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What can foreign retailers bring in which India doesn’t already have?

Harvard Business School’s Rajiv Lal on the major challenges for Indian retailers and the impact of FDI on kirana stores
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First Published: Wed, Jan 23 2013. 09 51 PM IST
Rajiv Lal says the most difficult challenge for organized retail is to have a profitable business Photo: Abhijit Bhatlekar/Mint
Rajiv Lal says the most difficult challenge for organized retail is to have a profitable business Photo: Abhijit Bhatlekar/Mint
Updated: Fri, Jan 25 2013. 03 13 PM IST
Mumbai: Profits have been eluding Indian retailers for some time now, even forcing some to shut shop. Subhiksha Trading Services Ltd had to wind down operations, Aditya Birla Retail Ltd consolidated its stores after a phase of expansion and Reliance Industries Ltd ’s retail subsidiary effected three management changes in six years.
Retailers must explore ways to become profitable or get out of business, says Rajiv Lal , Stanley Roth, senior professor of retailing, chair, General Management Programme at Harvard Business School. In Mumbai as the co-chair of an executive education programme, Leading Growth through Customer Centricity, Lal said in an interview that kirana or neighbourhood stores will continue to provide stiff competition to large organized retailers. He was also sceptical of the value that foreign retailers such as Wal-Mart Stores Inc. and Tesco Plc.—that have partnered with Indian conglomerates for retail—can add. Edited excerpts:
What is the most critical question that Indian retailers need to ask themselves?
The most difficult challenge for organized retail is to have a profitable business. Organized retailers have been with this business for a while now and yet if you look, I am not sure if they are profitable as yet. So, one really has to ask oneself: How can I get a profitable retail business? Organized retail business in India, especially in food that is a huge business, has severe competition from the kirana stores. The kirana store typically has margins of 15-18%. As India has a suggested maximum retail price (MRP), even if organized retailers create a fantastic shopping environment, you can’t change the MRP and are unable to make money with the kind of margins that traditional retailers make.
But scale brings economy and profits. Why has that not happened for retailers?
Retailers are not making those investments. Everybody is focused on the front-end. Scale is not going to drive down costs. Instead, look at the cost structures of kirana stores. It’s very different. They don’t pay much for labour or real estate, utilities, ambience or refrigeration. For organized retail, these costs are substantial. Just the energy cost can be so high or the fluctuation cost can be so high that it can make a difference between profit and loss.
Most retailers have been around for 5-10 years and yet they are not profitable. Is this the norm globally?
No. You really have to ask the question if after 10 years you are not profitable whether it makes sense to stay in this business. You have to see how far is the Indian consumer willing to travel. Say, 10-15 minutes. In 10-15 minutes, what distance can you travel? Maybe 2-3km. In this distance of 3km, are there alternatives available to you on the way? The answer is many.
When you think of organized retail, the question is what is their catchment area. Given where you want to be in terms of real estate costs, there is a huge play between real estate costs, sizes of stores and catchment area. If you are in a populated area, you have traffic issues, infrastructure issues, therefore, the real estate costs are high. So the question is how do you make this a profitable business. On the other hand, if you are on the periphery of the town, the real estate costs are lower, but travel costs are high. Given the fuel costs are high, once again you have to ask the question how you are going to make it work. These are some challenges.
What impact will foreign direct investment have on retail?
The kirana stores will give these guys a run for their money. I don’t see it having much impact. If you look at other parts of the world, look at Brazil, kirana stores are live and well. Look at China, it’s the same story. In the Indian context, it’s an even more pertinent story.
It just shows that the kirana stores are dynamite entrepreneurs. In India, it is a very peculiar problem. Because in many other emerging markets, big box retailers or organized retailers came in at a different time in their economic cycle, much earlier relatively to India. Since the organized retailer came at a later point to India, it is seriously affected by the cost structures—especially, real estate and human resources. These cost structures are not going to change.
But global retailers can bring technology and investments to help organized retail grow in India...
Indian business entrepreneurs are very sophisticated. So when people say foreign retailers will bring in new skill sets, I am not sure. It’s not evident to me what foreign retailers can bring to the country that the Indian retailers don’t already have. Even money is available in the stock market. So capital, too, is not an issue. That’s why you don’t necessarily see foreign retailers jumping up and down to come here.
Look at other countries where global retailers are large—China and Brazil. Global retailers are not profitable there. Tesco had expanded significantly in China, now it’s pulling back. At least in the food sector, the examples of successful foreign retailers are rather limited.
But are global retailers interested in setting up shop here?
Well, if the home markets are saturated, retailers have to look for growth elsewhere. But whether or not these adventures lead to profitable growth is the question. As far as the data suggest, even in a place like China, where Wal-Mart has an $8 billion (around Rs.42,800 crore) business, it is barely breaking even. They have been there for 15 years. That’s the challenge—on the one hand, you can’t escape going into these markets because of growth, but on the other hand, profitability is a challenge.
So what’s the way forward for Indian retail to become profitable?
I believe the solution has to come from inside India. Once somebody comes up and shows the model for success, then perhaps there will be other people who will jump in. The only solution is what Reliance Retail had offered and conceived long time ago when they conceived this business—when they spoke about ‘from the farm to the end-user’. When you think of this, the savings from the farm are huge, especially in food. In food, the cost of perishability, or food destroyed from farm to store, is 40%. And unless you can really have systems and processes in place that can save that 40%, it’s not clear to me how the organized retail really competes with the kirana store.
Are there pockets in which we are seeing success?
Given the size of the market, India’s infrastructure, IT (information technology) issues, human resources problems, I don’t see it. Look at Cafe Coffee Day, is it doing well? If, Cafe Coffee Day is not doing well, then why will Starbucks do well? Maybe if they want to be at the very top-end, then how many stores will they have? What will be the size of the business?
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First Published: Wed, Jan 23 2013. 09 51 PM IST