The Hindu Business Line : `In retail, wins are at back-end'

At a relatively young age of 47, one could well call K. Radhakrishnan one of the wise old men of Indian retailing. As Vice-President (Merchandising) of Foodworld Supermarkets Ltd, Radha, as everyone in the industry calls him, was part of the founding team of Foodworld along with Pradipta Mohapatra and Raghu Pillai, and oversaw the expansion of India's first chain of supermarkets to a 90-store, multi-city chain spread over the South and west of India. Radha transitioned from Foodworld to RPG's Spencer's Retail when RPG pulled out of Foodworld and decided to expand under the Spencer's brand.

The retailer put in his papers at Spencer's recently and has thrown in his lot with what promises to be the Big Daddy of Indian retail - Reliance. As CEO, Hypermarkets, Reliance, Radha has to oversee a frenetic roll-out of Reliance hypermarkets in several score cities across the country. While between jobs, he spoke to BrandLine on the state of organised retail in India, its impact on the corner kirana store and on some myths of modern trade. Excerpts:

There is an ongoing debate on the impact of organised and big-box retail on the corner store, that it can wipe out small traders and so on. What has been the impact of organised retail on the local stores, the regular mom-and-pop stores, especially in a city like Chennai where penetration by organised retail is a lot more?

In Tamil Nadu, because of the cooperative stores' movement, it's one of the most competitive markets and it was strange that one would start a chain like FoodWorld here. But over the 10 years we've seen the market, I cannot recall significant number of moms-and-pops closing down; maybe some have. But the ones that we've seen closed are not them, but the other supermarkets, like Vitan in Chennai, Nanz in Delhi, MyHome in Bangalore. Those closed not because of competitive reasons but other management reasons; we don't know. But, mom-and-pop or small kiranas are clever businessmen, because they have to survive and do business and they are profitable. They borrow to buy goods, turn it around, manage their cash, so they are clever business people; they offer credit, phone service, door delivery... so in a sense organised retail has not hit them. I don't agree that it has hit small kirana shops. Also, the market is so huge that it is unlikely that someone can come and close down scores of shops. So, I am not so sure. Also, the fact is, our cities are fairly cluttered; you don't drive huge distances of 10-15 km to shop. So location strategy is critical and with petrol prices going up, even more so.

So, what happens to the concept of destination stores and hypermarkets?

That will still be there but what categories drive destination stores will determine their growth. That is the trick - you need to know what will drive destination footfalls. That's critical and that's the sleight of hand of the retailer.

So, what do you make of this whole debate of FDI in retail which makes out that the impact of organised retail will be on the small kirana store?

I tend to disagree with that. The formats which are coming in are large formats and not the mom-and-pop stores; they're going to be larger stores — definitely more than 25,000-30,000 sq. ft. stores and they will have a different position and the consumer will see them differently, whereas the mom-and-pop stores will be closer home and they will be a different proposition for sure. But, the nature of the stores and what they sell may change. And, even the existing supermarkets may have to change what they sell, how they sell, their pricing strategy.

The other thing is: take the example of a city like Chennai, about 6 million people, about 30,000 mom-and-pop stores. Are we saying that all these people will be served by these stores? Very unlikely. Don't forget that there is a huge wet market out there. They are smaller than kirana stores — there's a huge wholesale market too — Parry's Corner in Chennai is a huge wholesale market. People go there to buy commodities from there. So, when modern retailing grows, more and more people will shop from some kind of organised retail. Whether it's mom-and-pop or self-help, and that's the way it's going to grow, people will get converted to this kind of shopping.

Take the case of meat and fish, 99.9 per cent is from the wet market, we haven't even got anything into the stores; that's a huge market. And, what about vegetables? I would believe 85-90 per cent of vegetables is from the wet market. Take wheat, only 4 per cent is packaged atta and the rest is from the wholesale market.

And, what about the number of rice merchants in the city? They are category experts, but they are all in the wet market and all that can be converted into modern trade. Modern trade and kirana can grow, by bringing more and more people into over-the-counter purchase or self-help.

Have you seen an example of any local store which spruced up its act because of modern trade coming into its area?

Without exception, every store of FoodWorld which opened upgraded every kirana store in the area — they gave better service, put better lights, more range, reduced price, home-delivered, created a customer data base and in their own way ate into the market of the FoodWorlds, Trinethras and Subhikshas. They are extremely clever retailers, so we are underestimating their ability to adapt. I've seen them adapt and I've seen smart retailers in every city who pose a threat to modern trade.

Can you give some examples of this reverse impact?

There are a couple of local stores in Arumbakkam and Besant Nagar (both residential areas of Chennai) which have been around for a long time. They spruced up their act and made it partially self-help and they've started affecting the big stores. And the chain stores are having to match their prices and presentation; it's been a challenge.

The common perception of organised retail is that they are air-conditioned stores, self-help, bright lights, but that's a simplistic view; isn't organised retail all about the back end?

Organised retail is quite a few things: it's got to be self-help, the consumer must be able to pick up the product. If you can't do that you're taking away the main edifice of organised retail. So, anybody who doesn't allow products to be picked up is not allowing the consumer to optimise among brands; that is the first aspect. The other one is it has to be a chain of stores; you may be one good store, but the moment you become a chain of stores the demands on the retailer became bigger and thirdly you need to have a distribution centre, you need to consolidate and you kick in a lot of advantages. But if you don't have that and you don't consolidate you cannot compete by buying higher volumes, buying cheaper; you won't have bargaining power, these three things are necessary and at the back end the trick is about size, how quickly you resource yourself and how quickly you expand the brand name, both these must happen. And, you need great back end IT systems and people who know the domain. You need pricing flexibility while maintaining tight controls as well.

Going by the Chennai experience there are single stores which have some IT, offer lower prices, offer home delivery, are open long hours, and if an organised chain comes to that area, how does he beat this USP?

The victory has to be at the back-end. If you're a single store, the consumer experience is all right, but is your ranging good enough, is your pricing and sourcing good enough? Because the key to modern trade is disintermediation, you've got to pass it on to the consumer; that's what modern retail does. It doesn't matter how evolved a country you are, price is still an issue. The first choice of purchase, especially so in grocery, price is the first criteria or can be the biggest threshold for not picking up a product.

Organised retail, would you say, has mostly made a dent in branded products?

There are only a few players today, and other than FoodWorld and Spencer's, none of the others do grocery and vegetables in a big way; rather, they have not invested in that category in a big way as yet. You've got to do staples and fruit and vegetables yourself instead of contracting it out, and only then you can say you're a good organised retailer. To say that modern retailing has found its place, it's only in staples and FMCG branded products, except for these two companies. They've invested hugely in commodity and fresh business and these are destination drivers. Branded goods are not a differentiator and it is also not a price differentiator because the ceiling and the bottom is fixed by the FMCG company because of the MRP regime.

Therefore you don't have the capability to optimise between categories and brands, push one up and another down so that you can make higher weighted average margins; that's not possible today. Therefore victories in branded goods is not a big one, you will not find range differences in branded goods between all the retailers; they almost always carry the same thing, but when you talk of fruit and vegetables and staples, there are huge differences. So, only those retailers who can invest in staples and fresh can really make any impact and that is where the battles are to be won.

What's the next big horizon for organised retail ?

Apart from making a dent in the wet market, the other category are products which are amenable to imports, like garments, DIYs, general merchandise, electricals... these are not traditionally part of Indian hypermarkets today, and there's a huge demand and that could be a differentiator. These don't have supply chains like FMCG; they are very erratic. You've got to know how to manage these categories. Imported processed foods is another big area. One other area which could make a significant dent is private labels; it could make big inroads into existing branded players, so without increasing categories you could increase your margins and increase value.

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