While the business opportunities of transforming to modern retail are clear, the front-runners have not made the progress seen in other sectors. Recent reports show how big retailers with pedigree and capability, including Reliance Retail Ltd and Bharti Retail Ltd, are facing challenges. This means the route for India’s retail sector is not clear, and even questions whether big retailers will be the inevitable face of modern retail.
At the most basic level, modern retailing seems inevitable as shoppers demand keenly priced goods in an attractive retail setting. This means the future for retailing is to bring together the “theatre” and “factory” elements — a combination that needs robust structures and meticulous attention to detail in business planning and daily execution.
Illustration: Malay Karmakar / Mint.
Big retailers have the advantage of being able to use their scale to secure the best locations and get the best deals from suppliers. They are also able to organize their processes to efficiently supply quality goods to their customers with a minimum of waste, thereby keeping costs down.
However, shoppers will always value service, and no one does this better than a store owner-manager. Tomorrow’s battleground in retail is, therefore, over the ability of big retailers to tout the “factory” side and ensure they motivate their store teams to provide customer service, while local stores will need to retain the “theatre” of shopping through their intimacy with customers while developing behind-the-scenes operations that efficiently enable quality goods to be sold at a fair price.
While there is undoubted potential in the Indian market, driven by the legendary scale of the middle class, today’s modern retail sector remains small by international comparison. Efforts to tap this potential are hindered by several factors and, as a result, expansion and investment is being held back and commitment deferred.
With current attempts to open up the modern retail market not achieving the expected results, there is merit in looking ahead and considering these alternative scenarios on how modern retail may develop: consolidation, regionalization, or localization.
Consolidation is prevalent in most developed retail markets. For example, in the UK three retailers led by Tesco Plc. take around 60% of the grocery market. This model is being exported around the globe by multinational retailers such as Metro AG, Carrefour SA, Tesco and Wal-Mart Stores Inc., where they aim, and often succeed, in taking major market shares in each of the countries they enter. Naturally, India is viewed by many in a similar light.
Regionalization exists in large markets such as the US, where a few retailers dominate the market in the various regions (in competition with the ubiquitous Wal-Mart). Again, this model has applicability to India, where critical mass can be achieved in individual states, allowing the most populous or affluent areas to be developed on a case-by-case basis. Tesco is a master of this strategy and its “country in a box” capability allows it to establish, in a matter of months, an infrastructure to support a cluster of new stores, as recently illustrated in its entry into the US in selected markets in California and Arizona.
The third scenario is one of localization, which demonstrates that big retailers are not the inevitable winners. To illustrate this point, look to Italy and Scandinavia, and to some extent the UK. Italy remains a fragmented market of small companies, which reflects its tradition of strong local identity. While big retailers operate in this market, none are able to dominate it. In Scandinavia, the Swedish retailer ICA AB appears at first glance to dominate the market; however, this is an organization with a decentralized, federal structure, where stores are owner-managed and these owners are shareholders in the parent company, who work together to call the shots. Even in the UK, where Tesco is dominant, alternative examples of corporate ownership still survive and flourish, including various cooperatives and the John Lewis Partnership, a rapidly expanding retailer without shareholders where each employee is a partner.
It may be that Indian retailing consolidates along the lines of the models seen elsewhere and a few big retailers emerge. Then again, the entrepreneurial spirit is strong and individuals with intimate local knowledge may seize the market. Or, several scenarios may combine to produce examples of each archetype as well as ones that are uniquely Indian.
It is also the case that today’s underdeveloped modern retail market presents the opportunity to leapfrog development steps followed elsewhere and embrace hot topics such as sustainability and e-retailing.
Sustainability can be achieved by moving straight to a local sourcing for local consumption model, avoiding the need to establish and then disassemble both international sourcing arrangements and centralized distribution to go straight to a more sustainable, low carbon approach to retailing.
E-retailing has been constrained at several “bricks and mortar” retailers by a need to utilize existing infrastructure. Setting up a “greenfield” operation allows home shopping to be offered as an integrated channel or to be introduced when market conditions allow.
The lesson this presents is that we find a different challenge to the one seen in other countries. This means we can look elsewhere for ideas but the context is not the same so, as the Americans would say, a “cookie cutter” approach cannot be followed. Just because an idea worked in Europe or South-East Asia does not mean it will be successful in India. This has profound implications in how we move forward, not least in recognizing that clearly different scenarios lie ahead and that success will have a distinctly Indian flavour to it.
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Paul Chapman is a Fellow in operations management at the Saïd Business School, University of Oxford.