The Hindu Business Line : On a quest for ‘value’

The largest segment in organised retail has always found it tough to beat the local kirana stores, but now it is bending backwards to adopt a model similar to theirs. Deep discounting and value based positioning have become the norm, considering that making profits is still a long haul for these players.

In fact, except for the Future Group’s Big Bazaar, most of the other players are still struggling to make money in a recessionary environment. Most food retail chains are either in the throes of relocating or restructuring their operations.

Take the case of Reliance Fresh which has decided to adopt value-based positioning to be on a par with the local grocer. It would now be adopting a pricing policy which would match that of the local grocer. “We are strengthening our positioning of being a value-based retailer and our pricing would be similar to that of the local grocer,” said an official from Reliance Fresh.

Most of these retailers believe that emulating the strategies of the local grocers and being value-based retailers has its advantages in times of a recession.

“In a recessionary environment, customers are looking for retailers who offer value. We constantly evaluate the needs of our consumer segment and our value proposition is focussed on meeting their needs. In this environment, it is also important for a retailer to get his business model right. We are clear about the business model that we are seeking to achieve and are driving towards those metrics. We constantly assess stores to see whether they are consistent with our business model, sometimes closing or relocating them. It is not so much supply chain or logistics that drives the relocation decision,” says Thomas Varghese, CEO, Aditya Birla Retail (ARBL).

A challenging format

At the same time, food and grocery continues to be the most challenging format of the lot. According to Sanjay Sethi, Vice-President — Food & Agriculture, Technopak, “Perishability and daily use make food and grocery (F&G) the most challenging format in retail. The emphasis should be on manpower and geographies. In order to succeed in the current business environment, retailers have to build strong supply chains through select tie-ups with competent vendors. The nature of work in these businesses is quite different, not necessarily easy. The talent required for dealing with F&G is higher and has not been developed properly as yet. It demands higher financial controls and that is also a challenge. A private label is not the best solution in the food business if it is already highly competitive. A more efficient supply chain is a better solution.”

In fact, getting volumes in this low-margin category remains difficult apart from managing the backend supply chain. “The volumes are still less in the food and grocery segment compared to other formats. It is tough to manage the backend and costs for most retailers in this segment,” claims a manager from a food and grocery retailing company. At the same time, there are certain advantages of being in this segment.

According to Anand Ramnathan, Manager KPMG, Advisory Services, “Food and grocery retailing scores over other formats like apparel retailing which have higher margins but once the store stabilises, food and grocery stores earn higher returns due to lower fixed costs and significantly higher stock turnover ratios. The food and grocery segment is expected to be among the major drivers of organised retail in India in the near future.”

Besides, recession has yet to take its toll on this segment. As Ramnathan observes, “The recession has affected home food and consumption to a lesser extent as food and grocery constitute a basic necessity for the masses. To fight the downturn, retailers have to ensure that the key selling items are available all the time to avoid stock out and at the same time they have to groom their supply chain. They should also take pro-active marketing initiatives and look at better price offerings. The food retailers can focus upon value-added food and home meal replacers.”

According to KPMG, the food and grocery market in India was valued at $236 billion in 2008. It is growing at a CAGR of around 6 per cent and is expected to reach $482 billion in 2020. The food and grocery segment contributes about 60 per cent of the retail sales in India and comprises mostly of the unorganised sector. Organised retail comprises only about 1 per cent of the segment but is expected to grow at 25-30 per cent in the coming years. Food and grocery is followed by clothing and fashion accessories with about 10 per cent share of the retail market.

According to Varghese of Aditya Birla Retail, which owns the ‘More’ outlets, the key elements required to be a successful food and grocery player are:

Consumer insight and understanding

The right value proposition to appeal to the target consumer

Appropriate assortment, localised to the catchment

The right pricing and promotion to deliver the value proposition

A store team that is trained and actively engages with its consumers An efficient supply chain which delivers the product to the store at the right time at the right cost

An IT backbone which knits various elements of the retail value chain together and provides the right information to the right people at the appropriate time, and

A merchandising team which is able to plan localised assortment and drive the appropriate terms of trade with its vendors

Getting a foothold in the business through the acquisition of Trinethra outlets in the South, ABRL has been able to imbibe some of the learnings in the food and grocery segment. As Varghese says, “While ABRL has been in this space for little more than two years, we have been able to leverage our learnings from the Trinethra acquisition and I believe that we have the critical elements of the mix in place.”

Growth potential

Hopeful about the potential of this segment, Varghese adds, “Food and grocery is by far the largest segment in retail and given the low penetration, organised retail offers the largest scope for growth for organised players. We expect the segment as a whole to grow in line with GDP.”

However, building private labels in the food and grocery segment will take a while. While the Future Group has planned a big exercise towards building private labels across categories such as FMCG, household consumer durables and apparel, establishing the brands especially in food and grocery will take time.

As Samar Sheikhawat, Vice-President, Marketing, Spencer’s Retail, says, “It will be a slow burn and will take at least 15-20 years before private labels in food and grocery can compete with established FMCG players, as quality and credibility will be an issue as these are high involvement products.”

For Spencer’s Retail which has already closed 100 stores and at the same time has inaugurated 400 additional stores, making money will take time. “Retailers who have invested ahead of the curve are the ones facing a loss. We do not claim to be the cheapest and have been positioned as an upmarket value-based retailer,” says Sheikhawat.

Spencer’s Retail plans to extend the range of its private labels from 15 per cent to almost 20-25 per cent in the next two years and predicts profitability in its retail business at almost the same time.

For Aditya Birla Retail, building the private label business is also going to be an ongoing exercise. As Varghese says, “Right from the beginning, we have been investing significantly in the private label range across various categories including staples, apparel as well as over 54 categories in the FMCG space of processed food, home care and personal care. At this stage, private label grocery accounts for approximately 5 per cent and it is our plan to drive this share to about 20 per cent in three years. Through our private label range we offer a guarantee of quality, lower prices compared to benchmark brands and better value which directly benefits our consumers. Given the increase in share of our private label in various categories compared to benchmark brands, clearly the consumer sees and appreciates this value.”

Organised food retailers are here to co-exist with the kiranas but it would still take a while for consumers to perceive ‘value’ in their offerings.

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