The Hindu Business Line : Food for retail thought

Food and grocery retailing present the biggest opportunity for growth within the Indian retail industry. So should food retail chains be popping the champagne? Catalyst presents a reality check.

FIRST, some number crunching. According to a study on the food and grocery retail market by KSA Technopak, the country's overall retail sales now account for 44 per cent of its GDP. Food retail sales make up for close to 63 per cent of total retail sales. In absolute terms, food retail sales have grown from Rs 3,81,000 crore in 1996, to Rs 7,03,900 crore in 2001. And, just for the record, non-food retail sales have grown from Rs 2,22,400 crore in 1996, to Rs 4,19,000 crore in 2001.

Besides, the food and grocery sector now accounts for 14 per cent of total organised retail, after clothing and textiles (at 36 per cent) and watches and jewellery (at 17 per cent).

Food and grocery retail offers the biggest opportunity for growth, provided levels of investment are high, says the KSA study.

Now, a reality check. Modern, or organised retail, accounts for just about 1.6 per cent of the total retail sales in the country, estimated at Rs 18,000 crore, says the KSA Technopak study.

The study further analyses that last year, for the first time in five years, retail shares of grocery dropped, even though in terms of absolute value, the shares remained stable. KSA Technopak attributes this to an international trend — even as total consumer expenditure rises, grocery shares slip at the cost of lifestyle-related expenses.

A recently released CII-Jones Lang LaSalle report states that real estate has been the big deterrent to growth of the retail sector. The report highlights that areas that may require attention, consistency and radical change include area calculation, leasing costs and practices, deposit levels, operating costs and outgoings, property purchase practices, shopping mall building standards, and a legal framework.

Explains Arvind Singhal, Chairman, KSA Technopak, "Organised food and grocery retailing in India has a long, long way to go. The sector has not seen too many big entrants. The industry requires a lot more players. What it also requires is fundamental investments. That's not happening as yet."

Agrees Raghu Pillai, President, Retail Business, RPG Enterprises, "There are not enough players. The business is not exactly cutting edge or sexy, the gestation periods are long, institutional funding is difficult, and there is none or little Government support. But I believe the industry will see large investments coming once the current ban on foreign direct investment is lifted. But that could be two-three years away." Says R. Subramanian, Director of the Chennai-based discount retail chain, Subhiksha: "Food and grocery retailing is a tough business. Margins are low, and consumers are not dissatisfied with existing shops where they buy. For example, the next door grocery shopkeeper is smart and delivers good customer service, though not value."

Simone Tata's much-talked about food retailing venture under the Trent name, for example, is yet to take wing, even as there is talk of LifeStyle International planning a foray within this sector.

As of now, while Chennai has some five organised food and grocery retail chains, other big cities such as Delhi, Bangalore, and Mumbai average only two-three such chains.

Also, most food retail players have been region-specific as far as geographical presence is concerned. Take the RPG Group's FoodWorld, Nilgiris, Margin Free, Giant, Varkey's and Subhiksha, all of which are more or less spread in the Southern region; Sabka Bazaar has a presence only in and around Delhi; names such as Haiko and Radhakrishna Foodland are Mumbai-centric; while Adani is Ahmedabad-centric.

Industry representatives say spreading presence across cities is a tough call. As Singhal points out, "Organised food and grocery retailing chains going national requires significant investments. Retailing within this sector is not just about the front-end, but involves complex supply chain and logistics issues as well."

Take FoodWorld, which came in first in the food and grocery retailing sector. The chain has no plans to venture beyond the Southern region just yet. "Our current plan is to focus on the Southern markets and achieve saturation. Maybe by 2005, we could look at the other regions, but there are no firm plans as yet," says Pillai. FoodWorld has a current sales figure of Rs 350 crore. Subhiksha too is gung-ho about the future of the discount chain. Says Subramanian, "We deliver significant price value to the customer. We want to be the principal store of purchase for at least 40 per cent of all consumers living within 500-750 meters of the store, that is, within walking distance."

Meanwhile, the RPG group plans to take its new formats such as Giant Hypermarkets national over the next three years. Grocery is a large component of this format, but not the only one.

Elaborating on the hurdles of going pan-Indian, Pillai observes: "Fundamentally, the way a basic grocery retailing model works is that the high set-up costs in terms of setting up buying/ distribution infrastructure is gradually amortised over a larger number of stores. The back-end costs without distribution centre costs, or what in retail jargon is called retail administration costs, should stabilise at around 2.5 per cent to 3 per cent of sales."

Pillai says the obstacles of looking at a pan-India model for grocery are several. Given the federal nature of the country, the weak infrastructure and the major variances in eating habits in different parts of the country, one will have to replicate the retail administration costs for at least each region and therefore the gestation period of the project becomes huge. "Of course, if one can get a model in place where the upfront store revenues scale very rapidly, then it is possible. Therefore, if one is to attempt a pan-Indian grocery foray, it will have to be in the hypermarket format with its attendant investment numbers and risk profile," he adds.

Adds Arif Sheikh, President, Sabka Bazaar (owned and promoted by Home Stores India Ltd): "While margins in the food and grocery business are only about 15 per cent, supply chain management costs are very steep. Therefore, it is difficult for food retail chains to go national." Sabka Bazaar currently has 19 outlets in and around Delhi, and there are no immediate plans to spread wing.

Sheikh presents another argument. According to him, there is so much potential to extract from individual regions, that players are in no tearing hurry to spread out. He cites a recent IMRB study, according to which in the six major metros, Delhi has the highest per capita consumption of food and grocery, among supermarkets. Chennai, the mecca of retailing, comes at fourth place. "This shows the high potential the sector presents. Chennai has some five supermarkets, and each of these are doing well for themselves. So there is enough scope to expand even in one single city."

Sabka Bazaar is now generating sales of Rs 11 crore from its 19 stores, says Sheikh.

Pantaloon Retail (India) Ltd, which operates two types of retail formats, made its maiden foray in food and grocery retailing in the North late last month. Big Bazaar, Pantaloon group's discount store chain, has taken off to a roaring start in Delhi, says a company official. The Pantaloon Big Bazaar in Delhi is the sixth for the group, and the first in North India. According to a Pantaloon official, existing Big Bazaar stores in cities such as Hyderabad, Bangalore and Mumbai attract footfalls of 20,000 to 25,000 per day, more so during weekends.

While Big Bazaar is essentially a discount store retailing product categories ranging from food and grocery to apparel to footwear to home and interior products, food and grocery retailing forms a significant part of the chain's business. "Typically, while food and grocery retailing does well at the beginning of the month, the apparel sector sees maximum offtake during festivals," points out a Pantaloon Big Bazaar official. The Pantaloon group is now gearing up to open its next Big Bazaar in Nagpur within a few months time.

Of course, this is the tip of the iceberg, and KSA Technopak's projections will well give a shot in the arm to the industry. Given that organised retail has been registering growth rates of approximately 40 per cent over the last three years, it is expected to grow to about Rs 35,000 crore in 2005, and close to Rs 70,000 crore in 2010.

And as an industry analyst elaborates, "Some years down the line, food and grocery stores will become dominating trade partners for the food industry, which, in turn, will be forced to offer special discounts and trade terms for them to get the shelf space in such stores. Also, once established, in-store label brands will become a real threat to the industry as manufacturers will have to compete with the store label brands which are generally very price-competitive."

Replicating the success stories of names such as Sainsbury and Tesco may still be a distant dream for Indian food and grocery retailers, but at least the winds are blowing in the direction of growth.

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