The Indian retail landscape has undergone astounding transformations in the last decade. From the highly fragmented, family-run mom-n-pop stores, new formats of medium to large-sized Indian and international retail chains, amongst others, are today decidedly visible across the country.
With India experiencing diverse economic challenges, the retail industry, in particular, is feeling the additional pinch because retailers, who are still facing the challenges of organising their new formats, are receiving lesser consumers walk-ins and those that do, have sharply cut back on their spending, thus doubly jeopardising the industry’s growth. This is no time to fear the current economic situation, but a time to consolidate and optimise a strategy which would be the answer to value creation and survival in the retail sector. Retailing that will emerge thereafter will write the history of a great industry in India.
Learning from other industries
In a way, the retail industry is going through what the biggest Indian industries have already seen and learnt and which are now regarded as the ‘Pillars of Modern India’. A glance into the blueprints of some of the biggest industries of India today, like telecom and airlines, will reveal that they have gone through a phase of teething troubles, challenges before consolidation, profits and massive expansion.
In 1998, the telecom industry needed huge investments. There were players trying to draw level with major investments in infrastructural, match product and service delivery. Even today’s most successful companies, like Essar Telecom, were roughed up by more than a few days of bad weather. While a call today costs Re 1 (if not lesser)—a far cry from the Rs 16, and service available even in an elevator, the telecom industry is posting profits despite the downturn.
What brought about this change? The answer lies in the telecom players’ drive at consolidation, pooling of common resources towards infrastructure and providing territory-based services which eventually gave the economies of scale and culminated into excellent consumer service, creating an environment where a cell phone transformed from a luxury to a necessity.
Similarly, a glance into the airline industry’s growth chart will show an analogous setup. Private carriers have been able to project themselves as first names in domestic transportation only because they provided value-for-money services which they achieved by pooling in their resources right from the common ground staff and services to sharing carriers during low occupancy.
Today, retailers should not restrict their leanings towards the best practices followed in the retail industry in India and abroad, but should look at other exemplary industries to learn on various important business parameters.
Retail is India’s largest industry, accounting for over 10 per cent of the country’s GDP and around eight per cent of the employment. The global slowdown coupled with domestic competitive pressures, especially the pressure on sales growth, and profit margins have put tremendous strain on the new organised retailers who were still looking to grow their enterprise. The recently concluded NRF Retail Conference in New York in January 2009 has also confirmed that this would be a tough year for the industry.
But, if we dig a little deeper, we will realise that the Indian retail dilemma has brewed on several quarters and an economic slowdown has only meagerly dented the retail environment. To begin with, was there really a need for so many new grocery formats with the same product offerings, particularly in the mid-size segment, when there were already so many in existence? Did retailers truly tell between their business plans for small and big box retail? While the entry of Wal-Mart was exciting, who looked at the cluster approach and store level profitability model of 7-Eleven? Could an alliance model with existing grocery retailers who had negotiated rentals way back, have been more feasible?
Here, I would like to cite a case in point for retailers like Subhiksha or many other retail formats in grocery and where they lost their projections. The fact is that these businesses emanated from the excitement of retail where creating business valuations was bigger business than creating core competence of the business at ground level. In a way, this retail burst would be no different than the dotcom burst where a valuation and seed funding gained more eminence than project viability. More retail was perceived out of possible funding, which could happen in the future, rather than any ground level linkage of a business.
Another disconnect was between the business plan of the company and the business plan of the store. I remember seeing a Subhiksha billboard, but could not find a store in the vicinity. So, while the residents would be excited about visiting a Subhiksha store they would only discover that either there was no store nearby or it lacked merchandise.
For some retail businesses which have a large bandwidth like hypermarkets and departmental stores, it is perhaps viable to do long term planning. Being a big ticket business, certain big players can meet up with the requirements of these formats but it capsizes when all sized businesses start linking today’s business with tomorrow’s forecast. Even in other categories like fashion retail, is it feasible for a brand to offer a minimum guarantee to 200 stores as was announced in most blueprints?
Today, as the Indian retail industry is giving out ‘a tale of size and sighs’, the larger problems are perhaps only three—unreasonably high real estate cost, which could not be matched with high sales, too much flatulence in the back-end HR cost, and financial incompetence as retail projects were not based on accruals, but on market excitement. Maybe, it was underestimated that retail is a small business and its costs and overheads should therefore be in tandem with the costs and overheads of the store(s) and not that of the corporate structure.
Overcoming the barriers
So what is the answer? I feel that this is the best time for retail business, because business planning in retail will now be more realistic, more so for startups and existing operations, as all the factors are now placed right, like the HR cost, real estate or even valuations of companies looking to exit. Just like banks, telecommunications and carriers, we at Franchise India feel that consolidation will accelerate throughout the retail environment in the months and years ahead, and promises to be a powerful catalyst in the overall development of the Indian economy. There will be a lot more alliances now, whether at the store level, through a franchisee or at chain level through merger and acquisition.
This will result in greater operational efficiencies and economies of scale, which will subsequently shape the retail industry and will be seen as a way of strengthening one’s position in an industry with fewer, larger players. This will take various forms and what will emerge is world-class retail structure which would truly create bounty of revenues for its beneficiaries. It is time for retailers to put their act together and plot their roadmaps for success and thus, pave the way for a phenomenal industry.
Mergers & acquisitions: M&A would see a heightened role in the retail industry which would focus primarily on improving efficiency, consolidating overheads, streamlining real estate capacity and capturing other cost based synergies. Strong retailers would use this technique to advance their competitive position and collate with under-performing retailers. Furthermore, retailers will use M&A to restructure the value chain to deliver faster, more distinctive or less expensive products. It will also help retailers to quickly achieve growth and scale inorganically by leveraging existing skills and tapping into new markets and customers.
Supply chain synchronisation: Various estimates put the supply chain costs in India, across all product categories, between 12 per cent and 50 per cent. This is largely ‘cost’ and not ‘value added’. In the case of basic products, a significant portion of these costs is sheer wastage. It’s a double whammy, so that while the customer ends up paying more, an Indian farmer is paid much less. The transportation expenses can be lowered by the introduction of common consolidation terminals and shared supply chain.
Pooling common resources: It is a fact, in the present context, that retailers cannot manage what they cannot measure. Retailers firstly need to evaluate the common practices they have with their peers where a common pool of resources can create cost reduction opportunities, whether it is for infrastructure or HR or technology. Wherever possible, retailers should come together and pool resources for common practices.
A fundamental transformation of the retail industry is underway and a retail rebound is inevitable. While a quick turnaround may be expecting too much, there are certain economic changes working in favour of the retail industry: Falling oil prices, the housing market correction, an expected retail stimulus package in the Union Budget of 2009, give hope which in return will help restore confidence in consumer spending. There is also a growing amount of pent-up demand. Today, consumers have sharply cut back on their spending—there is every reason to believe that sooner rather than later, they will vent out their true stance.