ENTER, NEW-AGE NEIGHBOURHOOD RETAILERS
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Mar, 01 2007

ENTER, NEW-AGE NEIGHBOURHOOD RETAILERS

WITH modern organised retail making its appearance across urban India, the debate on its impact on the traditional Indian retail businesses, including the neighbourhood kiryana stores, gets shriller. Those against opening the Indian market to foreign dire

WITH modern organised retail making its appearance across urban India, the debate on its impact on the traditional Indian retail businesses, including the neighbourhood kiryana stores, gets shriller. Those against opening the Indian market to foreign direct investment use a barrage of arguments. The most superficially potent one is the impact it will have on the livelihood of the millions currently eking out a living from their small retail businesses.

With organised retail panning out in the Indian context the fight for the share of customer spending will be between the presumably powerful modern retailers and the helpless small traditional ones. It is presumed that the growth of organised retailers across urban and rural India will lead to massive unemployment over the next 10 years. These are some indicators of the changes organised retail would bring in its wake.

Changing market place

During the last few years, a wave of new formats has surged onto the retail space of India mingling with the traditional formats and sometimes replacing them. In the process of further transformation, Indian retail space has today new appearance and greater range of activities and facilities. Interestingly, this revolutionary change and people's lifestyle have a reciprocal relation: one influencing the other.

With planned investments of $22 billion over the next five years, excluding what might be brought in by new global and large local players, the retail sector, henceforth, is expected to grow at 40 per cent to $427 billion by 2011.

A consequence of all these investments will be the fact that India's present 2 sq.ft per capita retailing space will rise by 15 to 20 per cent in 2010. To be viable, the huge investments made in the sector by India Inc. would have to be responded to by a corresponding massive surge in footfalls. And for that to happen, a lot of links would have to fall in place.

Organised retailing

Organised retailing, which aims at providing an ideal shopping experience for the consumer based on the advantages of large-scale purchases, consumer preference analysis, excellent ambience and choice of merchandise, has been adopted in a large number of Indian cities with many business houses investing in this segment. The organised sector, which began with lifestyle retailing, has now moved on to value retailing as well.

For decades, consumer goods, that companies have been delivering to India's 1.2 crore kiryanas, have more or less been on terms of their own choosing. With Wal-Mart's advent in the US, the relationship between manufacturers and consumers has drastically altered in the latter's favour. While the results in the case of India's retailers may not be necessary, some major changes would definitely be in order.

Retailers like Reliance, Pantaloon or Subhiksha may bring about a change, however, the fact remains that ordering or sourcing by retailers is still more tactical than strategic and not many retailers have long-term agreements with suppliers.

While the urban market constitutes 45 per cent of India's retail market, with top 748 cities alone accounting for $105 billion in retail sales, small-town India is the next big destination in the retail business. Consider these figures: in 2005, the contribution of smaller cities to total organised retailing sales was 15 per cent and was expected to grow to 25 per cent by the end of 2006. Organised retailing in small-town India is growing at 50 to 60 per cent a year compared to 35 to 40 per cent in the large cities. The striking point is that it is the big names in the organised retail business that are eyeing these new opportunities.

The rise of organised retail does not mean the end of traditional retail, for, the Indian retail sector, according to an estimate, is valued at Rs 14,40,000 crore, of which organised retail accounts for a minuscule 3 per cent.

Retail real estate demand

Today, close to 95 per cent of India's outlets are below 500 sq.ft in dimension. Compare this with the modern 2,000 to 5,000 sq.ft of Reliance Fresh stores and upcoming supermarkets of over one lakh sq.ft. With over 1,000 hypermarkets and 3,000 supermarkets projected to come up by 2011, India will need additional retail space of 7,000 lakh sq.ft. Current projections on construction point to a supply of just 2,000 lakh sq.ft, leaving a gap of 5,000 lakh sq.ft that needs to be filled, at a cost of $15 to 18 billion.

Pantaloon Retail, currently, has 32 lakh sq.ft spread across several formats and is expected to have 100 lakh sq.ft of space in the country by 2010. Again, in tier -II cities, where lease rentals are 40 to 50 per cent lower than those in top tier cities, Pantaloon has been quick to establish its presence.

Availability of quality retail space will be a key determinant for the growth of the sector.

Perfect neighbourhood retailing

In such a scenario, questions are being anxiously asked by the local retailers as well debated in political circles. Will the unorganised retail sector be able to continue its hold on the Indian consumer, drawing them away from the attraction of the so-called organised ones? Will this sector be able to survive in the big retail environment where giants like Wal-Mart and others are entering? Will the international retailers prove to be a threat to the traditional desi kiryana shops.

The retail scene in India is presently undergoing a sea change with the emergence of scores of modern retailing malls, stores and multiplexes all over the country, which was earlier dominated by millions of mom-and-pop stores. This change is clear and visible not only in the large metropolitan cities, but is fast invading many tier I and II cities as well.

Though, sooner or later, mall culture will be adopted, the focus shifting from neighbourhood retail to mall retail, the traditional retailing business would not be affected much as the consumers would still depend upon neighbourhood kiryana shops instead of visiting malls and super-markets for small grocery items.

Perfect neighbourhood retailers like groceries, pharmacy, saloon, dry-cleaning, stationery, music-audio/video, hardware-electronic, sweet/bakery, gifts or flowers and crockery would continue as these would be having their usual customers.

Says Viraj Gandhi, CEO, Medicine Shoppe India, "There are certain categories which are very much neighbourhood-driven for which people do not go to hypermarkets." He adds, "If you analyse western countries, you will find that this perfect neighbourhood concept is already there, for, certain basic necessities are convenience-driven rather than price-driven."

Empowering small retailers

Today, for all the difficulties of doing business in the country, India has become a fertile ground for breeding new entrepreneurs. The markets are vibrant, capital can be arranged, and technology and de-regulation keep throwing up new opportunities.

Such opportunities are being brought in by international retail giants and home grown retail players. What is being feared as a setback to the neighbourhood stores, the coming of giant players will be a clear boon for them. It is but obvious that these giants will build in the outskirts of large and small cities due to unavailability of large chunk of land in prime locations and the hazards that parking and traffic would cause. Though some families would frequent these large formats for their weekly shopping, most may not find it convenient to drive across town to save a few rupees. In such a situation locality shoppers would still rely on the neighbourhood stores for their everyday needs.

Though the perfect neighbourhood arrangement would definitely be the norm even after years, the main issue with small retailers, today, is their survival in this new emerging competition. Corporates, or foreign retailers, cannot be stopped from entering the Indian market, but systems can be surely upgraded to have an edge.

"With the coming of the biggies," says Vikaas Gutgutia, founder, Ferns N Petals, "the small retailers will certainly be affected, but these retailers have an edge in terms of knowing their customers well, which large corporates will lack and that is what a small retailer can cash-in on."

Besides these positives, small retailers do need to take a few important steps that could work in their favour. In this regard, Gutgutia says that these retailers need to be innovative and upgrade and add value to their system." Sameer Modi, President, Twenty Four Seven Retail Stores Private Limited adds, "If the small retailers are able to convert their business into modern format they will be better off."

Once the problem is understood, the right solution must be initiated. Companies like Medicine Shoppe, Twenty Four Seven Retails Store Private Limited, Pivot Point India and Ferns N Petals are coming to the rescue of these retailers by offering them their franchises. Inviting small retailers, Gandhi says, "We always want existing people to come on-board. It is sensible for small retailers to ally with people who are into franchising."

Owing to certain practices that are followed in a franchise system, the question arises: Is franchising the right choice for small retailers?

Gandhi answers, "There are formats that are extremely large or small, therefore, taking a franchise will be a judicious decision." Modi adds, "The whole idea is to provide partnership in value. Our set model will provide additional advantages, like one-door supply, increase in business, and increase in customer base. Our model is based on dual sharing of investment where the small retailer will benefit further."

There is another factor that would benefit small shops. Since large format retailers would not be accessible to all in a particular locality, the giants would seek franchisees from among the neighbourhood store, making arrangements for the products and logistics and back-end support. As large retailers would be sourcing goods from the manufacturers directly, the goods would be available at cheaper prices than at the smaller stores. A franchisee small store would, thus, receive goods at much lower prices than its non-franchise counterpart in the same locality. These new retail franchisees would constitute the community of new entrepreneurs in the small retail formats.

While a franchise tie-up with these companies will benefit small retailers in establishing retail space and being part of the organised retail market, it will also keep their individual identity of being an entrepreneur intact.

Franchising is a well-suited business model for the entrepreneurial psyche of the average Indian businessman who loves to have ownership and control of operations.

With inputs by Punita Sabharwal

Gaurav Marya's reflections

Perfect neighbourhood retailers, 10 proven business ideas

With corporate giants entering the retail arena and offering competition to neighbourhood retailers in terms of better environment, lower prices and better values, it is high time that these retailers reinvent themselves to fend off the heat.

Neighbourhood stores in India are offering services possible only at their level and surviving on low profit margins. With the coming of local corporates like Reliance and Pantaloon, they are fighting a losing battle due to minimum means, with survival becoming a major issue.

For these small retailers, only two options are available, today: either shut shop, or upgrade services and grow the business.

The image of a small retailer is set to undergo a sea-change in the next 2 to 3 years. It is time for the small retailers to go in for new technologies and evolve further. They need a set model and system in place that can help them serve their clients better.

There are certain categories of retailing that a neighbourhood locality cannot go without as they involve essentials of an individual's daily life. These categories consist of groceries, pharmacy, saloon, dry-cleaning, stationery, music-audio/video, hardware-electronic, sweet/bakery, gifts or flowers and crockery. The neighbourhood retailers in such categories would retain their own selected area of operation as they would continue to receive their usual customers.

In order to survive any loss brought about by a large retailer's dominance in the area, small retailers would need to innovate, upgrade and add value to their system by converting their businesses into modern formats.

Ideally, big companies should join hands with the small retailers and offer the right system to make them a part of the organized retail. Here, franchising comes as the right option which can help them to upgrade the services and also enhance the customer's buying experience.

These 10 categories make up the proven businesses in any given neighbourhood with the perfect neighbourhood arrangement becoming the norm in the days to come.

Gaurav Marya, President,
Franchise India Holdings Ltd

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