The Hindu Business Line : Retail — Setting store by the right model

Retailing thrives on direct interaction with customers to understand their shopping habits, the nuances of which continue to surprise retailers who have been in the business for years.

MR R. SUBRAMANIAN, MANAGING DIRECTOR, SUBHIKSHA

Shanthi Venkataraman

“Retailing isn’t easy. A few years from now, we see several players wanting to exit from this business,” says Mr R. Subramanian, Managing Director of discount store chain Subhiksha. And when they do, the Rs 800-crore retailer hopes to use its stock as a currency for acquisition. That, Mr Subramanian says, is one of the key reasons that has prompted Subhiksha to consider going public, once they reach the 1,000 stores milestone. With close to 800 stores already operational and the numbers growing, that IPO (initial public offer) does not seem too far away.

Investors welcome IPOs from the retail sector, as they offers another opportunity to play the theme. The high growth potential of this sunrise sector has given retail stocks rich valuations. Vishal Retail, a big-box retailer with a focus on smaller towns and cities, became the latest to join the listed space last month and made a spectacular debut on the bourses.

The entry of corporate bigwigs such as Reliance, Bharti-Wal-Mart and the A.V Birla Group, has set off a new growth wave for the nascent organised retailing sector, and has investors more excited. But mounting real-estate and employee costs, an under-developed supply chain, and diverse consumer tastes promise to challenge even the big boys.

Moderating expectations

The going will not be easy for those entering the sector with stars in their eyes, feels Mr Subramanian. A low-margin, high asset turnover business such as retail will be an entirely different ball game from the businesses some of these players have mastered. Retailing also thrives on direct interaction with customers to understand their shopping habits, the nuances of which continue to surprise retailers who have been in the business for years. Nor is anyone willing to bleed for too long for the sake of getting a share in the retailing market, which would have had Subhiksha worried.

“Some rationalisation has set in. People are beginning to understand that this is not an easy business,” says he. Reliance Retail’s foray has been somewhat slower than anticipated, with the giant still appearing to be more in the experimental phase of its aggressive expansion. The Birla Group and Bharti too, have been tight-lipped about their expansion plans, not wishing to draw too much attention to their moves.

Differing Formats

Besides, it takes a while to get the model right. While it is easy to borrow modern retailing concepts from the West, Indian retailers frequently find that the Indian market presents many unique challenges and that formats need to be adapted accordingly. For instance, hypermarkets were seen to be the best way of offering customers discounted prices.

Taking a leaf out of the books of retailers such as Carrefour and Wal-Mart Super Centers, players such as Pantaloon Retail and RPG operate stores such as Big Bazaar and Spencer’s hypermarket. Spread over 50,000 square feet, these stores offer a wide variety of merchandise from food to apparel to consumer electronics. By buying in bulk, these stores are able to source their products at lower prices and pass on benefits to consumers.

But to find that kind of real-estate, these players have to move away from the city. Indian consumers neither have the habit of shopping in bulk nor the inclination to drive distances on congested roads when they have vendors clamouring for their attention right outside their doorstep.

Mr Subramanian believes that such stores ultimately do not offer substantial discounts to the city retailer. There is already an element of price control in India as several items fall under the MRP (Maximum Retail Price) regime. “In the West, a city store may retail a product for Rs 150, while a hypermarket would sell it for Rs 100. Here, a city store also sells a product for Rs 100 because of the MRP.” The ability of a hypermarket to sell products at a significantly lower price, say for Rs 65, he feels, is unlikely.

Retailers now figure that given the quality retail space constraints, small neighbourhood stores may be the more appropriate format to reach middle-class customers. Reliance Retail has adopted this format with its Reliance Fresh stores. Pantaloon Retail’s Kishore Biyani recently announced that the group might look at the kirana store format to reach customers who shop for their daily requirements.

Perfecting the small-store network

The proliferation of the small-store format means more competition for Subhiksha, which has 780 outlets across the country. Subhiksha has been on a rapid expansion phase in recent years. As it tends to open stores on existing properties or ones that would come up within three months, it has not faced the challenge of timely store openings unlike some of its peers, which have been at the mercy of mall developers.

“In the small-store format, the execution risk is managing a large number of stores,” says Mr Subramanian. Subhiksha has offices across the country to coordinate the management of its stores, following the telecom SBU model of operating its businesses. So far, it has used its relationships with its big suppliers to streamline its supply chain, having the likes of Hindustan Unilever undertake the delivery of its products right up to Subhiksha’s hubs.

Subhiksha has focused on opening stores region by region. It is important to achieve deep penetration to compete with neighbourhood kirana stores. Their catchment area is now a radius of 750 metres. Mr Subramanian says that the first 500 metres of the catchment area offer the highest potential in terms of attracting customer walk-ins. Any competition that comes up within that radius would be stiff. So Subhiksha would much rather compete with its own stores. “We don’t mind cannibalising our own sales,” he says, not unlike the coffee chain Starbucks, which has been known to open more than one outlet in a single street.

Targeting repeat purchases

At a time when many retailers wish to be a one-stop shop for the consumer, Subhiksha focuses on selling FMCG, fruits and vegetables, medicines and recently mobile phones. Fruits and vegetables are purchased at a greater frequency, in some cases, almost on a daily basis. Drawing customers into the store regularly and frequently might induce them to make impulse purchases. This is something that other retailers have also picked up on. The Future Group has several of its Food Bazaar stores operate within its Big Bazaar hypermarkets.

But Mr Subramanian says that the same value proposition has to be offered across categories for cross-selling of products to succeed. In Subhiksha’s case, it means that its fruits and vegetables as well as its FMCG products need to be perceived as inexpensive in comparison with the market. Otherwise, customers, who are used to shopping at different places for their needs, would buy FMCG products at the store but go elsewhere for their fruits & vegetables. “Indian consumers are quite capable of unbundling transactions, of cherry picking”, says he.

It is probably that aspect of Indian consumer behaviour that will make things tough for Indian retailers that fail to create the right connection with the consumer. It is tough to be a retailer in India. Consumers are way too smart and demanding.

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Retail — Setting store by the right model