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In partial fulfillments of the requirements of the course Retail Management On 01.03.09
Arihant Singhi Pratik Gupta Vijay Leon
Executive Summary The Indian retail market has around 15 million outlets and has the largest outlet density in the world. However, most of these outlets are basic mom-and-pop stores with very basic offerings and fixed prices, and lack good ambience. The Indian retail scene has witnessed too many players in too short a time, crowding several categories without looking at their core competencies or having a well thought out branding strategy. Although the organized retail sector has come up in a big way in India, of late, the local kirana stores are still far from phasing out. The kirana stores have much lower operating costs than an organized retail store. Organized retailing is spreading and making its presence felt in different parts of the country. With the entry of very large corporate houses like Reliance Fresh, Vishal, AV Birla group, Bharati Wal-Mart joint venture and the existing Biz Bazaar, Spencer, Food Mart are also in large scale expansions across the country. India has been rather slow in joining the Organized Retail Revolution that was rapidly transforming the economies in the other Asian Tigers. Though with a population of a billion and a middle class population of over 400 millions organized retailing (in the form of food retail chains) is still in its beginning in the Country. When a new idea whose time has come arrives, it cannot be bunged by anyone. Especially when it proposes an essentially finer monetary and behavioral value scheme to its clientele, it gradually takes over the old way, and other stakeholders have no option but to acknowledge and transform accordingly. Modern retailing is one such inevitable reality which has started taking a spin in the traditional retail scenario and is soon liable to capture the retail sector and further enhance its compass. The question which then arises in the face of this foreseeable change is the future of the traditional outlets (Kiranas) with a network so intense that most of us have a kirana store within five minutes of our residence. The kirana also operate on a low-cost model with family-owned properties (an extension of the house), with most of the family working in the store itself. They cater to impulse needs at short notice, and early opening and late closing times which suit many families. In the last five years (2001-2006) Indian retailing industry has seen exceptional augmentation. Where the country was in the dominance of unorganized retailing 2|Page
the organized retailing sector has now emerged in a momentous way and is contributing significantly to the growth of Indian retail sector. It is predicted that organized retail will form 10% of total retailing by the end of this decade (2010). Cultural and regional disparity in India is the major challenge in the face of retailers. Due to this factor the retailers in India are deterred from adopting a distinct retail format. And so there is a scope for a variety to formats to co-exist in India. These are the few reasons why we have chosen this format. In order to move ahead with our plan, we’ve had to make certain assumptions and get a fair idea of the market. For this, the group conducted a primary research on the local kirana stores with respect to their financials. The assumptions for the model store EBITDA are based on the research findings. The sample size was of 20 kirana stores of size of approximately 200-250 sq. ft. The research frame was around the areas of Bowbazar, Sealdah, Kalighat, Bhawanipore and Kasba. While calculating the EBITDA assumptions were made on sales, gross margin percentage and operational expenses. Finally, the per square feet EBITDA worked out to around Rs. 95. Apart from this, the 4 P’s of marketing – Place, Promotion, Price and Product – have also been covered in this project. We are setting up 55 stores in 11 tier 2 cities to reach the mass and attract footfalls. A category mix with space allocation , sales and sales/ sq.ft, GM%, RGM % has been calculated.
Table of Contents
Stage 1 Stage 2 Rollout Strategy People Strategy 57 58
Franchisee Vs. Own Store Strategy RO/DC Costs 60
History of Retailing Retailing as an occupation came into existence when farmers started producing more food than they required. Trading was an important part of daily life in the ancient world. Different people had different skill sets, and people who had a surplus of one good desired the goods they did not have or could not produce. In India, the existence of the current kirana format and other shops can be traced to the Manuscript and Kautilya’s Arthshastra. These texts provided guidelines for dealing with customers, after sales- service, and quality and price guarantees. Such scholarly works provided the equivalence for exchange in case of barter. They also defined the tax structure for retail and wholesale transactions. Kautilya’s commented on the location of stores dealing in specific products in a city. He also discussed manner in which funds and investments could be managed for better results. Memoirs of traders who came from Europe indicated that Indian merchants carried out business with low margins in order to enhance sales. Indian history and archeology record the existence of markets during the Harappan civilization also. Elaborate descriptions of local and periodic haats have also been found. These were the places where commodity exchange was carried out and people congregated and derived several non- economic values. The new retail formats that are now seen in India have their genesis in Europe. The earliest traders were believed o be Cretans who sailed the Mediterranean and carried on trade with the people of the area. Indian Retail Industry – Introduction Whether the changes taking place in the Indian retail landscape represent evolution or revolution is a matter for conjecture. However, nobody can doubt that a dramatic transformation is underway. Due to its unorganized nature, the Indian retail industry is one of the most fragmented and challenging in the world. Retail sales in India amount to $500 billion and account for 10-12 percent of the gross domestic product (GDP). The Indian retail market has around 15 million outlets and has the largest outlet density in the world. However, most of these outlets are basic mom-and-pop stores with very basic offerings and fixed prices, and lack good ambience. These stores are highly competitive due to lower land and labor prices. Also the stores usually save tax as they belong to the small industry sector.
Over the last decade, India’s middle- and high income population has grown at a rapid rate of 10 percent per annum, even as the large low-income base has shrunk. The changing identity of Indian women and the structure of the family are driving the demand for convenience. Customers are demanding better store ambience and are looking for solution provider and external guarantors of quality and usability. The Indian consumer is increasingly focusing on value, convenience, variety, and a better shopping experience. The increase in variety, quality and availability of products as well as an increase in spending power has resulted in consumers increasingly using supermarkets and hyper markets for their personal shopping. There are a significant number of new competitors in the retail market, and the established players are seeking opportunities to expand rapidly. Currently, the government does not allow 100 percent foreign direct investments (FDI) in the retail sector. However, it is on the anvil and the entry of multinational retail chains would change the entire retail scenario. The government has allowed single brand retailers to make direct investments. India is the country having the most unorganized retail market. Traditionally it was a family's livelihood, with their shop in the front and house at the back, while they run the retail business. More than 99% retailers function in less than 500 square feet of shopping space. Global retail consultants KSA Technopak have estimated that organized retailing in India is expected to touch Rs 35,000 crore in the year 2005-06. The Indian retail sector is estimated at around Rs 900,000 crore, of which the organized sector accounts for a mere 2 per cent indicating a huge potential market opportunity that is lying in the waiting for the consumersavvy organized retailer. Purchasing power of Indian urban consumer is growing and branded merchandise in categories like Apparels, Cosmetics, Shoes, Watches, Beverages, Food and even Jeweler, are slowly becoming lifestyle products that are widely accepted by the urban Indian consumer. Indian retailers need to advantage of this growth and aiming to grow, diversify and introduce new formats have to pay more attention to the brand building process. The emphasis here is on retail as a brand rather than retailers selling brands. The focus should be on branding the retail business itself. There is no doubt that the Indian retail scene is booming. A number of large corporate houses —Tata's, Raheja's, Paramus’s, Goenka's — have already made their foray into this arena, with beauty and health stores, supermarkets, self-service music stores, new age 6|Page
book stores, every-day-low-price stores, computers and peripherals stores, office equipment stores and home/building construction stores. Today the organized players have attacked every retail category. The Indian retail scene has witnessed too many players in too short a time, crowding several categories without looking at their core competencies or having a well thought out branding strategy. The growth rate of super market sales has been significant in recent years because greater numbers of higher income Indians prefer to shop at super markets due to higher standards of hygiene and attractive ambience. With growth in income levels, Indians have started spending more on health and beauty products. Here also small, single-outlet retailers dominate the market. In recent years, a few retail chains specialized products have come into the market. Although these retail chains account for only a small share of the total market, their business is expected to grow significantly in the future due to the growing quality consciousness of buyers for these products .Numerous clothing and footwear shops in shopping centers and markets operate all over India. Traditional outlets stock a limited range of cheap and popular items; in contrast, modern clothing and footwear stores have modern products and attractive displays to lure customers. With rapid urbanization, and changing patterns of consumer tastes and preferences, it is unlikely that the traditional outlets will survive the test of time. Despite the large size of this market, very few large and modern retailers have established specialized stores for products. There seems to be a considerable potential for the entry or expansion of specialized retail chains in the country. The Indian durable goods sector has seen the entry of a large number of foreign companies during the post liberalization period. A greater variety of consumer electronic items and household appliances became available to the Indian customer. Intense competition among companies to sell their brands provided a strong impetus to the growth for retailers doing business in this sector. Increasing household incomes due to better economic opportunities have encouraged consumer expenditure on leisure and personal goods in the country. There are specialized retailers for each category of products (books, music products, etc.) in this sector. Another prominent feature of this sector is popularity of franchising agreements between established manufacturers and retailers. A strong impetus to the growth of retail industry is witnessed by economic boom and driver of key trends in urban as well as rural India. 7|Page
Key Trends in Urban India: • • Retailing in India is witnessing a huge revamping exercise. Estimated to be US$ 200 billion, of which organized retailing (i.e. modern trade) makes up 3 percent or US$ 6.4 billion. • India is rated the fifth most attractive emerging retail market: a potential goldmine • Ranked second in a Global Retail Development Index of 30 developing countries drawn up by AT Kearney. • India is rated the fifth most attractive emerging retail market: a potential goldmine • • Food and apparel retailing key drivers of growth. Organized retailing in India has been largely an urban phenomenon with affluent classes and growing number of double-income households. Key Trends in Rural India: • Rural markets emerging as a huge opportunity for retailers reflected in the share of the rural market across most categories of consumption • ITC is experimenting with retailing through its e-Choupal and Choupal Sagar – rural hypermarkets. Key Drivers: Changes in demographics: India has the lowest median age of 24 as compared to developed countries like USA, UK, and Japan etc. The composition of the Indian population is shifting towards the age group of 20-49 i.e. the working population with purchasing power. Approximately 60% of the Indian population is below 30 years of age. Thus, India has the largest ‘young’ population in terms of sheer size and this young segment is the major driver of consumption as they have the ability (disposable income) and willingness to spend.
Rising income levels: India is the second fastest growing economy in the world. A larger number of households are getting added to the consuming class with growth in income levels. Increasing instances of double incomes in most families coupled with the rise in spending power is further fuelling the growth of retail sector. Changes in consumer needs, attitudes and behavior: The growth of modern retail is linked to consumer needs, attitudes and behavior. Rising income levels, education and global exposure have contributed to the evolution of the Indian middle class. As a result, purchasing and shopping habits have been inculcated and are increasing day by day. Historically, Indians have not been the ones to splurge on luxury items. Today, people are willing to try new things and look different, which has increased spending on health and beauty products apart from apparels, food and grocery items. Increased credit friendliness: There has been a radical change in the Indian consumers’ mindset regarding credit. With the easy availability of credit and declining interest rates, personal credit has witnessed growth. The boom in financing has resulted in an increase in spends on housing and consumer durables such as two-wheelers and cars. The use of plastic money (credit and debit cards) has increased significantly in the last 3-4 years. In fact the ease of payments (ability to spend without cash) due to the use of credit and debit cards, has also led to an increase in total spending on shopping and eating out. The total number of debit and credit cards issued in India in FY06 was estimated to be around 47 m and 18 m respectively. Indians withdrew nearly US$ 50 bn using credit cards from ATMs in 2005. This includes US$ 26 bn through Visa credit cards alone. Visa saw a 36% growth in the number of cards issued, making India the third biggest card market for Visa, after Japan and Korea (Source: IBEF). With the acceptance of and the increase in the number of electronic data converter machines installed in retailing outlets, credit and debit cards will provide further fillip to organized retail. Increasing awareness of Indian consumers: Over the years, as a result of the increasing literacy in the country, exposure to the west, satellite television, foreign magazines and newspapers, there is a significant increase in consumer awareness among the Indians. Today more and more consumers are selective with regards to the quality of the products/services. 9|Page
Customer Expectations: consumer value expectations from markets and shops have changed dramatically in the last few years. This threw up new challenges for retailers, such as increased pressure from the other product categories that are vying for a share of the same wallet of the target consumer; changing ‘value’ equations and a sharper focus from retailers. Growth in Indian retail has been driven by the country's economic fundamentals over the past few years. Increasing number of nuclear families, easy financing options, increase in the population of working women and emerging opportunities in the service sector during the past few years have been the key growth drivers of the organized retail sector in India. Consumers are now showing a growing preference for organized retail, resulting in increased penetration. The retailing sector is at an inflexion point where the growth of organized retailing and growth in consumption by the population is expected to take a higher growth trajectory. Going forward, we believe that accretion to income levels of the rising Indian middle class (represented by the financially independent young population) and the consequent rise in disposable incomes will fuel growth of the retailing sector.
High Costs for the Organized Sector: traditional retailing has been established in India for some centuries. It has a low cost structure, is mostly owner operated, and has negligible real estate and labor costs and little or no taxes to pay. In contrast, players in the organized sector have high expenses to meet and yet have to keep high prices low enough to be able to compete with the traditional sector. The kiosk type of shops operates on the assumption of zero land and labor costs. For organized players, the land can cost up to 6-10 percent of sales as compared with just 3- 5 percent globally. Although manpower costs are lower at 5-6 percent of sales as against 6- 10 per cent globally, energy costs are high at 1.5- 3 percent against 1.5 percent internationally, and so are the working capital costs. (Source: Mc Kinsey report on retail in India 2006-07). Poor Infrastructure: in India, infrastructure such as cold- chain infrastructure is primitive, affecting the modernization of the food sector. In order to succeed, supermarkets would require volumes to be cost competitive, which would require 10 | P a g e
operations with hubs all over India. Indian infrastructure is not fully developed yet. Roads and rail infrastructure need to be developed. The efficiency in supply chain is far below the international standards. It is also difficult to find suppliers for a large quantity as would be needed by a national chain. A strict quality control increases the prices of the merchandise and the gap between demand and supply. Strong IT Support: the backbone of retailing is IT. It would require large investments that connect every aspect of the operations seamlessly, from suppliers to cash counters. For instance, a store like Food World generates about a million bills every month. Similarly, a other stores like Pantaloons, Piramyd, Shopper’s Stop can track sales and place orders based on scientific demand projections. Specialization: According to experts, the real boom in organized retail will come once the supermarkets start selling daily need goods at 90 percent of the regular prices, as Carrefour is doing in China. The key will be a national scale presence build on strong sourcing networks that connect the business directly with farms, and sell fresh food at attractive prices. Lack of trained workforce: Workforce employed for the retail industry is not well trained when compared with the Western countries. A skilled person can add on to the productivity. Training the individual lies in the hands of the retailers.
Bottlenecks for retail growth: Factors Barriers to FDI Description Implications FDI not permitted in Absence of global players pure retailing Franchisee Limited exposure to best of
arrangement allowed practices Lack of Industry Government does not Restricted status recognize industry the finance
Restricts growth and scaling Structural impediments Lack of urbanization up Lack of awareness of Indian consumers 11 | P a g e
transportation Restricts retail growth of Growth of small, one-store formats, with unmatchable cost structure Wastage of almost 20%-25% of farm produce Difficult to find good real estate in terms of location
infrastructure Consumer habit buying fresh foods
Administered pricing High cost of real Pro-tenant rent laws estate Non-availability government
and size of High land
land, constrained supply nature of
zoning restrictions Lack of clear Disorganized ownership titles, high transactions stamp duty (10%)
chain Several like apparel
segments Limited product range and reserved
for SSIs Distribution, logistics makes scaling up difficult constraints restrictions purchase movement grains, cold of absence – of and food of chain
infrastructure Long intermediation High cost and complexity of chain sourcing & planning Lack of value addition and increase in costs by almost 15% Complex Taxation Differential sales tax Added cost and complexity of System rates across states distribution
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Cost advantage for smaller stores through tax evasion
Sales tax avoidance by smaller stores Multiple Legislations Stringent labor laws Limits flexibility in operations governing payments Multiple licenses/clearances required Customer preferences Local habits Need for variety Need to stock larger number of SKUs at store level Cultural issues Increase complexity in hours of work, minimum wage Irritant value in establishing chain operations; adds to overall costs consumption Leads to product proliferation
sourcing and planning
of Highly class
educated Lack of trained personnel does not of proper Higher trial and error in
consider retailing a profession choice Lack of training
managing retail operations Increase complexity in sourcing and planning Increase in personnel costs
disintermediate and pass on intermediary margins to
Reasons for choosing Organized Kirana Stores: 13 | P a g e
The new format of grocery stores are likely to be 3,000-5,000 square feet in size and serve a catchment area spread over a 2-3 km radius as opposed to the kirana store which serves not more than a kilometer away. "They will offer a better range, assured quality and better prices in a superior shopping environment. Like the kirana store, they too will leverage cheap labor for convenience services like home delivery". The proliferation of mom-and-pop stores offering home delivery and long working hours makes a top-up convenience-based proposition difficult to implement. In order to survive, such stores need to create a chain that enrolls a number of existing retailers as franchisees and add value through superior sourcing, logistics and merchandising. Stating that supermarkets or hypermarkets is the world's most successful grocery retail format, the report points out that such stores require large space. Given their space requirements, it may not be economical to locate such stores in or near dense residential localities, it says. Reflecting on the "mandi" (the wholesale market) mentality of Indian consumers, the report says that the club warehouse format is set to emerge in the near future. "In India, as in other parts of the world, this format is likely to capture around 10 per cent of the grocery retail market," it says quoting a survey that over 30 per cent of a village's expenditure on food are made at nearby towns. The warehouse format is ideally structured to capture this opportunity. To really succeed in the rural markets, however, a warehouse visit needs to be perceived as a bigger social occasion than a "haat", and to compete with the latter on merchandise, pricing and costs. Grocery constitutes over 50 per cent of the Indian retail market and has an annual turnover of over $80 billion. Though it is an extremely large market, the organized sector's share of this market is very small. Grocery has three components, branded products including packaged foods, soaps and detergents and toiletries and household items; dry unprocessed grocery including grains and cereals; and fresh grocery including fruits and vegetables, meat, dairy and deli products.
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According to the report, if India reaches the level of consolidation achieved in China, i.e., 10 per cent of its total market size, the organized grocery retail market will be worth $18 billion by 2010, where a leading player, with 5-10 per cent share of the organized market, could be a $1-2 billion company. As per an estimate, there are about 6.5 million grocery outlets in the country in various formats. In value terms, the total sale of the sector is estimated at $90 billion, over 50 per cent of the total Indian retail market. Almost the entire grocery retail market is unorganized and fragmented. Despite efforts of the government and the co-operative sector, for example, Super Bazaar and Mother Dairy, Safal and Sahakari Bhandar in metros, the modern formats constitute a mere 2 per cent of the total sales even in urban areas. Despite the advances and efforts of a few retailers over the five years, the nascent organized sector in grocery retail still has a long way to go. The turnover of Food world is less than one-sixth the sale of a single Carrefour hypermarket in China. Even in terms of profit margin, leading Indian retailers earn a gross margin of 18 per cent compared to an average gross margin of over 25 per cent overseas. To maintain a good margin, the McKinsey-CII study suggests that retailers must be extremely efficient in their operations and design as Indian consumers are extremely value-conscious who will not pay more just for a superior shopping environment. For better profit margins, the study goes on to advise retailers to convince skeptical consumers of their low-cost position through promotions and branding and maintain a superior cost structure to offer low price while maintaining their profitability. Also, with their strong financial backing and streamlined processes, they would be able to better the services offered by the local kiranas. The local kiranas suffer from cash crunch and hence are not able to scale up to the required levels. The organized players with their financial muscle will be able to do that and in the process will be able to pass the economies of scale to the price conscious consumers.
Other Options that were rejected: 15 | P a g e
Toy Store: The idea was to open chain toy stores on a pan India basis. The differentiating factor was the size, product offerings and services provided. Following are the main characteristics of the store: • • Size: 30,000 sq. ft. (average) Product offerings: Toys and accessories for all ages including sections for collectors • Play area: Play area for kids to test any toys they may want to.
We rejected the idea for the following reasons: • The spending mentality: In India, the spending on toys is not as much. The Indian parent still prefers to buy his child the toy from the local store. Also, other organized stores like Pantaloons and Shopper’s Stop have a dedicated kids’ section within them and hence this takes away the feasibility and uniqueness of this option.
Financial Reasons: High end toys are slow moving items. This would result in the blockage of a large amount of working capital. This in turn would require huge financial muscle power which might be difficult to obtain for a start up.
Other Reasons: The average spend on toys in India is about Rs. 200, which is significantly lower than the western countries. This low basket size also makes this an unfeasible option. o o A large number of toy stores are already present in the market. Stores such as Shopper’s Stop and Pantaloons have a toy section available within them. o All malls have an average of 2 -3 toy shops within them.
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Organized Tea Retail:
We decided to go for organized tea retailing. Tea is almost a necessity and that would have taken care of repeat purchase. The concept was that we would get into yea retailing and the customers could taste the tea and then buy the tea of their choice.
This option was rejected because: • Niche: This is a complete niche that might not be big enough or attractive enough at this moment. The market might not be fully ready for this concept.
Working Capital: Again this is a working capital intensive business and loose tea is not a very fast moving item. This would mean that the inventory levels would remain thus blocking huge chunks of working capital.
Untested: One more deterrent factor was that this concept is a complete untested one. Also, in these times, the preference is more towards having packaged tea and they are readily available in other formats of organized and unorganized retail.
Lack of differentiation: The group also realized that there was not much of scope for differentiation which is the name of the game in organized retail. This meant that we were not being able to provide anything extra that would lure the customers into our store.
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Global Scenario: The US$ 9 trillion Retail industry is one of the world’s largest industries and still growing. 47 of the Global Fortune 500 companies & 25 of Asia’s Top 200 companies are retailers. Even as the developing countries are making rapid strides in this industry, organized Retail is currently dominated by the developed countries with the USA, EU & Japan constituting 80% of world. Retail is a significant contributor to the overall economic activity the world over: the total Retail share in the World GDP is 27% while in the USA it accounts for 22% of the GDP. The share of organized Retail in the developing markets ranges between 20% to 55%. Traditionally, local players tend to dominate in their home markets. Wal-Mart, the world’s leading retailer, has about 8% of the US$ 2,350 billion market in the USA. Similarly, Tesco has a market share of about 13% in the US$ 406 billion UK market. The main value propositions that most large retailers use a are a combination of low price, ‘all-under-one-roof’ convenience and ‘neighborhood’ availability. Globally the grocery portion accounts for close to 40% of all organized retail sales. In the global scenario grocery also includes items like fish and meat. The grocery industry consists of food retailers in supermarkets, hypermarkets, cooperatives, discounters, convenience stores, independent grocers, bakers, butchers, fishmongers and all other retailers of food and drink for off-thepremises consumption. The industry is relatively fragmented with a few large global players. In facing the fierce competition against foreign giant players, a relatively large numbers of domestic retailers were consolidated with localized operations. Globalization effects have also accelerated and altered the crossborder trade, linking new suppliers and retailers across geographical boundaries. The competitive landscape has made it very hard for local small retailers to manage the market
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The global food retail industry was exciting for the period 2001-2005 with a compound annual growth rate (CAGR) of 3.5%. The market is set to grow at 3-4% for the current year and towards 2010. Last year, the lucrative food retail sector generated a market value of almost $3 trillion. Increased sales of premium and luxury items such as the supermarket's own premium brands and organic and health foods, largely boosted the food retail industry against a backdrop of strong competitive landscape, where most retailers find it hard to control pricing. The increased popularity of luxury items adds good market values to the food retail industry as those items are typically higher priced. Health-enhancing foods and organics are likely to be major growth areas for the more developed AsiaPacific markets in near future as consumers are prepared to pay a price premium for such products. Customers’ shopping patterns in the food retailing business has changed over the last few years. Customers are increasingly purchasing their products from hypermarkets and supermarkets rather than at smaller grocery stores. The leading revenue source for the global food retail industry comes from the supermarkets segment. The segment generated total revenues of $1.2 trillion in 2005; carving out 40% of the food retailing market value. In comparison, the hypermarkets took up 12% of the market value share. Geographically, Europe is the largest food retailing market with a global share of 38%. The Asia-Pacific market is slightly smaller with 34%, accounting $1 trillion market value that is mainly due to the rapid expansion of food retail in India and China. Japan is currently the largest contributor to the Asia-Pacific industry accounting for 38% of the regional industry’s value. The second largest market goes to China with 33.4%, followed by India at 16.4%, Australia 4.9%, South Korea 4.8% and Taiwan 2.3%. The compound annual growth rate (CAGR) of the food retail industry in the Asia Pacific was 4.7% Singapore represents just 0.2% of the Asia-Pacific food retail industry's market value. Singapore’s industry share is not expected to change by 2010. The Singapore food retail industry registered a compound annual growth rate (CAGR) of 0.9% for the period 2001-2005. This was significantly below the average CAGR for the wider Asia-Pacific region of 4.7%. It shows that the life cycle range of the Singapore food retail industry is reaching a matured stage, exhibiting marginal levels of growth and decline. The industry registered a negative growth of 2.3% in 2005 with a market value of $2.2 trillion. 19 | P a g e
Supermarkets dominate the Singapore food retail industry driving its 60% market share. The provision shops segment and the mini-markets retail equally occupy its remainder of 40 %. Aggressive marketing strategy recently employed by the international retail chains has expanded the supermarket and hypermarket food retail floor-space in Singapore significantly. In the Asia-Pacific region, foreign interest speeds up the development pace of many domestic food retailing industries particularly in China3 and India. Major international players like Wal-Mart and Carrefour are pursuing rapid expansion in China in an effort to fortify their regional presence. Large population size of over 1.3 billion with the rising levels of disposable personal income is fueling the rapid food retail growth in China. However, China remains a price conscious consumers market. Wal-Mart's low cost image offers a key value proposition to Chinese consumers. The company worked closely in partnership with Chinese players to gain competitive advantage in local knowledge and expertise. The China grocery retailing registered a compound annual growth rate (CAGR) of 11.1% for 20012005, with a market value of RMB 1.3 trillion. Hypermarkets, supermarkets and discounters are the major retail formats that drove the growth of grocery retailing business in China for the period 2001-2005.
The Indian Scenario: The neighborhood kirana store is as common in India as the various numbers of festivities it indulges in. If one looks down a street, he will come across the omnipresent neighborhood kirana store round the corner. Although the organized retail sector has come up in a big way in India, of late, the local kirana stores are still far from phasing out. Quotes one of the sources from Technopak KSA, a leading research firm operating in the retail sphere, “''Kirana stores are not endangered but in fact they will evolve and reinvent themselves and will continue to dominate the modern bulk of shopping. Just because a large number of players are getting into retail does not mean the kiranas are phasing out. Merely six cities contribute to 80 per cent of the retail turnover,'' The average size of a local neighborhood kirana store is anywhere between 200700 square feet. The catchment area they cater to is normally about a kilometer. They are normally located in busy residential areas that are well 20 | P a g e
connected and have proximity to the households. The merchandise mostly consists of FMCG staples, FMCG foods and FMCG non food like cosmetics among others. They do not store fancy or very high end items. The look and feel of these stores is very pedestrian. The décor is also very utilitarian. They also provide the very important aspect of the look and feel factor for the consumers. The scale at which they operate is much lower than what an organized retail format store does. The margins are almost similar to the organized sector but where they win hands down are the operating costs. The kirana stores have much lower operating costs than an organized retail store. This leaves them with a higher operating margin. They are till date preferred to the organized retail formats. There are a host of reasons for this affinity. The various reasons that make the local kirana stores so popular are: • The trust factor: This is a major factor behind the phenomenal popularity of the local kirana stores. The trust stems from the long standing relationship that the consumers have with the stores. This leads to a quality and price assurance that the kirana stores enjoy and this comes from no extra cost being incurred.
Customized Service: Due to higher operating margins, the kirana stores can afford to customize and personalize their services. They also have a mental note of the tastes and preferences of their customers and they can customize accordingly. This is not possible for an organized retail store as the opex is already too high and further personalization further affects their margin.
Discounts: This is another big reason behind the popularity of the local kirana stores. Due to their lower operating costs, they enjoy a higher operating margin. As a result they are able to pass on the benefits to the customers. This also makes them hugely popular. The bigger stores on the other hand have very high opex and as a result suffer from compressed margins. As a result at best they can rub special schemes but not price discounts.
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Other Benefits: There are a host of other benefits that the local kirana stores offer. There are services like home delivery, credit facilities etc that the local kirana stores offer.
Other Reasons: According to a survey done by The Economic Times, the consumers perceive organized retail malls and stores as a destination point. However, they prefer their local kirana stores for their day to day purchases, planned as well as unplanned.
Some facts and figures with respect to the local kirana stores are: • There are about 7.85 million retail outlets in India catering to a population of about 1027 million. • • • • Most of the kirana stores are in the unorganized sector. Most of them are proprietary based. Also, they are normally small players with a working capital crunch. Mostly, the kirana stores in India deal with FMCG staples and non food items like cosmetics along with FMCG foods. • They are characterized by a dedicated set of customers, who shop from these stores every month for their planned as well as unplanned purchases.
Global Players in the business and their financials: Some of the major grocery store chains in the global context are: • • • • • Wal Mart Tesco Carrefour Ave Market Inc. Adams & Sullivan 22 | P a g e
Alco Store etc.
Stores like Wal Mart, Tesco and Carrefour are supermarkets that also store other items like apparels, accessories, electronic items etc. In the western countries online grocery shopping is also a big thing. Tesco has a dedicated section towards that. However in India, the dependence is still on physical shopping. We have analyzed one of the major stores. Carrefour: The Carrefour Group achieved its goals in 2007 despite a fiercely competitive environment in Europe and against the backdrop of deflation in France for the first three quarters of the year: • Sales net of tax rose by 6.8% at current exchange rates (or 7.0% at constant exchange rates), which represents the company’s third consecutive year of accelerating growth; • Activity contribution rose by 3.4%, a growth rate similar to that achieved in 2006. • Growing markets confirmed their role as an engine for growth within the Group. These markets represented more than 25% of Group sales in 2007, versus 21% in 2004. • Activity contribution before depreciation and amortization grew by 5.8%, while activity contribution after IFRS 2* reclassification rose by 3.4%. • Financial expense showed a net expense of 526 million euros, an 11% increase over 2006. This increase was the combined effect of rising interest rates and increased average financial debt, notably due to acquisitions which occurred this year. • The taxation rate was essentially stable at 28.7%. After the integration of companies consolidated by the equity method and minority interests, the Group share of net income rose by 0.7%. In a snapshot:
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EBITDA (2007) - 2005.2 Million euros Sales (2007) – 82148.5 million euros Grocery Contribution - Approximately 15% Hence on account of grocery, EBITDA- 300.78 million euros Sales - 12322 million euros
The India Story: India has been rather slow in joining the Organized Retail Revolution that was rapidly transforming the economies in the other Asian Tigers. Though with a population of a billion and a middle class population of over 400 millions organized retailing (in the form of food retail chains) is still in its beginning in the Country. This was largely due to the excellent food retailing system that was established by the neighborhood Kirana (Khandani traditional business) stores that continue meet with all the requirements of daily needs without the convenience of the shopping as provided by the retail chains; and also due to the highly fragmented food supply chain that is cloaked with several intermediaries (from farm-processor-distributor-retailer) resulting in huge value loss and high costs.
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This supplemented with lack of developed food processing industry kept the organized chains out of the market place. The correction process is now underway. Big daddies of Indian corporate sectors are now jumping to establish the retail chains across the country. The systems are being established for effective Business-to-Business (farmer-processor, processor-retailer) solutions thereby leveraging the core competence of each player in the supply chain.
Spread of Organized Retailing in India: Organized retailing is spreading and making its presence felt in different parts of the country. With the entry of very large corporate houses like Reliance Fresh, Vishal, AV Birla group, Bharati Wal-Mart joint venture and the existing Biz Bazaar, Spencer, Food Mart are also in large scale expansions across the country, the spread of the organized retail is going to reach soon the small populations towns of 1 lac to 5 lacs after covering all big, medium and small cities. The trend in grocery retailing, however, has stated with a growth concentration in the South. Though there were traditional family owned retail chains in South India such as Nilgiris as early as 1904, the retail revolution happened with various major business houses foraying into the starting of chains of food retail outlets in South India with focus on Chennai, Hyderabad and Bangalore markets, preliminarily. In the Indian context, a countrywide chain in food retailing has been pioneered by Big Bazar and Reliance fresh only.
Retail Models in India: Current & Emerging: The Indian food retail market is characterized by several co-existing types and formats. These are: Kirana Stores and Hawkers: 1. The road side hawkers and the mobile (pushcart thela variety) retailers. 2. The kirana stores (the Indian equivalent of the mom-and-pop stores of the US), within which are: a. Open format more organized outlets 25 | P a g e
b. Small to medium food retail outlets. Emerging organized retailers: Within modern trade, we have: 1. The discounter (Subhiksha, Apna Bazaar, Margin Free, Reliance Fresh) 2. The value-for-money store (Nilgiris, Big Bazaar, Cooperative Stores) 3. The experience shop (Foodworld, Trinethra) 4. The home delivery (Fabmart) 5. Super stores & wide reach stores (Reliance Fresh, Spencer, and Food Mart)
Kirana/Grocers/ Provision Stores: Semi-organized retailers like kirana (Khandani stores), grocers and provision stores are characterized by the more systematic buying from the mandis or the farmers and selling from fixed structures. Economies of scale are not yet realized in this format, but the front end is already visibly changing with the times. These stores have presented Indian companies with the challenge of servicing them, giving rise to distribution and cash flow cycles as never seen elsewhere in Asia. The model is very antithesis of modern retail in terms of the buyer (retailer)seller (FMCG) equations. It is not unknown for MNC leaders to link the supply of one line of products to another slower moving line of products. These retailers are not organized in the manner that they could challenge the power of the sellers, most protests have been in the form of boycotts, which really haven't hit any company permanently.
Hawkers 'mobile markets': This unorganized sector is characterized by the Thela vendors (also known as “mobile market”) seen in every Indian by lane and is, therefore, difficult to track, measure and analyze. But they do know their business these lowest cost retailers can be found wherever more than 10 Indians collect a rural post office, a dusty 26 | P a g e
roadside bus stop or a village square. As far as location is concerned, these retailers have succeeded beyond all doubt. They have neither village nor citywide ambitions or plans their aim is simply a long walk down the end of the next lane. This mode of “mobile retailers” is neither scalable nor viable over the longer term, but is certainly replicable all over India. Most retailing of fresh foods in India occurs in Mandis and roadside hawker parks, which are usually illegal and entrenched. These are highly organized in their own way. Hawking of food products, cooked food and FMCG products is a very interesting model of retailing. Much has been written about these roadside “malls” from social security issues to their nuisance value. However, if you put these hawkers together, they are akin to a large supermarket with little or no overheads and high degree of flexibility in merchandise, display, prices and turnover. While shopping ambience and the trust factor maybe missing, these hawkers sure have a system that works. Organized retailing is spreading and making its presence felt in different parts of the country. Today the food retail sector in India is about Rupees Fifteen Lakh Crores (USD 250 billions) of which the organized food retail segment is about 2.5 per cent and increasing at a pace of over 25% y-o-y. To be successful in food retailing in India essentially means to draw away shoppers from, the roadside hawkers and kirana stores to supermarkets. This transition can be achieved to some extent through pricing, so the success of a food retailer depends on how best he understands and squeezes his supply chain. The other major factor is that of convenience shopping which the supermarket has the edge over the traditional kirana stores. On an average a supermarket stocks upto 5000 to 7000 units against few hundred stocked at an average kirana stores. Though with excellent potential, India poses a complex situation for a retailer, as this is a Country where each State is a mini-Country by itself. The demography's of a region vary quite distinctly from others. In order to appeal to all classes of the society, retail stores would have to identify with different lifestyles. Hence one may find more of regional players competing with nation wide successful retail chains. It can be observed that the most popular retail format in India is the 'supermarket', beside the corner shop/grocery store. Hypermarkets have very recently come into being and are negligible in number though most retail chains do intend to expand their presence through this format as well very soon. 'Discount chains' are also substantial in number and are growing at a fast pace throughout the country. Given that organized retail has been registering growth rates of approximately 40 per cent over the last three years, it is expected to 27 | P a g e
grow to about to Rs 90,000 crore in 2010. If projections were to be made considering the current trends in food retailing in India, some years down the line, food and grocery stores will become dominating trade partners for the food industry, which, in turn, will be forced to offer special discounts and trade terms for them to get the shelf space in such stores. Also, once established, in-store label brands will become a real threat to the industry as manufacturers will have to compete with the store label brands that are generally very price-competitive. As for the spread geographically, strong chances stand that the major chains would spread to the next grade of cities in the country over the next 5 years or so and then progressively start covering every corner of the country. Most chains have already started developing their own unique supply chains that would suit their needs precisely. Technology Trends: A successful retailer's winning edge will come from sourcing - how best it can leverage its scale to drive merchandise costs down, increase stock turns and get better credit terms from its vendors. There are obvious and hidden areas where costs can be pruned and the benefits of this lower cost of retailing can be passed on to customers as lower prices, which in turn should fuel demand. One way of trimming costs is use of the latest technologies in supply chain, inventory management and use of IT tools to rack the consumption pattern and the changing habits of the consumers. The present food supply chain in India is full of inefficiencies - a result of inadequate infrastructure, too many middlemen, complicated laws and an indifferent attitude. To combat and improve efficiency in the supply chain Corporate are taking NGO interventions at the farm end in the form of Farm Management Services to ensure quality and timely supply of produce for the operations. The Farmer-Corporate relationship has helped both the farmers and the corporate in bringing the high quality low cost product to the retail shelf. To ease the burden of the corporate in setting up farm management services, several leading NGO bodies have taken up this activity essentially due to the fact that their operations are mostly at the farm end. The other important aspect of retailing relates to technology. It is widely felt that the key differentiator between the successful and not so successful retailers is primarily in the area of technology. Simultaneously, it will be technology that will help the organized retailer score over the unorganized players, giving both cost and service advantages. Retailing is a `technology-intensive' industry. Successful 28 | P a g e
retailers today work closely with their vendors to predict consumer demand, shorten lead times, reduce inventory holding and thereby, save cost. Wal-Mart pioneered the concept of building a competitive advantage through distribution and information systems in the retailing industry. They introduced two innovative logistics techniques - cross-docking and electronic data interchange. Today, online systems link point-of-sales terminals to the main office where detailed analyses on sales by item, classification, stores or vendor are carried out online. Besides vendors, the focus of the retailing sector is to develop the link with the consumer. `Data Warehousing' is an established concept in the advanced nations. With the help of `database retailing', information on existing and potential customers is tracked. Besides knowing what was purchased, by whom, during which time of year, festive seasons shopping pattern, all these information are compiled, analyzed and future shelf planning, discount offer or season sales planning is made. Supplier Retailer Relationships: Traditionally the supplier-retailer relation in India comprised several layers such as the national distributor, the regional C & F , wholesaler and the end retailer. However this scenario is fast changing with the organized retail increasing its presence in the country where the relationship is directly with the manufacturer. However this new model has been affecting the relationships that the manufacturer enjoys with the traditional system which is still the most dominant in the entire retail sector. However with technology replacing the supply chain and improving distribution and logistics chain, the role of these middle chains would slowly fade away and there will be direct manufacturer retail chain combine to offer each party try to squeeze maximum margins out of the other. Innovations in Transportation Logistics The logistics service providers have been innovating several interesting formats and models for the retail sector. As retail chains begin to focus more and more on the retail end, the logistics support would begin to get outsourced. The cold chain involving nationwide cold storages, refrigerated vans to transport food articles and specialized logistic companies offering the fleet for these services to organized sector big retails is now a reality in India in modern retail environment. With IT support logistics service providers would continue to innovate and develop effective distribution systems for the retail sector. 29 | P a g e
Social Trends: Changing Social trends in India will fuel growth of food retailing in a country. India is geographically vast and culturally diverse. The ICT revolutions, double income families where husband and wife both are working and more and more Indian women are now moving into education and jobs, packaged food, ready to cook food and shopping convenience in organized retail ambience under one roof would be the increasing replacing the corner kirana shop / traditional grocery shop shopping .Increased income levels and more women willing to make use of their education by joining work has increasingly affected the shopping pattern that is moving towards fulfilling the need of convenience shopping in the form of Supermarkets (now graduating to Hyper format) home deliveries. Indian consumer is quality and price conscious and this awareness would drive the retailers to rework their supply chain relationships. Food Safety Issues: As awareness grows about food safety issues, the need for countries to provide greater assurance about the safety and quality of food also grows. The increase in world food trade and the advent of the Sanitary and Phytosanitary (SPS) agreement under the World Trade Organization (WTO) have also raised interest in food safety requirements. To ensure a strong presence in global markets, India realizes the need to meet these challenges and keep pace with international developments .In India, it has come to the notice of general public of late that very “popular” food companies could also go way ward as far as food-safety and public health issues are concerned. This has triggered off a drive by the public and the Government to put more stringent food safety and public health measures in place while manufacturing, storing and packaging of foodstuffs takes place. Most foodstuffs pass through the organized retail channels on their way to the purchase baskets of consumers and therefore the retailers are beginning to realize the need for food safety and security. Grading and standardization measures are being taken at various stages of the manufacturing, processing, packaging and storing of all kinds of food materials. To ensure food safety and maintain product integrity from the source to the customer (farm-to-plate) the Food Companies are establishing a totally integrated infrastructure and services package. This connects and maintains the 30 | P a g e
flow of food from the source (farmers/food growers, farm service centers, market yards, processors and importers) to the customer (food service outlets, food processing units, food retailers and food exporters). This package will help eliminate or prevent identified hazards or reduces them to acceptable levels. This trend is slowly beginning to take shape with the efforts to integrate and consolidate the supply chain in Indian Food Retailing. The Codex, HACCP (Hazard Analysis Critical Control Point), ISO 22000, Bar coding (adoption of EAN systems) and food-hygiene standards have been increasingly adopted by the food processing units in India as prerequisite for becoming vendor for big retail chains. Critical issues: Do food chains improve the marketing efficiency of agricultural commodities and benefit both the farmer and the consumer? Does the marketing arrangement work to the exclusion of the small and marginal farmer or are there ways to include these vulnerable groups of farmers in the production process? Will regional specialization induce by food chains lead to unsustainable farming practices by adopting mono cropping etc? What impact will it have on the farmers’ incomes and sustainability in use of natural resources? In an economy like India where the retail Kirana industry employs millions of single man entrepreneurs business, will the development of super markets chains lead to the closure of these Khandani kirana /grocery shops? What about the present distributors, C & F and dealers chain employing millions of people which will surely be extinct business soon making them unemployable? Are consumers benefitted by the entry of food chains? or creating big monopolies by forcing closure of thousands of small retails shops? The group chose to focus on the details of Foodbazar as a part of Pantaloons Retail Food constitutes 62% of the total consumption expenditure of Indian consumers, forming the single largest category spend. Considering the size, opportunity and challenges in this segment, the company has outlined a strategic roadmap for developing a formidable and profitable business in this category. Leading the company’s presence in this category, Food Bazaar witnessed healthy expansion during the year 2007-08, by adding 47 stores during the year under review. The 31 | P a g e
total count of Food Bazaars as on June 2008 stood at 136 stores. In order to build a dominant presence in the food category, the company decided to explore both the premium and bottom-end of the market, in addition to the mid-market presence through Food Bazaar. In the premium segment, Food Bazaar piloted ‘Gourmet’ in Delhi for the discerning customer seeking richer experience. This store celebrates lots of impulse and destination categories packing in wide assortment of foods (both local and imported). The store also presents fresh food experience with an extensive assortment of bakery and customized snacking options. Food Bazaar private brands have been very successful during the year 2007-08 and have provided tough competition to established brands. Private brands of Food Bazaar created a strong hold in the consumer mind-set, offering better value for money proposition, and resulting in the company deriving better margins in the business. In order to cater to the very mass segment, a crucial development during the financial year 2007-08 has been the launch of KB’s Fairprice and its aggressive expansion plan. KB’s Fairprice is designed as low-frills, small format convenience store located in low-income neighborhoods in metros. Similar to immensely successful Aldi chain in Germany, KB’s Fairprice stocks only 300 SKUs, comprising of basic necessities, isn’t air-conditioned and works on a very low operational cost structure. Launched in August 2007 in Delhi, by June 2008, the company operated 101 stores in Delhi, Mumbai, Hyderabad, Bangalore and Ahmadabad. Having met with a very enthusiastic response from its target customer group, the company intends to have a very aggressive expansion plan for the format with a planned opening of 20 stores every month. The format is expected to garner a large share of the customer segment, yet untouched by modern retail formats. Adding more value to the food business is that the share of own brands as a percentage of total Food Bazaar revenue has increased significantly and comprises nearly 60 merchandise categories with more than 320 SKUs across the FMCG landscape. During the year under review, 14 new products with 32 SKUs were launched, through private brands. The buying teams of FMCG were restructured around brand relationships to exploit full potential of category growth initiatives in FMCG world. Perpetual Inventory system was set up across all stores to regularize weekly stock take of Top 100 high shrink articles. This has built rigor into the stock integrity of the stores. Building the Food Ecosystem: A number of new businesses and strategic steps taken at the group level is helping 32 | P a g e
the company derive more value in the food category. The most crucial development has been the group’s acquisition of a controlling stake in Godrej Adhar, a rural retail chain in 65 villages across India. This network not only provides a channel to capture rural consumption but is also being scaled up an efficient sourcing network for rural agri-produce that can serve Food Bazaar. In addition, the group’s partnership with MyDollar Store franchise in India is helping our network offer new, aspirational imported brands to consumers. The group’s logistics arm, Future Logistics is also exploring tie-ups with major international food brands for distribution in India. The group, through its venture capital and private equity arms is exploring opportunities to invest and partner with small and medium food brands and manufacturers that will help build synergies for its food business. An investment has already been made in Capital Foods, a company that markets brands like Smith & Jones and Ching’s Secret. In the forthcoming financial year, Futurebrands will signify scantly increase its investments in the private brands in the food category. Thus, the critical aspects of the food chain, sourcing logistics, brand development and supplier engagement is helping the company build a more consolidated strategy towards dominating the food consumption space.The financials of Foodbazar is shown below: Pantaloons Retail: Sales (2007)- Rs. 5048.91 crores EBITDA- Rs. 494.8 crores Food Bazar’s contribution to Pantaloon Retail’s revenues-60% Hence on account of Food Bazar, Sales (2007) - Rs. 3029.46 crores EBITDA- Rs. 296.88 crores.
Market Size in India:
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Retailing in India is currently estimated to be a US$ 230 billion industry, of which organized retailing makes up 3 percent. By 2010, organized retail is projected to reach US$ 30 billion with an expected growth rate of about 400%. A study conducted by Fitch, expects the organized retail industry to continue to grow rapidly, especially through increased levels of penetration in larger towns and metros and also as it begins to spread to smaller cities and B class towns. Fuelling this growth is the growth in development of the retail-specific properties and malls. According to the estimates available with Fitch, close to 25mn sq. ft. of retail space is being developed and will be available for occupation over the next 36-48 months. Fitch expects organized retail to capture 15%-20% market share by 2010. While organized retail makes up for over 70-80 per cent of the total business in developed countries, the Indian organized retail segment pales in comparison with other Asian countries such as China, South Korea and Thailand. Retailing is the largest private sector industry in the world economy, with the global industry size exceeding $6.6 trillion, according to Euromonitor. In China, the organized retail segment accounts for about 20 per cent of the overall business; in Thailand, it is around 40 per cent, while in Malaysia it makes up for nearly 50 per cent of the total business, according to the data. The retail sector in India is highly fragmented and organized retail in the country is at a very nascent stage. Of the 12 million retail outlets, more than 80 per cent are run by small family business, which use only household labor. China and Brazil, took 10-15 years to raise the share of their organized retail sectors from 5 per cent to 20 per cent and 38 per cent respectively. India too is moving towards growth and maturity in the retail sector at faster pace, according to Ernst and Young India. According to the E&Y India Retail Report:
Hypermarkets to be the preferred format for the international retailers entering India Malls to move beyond the metros, increase presence in tier II cities Organized retail penetration highest across footwear, clothing segment. Franchising gaining steam with retailers. 34 | P a g e
• • •
Retail sales in India amounted to be about Rs.7400 billion in 2002, expanded at an average annual rate of 7% during 1999-2002. With the upsurge in economic growth during 2003, retail sales are also expected to expand at a higher pace of nearly 10%. Across the country, retail sales in real terms are predicted to rise more rapidly than consumer expenditure during 2003-08. The forecast growth in real retail sales during 2003- 2008 is 8.3% per year, compared with 7.1% for consumer expenditure. Modernization of the Indian retail sector will be reflected in rapid growth in sales of supermarkets, departmental stores and hypermarts. Sales from these largeformat stores are set to expand at growth rates ranging from 24% to 49% per year during 2003-2008, according to a report by Euromonitor International, a leading provider of global consumer-market intelligence. Retail Trade Retail Sales (Rs Bn) Retail Sales (US $Bn) 200 5 15.4 0 349. 2006 17.36 385.8 7.5 10.4 2007 19,46 5 421.3 7.7 9.2 2008 21,71 5 467 6.9 10.8 2009 24,21 5 516.3 6.8 10.6 2010 27,107 564.7 7.3 9.4
4 Retail Sales Volume Growth 6 (%) Retail Sales US$ Value Growth 13.6 (%)
The trends that are driving the growth of retail sector in India are:
• • • •
Low share of organized retailing Falling real estate prices Increase in disposable income and customer aspiration Increase in expenditure for luxury items
The Total Retail market size in India at the end of 2007 was Rs 12,781 bn. The country's retail market will grow to Rs.18.1 trillion ($395 billion) by 2010 as organized retail is expected to be 13 percent of the total market, according to a report.
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The organized retail market, which is expected to grow at 45 percent, will be worth Rs.230,000 crore (Rs.2.3 trillion) by 2012," said the India Retail Report 2009, released by the New Delhi-based research group Images F&R Research. Food and grocery dominated the retail segment with 59.5 percent share valued at Rs.7.92 trillion, followed by clothing and accessories with a 9.9 percent share at Rs.1.31 trillion. A break up of the Indian Retail Turnover (Organized and Unorganized) in 2007 is given below:
The organized retail market breakup is as shown below. Clothing and Textile has the largest pie of organized retail market since Grocery [Reliance Fresh etc] are facing protests on opening new outlets in the backward states of India such as Uttar Pradesh, Orissa, Bihar etc.
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Key Drivers of the Business: • Size of Market As of now the Indian consumer prefers going to the traditional kirana store for their daily needs. Today, this market is much bigger than that of the bigger and organized retail outlets like Reliance. This will not change in the near future as it requires changing the basic mentality of people. The average Indian has always been going to the kirana store in the corner all his life. This is something we cannot change that easily. Thus, as of now there is huge potential in investing in the kirana store model.
Indian Mentality The Indian mentality as mentioned above is characterized by the kirana stores. The kirana store is a culture that has developed over the years and culture cannot be changed easily. The kirana store represents convenience and familiarity – both factors that make the kirana store something that one cannot do without. The relationship between the kirana store owner and the customer is very deep – they are like an extended family where each of them would know what’s going on in each other lives. Thus, them.” as the saying goes, “If you can’t beat them, join
Financial Muscle The kirana store market is huge but the kirana store owner does not have the ability or the financial backing to scale up operations. By scale up operations we mean that a kirana store owner does not find it profitable to open a chain of stores. But in our case, we not only have the financial capability, but also the ability to scale up operations. We plan to serve customers on a pan India basis. Therefore, wherever in India a customer travels, he or she will always find our store.
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Up selling is a method of moving the consumer from a lower end product to a higher end product. In this case the kirana store is on the lower end while the supermarket and hypermarket are on the higher end. Currently the major chunk of customers prefer going to the kirana store rather than a supermarket for various reasons. Thus, we’re starting from the bottom of the pyramid. We’re offering customers what they want – a kirana store. The difference here being that this is a chain kirana store. With this chain of kirana stores, over time we plan to slowly move the consumers towards the bigger retail formats. Therefore we are preparing a customer base for ourselves for the future – we would have served them as a kirana store and we will be there to serve them as a bigger format.
Reach The problem one faces with a large retail format is reach – the consumers have to come to us. This is something they do not want to do. Thus, key here is convenience. Therefore with our kirana stores we take the store to them, we become the store around the corner. The only difference in our case is that we are a pan-India chain kirana store which we will use to our advantage and a differentiating factor.
Presence Trust is one of the factors we can play with here. In today’s dynamic world we have a large number of people travelling frequently for various reasons. Wherever this person goes, he or she will at some point or the other need to visit a kirana store. Thus, when the customer sees our chain of stores, it will be something that he or she trusts.
Latent Demand There is a number of things which a kirana store does not cater to. With our financial backing, we will be able to cater to these demands. Some of the latent demand are: 38 | P a g e
o o o o
Pan India presence Pan India credit facility Home delivery at all locations Imported foods
Key Challenges for the Business: • Established System We would be cutting into an already established system where people already have a rapport with the existing kirana stores. This would be like introducing a new cog in a well oiled machine. The challenge here would be to get people out of their comfort zone with their local kirana and move them to ours. The challenge here is to differentiate from these kirana, but this in itself poses a challenge as they offer a host of services ranging from home delivery to credit facilities and most important they have a rapport with the customer which has been formed over years.
ROI One of the biggest challenges to running such a business would be to get a good ROI. Traditional kirana have a high ROI as their operating costs are low. In our case, being an organized player our operating costs would be higher. Operating costs pose a challenge in the following areas: o Real Estate Traditional kirana are based either out of homes, illegal properties, a property which has been rented by the owner over a long period of time (leading to a very low rent) or a small place say 300 sq. ft. (leading to lower rent). Since we cannot resort to any of the above mentioned methods and are be entering the market now, the rentals would be on the higher side. Thus apart from fighting the higher rentals we have to make sure that we utilize our space efficiently. o Infrastructure 39 | P a g e
Once again traditional kirana use locally manufactured and low cost infrastructure and have no air-conditioning. We on the other hand have to maintain a particular standard over all locations and provide air-conditioning at select outlets. o People Traditional kirana are owned and run by the same person. The owner employs one or two people to help in the daily running of the store but he is in control of the store. We on the other hand employ someone to run the store. This person has to be trustworthy and competent enough to run the store and interact with the customers. An employee with such characteristics will be available at a higher cost. o Technology Unlike the traditional kirana stores our stores would have some presence of technology. This would range from billing machines to internet access. Thus, adding to our capital and maintenance costs.
Facilities The biggest challenge is to provide the customers with the same facilities that are provided by the traditional kirana stores. The problem is not to provide the facility but to do it in a cost effective manner while also differentiating from what they provide. challenges faced when providing facilities: Following are some of the
Credit Facility Almost all traditional kirana stores provide credit facilities. This they do on the basis of the rapport they form with the customer over a period of time. The problem that arises with us is that of onus – who decides to which customers credit can be given and secondly who takes responsibility for the credit that is given. Unlike the kirana 40 | P a g e
store owner who first maintains a rapport with the customer and then gives the credit, we will not be able to follow the same model. o Home Delivery Home delivery is again something provided by all kirana stores and that too without a minimum purchase criterion. With our higher cost of operations, it would add to our cost if we went about offering home delivery service for any small amount. o Rapport The biggest challenge is that of rapport. As mentioned before, the average kirana store owner is like an extended family to most of his customers. Both parties would know what is happening in each other’s lives. This is a major barrier which we would have to break when we enter the market. o Familiarity The kirana store owner normally knows what his customer wants, thus he is able to stock accordingly. Being the owner and the person who runs the store, he is able to make decisions quickly and adapt almost immediately to consumer tastes and preferences. o Discounts The kirana store owner also gives discounts to his customers on almost every product. This he does according to the customer and his transactions or rapport. He can give high discounts as his operating costs are low. For us, our operating costs are higher due to which we may not be able to give discounts as high as the kirana store.
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Current Competitors: Unorganized Format- “Kirana Stores” or the Mom-n-Pop Stores Positioning: The kirana stores or the mom-n-pop stores operate on a low-cost model with family-owned properties (an extension of the house), with most of the family working in the store itself. They cater to impulse needs at short notice, and early opening and late closing times which suit many families. The kirana will have a low cost structure, convenient location and customer intimacy. The importance of kirana stores is emphasized in the fact that consumers need convenience in retail. The neighborhood kirana store will forever maintain a favorable factor of convenience. Unlike a developed market where consumers travel some distance for shopping, Indian consumers have the kirana stores to service them on all days, all through the year. The Indian Retail market has around 1.5 crore outlets and has the largest outlet density in the world. Most of these outlets have very basic offerings and offer over-the-counter service. These are highly competitive stores due to cheap land prices and labour. In common parlance they are known as mom-n-pop stores or the kirana stores. Informal Retailing Sector, consists of typically small retailers who most of times organize the things through sole proprietorship type of organizations. Due to their small size and lack of capital investment they were mainly suffering from inefficient supply chain management and approximately no monitoring of labor laws. Even from the government's point of view, there was enough tax evasion as the tax enforcing mechanism could never be applied over then due to their complex structure. Kirana stores" the traditional retail outlets work with an age old set up of a shop in the front & house at the back. More than 99% retailers function in less than 500Sq.Ft of area. The producers distribute goods through C & F agents to Distributors & Wholesalers. Retailers happen to source the merchandise from Wholesalers & reach to end-users. The merchandise price gets inflated to a great 42 | P a g e
extent till it reaches from Manufacturer to End-user. Selling prices are largely not controlled by Manufacturers. The mom-n-pop stores look for smaller consumer segments rather than the big tickets and choose a location so that they can serve the customers with a targeted merchandise mix, price, and other services. A large number of them tend to specialize in a particular product or service category. These stores are labour intensive with a very low level of technology. Most of the work related to buying, merchandising and fund management are carried out by the owner. Independents tend to allocate limited time and resources to long-term planning. Independents have limited bargaining power with suppliers as they often buy in small quantities. They are largely influenced by the other channel members. Due to low economies in buying and maintaining inventory, the transportation, ordering, and handling costs are higher. “Independents account for more than 80 per cent of the total retail establishments. However, their share is based on the development of economies. While in the US these firms account for just 3 percent of the total US store sales, in developing countries such as India, their share is almost 95 percent”. Competitors- Organized Retailers (Global) Wal-Mart: Wal-Mart the world's largest retailer, next to only Exxon Mobil, with an 8.9% retail store market share in the US and a global turnover of $312 billion is the most famous example of a successful retail strategy. However, Wal-Mart's international operations spread across 14 markets outside US, has been a mixed bag of experiences for the company. Despite Wal-Mart's impressive track record and strength, the question is, "How can it stay ahead?" given the rapidly changing retail landscape, newly emerging markets and aggressive global competitors. Business Model: Wal-Mart operates under nine different retail formats through primarily three retailing subsidiaries: Wal-Mart Stores Division U.S., Sam's Club, and Wal-Mart International.
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As per the Generic Strategies Framework of Michael Porter, Wal-Mart has adopted a strategy somewhere between "Focused Low-Cost" positioning and "Cost Leadership" where-in, • Market scope— Global operations cater to a diverse customer base. In the US price conscious low and middle income consumers with a focus on smaller towns. • Source of competitive advantage-—consistently low prices with high
customer service and stringent cost control measures. Global Strategic Intent: • • • Dominate the retail space across the world Cash on the retail boom in emerging economies and capture market share Replicate the success achieved in the US markets and become the world's largest retailer
TESCO: Tesco is an international grocery retail chain that is based on the United Kingdom. It is the fifth largest retailer in the world, with over $80 billion in sales and 2,800 stores in 13 countries. Tesco originally specialized on food but later on expanded to selling clothing, electronics, and internet and financial services. Mission Tesco aims to “create value for customers to earn their lifetime loyalty”. The company claims that their success depends on their consumers and their employees. This is the reason why Tesco is making a regular effort to understand the needs and wants of their customers and staff, and learning to respond onto these. Positioning: Low Price Strategy: Tesco believes that consumers want value for their money, and this is the reason why they try to keep their prices as low as possible, without sacrificing product quality. Between 2000 and 2005, they were able cut 44 | P a g e
their prices down by 15%. The company claims to sell its products based on a national price list which is available on their website. Customer relationship management: Tesco claims to make a regular effort to understand the needs and wants of their customers, and learning to respond onto these. This strategy has helped them tailor their products and services to changing consumer needs, such as an increasing concern for health, a growing number of working mothers, etc. They are able to do this by having annual forums which they call “Customer Question Time”. Twelve thousand customers attend these yearly meetings and give their comments and views on Tesco’s products, services, pricing, and quality. Also, they have a customer service help line that consumers can call for important matters. Five Store Formats: Unlike the “one size fits all” strategy of Tesco’s main competitor Wal-Mart, Tesco appeals to upper, lower, and middle income consumers, calling it, “an inclusive offer”. Tesco offers five different store formats, each tailored to fit their various consumer needs and complement their lifestyles. These include Extra, Superstore, Metro, Express, and Homeplus. Extra Stores. These stores are 60,000 square feet in size. They aim to be a one stop destination store and so they sell food and other items such as electronics, clothing, beauty products, seasonal products, and hardware. · Superstores. These traditional-sized supermarkets (2050,000 square feet) emphasize on food, but also sell various products. The store’s product line is extended on a regular basis.· Metro Stores. These small sized supermarkets (7-15,000 square feet in size) sell ready-made meals. They are located at the center of the city and cater to busy customers. · Express Stores. These convenience stores (3,000 square feet in size) emphasize on produce, alcohol, and fresh-baked goods. The stores are located near residential places and corporate offices, aimed to offer convenience to nearby residents and employees home. These stores are 35-50,000 square feet in size and emphasize on non-food products, including clothing. BIG BAZAAR: ‘FOR THE GREAT INDIAN MIDDLE CLASS’
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It is a unit of Pantaloon Retail (India) Ltd and caters to the Great Indian Middle Class. It was started as a hypermarket format in Mumbai with approx. 50,000 sqft of space. Its values and missions are to be the best in Value Retailing by providing the cheapest prices and hence goes the tag-line It sells variety of merchandise at affordable rates, the prices of which it claims are lowest in the city but the level of services offered is also very low. Usually the items are clubbed together for offers as on the lines of Wal-mart and Carrefour and it also offers weekend discounts. It currently operates out of 64 stores and top 15 stores register a cumulative footfall of 27 lakh a month on an average. The following graph shows the retail life cycle and we can say that Big Bazaar is currently at the Growth Stage.
Cash flow Flows
Introductio n Time
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Big Bazaar’s has positioning and target audience caters to masses beginning from the low-end of the hypermarket format and attracts its consumers by the discounts which they offer to customers as they procure products in bulk from the suppliers. Factors taken into account to determine our positioning strategy • Target Audience- Sec B, Sec C, and women. The Age Group is between 2550 • • • • Need Satisfaction- Satisfying the household needs of the consumer Benefits- Convenience, Personal Touch, Credit Facility and Discounts Pricing- EDLP Availability- Every nook and corner and at an arm’s length of desire
Our Positioning: To serve Sec B and Sec C, women and audience between age 25-50 so that their household needs are satisfied by offering credit, personal touch by being present in every nook and corner of their locality. Product: Merchandise Strategy
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A kirana store, supplies products for daily household purposes, thus our product range will include these types of products. The range of products that are to be stored will be under the following heads: • • • • • • • • Food and Beverages Staples Meat and Poultry International Products Personal Care/Beauty Products Household Products Healthcare and Hygiene Mobile Recharge
Every store will have different needs and this will depend on the type of customers we serve. It makes no sense to store products according to what we feel would be right. There will be a select range of products which will be standard in all stores. These are those products which do not have much demand and will have less margins but will have to be stored as there will be few customers who will demand it. Apart from this there will also be some products which we can be sold through push. But, the exact brands and product range that is to be stored will be decided by the store manager depending on the customer demand. Thus, the store manager has to interact with the customers to find out what they want, track daily sales to decide which products are in demand and finally make the decision as to which products to store. Price: Pricing Strategy We are positioned as an everyday kirana store, a shop round the corner. When it comes to pricing, most of these types of kirana stores offer a small discount which they give out of their margin. This is done for two reasons – to attract more sales and to gain and maintain a rapport with the customer. In order to succeed we not only have to provide what they’re providing but also differentiate ourselves from them. 48 | P a g e
Thus, we will price our products lower than the maximum retail price, i.e., we will follow a discount store model. At this point a very important question can be raised – how do we sustain a discounted store model when our operating costs are high and margins are low? In order to answer this let us look at a Big Bazaar or a Food Bazaar – how are they able to offer discounts? This is possible for them because they sell in bulk which gives larger number of turnovers and also gives a higher bargaining power with the suppliers. In our case we are running a small store format, not a big one like the above mentioned. On the other hand we will have a large number of stores, the sales effected from which will be large enough to not only have a large number of turnovers but also will give us a higher bargaining power with the suppliers, enabling us to sustain a discounted store model. Our model will also include volume discounts. The higher the customer purchases, the higher the discount we will give. This is done in order to induce higher purchases. We want the customer to do all of his or her household shopping from our stores. Place: Location Strategy Large format retail stores like Spencer’s or Food Bazaar are facing problems mostly due to the traditional kirana stores. The traditional kirana store offers the customer with convenience of location and having used these stores for a long period of time, it has entered the consumer’s comfort zone. Thus, since at present it is difficult to get the consumer to the store, we plan to take the store to them and operate within their comfort zone which would be the store round the corner. Our stores would be located within residential areas where consumers can easily access our store. Our catchment area would be around 2 kilometers with the service of home delivery restricted to this 2 kilometers. The shop should be on the ground floor and in a visible location which is easily accessible to customers. This may translate to a slightly higher rent but for us most of our advertising is on the basis of visibility. Apart from this we will also have to look at the density of customers around our catchment area. The higher the density, the larger is our customer base. For example if we have a few high rises around our store, our customer base would be larger. We will also have to 49 | P a g e
look at a location which is easily accessible to the suppliers in order to ensure a seamless supply. Promotion: Marketing and Promotion Strategy First let us look at the traditional kirana store’s marketing and promotion strategy – they do not have any marketing or promotional strategy as such, they basically leverage their rapport with their customers to market and promote their goods. Apart from this they offer discounts as mentioned before to keep their customers coming back and satisfied. They use the services they offer such as home delivery as a marketing tool. As for us, our marketing and promotional strategy will be in the following manner: • Creation of a push and pull In the initial stages when no one will know us we would have to create a market pull. This market pull can be created through billboards, flyers, mailers and advertising in the local cable network. Apart from this, since the store will be in the midst of a locality and will be in a visible spot, the store itself would be a form of an advertisement attracting customers to it. Once these customers start visiting the store, it is the responsibility of the store manager and his assistants to create a rapport with the customers and in turn create a push.
Advertising When we launch our stores we will have to advertise in order to educate the customers about our store. This can be done through mailers, flyers and advertising on the local cable networks. Since we will be operating in a particular area, mailers and flyers will be a low cost method to inform customers about our store. Local cable networks advertise at very low costs on their channels. This would another method to communicate about our stores to the customers. Once the stores are set up, the store and the store manager himself would be the mode of advertising.
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Personal selling & sales force The sales force which is effectively the manager and the assistants will be our main source of advertising. They would not only communicate about our services but will also form a rapport with the customers to advertise and sell the products and services. A traditional kirana store operates in this manner. The main source of advertising is the store owner himself.
Sales promotion Sales promotion is another form of advertising which we will adopt. As mentioned before, we will have a higher bargaining power with the suppliers due to the numbers we will churn. Thus, like the bigger format stores we will run promotions offered by the suppliers on a daily basis. For example one day a company might offer a buy one get one free offer or a discount on purchase offer. Apart from this, at certain intervals we will bank on certain sales promotions offered by us.
Pentagon and Triangle Elements:
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Within the pentagon we have the triangle elements which are all internal to the organization and include the systems, the logistics and the suppliers. Let us look at each one of these elements individually. Systems: When we talk about systems we are referring to the IT infrastructure in place. Every store will have instead of a PC a Thin Client Solution. A Thin Client Solution is a device like a PC which runs minimal computing functions as well internet accessibility and can run USB supported programs and devices. This dramatically reduces our cost as a Thin Client Solution costs around Rs. 5000. This device will run a CRM cum ERP software which will be connected to our central server through an internet connection. All sales promotions, discounts and offers will be updated through this system. As the above mentioned device can support USB devices, we can have scanning and billing through the same device. Logistics: Since we will operate on a kirana store model, our stores will be located all over the city and most locations will be deep within residential areas. Thus, for us to procure directly from the company and supply to our stores would include huge transportation costs and storage costs. Thus, we plan to procure from the supplier of the respective area we are located in. For goods that are not available or supplied in that particular area, we will procure directly from the supplier and supply the goods directly to the respective stores. The storage would be taken care by the stores themselves. Suppliers: Even though most of our goods will be procured from the respective suppliers of the area we are present in, it is important for us to have a tie up with the respective companies in order to get discounts, sales promotions. Being organized we have data about customer profiles and customer preferences. Over a period of time we will have data which can be used by these companies. Companies invest large amounts of money in order to get this data. Thus, the relationship can be mutual. The pentagon elements comprise of people, value, product, place and communication. These are elements which are customer facing.
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People: Our whole model runs on the basis of the decisions taken by the respective store managers. Thus, not only is it important for us to select the right people but also make sure they’re trained properly. The store managers will maintain a rapport with the customer, gain their trust, bring them into a comfort zone, push products and find out what the preferences of the customers are. The way the store manager acts and serves a customer is a service in itself which apart from other things would require a huge amount of knowledge about the products. Value: We not only provide the customers with household products for their daily needs but also give them value for the money they spend by way of a comfortable and friendly environment but also by way of the services that they receive from our stores. Apart from this there is also the assured quality of the products we provide. Product: The products we offer our customers will have to carefully chosen so we do not leave out anything that they may desire. Being a kind of a daily needs store we will have a wide variety of assortments varying from daily need products to household necessities to certain international products which are not available in the traditional kirana stores. Place: It is important for us to choose the right place to place our store in. Not only should it be in an area where there is a large density of customers but it should be in a place which is easily accessible. Communication: Communication is very important as it is for any business. In our case it is important for the store manager to communicate to the consumers what offers are available and what products are available and the store manager must also be able to get information from the customers about their needs and their preferences.
MODEL STORE EBITDA:
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The group conducted a primary research on the local kirana stores with respect to their financials. The assumptions for the model store EBITDA are based on the research findings. The sample size was of 20 kirana stores of size of approximately 200-250 sq. ft. The research frame was around the areas of Bowbazar, Sealdah, Kalighat, Bhawanipore and Kasba. The logic for choosing these localities was that all of them are proper residential areas where the population is mostly SEC B and C. The research findings are given below: i) ii) iii) iv) The monthly turnover is around Rs. 4, 00, 000. The Gross Margin on sales is approximately 10-15%. Pilferage is about 1% of sales. Operational expenses vary according to the floor space. For a 250 sq. ft. store it is approximately to the tune of Rs. 25, 000 -. v) There is high level of customization according to the location and consumers’ tastes and preferences. vi) vii) viii) The catchment area of a store is about 1-1.5 kilometers. Most of the stores are owned property. The average bill value of a SEC B customer is about Rs. 4000- Rs 5000 per month.
Assumptions for Store EBITDA: 1) Sales: The monthly sales for a store of the size of 500 sq.ft. will be approximately Rs. 7,00,00. This figure is arrived at after doing a primary research of the local kirana stores. The finding was that for a store of approximately 200-250 sq.ft, the average monthly turnover is about Rs. 3, 00,000.
2) Gross Margin Percentage: The research indicated that the local kirana stores (of size about 200 sq.ft) operate on a margin of approximately 15%. The 54 | P a g e
group has decided to take a more conservative figure f approximately 12% as the Gross Margin Percentage. Also, the margins for different SKUs would be different. The Gross Margin Percentage would be an average of all the SKUs.
3) Operational Expenses:
a) Rent: The rentals for a 500 sq.ft plot.
as found out through primary
research is approximately Rs. 5000 per month. We are not going for the revenue sharing method immediately. The industry norms for revenue sharing in organized retail is anywhere between 3-20% of turnover. Going for this agreement will affect our initial profitability. With sales expected to be to the tune of Rs. 5, 00, 000 per month, even a 3% revenue sharing would mean paying triple the actual rent. The rentals however also depend on the location, and hence for all practical purposes we are keeping a range from Rs. 5000-Rs. 8000 as monthly rentals.
b) Electricity: The store would be approximately 500 sq.ft. The store would have refrigeration facility, computers, signage boards etc. The average electricity bill per month is assumed to be to the tune of Rs. 3000.
c) Salaries: There will be a store manager and two store assistants. The store manager would be responsible for the billing as well as all the other store level decisions. The store assistants would assist the store manager at the store and also look after the home deliveries. A ballpark figure of Rs.20, 000 has been taken o/a salaries. The break up is shown below:
Position Store Manager Store
Number people 1 2
of Salary Month 10, 000 5, 000
Per Total Salary 10, 000 10, 000 55 | P a g e
d) Repairs and Maintenance: There will be minor repairs and maintenance that will be required at the store. A ballpark figure of Rs. 1000 per month has been decided on this account.
e) Phone Charges: This item has been dealt with separately. This is because taking orders over the phone and the internet will be commonplace. Hence, the usage will also be high. The figure has been taken to be approximately Rs. 2, 000.
f) Pilferage: Our store will not be a self service store. It will be very much like the kirana stores where the servicing is done by the store assistants. This should keep the pilferage level down. However there will be a certain degree of pilferage which has to be accounted for. Pilferage has been assumed to be approximately 0.5% of sales, which turns out to be Rs. 2500 per month.
The Model Store EBITDA is shown below: Particulars Sales Gross Margin % RGM (A) Opex Rent Electricity Salaries Phone Bills Pilferage Repairs and Maintenance Total Opex (B) Store EBITDA EBITDA per Sq. ft Amount (Rs) 12% 84, 000 8, 000 3, 000 20, 000 2, 000 2, 500 1, 000 (A) - (B) 47, 500/500 36, 500 47, 500 95 56 | P a g e Amount (Rs) 7, 00, 00O
Capex Decisions: The capital expenditure of our store will be lesser as compared to the bigger formats of organized. This is obvious due to the smaller size of our stores. Also, the property would be on rent basis and will not be bought or leased. Although this will lead to higher operating expenses, the capital expenditures will be kept in check.
The other items of capital expenditure would be building up the shelves and racks. The layout of the store would account for a significant portion of the capital expenses. The layout has to look better and be jazzier than an unorganized retail store. The infrastructure costs would be kept under tab because of the decision to operate on a rental basis.
Our store, as said earlier, will also provide home delivery facility within the catchment area. For this purpose, two scooters will have to be kept. This will also add to the capital expenses.
The store being a part of organized retail will be connected to all the other stores of the same chain. This will call for a substantial investment in IT infrastructure. Also, the fact that we would be providing online shopping would also contribute towards this aspect. Servers need to put in place at the central level. At the store level, computers, printers, scanners and all the other accessories need to be installed.
Interior decoration and decor will also be part of the Capex decision. The decor will not be as fancy as a large format store but at the same time , it will be better and more beautiful than a kirana store. This will call for some amount of capital expenditure INVENTORY DECISIONS:
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The inventory decisions will be taken mostly at the central level. However, some part of the decision making power will also be kept with the store managers at the store level. This is because we want to leverage the inherent strength of unorganized retail. Ina kirana store, the shopkeeper exactly knows what his customers want. Similarly, we will also customize our inventory. The customization will be according to the location. e.g. a store in a Muslim dominated area will not store pork. The SKUs that will be stored along with their turnaround time is given below: a) Staples- 30 days b) F&B- 15 days c) Meat & Poultry- 15 days d) Health & Hygiene- 30 days e) International Food - 45 days f) Mobile Recharge - 30 days.
REASONS FOR CHOOSING THIS FORMAT: Several kirana shops across cities are coming up with innovative ways of getting the best deals from FMCG companies. Worried about the long-term effect on their businesses, kirana owners have gone in for an image-makeover and have begun building up personal relationships to woo the consumer. Setting aside their preference for cash purchases, several such kirana shops have also begun accepting credit cards from customers and passing on their business margins on MRP to consumers. Boards stating the 'best buys' of the day are being put up outside such transformed stores and freebies like a bar of soap, a bottle of cola or a chocolate bar are being offered with purchases of a certain amount. In several areas, 20-30 small kirana owners have come together to form associations and source their purchases collectively from manufacturers for higher discounts. A new idea whose time has come when arrives cannot be bunged by anyone. Especially when it proposes an essentially finer monetary and behavioral value scheme to its clientele, it gradually takes over the old way, and other 58 | P a g e
stakeholders have no option but to acknowledge and transform accordingly. Modern retailing is one such inevitable reality which has started taking a spin in the traditional retail scenario and is soon liable to capture the retail sector and further enhance its compass. All elements in the delivery chain better accept it and prepare, rather than trying to rob the customers of a superior way of life by promulgating fallacy and protecting vested interests. The question which then arises in the face of this foreseeable change is the future of the traditional outlets (Kiranas) with a network so intense that most of us have a kirana store within five minutes of our residence. The kirana also operate on a low-cost model with family-owned properties (an extension of the house), with most of the family working in the store itself. They cater to impulse needs at short notice, and early opening and late closing times which suit many families. The supermarkets on the other hand propose an elite ambience with economy for all sectors of the society. In the last five years (2001-2006) Indian retailing industry has seen exceptional augmentation. Where the country was in the dominance of unorganized retailing the organized retailing sector has now emerged in a momentous way and is contributing significantly to the growth of Indian retail sector. It is predicted that organized retail will form 10% of total retailing by the end of this decade (2010). Cultural and regional disparity in India is the major challenge in the face of retailers. Due to this factor the retailers in India are deterred from adopting a distinct retail format. And so there is a scope for a variety to formats to co-exist in India. As the present-day retail sector in India is mirrored in expansive shopping centers, multiplex- malls and huge complexes offering less than one roof shopping, entertainment and food, the notion of shopping has tainted in provisos of format and consumer buying behavior, escorting in an upheaval in shopping in India. This has also added to large scale investments in the real estate sector with major national and global players investing in mounting the infrastructure and construction of the retailing business. The organized retail boom in India has mostly taken place at the big malls and the hyper markets. Here, it should also be kept in mind that most of India's population is below the traditional SEC A classification. The reason why organized retail has not seen the penetration it wanted is that they have not been able to 59 | P a g e
bring themselves to the customers. The traditional kirana store wins hands down in this aspect. This why we decided to make a foray into this format. The whole idea is to make the shoppers upgrade and graduate to organized retail. In order to achieve that they have to be first given what they are used to, albeit in an organized manner. Also, the hyper and the supers have a psychological barrier. Research shows that these places are considered to be destinations by the shoppers, where they like to spend some time, but not necessarily shop. The idea is to overcome the psychological barrier by tweaking their preferred services.
Working Capital: The retail business is a working capital intensive one. Managing one’s working capital is very important in this line of business. If not managed well, it can lead to cash blockages. Inventory, Debtors and Creditors account for the major chunk of working capital. This is because inventory is mostly on cash and even if it is on credit, the days allowed are less. Hence, cash management becomes here. Our format is that of a kirana store. The merchandising will similar to what similar stores often. The sourcing will be done centrally. The inventory turn cycle (approximate) is given below: Food & Beverages – 15 days Staples – 30 days Meat & Poultry – 15 days International Food – 30 days Personal Care – 30 days Household Products – 30 days Healthcare & Hygiene – 30 days Mobile Recharge – 15 days. There will be a safety stock of 5 days for products like F&B, Meat & Poultry, and Mobile Recharge that have a faster turnaround time. On the other hand SKUs like 60 | P a g e
Staples that have a slower turnaround time will have a safety stock of 2-3 days. This will prevent stock outs. There will be an inventory management system that will allow inter store transfer in case of stock out at any particular store. The average inventory turnover is around 20 days. Primary research shows that the credit allowed to purchase inventory is around 15 days. Also, average period for credit given to customers is around 7 days in case of a small kirana store. This is where, we being an organized player, can leverage that. As said earlier all sourcing will be done centrally. This is where we can leverage our size. We will have better bargaining powers than the unorganized kirana stores. This will allow us to get a greater credit period from our suppliers. Also, since the credit allowed by us will be through membership cards, it will allow more efficient collection. For our working capital requirements we will plough back our profits and also take bank financing. Key aspects that get derived from the positioning
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Roll Out Strategy: Marketing Communications: 1) Newspaper Insertions: Insertions will be placed inside newspapers in the areas where the stores will be opened. The insertion will let the consumers know about the store opening date and the exact location of the store.
2) Advertisements on local cable channels: We will have a tie up with the local cable television service provider for advertising on the local cable channel with respect to the areas where the stores will be launched. The communication will be to make the customer aware of the date of opening and the location of the store. Also, it will cover the SKUs that will be stored.
3) Hoardings: We will also advertise through hoardings. The hoardings that will be selected will be strategically placed at points of maximum visibility in the areas where the stores will be launched.
4) Promotional Activities: There will be some promotional activities that will take place on our behalf. We will sponsor the activities of the local clubs. Also, whenever possible, we will roll out in a festive season, e. g. Durga Puja in Kolkata. This is because during these times, the interest levels are high and also the local activities are at their peak. It becomes easier to attract attention during festive periods. Also, the purchase budgets are higher. Hence, our format can actually give them more value.
Number of stores per city (pilot phase): The number of stores in the pilot phase will be 5 per city. The cities that have been selected for the pilot launch of our store are: 62 | P a g e
a) Chandigarh b) Ahmedabad c) Vadodara d) Pune e) Coimbatore f) Ludhiana g) Faridabad h) Bangalore i) Patna j) Hyderabad k) Bhubaneswar The reason behind choosing these cities to launch our store is that these cities are the highest spenders on FMCG (in that order). Also, as discussed in our location strategy, most of the cities are Tier II cities and they go well with our kind of store format. We are not going for ATL marketing communications as the launch will be in select cities initially. Also, our store format will be opened in select locations initially. ATL communications will create a greater buzz than we can service initially. This is true to the motto of having a neighbour round the corner store.
People Strategy: Our whole model runs on the basis of the decisions taken by the respective store managers. Thus, not only is it important for us to select the right people but also make sure they’re trained properly. The store managers will maintain a rapport with the customer, gain their trust, bring them into a comfort zone, push products and find out what the preferences of the customers are. The way the store manager acts and serves a customer is a service in itself which apart from other things would require a huge amount of knowledge about the products. 63 | P a g e
Number of people per store: There will be 3 people per store. There will be a store manager and two store attendants. As discussed in the earlier stages, we will also have a home delivery facility. The two store attendants will also take care of the home delivery service. Employee Training: The training programme for the employees will cover the following areas: a) Product Training: This will train the employees on the various SKUs that are there in the store. It will also train the employees on the margins that is there on the various product categories.
b) Technology Training: Our store will deploy technology to a considerable extent. The inventory management system will be automated. Also for the credit facility we will be using prepaid cards which will again call for technology deployment. Hence it becomes important for the employees to be conversant with technology in order to be able to put it to optimum level.
c) Soft Skills Training: This is a very important part of employee grooming. The people on the shop floor need to have good soft skills to deal with the customers. This service differentiation will also be a core competence and a USP of our store.
d) Operational Training: This will enable the employees to have a hang of how to manage and run a store. This becomes important in the absence of a store manager.
Franchisee Vs. Own Store Strategy Managing a brand that has both franchised and company-owned stores is like walking a tightrope. The two business models are like oil and water, thus they just don't mix. When franchisors own and operate stores themselves it presents a conflict of interest. This arises from the temptation to favor one's own stores with 64 | P a g e
better locations and support. Even if a franchisor remains fair, having a large chain of company owned stores carries with it the risk of perceived bias. On the other hand, company-owned stores give franchisors invaluable and ongoing insight into the market, which in turn benefits the franchisee system. Also, having company owned stores work to an advantage as they can be a cash cow, and thus our income is looked after. These stores can also be used to train franchisees and for the trial purposes of new products, so poor product isn’t inflicted onto the chain of franchisors. One of the well-known benefits of franchising is having motivated owner operators on the job. For this reason, company owned stores are rarely as profitable as franchises but as mentioned before they're really useful as a testing ground and to understand the dynamics of running a store. Also this is a very useful tool to train new joiners. One of the ways to avoid conflict would be to make sure that company stores are not in direct competition with franchisees. The other challenge in running both models is creating different management structures. Despite the challenges, many retailers continue to dabble in both models. Recently there has been a trend towards large corporate retailers turning to franchising. For these companies, the challenge of setting up a second management structure to incorporate a franchising arm is even more onerous than usual. Finally, when it comes to brand reputation, one bad apple can spoil the whole basket. This holds true for both models but in the case of company owned stores, the control still lies with us. Keeping in mind what we have mentioned above and the fact that we are a new brand entering the market, we would initially like to start only with company owned stores. It would help us to understand the market dynamics and the entire scenario with regards to competition, supply chain, logistics, and customer relationship management. This way we can learn the business, identify glitches and more importantly ways to solve these problems. Apart from this we will also be able to establish our brand name and reputation in the market not only with customers but also with 65 | P a g e
parties interested in associating with us in the form of franchises. Once we have settled down with our business, say in 2 – 3 years time, we will move towards a franchisee model. The objective then will be to bring down the number of company owned stores and move to a franchisee model. Even then we will not move to a wholly franchisee based model; we will maintain a certain number of company owned stores. RO/ DC Costs Regional Office Costs include all the overheads and administrative expenses incurred by the organization. Departments include payroll processing, human resources department, finance department, market research team, market development team; vendor development process takes place in the regional office. Overheads and administrative expenses include salary, electricity, telephone bills and maintenance costs etc. These expenses are usually fixed costs. Since, we propose to open our outlets in eleven tier two cities covering all the four zones; we will have four regional offices. They are Ludhiana Faridabad Chandigarh Bangalore Hyderabad Coimbatore Bhubaneswar Patna Ahmedabad Vadodara Pune North North North South South South East East West West West Pune Bhubaneswar Bangalore Chandigarh
The cities selected for the initial launch of our outlets has significance as the mentioned cities population have been top spenders in FMCG segment in the last
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financial year. The regional offices have been selected on the basis of the availability of place, repute, manpower in the city. The Regional office hierarchy is depicted in the following chart
Distribution Costs Establishing a DC will raise our costs, thus in order to keep our costs low, we will not establish a DC. Also maintaining a DC would mean having our own logistics system which adds to the costs. In our case the costs would be higher as our stores would not only be over a large geographic spread but would also be located in the bowels of localities. As for storage, facilities will be maintained within the respective stores. Therefore, we are faced with the challenge of maintaining a constant supply to our stores. This problem can be taken care of in the following manner: • For most products we will get our supply from the supplier or the wholesaler of the area in which our store is located but this will be on a special tie-up with the respective brands. • For other products, we will procure our goods directly from the company. The company will supply the goods directly to our stores. • As for imported products, their demand will be much less than our other products. Thus, there is no need to maintain a constant supply. These products can be stored in our store itself. Procurement of these products can be done through the local supplier or through direct procurement from the distributor.
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