in which not just the government but large retailers can play a role is in ensuring that SMEs are funded adequately. Bank sources in the form of term loans and working capital limits is only the start. The rest comprises of actual cash flow, much of which are limited by the long credit period demanded by retailers. Payment can stretch as far as 6-8 months, and include sale-or-return terms which squarely place the burden of funding the retailer’s business on the SME supplier. Unless we can mandate better payment practices, the boom of retail giants will be created using millions of dead or barely alive SMEs as building blocks. And what we don’t realise is that the retailers’ own health is also at stake, because lazy payment terms create a maze of poor practices, from product planning at head office all the way to the retail store. For instance, products that will not sell get stocked for short-term margin through placement fees, and block shelf-space and cash flow that affects other suppliers. Promptness of payment to SMEs must become a metric to measure the health of retail companies – after all, what gets measured gets tackled. And for the proponents of “Corporate Social Responsibility” – what better way to promote CSR and wide-ranging economic well-being than by ensuring the the smaller businesses in the ecosystem are not starved of the funds that are rightfully theirs!

SMEs are not just the foundation, but also the beams and pillars on which the glass and steel cathedrals of modern retail are built, and a vital indicator of the economy’s overall health. The sector needs to be tended to proactively and holistically, both by government and by large businesses, as an investment in India’s economic future. Perhaps we will even create some world-beating companies along the way.

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Thinking Small

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July 28, 2012

Vishal Krishna
BusinessWorld, 28 July 2012

When you have Rs 7,846 crore in debt, that takes centrestage and everything else is pushed to the sidelines. And that is exactly what was happening at Kishore Biyani’s Future Group over the past few years. However, after selling a majority stake in Pantaloon Retail to the Aditya Birla Group, managing a private placement with Bennett, Coleman & Company (BCCL), and getting private equity giant Warburg Pincus to acquire a majority stake in Future Capital Holdings (FCH) resulted in Biyani raising nearly Rs 2,500 crore in the last couple of months. Further, with Warburg Pincus taking over the Rs 3,800-crore debt of FCH, nearly Rs 6,000 crore in debt has been wiped off Biyani’s balance sheet.

Improved financials have left Biyani free to concentrate on his retail business. And first on his to-do list is Central — the group’s large format retail store which is like a series of shop-in-shops. “The Central store format is going to be our major revenue driver in the lifestyle segment in the coming years. We are targeting revenues of Rs 3,000 crore from Central in 2012-13,” says Biyani, chairman of the Future Group. In 2010-11, Pantaloons contributed to at least 50 per cent of the Rs 4,325.57 crore revenues generated by the group’s lifestyle arms; Central and Brand Factory (selling branded products at discounted rates) contributed to the other half.

After Big Bazaar, Central is the only marquee outfit big enough to generate the revenues. “Central is a successful and scalable business as it helps the landlord, the brand and the retailer share the upside of the business,” says Biyani.

Central’s business model is simple: Brands enter into an agreement with Central whereby they pay a minimum guarantee or rent per sq. ft (which may be upwards of Rs 75 per sq. ft), plus 10 per cent of the revenue. In case of the absence of rent, it will be 30 per cent of the revenues. Thanks to this model — Apple is attempting a similar arrangement with Walmart and Target — it covers itself during a slowdown while it shares the revenues of the brand when the going is good.

“Central is a marketplace and works well with Indian mindsets; retailers fight for the best spaces,” says Biyani. While K. Raheja promoted Shoppers Stop and Micky Jagtiani-owned Landmark Group’s Lifestyle stores also have shop-in-shops, they do not have a marketplace model for their stores.

“Not all brands work in every city when they are on a business model of minimum guarantee plus percentage of sales because the brands are under stress to perform,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy. Large retailers operate on this model in the West where space is given to brands and they have to ‘perform or perish’. “If a brand succeeds then Central benefits,” says Dutta. However, it is the duty of Central to draw in traffic. “Since we have footfalls of two million every month, there is no reason why a brand should complain about why they have not translated into sales,” says Vishnu Prasad, CEO of Central. The model works best in metropolitan cities as it banks on high footfalls.

But globally, the model of leasing out a shop floor to a brand works only in the case of FMCG companies, which want to test a new product line. This model is not very popular as the brand not only has to pay a rent but also share the sale proceeds with the retailer.

Evolving Business

In the eight years since its inception, Central has grown significantly. It has 22 stores covering 2.7 million sq. ft of retail space — 13 per cent of the Future Group’s total of 17 million sq. ft across the country. By the end of the year, Central will occupy 20 per cent of the group’s total retail space. Another 10 stores at a cost of Rs 125 crore are expected to be opened this year. Revenues have increased by nearly 30 per cent year on year between 2009 and 2012 and Central is expected to close its financial year in June with revenues of Rs 1,500 crore.

So what works in Central’s favour? Upfront it is its inventory model. Most brands work on a mutual agreement of a minimum shelf life of 90 days, after which the product is sent back to the manufacturer. Hence, very little inventory sits on the books of Central.

Further, Central has also been able to gather a lot of data on buyer behaviour and shopping preferences. While other stores use loyalty cards to gather data, Central’s data is based on the categories that people shop for and their preferences. “In the first five years of our growth, we brought in brands and it was a model where we drove consumption and left the selling to the brand,” says Biyani. However, between 2008 and now, it has been about collecting data on customers and telling brands what to sell and what to avoid in their space.

Prasad and his 14-member team have crunched six years’ data on what customers shopped for at Central. “We began to speak the language of what the data told us, the brands could not ignore our findings,” he says.

The data provides specific information such as a gender-wise break-up of customers’ preferences. “We collect data in-house. With the data in hand, we make sure a customer in Central gets what he wants,” says Prasad. Data collection has helped other retailers too. “Data is the key to the success of every retail business; 70 per cent of our revenues come from the 2.5 million customers who form our database,” says Govind Shirkande, CEO of Shoppers Stop.

Central has tied up with nearly 1,000 brands and ensures that they introduce their new collections a month before they release it in the market. “Analytics gives you an edge and very often our collections are different to the ones you get in the market,” says Prasad.

Even inventory management is done differently in Central. The inventory risk is on the manufacturer, where 40 per cent of the stock is contracted to be returned if not sold. But because Central sells most of the goods in store, only around 10 per cent of the stock is returned at the end of season.

According to analysts from E&Y, only 6 per cent of the $450 billion retail industry is organised. Of the 6 per cent, 45 per cent of the organised retail business comes from apparel retailers. “The apparel business has seen very few glitches over the last couple of years. It is in this context that some formats have done very well,” says Pinakiranjan Mishra, partner and national leader of consumer markets, E&Y.

In many ways Central is a seamless mall, at least that was the branding that shoppers became used to. It’s a place where they can shop, eat and watch movies. “We are often referred to as a mall and it is difficult to do away with that reference,” says Prasad. But all that is changing now and Prasad and his team are working on a business plan for a new format for the next three years. This has been prompted by some external issues such as the slowing economy. Plus, the large format itself is becoming a burden to replicate across India. “It is very difficult to get large properties across Indian cities as rentals are very high,” says Dutta of Third Eyesight.

Currently, nearly 40 per cent of the properties are on a revenue-share model with a minimum guarantee. During the first six years of operation, it was the high rentals (of nearly Rs 150 per sq. ft) which resulted in low margins of only 5-7 per cent. In 2010, all that changed when the management adopted a revenue-share model, increasing margins to 10 per cent. The net margin of the competition is between 10-12 per cent.

What has differentiated Central from the likes of Shoppers Stop and Lifestyle is its sheer size. While Central operates large-format stores — at least 100,000 sq. ft in size — located in independent properties that have been leased for a period of eight years, the other two operate stores with an average size of 45,000 sq. ft. But all that is set to change.

Next Move

Biyani now plans to open smaller formats of Central that will compete directly with Shoppers Stop, Westside, Lifestyle and the like. The first store is set to open soon at the Brigade Orion Mall in Bangalore. “This format fits well in our mall and is well positioned because of its multi-brand presence,” says Vishal Mirchandani, CEO of Brigade Orion Mall.

“We have realised that the large format has its limitations, but we will have the best of Central in the smaller formats and that is our differentiation,” says Prasad.

Analysts estimate that the new model can be scaled up to over 50 stores in the next five years. But the quality of the malls that they sign up with will be crucial to their success. In India, only about 15 malls of the 255 in operation seem to be bringing in revenues for retailers; the rest are still struggling.

Homing in on the right property is essential. Explains Kabir Lumba, managing director of Lifestyle India: “Our expansion strategy has always been to sign on good properties and not scale up to locations where we will not grow. That is why Lifestyle has been a success. We try to do more with the current set of properties.”

With a large number of retailers failing, there is a surfeit of properties up for grabs. This may work in Central’s favour. It needs to scale up its operations by opening more stores in the years to come to take on competition. “We are growing and have targets; Central is the best kept secret of the Future Group,” says Prasad.

(This story was published in Businessworld Issue dated 06 August 2012.)

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Coffee World to invest Rs. 50 crore in expansion

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July 27, 2012

Pallavi Srivastava, Pitch
New Delhi, 27 July 2012

In the last few years, coffee consumption has kicked off exponentially in the Indian market and the latest player to offer the cuppa is Swiss brand Coffee World. The company, which is buoyant about its performance amidst the clutter of brands, is confident of staying ahead of established players like Café Coffee Day. Will it deliver? Pitch finds out.

If market estimates are to go by, approximately 200 coffee outlets have been opened in the country every year for the last five years. This increased caffeine love of Indian consumers has resulted in huge expansion of early movers like Café Coffee Day (CCD), Barista, Costa Coffee and has also lured many international brands like Starbucks (to open its first store in second half of 2012), Coffee Bean & Tea Leaf, Gloria Jean’s to open shop in the recent past. Coffee World, café chain from Switzerland based group Global Franchise Architects (GFA, which has brands like Pizza Corner and Donut Baker) is another brand looking at milking this caffeine induced retail opportunity in the Indian market.

Coffee World made a low profile entry in the Indian market in 2006 in South India and Delhi but it closed its Delhi operations after some time due to franchise issues. But looking at the surging market for coffee over the last couple of years the brand has got aggressive and is expanding in North and East India too. It has partnered with GAMA Hospitality, the master franchise of GFA, which is handling Coffee World’s operations in these two regions and has six stores, three in Delhi/NCR and three in Kolkata. However, the South India stores of GFA work on a local franchise model. GAMA hospitality also handles GFA’s other brands Pizza Corner and Donut Baker. Overall, it has about 18 GFA stores across brands while GFA has about 80 stores (Coffee World, Pizza Corner and Donut Baker) across the country.

The great Indian caffeine opportunity

So why is Coffee World getting aggressive at this time? Well, the numbers will answer that! According to the Coffee Board of India Statistics, the per capita coffee consumption in India is merely 82 gm compared to developed markets like UK, where it is 4 kg, while for some European economies it is as high as 10 kg. Not just that, valued at Rs. 1,000 crore, the growth rate of Café Chain market is about 15-18 per cent annually. And according to Technopak Advisers there is scope for about 2,700 more cafes in the country in the next five years. Currently, there are about 1,800 coffee stores.

From being a traditional beverage consumed mainly in South India, coffee has become a trendy beverage with a national presence. According to the reports the coffee consumption in Northern India has been growing at a phenomenal rate of over 40 per cent.

Premium experience at competitive pricing

But though there is a huge opportunity in the café segment in India, it has players like CCD, Barista, Costa Coffee, which already dominate the market and biggies like Starbucks too are all set to open their stores. In such a market, is there enough scope for a player like Coffee World?

Devangshu Dutta, CEO, Third Eyesight, feels, “There is still significant scope for new entrants into the café market in India, despite the head start that the existing coffee chains have in terms of number of outlets.”

At the same time establishing itself will not be an easy task for a new player. As Anand Kumar Jaiswal, Professor Marketing, IIM Ahemdabad, points out, “There are currently two types of coffee chains in the market: first coffee pub model like CCD and second experience cafés like Barista, Coffee Bean & Tea Leaf etc. The first mover’s advantage will always be with them and it will not be easy for any new player like Coffee World to create its space.”

Experts feel that in a market as dynamic as India, there is always space for a new player but like any business the challenge for the player is to find the right space for itself. For instance, CCD has become ubiquitous in India with its ability to spot the right locations before they come in vogue and be present there. Sunil R Shetty, Planning Services Director, Draftfcb + Ulka, believes, “The challenge for Coffee World will be to understand the niche it wants to address and then build on it. If it aims to be a premium player then how will it differentiate itself in the market versus Coffee Bean, Starbucks and others, is the first question. Once Coffee World is able answer this critical question, the rest is easy.”

So what is the space Coffee World is looking at? Gaurav Agarwal, Director, GAMA Hospitality answers, “There are a lot of consumers in India who are conscious about what they spend and where they spend, but at the same time want a good coffee experience. That is the space we are looking to capture and our positioning is premium coffee experience at competitive pricing.” The company’s products are priced 10 per cent lower than Barista and Costa and at par with CCD.

So why a customer would go to a Coffee World instead of a CCD if the prices are same and considering that CCD is a well established brand? Agarwal says, “In terms of product, we are much better than CCD, they can never compete with us on product quality. I don’t consider CCD as competition.”

He further shares that Coffee World offers on the spot freshly made sandwiches and waffles, which differentiates its offering from other brands as they offer stored sandwiches and other products, prepared earlier.

So is this mid path of competitive pricing and better experience a sure shot way for success in the coffee chain segment? Experts feel that it isn’t. IIM’s Jaiswal says, “It is not as easy as it sounds. If Coffee World is not able deliver on its promise of price, the customer will go to CCD. If it fails to deliver on experience, the customer will go to Barista. So it will be a tight rope they will be walking.”

Journey so far

While the road ahead may seem different for Coffee World, but the brand has been doing decent for a starter. According to the company, the Coffee World Stores have monthly sales of about Rs. 75 lakh. While that may look miniscule compared to what established brands might be making, but experts feel it is a good enough number for a relatively new brand. Agarwal seems even more confident about its performance and claims, “In terms of sales we are number one in Kolkata. We have an outlet in Kolkata’s South City Mall. There is also a CCD outlet in the same mall. And our sales are much higher than them.”

As far as marketing spends are confirmed, Coffee World spends 4 per cent of its sales. And the majority of its marketing activities include hoardings, flyers, e-deals at discounting site to encourage product sampling.

Agrawal also seems very excited about the future expansion plans. “In coming years, we will be expanding into many cities around Delhi including Chandigarh, Jaipur etc,” he adds. Plus, GAMA Hospitability will be investing about Rs. 30-50 crore in future expansion.

While the road ahead may not be cakewalk for this nascent brand but experts are of the view that it will certainly benefit from Indian consumers’ increasing preference for coffee. And perhaps differentiation will help the brand carve its own niche in this space. Draftfcb+Ulka’s Shetty agrees, “Globally chains have successfully followed this strategy to build business in markets dominated by Starbucks; whether it is Green Mountain with its fair trade and organic routes or by a differentiated experience like Caribou Coffee with its mountain lodge theme décor.”

Third Eyesight’s Dutta feels, “Any café, regardless of the size of its parent company and its brand image, needs to prove itself at each specific location. Familiarity and predictability to a customer are important to customers.” And, thus, maintaining a high degree of consistency of product and service over a period of time will be key to this, at each location as well as across the chain for the success or failure of any brand.

(This article appeared on July 27, 2012 on Pitch Online.)

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Indian Government Seen To Be Relaxing Rules To Keep IKEA Interested

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July 19, 2012

REUTERS / Businessworld

New Delhi, 19 July 2012

The government appears set to relax heavily criticised sourcing rules for retailers, anxious not to scare off IKEA – one of the few big name firms that has said it will invest in the country – or any others willing to follow.

India kicked open the door to foreign retailers in January when it removed an investment cap for single brand chains to set up shop but then shot itself in the foot by imposing a requirement that companies had to source 30 per cent from small local firms.

IKEA and others have balked, and the government’s response is being seen as a test case of how well it can revive flagging investor confidence at a time when economic growth has slowed to its weakest in nine years.

Signs point to backtracking on the part of the government, with a top official closely involved in framing retail policy telling Reuters that key clauses may be relaxed although the government was still discussing the pros and cons as well as the extent of any relaxation.

"We are in the process of finalising our views about all this," said the official, asking firms to "be a little patient".

Analysts are confident there will be an easing of the rule.

"The government is in damage control mode. It realises it has sent out a wrong signal by putting the thirty per cent sourcing requirement for foreign retailers," said Saloni Nangia, senior vice-president for retail at Technopak consultants.

Prime Minister Manmohan Singh this month also held up the Swedish furniture giant’s planned $1.8 billion (Rs 9,954 cr) investment as an example of investor confidence, while the trade minister said its already substantial amount of sourcing from India would be taken into account.

New Delhi is also pushing to resuscitate a reform to allow foreign retailers that sell many brands – supermarkets like Wal-Mart Stores – to invest in the country with a 51 per cent cap on ownership. At the moment, they are only allowed to operate in a wholesale capacity.

The government’s plans were scotched last year by a political backlash but India could launch the policy within weeks if the political climate is right, the official involved in retail policy said.

"We are pushing, to the extent we can," he said. "Multibrand retail is only a pause. There are no major issues there."

PENALISING SUCCESS

The sourcing rule for single brand retailers currently stipulates that local suppliers must not have more than $1 million (Rs 5.53 cr) invested in plant and machinery.

The rule was designed to ensure that India’s manufacturing sector, which pales next to China’s, benefits from foreign money rather than being muscled aside by imports. But it represents a headache for retailers looking for scale and reliable, high quality suppliers.

IKEA has asked for a 10-year window to comply with the rule – a time frame for the government has said is too long.

"It will take us time to fully live up to the requirements," said Josefin Thorell, a spokeswoman for IKEA. The company has declined to comment on how it would respond if it did not get 10 years.

UK-based footwear retailer Pavers, the only other retailer besides IKEA to apply for wholly owned operations since the rule change, is asking that sourcing not be measured based on the value of goods sold.

"Our request along with the industry is that 30 per cent of that should be on the cost price instead," said Utsav Seth, chief executive of Pavers’ Indian operations, although he added that Pavers would comply with the current rule if its request was denied.

In addition to ironing out these policy matters, the government is also rethinking what to do if a supplier grows beyond its original size. According to a policy document in November, an Indian company would be disqualified from supplying a foreign firm if it grew beyond its original $1 million (Rs 5.53 cr) investment.

"I would call it penalising success," said Devangshu Dutta of Third Eyesight, a retail consultancy.

"If you are successful in actually helping small companies grow, they would be penalised because they would not be able to supply you any more. And you would be penalised for helping them grow."

Another rule, one that says an investor must own the brand it is proposing to bring to India, may also be relaxed, said the official involved in retail policy.

This has tripped up Spain’s Inditex S.A. which applied for permission to bring a second clothing brand, Massimo Dutti, to India in addition to its flagship clothing brand Zara.

The government has put that proposal on hold after the application was not submitted by brand owner Inditex but by its wholly owned unit Zara Holdings BV.

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What IKEA brings to the table

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July 13, 2012

Raghavendra Kamath, Business Standard

Mumbai, 13 July 2012

Just one sentence in the IKEA website sums it all up: “We design the price tag first and then develop the product to suit that price”. The $30 billion (over Rs 165,000 crore) furniture powerhouse with 330 stores worldwide obviously doesn’t like to mince words: it’s an out and out price warrior in all the 41 countries (India will be the 42nd) it operates in.

That obviously would be a cause for concern for the four to five organised players, which account for 6 per cent of the total furniture market in India, while the rest is in the unorganised segment.

“Product developers and designers work directly with suppliers to ensure that creating the low prices starts on the factory floor,” says IKEA Group spokesperson Josefin Thorell. Others agree. “People flock to IKEA stores because of price”, says Debashish Mukherjee, partner and vice president at AT Kearney, a global management consulting firm. Consider this: in China, the retailer has cut prices by 60 per cent since 1998 when it entered the market.

The low pricing has its roots in sourcing. Globally, a third of IKEA’s sourcing comes from China, and two-thirds from European countries like Poland. While IKEA develops the entire range of furnitures in Älmhult, Sweden, product developers and designers work directly with suppliers. IKEA has about 31 distribution centres in 16 countries, supplying goods to its stores. Since it owns product rights of almost every product, it can switch suppliers whenever it feels.

At the heart of the strategy is the concept of do-it-yourself (DIY) furniture which means buyers have to assemble different pieces of the product themselves. The ‘flat packs’ design helps the retailer to sell them at lower prices, consultants say. A customer has to take the delivery of the product and assemble it himself.

Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy explains: “When they sell flat packs, there are no assembling costs, lower shipment costs and mostly products are sold on catalogues, which helps them reduce operational costs and lower prices. Those flat packs work well with young consumers whose budgets are normally tight,” says Dutta.

The IKEA catalogue, many say, is the company’s greatest weapon. A 300-page missionary text, it goes out to over 180 million people in 27 different languages. The catalogues also help the retailer to save on advertising costs, says Sanjay Badhe, a Mumbai-based independent retail consultant.

DESIGNS
Original styles and designs make it different from others, say consultants. The other key element is flexibility. For example, the beginnings of IKEA in America were inauspicious, with European compact efficiency conflicting with America’s “bigger is better” creed. IKEA’s designers changed their mindset on how they approached American design after the head of US operations made a stunt of it: He handed out T-shirts to Swedish designers that declared “size matters.” They apparently got the message.

There will also be a certain recall value even before IKEA makes an entry into India. For example, its products are already popular among urban shoppers.

WHAT IT MEANS FOR INDIA
IKEA’s Thorell says the Swedish retailer’s presence in India will, in a major way, help improve availability of high quality, low-price products, increase sourcing of goods from India and increase the competitiveness of Indian enterprise through access to global designs, technologies, skill development and global best practices. IKEA sourced goods worth $ 450 million (Rs 2,475 crore) from India in 2011 and says it plans to exceed over $ 1 billion (Rs 5500 crore) over the next few years.

India’s total furniture market is estimated to be around Rs 100,000 crore and organized market constitutes six per cent of that at Rs 6,000 crore. Home Town run by Future Group, Home Centre owned by Dubai’s Landmark Group and Homestop of Shoppers Stop are the main organised players in the market.

“Their entry will bring a sea change in the Indian furniture market,” says Mahesh Shah, who heads Home Centre, the home products retailer at Landmark group. Shah says IKEA could pose a challenge for value retailers such as Furniture Bazaar.

CHALLENGES
Some consultants such as AT Kearney’s Mukherjee says that IKEA will have to figure out the last mile supply chain issues in India. The reason: most western countries have large houses and cars and even large parking lots where IKEA’s furnitures, which are folded and sold, can be stored. But In India, both cars and houses are smaller, making it difficult for consumers to stock them.

“In India, the cost of real estate is high, retail space availability is an issue and overall store efficiency is a big challenge. They can’t cut and paste their global model here. They have to develop India-specific strategy,” says Dutta of Third Eyesight.

“Globally, do-it-yourself concept is quite popular, But in India, people are more comfortable with readymade furniture or getting it made from carpenters. It needs to be seen as to how IKEA develops here,” says the chief executive of a retail chain who did not want to be quoted.

(This article appeared in Business Standard on 13 July 2012.)