Innovation at every step is the key

Innovation at every step is the key

Can retailers make money in India? McKinsey believes they can. “We believe the winners in India will be those who recognize that making profits will require a different approach since this is a market of millions of small transactions and rapidly evolving consumers, whose spending across categories is different from that of shoppers elsewhere and whose shopping habits vary across clusters," says the report.

It identifies five ways that will help retailers in creating a profitable operating model: integrating real estate into the business model; creating an effective and scalable supply chain; increasing basket size by shaping consumption; developing and retaining talent; and influencing regulation to ensure healthy development of the sector.

Manpower issues

Developing and retaining talent

Organized retail may require around 1.6 million employees by 2015. While talent costs in India are quite low, the report highlights two critical challenges for retailers—retention and availability issues in certain skills.

With 5.2 million students graduating from high school and 2.2 million from college every year, finding manpower should not be a problem for retailers but the report says the main cost for retailers will lie in equipping these entrants to join the workforce with the requisite skills.

Also See How to make consumers spend more (graphic)

How to make consumers spend more

Average basket sizes in India are a fourth that in developed markets and half of those in China. The report says that while income growth will result in an increase in these, the quantum of this increase will be higher if companies can convince “window shoppers" to make their first purchase in categories they have never bought before.

This could be done by: (i) managing price perception—most Indian shoppers believe organized retail is more expensive than traditional retail and retailers need to manage this perception; (ii) owning core customers—retailers need to devise more effective ways of retaining customers; and (iii) actively increasing consumption—this could be done by creating new shopping occasions, increasing purchase per occasion and financing consumption.