A viable retail model breathes shoppers

Organized grocery retails in India are not driven by traditional social and shopping habits. Is that why, in spite of hypermarkets, super-markets mushrooming in urban areas, quick ROI is missing? High rentals and heavy discounting culture have made profitability tough.

As shoppers, what do we love in organized grocery retails? Good ambience, hygienic, AC-cooled, self-help, everything under one roof. Offers are galore, and you get the right bill. But what we hate are long billing counter queues, no bargaining, no credit, inconsistency of merchandize availability, especially when you expect that corn you buy to be of the same size and colour every time. Also, you’re forced to buy more as groceries are pre-packed.

Compare that with shopping at your local mom&pop kirana store. The shopkeeper knows you, your household members, and makes home deliveries on a phone call. Greeting you with a smile, he gives you credit and you can bargain. When the exact merchandize you need is not available, his advice on where to find it is genuine, or he offers a substitute with his assurance. You choose any small amount you want to buy, he’ll even oblige with a single piece from an offer pack. Of course there’s downside too. The loose merchandize is open to the elements, so hygiene is doubtful. Small stores don’t stock dairy and fresh vegetables, and you have to wait for the retailer to serve you.

If you are an organized retailer, your store will never be successful if you do 3 things: imitate successful Western model without localization, hire FMCG professionals to run the business (of course exceptions are always there), and not make the shop indispensible to shoppers. Here are the reasons why:

FMCG professionals are not cut out for the retail’s catchment, sourcing, footfall to conversion: FMCG professionals do not have the merchant’s mentality, nor the capacity to manage ultra-diverse product categories. That’s because their expertise is different. It’s on raw materials purchase, how to innovate new product lines, sales and marketing of focused product segments and line extensions, and sometimes the manufacturing process if its not outsourced. Taking MBAs is a big mistake too; they dream of joining big corporations. Grocery retail is an everyday, nitty-gritty, painstaking, hard working job. People perfect for grocery development is the huge graduate population waiting to prove their competency. You may require senior procurement and supply chain professionals, and a few MBAs to help understand the shopper’s psycho-socio-economic and family conditions and anticipate their needs and desires as retail marketing process. Converting mom&pop store people into organized retail salespersons is the real answer. They have real experience in supply chain, stocks, offtake and relationships with shoppers.

Benchmarking Western organized retail model is hara-kiri: The logic in the West was that all product categories are already branded so retails can give self-experience to shoppers. To increase income, retailers started the private label concept that mirrors national brands but gives shoppers about 30% discount. In developed countries, as organized retailers are the only outlet for manufacturer brands, they command 30% margin. In contrast, Indian organized retailers have no power as they represent only 5 to 6% of the manufacturer brands’ business. So they barely get 15% margin.

Misinterpretation of private label: Private labels that Western retailers created get 50% margin. Fresh counters selling non-packaged fruits, vegetables, meat, fish and seafood fetch about 50% margin. In Europe, fresh products were not available on streets as they are in India even today. Misinterpreting its meaning, Indian organized retails sell commodities as private label that have no brand significance in the market. In every area, from private label to manufacturer’s brands and fresh counter, their margins are very low. Without solving these issues, it’s a grave mistake for organized retail to spend on high cost real estate, and expensive foreign and Indian professionals. In such immature markets, those who invested in retail like Bollywood film betting to make box-office hits within 5 weeks, could never bring in ROI. Applications like this in emerging markets create no business model. Its unclear whether their business is genuine or merely to create valuation.

Commodity products cannot drive organized retail: The first disconnect is competing with unbranded commodities that do not justify the earning per square foot value. Are organized retailers providing extra benefit to shoppers here? Or able to prove added value in their brinjals and potatoes beyond vegetables sold by the cart-seller just outside the retail? How many of the majority of urban shoppers below Rs 25,000 income per month know or consume that rare avocado or broccoli you introduced?

Mom&pop store owners are the genuine, shopper-sensitive retail merchants: Retail business is very different from running a manufacturing or service industry. Retails require understanding of the catchment area, procurement of multiple categories and brands, techniques of acquiring shopper footfall and the alchemy of conversion in the store by frequently creating eye-catching activities. So it is a waste of money for retail owners to hire highly educated professionals when only an intelligent merchant mentality is required.

New thinking for a viable retail model: Seriously reduce real estate cost by creating a hypermarket outside the city and arranging transportation for shoppers. The low cost will benefit shoppers, inviting them to come regularly. Divide the store in one floor as under: (1) sell commodity through high tech dispensers like those used for boiled candy where the product is visible but not touchable. A touch-and-feel sample can be exposed. (2) Surround three walls with fresh fruits, vegetables and bakery. An aromatic bakery is big income to compensate the loss from wastage of fruits and vegetables. (3) In the centre put FMCG branded category products with general merchandize. (4) Put hypermarket lifestyle products, from garments to consumer electronics and entertainment, in another part of the store. These require huge marketing of believable factor, so it would be better to market need-based rather than exhibitionist lifestyle and consumer electronics products. (5) Divide the store-named private label into 3 layers, basic, superior and premium, and do marketing that’s credible to shoppers. Sell national brand alternatives without copying them, and avoid innovative categories. (6) Promote the retail brand and private label as a value proposition that’s aspirational, not as discount store. Any discount should reflect as store transaction from low production cost only. (7) Create outstanding retail marketing, with fast movement of national brands. (8) Organize the merchandise into a planogram that respects entry, mid and premium price.

If you are a retailer, ask your shoppers what they think of these points. You’ll definitely get “This is the way to go” as the answer.

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