Retailing in Kerala


By

Dr. M Bhasi
Reader
School of Management Studies
Cochin University of Science and Technology
Kochi-682 022
 


Introduction

Organised food retailing is a relatively new phenomenon in India, with small Western-style supermarkets only starting to appear since the 1990s. Most food is still sold through local 'wet' market vendors, roadside pushcart sellers or tiny Palacharaku (grocery) stores. Although less than one per cent of food is estimated to be sold through supermarkets, this share is growing rapidly. Most supermarkets are independent operations, typically occupying from 1000 to 4000 square foot and carrying about 6000 stock-keeping units. Most of the supermarket development has occurred in the south of the country in the major cities of Bangalore, Chennai and Hyderabad, as well as New Delhi and Mumbai in the north. An estimated 500 shopping malls are expected to be built by 2010 from a near-zero base in 2000. Market analysts estimate the organised retail sector has been growing by nearly 30 per cent a year since 2000 with similar growth likely in the short-to-medium term. The sector is expected to undergo further change with prospective new domestic and global foreign entrants, and the takeover or exit of some existing participants. Global players such as Wal-Mart (US) and Carrefour (France) have indicated their plans to enter India once Indian foreign investment regulations permit. The Indian consumer is changing rapidly. The average consumer today is richer,younger and more aspirational in his or her needs than ever before. Consumers now value convenience and choice on a par with getting value for their hard earned money. A range of modern retailers is attempting to serve the needs of the 'new' Indian consumer. The last few years have witnessed an explosion of organized retail formats like supermarkets and hypermarkets in an otherwise fragmented Indian retail market.

Food retailing in India

Traditional local markets and small-scale retailing continue to dominate India's food retail sector. There are an estimated 12 million retail outlets, of which almost seven million sell food and grocery products. The vast majority of these are small kiosks (17 per cent), general provision stores (14 percent) and grocery stores (called Palacaraku 56 per cent of all rural retail outlets) run by a single trader and his family. With more than 71 per cent of the population living in villages, most of India still does its food shopping at small-scale vendors in the local village, or at larger-scale weekly markets often serving several villages in one area, where small individual vendors trade. In the towns and cities, most consumers do their food shopping at the local neighbourhood independent small retailers, kiosks and street hawkers. Servants in high income households usually undertake this task. Most cities and towns also have one (or more) large central fresh produce market where wholesalers and retailers (plus some consumers) procure their supplies for the day from individual traders. The Food Corporation of India (FCI) has an extensive nationwide network of about 478,000 fair price shops and sells subsidised food grains and certain other staples, but since the retargeting of the Public Distribution System (PDS) in 1997 to focus on the poor, these are only available for those below the poverty line set by the government. There are also a few other chains of government-operated provisions stores, such as the Neethi and Maveli stores and their Triveni and Supplyco supermarkets.  There is also the Franchise mode operated Margin Free supermarkets. There are the higher end supermarket chains exclusuve to Kerala such as that of the Varkeys. Even with all these the majority of food and beverage retailing is categorised as belonging to the unorganised sector. There is no firm data for the total value of India's annual food and beverage expenditure, however there are various calculations and estimates, such as about US$90 billion by 2000 based on the Indian government's estimates of average urban and rural household expenditure on food and beverages, and about US$200 billion now and growing at 4-5 per cent a year, based on industry estimates. However it is commonly believed that less than one per cent of food and beverage retail sales take place through the organised retail sector, though this share is estimated to be growing rapidly. An early form of 'supermarket' has been around in India for some time: the single-unit, smarter family owned grocery and provisions store, now calling itself a supermarket (while others may call it a 'super-palacharaku kada'), of which there are at least five to 20 in each city.

One of the pioneer supermarket chains was created in 1995 through a technical agreement (and from 1999 by a 51/49 joint venture) between India's Calcutta-based RPG Group and the UK's Jardine Matheson Group's Hong Kong-based subsidiary Dairy Farm International. The joint venture converted the loss-making old Spencer department store chain owned by the RPG Group into the Foodworld supermarket chain, with about 94 stores in several southern cities, including Chennai, Bangalore, Hyderabad and Pune, by 2005. While Dairy Farm aims to continue expanding the Foodworld chain, the RPG Group decided in 2005 to sell its 51 per cent share in the Foodworld joint venture, though possibly retaining half the supermarkets rebranded as Spencer's. RPG Group plans to focus on developing its other retail businesses including the Spencer hypermarket chain, which had three stores opened by 2005, and a plan for 20 stores across India by 2007 in existing cities plus others such as Chennai, Bangalore, Delhi, Calcutta, Ahmedabad, and Chandigarh. Several other Indian-owned companies have developed chains of supermarkets, hypermarkets or convenience stores, mostly in major cities in the southern states plus in Mumbai and Hyderabad. Another pioneer, the Nilgiri supermarket chain, opened its first supermarket in Bangalore in 1971 and by 2005 had built a network of 30 stores, both company-owned and franchised, in the states of Tamil Nadu, Andhra Pradesh,Maharashtra and Karnataka. The Hyderabad-based Trinethra Group opened its first supermarket in 1986, expanded to 68 stores by 2004, then acquired the 12-store Fabmall chain in Bangalore, in partnership with a new 50 per cent equity investor, Bangalore-based GW Capital, to enable further expansion into more states. Fabmall now has many stores in Kerala also. Other significant chains include the Subhiksha discount supermarket chain, with 72 stores in Tamil Nadu, and Pantaloon Group's 42 Food Bazaar supermarkets and Big Bazaar hypermarkets in major metropolitan centres. The Indian government has taken a cautious approach to allowing foreign direct investment (FDI) in food retailing (and retailing generally), with majority foreign ownership in food retail chains not allowed, and approvals generally given on a case-by-case basis. (In February 2006 the government made a small concession on FDI in retailing, by announcing that up to 51 per cent in retailing of "single brand" products would be allowed.

Since the joint venture of the RPG Group and Dairy Farm International was approved in 1999, only Germany's Metro Group (with two Metro Cash & Carry wholesale stores opened in Bangalore so far since 20029), and the South African-owned Shoprite Group in partnership with a local investor (with one Shoprite hypermarket opened in Mumbai in late 2004) have been permitted to set up operations. Local foodservice group Radhakrishna has also gained a licence for food wholesaling in partnership with France's Intermarché Group, whereby independent food retailers can sign up for use of the Spar store brand. Several major multinational corporations, in particular Wal-Mart, have been lobbying the Indian government to allow majority foreign ownership in retailing. Wal-Mart has indicated that it would significantly increase its sourcing from Indian suppliers from its current level of US$1.5 billion a year (so far mainly non-food products, but likely to soon include some food products, such as basmati rice, tea, spices, seafood), if it were allowed to set up retailing operations. Major Indian retail groups, such as the RPG Group and the Pantaloon Group, have expressed their strong opposition to allowing more foreign direct investment into Indian retailing, especially majority foreign ownership. They argue that the sector is still at a very early stage of development and multinationals such as Wal-Mart would swamp local players, especially the kirana-wallahs. However the Indian government appears to be considering some degree of liberalisation, in the interests of improving efficiency in retailing and supply chains and so strengthening the integration of the Indian agrifood market, plus opening possible new avenues for Indian exports via multinational retailers.

Retailing is set to double in the next three years, with the emergence of more national and International retail chains To tap this growth opportunity, Indian retail organizations need to be prepared for a quick scale up across dimensions of people, processes and technology in addition to identifying the right formats and value propositions for the Indian consumer. The theatre of modern retailing action is without doubt in urban areas, but India is witnessing experiments to tap rural retail potential also. There are Opportunities and Threats– are the retailers prepared? Can Indian retailers learn from international experience and beat them at their game? 

Experts feel that India is heading towards mall over-capacity. A reason for this opinion is the fact that there may not be sufficient anchor tenants to occupy all the malls that are being planned. Also all emerging malls have very little differentiated value propositions. Malls need to differentiate themselves clearly and one option may be to specialize. Another characteristic is that with respect to operations management and leveraging technology, retailers in Kerala are at a nascent stage. This would be another area of opportunity for winners of the future to distinguish themselves clearly from the rest of the industry. Human resources – the impending war for talent is on. India is already facing retail manpower and capability shortages. These are set to intensify, given the rapid growth forecast for the industry. Attrition levels, while low compared to global standards, are set to increase going forward. Winning the imminent war for talent is imperative for success in Indian retailing. Indian retailers need to develop a combination of good HR practices to enhance competency and retention while simultaneously developing processes and systems to ensure that high personnel turnover does not disrupt operations.

Faced with these challenges winners of tomorrow will be those that experiment and innovate. While there are obstacles, there are clear opportunities in modern retailing in India.There are many lessons India can take from other countries that have moved along the path of retail evolution. There are also several best practice organizations from which Indian retailers can pick relevant lessons and tailor them to suit local requirements. "I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I - I took the one less traveled by, And that has made all the difference." Robert Frost, "The Road Not Taken" Organizations that experiment and innovate across different aspects will be the ones that emerge as winners.

Kerala being a consumer state an unprecedented consumption boom is expected. Indian retail – the right enablers are falling to place. There are multiple factors driving Indian retail growth. With roughly 60 percent of the total population below 30 years of age, favorable demographics are expected to drive consumption across categories. The purchasing power of a young consuming middle class has been talked of since the time of economic liberalization in 1991. However, it is only today that we are witnessing the spending power associated with this consumer segment. For example, 50 percent of cellular phone purchases in the past year were by the under-30 age group. This consumption is expected to continue due to the aspirational nature of spending associated with this consumer segment. The AC Nielsen Online Omnibus Survey 2005 rates India in the highest category of Aspiration Index in Asia, along with China, Indonesia and Thailand. The aspirational nature of consumption is underlined by the trends witnessed in the consumer durables sector. While the overall refrigerator segment has been growing at 6 percent, frost-free refrigerator sales have been growing at 61 percent; similarly, while the washing machine market grew at 17 percent in FY2005, the sales of automatic washing machines grew by 63 percent. The positive demographics and the Indian consumer's increasing disposable income have been highlighted by several studies. Increasing double income families in cities is another positive factor. Salary hikes in India are also expected to increase at a faster pace than other developing countries. All these portend a sustained growth in discretionary spending in India. Food and apparel retailing likely to drive growth. With various factors impacting growth in retail, some segments are bound to grow faster than others. For instance, increasing affluence is driving growth in the watches and jewelry segment, while awareness of health is driving growth in lifestyle pharmaceuticals. Growth is expected in all retail segments across the board; however, food and grocery is expected to see the highest growth.

The Future: Promises and Problems

The Indian retail market offers significant opportunities for domestic and international retailers and property developers/investors across a broad range of geographies and formats. Rapidly changing consumer behaviour, new market entrants and changing government policy will further transform the sector, and open up yet more opportunities. The organised retail sector is developing at breathtaking speed, and the insatiable demand for modern retail is far outpacing supply. The market has entered a very exciting phase of evolution, but undoubtedly there will be losers as well as winners…

In the rush to expand retail formats and build new malls, many retailers and developers have lacked strategic vision, and in a booming market they have often lost sight of the "end game". There is also a huge amount of market hype, and a widening gap between developers' claims and what is actually happening on the ground. The reality will be that many planned retail schemes will not get built, and most of those that do eventually become operational will fall well below international standards. As more choice becomes available for the Indian consumer, many malls and retail concepts will fail the test of time.

Yet this "shake-out" will provide even greater opportunities for an elite group of visionary developers, owners and retailers who have the scalability, the teams, the processes and the logistics required to flourish in this rapidly growing retail environment. They will go on to set new benchmarks, not only for India, but for the world. The Indian retail market is full of promise, but it is not for the faint hearted and success requires a deep understanding and knowledge of the Indian consumers and their likely retail requirements.

For the existing retailers the ones to be hit worst will be the whole sellers and other market intermediaries, their function will no longer be needed by organized retail chains who will directly source from producers and manufactures. This crumbling of the traditional distribution channel will have its effect on small retailers whose supply source will dry up. The retailers who will be worst hit are the supermarkets or large provision storeowners who have only one or a few stores and therefore cannot take advantage of bulk procurement. Their customers will move over to the Hypermarkets chains. The small palacharaku kada will exist even then because of two reasons, firstly because many of their customers buy from the because of the credit offered secondly the quantities of provisions that these customers buy at a time is small, this small purchase will not get them the desired savings in large supermarkets. Many customers of large retail outlets will buy items such as milk and some odd provisions that get over in between planned purchase from large supermarkets from the nearby small provision store.

In terms of employment in the retail sector, there will be a change in both the quantity and quality of employment. Organized retailing will be more efficient and hence for the same quantity sold less number of people will be employed.
 


Dr. M Bhasi
Reader
School of Management Studies
Cochin University of Science and Technology
Kochi-682 022
 

Source: E-mail July 13, 2007

        

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