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How they make profit, not the number of players, is the issue

How they make profit, not the number of players, is the issue
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First Published: Thu, Sep 25 2008. 09 56 PM IST

Retail therapy: Ireena Vittal, a partner at McKinsey, says retailers need to create a consumption culture first, not just fight for market share. Abhijit Bhatlekar / Mint
Retail therapy: Ireena Vittal, a partner at McKinsey, says retailers need to create a consumption culture first, not just fight for market share. Abhijit Bhatlekar / Mint
Updated: Thu, Sep 25 2008. 09 56 PM IST
New Delhi: Even as organized retail takes root in India, there are many questions that still need to be answered, relating to the consumption habits of Indian consumers, the right business model for the market and the profitability of retail companies. Ireena Vittal, a partner at McKinsey & Co., spoke about some aspects of the Indian retail market in a telephone interview. Edited excerpts:
Retail therapy: Ireena Vittal, a partner at McKinsey, says retailers need to create a consumption culture first, not just fight for market share. Abhijit Bhatlekar / Mint
Most reports on organized retail, including yours, have talked about the unexplored potential that India presents. Yet, we see a lot of retailers who entered the market going slow and reviewing their expansion plans. Some are even saying that the actual market size is smaller than they expected. Your comment.
Lots of people overestimated. But it is still the last big, virgin retail market left in the world. By 2015, it will be almost the size of the Italian retail market which is today among the top 10 retail markets in the world. Right now, it doesn’t have enough large retailers as yet. I agree not the entire one billion population is addressable yet. In our study, we have identified the relevant shopping group and the clusters that offer the opportunities right now. These relevant shoppers are going to grow five times from 13 million households to 65 million households in the next eight years. That’s clearly an opportunity. Then, these relevant shoppers live in the top 60-70 towns, which is where the retailers need to focus.
What kind of mindset do retailers in India need to have?
In India, we don’t have enough brands. If you look at a category like food, the size of the food market is $225 billion and largest organized food company is $1 billion (in turnover). The first thing that retailers need to do is to create a consumption culture and not just fight for market share. In most countries, brands came first and retailers later. So by the time organized retailers came, the branded players had already created categories.
The second issue that needs attention is fixing the supply chain. There aren’t enough suppliers at the backend and those who are there aren’t scaling up at the same pace at which retailers are. So even if you have demand, there may be a stage where the supply may not be enough.
How many players can the Indian market sustain even as incomes and consumption keep growing?
Retail is a very fragmented market everywhere in the world. Retail is not likeother sectors where the No. 1 player has 60% of the market share. To give you an example, the largest hypermarket player in China just has 2% market share.
I don’t think the issue is how many players the market can sustain. The market can take a lot of players. The issue is how the players make profit. Profitability is the core issue. Retail is a thin-margin business. If your net margin is 5% or 7%, it takes two-three big hits for the whole margin to be wiped out.
Your report suggests a workable supply chain for India would be a blend of traditional as well as modern supply facilities. Could you elaborate on this?
The reality of this market is that you can build a very strong physical supply chain without owning most part of it. The reason that this happens in India and doesn’t happen in other markets is that there are enough people who are willing to do small business even if they can make Rs10,000-20,000 a year. Second, the cost structure of the third party as a distributor or a transporter is usually less than a big company because they work with very different cost modules. Third, as long as you are comfortable with thousands of people working for you but are not on your books, it is possible to manage it through shadow management. So the tradition in the supply chain is that you don’t necessarily need to own everything in India. Taking this physical infrastructure in India and putting on top of it the information technology infrastructure which is most evolved in the world is the kind of innovation we will see in the market.
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First Published: Thu, Sep 25 2008. 09 56 PM IST