Organised Retail: A Reality Check

I have penned some 3 posts on Retail so far, and forwarded the following assumptions:

• Organised Retail will not kill the Kirana Format
• The two can co-exist

I had occasion to visit the market today to stock up on provisions, and I decided to cross-check my personal hypothesis by talking to a Reliance Fresh Outlet and a couple of my regular Kirana Stores. These are almost next door to me, and more importantly, are less than 100 yards from an EasyDay Superstore

The Kirana Owner was pretty candid in his analysis. He said "Dhanda kam hone kaa to sawaal hi paida nahi hota sir. Peheli baat to har cheez ke daam badh rahein hain, doosri baat hum graahak ke baju mein hi baithhe hain. Pichhle teen saal mein humaaraa dhandaa to badhaa hi hai, ghataa nahi. Itnaa zaroor hai ki kisi din 5000 ka maal biktaa hai to kisi din 3000 kaa."

Translation: Business has gone up in the past 3 years. I asked him about the past 3 years simply because it has been around 3-5 years since the modern format stores- the big chains extended their presence in Indore. I live in one of the biggest but oldest suburds in Indore City with several major colonies. There are 2 major LFR outlets within 1.5 Km of each other servicing a major residential region of the city, and these retailers were in the immediate vicinity of the superstore. A perfect example of co-existence

At Reliance Fresh, I talked to the billing counter clerk. His feedback was there were around 300 - 500 walk-ins  per day with an average billing of around 100000 - 150000 per day. The purchasing habits of customers were heavy purchases in the first week of the month followed by sporadic purchases spread through the rest of the month. I was frankly surprised at the low average billing and queried him on it. His response was a big learning for me: "Sir, It is not like that. Yes, average billing in the rest of the month is low for normal days - but on scheme days the offtake is greater. Retailers - nearby retailers - tend to stock up on various commodities (especially oils) and products in bulk whenever we launch a good scheme. The walk-in I told you about are purely retail customers". This tends to confirm my observations on my various visits to superstores when I have observed bulk purchases happening. It was nice to have confirmation of my observations.

We can safely make further assumptions from this, especially since I have observed this happening in other stores as well. 

• Firstly, this is in keeping with the normal practice of the FMCG trade. To understand this, one needs to understand the structure of the FMCG retail market in India. It is not necessary that the small retailers purchase from the company reseller (distributor), you have a number of intermediaries in operation like wholesalers etc. What we are seeing is the development of a trade structure in the retail space in the role of a quasi-wholesaler. Since a supermart can negotiate better rates with companies, they have to do a quid-pro-quo and lift large quantities. These savings are then passed on to customers in the form of discounts. Frequently, to liquidate stocks or to generate sales discounts are passed on - and the small retailers take advantage of this.  
• The other assumption is that the entry of Bharti Walmart in the wholesale market will cause increase of competition in this arena - and this is going to impact the traditional wholesale market as well as superstores. In fact, they are going to have a negative impact on superstores only for the 2 reasons below:
• First, they will have the potential to take away whatever little business that is coming their way from small retailers (whether they will do so or not is another question)
•  They will make cheap rates available to small retailers, since you require a copy of municipal shop licence to make purchases
• A good many customers of the superstores will also be lost, since some normal customers are also availing of this facility at the wholesale format store of Walmart by making entry cards on friends business licences and since each card holder is allowed one guest. 

In simple terms, the competitive scenario for each component of the chain - LFR, Wholesaler, Retailer is fraught with challenges. This is a competitive market we are talking about - and each player is faced with his own set of challenges

1. The Small Retailer is having to cope with rising prices of products, changes in demand with wet grocery becoming more important, small pack sizes, shifts in consumer offtake, and competition from the LFRs which, though muted, is present all the same
2. The LFR is facing challenges from the existing local large kirana stores like Prem and Gokul mentioned earlier; shift in customers to Walmart; Increasing competition from other LFRs that are increasing their footprint; Internal stress caused by heavy overheads and expenses leading to high target requirements for survival; Increase in the cost of land and lease rentals

This is why you can spot an interesting paradox in Organised Retail in India: While Food and Grocery items contributes 11% of the revenues of the industry - this forms only 1% share of the total category revenues including Organised and Unorganised Formats. By comparison, Clothes and fashion is at 23%, Footwear 48%, Durables 12%, Books 13%. Organised Retail seems to be facing major hurdles in this category because of fragmented and localised nature of demand and a host of local tastes and brands to contend with, A massive unorganised and well-serviced retail network, Intra - category competition and the wide spread of the Indian Market. 

I can only say that this is a most interesting marketing effort to watch...