Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 2 :: August 1998
A Big Deal
Madona Devasahayam
Retailing in India is in the process of getting more organised and professional. Large retail formats -- hypermarkets, warehouse clubs, and discount superstores -- are set to take over the retail scene. Medium-scale retail formats such as department stores and supermarket chains have already made an appearance and are slowly changing the face of retailing in the country. Where is the small neighbourhood retailer* placed in the scheme of things ? Will he survive or perish ?
Marketers and supermarket operators agree that the small retailer has assumed an important role in the distribution mix. He will survive the advent of organised retail in India, albeit in a different form and role to his current position. He will innovate, improvise, adapt and learn to co-exist with the medium and large retail formats.
In mature retail markets, such as the US and Western Europe, individual small retailers have in many cases closed down or changed hands, but their total number has actually continued to grow, even as large organised retailing chains have begun to dominate the market. In these markets, small retailers have survived and flourished by adapting their services and product offering to meet the changing needs of customers.
Small retailers no longer remain the primary source for the basic monthly shopping basket: the consumer normally gets better prices, quality, selection and convenience for these purchases at organised retailing chains. In fact, the small retailer has had to downgrade himself by giving up his position of being a monthly shopping stop. To give an example, if a customer buys 100 items a month, he now buys 80 of them from the supermarket at one go, and the remaining 20 as and when required from the small neighbourhood retailer.
The small retailer has, therefore, learnt to focus on customer/product niches and services where he can add value that large retail chains cannot. For instance, many small retailers have become corner stores or convenience stores, where consumers pick up their immediate or unexpected day-to-day needs. Most of them begin stocking gift items and novelties, greetings cards, soft drinks and chocolates, which ensure impulse purchases and add to the margins.
As consumer tastes become more sophisticated, other small retailers offer a deep assortment, in particular, specialist products, that a multi-product retail chain cannot match: they become destination stores which customers seek out because of the owner's personal knowledge/interest in the product category and their large and specialist selection (of fruits and vegetables, cheeses, or gift items). Some others capitalise on their ability to offer personalised service and advice that a large store cannot: customers seek them out because they trust their advice on special purchases, like in the case of watches, jewellery and cameras.
The urban Indian retail sector has traditionally been structured around three small retail entities -- the grocer, the general store and the chemist. The grocer stocks non-packaged, unbranded commodities such as rice, flour, and pulses, as well as branded fast-moving consumer goods (FMCGs); the general store stocks only branded, packaged FMCGs. The chemist, apart from dispensing pharmaceutical products, sells branded FMCGs such as personal care products, and health foods. Alongside the three retail outfits, exists a large segment of smaller, unorganised players -- paan-beedi stores (or cigarette kiosks) which stock products in sachets, batteries, confectionery and soaps; bakeries and confectioners; fruit juice/tea stalls; ice-cream parlours; electrical and hardware stores; and non-food boutiques. These retail outfits stock branded FMCGs that gel with their businesses. These apart, there are the hawkers, carts and stalls that dot sidewalks and street corners, and several door-to-door sellers such as vegetable vendors.
According to the global consulting group, A. T. Kearney India Ltd, there are over five million such small retail outlets in India. They account for nearly 95 per cent of the total retail turnover in the country and their number continues to grow.
The small retailer in India continues to be favoured both by the marketer and the customer. For the marketer, small retailers are becoming increasingly important in the retailing pyramid. This is primarily because of the increase in stock-keeping units (SKUs) over the past years. (A Stock Keeping Unit is one particular variety of a product in one size/volume. For instance, if company X manufactures two brands of soap, each in three sizes, then the number of SKUs the company has is six). According to ORG's retail audit, in 1996, the number of packs more than doubled in the 57 core FMCG categories like white toothpaste, detergent powder and cold cream. That apart, there have been 19 new FMCG categories (between 1990-96) like branded atta, anti-aging creams and dishwashing pastes that have been introduced and they have additionally contributed 1378 brands and 2579 SKUs at the retail counter. This SKU proliferation has caused intense pressure on shelf space. Marketers, therefore, have been forced to seek width in distribution rather than depth. So, the small retailer is playing a significant role as a distribution channel for FMCGs in existing and new settlement areas in urban cities.
Here in India, the capital needed to set up a small retail outlet is negligible, and the operating costs/overheads are low. Supply chain integration does not quite matter in the case of the small retailer because of the small scale of his operations. He normally deals directly with wholesalers with whom he is able to negotiate rates. Retail consolidation (consolidation of buying power) among supermarket operators is unlikely to hurt small retailers simply because it will affect manufacturers directly, who will not want to compromise on the distribution reach to offer large volumes to a few big retailers. And they are the small retailers who form an integral part of the wide distribution network set up by the large FMCG companies. Marketers have also found that private/store brands from supermarkets can prove to be a threat to their own brands and hence, desist from encouraging retail consolidation.
The customers favour the small retailer for the low prices and services he offers. The small retailer is providing all those services which supermarkets normally don't. This has increased competitiveness in the trade, especially his own ilk. This competitiveness has improved customer service levels which are reflected in the wide-ranging facilities being offered by him. Such facilities include telephone order system, credit facilities, home delivery, and branded products procured on order (in case of stock-outs). More importantly, he is available next door, most often the owner himself is present to offer personalised service. In this way, he is able to develop a strong relationship with his customers who, over a period of time, become extremely loyal.
The small retailer has ensured convenience which is the basic platform on which a supermarket positions itself. Large, organised retailers agree that small retailers are a powerful lobby to stand up against and have been difficult to dislodge.
In fact, the small retailer has forced supermarkets to offer the same range of services such as telephone order and personalised service which defeats the very purpose of the supermarket (supermarkets generate greater revenues when they get the customer or the traffic into the store as it facilitates impulse purchases). More importantly, supermarket operators have been unable to offer substantial price differentials to wean away the customers. This is mainly because of the high real estate prices. A supermarket operator either buys or leases real estate at market rates. This cost has been the biggest deterrent to the viability of the business. This high investment in real estate offsets any price advantage that the supermarket would have secured from the marketer for bulk purchases and passed on to the consumer to gain an edge over the small retailer.
So, the main reasons why customers normally do not shift loyalties from the small retailer to supermarkets, include:
- proximity of the small retailer - added service provided such as credit facility, ordering on the phone and home delivery - stockouts at supermarkets - high prices at supermarkets - personal attention of the small retailer - parking space problems at supermarkets - operating systems of the supermarket such as long queues at checkouts, poor air-conditioning
The small retailer will be around also because, by his very nature, he will be able to deal with several peculiarities in the Indian consumer psyche. For example, the small retailer is benefits from certain myths among middle-class customers who are the target audience of supermarket operators. One such myth is that `whatever is modern is expensive.' This keeps several potential middle-class shoppers from buying at supermarkets. Another myth is that fresh foods that are pre-packaged may not really be fresh (in the case of fruits and vegetables). Here, neighbourhood vendors have an edge since they replenish their stock on a daily basis and most of them offer the products at the doorstep.
Myths apart, there are certain customer attitudes that have prevented supermarkets from taking full control of the retail scene. One of them is the prevailing habit of sending servants to do the shopping, especially in the north and west. Generally intimidated by large stores, servants stick to the small, friendly store where they can relate to the shopkeeper on a one on one basis and speak his language. Also, there is a tendency among Indian customers to buy fresh food products (ingredients/raw commodities) and avoid packaged, processed foods (which is what supermarkets mostly stock). This is because of the prevailing habit of consuming home-made food, as opposed to the western habit of storing and consuming processed foods. The average size of refrigerators bought in Indian households is evidence enough. The largest-selling size in India continues to be 165 litres which is among the small sizes in the category.
However, these attitudes and practices are changing, especially among the upwardly-mobile, urban nuclear families. Disposable incomes among them are rising. There is a high degree of exposure to mass media, especially television and the World Wide Web. This segment of customers trusts brands and has no qualms about trying out processed/convenience foods. But the bad news is that they form a microscopic minority.
Supermarkets are yet to get The Great Indian Middle Class and Rural India in their fold. That may take a very long time to happen because it is extremely difficult to break cultural and demographic barriers. Until then, small retailers will be the most-sought-after retail entities, especially by those marketers who are keenly looking at penetrating semi-urban and rural areas.
* Note: According to ORG-MARG, a small retailer is defined as one with a mean turnover between Rs 17,500 and Rs 52,500 per annum.
References: Milestones, an ORG-MARG publication
Acknowledgements: Suraj Srinivasan, Director, Subhiksha Simon Bell, Principal, A. T. Kearney Ltd