Fresh out of a meeting with a large international retailer this morning, I would like to share something that I mentioned to them: that the Indian market is not as large as it seemed to most people 2-3-5 years ago (whatever base figures they may be using to calculate potential market size); neither is it as small as it seems today to brands that entered the market 10-15 years ago.

There are significantly different dynamics at play, which make the Indian market totally different from the growth curve you might have been accustomed to in the history of the US, Europe, or even more recently, China.

However, some fundamental realities remain common on the consumer side:

• Given choices, consumers will choose

• Given better environments, consumers generally will migrate to them

• Given lower prices for comparable products, consumers will compare, and choose not to spend beyond what is necessary

• A better merchandise mix will win out over a narrow / poor mix

The realities of real-estate costs are the same for everyone–whether the retailer is domestic or international. Domestic retailers may have an advantage in being able to move quicker on closing deals but foreign retailers may have deeper pockets to play with.

Politics remain the same as well–China opened its markets to investment by foreign retailers after allowing its domestic retailers to grow in scale; Eastern European countries may raise the occasional stink about the lack of competition when two foreign retailers decide to swap assets; even in their home markets, Wal-Mart and Tesco face determined opposition. In India we’re seeing just another version being played out.

All this, while everyone is mostly fighting for the top-tier consumer. There is a wider market out there, my friends, a very different one that needs to be understood well, together with its implications for your business model.

Normal human tendency is to label what one doesn’t understand. And so we call the younger members of society by various names – youth, teens etc. By putting them into categories of age, we claim complete understanding of what they are, what moves them, and what they want, in effect adopting convenient disguise for the fact that we actually don’t have a clue.

My personal favourite term is “tweens”. In my dictionary, tweens are that magical, difficult, weird age somewhere in the region of 10-16 years, give or take a couple of years, when one is not quite an adult to be allowed an opinion, and not quite young enough to be indulged one. I believe that is why rebellion is the hallmark of the tweens and the teens.

Let’s look at the broad segment of the young (under 20) population – about 450 million individuals in India are estimated to be below 20 years of age. 105 million individuals are in the age group of 15-19 years, already in their early years of discretionary consumption. About 112 million individuals are in the 10-14 years segment – within 5 years many of these will be making career choices, and in another 5 years most would have already begun earning and spending. Imagine the power of the tweens and the teens.

However, this is not one homogenous mass of youngsters who think in the same way. Some, of course, will be a typical marketer’s delight – gulping heavily-advertised colas and wolfing down pizzas and burgers at a birthday party with their pals, while demolishing each other on the latest game console. Others may only be aspiring to acquiring a fraction of such a lifestyle in their later years. Many – too many – will not only not have these things, but may not even be able to dream of a lifestyle that looks much different from their parents.

Some are motivated by firang lifestyles, and may look at the earliest opportunity to apply for a student visa in the west. Others are surprisingly loyal to the idea of staying within the country, and actually contributing to progressing it. An increasing number find their “Indian skin” very comfortable to wear, even while moving in rhythm with a semi-westernized lifestyle.

They’ve got a whole bunch of different ideas about relationships. To many, career options are always wide open and whoever works for life in one job may have no other options. Yet, when it comes to personal friends, the buddies from pre-school may still be the ones they hang around with.

Clearly age, then, is not the key differentiating or grouping factor. Neither, it would seem, is income or education. SEC segmentation more or less breaks down when dealing with the youth. There are many, possibly hundreds of segments for a marketer to deal with.

“What’s hot” may change every week – if it’s really hot, it may stay around 3-4 months. RDB ( Rang De Basanti ) was a protest against the society the young are inheriting, and its candle-light march was emulated for many a cause. But Munnabhai is cool today, and Gandhigiri is now the road to follow. On the other hand – are these really two sides of the same coin?

Some very global trends catch on very fast, while others are uniquely Indian.

So how does one make sense of this kaleidoscope? How is a marketer to predict what will appeal to the most consumers? How can we lead the consumers into our store, to our brand counter, to the product that we want to promote?

If I were to pick one learning for the youth market that made – and still makes – youth markers successful, it is the fact that they do not predict fashion and trend. They do not attempt to lead the consumer but follow diligently. They identify the opinion leaders, identify with them, and understand what’s hot with them. Then they place their bets – a lot of them, well-spread out. Sure, not all of them are right, but it’s a whole lot better than trying to predict fashion 8-12 months in advance.

An equally critical step is to let go of the trend even as it is being picked up by others. After all, if you’re really with it, by now you ought to have identified the next hot trend rather than flogging the same horse that everyone else is on.

Here a newsflash, the youth are bright, for all the appearance of vacuity; extremely opinionated, despite the apparent boredom they display; fully-charged up with the current domestic social concerns and a clear view – well-informed or not – of what’s happening around the world.

We’ve seen some successes in the Indian market, with a few companies being at the forefront of trying to understand and cater to the youth with offerings that are innovative and promotions that talk to them in their language. And yet, most companies are still working at them in the same mould as they were a decade ago, while others are simply trying to transplant strategies that worked in another country.

The largest market opportunity in decades is going a-begging. What’s going to be your platform to make the connection? What’s the relevance of your message? Unless you’re listening to the youth, they’re unlikely to be listening to you.

Mall Mania, Mall Madness – alliterate as you will – it’s a phenomenon that is certainly taking over the newsprint, airtime and, quite possibly, your neighbourhood.

A study published in 2005 estimated that by 2007 over 360 shopping centres would be operational around the country, with approximately 90 million square feet. A meagre increase of 0.08 sq. ft. in per capita shopping space doesn’t seem like much in a country of a billion-plus people.

But most of it is concentrated around the big cities – Delhi and Mumbai account for more than half of the total space projected, with the other metros and mini-metros such as Bangalore, Pune, Hyderabad etc. taking the total up to 90% of the space.

One may argue that money (real estate development) is only following the money (consumers) – after all, there are more consumers and higher incomes in these major urban centres.

But why would mall developers expect Delhi’s consumers to suddenly switch en-masse to shopping in Gurgaon, where 6 malls are already active in a short distance of about a kilometre, 3-4 more under hectic construction in the same area and several more scattered around that suburb? Or why do Mumbai’s developers expect people to drive several kilometres from the suburbs on a regular basis to the centre of town to grace only their shopping centre? It is only such expectations that can explain the gold rush mentality that is overpopulating certain areas with shopping centres and malls.

While per-capita availability of A-grade shopping real estate looks really low, in certain areas we foresaw oversupply, with developers thinking in terms of “property” rather than as retail space managers.

Most shopping centre developers have carried out only cursory studies on the customer catchments that their tenants will be expected to live-off. As a result, conversion of footfall into sales is low for the tenants, except for food-courts, which are benefiting from the window-shoppers rounding off a day or an evening of roaming the malls with a meal. There is a lack of differentiation in product and service offer between the shopping centres and, with nothing distinctive on offer, repeat visits and – more importantly – repeat purchases are a challenge.

Developers in smaller towns seem to be following the same model, scaling up space or scaling it down based on the capital cost vs. expected capital gain and tenancy income. They are pitching for much the same brands as tenants as the developers in the bigger cities.

There is competition for customer traffic between the shopping centres and large stores (such as Mumbai’s newly opened Hypercity, across the street from InOrbit Mall, both developed by the Rahejas), between the shopping centres and the traditional high street, and between large format stores and speciality malls.

For the most part shopping centre development in India in the recent years has been seen as an aspiration to be fulfilled – hence, the most important factors have been the size of the shopping centre, quality of fixtures, marquee tenants who can provide the glamour or the legitimacy). The focus has been more on the “positioning”.

The business will begin maturing and will begin taking developmental leaps forward when centres are seen as commercial infrastructure to be planned with the end-consumer in mind, and to be serviced over a certain lifetime.

Until then, we can look forward to announcements of many hundreds of shopping centres, the launch of a few hundred, and the conversion of many of those into uses other than as shopping centres within a few months or years of their launch. And for investors also it might be a game of Roulette rather than Patience.

With the possibility of 51% foreign direct investment (FDI) in India opened up to foreign retailers, one of the questions arising frequently is whether this means the death (or at least a slow-down) of franchising in India.

After all franchising, in most people’s mind, has these alternate images of unscrupulous franchisers ripping-off the life-savings of the small retailer on the one hand, and shady landlords in the guise of retail franchisees gouging at the pockets honest businessmen who are trying to build national brands. There also haven’t been too many sustained success models in India where both franchiser and franchisees have consistently won.

Surely, with FDI opening up gradually, foreign retailers would want to set up joint ventures in which they have control, rather than go through the franchise route, where their brand is “at the mercy of another company”? So it is a legitimate question, whether FDI sounds the death knell for franchising.

However, jumping to that conclusion would be to ignore the fundamentals of franchising as a business. If the barrier to FDI was the only factor in the growth of franchising, there would be no franchise businesses in countries such as the USA (the largest retail market) or Australia (again one of the most dynamic albeit small markets for franchising in the world), which have negligible barriers against foreign retailers or service providers setting up their own outlets.

At its most basic, a franchise is an authorisation, granted to an individual or company by another company, to sell its goods or services in a specific territory. The motivations for entering such a relationship are as varied as the individuals involved in the business, but typically cover some common points.

For the franchiser, franchising offers increase in the business footprint and scale that can help to reduce costs per unit of sales, improve business visibility and the brand, and make the business a more likely candidate for investment or listing. Franchisees become a source of finance and additional management to grow the business, which otherwise would need to be provided by the franchiser himself. Franchisers also gain from the franchisee’s local market knowledge, existing infrastructure and real estate, which they would otherwise take time, money and effort to build. What’s more, each franchisee is an entrepreneur and “business partner” who directly gains from helping the franchiser grow, unlike employee managers – thus, potentially there is more energy and enthusiasm available to drive the business.

The big trade-offs for the franchisee are that the local (or regional) business ownership, topline (sales) and a chunk of the margin, are passed on to the franchisee.

The biggest motivator from the franchisee’s point of view is that, despite operating under another company’s brand and selling another company’s products, he is not an employee but an independent business owner. This is as important to an individual store franchisee as to a regional or national master franchisee. The franchise relationship also offers the umbrella of a brand under which to operate his own outlet(s) – the time, efforts and investment put into the brand across the various territories all converge to the benefit of the individual franchisee when the customer walks in with a prior knowledge and confidence in the brand. The franchisee also benefits from previously defined processes and systems, as well as structured training and business coaching.

However, if I were to identify two major hurdles in the path of growth of franchising, they would be the immaturity of the business model on the franchiser’s part, and lack of compliance on the franchisee’s.

The franchiser must approach the market with a well-structured model that makes money and can be replicated across locations, and with a system of training and transferring knowledge to the franchisees.

The franchiser must also have a clear control on the product stream, intellectual property or other key success factors without which the franchise reduces to a generic outlet. Given the overloaded courts in the country, litigation to stop a franchisee from misusing the Brand’s rights is only a very very remote last resort!

There are no hard and fast rules that can be generalised about whether franchising, joint-venture or direct investment is the correct model to follow – each situation is unique to the specific companies involved, and it comes down to previous experience with franchising, the feasibility of franchising in that specific product or service mix, and the business attractiveness (risk and investment versus the return). Franchising offers an attractive model of business growth, certainly a more collaborative one which is in keeping with the changing and entrepreneurial environment. Now that both models, direct investment and franchise, are available, companies can actually make decisions based on a balanced analysis.

India has literally millions of individuals who would prefer to be their own boss and run a business, rather than being an employee. There are joint-families, where resources may be available in the form of some real-estate and family members who can be part of the business. Personal loans are available from family and friends, in the close social fabric of our communities. Ideal ground for franchising to grow.

To close, I must quote a conversation with an international Brand about 30 months ago. I put across the premise that given India’s potential size and strategic importance as a market, surely the brand would consider setting up its own company rather than a franchise relationship. The Brand’s head of internationalisation looked ambivalent because at that time FDI in retail was nowhere on the horizon, but thought that they might consider it if government regulations changed. Well, the government allowed FDI earlier this year. And yet, this brand recently launched in India through a franchise relationship, for many of the reasons listed above.

Franchising lives!

(Guest Column in The Financial Express on 5 May 2006)

(This was a Case Study Analysis for The Financial Express on the justification for implementation of ERP in a start-up modern (organised) retail business – 15 April 2006)

Most consumer, product-supply chains have evolved into fairly complex chains for two main reasons. Firstly, despite all the talk about removing intermediaries, there are still many people involved in the entire supply chain at different levels — for no reason but that they do add some value in the steps they are handling. Whether this is breaking of bulk, or handling of disparate products, shipping or storing goods, or providing bridge finance, each intermediary is in the chain because he has a role to play.

Secondly, and more importantly, product diversity has increased tremendously. Whether it is the number of brands available of biscuits, or the number of types of melons, or the package sizes of shampoos, the growing market has created more suppliers, more product segments and more variety for the retailer to handle.

With perishable items, a third factor gets added in: date of production and shelf-life. Clearly, even in a developing market like India which has lax regulation and low compliance, consumers are increasingly aware of perishability of products. And as companies grow in size and profile, their vulnerability to litigation also increases.

The retailer, who is the critical link between the consumer and the rest of the supply chain, must effectively manage not just the diversity and the perishability, but also communicate with and manage with the rest of supply chain. And given the nature of the complexities, Mr Paul’s business would have no choice but to implement an effective IT system that would keep the company’s executives clued into the information on as near-time a basis as feasible. For a company that is planning operations at a certain scale, even the opening of one store without the IT system would create a huge gap to overcome in subsequent growth.

However, the IT system alone cannot guarantee the success or failure, and certainly not the profitability of the venture. Technology may be seen as the easy quick-fix, or as the stick with which to drive process discipline. But to me it is the last link in a chain that begins with ‘People’ and leads to ‘Processes’. Without the right orientation, training and skills, effective processes cannot be created. Without effective processes, the best IT system in the world is, at best, very effectively enabling a bad organisation.

The advantage of an existing branded product is that it is more ready for roll-out than a bespoke (custom-developed) system would be. Not just would it take more time to create a bespoke solution, it would also require the involvement of senior management. Senior management time is a rare commodity in the best of times — in a start-up business, it is even more scarce.

There is also the premise that a branded IT product that has been implemented across other companies will have some amount of best practice built in. With the assumption that poor practices are not also built into the system, it might actually help the management to leap-frog the business learning curve.

On the other hand, Mr Paul may be paying for features and capabilities in the branded IT product that his fledgling business will not use for a long time. Customisation and implementation needs may also push the cost over the limit.

Therefore, the ERP system must be evaluated just like any other business investment or expense.

There must be a clear rationale for it, a very clear set of objectives and deliverables, and a well-structured programme and project plan for implementation. Like any other investment, IT must also be evaluated for returns.