January 21, 2007

My last post on retail – The Great Indian Retail Dream: Euphoria or Reality? – generated some discussions. That led me to drill the retail story a bit deeper and to study evolution of retail in comparable economies like Brazil and China. The more I drilled deeper, the more convinced I became that the great Indian retail party may not happen anytime soon. Organized retail’s grand plans may hit a road block in India due to many economic, social, developmental, infrastructural, and consumption-centric reasons. But one thing that may be the biggest party spoiler is the fact that India is a country with a mind, body, and soul distinctly apart from any of the economies of the world. India’s distinctiveness will ensure that what worked elsewhere may not work here at all. The standard paradigm of organized retail may not fit in India’s case. And that may be the first of the major life threatening jolts for the grand plans of the organized retail in India. Let’s see how some of the typical Indian phenomena can emerge as villains in the great Indian retail opera.

Urbanization
Growth of organized retail is predominantly an urban phenomenon. The prospects of organized retail are determined by the level of urban population. Studies in developing economies have suggested that urban families spend 2.5 times more than rural families. In India, urban population is growing at a CAGR of 2.4% annually and expected to grow with this rate till 2015. Going by the forecast of 2009, India will have an urbanization of 30%. This will increase to 32% by 2015. Compare this with Brazil, one of the BRIC economies, where the urbanization level is 85%. It is not a surprise that in Brazil, the organized retail has a 36% market share of total retail. Even in China, where organized retail has a 20% market share of total retail, the urbanization level is 42%. China saw its urban population rise from 17.9% in 1979 to 41.8% in 2004. During this period the urban population grew from 170 million to 540 million at a CAGR of 4.5% and resulting urbanization grew at CAGR of 3.3%. This growth of urbanization in China is said to be amazingly fast and unprecedented. So can India’s urbanization also move on a fast track? No, it cannot. China had and still has a booming manufacturing sector which helped it in rapid urbanization. Manufacturing sector is better placed than service sector to accelerate the process of urbanization. Manufacturing sector helps in creation of urban centers whereas service sector comes later to service the urban centers. India is too service heavy and manufacturing malnourished to create the phenomenon of fast paced urbanization.

Nations within a nation
India is a peculiar country. It is like having 50 nations within a nation, each having its own tastes and preferences. It’s not about tastes and preferences; it is more about cultural pockets within India that dictate the consumption behaviour of the people. Add to this the sharp regional disparities and you have a nation of contradictions. Across India, what works in Tamil Nadu may not work in Punjab. It is equally likely that within a region, say Maharashtra, what works in Mumbai may not work in Nagpur. And then it is also likely that within Mumbai, what works in Malabar Hills may not work in Borivilli or Dahisar. But that’s the crux of Indian consumer! How is it related to growth of organized retail? Organized retail is a big game of standardization. It is a volume game where you standardize everything, come up with big volume requirement, use the volume factor to squeeze the supplier and get a favourable price. But India is a nation of customization. Here standard things don’t work. Ask a typical housewife in India about customization and she will rattle off the list of customization required in break-fast for every member of her family – the son wants toast, butter, and double-egg omelet; daughter wants corn flakes with honey; hubby wants aalu paratha with decent helpings of butter and dahi, and she herself prefers a glass of juice along with a slice of fresh bread and jam. Whew! Mr. Organized Retailer, Indian consumer is no different. We are a nation of “mera wala pink” type citizens. We want everything our way. How the organized retailers are going to program their retail models to bring this level of customization and without losing the price and other advantages is to be seen. Here, a friendly kirana stores has a clear advantage.

Sachet economy
India is a sachet economy. Until sachet happened, as common a thing as shampoo was considered a luxury by majority of Indians. A typical Indian doesn’t have money to indulge in bulk purchases. India buys little, consumes it, and then again buys a little. We are people who don’t have the luxury of fat working capital and cash flow to run our life. Majority of us can’t keep our precious money blocked in 60 days, or even 30 days of household inventory. Situation in life of majority of Indians is such that they need to turn the inventory of running their life on a weekly or fortnightly basis! Now, all those die-hard fans of Walmart very well know that organized retail often encourages bulk purchases by giving great offers and cajoling consumers to purchase in advance the consumption requirements of the near future. One year back, I met an American and his wife on way to Agra. During random talks, he said that they used to buy 6 months of toilet paper in US whenever Walmart comes up with a great offer and that they had a separate storage room in their house where they kept such discounted and advanced purchases! How many Indians can afford that? Growth of organized retail is dependent on volumes – both from retailer’s side as well as consumer’s side. Organized retail may not fit the bill of sachet economy. Kirana shops are better placed to cater to the demand of a sachet economy. Yet another reason to justify that Kirana stores will rule India for a long time.

Where is the demand?
An analysis by Technopak indicates that out of the $ 300 Billion Indian retail market, around 45% is in urban India and the balance 55% in rural India. Given the fact that India has 720 million people living in over 627000 villages, it’s a tough task for organized retail to tap the rural retail demand. Even the data from NCAER which says that 17% of 627000 villages account for 50% of rural population and 60% of rural wealth doesn’t ease much pain regarding inability to tap rural demand. This will mean reaching out to 100000 villages to tap 50% of rural demand. Given the scattered nature and spread of the villages, it is virtually an impossible task for organized retailers to effectively capture this market.

Coming to the urban retail consumption, an analysis by R K Swamy BBDO points to the fact that top 784 cities/towns in India have 78% of the urban population, having 78% of the urban retail market, which is 35% or $ 104 Billion of the total retail pie. Going by the growth rate of total retail and rate of urbanization, we can assume that this urban market in top 1000 cities/towns will double in size to $200 Billion by 2015.

So, organized retailer will have to capture 32% of this market to meet the projected $64 Billion of organized retail revenue by 2015. A tough task considering the stranglehold of kirana in 95% of these top towns, coupled with poor infrastructure, supply chain, and the present reach of organized retail in just top 10-15 cities. Add to these the sharp decline in income level of masses as you move down the hierarchy of the cities, and it may be almost impossible to scale to the grand level of $64 Billion in just 8 years.

Where is the supplier base?
Success of organized retail is also dependent to a large extent on availability of strong supplier base that has the capacity to meet large volumes at competitive prices and standardized product quality. Success of organized retail in China may be attributed to the strong presence of manufacturing units with scales to supply big volumes at competitive prices. But do we have a strong manufacturing presence? The answer is no. Industry contributes around 27% to India’s GDP. This contribution is same as it was in 1985. Compare this to China where industry contributes more than 46% to GDP thereby providing a strong base of suppliers. Moreover, in India’s case the manufacturing scene is fragmented. There are thousands of small manufacturers for consumer goods but very few with the scale needed to service the requirements of a chain of hypermarts with consistent quality.

Even in agricultural produce, the agricultural land holdings are highly fragmented with average holding size of less than a hectare. Going by the requirements of organized retail, it would take thousands of these fragmented agricultural holdings to service a big retailer. Also, euphoric announcements by a number of players willing to play in the great Indian retail rush is going to lead to a situation of too many retailers chasing a few quality agricultural suppliers resulting in jack up of procurement price and diseconomies of scale in the short run. Apart from these, procurement from fragmented land holdings will in all likelihood result in inconsistency of quality and specifications signaling more trouble. Contract farming may be a solution here but the concept is yet to get inside the heart of Indian agriculture. Moreover, getting involved in contract farming is requires good investments and commitment. Again this is a long term call that is not going to give great return in short run.

Backend operations
Organized retail’s success, to a large extent, is determined by the efficiency of its backend operation and the capacity to squeeze cost out of the system. Unfortunately, till now the focus of the organized retail players has been on front-end like buying real estate at obscene prices, attracting customers to the glitzy malls, and giving them a shopping experience. Only recently, there have been talks about investment in backend operations by a few players. But such backward linking cannot happen overnight with the kind of storage and cold chain facilities, and road and air connectivity we have, particularly in villages and smaller towns. Moreover, to build such massive backend infrastructure we need an investment that is not pocket change. An estimate by FICCI/ YES Bank Knowledge Initiative 2006 puts the investment at $4.1 Billion or Rs 15,700 crores just for providing proper cold chain facilities. A report by Rabo Bank in 2005 on status of food processing industry in India puts the figures of investments at Rs 99,700 crores till 2015 to achieve market potential and capacity creation. There is more to organized retail than floor space! Front-end can be taken care in short term but backward linking is something that will take a lot of time, energy, planning, investment, flawless execution, and effective handling of externalities resulting from social and governmental interventions.

Finally…
We are trying to do in 10 years what took other nations 25-30 years to achieve. There is nothing wrong in being on fast track, but only if the environment is conducive and supporting infrastructure is well developed. Unfortunately, in India’s case it is not conducive yet and it may take 10 years to make the environment conducive and infrastructure robust to fuel the growth of organized retail. Ultimately we too may need around 25 years to reach the stage we are aspiring to reach in 10 years.

So why there is hullabaloo in Indian retail orchard?
Imagine this scenario. You come up with a new kid’s junction where you give kids some great toys to play with in an ambience that interests kids immensely. You introduce it to a child. He loves it. The child’s parents can afford the price tag and also has a car to drive his child to junction. Encouraged by this success, you introduce the kid’s junction to some other kids whose parents could afford it and feel the enjoyment of their child. So you are excited as more and more kids get interested in your kid’s junction. Soon all the kids in the town whose parents could afford sending their kids to the junction have already become patrons and you are finding difficult to find new kids with well-to-do parents. Also, the initial excitement of this new kid’s junction has melted down now and it doesn’t excite kids as before.

That’s what is happening with soaring growth of organized retail and resulting euphoria. The organized retail is the talk of the town (and media) these days because it is servicing to the latent demand of fun-filled shopping experience in the big cities. Once this latent demand of the big cities is taken care of, the growth will slow down a bit. What is driving this euphoria can be summed up in this simple statistics: 6% of India’s population lives in top 6 cities contributing 14% of India’s GDP and accounting for 68% of organized retail.

Well, going beyond this to the heart of real India which is fragmented, scattered, and poor may not be so easy. So, tread carefully!

3 comments

  1. Anonymous // March 5, 2007 at 2:40 PM  

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  2. Sridhar // April 8, 2007 at 10:16 PM  

    That was a very good analysis. It is just a hype about organized retail. Thankfully, as per your facts, there won't be a major change in retail business in the near future.

    Your statement on sachet economy are perfect. Even with budget of about 20K for just groceries, I wouldn't stock up for months as I used to do in US. The kiranas have evolved too to cater to different segments of the market and I guess they are making handsome profits which is why they continue to be in the business.

    But what is wrong with unorganized retail? Why can't mom-and-pop stores continue to cater to majority of Indians? Who gains when the organized retail enter Indian market? Is it the consumer, or the big business that run and supply to the retail stores? The losers will be the low end traders and small time entrepreneurs. Do we really need big retail chains in India?

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