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A file photo of shoppers at a mall in New Delhi. Analysts say the nature of the Indian consumer changes every few hundred kilometres. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)
A file photo of shoppers at a mall in New Delhi. Analysts say the nature of the Indian consumer changes every few hundred kilometres. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

MNCs can learn from Indian retailers

Foreign retailers need to be flexible with store formats and sizes, and have to deal with inefficiencies patiently

Mumbai: Wal-Mart and Ikea both want to enter the India market. Others such as Tesco are also reviewing the new policy as the Indian market presents an opportunity. After all, the organized retail market is expected to be worth more than $80 billion by 2015. And, the Indian government wants overseas firms to come, although there was the usual chorus of disapproval following the decision to open up foreign direct investment, or FDI, in multi-brand retail on 14 September. Remember, the move had once been rolled back a year ago because of the opposition drummed up against it.

Inter Ikea Systems BV will invest €1.5 billion (around 10,350 crore today), it said in June. The retailer’s application is being reviewed by the government. Wal-Mart Stores Inc., already in a joint venture with the Bharti group in the so-called cash and carry segment, also plans to set up supermarkets with its partner. The government allowed overseas investment to the tune of 100% in single-brand retail in January, up from a 51% cap. The limit for multi-brand retail has been set at 51%.

Applications for entry are winding through the approval process. Earlier this month, single-brand retailers such as British footwear retailer Pavers England, US-based clothing company Brooks Brothers and Italian jeweller brand Damiani got a green light for investments, nine months after the policy change in January.

While one of the biggest reasons for opening up multi-brand retail is getting overseas firms to share their expertise in managing supply chains, experts say multinational corporations (MNCs) can draw valuable lessons from the fledgling domestic industry, which, in a decade of its existence, has had to deal with turbulent times following the global financial meltdown in 2008.

This includes dealing with variety.

“MNCs are used to operating in homogenous markets and have less experience in managing multiple formats and store sizes," said Abheek Singhi, leader of consumer practice and India partner and director at Boston Consulting Group (BCG).

MNCs will also need to learn how to function in an inefficient environment.

For instance, Reliance Retail has learnt to run its stores with merchandize levels that are 20-30% lower than what they can hold. It has roped in expats from Wal-Mart China and, before that, from Tesco Lotus, Thailand, over the past three years to run its value retail business, which includes the food, grocery and hypermarket retail businesses under Reliance Fresh and Reliance Mart chains.

In India, traditional retail accounts for approximately 95% of the overall $450 billion retail market. Given the small size of the organized market, retailers are finding it difficult to collaborate with even global consumer packaged goods companies such as PepsiCo India Holdings Ltd or Hindustan Unilever Ltd to achieve fill rates (or stores stocked to full capacity), comparable with international markets.

International retailers used to penalizing vendors for missing strict delivery schedules may need to make an exception in the country. “One of the important things we have learnt is that maintaining an assortment is often a great challenge," said Bijou Kurien, president and chief executive officer (lifestyle business) of Reliance Retail.

Besides tweaking processes, international retailers will also need to get used to the Indian way of doing business. Targets aren’t always met, owing to the various unforeseen circumstances. That includes store opening targets.

Tata Starbucks Ltd, the joint venture between Starbucks Corp. and Tata Global Beverages Ltd, said in January it would open around 50 stores by the year end in Mumbai and Delhi. With just one store open, that number may be hard to meet.

To be sure, such delays are the norm in India. Mall developers delayed adding nearly 44% of the 2.27 million sq. ft of shopping mall space they were to add in the first half of this year (January-June), according to a July report by Cushman and Wakefield Inc., a real estate consultant.

“Foreign retailers must take their promises, plans and commitments of Indian retail professionals with a pinch of salt," said Harminder Sahni, managing director, Wazir Advisors.

Another difference is inexpensive labour but exorbitantly expensive real estate, made worse by substandard construction quality.

“Retailers’ businesses are usually optimized to ensure high labour productivity but in India they will have to optimize their business models for shop floor productivity as rentals are higher and manpower costs are cheaper," said Singhi of BCG.

On account of the high cost of real estate, retailers are moving towards mid-sized stores that are smaller than international norms.

“A balanced combination of food and apparel will need about 30,000-35,000 sq. ft. For only apparel, the optimum store level is about 12,000-15,000 sq. ft," according to a 12 October ICICI Securities Ltd report by analysts Anand Mour and Gagan Borana. So far, no model has found “assured success", the report said.

It pegged average sales per sq. ft for food at around 20,000-25,000 and for apparel at 10,000-14,000.

As such, “the sales per sq. ft in India is lower than developed and some emerging countries," said Pinaki Ranjan Mishra, partner (retail and consumer practice) at Ernst and Young. This is largely due to the difference in purchasing power and rental expenses as a percentage of sales being marginally higher in India.

While retailers chase revenue, they need to keep a close eye on profitability in the capital intensive business.

Most Indian retailers such as Reliance Retail, after six years of operations, and Aditya Birla Retail, after five years, aren’t profitable yet.

In fiscal 2012, Reliance Retail parent Reliance Industries Ltd invested 5,027 crore of fresh capital in the subsidiary. Reliance Retail reported a loss of 434 crore in that year.

Likewise, Aditya Birla Retail’s stand-alone revenue was 687.93 crore and the firm posted a loss of 423.10 crore in fiscal 2011, according to its annual report. It had unsecured debt totalling 3,113.36 crore as of March 2011.

“Retailers investing in India need to keep their debt and equity levels low, preferably below 1," said Abneesh Roy, associate director, institutional equities-research, Edelweiss Securities Ltd, pointing to the high debt of most Indian retailers.

Another misconception is that Indians are obsessed with low-cost goods, which often mistakenly translates into merely piling up cheap products on the shelves, regardless of the overall ambience. Mega Mart, a retail chain run by the Arvind Lifestyle Brands Ltd unit of Arvind Ltd, had to rethink its business model to provide a department store experience, even though it was selling brands such as Wrangler, Lee and Arrow at a discounted price.

“Just selling brands at a cheaper price was not enough to attract shoppers. Customers were looking for a shopping experience," said J. Suresh, managing director and chief executive officer, Arvind Lifestyle.

On the other hand, there are exceptions to this rule. Future Group owned Big Bazaar aims for precisely that effect at some of its stores—mountains of obviously cheap goods on an overcrowded shop floor.

Overseas retailers will also need to indigenize their products to suit local tastes.

For instance, Marks and Spencer saw little success first time around, when it aimed for a stylish, premium image. The retailer subsequently repositioned itself as an affordable brand, dropping prices 30% and customizing its collection to suit local tastes (pockets on shirts and pastel shades).

Finally, the market is as diverse as it’s large. The nature of the Indian consumer changes every few hundred kilometres. What works in Mumbai may not work in Nashik, say analysts.

Most large firms such as Pantaloon Retail (India) Ltd are now consolidating operations after having expanded at a frenetic pace. Pantaloon is present in more than 90 cities but is consolidating its operations to focus on 16 cities and a surrounding network of secondary cities.

“It’s imperative that to get benefits of scale, we need to concentrate in a few circles. This makes it easier for supply-chain and support. We are committed to that and we will see that emerge as a trend," joint managing director Rakesh Biyani said in an interview on 11 October. National coverage wasn’t an absolute necessity as individual cities provide significant opportunities if penetrated well.

Even HyperCity—a hyper market retail chain subsidiary of Shoppers Stop Ltd, India’s oldest department retail chain—is seeking to focus on a few cities such as Mumbai, Bangalore and Hyderabad.

“This is about regional dominance. There is a lot of opportunity in India and these markets, in their own rights, are big individual markets," said Mark Ashman, chief executive officer, HyperCity.

The Indian market may be lucrative, but it’s difficult to crack. “All this means you have to sell a lot more in India for the same turnover in developed markets," said Ranjan of Ernst and Young.

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