The Hindu Business Line : Retail rush

With significant changes taking place in the Indian retail sector, it will be appropriate to consider how these changes will affect the Indian consumer. The total retail market is worth about $200 billion and the modern retail off-take is just around 2-3 per cent but growing at about 25 per cent.

With a range of retail formats emerging, consumers have several options depending on their lifestyles.

Another interesting factor is that the retail density (number of retail outlets /given number of consumers) in the Indian market is increasing compared to several developed markets where the retail density is much lower due to diffusion of modern retailing practices. India has around 12 million `mom and pop' or neighbourhood stores (also called kirana stores)

The target

At a very simplistic level, the target segment of consumers will probably be a major consideration for any type of retail outlet. The target segment's demographic and psychographic factors will be important criteria for marketers planning retail outlets. Unlike its spread in a developed market (the US for example), when Wal-Mart enters India, it cannot have huge stores all over the metros (Wal-Market's turnover is almost equivalent to the value of the retail market in India) to compete with kirana stores.

Regardless of consumers' lifestyles, the kirana stores would continue to serve consumers as before, probably with a significant change in the range of products stocked. For example, a consumer at the higher socio-economic strata may purchase apparel or some of the fast moving consumer goods through modern retailing but would still depend on the kirana stores for categories like groceries, vegetables and fruits (perhaps the consumer may buy the premium offering in these outlets). Hence, unlike a developed market where consumers need to travel some distance for shopping, Indian consumers in most parts of the country have the kirana stores to service them on all days during a year. Consumers would therefore not stock some categories for a week as in other developed markets.

It is in this context the `everyday low pricing' type of discount stores like Subhiksha will score with neighbourhood consumers. Such no-frills stores (that are around 1000-1,500 sq ft) store minimum stock-keeping units (SKUs) required for the neighbourhood consumers and use supply chain arrangements to source vegetables and fruits at attractive prices. Given the cultural practice of placing a strong emphasis on fresh vegetables and fruits and the fact that markets supplying them are far-flung even in urban areas, consumers may develop a strong loyalty towards these kinds of stores (especially when prices of both fresh vegetables and everyday FMCG categories are attractive). It is such stores, especially in middle-class/upper middle-class neighbourhoods, that will offer stiff competition to the kirana stores and not modern retail hypermarkets.

But even in this scenario, discount retailing is not feasible to cover the entire consuming population, and in most areas (both urban and rural), the traditional grocer will continue to be important for the consumer.

When it comes to categories like apparel and appliances, modern retail formats like Big Bazaar or Shoppers' Stop will attract consumers from several parts of a city as they may not mind travelling to save on durable products and apparel.

Product categories and retail formats

Modern retailing (other than the small format discount stores) dealing with FMCG goods has to necessarily bring in differentiation in some form and this differentiation should be sustained. Such a modern retail format also has to have a location-based advantage to ensure that it is not within the vicinity of a discount store (or a supermarket) if it wants to use the advantages of supply chain associated with well-known brands.

In a specific geographical area in Bangalore, there are four supermarkets very similar in size and carrying almost similar merchandise within 1-2 km. Consumers will find it difficult to associate any specific proposition to any of these stores. A fifth store (supermarket) in the same vicinity offers regular `everyday low pricing' on all its merchandise. This store is different from the conventional small discount store in that it carries a much larger variety of product categories and SKUs and provides discount on all these without depending on the traffic to vegetables and fruits (which is variable as a small extension to the store). Hence, if a supermarket is to offer sustained discounts on all its merchandise, it has to depend on its supply-chain efficiencies and also have a huge volume of sale. Location is a vital factor to attract consumer traffic for such huge volumes for such stores (unlike a small neighbourhood discount store where the volume turnover may not be so high).

Private labels and the context

One more approach for large retailers is to develop private labels that will have `value perception' from the viewpoint of consumers. Already some of the retailers may be attempting this approach. The Aldi chain in Germany is a fine example of this model where 95 per cent of the merchandise consists of local labels. The chain has such strong goodwill among its consumers that even Wal-Mart was unable to break its hold. Consumers had gotten used to the value offered by the chain over a period of time; this model is often cited as one of the major causes of Wal-Mart's failure in Germany.

In the Indian context, there is immense scope to develop private labels in a variety of categories. Given the diverse spread of spending power and generic competition at the lower end of the market, quality associated with a category can have varying perceptions across socio-economic segments.

For someone at the higher end with a purchasing power that would be insensitive to prices, quality can denote premium across categories such as FMCG and fruits and vegetables, which are bought on an everyday basis. This is a segment which would want the best and if a private label provides quality normally not available among established brands in the market, this segment would be loyal to the store/retailer (higher-end tea is an example and several modern retailers stock a quality that is not available generally from well-known brands).

On the other hand, at the bottom of the pyramid (lower end of the socio-economic spectrum), there is generic competition at work. Given the minimum wages and the high price sensitivity, the consumer in this segment tries to balance his/her aspirations (in terms of using branded products or using branded offerings across categories) with the income. Hence, quality means satisfactory level of performance across categories.

It is not uncommon to find consumers in this segment having a trade-off with regard to buying branded offerings across product categories. For instance, a family may buy branded detergent and biscuits once in a month or so or may be alternating them with other unbranded alternatives to balance the household budget.

There may a few layers of consumers in between the higher and lower segments, thus opening up several possibilities of developing private labels appropriate to the respective segment. In durable categories too, with an insignificant percentage of offerings being branded, there is vast scope for retailers to develop private labels. Insignificant percentage indicates the overall penetration of branded durables, including all categories, at a national level including rural areas. Big Bazaar has already started developing such private labels with regard to durable categories.

Tracking consumer behaviour in the Indian context, using information technology to capture the patterns of buying, and trading the right kind of merchandise are some of the pre-requisites to a retail strategy in an environment that poses unique challenges to marketers.

(S. Ramesh Kumar is a Professor of Marketing, IIM, Bangalore.)

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