The Hindu Business Line : Small towns, big opportunities

MOST of the retailing opportunity being described in the media nowadays or being attempted by entrepreneurs in the country is urban-centric. Even if we were to add the growth plans of most of the organised retailers, it does not cover more than the top 30 towns. The two main reasons said to contribute to this phenomenon are the law of diminishing returns and low productivity outside big cities.

The first reason assumes that consumption and city penetration is a diminishing curve, which means for a national FMCG brand, 30 per cent of its sales would come from the top 30 towns (population above 1 million) and the remaining 70 per cent requires a penetration of more than 700 towns. Secondly, organised retail economics requires high productivity which is only possible in urban conglomerations.

I believe that these arguments are not comprehensive enough for discarding the small town retailing opportunity. When I refer to small towns, it means towns with population between 20,000 and one lakh. India has about 500 such towns, which are taluka centres or large mandis.

Let us first look at retail consumption nationally. We know that about 55 per cent of retail consumption is non-urban. Research further indicates that about 50 per cent of consumption takes place in small towns, which means that these small towns address about one-fourth of the domestic retail consumption. However, if we consider that about 10-15 per cent of urban consumption is driven by consumers from small towns, we find that small towns are perhaps responsible for a third of the domestic consumption.

These small towns also provide a market continuum where the high-income rural consumers and middle income urban consumers come together to provide a large consumer base. The rural consumers visit the mandis and the talukas to sell their agricultural produce and combine this with shopping.

Hence, looking only at the population of these towns in isolation can be misleading. We need to actually look at total addressable population by summing the surrounding village population.

I would now like to talk about two retail models running successfully in small towns. The first example is Warna Bazaar in Kolhapur and Sangli in Maharashtra. Warna Bazaar has two superstores each of 10,000 sq. ft. and about 30 stores of 500-1,000 sq. ft. at village levels. They cater to 78 villages and have a product mix covering apparel, food and grocery, agri-inputs, vehicles, consumer durables and hardware. They have an annual turnover exceeding Rs 50 crore, which on retail space of 43,000 sq. ft. gives Warna Bazaar a retail sales productivity of Rs 11,650/sq. ft.

The second example is of Kasti Society, based near Ahmednagar in Maharashtra. Kasti Society has several shops arranged in a shopping centre format with three supermarkets. They cater to 70 surrounding villages. The total retail space is 5,000 sq ft, and with a turnover of Rs 13 crore, the sales productivity is Rs 26,000 per sq ft compared with an average urban retailer's productivity of around Rs 7,000 per sq. ft. Both of these entities are cooperative initiatives.

KSA research shows, in small towns, average sales per sq. ft. is about two-thirds of the urban towns. While productivities are fairly high, the rentals in these towns are one-sixth of urban levels, making small town retail models viable. Rentals are the single largest cost factor in modern retail operations.

The small town markets also provide a tremendous opportunity for private labels. Most retailers in the urban markets have struggled to create successful private labels in heavily branded categories. The penetration levels of these branded categories are lower in small towns providing an opportunity for the small town retailer to fill the gap through his own labels.

However, there are some key success factors which need to be built while attempting this huge opportunity. This model requires a strong offering of agriculture-related products and services through which a strong consumer pull can be established. The services need to focus on the improvement of yield so that the consumer's ability to spend is enhanced. This could result is some dependency and trust which can be leveraged. Building a relationship with this consumer will require retailers to invest in direct communications. It is leveraging of these relationships which will result in good returns.

There are quite a number of corporate initiatives already on the field. DCM Shriram group's Hariyali Kisaan Bazaar has stores 16 stores across Uttar Pradesh, Haryana, Punjab and Rajasthan. Godrej Agrovet's Aadhaar has about 15 stores in Punjab, Maharashtra, Karnataka and Gujarat. ITC's Chaupal Sagar in Madhaya Pradesh is also an initiative in this direction. However, it is more procurement-led and ties in with its e-chaupal network. Most of these initiatives have been in the experimental stages in the last few years. But a faster roll-out is expected in the coming years now that most have tested and fine tuned their concepts.

We all must remember Wal-Mart took advantage of this small town market in the USA and over a period of time built a scale which was used to drive competition out of urban conglomerations. So who is going to do a Wal-Mart in India?

(The writer is Associate Director and Head (South India Operations), KSA Technopak.)

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