The sector of retail that has been attracting the most corporate interest over the last few years is the food & grocery market.

Quite logically so, since this comprises the largest slice of spending – well over 40% in urban markets and above 50% in the lower income towns and rural areas. It, therefore, offers the maximum opportunity for rapid scaling. Working in sequential logic, the nature of that large business would be highly capital intensive, and the large amounts of investment and large footprint should logically act as entry barriers for competitors. Size should also drive costs down through efficiencies of scale and raise margins by removing intermediaries.

By that reasoning, the bulk of the small retailers should be out of business very rapidly, as the well-capitalised corporates buy their way into the market, whether by opening their own stores or by acquiring many retail chains and mashing them together into one company.

This has led some commentators and consultants to predict that within the next 5-10 years, as much as 25-35% of the food and grocery market would be taken by the so-called organised retailers.

That, in my opinion, is a gross overestimation of the pace of change.

Fortunately for the smaller retail chains and the independent mom-and-pop stores, and unfortunately for the large corporates, scale and efficiency is not enough of a competitive advantage at the local level. Retail is a business in which you have the opportunity of growing or diminishing your business’ future prospects every time a customer buys at your store, or chooses not to.

And the food and grocery business is tougher still, since you cannot impose a product top-down in India, with a mix of cuisines and cultures that are as varied as different countries in Europe.

Yes, change is coming to the food business. Like other products, food retailing in India will convert more and more towards modern retail, but it will happen in slices of percentage points. It will happen only when the modern retailers understand and respect the cuisine boundaries rather than imposing a sea of sameness for consumers across the country. It will also need retailers to plan and manage the supply chain and vendors at micro-levels.

There are plenty of speed-bumps and potholes on the way – proceed with caution.

During India ‘s misplaced years post-Independence, business and commercial activity was treated as a ‘necessary evil’. Businessmen were labelled as rapacious, self-interested people who needed to be kept under strict control. And shopkeepers were possibly among the lowest on the social ladder according to the economic and governance pundits.

In the last 20 or so years, fortunately, that tide has turned significantly – the role of business in economic and social growth is publicly acknowledged. Inspiring leaders such as Narayana Murthy of Infosys, Sunil Bharti Mittal of Bharti, and Ratan Tata of Tata Group offer aspirational models for a new generation of Indians.

Yet, retail, for all the zillions of column centimetres and hours of airtime that it gets, is still seen as a slightly dubious activity.

For most planners on the government side, it has been and remains an afterthought. Often, a few poorly developed square feet are allocated when a new community or urban development is being planned. On the other end, a number of massive glitzy shopping malls are being set up by real estate developers that have no correlation to their surroundings and catchment.

To my mind, retail developments need to be seen as part of urban infrastructure and also, more importantly, as part of the social fabric of a town or city. Government at all levels, especially state, district and municipal level, need to understand that the presence of successful retail developments in their population centres are an indication of the social and economic health of their localities.

A well-planned retail centre not only creates income for the local population and the local government, but also provides a very important socio-cultural platform for interaction between the different segments of a community. The presence of successful brands and retailers acts as an attractive beacon for other businesses, small or large.

Internationally several examples exist – especially in Europe – where after decades of suburban growth, town planners are focussing on re-developing ‘inner cities’ with a mix of large and small retailers, in environments that are shopper-friendly in every way. They are rethinking public transport connectivity, planning in pedestrian-only walkways, greening and sheltering, effective lighting, open spaces, and cultural centres. And yet, this mix would be incomplete without food and shopping.

Government bodies also need to realise that it is not productive to simply hand off large chunks of land to private developers to put up concrete-steel-and-glass blocks in the form of shopping centres. One should be able to look back 30-40 years hence, and say that the development added something positive and organic to the urban landscape in that town or city and was truly beneficial to the local population.

Visionary shopping malls like the Kapaliçarsi (“Covered Market” or Grand Bazaar) of Istanbul that was established in 1461, are obviously few and far between. Bluewater near London in the United Kingdom , and inner city developments on continental Europe offer more contemporary examples. However, India ‘s own traditional markets, at least until a few decades ago, also offer points of reference and inspiration.

I believe a rethink of the role of retail is highly overdue. If urban planners in the government and private developers can work together to plan and create more complete and ‘organic’ retail centres for the future, India ‘s urban centres will be far healthier and dynamic places to live in.

A few weeks ago there was an immense buzz about an email that was apparently leaked from Starbucks. Chairman Howard Schultz apparently had written this to CEO Jim Donald, and there was immense speculation about whether it was fake or a genuine leak.

Well, Starbucks itself put that mystery to rest by confirming the e-mail’s authenticity, and that makes it even more interesting. The soul-searching shared by Schultz in the memo, reflects the criticism that Starbucks has faced in recent years.

As a pioneer of “the third place” experience, it must be especially painful for Schultz to admit that the quality of experience now is below what the consumer would (or should) expect. In the quest for scale and efficiency, he says:

“…we have had to make a series of decisions that have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

He acknowledges ownership for the decisions, which he says…

“…were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is unfortunately much more damaging than the individual pieces.”

As a brand with over 13,000 locations, clearly Starbucks needs to be able to work with a model which is consistent across locations, can be implemented quickly, and delivers the product quickly and at controlled costs. Automation and packaging are two major areas that have given it that capability, but have also become the weak point of the experience from the perspective of coffee connoisseurs, or even people who would just enjoy a “rich and personal” experience.

Schultz quotes some specific cases that are especially powerful illustrators of what is right AND wrong with the business model.

“…when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency but removed much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista.”

Clearly the automatic machines improve the consistency of coffee delivered in each cup of Starbucks, and also reduce time the customer waits (a huge issue in many of the stores where peak-hour traffic can result in customer queues right to the door). But it is that much more generic an experience. And one would imagine that the barista behind the counter is also just that bit less involved (dare we say, less passionate) about the cup.

Creating a process (and better still, automating it) reduces the dependency on individual skill in any business, and is a strategy followed by all businesses that want to scale up without losing quality. However, an experience that is supposed to be “personal” and unique, needs to retain the human touch to a far greater degree.

Schultz talks about moving to flavour-locked packaging – again a great decision to retain the quality of the product across the chain of stores, while creating an efficient supply chain from procurement, through roasting, bagging and shipment to stores. Each of the outlets receive the coffee with a optimal shelf life left in the product. However, as Schultz says,

“…I believe we overlooked the cause and the affect of flavour lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma — perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage?”

When Schultz took over Starbucks there were hardly any significant competitors – it was either personalised, neighbourhood cafes or fast food joints serving low-grade motor oil masquerading as a beverage. The product itself that Schultz wanted to sell was not just the coffee, but the possibility of someone having a beverage in a relaxed environment outside home or a bar.

Today, Starbucks has itself upgraded the customer’s tastes and expectations, but risks losing that product leadership to smaller competitors, even as the fast food chains are improving the coffee that is served on the go, at prices often cheaper than Starbucks, and also as other “third place” options emerge.

It is the closing of the memo that shows a ray of light…

“…we desperately need to realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. I have said for 20 years that our success is not an entitlement and now it’s proving to be a reality…Let’s get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and 150,000 partners and their families who are relying on our stewardship.”

From reactions from various quarters, it seems that a lot of people not only agree with Schultz, but also admire him for his frank assessment of Starbucks’ weakening brand leadership and authenticity. When the leadership is honest with itself, there must be hope for the brand and the company.

An acquaintance who works with Starbucks expressed it eloquently when she identified the challenge of “staying small, while growing big” and said, “I’m glad our leadership hasn’t forgotten the qualities that have made us who we are.”

Starbucks remains a market leader by far, in terms of retail footprint worldwide and can only grow stronger by sorting out these issues which are at the core of the business.

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

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

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

• Given choices, consumers will choose

• Given better environments, consumers generally will migrate to them

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Franchising lives!

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