Next 3-5 years are tough for retail biggies

For anything that big company-led modern retail may or may not be able to achieve in the next 10 years, at least the current hyperbole on either side of the ‘great Indian organised retail debate’ will be settled for good.

The prophets of doom and boom, those who currently predict the trampling of the 15 million-odd traditional, small shopkeepers by the big-budget, big-format, Indian or foreign-led modern retailers, and or the irrational exuberance of those who make out organised retail as being the saviour and succor of possibly everything wrong with Indi would have been sobered by the reality of retailing in a country as diverse and chaotic as India.

According to Damodar Mall, CEO (Innovation & Incubation) at Future Group, the country's biggest retailer: “By 2017, organised retail will be 15-20% of the total retail market. And yes, impact on rural incomes and urban prices will be real and positive.” Mr Mall is being a realist here, for other predictions are much rosier. A recent report on the retail industry by management consultant Ernst & Young India, Winning with Intelligent Supply Chains, puts organised retail's share closer to 25-30%.

The lure of such big chunk of a humongous pie (total retail market $ 800-billion by 2017, according to Technopak Advisors) is obviously the reason for the formidable line-up of global retailing majors (Wal-Mart to Carrefour) and some of India's biggest corporations (Reliance Industries, ITC, Tata Group, Bharti Group, Aditya Birla Group, RPG Group, Mahindra & Mahindra et al) to put a foot in the retail door, one way or the other, lack of experience and adverse policy environment notwithstanding.

But make no mistake. Like in every new industry—the telecom sector in 1990s, for instance—the actualisation of the promise of organised retailing in India will also need painstaking, often frustrating, effort to chisel out India-ready business models, retail formats and delivery models. Says Govind Shrikhande, CEO of Shopper's Stop: “Products, properties, people and profitability are going to be huge challenges.

Given the real estate prices and shortage of talented staff, the run-up expenses for growth are going to shoot up sharply. Already there are groups which are getting into businesses outside retail to support retail. Groups which are not retailers are getting into retail. Unplanned expansions without the back-end to support retail will lead to a consolidation phase that has already begun.”

He's bang on, as there are no easy pickings, as some existing players are already discovering. Take Reliance Industries-led Reliance Retail and ITC, for instance. The former already having all but abandoned its debut-model of fresh food retail (Reliance Fresh) and the latter uncertain on the payoffs on its huge investments into rural trading platform (e-Choupal).

Says a candid Ireena Vittal, partner at McKinsey & Co's Delhi office: “Its' just the first phase of retail playing out in India currently, where lot of players are merely 'land-grabbing'. Once the second phase with focus on creating differentiation kicks in a couple of years, half of the new entrants of today will simply die.”

She cites the example of China, by all accounts a decade ahead on the organised retail curve compared to India, where competitive intensity in organised retail is so severe that even the largest retailer, a local Chinese company, has a market share of less than 1%! Poses Pantaloon Retail's CEO Rakesh Biyani: “Let us see who is in the business for the long haul. The next three to five years will determine retailers from (mere) investors.”

Already many an assumption is coming unstuck, the huge cost-efficiencies that organised sourcing of fresh farm produce was supposed to bring, for instance. According to Rajan Chibba, founder of Intrim Business Associates, who has tracked organised retail from its infancy: “The biggest myth that has been perpetuated, and unfortunately bought by many a player entering retail in India, has been the assumption of nearly a third of the country's fresh produce of vegetables & fruit is wasted, and that works to almost 50 million tonnes! Have you ever seen piles of fruit or vegetables rotting anywhere in this country?”

Eking out margins from an already cost-efficient, though highly unorganised, supply chains and managing hundred of thousands of workers will separate the survivors from well, the dead. It may be too early to pick winners, but one can already spot fast learners, a key skill for surviving the early growth pangs in retail. “Prices at traditional mandis is highly erratic because of the delink between supply and demand.

Organised retail will get the system more responsive on the supply-side,” adds McKinsey's Vittal. Some players such as Reliance Retail see straightening of demand-supply dynamics at the mandi level as a precursor to a smooth retail front-end and are entering into commodity trading (of fruits, vegetables and staples) with a vengeance.

“The DNA of a retail business is very unlike manufacturing sector, even services. Retail scales up one store at a time, and unlike telecom or banking which just move 'information', retail is physical. In the next 10 years, there will be far more 'pure-breed' retail companies, even though at the holding level they may be owned by a conglomerate,” adds Future Group's Mall.

A motley group of few big national level players and perhaps tens of strong, specialised regional retailers would peacefully co-exist with the million of traditional family-run retailers, a majority of who would have upgraded their stores and wares to complement rather than compete with big company-led stores. And for anything, even the harshest critics of organised retail admit that the sector would have created millions of quality jobs by the next decade.

Says N V Sivakumar, leader retail practice, PricewaterhouseCoopers: “10 years from now, no one will be asking questions on foreign investment or big versus small retail, for organised retail will already be looking at rural India as its final frontier.”

According to Pinakiranjan Mishra, partner (retail & consumer products practice), E&Y and author of Winning with Intelligent Supply Systems, “Organised retail has the potential to take rural income up 50% and output 20-30% leading to a massive productivity jump in rural India.”

The basis of his optimism may sound tenuous right now, but a strong rural-urban linkage already exists. A recent study by Future Group exhibits that every Rs 100 increase in urban consumption takes rural income up by Rs 39. For whatever is the pace of growth in organised retail, here to 2017, the rural-urban linkages will only grow stronger.

Shailesh Dobhal, Kala Vijayraghvan & Chaitali Chakravarty