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December 15, 2008
By Sangita Ghosh
Images Retail
December 2008
THE INDIAN RETAIL SCENARIO HAS BEEN WITNESSING SIGNIFICANT ADVANCEMENT WITH TRADITIONAL RETAIL FORMATS MAKING WAY FOR MORE INNOVATIVE AND TECHNOLOGICALLY EVOLVED FORMATS. ONE OF THE INNOVATIONS TO WATCH OUT FOR IS THE ‘RETAIL KIOSK’, WHICH TRULY MAKES BUSINESS SENSE FOR RETAILERS BECAUSE OF ITS COST BENEFIT STRUCTURE AT THE ‘POINT OF SALE’ ESTABLISHMENT PROCESS AND EASE AND CONVENIENCE FOR THE CUSTOMERS TOO.
The concept of ‘Kiosk Retailing’ in the Indian retail scenario was virtually unknown until a few years-ago. Over the past few years, however, retail kiosks or mall kiosks have become an increasingly ubiquitous component of the retail and real estate landscape. The kiosk concept started gaining broad-based acceptance and success among the international retailers in the 90s; the model is now gradually getting a foothold in India.
Certainly, there are reasons for a kiosk scoring over a full size store – in terms of presenting a cozy yet convenient and eye-catching venue to attract the impulse buyers that pass through a mall aisle or a shopping centre space. According to Devangshu Dutta, CEO, Third Eyesight, "Kiosk retail can be defined by the presence of outlets with a small physical space in an open format with ‘temporary’ or even mobile fit-outs, but may be stationed at a place for a long time. The structure of a kiosk could be designed as a standalone structure like a terminal, or a semi-enclosed booth."
In general terms, kiosk retailing programmes are specified as ‘speciality leasing programmes’ and the retailers are called ‘speciality retailers’. Dutta says that any product that does not require a large amount of storage, can be sold without any preparation and served with minimal staff, is an ideal to be traded through the limited and open format of a kiosk. These can include physical products such as snacks, jewellery, holiday merchandise, novelties, or services such as financial products, simple medical check-ups, grooming and services etc.
The benefits of a kiosk format include:
• Avoiding unnecessary in-store product inventory and
associated warehouse costs
• They offer promotional opportunities for the retailer
• Help increase active footfalls for mall owners
• Reduce input costs by lowering employee headcount
through self-service and multi-use models
• Offer extremely lean and mean communication
• Facilitate interaction with the service retailers
and ease the way of availing their services
• Thus, result in incremental sales even at off-site
locations with more compelling revenue returns
In India, retail kiosks can be seen in shopping plazas and malls as small retail outlets to sell products or to facilitate services. A few examples of the retailers leveraging the kiosk opportunity include fruit juice brand Mr. Orange from MX Foods, Candico India, Boost, wellness retailers such as Kaya Skin Clinic and Lakme, financial companies such as ICICI Bank, Citi Financial and Reliance Money, holiday package providers such as Club Mahindra or insurance firms such as Max New York Life Insurance etc. In each case, the mall allots a space either on rental or revenue sharing basis to the retailer depending on merchandise. A relatively advanced form of kiosk retailing can be seen in Europe and US. In Europe, kiosk retailing has evolved as a special, advantageous and cost-effective category in retailing and is strategically located in the malls at frequent stops. In the US, kiosk retailing has emerged as one of the effective platforms of low-cost, low-risk entrepreneurship. These retail kiosks are also known as ‘creative entrepreneurship’ showcasing product categories such as handicrafts or other essential low-budget home improvement essentials or personal usage products. One of the leading global kiosk consultants and trade magazine publisher Patricia Norins quoted that in the US about 25 percent of the 50,000 -plus kiosks in shopping malls are owned or operated by recent immigrants – thereby giving them a low-risk option to establish themselves.
STARTING OUT
For a greenhorn, kiosk retailing provides easy but effective
branding with a much smaller space leading to lower rents
but with satisfactory sales that can establish a brand much
faster in high-end malls. Candico forayed into the Indian
retail scenario with its innovative kiosks designed in Dubai.
Mr. Orange sells fresh fruit juice from its orange shaped
kiosks that were innovatively designed in Spain. If the concept
is applied correctly and effectively in mall spaces, the format
of kiosk retailing would prove to be an extremely effective
profiting model, turning a large amount of under-utilised
floor-space in a mall’s common area into an innovative revenue
stream.
THE FORMATS
As the face of Indian retail changes, the structure, design,
functionality and application of retail kiosk is also evolving.
Generally ‘kiosk’ refers to a booth-like structure where simple
and inexpensive merchandise in isolation is sold. But of late",
the retail kiosk has evolve&" from this typically
four-sided, square structure to a limitless array of colours,
shapes and designs selling ice cream to jewellery to service
messages from concepts financial giants and real estate companies.
Then, there are technically evolved electronic kiosks, also
known as ‘interactive kiosks’, where a customised software
enables the user to access the system flawlessly for a specific
purpose. This structure could simply be a standalone computer
terminal with a keyboard or the latest touchscreen facility,
financial services or simply a tool to disseminate free public
service information. As outlined by Technopak, retail kiosks
in India have evolved in two formats. The first variant is
in the form of a small-sized shop, having a semi-permanent
fixture and is generally present within a larger establishment
such as a mall, department store, etc. In India, there are
quite a good number of F&B retailers across categories
who have explored the idea of retailing through kiosks – Candy
Treats, Cookie Man, Domino’s, Yo! China, Cafe Coffee Day,
Corn Man, Baskin Robbins, Mr. Orange, Nestle etc.
The second variant is the much advanced and technically inclined e-kiosks, which are largely services oriented and generally unmanned. One of the pioneers in this is Reliance Money, which began its operations since its very inception through kiosk retailing to reach out to as many customers as possible. Sudip Bandyopadhyay, CEO and director, Reliance Money, sees a lot of promise in this format, saying, "Kiosks are going to prove like ATMs, which revolutionised the banking industry. We hope our kiosks will change the way people avail financial services over a period of time." Reliance Money, at present, has a vast network of 2,500 retail kiosks at different places across the country based on target customer availability and accessibility.
WHY A KIOSK?
While kiosks can be very profitable for the owner of the real
estate considering the high rent, some developers also use
kiosks to make the retail environment more dynamic and fluid.
This, according to experts, shows the trend of a positive
future for the retail kiosks in India.
Rakesh Pandey, CEO for Kaya Skin Clinic, clarifies, "Be it brand building or business generation, the clarity of the parameter itself guides the financial implications of the kiosk model. Through kiosks, are you being able to capitalise on the short window of opportunity with a potential client at the venue? It’s important to remember that a potential client’s live experiences at a kiosk can either positively pre-dispose or completely turn off the client from the brand." Spencer’s Hyper, where Kaya has opened its retail kiosks, is of the opinion that the main retailer should be careful about the kiosk retail partner; the products retailed at the kiosks should have business synergies and target the same market segment. Samar Singh Sheikhawat, VP-marketing, Spencer’s Retail Ltd, elaborates, "Since modern retailing is all about the shopping experience, the partners in kiosk retailing should ensure that they conform to the quality standards and service level agreements as does the main retailer. This is to ensure that consumers have the same experience whenever they avail of any product from a particular retail outlet."
According to industry experts, innovatively positioned kiosks can become the centre of attraction in a mall and create a vibrant environment ensuring higher footfalls and revenue for the shopping centre owner. To create freshness or for a change in the shopping floor environment, one kiosk can be inter-changed with another temporarily, otherwise impossible with a full size retail store. Analysts point out that with the strategic point of sales coupled with the catchy placements in the shopping centres, the kiosk is becoming the new pull for both realtors and shoppers. When the retail kiosks offer services to the customers, it also increases consumer awareness and proposes new strategies for the retail brands to further diversify their business in multiple directions.
The Kaya Skin Clinic, for instance, has prototyped the kiosk
model to make expert skin-care easily accessible. Pandey shares,
"With the kiosk model, the idea for Kaya was to ‘go where
are clients are’, thereby saving their time and also aiding
them to make accurate decisions about their skin-care needs."
For Kaya, cosmetics account for the majority of sales from
these kiosk counters. ‘According to the chain, skin-care product
sales contribute to 30-35 per cent of the total sales for
the brands that sell both cosmetics and skin-care products
through this format.
Bandyopadhyay at Reliance Money says, "Our kiosks are
additional touch points for our customers to avail services
and it would not be possible to measure revenues separately.
Our customers can go online, use call and trade, visit our
branches or avail services through kiosks. The same customer
may use different modes at different points of time based
on his or her convenience."
Coffee Day Xpress, from Amalgamated Bean Coffee Trading Company Ltd, serves food at kiosks called ‘Xpress’ for those who need a quick bite on the move. The growth of Coffee Day Xpress also comes from its innovative franchising model. The low-investment, high-return business model has proved popular with entrepreneurs who are eager to cash in on the brand’s ‘plug-and-play’ kiosk concept that can get started within 10 days of the franchise agreement.
THE MERCHANDISING STRATEGY
The format of the kiosk, its position and its usability demand
a specialized merchandising strategy. As observed by Technopak,
the low value and impulse purchase appeal facilitate the usage
of kiosks for product categories that consume less space –
eateries, banking solutions, telecom services, flowers, tobacco,
books and music and fashion accessories. Besides these, innovative
e-kiosks, which provide multiple services such as ticketing,
payment of bills etc. and self-service -kiosks for photo development,
are also in vogue. Also, companies are increasingly using
kiosks for information dissemination and promotional activities.
Punit Khanna, principal consultant, Technopak Advisors, says,
"Products that consume less space and are as tentative
as impulse purchase items, are best suited for kiosks."
Based on the nature and format of the kiosks, the merchandising
strategy is crafted. Kaya Skin Clinic – with focus on creating
awareness among health-conscious consumers and future clients
– has a typical merchandising strategy whereas Reliance Money,
which operates self-service kiosks, has no merchandising and
depends on software for communication and backend operation.
Kaya kiosks have following features:
• Focus on POP material to communicate message
• Take-away skin-care literature to draw the visitor
to their clinics
• Arranging skin-care camps along with skin counsellors,
doctors for individual consultation
• Skin-care camps arranged usually on weekend, at a
high-footfall area in a mall or department store
Coffee Day Xpress is a modular kiosk of 60 sq.ft that can easily be set up in short notice. For that, they maintain a specific merchandising strategy with an ease and less complicated and ready-to-eat food on their menu. Other characteristics include:
• Each kiosks comes fully equipped with a hot coffee
– bean-to-cup machine, a cold coffee and a thick shake
machine, a blender, pastry cooler, microwave oven, griller,
and a refrigerator, to serve quickly
• Easy to maintain and clean
• Available in both indoor and outdoor modules
THE BUYERS
Kiosks retailing is driven by impulse shopping and is clearly
targeted towards consumers ‘on-the-move’. The
customers increasingly see a mall as a leisure zone; stopping
by a kiosk and trying out a relatively low value item such
as a glass of orange juice or a pack of candy or something
higher up in the value chain such as sunglasses or watches
is a natural activity in that environment.
“The target customers for a kiosk are the passers-by – often impulse buyers. Therefore, the merchandising and display has to be ‘alive’ and should be able to reach out to grab the customer’s attention in the busy environment,” Dutta points out.
Retail kiosks also have the USP of setting up interesting point of sales, catchy positions and attractive product lines resulting in satisfactory sales figures in comparison to the retail space they occupy, which can be replaced at times for variations.
STRATEGISING THE LOCATIONS
Most analysts agree that the ideal criteria for location selection
that a kiosk model looks for should be focused on high traffic,
high visibility areas at mall atriums, inside department stores,
hypermarkets or supermarkets, and places with higher footfalls
such as airports, railway stations and a metro stations. However,
meeting these criteria demand high investments from the retailers.
Says Dutta, “Kiosks work well in areas with
high footfall and high off-take, where the rentals per square
foot would also be high. Therefore, the financials of a kiosks
generally require high gross margins.”
According to Ali Mir, GM – retail, NCR Corporation, a technology company for Retail Kiosk solutions, “The strategic locations for a kiosk should be at the store entry, entrance of a department in a store, mall entrance, at each floor of a mall closer to the elevators, food courts etc. that give the kiosk higher visibility and footfall.” Kaya Skin Clinic, which banks on its retail kiosk network critically, considers the following factors before finalising a kiosk location:
• Footfall in the mall and that particular location,
and the average ticket size of the mall to measure the trend
of the weekend skew
• Direction of footfall and also shopper’s mood
when visiting their kiosk
• The visibility of the location
• TG of the particular mall or store
• Demographic and psychographic profile of the residential
catchments
While the chain is quite enthused by the kiosk format, the
extremely high rentals for kiosks, and the point of furthering
the ‘no-escalation clause’ of the lease that usually
expires after 11 months, can hinder the spread of a kiosk
network.
Spencer’s, which has kiosks in its 70 stores, is certainly banking on the point of high rental but at the same time they entertain hopes of ensured returns. According to Sheikhawat, “Kiosk retailers need to be judicious with respect to the financial model they agree to. It can either be revenue sharing or a flat rental, but that of course depends on what is more profitable to the retailer.” High rental payout is definitely something that is currently queering the pitch for this mini-store format. Bandyopadhyay of Reliance Money says, “The rent for the location and the space required to put up the kiosk is very high, sometimes unrealistic and extremely critical. High-footfall retail space is very expensive and the cost-benefit ratio needs to be carefully analysed. The retailer and the mall owner need to understand the same and fine tune the strategy accordingly.”
GOING FORWARD
According to the experts, not just start-ups or speciality
retailers but major retail chains and established brands are
also looking for kiosk solutions to enhance their retail presence.
Even big-box retailers are looking for an easy, convenient
and cost-effective solution though network of retail kiosks.
According to Khanna of Technopak Advisors, “Given that
locations favourable to the kiosk format, such as mall atriums,
railway stations, metro stations, airports etc, are being
rapidly developed in India, we shall witness a larger proliferation
of this format.” Khanna also states that retail kiosk
is increasingly spreading beyond the F&B sector to include
other products/services as well. Going forward, retailers
will increasingly invest in this format for the multiple benefits
of:
• Flexibility in moving or transporting to a different
location whenever required
• Easy utilization in a format of low investment and
of low overheads
• Swift roll-out
• Convenience of 24X7 retail with e-kiosks
Experts say the pace at which Indian retail transactions are increasing, it clearly highlights the need for a more technically developed solution that is designed to constantly evolve with changing needs. The trend shows the need for 24X7 self-service kiosks that mimic the ecommerce model. Demanding customers and best practices adopted by global retail giants are driving Indian retailers to harness the benefits of self-service technology of retail kiosks in bringing efficiencies and retaining consumers. Starting from ordering the products to delivering the same at customer’s doorsteps, cash transaction and checkout self-service kiosks are making an impression. The concept has taken off well and is now being considered as a mode to spread awareness and promote the products across categories.
However, experts caution that too many kiosks in a mall can create disruption in terms of the prospective footfalls and common area of the mall. Balancing factors need to be designed between the mall owners, retail tenants and the kiosk retailers for a truly win-win solution.
Devangshu Dutta
December 13, 2008
News items seem to be ringing the death-toll for offshoring (Here’s one from the Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2008/12/10/AR2008121003574_pf.html.)
Job transitions across borders are an emotive issue at any time, certainly even more so during times of economic upheaval such as now.
But should the debate be about “offshore vs onshore” or about management competence?
A management team whose effort isn’t structured well enough to deliver on their customer’s expectation of a good product (service included) could also find many things on which to pin the blame for poor service, including the geographical location of the support engineers, their native language or what they had for breakfast.
(Or, maybe we should reword the old saying: success has many fathers, but failure is the neighbour’s baby.)
My experiences of phone support around the world range from the superlative to the abysmal, sometimes within the same day in the same country. Painting in broad brush strokes and generalizations (“onshore is high quality and prompt, offshore is low quality and frustrating”) totally miss the point.
The best illustration is when you walk into two brick-and-mortar retail stores on the same high street, and receive dramatically different levels of service. In any country.
To my mind, it is senior management that drives service – vision, culture and the processes. Senior management is responsible for creating the environment, and for creating the hiring and training standards. If you are encultured for fantastic service, your location or origin on the globe is immaterial.
Remote servicing is challenging even without differences in time zones, languages, cultures. The lack of technical or any other sort of individual competence shouldn’t be added to the mix. And that goes for both (onshore) management and (offshore) support staff.
Lastly – followers of BBC sitcoms may be the only ones with whom this might ring a bell – Fawlty Towers should be on the must-watch list for anyone who has anything to do with customer service. Especially if they are part of the management.
Devangshu Dutta
November 22, 2008
Whatever you might say about “customer relationship management”, you can’t fault some companies for trying.
Only, sometimes they just try too hard.
For instance, one bank (that shall remain unnamed) sent an email with birthday wishes WEEKS after the event. You could laugh at the mistake, blame it on a fault with the IT system, whatever.
But what do you do when the very next day they follow it up with an emailed apology that says:
“Dear Customer
We apologize for inadvertently e-mailing a Birthday wish to you. Kindly accept our sincere apology for the inconvenience caused to you.
We look forward to your continued patronage and wish you the best at all times.
With Warm Regards
XYZ Bank”
Sometimes customer relationships should remain managed in an understated and old-fashioned way. Otherwise the “WOW Factor” can turn into the “WHA…?! Factor”.
Devangshu Dutta
November 13, 2008
For all those who have admired the consistency and presentability of produce in western supermarkets, here’s proof that tough times really focus us on substance and force us to look beyond skin-deep beauty.
Even in fruits and vegetables.
British supermarket Sainsbury has challenged European Union guidelines that restrict the sales of fruits by certain physical standards. Sainsbury’s is questioning EU regulations that prevent selling “ugly” fruit and vegetables. Due to EU regulations such as size of cauliflower (minimum 11 cm diameter) and the shape of carrots (requirement that there should be a single root, not multiple), Sainsbury estimates that up to one-fifth of what is produced in British farms cannot be sold in the supermarket. According to Sainsbury’s estimate, not following these regulations can help to reduce prices by up to 40%, and reduce wastage by up to 20%. The retailer is also trying to drum up customer support by running an online poll (94% responses were in favour of Sainsbury’s move, at the time this column was being written).
So less beauty could mean more veggies in the supermarket, and more money in everyone’s pocket including, hopefully, the farmer.
And this may also vindicate anyone who has complained that the beautiful veggies and fruits in western supermarkets taste inferior to their “ugly” counterparts sold on Asian hand-carts. Give us more substance and less style, any day.
Let’s look at some other substantial issues that merchants should consider.
Remember “I can’t get no satisfaction”? That’s what Mick Jagger and his mates in the Rolling Stones hit the world in the face with in 1965, allegedly in response to the rampant commercialism they had seen in the US.
After 43 years – at least judging by the modern supermarket shelves – apparently we still ain’t getting no satisfaction. In fact, the array of choice tends towards “overload”.
A typical developed country supermarket is estimated to carry over 40,000 SKU’s. Can you think of 40,000 types of items (or even 10,000) that you would need from the supermarket for your home?
So here’s the result. During my travels, if I’m in a store that is unfamiliar I could spend over an hour wheeling a trolley around before reaching the checkout. The first 5-10 minutes are focussed on figuring out the aisles based on my list. The next 10 minutes are spent picking what is actually on my list. And the rest of the time before the checkout is usually spent browsing through the thousands of SKU’s and picking stuff that we never knew we needed when the family made the shopping list.
Now, the guys who run the supermarkets are generally a smart bunch – they’ve figured that the more options you put in front of consumers, the more they buy. My cash receipts are proof of that. But, as American professor and author Barry Schwartz (“The Paradox of Choice”) says, the point where the choice becomes counter-productive is already well-past in developed markets.
With such overwhelming choice, consumers get into analysis-paralysis. And even after they finally purchase something out of the enormous range, you get shades of post-purchase dissonance. Only, in this case the dissonance, the dissatisfaction is not related to a bad product, but: “What if there I had made another choice? What if there was a better product than this? What if there was something available for less?”
During these times, it is pertinent to also put this in the context of business costs. There is surely a cost of providing that humongous choice in supermarkets. Have we considered what the saving could be, if the variety was reduced, if the product range was consolidated?
Consider the time (and therefore cost) spent on product mix and pricing decisions – surely merchandising teams have to be larger if you have a larger product mix, since each person can only handle a finite workload. Consider the cost of logistics of handling a widely diversified range. Consider the efficiencies lost in diverse production mix. So, does the consumer really need, really even want all that choice?
Retailers like the German chain Aldi raise precisely those questions. Aldi sells about 1,100 SKUs compared to the usual 40,000. And it claims that the typical shopping basket in Aldi’s UK stores is 25% less than competing supermarkets.
Indian retailers, of course, are possibly yet to reach that pain threshold of choice. There are possibly some potentially useful choices that are still missing. But even here, it is well worth taking a hard look at the product offering. With availability levels that can dip as low as 50-60%, it is probably worth asking – what if we dropped XYZ product from our range? Would it really hurt our sales or even our image; or would it help us to focus better on the products that really matter?
If we took our attention away from building such false choices, could the business become more profitable and therefore more sustainable?
The US and European markets are often the source of many a management thought and business model related to consumer products and retail, and of “best practices”.
So, in closing, I should share this question someone asked me recently: “when do you think consumer spending will bounce back in the US?” My first response was, “If only I had a crystal ball”. But the next thought in my mind was what if US consumers actually came to a decision that they had “enough”? What if their excessive consumption was no longer the role model for consumers in emerging economies? What if, instead, the frugal consumers of India and China became the global role model?
What would your business model look like then? Would your corporate be more socially responsible? And would it have a better chance of lasting longer?
For those who are interested in taking this inquiry even further, I can recommend John Naish (“Enough: Breaking Free from the World of More”, 2008), John Lane, Satish Kumar, M. K. Gandhi, Alan Durning (“How Much is Enough?”), or any number of ancient Indian, Chinese, Greek or Roman schools of thought, many of them pigeonholed into “religious” or spiritual categories.
You might also like this video of a talk by Barry Schwartz on Ted.com (below).
Do please share the results of your inquiry with us, too.
Devangshu Dutta
October 15, 2008
(Written in September 2008)
Over the last few years India has had one of the highest GDP growth rates, across the world, and consistently. In the last two years GDP growth is estimated to have been 9.6 per cent (2006-07) and 9 per cent (2007-08).
A combination of private and public investments in recent years, as well as steady liberalisation of regulations, has created a situation that is unique in India’s history as an independent country, where business growth has lead to individual prosperity which is, in turn, leading to explosive growth of further business opportunities. Although India’s per capita income still places it in the list of “developing countries”, a significant population has emerged that is truly middle-class.
Rising incomes have created visible shifts in consumption patterns. Certainly, more Indians regularly consume cereal flakes, processed cheese and fruit-based drinks for breakfast than did ten years ago. A generation has grown to adulthood wrapped in ready-to-wear clothing (with visits to the tailor mainly for wedding trousseaux). And, yes, Indian consumers are increasingly welcoming modern retail environments over the traditional
These economic developments have attracted the attention of both domestic and international consumer-goods companies and retailers, and several of these companies have seen annual growth rates 20-50 per cent in the current decade. Many of the new entrants into the retail sector are large business groups that have set up modern retail chains whose share, although still small, is growing year-upon-year.
This growth of modern retailing is also having an impact on the processes and the infrastructure deployed for the retail sector. These businesses are run as true chains which require processes and systems similar to any chain-store business anywhere else in the world including merchandising, sourcing, human resource management, logistics and store operations. These modern retail stores demand Grade-A buildings for shopping centres, with associated infrastructure and services within them.
Therefore this, in turn, has created a growing opportunity for companies that are manufacturers or vendors of consumer products, suppliers of other goods that are used within a retail business or companies providing services to the retail sector.
In the rush to grow, while challenges have been acknowledged, none of them have appeared seriously debilitating in the long term, until possibly now.
During the years 2003 through 2007, news headlines mainly focussed on joint-ventures or strategic alliances, new store openings, new format launches, and mega-investment plans. If human resources were mentioned, it was about the apparent domestic shortage, about the expatriate talent being pulled in, and about incredible salaries. If shopping centres and retail space was studied, it was the phenomenal growth in square footage and the increasing scale of the new malls that was the focus.
Suddenly, however, the tide in the press seems to have turned. There’s mention of “slow” growth plans of major retail joint ventures. There’s whisperings and denials about lay-offs, accompanied by some high-visibility exits.
It would be tempting to read the signs as evidence that the previous growth was based on hype, which has run out of steam. It would be tempting, and it would also be too simplistic.
The fact is that macroeconomic factors are also acting as dampeners in 2008, and the year may be marked in the recent history of India’s modern retail sector for the dawn of realism. Just as the growth of the retail sector was reaching into the not so profitable geographies and beginning to ride on not very efficient structures, economic growth has begun to slow down dramatically. From a 9 per cent-plus growth rate in previous years, a variety of agencies expect GDP to grow between 7.5 and 7.9 per cent in 2008-09. Further, the Prime Minister’s Economic Advisory Council forecasts a GDP growth rate of 6.8 per cent in 2009-10.
What’s more, 2006 and 2007 have brought about phenomenal increases in two critical cost heads: real estate and human resource.
So on the one hand, retailers are facing dramatically higher operating costs, and on the other hand demand seems to be weaker than they have expected. For businesses that have been launched in the last 5-7 years, such a situation is completely new.
Estimating the Demand – Still an Art?
Since the early years in the decade, most retail chains have grown quickly by identifying new sites and replicating existing successful business models and formats. Typically, the growth was limited in its geographic spread, and the underlying consumption pattern differences between the existing markets and the new locations were not stark enough to be immediately visible. Much of the growth, in fact, came from new stores in the larger cities, including the metros, mini-metros and the next tier markets.
This high replicability has allowed the businesses to rapidly scale up into becoming truly national chains, and the presence of modern retail formats has become visible among the larger cities and towns.
As the companies have begun to feel “saturated” in the larger cities, they have gradually moved towards the smaller towns, with their existing product-price-format offer tweaked slightly.
However, the ethnic, linguistic and cultural diversity of India’s 28 states and 7 Union Territories makes it less like any other single nation-state and more like a collection of countries such as the European Union. The result is sharp differences in income, tastes, habits, and culture, all of which present a challenge for consumer products and retail companies in terms of product and pricing mix.
Most European brands do not approach different markets within the EU with identical strategies. So why should we believe that the business formula that works in one part of India will work in exactly the same way in other parts?
A bigger issue is the realistic estimation of the target population. There are cases where the demand has been grossly overestimated, and the business infrastructure and investment plans are over-weighted by these expectations.
Estimates of 200-300 million middle class (50-60 million households) sound very attractive, but by what measure of income and spending standards?
Going by the pricing of many of the brands in the market today, it would be logical to use developed market income standards. If we use global income standards the middle class numbers are much smaller. The number of households earning truly middle class annual household incomes (not adjusted for Purchasing Power Parity), is less than 5 million.
Of course, the upside is that the growth rate in this income class is estimated to have been over 20% a year during the current decade and this group is forecast to comprise of over 3.7 million households or about 20 million individuals by the end of the decade. There are few other markets in the world where the target population displays a growth of over 20% a year! Moreover, the annual growth rate of the incomes earned among this population is also the highest in the country. Further, a large proportion of this population is concentrated among the metropolises, as mentioned earlier.
So it is a nice market to be in, if the business plan is sized appropriately. You can expect some homogeneity based on the socio-economic classification, and the geographical reach is also limited, allowing for organic growth.
A specific challenge for companies wishing to enter with a “western” business model or product mix is that, even through its most controlled years, India has been a market economy (unlike China’s decades of a completely centrally controlled economy). Therefore, in most consumer products there are several domestic brands and Indian avatars of foreign brands available, even if the choice is narrower than on the shelves of western supermarkets. Competing offers are available, whether from Indian companies or Indian subsidiaries of global consumer products companies. In that sense, India is not a virgin market. There is already some (or significant) amount of marketing noise and clutter, created by the existing competition.
It is vital, therefore, for any company to identify the true overlap between its offering and the most appropriate consumer segment(s) in India to assess the real short-term and mid-term potential for its retail business.
The Urban Retail Opportunity and Challenge
While we are on the subject of the cities, it is very pertinent to look at the spread of the urban population.
As India’s population moves increasingly into cities, it is the larger cities (Class 1, with a population of over 100,000) that are growing the most. From 308 Class 1 towns, the number of Class 1 towns and cities in India had grown to 643 in the 2001 census, and are estimated to hold about three-quarters of the urban population.
These cities are also economic magnets. No matter how attractive the new boomtowns may sound, the larger cities still pull in huge numbers of immigrants from the smaller cities, towns and villages, keeping the ecosystem vibrant.
Within these, in terms of economic potential for retail businesses, it is the Tier 1 cities (metros and mini-metros) that are the still unmatched. In 2001, the top-8 cities were estimated to have 40 per cent of the urban disposable income, and despite rising costs and rising competition these remain the most attractive market for a company looking to establish a new retail business. In socio-economic terms there is more homogeneity available to a brand wishing to tap into a critical mass of customers, discretionary incomes are higher (in absolute not just percentage terms), and the infrastructure available to service the consumer is better.
Of course, the side effects of the population overloading are now visible, ever more, on the cities’ infrastructure and governance. And some of the overloading is contributed by the development of shopping centre space.
The growth of modern retail has brought with it a rapid expansion in shopping centre space. This is both an opportunity and a challenge.
While the extraordinary growth of shopping centres has provided more space for brands and modern retailers to grow their business, much of the growth has been concentrated in the metropolises.
Almost half the shopping centre space by the end of 2007 is estimated to have come up in the conurbations of Mumbai and Delhi. This “over-shopping” could potentially lead to the failure of a significant number of these malls. The failure may not result in outright closure – the better sites may change ownership, while others might get repurposed as office blocks or other commercial projects – but it will be painful, nevertheless.
Paradoxically, despite the proliferation of malls, for retailers and brands high real estate rental costs are the possibly the biggest headache. In many instances, brands have signed-on high-rent shops with the aim of balancing their portfolio over time, and fully expect these shops not to make money in the foreseeable future.
Further, the intensive development of malls, without adequate zoning and planning of support infrastructure such as roads and public transportation is now stressing not just the city, but the malls themselves. Even if there is adequate parking space within the mall (as compared to a few years ago), what good is it if a two kilometre stretch of road before the mall is choked with traffic moving at 2-3 kilometres an hour? The convenience of shopping under one roof is totally outweighed by the inconvenience of spending thrice the amount of time on the road, and is a critical deterrent to a serious shopper who is being targeted by the tenants of the shopping mall.
Tier 2 and 3 Cities – A Work in Progress
A recent study by NCAER and Future Capital Research compared 20 cities, and classified them into the Megacities (metros and mini-metros), Boomtowns and Niche Cities. The naming of these groups is quite telling.
Megacities on this list include Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad and Pune, and have approximately 50% of their income as surplus after household expenses (other than Kolkata and Pune which show surpluses in the 30s). They have large populations, and combined with the surpluses, this up to a massive economic opportunity.
However, the smaller cities have been developing into economic hubs in their own right. If population is a key factor, then Surat would be classified as a metro. It has a high average household income, as well as a high surplus. Similarly, Nagpur, with its logistically important location is also developing into an important market. Along with Lucknow and Jaipur, households in these cities have seen double-digit booms in terms of income growth since 2005, a trend also seen in the Megacities.
This trend of income growth, infrastructure development, trickling of business hubs into the 2nd and 3rd tier cities, will continue to broaden the base of modern retail and distribution further outside of the major cities. On the other hand, while households in cities such as Chandigarh and Ludhiana have high surplus incomes comparable to the Megacities, the much smaller base of population would force marketers to treat them as niche markets until a critical mass develops over the next few years.
Thus, while much has been made about the boom in the smaller cities and towns, the formulaic approach of rolling out the same business model will certainly not work.
The signs of overestimation of demand in Tier-3 and Tier-4 cities is visible in instances of downsizing of store-space by prominent retailers, as well as relocation or closure of some of the new stores which have not performed to expectation.
The Tug of War to Modernise Retail
In my opinion retail is fundamentally an organic business.
Countries that have displayed inorganic growth of modern retail through large-scale corporatisation tend to be economies that have developed rapidly in the last 20-25 years. Among these are the East Asian economies and the former communist Eastern European countries. Three critical factors that have enabled the disproportionate and rapid growth of corporate retail in these countries are: financial muscle, a bank of real estate and strong political linkages. In other countries the high share of modern retail has grown over many more decades.
In other countries such as those in western Europe and North America, retail consolidation has happened over many more decades, boosted occasionally by phases of economic boom (such as the 1920s, the 1950s and 1960s, and then the 1980s).
Many observers have imagined that India’s retail growth would follow the East Asian and Eastern European countries’ pattern, and have projected that India will reach a state of significant consolidation through corporate retail businesses by 2015.
If that were to happen it would be a rather sad “monoculturisation” of the business. Fortunately, I believe, that it is not likely to happen easily.
Firstly, the modernisation of retail trade has typically moved in step with broader economic and infrastructural development. If we use per capita retail sales as a surrogate measure for the overall economic development of a country in conventional terms, the share of modern retail is closely correlated with that (see the accompanying table). Viewed through that lens, the Indian retail sector is still very far down on the list, and is likely to remain fairly fragmented for some time to come.
Secondly, India has a strong entrepreneurial and organic retail ecosystem (not just retailers, but also suppliers and support organisations). Given the diversity of the market, and the sustained fragmentation of consumer needs, I believe the growth of India’s retail sector will not be driven by large companies alone, although they are helping to accelerate the process of sophistication – indigenous, non-corporate retailers and their suppliers have a strong role to play in the ongoing development.
I believe the Indian retail sector will evolve along a path that may be a hybrid, and in fact, may be closer to the European and American model, with a significant amount of entrepreneurial competition dominating the landscape.
Therefore, it is important for the executives in corporate retail organisations to think innovatively, as an entrepreneur would – think truly like a “dukaandaar” (shopkeeper).
Would a dukaandaar open a store in a place where he has no hopes ever of making money? Would he consistently follow this strategy for years? Would he believe that he is building brand equity and goodwill by doing so, that will sustain him in the future? The honest answer to all those questions would be an unqualified “no”.
Any long-term strategy can only be built on the premise that the business will be sustained into that term. If the short-term cashflows are not available to keep the business alive, no amount of long-term thinking will help, as some retailers have recently acknowledged while shutting stores or entire businesses.
It is also important for the corporate dukaandaars to continue to evolve relationships with the fragmented supply base, and support the growth of indigenous national-scale suppliers.
Models for Inclusion
Inclusive growth has become a buzzword in recent years. However, I believe India is one of the few major economies where it is more than just a buzzword.
In 2006, at the National Retail Summit organised by the Confederation of Indian Industry I expressed the concern that we were getting too preoccupied with the western model of urban economic development and consumption and we were ignoring the gap that was creating in India (the text based on that presentation is available on Third Eyesight’s website). To my surprise, I had no fewer than 60 conversations during the day about the subject, many of them with senior managers in large consumer goods and retail companies.
Clearly, the thought of sharing the growth and prosperity more widely does strike a chord with many more Indian urbanites than one would realise. What’s more, quite a few companies are actually taking a direct approach into bridging the gap.
There is no one single model that is applicable to creating these bridges.
Some – large companies such as ITC and Mahindra or smaller ventures such as Drishtee – have created retail businesses that also act as local exchanges of services and goods in the villages. Many of them include villagers as co-entrepreneurs through franchise structures, thus helping to generate and retain wealth within the locality.
Others – such as Fabindia among the visible, or Khamir and Dastkaar – are channels for rural artisans to participate in the economic growth as suppliers to the burgeoning urban demand.
Food retailers have started co-opting farmers into supplying to them directly, where possible. The attempt is to bypass middlemen who act as aggregators, thus making more margins available to both retailer and farmer. Many farmers are indeed happy to put in some extra investment in minor equipment and some effort, to help grade, sort and clean the produce, so as to get a still better price.
Yet, certainly, more could be done. For instance, how about if the largest modern retailers in the country created a permanent display for regional crafts in all their stores, and took these along as they grow their chains in the coming years?
And how about retailers growing businesses through demand generated by economic growth in the much smaller towns? By encouraging regional suppliers and local buying (as opposed to the central purchase mindset), not only would retail chains be better merchandised for local needs, but also be plugged more into the local economy.
Let us not ignore the possibility of local retailers who are right now “flying under the radar” to become important factors in the growth of these smaller towns.
Demand generation in Tier III towns and semi-urban areas will accelerate as the logistical connectivity improves and shipping costs decline through multi-modal transport. There is significant investment happening in both road and rail connectivity, and the newly well-connected dots on India’s map are visibly more prosperous than earlier.
As these developments continue, we should fully expect strong retail chains to begin building up, first locally and then regionally.
When we speculate about who India’s Wal-Mart might be, we shouldn’t forget that the world’s largest company emerged from sleepy, semi-rural locations in the US, and similar developments might happen in India as well.
Facing the Challenges
The Indian retail sector also has some distinct environmental challenges that are bigger than the specific economic blip it is facing right now.
For instance, to my mind retail is an integral part of urban infrastructure, but in most cities retail is a sideshow for urban planners. Either the space provided is too little, or laid out in such a manner that no sensible retailer can expect to have a sustainable and profitable store in that location. Or, if a large space is provided for the private development of shopping centres, the public transportation connections are next to nil, while the car-carrying capacity of the connecting roads is usually poor.
Some of the other challenges are related to the Indian government regulations controlling the sector. As an example, in the area of fresh produce, some states still have regulations that restrict the wholesale trading of the commodities to the mandis, or controlled market yards. This means that the consolidation and processing of farm produce is more difficult and expensive.
Real estate costs are an ongoing challenge for retailers, especially those that wish to develop mall-based businesses. Some mall owners have begun evolving from being “builders” to mall managers with a long-term view on creating a business of shopping centre management, and have begun linking their rentals to the revenues actually generated by their retail tenants. However, in several cases, the real estate costs are still in the double digits.
Reacting to the high real estate costs, brands have begun looking at the possibility of generating higher gross margins to compensate. In most cases, this has meant that selling prices are pushed up, rather than sourcing costs being reduced. While the consumer has been largely transparent to these increases in the last couple of years, I don’t believe this to be a sustainable margin strategy. The cracks are already showing, in the steadily increasing volumes sold under discounts, and the emergence of discount retailers who sell off-season and surplus branded merchandise. The message, clearly, is: the real, sustainable, price is at least 25-40% lower than the MRP. The market looks ripe for the emergence of every-day-low-price business models.
If I were to list out my top priorities for retailers in India, these would be:
1. Realistic demand estimation
Many chains are grappling with too much square footage in a certain geography in the form of very large stores or too many stores. While allowing for the fact that the market is significantly different from what it was 10-20 years ago, let us not expect entire populations to have increased their consumption multi-fold. Sales expectations need to be realistic.
2. Store productivity
For an entrepreneurial business, each store needs to produce results. Sure, there will always be some superstar stores and other locations that are a drag on the bottom-line. The performance needs to be analysed on an ongoing basis, and fairly dispassionately. Store productivity is a function of merchandise availability, store operations, advertising to build customer traffic and a host of other factors. However, unless the store is a marquee location (which very few are), there is no excuse for sustained losses. Fortunately, Indian management teams are today less scared of damage to their reputations, and more business-like when it comes to taking hard decisions on resizing, relocating or simply shutting doors.
3. Pace your growth
Think of a teenager who gets into a growth spurt, and suddenly adds length to his legs. The gait becomes ungainly and he doesn’t really know what to do with the extra inches. Many Indian retailers have gone through a similar disproportionate growth spurt. While stores have grown, the sophistication of the business has not. Let’s remember, the race for retail market leadership is a marathon, not a sprint. The appropriate rate of growth should be determined by organisational capabilities, rather than what others are doing in the market.
4. People
There is no shortage of people in India, as one of the leaders of the industry pointed out a few months ago. Let’s stop creating an artificial scarcity. There are people around who have been in modern retail trade in India for decades and are committed to it – they have the experience. There are others who have only recently entered but need direction and training. The investment in these two sets of people will possibly provide longer lasting returns than artificially inflated compensations for round-robin resumes.
A major “macro” risk to my mind is that retail is seen through narrow lens both by itself as well by as the government and its various arms.
In most cases, the governments various departments continue to treat retail as an incidental trading activity, or as a milking cow through indirect and direct taxes. The outlook towards retailing needs to change beyond the few government luminaries who can be identified as the retail sector’s friends. Whether it is provided “industry status” or not, the fact is that retailing is an industry in India, and needs to be treated with more respect. Even the local kiranawala adds significantly to the community and even the fragmented the market association keeps a vital part of the local ecosystem alive and ticking.
The other side of the story, the retail sector’s perspective of itself also needs to change. Retailers need to look beyond promoting short term consumption. As they grow larger, they are beginning to have a disproportionate impact on society, lifestyles, income distribution and the broader economic fabric of the country. In most developed markets retailers realise how much change they can drive, and many are using this power to benefit themselves and their societies at large. As Indian retailers grow in scale, I think it would be wise to build the “corporate social responsibility” gene into the DNA at this very early stage.
Looking to the Future
Given recent developments, some people may feel that the retail boom is over and it may already be too late to enter the Indian market. I beg to differ: I believe there is still a lot of steam, a lot of energy in the Indian market.
In fact, it would be most appropriate to quote Shah Rukh Khan from Om Shanti Om, “Picture abhi baaki hai, mere dost!” (“The movie isn’t over yet, my friend!”)
The road to modernising the retail sector in India is long, and we have only taken the first few steps yet. Economically difficult times are wonderful opportunities for shedding flab, challenging existing business models and assumptions, and also provide great frameworks for building efficient and lasting companies.
In closing, I would like to borrow a theme from the two great growth sectors in Indian retail: food, and fashion. Both thrive on change. Both thrive on freshness. And that could be the winning theme across the Indian retail sector.
Here’s to a fresh start in 2009!
