In the last few months, I’ve interacted with retailers and their suppliers from a number of countries in North America, Europe and Asia and, except for a handful, the conversations have not been happy.

In November-December companies in France, Belgium, Germany and the United Kingdom were dealing with a season where there was as much red on the P&L statements as in the Christmas shop windows. In January 2009, the National Retail Federation’s annual convention in New York had participation that was somewhat thinner than in past years, but the gloom in the atmosphere was thick enough to slow everyone down.

On the other side, the factory of the world, China, had been battered by a Year of the Rat that brought increasing costs, erratic power supplies, slowdown in orders, safety concerns and product recalls. All of this culminated in reports of factory closures and migrant workers at railway stations on their way home for the Chinese New Year holiday carrying not just clothing, but all their possessions including fridges and TVs. The resultant unemployment figures expected currently range from 20 million to 40 million people.

The Indian retail sector, of course, has had its share of pain. In an idle conversation on a sunny December afternoon, a real estate broker in Ludhiana had a pithy description for one of the retail chains: “Unhone apne haath khade kar diye hain. Bakee logon ne abhi tak toh haath neeche rakhe huey hain – unke bhi upar ho jayenge.” (“They have thrown their hands up in despair. The rest still have their “hands down” – but they’ll also give up eventually.”)

On the one hand you have the gloom-seekers. In the eyes of some of these people, the retail boom is over. In the eyes of others, the retail boom was all hype anyway, a big bubble of artificial expectations.

On the other hand, you have other people asking some uncomfortable questions: here’s a country that apparently has the largest population of under-25s, where millions of new jobs have been created and incomes have been growing. How can retail businesses be showing a decline in their top-lines?

I don’t think anyone has all the answers, but I can offer at least one speculation, borrowing from the title of a book that came out some years ago, named “Irrational Exuberance”. Robert Shiller’s first edition was related to the dot-com stock bubble, and his 2005 edition added an analysis on housing bubble that was developing at the time. He had, in turn, borrowed the term from the US Federal Reserve chairman Alan Greenspan who in December 1996 had said in a speech: “…how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?”

We now seem to be in such an unexpected (but was it really unexpected?) and prolonged contraction. Of course, consumers are feeling more cautious about spending, even if their actual income has not been affected (just as it wasn’t affected when they were feeling suddenly wealthy 12-18 months ago). Obviously, stores that should not have been opened will now get closed, or excessively large stores will be reduced in size. Companies that are over-stretched may collapse completely.

But I would label the mood prevailing now “irrational despair” as far as a consumer market such as India is concerned. From a position of over-optimism, the pendulum seems to be swinging to the other extreme of utmost misery, dejection and complete pessimism, and I think that is a swing too far.

I think it’s worth reminding ourselves of the factors that make India a market for sustained consumer growth. The country looks likely to have a large under-25 profile well into the next several decades. These young people will grow older and get into jobs. They will get married and therefore expand the number of consuming households. If the policy-makers don’t really mess up, real incomes should go up. Infrastructure projects should largely remain on track, regardless of the political party or parties in power, facilitating industry, trade and wealth distribution.

So the time is right for business plans that have sound fundamental assumptions – or as the cement ad says: “andar sey solid” (solid from within).

I’d like to repeat issues that I have highlighted earlier as top priority for retailers and consumer products companies in India. These are as follows:

1. Realistic demand estimation: Let’s work with realistic sales expectations, and not expect all consumption to multiply like cellphones have in the last few years.
2. Productivity Analysis: As a retailer (especially in food and grocery), margins are thin. Except for marquee locations there is no excuse for continuous losses. Store productivity depends on merchandise availability, staff capabilities and store operations, customer traffic and a host of other factors, and you need to know what’s working and what isn’t.
3. Moderated growth: Many retailers in India have had tremendous growth in scale without growth in sophistication in processes or people. Some have been driven by motivation to capture market share, others driven by their investors who want an exit, and a few might have been driven by ego. I’m not asking anyone to grow slower that they want to, or slower than they should. However, I would say: do look at Intel. A manufacturing company that makes its own products obsolete in an industry where rapid change has been the norm for the last 40 years. Intel alternates changes in its production and supply chain processes, and products – it doesn’t change everything at once.
4. People: A leader of the industry pointed out a few months ago that there is no shortage of people in India. But the race to the top of the heap (or as it seems now, the bottom of the loss-making pile) has created artificial scarcity of talent. One benefit of the downturn is that artificially inflated compensations for people jumping on the “retail boom bandwagon” will disappear (at least for now). If we can use the experience of people who have been in modern retail trade in India for decades, and train others who are fresh but committed, it will provide a more solid and lasting impact for businesses.

A number of companies worldwide that we know as market leaders and businesses to be emulated found their feet in the depths of the Great Depression of the 1930s. That should give some hope to entrepreneurs and professionals.

However, does that mean that only bad companies or unprofessional managements will fail in the current downturn? Certainly not. Does it also mean that all good companies or competent entrepreneurs will succeed? Again, the answer is, no.

Some bad companies will manage to ride through this trough, while some really deserving people will run out of cash, ideas and opportunities. Life and “natural selection” processes are not fair.

But, by and large, if we can get our heads down and focus on getting the right people together, making money to get through and having something left over to invest in the future of the business, we would have more chances of succeeding than by over-stretching, or by swinging to the other extreme and being totally defensive.

I won’t even attempt to predict how long the current downturn will last. The Great Depression lasted a whole decade, was “walled” by the Second World War, and the first blooms of real recovery only appeared in the early-1950s, or about twenty years from the first downturn. Other recessions have been shorter. In 2000, after the dot-com bust car bumper stickers in the US quoted a political satirist, saying, “I want to be irrationally exuberant again.” Within a few short years, many people were showing those very signs.

We can be pretty sure that such a time will come again. But I’m also quite sure that durable companies are unlikely to be built on bursts of such exuberance.

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.

If you’re like me, then at any given point of time you have a vague idea about what is in your refrigerator, but not quite. That must why we end up buying stuff that duplicates what is already in the fridge.

Here’s an example of what that translates into for me:

• A second bottle of chilly sauce, when the first one is only half-way through
• Three semi-consumed jars of jams and preserves, none of which look anywhere near finishing for the next couple of months
• Three packs of juice because one came “free” with two others (and all open because the family does not coordinate its consumption of flavours!)

At other times, it is the semi-consumed half-loaf of bread that gets trashed half-way through its fossilization process. Or the new flavour of cheese spread, where the price offer may have been tastier than the spread itself.

I sure there will be at least some among you who would have similar stories. (I would be shattered if I’m told that I am the only one with these tales of inadvertent consumption!)

In the normal course, we would not call ourselves excessive consumers. For the most part, we believe we display rational shopping behaviour. We make our lists before leaving for the market and we generally know which shop or shops we want to stop in at. So, why do we end up doubling or trebling our purchases, when we aren’t actively “consuming” double or triple the amount of food?

Well, the lords of marketing spin have mapped their way into our minds. In a strategy that has been proven over centuries, we are offered things ‘free’ or at a significant discount. The very thought of getting something for free, or for less than what it is worth, is so seductive and irresistible.

(As an aside, just look at what has happened during the last few years in the real estate market and the stock market – everyone thought that they were getting a good deal because the stuff was “worth actually more” than the amount they were paying. Not!)

We believe we are being rational in buying the three packs of juice at the price of two – never mind the fact that juice wasn’t on the shopping list in the first place. The danglers and end-caps jump out and ambush us, as we walk through the aisles. The samplers entice in their small voices: “try me”.

You might say that the really traditional kiranawala is the customer’s greatest friend and also a barrier against uncontrolled consumption.

By keeping the merchandise behind the counter or in the back-room, he maintains a healthy distance between the addiction source and all us potential shopaholics. In fact, he goes beyond the call of duty, and even prevents us from stepping anywhere near the merchandise by delivering to our homes.

The enticing deals and offers that you can’t see won’t hurt you. You won’t call to get that new, exciting BOGO (buy one-get one) offer, because you don’t know that it’s there in the store.

Unless, of course, the sneaky brand with its accomplice – the advertising agency – sidesteps him, and puts out the temptation in your morning newspaper.

By now, surely, you’re wondering whose side I am on.

Well, as a consumer and a customer, I am only on one side – mine!

As someone who is intensively involved with the retail sector, I’m also on the side of the brands and the retailers.

And believe me, we are all actually sitting on the same side of the table.

The years in this decade, after the recovery from the minor blip of dot-com busts, have been like one mega party and most people have forgotten that parties seldom last forever. And the morning after the wild party can start with quite a headache.

Retailers and brands have recently acted as if there is no end to multiplier annual growth rates, and consumers have been only to happy to prove them right. Until now.

Currently, we are passing through a fairly serious global economic correction which started in 2007. But it has only really hit hard in the last couple of months, as the headlines have increasingly started talking about recessions and depressions. Naturally, there are some people who have really lost money, others may be looking at the possibility of lower income. But even those people who sustain their current incomes are “feeling poor”, just as they were “feeling wealthy” when the markets were booming.

Of course, superfluous or discretionary expenditure such as movies in multiplexes, eating out etc. are the first to get hit. But should grocery retailers rest easy – after all, people still have to eat, right?

And how about deals, and multi-buy discounts – isn’t this the scenario where “more for less” will be the strategy which will work?

Well, I don’t believe it is quite so cut-and-dried, or quite so simple. The grocery shopping lists will not only become tighter, but will also be more tightly adhered to. Anything that looks like it may be a wasteful expense will be unlikely.

Remember the deals in the fridge? What you are throwing away now starts looking like money being put into the trash.

Pardon the seemingly sexist remark, but men: your wives will not let you get away with driving your trolleys irresponsibly into aisles where you are not supposed to be!

So how should retailers and brands respond?

Well, a good starting point would be to understand what the real market is. Let us not infinitely extrapolate growth figures on a excel spreadsheet on the basis of the early-years of new businesses. Let us not extrapolate national demand numbers from the consumption patterns of select suburbs of Delhi and Mumbai.

When we have the numbers right, let’s look at the business fundamentals at those basic levels of consumption. Is there a viable business model?

Is the business full of productive resources, or are we overstaffed with “cheap Indian labour”?

Is your modern retail business or your food / FMCG brand really providing value to the Indian consumer? For instance, two very senior people from large retail companies were very vocal this last weekend in stating that the value provided by local business to the value-conscious consumer was grossly underestimated by the industry.

I believe that best filter for business plans is the filter of business sustainability. How sustainable is the business over the next few years? What is the real demand? What are the true cost structures, and can these be supported on an inflationary basis year-on-year, or will you be squeezing the vendors for more margin at every stage until the relationship goes into a death spiral?

Let’s look at macro-economics. Are you actively looking at generating and spreading wealth and income around, or is your focus only on stuffing that third pack of juice into the fridge for it to go stale? If your strategy is the latter one then, to my mind, that is neither a sustainable economic model nor a sustainable business.

There’s more about the current and developing economic scenario, “realistic retailing” and other such issues, elsewhere on the Third Eyesight website and blog, including a presentation made at the CII National Retail Summit in November 2006 (download or read as a PDF). (The article based on that presentation is here.)

I really look forward to your thoughts and would welcome a dialogue on how you believe retailers and brands should work through the next few years as we unravel the excesses of the recent past.

“The Indian consumer is a damn tough customer”, said a senior manager a large retailer in India.

But is it really so?

• Let’s understand that the Indian consumer is “value conscious” and not “cost conscious”: She’ll buy extra kgs of rice for a discount but not atta (the quality of properly stored rice enhances with time; atta deteriorates …… she knows it). The discount offered should definitely be higher than her “return on capital” involved in buying the inventory (however miniscule the capital involved may be).
• The Consumer is Smart: If we try to sell him a branded pressure cooker at 15% discount on printed price and he does not buy it, let’s understand that he has done his homework very well; he knows that 25% discount on printed price is available in every local “kitchen shop” that he goes to.
• Localization is King: Let’s draw some inferences from an old Indian adage “Kos Kos par paani badle chaar kos par baani” (which means, in India “the quality of water changes after every mile and the dialect changes every four miles”). In such a diverse country everyone can’t be served the same way, with the same products – localization holds the key. When you sell Dudhi in Mumbai and Ghiya in Delhi, you are selling the same bottle gourd but the nomenclature is important. Does inventory of srikhand in Delhi and paneer in southern India give any distinctive edge to your retail offer, or should you focus on something that is consumer more locally?

Are we trying to open a simple combination lock (the Indian consumer’s mind) with a complex cryptographic fingerprinting algorithm?

Retailers need to invest in understanding, gauging and benchmarking the local preferences.  They need to be able to react to those preferences in a highly local manner.  And they need to acknowledge that the consumer is an intelligent value-conscious buyer, not a cost-focussed idiot.

That is the magic 3-number combination to the riches of the Indian consuming market.

The Third Eyesight Knowledge Series© comprises of workshops designed and developed to help functional heads, line managers and executives refresh and upgrade functional and product expertise.  

Third Eyesight’s next workshop in this series is focussed on Creating & Managing Lifestyle and Fashion Brands.

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