The impact of international formats and brands on Indian retail

17.09.12

India has a population of 1.1 billion. The country's rapidly-growing economy includes a middle class of 300 million people, and counting. So there's clearly scope for retailers to make an impact. But all formats are not alike.

Compare the experiences of supermarket chains alongside luxury international brands entering the Indian market, for example, and you'll see two very different outcomes.

The battle for local business: Kirana stores vs supermarket chains

There's an old Indian saying that "India is a nation of shopkeepers". Indeed it is; more than two million 'mom and pop' stores are part of the nation's retail scene, catering to a population of 1.1 billion.

Known as 'Kirana' stores, many of these businesses have been around for decades. Traditionally family-run, they stock everything from packaged foods to drinks to rice, spices and onions. They also offer credit, deliver home for free and accept telephone orders.

So imagine the challenges facing the international supermarket chains who decided to enter the market at the turn of the century. They needed to tackle some fundamental issues:

  • Could they match the offerings of the Kirana stores and still be profitable?
  • Could they match the relationships that the Kirana shared with their clients?
  • How could they wean consumers away from the Kiranas?

But this didn't stop a rush of supermarket openings in the early 2000s. There was a sense of 'real estate grabbing' by players such as Shubhiksha, FoodWorld, Food Bazaar, Reliance Fresh, More and others. Each retailer wanted to be present in as many places as possible - so they invested heavily in real estate, building stores and deploying resources. They were seemingly prepared for the 'long haul', but how has that worked in practice?

Fast-forward 10 years: Shubhiksha has shut up shop - and FoodWorld, Food Bazaar and Reliance Fresh have opened and closed around 2,000 stores between them. There are still some supermarkets in urban pockets of India; but market share for the major retailers is now just five per cent, and the Kirana stores clearly rule the roost.

So why did this happen? Our analysis suggests that five key reasons explain this phenomenon:

Unplanned growth - the rush to secure locations before competitors led to stores opening in areas without a sufficient customer base, leading to very low sales and major losses

High cost - store construction, air conditioning, equipment, salaries, interest and rental payments and service taxes are all factors for supermarkets. That's not the case with Kirana stores; their initial investments were recouped many years ago by forefathers, so they only bear operational expenses now

Margins - whilst superstores get slightly higher margins (around two per cent more) than the Kiranas, their cost structure is seven or eight times higher

Personality - Kirana stores know all their customers by name, accept telephone orders and offer free, fast home deliveries

Credit - regular Kirana customers get credit of a month or more, but supermarkets don't offer this facility.

Just 10 years after entering the Indian market, supermarket chains are reviewing their strategies and looking for ways to cut costs, improve sales and build customer loyalty. But Kirana stores still rule the roost; more than 80 per cent of FMCG sales come from the so-called "unorganised" sector.

The clamour for aspirational goods: how luxury retail formats have made their mark

In 21st century India, the middle classes have become globally savvy and understand the importance of brands and retail formats more than ever.

Take luxury retail formats, for example. Indian consumers have always favoured saving money to buy expensive jewellery and gold. It's a tradition in India to buy gold at festivals. Typically this takes the form of jewellery (which is locked away at home and only worn on special occasions); or gold biscuits (stashed away in bank lockers, to be used on a rainy day or given away through family inheritances).

Indians also have a habit of 'showing off' their expensive acquisitions - cars, pens, watches, handbags or shoes. A family wlll save to buy an expensive item to increase their social status - it's similar to 'keeping up with the Joneses'.

Mont Blanc opened its first ever Indian store at the Taj Mahal Hotel in Bombay more than 15 years ago. At that time, a Mont Blanc pen could cost upwards of Rs 20,000 (around USD 500), and many sceptical people predicted that the store would quickly close.

But that did not happen. Instead, Mont Blanc partnered an Indian entrepreneur and opened several more stores in five-star hotels in Bombay, Delhi, Madras, Hyderabad and Calcutta. Today, Mont Blanc stores can be seen in most luxury hotels and upmarket malls, and with their product portfolio expanding to watches, eyewear and travel goods, their demand has only increased.

Today many luxury retail brands are present in malls and high streets across India. Swarovski, Jimmy Choo, Emporio Armani, Gucci, William Penn, Watches of Switzerland and Omega can all be purchased in most large cities in India - at prices not very different from those overseas. It's a far cry from the times when consumers had to travel overseas to buy expensive items.

Similarly in the automotive sector, the success and growth of Mercedes-Benz, BMW, Range Rover, Rolls Royce, Jaguar, Ducati and Porsche bear testimony to India's new position on the world stage.

In summary, the Indian retail scene is a paradox of sorts. On the one hand, supermarkets are struggling due to consumer preferences for local, family-run Kirana stores; on the other, a booming luxury retail market continues to go from strength to strength.