Formats Vs Feeling

customer at about 80%, out of which 99% constitutes the unorganized sector. By 2006,

FORMATS VS. FEELING (ORGANIZED RETAILING VS. MOM & POP STORES)

organized retail in India was only 3% of the total US$350 billion retail industry. But it is expected to grow 20- 25% yearly, owing to changing lifestyles of consumers, rising income and favorable demographic patterns. Retailing concept is fast catching up the minds of the consumers in India. The organized retail sector is expected to rise

Authored By:

more than GDP growth in the next five years.

Abhishek Anand

Food and grocery as a segment and hypermarkets as a format are expected to be

IIM Indore – Batch of 2008

the major drivers of the organized retail

Mail : [email protected]

industry in India. Malls in India are increasing as these are positioned as a one-stop-shop for shopping,

INDIA RETAIL SECTOR

A finally

fter

60

years

of

unorganized

retailing and fragmented kirana stores, the Indian retail industry has begun

to

move

towards

modernization. New marketing formats like departmental supermarkets

stores, and

hypermarkets,

specialty

stores

are

spearheading the modernization drive. The annual growth of department stores has been estimated at 24%, which is faster than overall retail; and supermarkets have taken an increased share of general food and grocery trade over the last two decades. Food and grocery segment is growing, which accounts for largest share of retail spent by the

entertainment, leisure and eating-out needs of the consumer. By the end of 2007, 700 malls are coming up all over India, of which 40% are concentrated in the smaller cities. While organized retailing is growing at an annual rate of 35-40% in large cities, it is growing at 50-60% in small towns. Major players are also preparing themselves to take on the competition from the global players like Wal-Mart and Metro. Reliance is coming with a massive investment in retail sector. They are planning to invest US$5.6 billion to open stores in 1,500 towns and cities. Sunil Mittal's

Bharti

Enterprises,

which

has

announced its franchising agreement with US retail giant Wal-Mart to start a chain of retail

stores in India, has said that would invest

stores have continuously increased for the

about $7 billion dollars in it by 2010.

past 60 years. Only 4% of the retailers in the

With such investments coming into the retail market what will happen to the kirana or Mom & Pop stores of India. Will they be able to withstand the onslaught from big players?

unorganized sector have shops that occupy more than 500 sq ft. In a way, small retail business in India helps absorb about 6 to 7% of the huge mass of the unemployed. To study the impact of retailers on the mom and pop stores we need to can analyze the impact of Wal-Mart in USA. Wal-Mart Watch

INDIAN RETAIL STRUCTURE

features an academic article claiming that in Iowa, Retail Formats

2004

2005

Wal-Mart’s

expansion

has

been

responsible for widespread closings of ‘mom and pop’ stores, including 555 grocery stores,

Total

Grocery 5,170,70

Outlets

9

Traditional grocery 4,525,264

6,037,73 8 5,273,310

outlets

298 hardware stores, 293 building suppliers, 161 variety shops, 158 women’s stores, and 116 pharmacies. If these figure are anything to go by then Mom and Pop stores are going to face tough times ahead.

Supermarkets

175

2,314 MOM AND POP STORES

Other

grocery 645,270

762,114

outlets

Pop Stores.

Total Drugstores

352,786

405,743

Traditional

247,582

276,058

medical/drugstore

Customer Relations Mom and Pop stores in India have survived for the last 60 years on the basis of the customer relations they manage to leverage.

s Cosmetic stores

Let us analyze the characteristics of Mom and

This gives them a certain competitive 105,204

129,685

advantage over a retailing giant. MAP stores usually are the places where a customer finds intimacy, ubiquity and neighborliness in the

The above table shows the retail structure in

way

the

shopkeeper

interacts.

The

India. The number of traditional grocery

shopkeeper is more of a friend to the

customer than a mere service provider. He

Let

knows the name of the customers and is

organized retailers.

willing to have a conversations with the customers without giving a fabricated smile. The shopkeeper usually offers monthly credit tohis regular customers. Further he is willing to deliver Rs 5 worth of medicine to a home at midnight.

and

analyze

the

characteristics

of

Economies of Scale With huge investment in the retail sector, organized retailers have been able to benefit from the economies of scale. They have been integrating vertically from retail outlets to building malls and as a result manage to

Inefficiencies in Process Mom

us

Pop

stores

reduce the cost of operations. are

inherently

inefficient. Inveterate wastefulness of small shops, lifts prices 20 percent higher than they are in big stores. They lack expertise in inventory control and category management, hence they oftendo not buy the most profitable product mix. Bargaining Power of Suppliers Mom and Pop stores deal in both branded and non branded products. They usually buy in small quantities. This can lead to problems if suppliers start comparing his dealings with Retail joints who ensure bulk orders from the suppliers along with good display facilities. Bargaining power of Customers Customers are well informed of the goods, prices and the variety available in the market. Also the switching cost for the FMCG products is specially low. As a result the customers are in a better position to bargain than a shop owner. ORGANIZED RETAILERS

Efficient Processes Retailers like Reliance have invested a lot in the its processes. Supply chain Management has been the buzz word for process improvements. This helps the retailers in reducing cost and transferring this cost reduction to the customers. Bargaining Power of Suppliers At

present

bargaining

suppliers power

like

when

HLL dealing

enjoy with

retailers. But Wal-Mart in USA has changed the scenario completely. It is a well known fact that whatever Wal-Mart demands the suppliers have to provide. If that model could be replicated in India then bargaining power of suppliers will be reduced. Bargaining power of Customers Retailers have to cater to different consumer preferences in different regions. Some of the retailers are working on the image of retail outlets as a discount stores. Big Bazaar has had its “Sabse Sasta Din” around the 26th Jan

for the past 2 years in which it slashed prices

display of goods so as to have an aesthetic

of goods by 40%. Wal-Mart has a strategy of

appeal to the customers and also provide

“everyday low prices” which conveys the idea

suppliers with a chance to promote their

of a discount store. Also the retailers provide

products. The stores can come together and

the customers with a wider choice of

form consortia for helping each other. For

merchandise.

instance a group of 150 mom-and-pop shops

Customer Relations Customer relations is an aspect where the organized retailers have found themselves vulnerable. Although efforts have been made to improve customer relations, Mom and Pop stores still hold an advantage in this aspect.

with annual sales of $22 million in the city of Rajkot has hired Technopak, the retail consultancy to help them survive. These stores, , want to build a joint purchasing organization

and

computerize

their

operations.

The analysis clearly shows that the retailers

Mom and Pop store should be looking to

are at a distinct advantage vis-à-vis Mom and

develop themselves as a specialty store. This

Pop stores. The question arises what should

will help them to focus on a single line of

the small stores do in order to respond to the

products and as a result in improving the

retailing onslaught.

processes. Also the consumers will have more choice than that in the retail outlets where

WAY AHEAD FOR MOM AND POP STORES

only popular brands are available. But

Mom and Pop stores in recent past have been

feasibility needs

lobbying with government to impose a

venturing into a specialty store business.

restriction on foreign retail players in India.

Finally the Mom and Pop stores should keep

They have managed to get support from the

on leveraging the customer relationship the

political groups as well. But this is only a

store has developed.

to be

studied before

short term measure to avoid the competition. WAY AHEAD FOR ORGANIZED RETAILERS The best way ahead for Mom and Pop stores is to learn from the organized retailers and try to incorporate features which are feasible. First of all they need to improve the processes. Careful inventory management needs to be done by these stores to reduce losses. Also the stores need to improve their

Organized retailers have been trying to improve

the

customer

relationship

by

emulating Mom and Pop Stores. The stores intentionally make the setting of a wholesale market than a sophisticated shop. For instance the retailers hire people who scream

and sell the products like vegetables. They make provisions for customers to get products on credit. The retailers need to give their customers a more personalized shopping experience. This requires a complete study of individual consumer behavior. The retailers should continue to benefit from the cost advantage and the variety they offer to the customers. The Retail stores are bound to impact some of the Mom and Pop stores in the long run. The extent of effect will be decided by the strategies of the organized retailers and Mom and Pop stores in the coming future. But in the battle between Retail stores and Mom and Pop stores the customers are definitely going to benefit. COMMENTS Mail your comments to [email protected]