India’s retail revolution has finally begun

But supply chain is yet to match demand

Bangalore , Dec. 5

Is the average Indian consumer retail-ready or is retail readying the Indian consumer? Either way, changing shopping habits in the country are giving global retail giants the perfect setting for their Indian entries.

Take a look at this: the average ticket value (transaction value of goods sold) of the Indian consumer in large retail formats like Lifestyle, Shopper's Stop and even malls has doubled in the last two years.

Lifestyle International stores across the country clock an average of Rs 1,500-1,600 ticket value per consumer, and during festive seasons such as Christmas and Diwali, spending goes up by 40 per cent averaging around Rs 2,000 ticket value per consumer, says Mr Sankar Suryanarayan, Vice-President, Marketing, Lifestyle International. He is expecting a footfall of 1.5 million at 11 Lifestyle stores across the country during the next one month.

Mr Gibson G. Vedamani, CEO, Retailers Association of India, said that average spend in large formats hovered around Rs 800-900 two years ago when the country was in the first stages of the retail boom.

"It has doubled now. Even supermarkets have doubled their ticket value. From Rs 250-300 a couple of years ago, they are now seeing an average family billing worth Rs 600," he said terming this "a good ticket size."

Lack of variety

While demand and potential for more formats will grow, the country's supply chain is yet to match the requirement, according to Mr Govind Shrikhande, CEO, Shopper's Stop.

Lack of enough merchandise and variety is still restricting the Indian shopper, but there has also been an increase of cash memos by about 20 per cent.

This growth is also accompanied by a significant change in the billing value of non-apparel products such as cell phones, watches and personal care products.

"This was a 75-25 ratio and now has changed to 69-31," he said.

In fact, considering such big plans from retail behemoths, there are new players foraying into the retailing market to grab a larger pie of the retail market that has a shallow penetration of less than 3%. A case in point is two-wheeler maker Hero Honda's plans to foray into retail sector.

The cash and carry is a wholesale format that involves shopping of retailers and shopkeepers. The format has a ballpark margin of 2-3% and volumes quite high. Consider Bangalore-based retailer Metro. For this, a retailer needs to subscribe for membership of "Metro" and give in requisite information.

Department stores are multi-brand outlets that include apparel, lifestyle products, except food and grocery. The format generates a margin of 30-40%, if strong brands are kept for selling. Also if private-label like a company's own brands are sold, it could generate a margin of 50-60%.

While speciality stores are single concept outlet. They can be a jewellery stores or a footwear stores. Again here if the stores sell their own brand, the margins are around 40-50% or else it is around 20-30%.

Hypermarkets and supermarket are analogous. Both include household and general merchandising stuffs like food and groceries. The only difference is pricing. Also, though volumes are high the margins that this format gives are around 15%. Despite such positive developments, what needs an immediate attention is whether this is the real case. There are challenges that may negate the positive impact of such developments.

Fragmented nature

The Indian retail sector per se is fragmented in nature. Of the total retailing, 3% accounts for organised retailing, while the remaining 97% is dominated by the Kirana shops. The paucity of data has given a cloudy vision to the industry. So it has become difficult to gauge the growth of the sector. It has also resulted in limited access to capital, labour and suitable real estate options.

Supply chain

Inefficient back-end supply chain has been one of the major emerging issues that the retail sector has been contending with. It has also added to the costs of the retail companies. Deepankar Halder, CEO, Spinach Stores of the Wadhawan Food Retail avers, "It is indispensable for the distribution network to fall in place, otherwise goods that are not delivered, when required, add to the burden of retail companies."

Manpower and retention

The sector is in dire need of skilled manpower that will make a difference for retail companies. Says Halder, "The executives that we employ at the front-end need to have right attitude as they are the reflection of the company's brand." Due to dearth of skilled workers, poaching people is evident amounting to bidding up for salaries. Manpower Retention has also become a daunting task for companies. Pantaloon spends at least 7% of its revenue in training and educating its staff.

Inventory management

This primarily refers to the execution aspect of retailing. Companies increase their efficiency through better inventory management. Inefficiencies at the inventory level result in cost additions like goods remain in the warehouse without being delivered along with the rent paid for the unproductive period. In order to avoid this, companies like Pantaloon has plans to invest in at least $25 million in IT to ensure minimum inefficiency and better inventory management.

Lack of infrastructure

The retail sector is deprived of investments from the government's side. In fact, this is the reason for private players jumping into the sector to cash in on the still-to-mature domain. More so, good margins of companies are more an outcome of absence of competition than anything else. In this case, foreign direct investment (FDI) may change the situation.

And with the government allowing 51% FDI for single brand retailing there are few good news ahead. In fact, according to a PriceWaterhouseCooper study, India will see a whopping $412 billion in the retail sector by 2011. And the influx of foreign players Wal-Mart in the Indian retail domain will have a positive impact, if things fall in proper place at a right time. Also the increasing presence of foreign players will ensure participation of Indian manufacturers in the international goods, outsourcing market-an area where China is ahead of India. The CEO of Spinach Retail puts, “It is a good thing. Endeavours (mergers and acquisition) like these will see best retail practices and discipline brought into the market.”

Also the advent of foreign players will lead to improvement and increase in the overall profile of employment in the sector, not to mention, the overall improvement in the brand perception of the industry.

Analysts believe that retail stocks will scale new heights due to the influx. It is also perceived that the market share will be distributed and hence reduced, prompting retail companies to manage competition with a difference. However, it will also result in a curb in margins in the long-run.

Investor’s perspective

One of the challenges that dawns on the sector is the soaring real estate prices. India's real estate prices have gone up by 80 to 100% over the last year. And it is estimated that the Indian retail sector will need an additional 200 million sq ft in the process of its expansion. But the impact of increasing real estate prices on operating profit of retail companies remains to be seen. How much impact it will make on the market is also too soon to be answered.

Some analysts opine that currently most stocks are at high valuations, given the expansion plans of the retail companies, which seem good in the longer term. Pantaloon, the market leader, has a P/E ratio of 57, while Wal-Mart has a P/E of 17.37. Also the growth opportunities that the sector entails call for patience and those investors who have long-term perspective will see good appreciation.

Investors considering the sector as an investment opportunity should understand the local dynamics and should decide accordingly.

Analysts expect Pantaloon and Provogue to emerge as aggressive players against Shoppers Stop, considering their good growth visibility. As regards Reliance Retail, it is perceived that the company will take around 2-3 years to match Pantaloon and Provogue's performance.

Though Reliance has aggressive plans like tie-ups and acquiring co-operatives that are not doing well, it is a matter of time that will determine the potency of such plans.

It is perceived that saturation will hit the sector in five years hence; sustaining growth will emerge as a Herculean task for the retail players. But what investors need to look at is growth, profitability and cash flow of the players. Also, the competition from Wal-Mart and Reliance Retail, both of which reflect robust ability to change market dynamics, must not be ruled out.

Not all the AMC fees will flow into Pantaloon since their ESOP scheme is also running from this AMC but still they should get about 65% - 70% of these flows.Even a research house like Enam is not making any projection from these businesses because they are not sure how much profit will those ventures make etc etc. But for the investor this is like  a margin of safety. And  the person (Prashant Desai) handling these investor relations and these new businesses (Private Equity) was earlier with RARE ENTERPRISES!!!

In my mind I think market will start discounting increasing competition in Retail sector in which Pantaloon had monopoly till now (almost) and that will refelect in Pantaloon stock price as well.

Will Wal-Mart Succeed in India? Perhaps...But It Won't Be Easy

"He doesn't realize it, but I know everything about him," says Indian retail magnate Kishore Biyani about a young man sitting with him in a Mumbai hotel meeting room in early December. "I see that he is wearing Colour Plus trousers. I know his waist size ... I know everything about him. We are a company of observers, and everybody is trained to observe customers," says Biyani, who is CEO of the Future Group and managing director of its flagship Pantaloon retail chain that last year had revenues of Rs. 2,018 crore ($450 million) and expects to become a $1 billion company by mid 2007.

Biyani often spends Sundays hanging about unobtrusively and watching shoppers at his company's 200 clothing stores in 32 Indian cities. The home-grown retailer's obsession for observing the average Indian consumer also at public places like temples and movie halls underscores what could be Wal-Mart's biggest challenge as it sets up shop in India in partnership with Bharti, a leading telecom services provider. "India is a very diverse country -- we have 6,000 castes and sub-castes in 28 states, and every community has its own tastes; every state has its own nuances," says Biyani. "To manage the diversity and the heterogeneity will be one of the biggest challenges for anybody who comes to this market."

Cash and Carry

India's retail industry is one of its fastest growing (with a 5% compounded annual growth rate) and has $320 billion in annual revenues this year, according to a report titled, "Retail in India: Getting Organized to Drive Growth," released recently by consulting firm A.T. Kearney and the Confederation of Indian Industry (CII). Never mind that Wal-Mart's $315.6 billion in global sales last year is about the size of the entire Indian retail industry. "Rising incomes and increased consumerism in urban areas along with an upswing in rural consumption will further fuel this growth to around 7%-8%," the authors say, pegging India's consumer class with rising disposable income at 400 million people.

But now that Wal-Mart plans to enter India, attention is focused on the retail giant's India strategy. Wharton professor of marketing http://marketing.wharton.upenn.edu/people/faculty/raju.cfm - Jagmohan Raju says one big challenge Wal-Mart will face in India has to do with how it is perceived by consumers. "In the U.S., when you think of a big warehouse store, you think of lower prices, and small, boutique stores have higher prices," he says. "In India, the perception is exactly the opposite -- the bigger store has higher prices; smaller shops can offer lower prices because their overheads are lower. How will Wal-Mart's positioning of lower prices carry forward in a mindset where customer perceptions of big versus small are so different?"

Consumer Behavior

http://marketing.wharton.upenn.edu/people/faculty/bell.cfm - David Bell , Wharton professor of marketing, says Wal-Mart's business model is founded on "everyday low prices for consumers and squeezing costs out of the system, and customer service with friendly people who greet you." But those, he argues, do not guarantee shopper traffic, as consumer behavior is dramatically different across global markets. Coca-Cola might adjust to people's preferences in different markets by making its drink sweeter or more effervescent. Or McDonalds could allow people to consume alcohol at its restaurants in France and make hamburgers with rice patties in Japan. "But there's considerably more variation in the way people shop for products than their underlying preference for the products themselves," Bell says. "This is what makes it more difficult -- not just for Wal-Mart in particular, but for any retailer -- to be truly global."

Changes in consumer preferences that Wal-Mart will encounter have to do with simple things like how often people like to go to a store or what motivates them to choose one store over another. "In local markets, you have dynamics of retail competition, variations in the frequency with which people like to shop, variation in the kind of products that drive people to the store, variation in the importance of the retail assortment."

It is too early to tell if some of the controversies Wal-Mart has faced in the U.S. will crop up in India, too. "In the U.S., a number of small towns did not like Wal-Mart for a couple of different reasons," says Bell. "One is purely aesthetic -- these big boxes look pretty ugly -- and the practice of having huge buying power can be detrimental to the local economy -- people who try and compete on price. Thirdly, they are criticized for their employment practices, such as their benefits, and ethnic and gender discrimination in hiring."

Wal-Mart's most immediate challenge could be finding real estate at preferred locations and financing it at the prevailing prices. Biyani says his group bought most of its real estate long before the current price boom. "If we were to do business at today's rates, we'd have to shut down," he says. "The Wal-Mart model is very real estate hungry," says Raju. "They need a lot of real estate, close to where people live, and have easy access to them. The Wal-Mart model also relies on the fact that everything is on display, which requires lots of space."

Raju notes that if, as many industry watchers expect, Wal-Mart sets up its stores on the outskirts of urban centers, other challenges could emerge. "If you are going to travel by train, you'll have to carry your purchases in a bag, and then you'll buy less," he says. "If you drive your car there and load it up, Wal-Mart should have a place to park all those cars." Some industry experts have argued that the typical Indian consumer does not travel more than 6 km (3.75 miles) or 7 km to shop, and that few suburbanites own cars.

Raju says he expects Wal-Mart to adopt a blended model of its traditional format tweaked to fit the reality of Indian real estate. "It would be stores where you have all the products on display, but you don't pick it up and put it in your cart yourself." This would involve something like a handheld computerized device, he says, into which customers enter information about the products they want to buy. They would then collect their purchases at a checkout point at street level and drive away, or have them delivered to their homes.

More blending might be on the way, especially in cultural nuances. Wal-Mart's recent debacles in Germany and Korea, where it sold out to local retail players and exited, could be wake-up calls. In Germany, Wal-Mart's low price strategy failed to win it a distinctive market position simply because two other well-entrenched retailers -- Aldi and Lidl -- have been following that strategy for years, says Bell. He notes that Wal-Mart was also faulted for relying too heavily on a U.S.-driven view of how Germans shop, made worse by populating its top management in the country with U.S. expatriate executives, many of whom couldn't speak German. Thirdly, the Wal-Mart strategy of a price-service combination with friendly greeters and so forth backfired. "Culturally, greetings and friendliness in stores are viewed by the Germans with a lot of suspicion," says Bell.

Rites of Passage

Wal-Mart also had some lessons to learn in South America a couple of years ago, when it discovered that the design and layout of its stores did not match shopper preferences. "In South America, shopping for some families is a social or an entertainment-driven event," says Bell. "You have the whole family or the extended family shopping together, so you need much wider aisles." That, he says, is unlike what Wal-Mart is used to in the U.S., where a single person typically shops for the entire household, while other family members are looking after the children or at work. "It seems like a fundamental thing, but you could never predict that coming from the outside unless you have a local partner."

Chastened by these experiences, Wal-Mart may not face the same problems in India. Bharti, its local partner, is a leader in the mobile phone services industry and must have deep insights into Indian consumer behavior patterns. Even so, there could be surprises, as Biyani's Big Bazaar store chain learned the hard way a couple of years ago. The chain had bought 100,000 white cotton shirts, expecting good demand. But sales were slow, and promotional campaigns fell flat. It soon figured out why: The demographic profile of Big Bazaar's middle-class shoppers meant people who commute in crowded trains and buses and not in air-conditioned cars. For them, white shirts are high-maintenance hassles, needing frequent laundering. The group eventually liquidated its unsold inventory of white shirts through heavily discounted sales.

Wal-Mart's legendary success at procuring its supplies at extremely competitive prices has no doubt pleased its customers to whom those savings are passed on, but critics have accused it of compelling its suppliers to survive on very thin margins. Here, Biyani says he works differently. "We are not like Wal-Mart; we believe in a situation of win, win and win," he says. "The supplier should win, we should win and the customer should win. In Wal-Mart's strategy, and maybe that of other international retailers, the company wins and the customer wins. Somebody has to lose for those two to win." Future Capital Holdings, a Biyani-run private equity firm, last month raised $830 million that it has begun investing as vendor financing in manufacturers of foods, garments and fashion jewelry, among others. Products of these companies get captive shelf space at the Future Group stores.

Raju says existing national brands will need to plan their response to Wal-Mart very carefully to ensure that while they get to supply the retail giant, they also don't alienate their smaller store buyers. "They are used to it in the U.S.," he says. "Right now, Hindustan Lever deals with a lot of small stores. Tomorrow they will be dealing with large buyers like a Wal-Mart or Reliance Retail, so the relative power structure of buyers and who is supplying will change. This is a challenge they have faced in developed markets where they deal with the Tescos and Safeways." He expects the national brands in India, such as Hindustan Lever and Procter & Gamble, to figure out ways to help small stores with specially tailored services "to ensure they also thrive and do well."

Raju sees bigger benefits flowing to other players in the retail supply chain, such as farmers. "Companies like Wal-Mart coming to India, I hope, will help farmers because there will be fewer players in the chain," he says. "Farmers could form cooperatives to supply directly to Wal-Mart rather than have to deal with multiple intermediaries."

Party Spoilers

India's retail promise must seem tempting, but that outlook "is tempered by the fact that the country is grappling with severe infrastructure and policy issues," says the CII in the report it produced with A. T. Kearney. "Cold chains [distribution chains for perishable items], warehousing and logistics infrastructure will fast become unmanageable challenges for India if proactive action is not taken." It points to policy regimes that vary across states, "inadequate quality control and the lack of a skilled workforce."

Biyani doesn't buy all that, arguing that "India is a nation of dukaandars (shopkeepers) and that enough retail talent is available. He also dismisses concerns about distribution and logistics infrastructure with a simple, rhetorical question: "Have you [in the recent past] faced a shortage of anything you wanted to buy?" Biyani scoffs at Wal-Mart's logistics and supply-chain strengths. "Where will they run their Volvo trucks here?" he asks, adding in a lighter vein, "They will probably have to have bullock carts and handcarts in their supply chain."

Raju points out that Wal-Mart's efficiencies stem from the scale of its purchases, which determines what prices it pays suppliers. "Suppliers are willing to work with them because if they don't work with them they lose a big part of the market," he says. The Wal-Mart buying center at its Bentonville, Arkansas, headquarters "is huge, and that's why most of the companies' vendors have their branch offices in the city where Wal-Mart's headquarters are located," adds Raju.

Coping with Oversupply

Organized retail is just beginning in India, but plans call for some 600 malls to be built over the next decade across the country. The nascent industry in India could learn valuable lessons about what went wrong with retailers in the U.S., leading to bankruptcies, closures and sell-offs at companies like K-Mart, Caldor and Bradlees.

"What went wrong [in the U.S. market] is oversupply," says Martyn Chase, chairman of Donaldson, a London-based company that manages 350 retail malls across Europe. "One mall gets built, and somebody builds a new and bigger mall nearby, so the previous one is killed." He doesn't see an immediate threat of that happening in India, but says "you will get casualties in 10 years when you have too many of them." He attended a CII-organized two-day conference on the retail industry in Mumbai in late November, and is trying to persuade his European retail mall clients to invest in India.

Chase says the way to prevent hemorrhaging and consolidation in the industry is to bring regulatory oversight. "You need proper regulations governing mall locations, mall size and the like," he says. "Before you are allowed to build a mall in the U.K., you have to demonstrate there is a need for it, by proving that there is enough demand from people who live in that area to make the mall work."

Biyani argues that the underlying dynamics of standalone retail are not attractive. (Pantaloon's urban locations put it in a different market segment from that of the big box centers Wal-Mart might put up on city outskirts.) "In India, no retailer has made big money so far," says Biyani. (Pantaloon's profits last year were 3% of revenues.) "The money is in the peripheral activities; it's never in the retail itself. It's the power of retail that gets you the money; it's never the transaction that gets you the money."

Source: Knowledge@Wharton

 
The real story of India's retail boom
 
Pummy Kaul and Prashant Mahesh, Outlook Business 
 
 January 19, 2007

On a weekday, the DLF Mega Mall -- located in the IT and ITES hub of Gurgaon on the outskirts of Delhi -- bears a deserted look. Of the few operating shops in this large mall, most have nary a customer. The same goes for several other retail outlets and many of the other malls in the vicinity.

True, a retail chain like Future Group's Big Bazaar may be clocking heady sales (growing at 100% year-on-year), but the dozen-odd shops operating in its proximity wear a deserted look, giving a somewhat hollow ring to the much-talked-about retail boom in the country.

In what seems like a quirk of circumstance, malls have sprung up all over urban India in anticipation of a consumption boom that may itself prove to be eventually truant.

Move to Mulund (West), a suburban locality of India's financial nerve, Mumbai. Rajesh Parashar, a resident of the area has the option of shopping at Big Bazaar, Apna Bazaar, Subhiksha, Spinach, Shoprite, Foodland or at the local Sai Supermarket, all of which are within a two-kilometre radius of his residence

This is paralleled by the developments happening in the Delhi suburb of Ghaziabad, where the upcoming Shipra Mall at Indirapuram already has Big Bazaar operating out of its lower-ground floor, while Reliance is slated to open shop on the third floor. Customer footfalls, however, are more in the projections of the occupiers of the mall than real.

All this retail activity, and more, and the sheer gargantuan size of the investments planned, beg the question -- does the consumer's wallet have enough money in it for everyone?

"Only time will tell," is KPMG's executive director, Deepankar Sanwalka's laconic answer. To a great extent the success or the failure of malls will hinge on the consumer population of the area. "If the spending power of consumers is high in a locality, it could sustain two-to-three large players." Not so, elsewhere, he adds poignantly.

The significance of these remarks sinks in gradually. With planned investments of $22 billion over the next five years -- excluding what might be brought in by new global and large local players henceforth -- the retail sector is expected to grow 40% to $427 billion by 2011.

Organised retail, which is 3% of the whole currently, is in turn pegged to grow to $64 billion by 2015. And one consequence of all those investments will be the fact that India's present two square-feet per capita retailing space will rise 15-20% by 2010.

To be viable, the huge investments made in the sector by India Inc would have to be responded to by a corresponding massive surge in footfalls. And for that to happen, a lot of links would have to fall in place.

Between the drawing board and the emerging market realities, the realisation dawns that a lot of things can go wrong with India's much-heralded retail revolution. The more visible among these loose ends: vexingly high real estate prices, the loosely-knit distribution networks in India's hinterland, the near-absence of any modern supply chain logistics, shortage of skilled personnel, and a regulatory system that resembles a patchy quilt more than anything else.

Then there is the nature of the business itself. Retailing is a low-margin, high-volume, commodity business where profitability gets strained as competition intensifies. And if wrong choices are made regarding the location or the formatting of the store, woe betide the retailer. The catches are many and to make it big, a retailer would have to negotiate all the tricky turns most of the time.

The big players are sanguine, however. "There is enough room for six-to-eight players," says Reliance group chairman Mukesh Ambani, who recently kicked off the first Reliance Fresh outlet in Hyderabad. There are reasons for his optimism: the country's preponderantly young working population, disposable incomes that are expected to increase at an average 8.5% per annum till 2015, and a steadily climbing per capita income (from $460 in 2002, it rose to $620 in 2005).

In fact, it is the expectation of a large working and earning population that has attracted most global retailers to the country. But most analysts are agreed that the Indian retail market could at best support 10 large players with revenues in excess of $2 billion each by 2015.

Given the number of players getting into the fray today, this clearly means a winnowing out of the weaker retail players. What's more, that time could be sooner rather than later, maybe just three or four years down the line.

That's not so surprising, industry insiders even say, pointing out that a large number of the new entrants may not be committed to retailing in the long term. While some almost certainly are looking to act as silent partners for foreign players, others may be more willing to look at an exit option a few years down the line.

Says Hemant Kalbag, principal, AT Kearney: "I see consolidation happening in the next five years. That's when the shakeout will happen and the successful retailers will look acquiring less profitable ones."

But that's still in the future. As of now, the retail turf is set for some frenetic activity. Reliance has drawn up a

Rs 25,000-crore (Rs 250 billion) retail plan that would see its outlets dotting 784 cities and small towns by 2010.

Already it has 17 stores in Hyderabad alone (the number will go up to 40 by end of the above period). More recently, Sunil Bharti Mittal made news when he announced an alliance with the world's biggest retail chain Wal-Mart, for a supply chain and cash-and-carry venture, besides a franchise agreement for retail.

Seen as a coup of sorts, this could exert pressure on other retailers in the country to explore similar collaborative opportunities.

Laying The Pipeline

Between them the likes of Reliance, the AV Birla Group, the Tatas, the Godrejs, the Bhartis, the Mahindras, the ITC Group and the Wadias -- and a horde of others -- will be sinking in close to Rs 1 lakh crore (Rs 1 trillion) in the business of retail over the next five years.

In their crosshairs, are a host of retail-related activities such as cold chains, retail supply logistics, warehousing, sourcing and merchandising management. All of which are seen as absolutely essential if the front-end retail business is to take off on a meaningful scale across the country.

The players have hit the ground running. Reliance is hiring overseas talent to beef up its management capabilities -- it has roped in Peter Bracher from Asda Wal-Mart as special adviser for Reliance Fresh stores and Kevin Pleass from Tesco, UK, to help with store design and construction -- even as the AV Birla group is on a talent hunt ahead of its Rs 15,000-crore (Rs q50 billion) retail rollouts.

Retail icon Kishore Biyani is also stepping on the gas -- he has announced plans to roll out 225 Big Bazaar stores and hundreds of other outlets in other formats in the next four years.

The Tata group too earlier this year expanded its footprint (beyond the formats rolled out by group company Trent of Westside fame) by entering the durables segment, in a tie-up with Australian retailer Woolworths, with the launch of its Croma store.

"We plan to have a national presence with 30 stores by March 2008 and double it to 60 by March 2009, with a capital of Rs 400 crore (Rs 4 billion)," says RK Krishna Kumar, Director, Tata Sons, who is spearheading Tata's retail venture.

He adds that the company zeroed in on the segment given the findings of an internal study, which revealed that only 0.5% of Indians own air conditioners, just 1% own computers, 3.5% washing machines and 11.7% telephones. Other players like the Dubai-based Landmark group, with its Lifestyle and Max branded outlets, are also keen to expand into the grocery segment.

Reports indicate the company is in talks for a tie-up with Carrefour. Then there are players like the K Raheja group's Shopper's Stop and the Rajan Raheja-controlled Globus that are expanding their reach in the apparel and accessories segments. Others like ITC (a big player in its own right), the Godrej group, Century Textiles and Raymond as well as mid-size players like Vishal Megamart, Subhiksha and Sabka Bazaar are busy increasing their footprint.

Taking a cue from the global leaders (whose eyes are also on India), India Inc's retailers are thinking big. Reliance Retail, for instance, has chalked out a plan to roll out about 5,500 stores of all kinds in 800 cities, 85 logistics centres and 1,600 farm supply hubs. AV Birla Group is looking at pumping in Rs 15,000-20,000 crore (Rs 150-200 billion) -- with an initial investment of Rs 5,000 crore (Rs 50 billion) in the next few years.

Similarly, Bharti is expected to invest Rs 6,000 crore (Rs 60 billion) in the initial phase. Biyani's Pantaloon is not far behind. The group plans to increase its total retail space to 30 million sq ft from the current 3.2 million sq ft; and take its turnover to Rs 2,500 crore (Rs 25 billion) by June 2010.

By global scales, the numbers are not out of the ordinary. The Bentonville, Arkansas, based Wal-Mart -- the big brother of retailers -- operates 6,640 stores and wholesale clubs in 14 countries, while its counterpart in Europe (it is based out of UK) Tesco runs 2,600 across 13 countries.

The others have chains of comparable sizes and reach. To keep their stores stocked with their myriad products, the global retailers have sophisticated procurement strategies in place that hinge on sourcing products globally based on prices, quality and timely delivery.

Not to mention deployment of cutting-edge technologies that enable real-time inventory tracking and ordering mechanisms. "Tesco, for instance, can sell jeans for �2 as bulk buying can help it source the same from its global suppliers at far less than this," says KPMG's Sanwalka. Thus, globally, retail is a business involving massive scales and deep pockets.

Climbing The Greased Pole

Moving up the evolutionary ladder won't be easy for India's retailers. Especially given the large number of potential spoilers. Availability of quality retail space will be a key determinant for the growth of the sector. With most Indian cities undergoing rapid urbanisation, spiralling rental costs has most retailers worried already.

Hitherto, most retailers have preferred to go in for long-term leases. But with real estate prices in most top tier cities hitting the roof in the past two years, lease rental increases are making business unviable for organised retail.

According to PricewaterhouseCoopers (PwC), the current average lease rentals across some of the top cities range from Rs 88 per sq feet per month to as high as Rs 120 per sq ft per month. On an average, lease rentals account for 7-8% of the revenue and 40-45% of the non-material cost for retailers. Unless these prices stabilise, most retail businesses could end up taking much longer than originally planned to break even.

Not surprisingly then, within hours of making his deal with Wal-Mart public, Sunil Mittal, the chairman of Bharti Group, said his top priority would be real estate acquisition, whether through leasing or buying.

To that end, the newly-formed combine is roping in DLF, Emaar, MGF and Ansals to act as partners and developers. Such an arrangement could prove to be a win-win solution: while it will ensure quick roll-outs and lower capex, it could also improve asset utilisation of the developments. At the other end, players like Reliance could set up hypermarkets in their own SEZs to meet the needs of local residents.

Another way out of this problem, as some astute retailers have found out, is to become an anchor tenant. According to PwC estimates, an anchor tenant typically commands a discount of 30-45% on lease rentals and is responsible for attracting footfalls into a mall.

Retail biggies like Pantaloon Retail, Shopper's Stop and McDonald's have been quick to endorse this strategy. For instance, Pantaloon has signed up with 100 of the 300-odd malls that will be developed over the next three years. This, points out PwC, will enable the retailer to leverage its first-mover advantage on a pan-India basis.

Pantaloon Retail currently has 3.2 million sq ft spread across several formats and is expected to have 10 million sq ft of space in the country by 2010. Again, in Tier-II cities, where lease rentals are 40-50% lower than those in top tier cities, Pantaloon has been quick to establish its presence.

The retailer's real estate fund, Ksh*tij 1, which has a corpus of $80 million at its disposal, is understood to have invested in projects in cities like Ahmedabad, Baroda and Surat. Pantaloon expects to have nearly 400,000 sq ft of retail space in these destinations by 2008.

The other determinant of success here is the location -- if the outlet is not easily accessible by a large section of consumers due to distance or other issues, viability could come in question.

Here the neighbourhood format has an edge. Sanwalka of KPMG is of the view that smaller stores of 1,500-2,500 square feet (as against 150,000 square feet hypermarkets) in neighbourhoods might do better in India. The verdict is still out on that one, and we won't know till one fails.

Adds KPMG's associate director Kaushika Madhavan, "All new entrants are planning rapid expansion and such a scale of ramp-up requires scalable processes and systems, which retailers are yet to develop. So we would witness mistakes being made as Indian retail evolves. Ability to learn from mistakes will be a critical success factor." And here deep pockets will help.

While Biyani already has a successful retail model in place and Bharti will look to cut corners with some help from Wal-Mart, players like Reliance and the AV Birla group would have to go through a longer learning curve.

Grapevine has it that soon after the Bharti-Wal-Mart MoU, Reliance Retail's A-team went into a huddle to discuss its response. The fact that the world's biggest retailer will be pitted against them has not been lost on them: now, Reliance has to worry about Wal-Mart's strength in the make-or-break area of supply-chain management.

This will no doubt be factored into the retailer's own mammoth Rs 6,000-crore drive to set up its own logistics, complete with its own airstrips and a fleet of transport aircraft dedicated to airlifting supplies to key markets.

Indeed, the key imperative facing retailers in India is that of creating robust, scalable supply chains that would facilitate their rapid spread across the country. "India is a fragmented country and an absence of a strong infrastructure and logistics system makes it all the more challenging to reach consumers," says NV Sivakumar of PwC.

A vital logistical link in most retailers' plans happens to be the cold chain. And many of them like Reliance Retail and Future Group are reported to be investing Rs 6,000 crore and Rs 400-500 crore (Rs 4-5 billion), respectively, on setting up logistics.

Another big player in the segment will be the Bharti Group. Overhauling this part of the supply chain will be key to the success of any retail venture in food and groceries segment. Currently in India, the wastage levels for perishables are as high as 40% because of a large number of intermediaries as well as loss during transportation as well as through lack of storage.

Says KPMG's Madhavan: "The fact is that most retailers in India still don't have a stronghold on operations -- be it merchandising, supply chain management or procurement."

Clearly, while the players can build on the experiences of industry leaders in other markets while developing their supply chain, the Indian market may require them to improvise frequently.

Foreign retailers have shown that managing operations innovatively can provide a significant competitive advantage to retailers. Wal-Mart, for instance, leverages IT to track supply chain processes like cross-docking very effectively. Similarly, Tesco requires lean production techniques of its suppliers and has high-reliability delivery systems in place such as 'milk-runs'.

Most analysts agree that retailers would have put in place global operational metrics.

One way to measure efficient operations is the inventory turns ratio. A comparison of the US and India is revealing. Where, in the US, the retail sector has an average inventory turns ratio of about 18 (some retailers like 7-Eleven score over 50), most Indian retailers range between four and 10, says KPMG.

The other key metric -- stock availability -- is telling too: Where global retailers achieve more than 95% availability of all stock-keeping units on the retail shelves, their Indian counterparts cut a rather poor figure at 5-15%.

There are other areas that retailers would have to master -- such as reaping economies in procurement and transportation, bulk storage, trend forecasting to minimise inventory levels -- before they can truly claim to have arrived.

Early entrants such as Shopper's Stop and RPG Group are acutely aware of this truth: both took years to bring their supply-chain models to the present efficiency levels. Even a player like the Dubai-based Landmark Group -- which has been operating in India for eight years now -- insists it still needs to bring their ERP solution system up to speed.

Others may face new, unexpected problems. Scalability is what the likes of Kabir Lumba, Executive Director, Lifestyle International, is banking on for growth. The group, which currently runs 12 stores, plans to open 45 more stores at a cost of Rs 450 crore (Rs 4.50 billion) over three years. Lifestyle's stores attract 40,000 customers every day, and are projected to close fiscal 2006-07 with a sales turnover of Rs 500 crore.

Again, when it comes to technology adoption and usage, there's a yawning gap between the Indian retailers and those in the West.

According to a recent survey conducted among the country's top retailers by KPMG, while retailers like Wal-Mart and Metro have started using RFID technology (offering high inventory visibility), retailers in India are still to take to bar coding. As systems grow in size and complexity, retailers would have set aside increasing amounts as IT spend.

The challenge posed by the global retailers is clearly formidable. But local retailers' more intimate understanding of their customer base will help them survive.

Besides, even the world's largest retailers have slipped when it comes to the emerging markets -- Wal-Mart was forced to rework its model in Mexico and a similar thing happened to Carrefour in China, where it had to revise its strategy. Also, Wal-Mart's track record in markets such as South Korea and Germany has been nothing to write home about.

The other big issue for retailers is people. Analysts agree that the manpower shortage will get acute as retail spreads beyond the metros. Says Sanjiv Goenka, Chairman, RPG Group: "The biggest challenge for us and, for that matter, any retailer will be getting trained personnel."

The Manufacturing Angle

With Wal-Mart's advent in the US, the relationship of manufacturers with consumers was drastically altered in the latter's favour. While the results in the case of India's retailers may not be necessarily as dramatic, some major changes would definitely be in order.

Strategic sourcing tie-ups between retailer and manufacturer will be the main drivers in this respect. A few weeks after Reliance rolled out its retail plan, one of the first things it did was to negotiate with leading FMCG companies, including Dabur India and Nestle India, for a direct retail account for the products they sold at its outlets. Earlier this year, Pantaloon did a similar exercise and sought 5% higher margins for products sold at its Big Bazaar and Food Bazaar outlets.

Says Atul Joshi, head of the no-frills chain Subhiksha's northern operations: "For an FMCG manufacturer, the cost of dealing with us (modern retail) is negligible. We were the first direct retail account with HLL about seven years ago." The no-frills chain assures 8-10% discount to consumers on all products it stocks.

While retailers like Reliance, Pantaloon or Subhiksha may be bringing a change, the fact is that ordering or sourcing by retailers is still tactical than strategic, points out a KPMG study. Not many retailers have long-term agreements with suppliers.

Also, traditionally retailers have played a passive role in this relationship. In contrast, Wal-Mart actively partners with manufacturers who supply it products to ensure that consumers are offered prices at the lowest prices possible. In fact, it was precisely the retailer's legendary aggression in bargaining that partly drove the massive wave of restructuring of the US industry.

Indian retailers have their work cut out in this regard, but it is far from clear whether they would be able to emulate this dimension of Wal-Mart's success story.

More likely, the retail chains coming up will be less combative in their approach towards manufacturers. "We will have to have a collaborative approach. But the threat from retail to packaged goods industry will prompt companies to invest a lot in R&D," says Adi Godrej, chairman, Godrej Industries.

The statement's import is not lost -- private labels have a big potential as promotional costs are low for retailers and the margins fat (as much as 60% against 35% for others). Also, these non-branded products can be offered at far lower price points, generating volume sales.

Getting It Right

Organised retailers in India are trying out a variety of formats, ranging from discount stores to supermarket to hypermarkets to specialty chains. However, of late, most players appear to be gravitating towards the hypermarket format.

Retailers ranging from Pantaloon to RPG to Piramals or the Tatas are working towards exploiting this model, perceived by consumers as more value-enhancing. But in the long run, what is most likely to succeed is a more balanced multi-format strategy.

This helps retailers adapt to the very different shopping patterns that can exist within the country and even within regions. Here again, merely copying global trends will not help. In a research conducted by KPMG International in developed markets, it was found that single-format players generated higher shareholder value than multi-format ones.

Some feel a combination of cash-and-carry and neighbourhood stores, as in a hub-and-spokes model can be a good bet. Says one retail analyst, nascent markets like India need a lot of room for experimentation on part of the retailers. Ergo, there are no cut-and-dried solutions when it comes to fixing on the right retail format.

Finally, while in the first flush of the retail boom, the elimination of traditional intermediaries may bring windfall gains (as well as bring welcome and much-needed relief to the producers), this source will increasingly dry out as competition intensifies and margins come under pressure a few years down the line.

What would set the survivors apart from those who are forced to sell out (or go belly-up) will be differentiators like location, value-added services (convenience), private labels and customer loyalty programmes, other than price. The last, a result of retailer-manufacturer tie-ups, state-of-the-art supply chain infrastructure, global sourcing and scale will be a key factor. And, if experience in other markets is anything to go by, an uncanny ability to read shifting trends.

There is nothing sacred about 2010 but that has been the general tendency.A 5 year outlook ought to be the minimum.

"It is like playing a tennis match at centre court, Wimbledon in front of a packed stadium. It's a great honour," says Mr Sunil Chainani, Director, who has shared the Fabindia story at IIM-A, and will now be presenting it at HBS on May 1.

According to Dr Mukti Khaire, Assistant Professor, HBS, who has put together the case, students of the Ivy League school are being trained to perform in a globally competitive world, and thus the increasing focus on unique success stories from outside the US. Founded in 1960, Fabindia makes the cut for being an example of a corporation that does not just aim to do well, but does good too. "A strong mission can be both an opportunity and a constraint on the growth of a firm," points out Dr Khaire. However, the private retailer's unique value proposition has not come in the way of it being recognised as big brand today. And this in spite of the fact that Fabindia has never advertised, points out Dr Khaire.

"Our constant endeavour is to resist the temptation of going `mainstream' which is more of a commodities game, and develop and widen the niche markets in which we are the dominant player," says Mr William Bissell, Managing Director, Fabindia.

With 57 stores in the country currently, and one each in Rome, Dubai and Guangzhou, the company is to add close to 200 stores in the next four-five years. And it is also believed to be on a look out for private equity investment.

And, true to its founding mission of creating sustainable employment, it is taking its craftsmen along. From providing jobs for close to 15,000 artisans today, it is hopeful of supporting another 1,00,000 in the next few years.

In that book "It happened in India" Biyani indicates specific problems that franchising has in India. he started with this model but had to change track very soon.

Basant,

 The war in Retail will eventually be of Scale and the one which does that earlier and at lower Costs(Ultimately Margins will shrink ) will have the edge.

Home decor is big business...Pantaloon shareholders will get a sense on Home Town...

Thanks for that insight.It was beautifully explained.

Agree Vipul,

Vivek bhai...same theory applies to my mom. She is willing to go to D-Mart which is 6-7 km away from my home.

By the time New Delhi hosts the 2010 Commonwealth Games, a retail consultancy estimates, there will be one supermarket every kilometre (half-mile) in the sprawling city of 14 million compared to about five in 2004.

Kriti Pallav, a married working woman, said she switched from her local grocer to the new Big Apple supermarket chain because the outlets were air-conditioned and open until late.

"This shopping experience is new and welcome. I don't have to haggle for prices here as I have to with the local vendor. The quality is good and overall there is great hygiene in the store," she said as she waited to pay through a computerised system.

Big Apple, owned by Express Retail Services, has opened 22 outlets in New Delhi in the past two years and says it plans a five-fold increase by the end of 2007, offering everything from groceries to cosmetics.

"We have 22 operational stores in Delhi at the moment but plan to open 100 outlets this year for which we have earmarked an investment of around one billion rupees (25 million dollars)," said Express Retail managing director Munish Hemrajani.

The trend is not confined to New Delhi.

The retail consulting and research agency KSA-Technopak predicted in an April report that by 2010 annual retail sales by chain stores will reach 21.5 billion dollars, from 7.5 billion dollars now.

But there are also pockets of unhappiness about the impact that the advent of modern supermarket shopping is having on traditional shopping habits.

Earlier this month, thousands of irate street vendors attacked stores set up by Indian giant Reliance Industries in eastern India, saying the new nationwide chain threatened their livelihoods.

"The process is going on as per the plan and we are looking at a cluster of stores by early 2008... you will see half-a-dozen coming up," Mr Sunil Bharti Mittal, Chairman and CEO, Bharti Group who was recently in the US, said here.

Mr Mittal had met Wal-Mart Vice Chairman Mr Mike Duke in Washington during the visit as part of a CII delegation. The two partners have started recruitments and were busy sorting out the legal issues.

"The legal issues such as brand agreement, franchise arrangement may take some time... but we are going ahead as per the plan," said Mr Mittal, who had last year announced an investment of $2.5 billion in its retail venture. While Bharti would manage the front-end, Wal-Mart would provide back-end and logistics support.

FDI in multi-brand retail is a strict no in India, which, however, allows 51 per cent foreign direct investment in single brand retail and 100 per cent in cash and carry wholesale business. The existing policy also allows FDI through the franchisee route .

The Bharti-Wal-Mart joint venture is being structured in consonance with the FDI policy.

Mr Mittal, who also met several business and political leaders in the US, said that the Americans were keen on India opening FDI in multi brand retail.

Asked about the FDI limit in retail desired by the US, Mr Mittal said in the beginning they would be happy to see it happening, may be with 26 per cent.

Company Profile:D-Mart  (Business India)