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
August 21, 2008
August is the month when India celebrates gaining its independence in 1947.
So it is quite apt to think about the implications the word “independent” has in the world of grocery retailing as well.
India’s food and grocery retail sector (as most of the other product sectors) is full of traditional “mom-and-pop” operations. Estimates of their share of the market vary from 97% to 99.5% of the total food and grocery sales – but it is given that “independent” retailers rule the roost, and the estimates vary only in the degree of predominance.
The word “independent” in this context differentiates an entrepreneur-run stand-alone operation from a chain store, and encompasses all the kiranawalas and corner shops – traditional, modernizing, as well as the best-of-breed. The business owner-manager of these operations is solely responsible for merchandising, buying, staffing & HR, finance and the rest of it. If he works well, he makes a decent living and helps others to make a living as well. If he doesn’t work well, others may still make a living but he will most likely just scrape by.
In many ways, of course, the word “independent” is related to “freedom”. The phrase “independent retailer” also conjures up a picture of overall economic freedom, of self-ownership of one’s business and economic destiny.
There is freedom from an externally imposed operating framework, freedom in selection of products, freedom in pricing, freedom to service local customers for the store in the most appropriate and locally-relevant way, freedom to manage the cash-flows as the owner-manager wishes to, and so on.
This picture obviously is based on the premise that the independence that is assumed is actually available, as it would be if the market remains hugely fragmented and the supply base also becomes fragmented with many suppliers and brands fighting out for their share of the pie.
Clearly, to anyone who is actually involved in the retail sector that is a huge assumption.
Yes, the supply base is certainly becoming more diverse than earlier as new brands get launched in the market and battle for shelf-space. These brands include not just start-ups or mid-sized companies, but also large companies who are well-equipped to deal with the large incumbents on their own terms. This is surely a good thing for the independent retailer, as it provides him more choice and makes his shelf-space more valuable.
However, there is a quantum difference in the sophistication in organisation, information availability and financial capability between a single-location independent retailer, and even a mid-sized branded supplier, and the balance of power is actually more fragile than it seems. As a supplier grows, it builds up a differentiated position and a distinctive branding and becomes less easily replaceable, while each independent retailer becomes more and more generic, and therefore replaceable. The major differentiating or sustaining factor for most such retailers is their physical location, whose desirability and marketability is not as much within their own control.
When you add large modern retailers into the mix, the economic freedom of the independent looks even more fragile.
Some observers would have us believe that in India modern retailers have little or no impact on the long-term health of independent retailers. This is quite contrary to the ample evidence available from the modernization of retail over several decades in other markets around the world. (Should we chant the old hymn, “But India is different”?)
The fact is that modern retailers don’t suddenly lead to a boom in consumption of food and FMCG products. While there may be some increment due to greater supply and better retail techniques, a new store will invariably take business from existing retail channels. After all, given a choice of a wider variety, a better shopping environment, similar or better products, and similar or better pricing, why would consumers not shift some or all of their spending to a modern retail store?
This, then, brings us to the (sensitive) question – what would happen to the independent retailers in such a circumstance?
Of course, we can take heart from the fact that independent retailers continue to exist even in highly-consolidated and more “developed” markets, and imagine that such a thing will happen in India as well.
Let’s not forget that in some developed and consolidated markets, independents may be supported by local laws and regulations (such as urban planning constraints), while in other places they are supported by the community which may not just show their support by shopping at the mom-and-pop store but also by actively blocking the entry of large retailers and chain stores.
In India the picture is a bit more complex and nuanced.
One the one hand, the consumer is apparently quite happy to enjoy better shopping environments, the convenience of all-under-one-roof. And, while estimates of “wastage” in the food supply chain vary widely, it is widely acknowledged that modern retailers can have a significant positive impact on product quality, value addition, and logistical infrastructure. That is surely a good thing for the country when it is vital to explore every bit of efficiency in food production and its delivery to the population.
On the other hand, regulatory or activist blocks have started to appear already, very early in the growth cycle of modern food and grocery retailing. A few state governments have even taken to banning or at least restricting the growth of corporate-promoted retail chains. Traders’ associations in many markets are quite clear in their perception of the threat from modern retailers to the independent’s normal existence. They express the wish to retain a livelihood threatened by corporate-backed retail operations that are perceived to be competing unfairly with their deeper pockets.
One of the core issues here is the sense of ownership, of being one’s own boss, the dignity offered by being an entrepreneur. Think about what we said earlier about the sense of freedom. Is there a way to retain, or even improve upon that?
The answer may lie in franchising. This may be the bridge between the two sides, and the vehicle for a “co-opted” growth of both.
In a fragmented market like India, it will certainly be a while before corporate retailers can understand and service diverse localities as well as the independents can, or have operations that are as efficient as a kirana-store. As long as independents evolve their own business to offer consumers better service, keep their operating expenses low, manage their inventory closely and retain the energy to run their family business, they will thrive. Imagine if that management capability, sense of ownership and drive became available to a corporate retailer.
At the same time, surely the sourcing scale and marketing muscle that are available to retail chains could be useful to an independent retailer, and help him build more business.
The fundamental successful structure for franchising is identical the world over. The franchiser is an entrepreneur or a company with a product or service that has a market beyond what he can immediately service. The franchisee is an entrepreneur who wants to have the pleasure and privilege of being a business owner, but would also like to benefit from being part of an organisation.
For a win-win, both franchiser and franchisee have to bring something to the table, they both have obligations and responsibilities and both have rights. The framework of the franchise relationship has to be clear in defining these, and yet allow operational flexibility. The partners must also be able to break-away if things don’t shape up the way they have planned, without being too restrictive of each other after the break-up.
The Indian market is not new to franchising. Lifestyle products such as apparel, footwear and others have franchise networks that date back to the 1960s. However, food retail has only seen sporadic attempts at franchising (many of them unsuccessful).
Some of the problems can be tackled by improving the operational and system rigour, while others (such as how do you manage fresh produce consistently at franchise outlets) may be insurmountable in the short term and will require some constraints to be built into the business model.
I believe food and grocery retailers need to explore the option of franchising for faster and possibly more efficient growth, and for encouraging a spirit of partnership in the development of the grocery retail sector. Inclusive growth is a trite phrase, but very true in this context.
India has been and will remain a land of entrepreneurs, and companies would be wise to co-opt that energy.
Who knows – you may even be giving birth to a retail giant. After all, Sam Walton also began his business as a franchisee of another company.
admin
August 10, 2008
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Devangshu Dutta
July 14, 2008
In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury’s. About 2-3 weeks later the two were reportedly back together. The alleged differences and the apparent solutions have been reported widely, as also the feeling that some issues remain unresolved.
If that reads like something you would find in a celebrity tabloid, you’re probably right. The relationship between brands and large retailers is truly one of the “love-hate” kind. And this case is no different from many other such relationships in various markets around the world. In fact, the Future Group itself is reported to have had similar run-ins with PepsiCo’s FritoLay and GlaxoSmithKline in the past.
I won’t dwell on the various allegations and clarifications about commercial structures and differential pricing in this particular case, since the view from outside isn’t really clear. But it is certainly worth noting that this case is not unique, and thinking about what the future (no pun intended) might hold for brands in markets such as India.
There is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. Brand generally rule fragmented retail environments such as India. Large retailers, on the other hand, squeeze out more margins in the form of bulk discounts, placement fees and the like. There’s more: special promotions, differential merchandising and delivery needs…the list of demands seems endless.
On the other side, retailers love brands for the footfall they bring. The brand typically creates a “need to buy” on the consumer’s part, and invests in creating a distinctive proposition which is valuable in a cluttered market. In many cases the brand would have also advertised where it is available. This is all good stuff for the retailer, who then essentially has to make sure that the brand is available and visible in-store to the customer to convert the walk-ins into sales. However, what retailers don’t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product’s price itself is multiples of a generic product’s price.
The retailer-brand partnership is a very powerful one, even from early days. Many consumer brands and branded companies have scaled up significantly with the growth of their retail customers. The US market due to its sheer size and its evolution offers numerous examples including companies such as Levi Strauss, Hanes, Fruit of the Loom and Proctor & Gamble that grew on the back of discounters such as Wal-Mart and K-Mart as well as retailers such as JC Penney, Macy’s and Sears. Similar examples appear from other countries where the modernisation and consolidation of retail have happened over decades along with economic development.
An established brand provides the new retailer credibility, even as the retailer provides the brand new shelf-space. Or the other way around: even a new brand provides value to an established retailer by identifying the market need, developing the product, managing sourcing & production, and establishing the consumer’s interest in the product, while it is the established retailer who provides the much-needed credibility and presence to the new brand.
For most, this remained a happy relationship for a long time even as the retail environment grew and evolved. Retailers focussed on creating shelf-space and managing it, while the brands focussed on creating products and desirability.
However, economic shocks various times and the rise of low-cost imports raised questions in retailers’ minds about the value added by the brand compared to the margin they supposedly made on the higher prices. At the same time, better communication and travel infrastructure as well as falling costs made it easier for retailers to consider approaching factories directly.
Enter private label, the “other” in the love-hate triangle.
Over the last couple of decades, department stores, hypermarkets, grocery stores and even discounters have worked seriously on private label. The opening premise was that you could entice the customer with a lower price (sharing some of the margin earned by direct sourcing), and as long as you gave a comparable product the consumer was happy. Many Indian retailers followed a similar route when they began exploring private label.
The strategy has had a varied degree of success, much of it to do with how the private label has been handled (indifferently in most cases). Recognising this flaw, many retailers around the world have attempted to improve their handling of their private label product development and also presenting it also in a manner (including advertising) similar to a national or an international brand. Some of these retailers’ own labels are now serious brands in their own right even though they are restricted to only one retail chain.
The difference between a “label” and a “brand” is the inherent promise that a brand has built into the name, the repeated experience that the customer has had with the brand that reinforces this promise, and the relationship that develops between the consumer and the brand. All of this requires structuring, nurturing and careful management, and it costs time, effort and money. When the economy and individual incomes are growing, consumers are willing to shell out a little extra for a brand and all that it stands for.
However, brands get into trouble if income and spending perceptions turn downwards, and comparable products are available. The 10+ per cent premium between branded and generic begins to look like an important saving to the customer. Or conversely, due to the growing market more suppliers for the same product appear that the retailer can use as a foil to the branded market leader. With falling import barriers, more diverse contract manufacturing becomes available for sourcing private label merchandise. The scenario becomes particularly grim if the relationship between the brand and the consumer is not old enough to have become lasting – in this case, replacement of the brand with an alternative or a retailer’s own label is truly feasible.
The Indian market, at this time, shows all of the above ingredients. Inflation is making consumers reconsider how and where they spend their money. The growth of the market over the last few years has attracted several companies with alternative products and brands e.g. ITC as a challenger to biscuit-cookie major Britannia as well as to Pepsi’s potato chip brand Lays. Retailers such as the Future Group, Shopper’s Stop and Reliance have actively incorporated imports into their sourcing strategy. In many cases, the brands that most want to be on the modern retailer’s shelves are new to the market, and don’t yet have a strong imprint on the consumer’s mind.
However, at the same time, retailers themselves are still developing the systems and disciplines to manage their relatively new businesses. They are more than fully occupied with rising real estate costs, and managing the front end. If a brand can handle the product and supply side for a reasonable margin, they are more than happy to ride with the brand.
There is place for the branded suppliers in the market, and for them even to lead the market. Even as retailers grow, branded suppliers won’t lie down or die quietly. Many of them (such as Hindustan Unilever) are also actively engaging with smaller retailers, to help them improve their business processes and competitiveness. On the other hand, they are also reconciled to the inevitable growth of modern retailers, and are developing “key account management” functions, parallel distribution processes etc. to cater to the large retailers differently from the rest of the market.
So will brands survive, or will it be the retailer with the muscle of the storefront relegate them to a small portion of the market?
As long as the competitive pressures and economic cycles remain, the relationship between retailers and their branded suppliers will inherently be a tug-of-war for margin.
In either case, whether individual brands or retailers win or lose in the short term, the consumer will hopefully be a beneficiary in terms of better product, more variety and some sanity in terms of prices.
Devangshu Dutta
March 4, 2008
Picture an upper-middle class consumer out shopping groceries in a large, air-conditioned hypermarket after catching the new movie at the mall.
Global best-practice is the standard here. The aisles are wide enough to allow two shopping-carts to pass each other comfortably, and are organized according to product categories. The shelves are neatly ticketed, and the products equipped with bar-codes to allow for quick checkout. The emphasis is clearly on convenience. But (surprise!) the store has apparently underestimated the demand for the conveniently pre-cut and packaged vegetables. The loose vegetables are going untouched, while the pre-cut packs are almost sold out. Looks like another win for modern retailers.
This scenario would seem plausible to most people who have observed or been part of the growth of modern retailing in a market like India.
The “organized retail boom” and “growing consuming class” are consuming miles of newsprint and eons of airtime, while the malls are the gleaming new temples at which every devotee of retail must pay respect. This is the picture of modernization or organization of the Indian retail sector that comes to the mind of most people.
On the other hand, the picture that comes to mind when one thinks about the traditional sabziwala (greengrocer) is a total contrast. A messy side-street, with the push-carts overflowing with an indifferent mix of vegetables, other than the occasional yellow bell pepper or some other such “exotic” produce. Or the typical kirana shop owner scrawling an illegible list of items and figures on a scrap of paper and handing it over as the “bill” for the groceries one has just bought. Surely, a business model that is not going anywhere fast.
So, to most people, the line between modern or “organized” retail and traditional or “unorganized” retail is quite clear, and the differences quite stark. “Organized retail” usually means large, “corporate” stores that personify the so-called “retail revolution” which apparently is about 3-5 years old, while traditional retail business usually means “unorganized” and “belonging to the past” (or at least, soon to belong to the past).
However, a revolution is when the majority starts getting impacted. When only a few create a change that mainly benefits them, it is a coup.
To anyone who has been involved in the retail sector for longer, in fact, there has been a far more interesting, widespread and ongoing change in the retail business over the past couple of decades, and possibly further back. This is not restricted to a few corporate groups. It is not even restricted to the front-end (store-end) of the business.
The change is created by the feedback loop between customer expectation and the minimum acceptable standard of service which is constantly being moved up. Of course, the newly-minted corporate retailers have a role to play in this. But, more than that, it involves many small changes accumulating organically over a period of time involving individual kirana owners, farmers, wholesale traders, market associations, the FMCG companies and even the migrant villager who sets up a hand-cart that may be stocked daily with rolling credit from the money-lender.
And that is my point. The modernization of retail is an ongoing process, and it is sustainable because it is widespread.
In recent Indian retail history, as customers we may identify a point where we saw the local shop shift from stocks in a dingy back-room to being displayed openly, setting the example for other shops in the market.
But the changes needed were not just at the retailer’s end – they also required the wholesale vendor’s approach as well as the FMCG principal’s approach to begin changing.
Certainly a shift occurred in service standards, when vegetable vendors started taking home-delivery orders on mobile phones – impossible without the wider telecom price-quality revolution. And when credit card swipe machines started appearing in the kirana, something that could have only happened with the support of the banks and their intermediaries.
And the pre-cut packaged vegetables whose demand the hypermarket had underestimated? Well, the sabziwala has that covered as well – beginning with the packs of cleaned baby-corn, this list has now expanded to include pre-shelled green chick-pea (chholiya), cut jackfruit and chopped sarson saag – vegetables that can be quite inconvenient to clean at home when time is scarce.
The impact of this modernization was brought home to me, when I observed a customer reprimanding the local sabziwala for not keeping adequate stock of shelled peas. The interesting aspect was that this was not one-half of an upwardly-mobile DINK couple. The customer here was a domestic helper, whose complaint was that he had many other jobs to get done around the house, and shelling peas was something that was too time-consuming and best “outsourced”!
So, to all those who have the question, “what is the key to succeeding in the Indian retail market”: the key may lie somewhere entirely different from where you have been looking, or the customer-profile that you have been building.
We are surely underestimating the business potential amongst India’s middle and not-so-middle classes – as we would discover if only we were to re-state business objectives and tweak strategy a little bit, and look at the market without high income-tinted glasses.
