The Hindu Business Line : `What matters in retail today is differentiation'

Bala Deshpande, Director, Investments, ICICI Venture, on issues concerning the organised retail market in India, the importance of proper execution of a particular format and FDI in retail.

With over 200 malls likely to come up in the next couple of years across the country and the organised retail industry growing at a pace of 30 per cent year-on-year, Bala Deshpande, Director, Investments, ICICI Venture, feels that the only way for retailers to carve a niche for themselves is by creating a format that would be difficult for competition to ape. In an interview to Catalyst, Deshpande talks on a host of issues concerning the organised retail market in India, about the importance of proper execution of a particular format, FDI in retail, and much more.

Deshpande, who has been with ICICI Ventures for a year, has had over 10 years of cross-function experience at multiple industries. She has worked in leading MNCs such as International Best Foods, Cadbury and ICI.

At ICICI Venture, she heads the growth capital investments group, which focuses on providing expansion capital across sectors including retail, media, textiles and manufacturing. She is also on the board of a number of retail companies such as Shoppers' Stop, Pantaloon Retail and Subhiksha.

Excerpts from the interview:

What are some of the parameters you look at before you decide to take stake in a retail company?

The parameters have shifted in the last two-three years. Earlier, it was scalability of the model and the ability to become pan-Indian that was taken into consideration. For instance, we invested in Shoppers' Stop as it was calibrated to cater to the diverse needs of the SEC A and SEC B population across the country.

Similarly, Pantaloon had multiple formats such as Big Bazaar which was based on the value-for-money concept, which again is extremely scalable, as Indian consumers, be it in the North or in the South, are value-conscious. However, scalability today is hardly an issue, neither is availability of retail space. What actually matters is differentiation.

Today, it is very easy to replicate a format such as Big Bazaar. Pantaloon and Shoppers' Stop had the advantage of getting ample time to perfect their formats. But who has the luxury of getting enough time to perfect their formats? Therefore, retail players have to ensure that their model is different and difficult to replicate.

How do you think can one create differentiation?

Companies such as Trent have their own labels, which is 60 per cent of their total merchandise. It is a way of creating differentiation, as the merchandise that you get in their outlets you will not find anywhere else. The other way to create differentiation is to concentrate on a particular category, such as a pharmaceutical chain or even books. In fact, books as a category has done extremely well. Brands such as Landmark and Crossword have gone through the pains of perfecting their formats and are now making a lot of money.

Therefore, it is all about getting your act right and getting adequate returns for every sq.ft. you invest.

What according to you is an ideal format you would like to invest in?

That is a difficult question. We don't have any particular format in mind, we only look at formats that would deliver.

In the consumer durables segment for instance, it is difficult to create differentiators. Since the net profit is in the region of just 1.5 to 2 per cent, it all depends on how you move the inventory and turn the market around.

However, a format such as Subhiksha sells everything that any other grocery store would sell, but its key differentiator is the 10-per cent discount it offers on its entire merchandise and the promise that it would enable you to save money for your family. How the store delivers this retail promise is what matters.

You can create formats by offering solutions to customers' needs in a unique manner. You could probably combine the discounts and the variety of a hypermarket with the convenience and comfort of a neighbourhood store, to put together a format.

For this, you could take real estate in a residential area so that you needn't pay as much as you would have had to pay on high-street, and thereafter, simulate the neighbourhood concept of retail.

Many mall developers are talking about developing speciality malls. Do you think the concept would work?

It is difficult to say what works. Arcus' positioning of home-to-home solutions, for instance, didn't work well and it had to close down. There was nothing wrong in the concept. It all depends on the market you are opening and the execution of the concept. If a mall is designed with a particular concept in mind, it has to be executed accordingly, only then it will work. It may sound theoretical, but that is the truth.

There are talks of putting up a luxury mall in Delhi, which would have brands such as Gucci and Louis Vuitton.

Yes, luxury products have a market in India and people have the money to spend on them; intuitively, it will work well. But if the mall developer puts together a luxury mall and overlooks factors as basic as providing ample parking space, it is bound to turn off customers. This is where execution plays an important role. If the concept is executed properly, it will work extremely well.

What does the future have in store for the retail industry? Is there anything in particular which you think will not really do well?

The future will see more speciality malls coming up in the cities, as people would want to see new things, and speciality malls would make for good differentiators.

The smaller towns, however, will see more of general formats, as they are still quite young as far as organised retail is concerned.

Whether there is a particular format that wouldn't work, it is quite early to comment. As of now, every concept is doing well because the industry is at a nascent stage and all the players are growing at 30-35 per cent CAGR. When organised retail is 15-18 per cent of the total retail market, only then would such issues crop up.

Are there any new projects in the pipeline in which ICICI Ventures is looking at investing?

There are many projects in the pipeline, but it is a little too early to disclose them. We keep looking at various kinds of formats, as our business is all about backing people and their passion for retail. In fact, 50 per cent of our job is in believing in the concept and the people behind it.

Do you think FDI in retail will finally come in? Will it be successful?

It will definitely happen; in fact, it should be in place by the end of the next fiscal. Established players would come in and look for partnerships and joint venture agreements with existing players.

And, if it doesn't work out, they may even look at signing a JV with people who are completely new to the business. They may also look at acquiring an existing player, provided the price is right.

I don't see any reason why FDI will not be successful. Even in markets such as China, brands such as Carrefour have had a successful run through joint-venture partnerships.

Do you think the coming of FDI would threaten the existence of domestic retailers?

FDI would have a positive impact, as the domestic players would push up scales and quality of performance. Competition is always healthy.