Devangshu Dutta
December 18, 2009
(Contributed to the BusinessWorld cover story – “What 2 Expect in 2010”, issue of January 4, 2010)
Everything that can be said and assumed about the Indian market is true at some level of granularity. Very simply, in India there is a segment for every product, an opportunity for every service, be it ever so small. But when bubbles are bursting all over, as the Noughties Decade comes to a close, the puzzle that is Indian consumer market also warrants a fresh look.
For most of the Noughties Decade India has seen Generation-C, the “Choice” generation, coming of age. They have moved over from being “secondary customers” consuming off their parents’ incomes, to entering the work-force and becoming customers in their own right.
It may sound trite, but Gen-C customers have grown up with many models of 2-wheelers and 4-wheelers and colour television with multiple channels. They have many more career options and many more opportunities in each career. Not only have they grown up on a diet of choice, they have also grown up with much higher confidence about the future, about their place in the world and what they can expect. And they have infected the outlook of generations older than them as well with a similar confidence.
Therefore, for most of the decade, it has been a distinctly rosy picture for consumer goods marketers and retailers. Business plans routinely expected 20-50% annualised growth, and businesses even delivered those figures on some basis or the other. Organizations as diverse as retailers and management consultants were inspired by India’s age-old image as the Bird of Gold. Supermarket chains mushroomed like never before, department stores and speciality retailers grew their footprints, quick-service and casual dining expanded covers, while electronics, durables, leisure companies, and car brands all counted India among their hottest markets.
Product off-take reflected this outlook. Amongst the FMCG sector, while basic items such as the bath and shower segment demonstrated a steady annualised growth of about 7%, premium cosmetics galloped at almost 20% a year. While the relatively mature 2-wheeler market grew at just over 7.5% annually between 2002-03 and 2008-09, the 4-wheeler passenger vehicle market demonstrated growth of almost 14% a year in the same period.
All this was before the recent rude interruption.
A speed-breaker began showing up in the consumer market in late-2007 and grew larger through 2008. Once the global financial markets melted down in late-2008, media sentiment turned acutely negative about the Indian market as well. And, eventually, with uncertainty prevailing around the world, consumer spending in India did take a hit. Consumers cut back on the frequency of purchases or traded down.
On the trade side, retail businesses began acknowledging that stores were performing below plan and went into rationalisation mode. For branded suppliers, where some of the growth had come from stuffing the pipeline and filling new shelves, wholesale order books became thinner.
Yet, as painful as the economic scenario might have appeared, the Indian consumer market has shown remarkable resilience. Demand in smaller cities and towns has remained robust. Regional brands, especially, found plenty of opportunity to grow in markets and geographical regions where they were under-penetrated or absent.
And as the mood lifted through the latter half of 2009, consumer demand clearly moved back up. The speed at which the demand rebounded would suggest that the Indian market was relatively sheltered from the global economic storm.
However, there are some critical differences to understand.
On the one hand, Gen-C’s confidence shook for the first time – a generation that has only seen upward mobility, witnessed job cuts and salary freezes or declines even if only second-hand. Comparisons with the Great Depression may be exaggerated but it is a scenario they can now imagine as a possibility. At least three new professional academic batches have or will have moved into the job market under these sober conditions. On the other hand, tremendous inflation in basic costs supports some amount of uncertainty about the future. The fact that many of the Gen-C would have just begun or would be about to begin families serves to only heighten such anxiety.
So, let’s recognise two immutable facts about the Indian consumer market in the current environment.
First: that the ancestral “steel safes” are back, at least figuratively if not literally. Customers do want to save more for now. And if they are spending, they want to feel that they are extracting far more value than the price they are exchanging across the counter, value that will last long after the transaction at the store. In recent years, this inherent ‘value orientation’ of the Indian consumer was neglected by many. Now every product, service or brand must aim to deliver this sustainable value, and demonstrate the value repeatedly.
Secondly, each business needs to look at the lifetime value of a customer if it can. Rather than cutting the golden bird open and trying to extract all the golden eggs at once, one needs need to keep the bird well-fed, happy and healthy, and enjoy its rewards over several years. Rather than creaming the market, pricing, branding and distribution need to be structured for a sustainable relationship with the customer.
Some businesses will work better than others in this market, and strategies will need to be adapted. A lifecycle approach may handy in identifying the business segments which might meet the steel safe criterion, or the golden goose criterion, or both.
The first segment that comes to mind is weddings. Wedding expenditure is seen as a “social investment” for both the families, and the actual items bought are an investment into the couple’s future together. So, bridal trousseaux and wedding wardrobes, wedding arrangers and catering, and household goods provide significantly more tangible and intangible value than the money spent.
Similarly, “first child” isn’t usually a segment in any marketing handbook, but should be. The couple’s first born, especially if the baby is the first in its generation will usually get a disproportionate amount of attention and spending on clothing and utilities. A baby’s growth into a child, of course, can provide a relationship and marketing opportunity that can last for years, but the first 2-3 years are specifically valuable. What’s more, given India’s demographic dividend in the form of a sustained under-30 age group, baby products have a sustained and growing value as a market.
As the child grows, there are clear indicators of current and future value that can drive purchases. While base schooling is an essential expenditure, extra-classes and tuitions are a high-value discretionary investment that parents are choosing to make. Sports, on the other hand, however essential they may be to a child’s development are often seen as a distraction. That is, unless the child is attending sports coaching and the parents have an eye on helping the child create a career from it – in which case, a coach who is apparently good, branded equipment and kit are definitely worth investing in. So a cricket coaching franchise might just be the ticket to fortune, while a toy company may struggle. Some may decry the decline in art, craft, philosophy and fundamental sciences, but these are not on the list of priority of most parents. In the short to medium term, parents would continue to disproportionately push their wards into academic disciplines that are seen to develop marketable skills and pay well. Expect continued growth in the engineering, medical and management education market, but also in other vocational disciplines.
On the other hand, everything is not an investment for the future. Present comforts may also provide extra value, through convenience.
Some of these comforts may be as small as enjoying out-of-home exotic meals (pizza and pasta still qualify as exotic for the bulk of the population). Or if eating out looks out of budget, ready-to-eat and ready-to-cook meals are an easy substitute. Jubilant, Yum, McDonald’s, Haldiram, Sarvana’s, Nirula’s and the thousands of other casual dining and snack food chains have a long clear highway of growth ahead, as do snacks and packaged food companies such as Nestle, Britannia and ITC.
Brown goods and white goods that offer comfort and convenience – coolers, water heaters, convectors, air-conditioners and kitchen gadgets – continue their onward march, despite the huge shortfall in electricity. Even if the big brands struggle with their price points and overheads, regional brands and private labels will continue growing strongly in these segments.
Health is another area for significant investment. With prevalence of lifestyle-ailments, from stiff necks to high blood pressure, basic pharmacists to cardiovascular specialists are all in demand. Anticipate significant growth to continue in over-the-counter medication, medical devices, as well as clinical and hospital care.
At the other end of the scale, with decent and adequate public transport lacking in most cities, we can expect personal vehicles to increase multi-fold, despite the small blip in 2008-09. About 60 million 2-wheelers and over 10 million passenger vehicles have already been added during the decade, and the growth trend looks set to resume from 2010, unless there are significant oil price or vehicle taxation shocks delivered by the government.
And as consumer confidence resurges, more overt displays or personal spends will return as well, including apparel, footwear, home products, accessories, vacations, fitness and recreation, but we would expect them to follow behind the higher priority “safe” or “geese” segments.
Finally, the one thing that marketers in any product need not be really concerned about whether there is a future in this market. Even, Hindustan Unilever, a mature FMCG company with very high distribution penetration built over decades, still counts less than 60% Indians as its customers.
Surely most companies have a much longer road ahead before they need to be worried about their markets becoming saturated.
Devangshu Dutta
February 13, 2009
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:
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.
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!
Devangshu Dutta
September 12, 2008
You can probably tell that I’ve held the view for some time now that the retail sector needs to pause for breath, and evaluate its growth strategies on some very fundamental parameters. (“Disclaimer”: Having invested 2 decades in the retail sector, I have an inbuilt bias towards the entrepreneurial and organic nature of retail, which is probably evident!)
As I was recently writing an article with the theme of “realism” echoing strongly, I came across this statement by Kishore Biyani of Future Group on 27 August: “I was an eternal optimist; now I have become a realist.” (Bringing Back Retail Realism, from MINT).
Now, with the India Retail Forum coming up next week, it’s interesting to read a mailer from the Retailers Association of India, with this wonderful quote from B. S. Nagesh, of Shopper’s Stop: “We have opened store after store and are in the process of opening many more – 100 … 500 … 1,000 … 5,000 and may be many more. Let us pause for a while for a reality check … Are our customers happy? Are our employees happy? Are our vendors happy? Are our stakeholders happy? Are we happy? …. The answer for all these questions ought to be ‘YES’ but in reality it is ‘NO’ for some. Where we have gone wrong? What do we have to do?… It’s time to share, reveal, reconcile and find ways to amend … And to open up, debate, consolidate and collaborate thoughts before we take the next step.”
I think we may finally get things back on track, with two of the most prominent leaders of the business asking the sector to reconsider and review.
When I wrote an article titled “The Myth and Reality of the Retail Revolution” 2-years ago (in August 2006), some friends looked at the title and said I was being pessimistic. I disagreed, and said that I was being realistic, especially since I ended it by saying that the real retail boom had not yet happened, and we had only scratched the surface. Organic growth will get us there – crash and burn won’t. (To judge for yourself open that article as a PDF – click here.)
What do you think?
Devangshu Dutta
March 13, 2008
Many people I know treat shopping centres or malls as a new phenomenon, a progressive development of recent times or a modern blot on the traditional cityscape (depending on your point of view).
However, Grand Bazaar (Istanbul, Turkey) is the earliest known mall, with the original structures built in 1464, with additions and embellishments later.
In India, if one were to include open arcades, Chandni Chowk in Delhi is reported to have opened around 1650, with its speciality shopping streets. (Of course, more traditional bazaars have been around many thousands of years around the world.)
But even if one were to get more “traditional” about the definition of a mall, possibly India’s first mall was founded in the hottest city in the country then, Kolkata (New Market) in 1874.
In more recent history, Delhi’s municipal pride, the air-conditioned underground Palika Bazar was a novelty in the mid-1980s, while Bangalore’s Brigade Road saw several early pioneers with their shopping arcades in the late 1980s.
Then came the mall-mania beginning with Ansal Plaza in Delhi and Crossroads in Mumbai. Everyone started looking at malls as the new goldmine, being pushed ahead by a “retail boom”.
The early stage of any such gold rush usually has several experiments missing their mark, which is what has happened with the hundreds of mall-experiments that have been launched in the last 7-8 years.
Some of the significant and common issues are starting to be addressed, but many others remain.
Catchment-Based Planning is Needed
The top-most issue in my mind is “oversupply”. While this may sound absurd to many people, given the low figures quoted for modern retail, I am referring to the over-concentration of malls in a small geography. If 8-10 malls open 4-5 million sq. ft. of shopping in a catchment that can only support 1 million sq. ft., everyone knows that some of the malls will fail. But everyone also believes that their mall will succeed (otherwise, they would obviously not have invested in the mall).
What happens to the malls that fail? Depending on the design of the building, many of them can be repurposed into office space – another area where a lot of investment is still needed. So in the end, actually, most people win, one way or the other. Yet, there will be some losers. Does anyone “plan” on being one?
The second key issue in my mind has been that mall developers have been thinking as “property developers” rather than retail space managers. The successful shopping centre operators worldwide (now also in India), are actually as concerned about what and who is occupying that space as a retailer would be. They are concerned about the composition of the catchment, the shopping patterns, the volume of sales, the shopping experience. Therefore, the tenant mixes as well as adjacencies are factored into the earliest stages of planning the shopping centres.
In fact, if I were to identify the most critical operational problem for many of the malls, it is the lack of relevance to catchment and, therefore, the low conversion of footfall into sales for the tenants other than the food-courts. Customer flow planning within the mall is another factor that can make a tremendous impact on the success and failure of the tenant stores.
Once you start looking at these factors during the planning of a mall, another obvious aspect that jumps out is “differentiation”. Currently, there is little to choose from between malls (other than possibly the anchor store). However, with more clarity in terms of the target audience, the potential strategies for differentiation also become clearer. The visitors also become segmented accordingly, and there is a natural benefit to the tenants occupying the mall.
If, as a mall operator, you want to be in business for long, and also develop other properties in the future, the success of your tenants is probably the most critical driving factor for your business.
Integration into the Urbanscape
When we gauge malls from the perspective of integrating within the urban landscape, there are obviously some glaring errors being made. Instead of aesthetic design that reflects the heritage and culture of the location and its surroundings, or some other inspirational source for the architect, most malls that have come up are concrete and glass boxes.
Beyond the looks, some of the malls are a victim of their own success. They attract more crowds during the peak than they have planned for. Not only does the parking prove to be inadequate, there is no holding capacity for cars entering or exiting the mall. The result is a traffic nightmare – not just for general public, but even for the visitors to the mall. Someone who has spent 45 minutes stuck in a jam waiting to get into the parking of a mall will certainly not be in the best frame of mind to buy merchandise at the stores occupying the mall.
Some of the problems lie outside the mall-developer’s control – for instance land costs are a major driver of the cost of the project (and, therefore, the lease costs to the tenants), and land is a commodity which is independent. Real estate is available within the cities as brown-field sites (former industrial locations), but the regulations are convoluted and the strings are in the hands of too many different departments of the government (city, state and central). This needs joint creative thinking on the part of developers, the government and the public, if our cities are to develop in a more sane fashion than they have in the past.
Similarly, land deals are still not clean enough for foreign investors to be comfortable participating in many developments. This obviously is holding back a tremendous source of capital and domain expertise that could contribute to the growth of this sector.
Many other operational issues exist – manpower, systems, health & safety – some of them can be managed or controlled by the mall developers, and it is a question of time (and of their gaining experience). Other issues are more in the domain of the government, and need a visionary push to make “urban renewal” a true mission.
New Life for the Cities
In my opinion, one of the most interesting areas which would be in the joint interest of almost all parties (that I can think of) is the possibility of revitalizing the high streets and community markets, and reinventing them as the true centres of shopping.
Many of our markets are rotting (a strong word, but let me say it anyway). The individual stores are owned by individual owners who are not all equally capable of maintaining the same look and feel throughout. The infrastructure in and around the markets are owned or managed by several different agencies. To make matters worse, there is often no cohesiveness and no synergy in the interests of most of the members of the market association. None of these individually have the power or the mandate to recreate the shopping centre. But what if they could get together and take the help of a re-developer?
If an example is needed, New Delhi’s Connaught Place provides the example of one stage of redevelopment. Connaught Place had lost its pre-eminent position as a shopping centre, due to the spread of Delhi’s population and the new local markets that had come up. Further disruption was caused by the construction by Delhi Metro. But DMRC has reconstructed an “improved” centre, and the Metro connectivity has made the customers come back into CP, as it is affectionately known in Delhi.
There are clearly many such opportunities around India’s cities. These need to be looked at as a commercial opportunity for all concerned (revenue for the redeveloper, better sales for the store owners / tenants, more tax revenue for the government from additional sales and consumption). But it is also a broader social opportunity to breathe a new life into our cities, and to make them proud beacons of a growing India.
It would be a mission that would truly prove the worth of shopping centre developers, urban planners, regulators and the retailers themselves.
Any takers?
