Indian_retail_mar09 Kpmg

CONSUMER MARKETS

IndianRetail: Timetochangelanes

KPMG IN INDIA

Foreword TheadventofNewYear2009heraldedinterestingyetchallengingtimes fortheGlobalRetailindustry.TheIndianretailindustry—oneofthe fastestgrowingindustriesinthecountryoverthepastcoupleofyears— isnoexception.While2008showedgrowthfortheindustryonthe whole,thelastquarterof2008wasimpactedbytheeconomic slowdownandliquiditycrunch,andthisisexpectedtocontinueinthe currentyear. Theyeargonebywaspackedwithseveralsignificantdevelopmentsfor theIndianretailindustry,includingtheentryofmanyglobalplayers, growingacceptanceofthemodernformats,thesuccessofmany specialityretailformats,andtherisingcompetitionintheregional marketsbeyondthemetrosandTier1cities. Ontheotherhand,theaftereffectsoftheglobaleconomicturmoilare beingfeltinIndiaaswell,andtheeconomyisexpectedtogrowata significantlylowerrateoverthenext2years(between5to7percent accordingtovariousestimates*).Consequently,overallconsumption levels,particularlydiscretionaryspendandimpulsepurchaseshavebeen affected,which,inturn,hasresultedinalowergrowthrateforthe industryforthecurrentyear.Moreover,thistrendisexpectedtocontinue in2009. Giventheindustry’schanginglandscapeandemergingchallenges,the focusofindustryplayerstooischanging;withastrongemphasison profitablegrowthinthecurrentscenario.Hence,retailcompaniesare increasinglyconcentratingonstrengtheningexistingoperationsand assessingoptionsforgrowththroughconsolidation,whilecontinuingto innovate. Lookingatthechangingcontoursoftheindustry,therearecertaindrivers whicharelikelytohaveanimpactacrossretailcategories,andwehave examinedthesedriversindetailinthisreport.Factorslikerenegotiating rentals,storerationalization,workingcapitalmanagement, regionalization,costoptimizationandmanpowerresizingaresomeofthe keyTopofMind(TOM)issuesforretailersinthecurrentcontextofthe downturn.Wehavefocusedonhowthesedriversareaffectingvarious playersacrosstheretailvaluechainandtheirstrategiestohelpcopewith theslowdown. Theanalysesandpointofviewpresentedinthereporthavebeen validatedthroughextensivediscussionswithindustryplayers.Wetake thisopportunitytothanktheindustryplayersformakingthisendeavor possible. *IMF,CushmanandWakefieldReport,2009

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Table of Contents ExecutiveSummary

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India’sRetailJourney-Fromgearfivetogear…

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Livinginuncertaintimes

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DisappointingFootfalls

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Margincontraction-Interestburdenadverselyimpactsprofits

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Rolloutdelaystocompoundproblems

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Besidestheweakeconomyandthefeebleconsumersentiments, thedisappointingretailgrowthisalsoattributedto…

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Mistakesbyretailershavealsoaddedtoexternaltroubles

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Strategiestohelpretailerscopewiththeslowdown

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Tougheninternalefficiencies

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Decodeconsumerbehavior

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Enteringintoalliancesandleveragingexpertise

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Buildacompetentsupplychainmanagementsystem

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Ventureintounderpenetratedmarkets:RuralRetailing

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Innovate:categories,services,businessmodels…

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FutureOutlook

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EXECUTIVE SUMMARY

TheIndianRetailsectorhascaughttheworld’simaginationinthelastfewyears. Toppingthelistofmostattractiveretaildestinationlistforthreeyearsinarow,it hadretailgiantslikeWal-Mart,CarrefourandTescosizinguppotentialpartnersand waitingtoenterthefray.1 India’sretailgrowthwaslargelydrivenbyincreasingdisposableincomes, favorabledemographics,changinglifestyles,growthofthemiddleclasssegment andahighpotentialforpenetrationintourbanandruralmarkets.However,with theonsetoftheglobalfinancialcrisis,Indianretailershavebeensufferingfrom theeffectsofrapidcreditsqueeze,highoperatingcostsandlowcustomer confidence. TheimpactofcurrentslowdowninIndianretailsectorissummarizedalongkey operatingparametersasfollows:

Impact of slowdown on key parameters TopLine/Sales Turnover

BottomLine/Profitability

CostCompetitiveness

CostofFinance

StockTurns/Rotations

WorkingCapital Availability

RealEstateAvailability

RealEstateCost

StoreExpansion

Footfalls

TierII/IIIExpansion

AdvertisingSpends

Attrition

Headcount/Recruitment

InvestmentsinIT

IntensityofConsumer Promotions

PositiveImpact

NoImpact/StatusQuo

AdverseImpact

Source: KPMG Retail Survey, March 2009

1 ATKearney'sGlobalRetailDevelopmentIndex(GRDI),2008

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Inthisreport,wehavesuggestedstrategiesfortheretailsectortohelpcope withimpactofslowdownandvalidatedthemthroughextensivediscussionswith keyplayersintheindustry.

Strategies to help cope with the recession

ManageCosts

•Optimizecosts(Cutcostsinawaythatdoesn’tharmthe business)andoptimizeresources.Keyamongstthemare: -improvelaborproductivity -manageinventoryefficiently, -renegotiatetherentals •Adoptarevenuesharemodelagainstfixedsharemodel

Optimizetechnologyusage

•Implementtechnology–speciallyinareasofmanpower training,realestatemanagement,supplychainandlogistics managementandday-to-daystoreoperations

Efficientstoremanagement

•Streamlinestoreprocesses,increasestorevisibility,manage staffeffectivelyandlookintostorelayoutandproductrange

Re-evaluatestoreviabilityandexpansionplans

•Classifystoresclearlyintocategories:profitable,highcost-high sale,lowcost-highpriceandunviableandtakeaction accordinglyforeachcategory

Decodeconsumerbehavior

•Investinconsumerresearch,payingcloseattentiontothe diversitypresentinIndia’sgeography,tobemoresharperin delivery

Enterintoalliancesandleverageexpertise

•Forgealliancesandpartnershipstoleverageoneachother’s financialmuscleandexpertise

Developprivatelabels

•Offercompetitivein-storelabelstoearnhighermargins—a win-winsituationforbothcustomerandretailer(thekeyisto improvequalityofin-storebrand)

Buildcompetentsupplychainmanagement

•Focusonlogisticsintermsofminimizingthecostsand knowledgeaggregation •Leverageontechnologyandexpertiseofforeignplayers

Tapunderpenetratedmarkets

•Thinkbeyondthemetropolitancities,targettheopportunity offeredbytherapidlydevelopingandlargelyunder-penetrated TierII,TierIIIandruralmarkets

Innovate

•Standoutofthecrowdandkeepofferingnewideas,services, experiencestothecustomers

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Some of our thoughts on future outlook and how it may impact behavior in retail sector are as follows: •Itiswidelybelievedthatthecurrentslowdownmightlastfor12–18monthsdependingongovernmentincentivesinincreasingspendsoninfrastructure, developmentinitiativesandotheractivitiestostimulatetheeconomy • Weexpectanincreasedfocusonvalueretailinthecomingmonthsandashift awayfromlifestylegoods,thankstotheimpactofthecurrentslowdown • ThereisexpectedtobeincreasingactioninfoodretailingandFMCGproducts asthissegmentislargelyinsulatedfromtheslowdown,whilesectorssuchas homefurnishingarelessfavored • Retailersarelikelytostartclosingunprofitablestoresandrationalizecapital expenditure,asapartofcostoptimization • Churninmallsislikelytoincreaseintheshorttermwhensomeretailersopt forlow-rentpremisesasameansofsustenanceinthecurrenteconomic situation • AsTierIcitiesbecomesaturated,retailersmaymovetoTierII,TierIIIcities whereprofitsarehigherduetolowerrentalsandoperatingcosts • Therearegoingtobeincreasedinvestmentsinshorteningofsupplychain. Thisismainlyduetotheincentivesofferedbythegovernmentandthe potentialforhigherprofitmargins • Thefrequencywithwhichretailersliquidateslow-movinggoodsbyoffering discountstoreduceinventoryislikelytoincrease. Thelongtermprospectsforretailchainexpansionarestillveryattractiveandthis periodofuncertaintyisseenbyretailersasanimportantconsolidationimperative foranindustrythathasbeengrowingat30-40percentp.a.2 overthepast decade. 2 JonesLangLasalleMeghrajReportonIndiaRetail2008

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INDIA’S RETAIL JOURNEY FROM GEAR FIVE TO GEAR...

Inthepastfewyears,India’sretailjourneyseemedpictureperfectwith themostattractive‘stops’stillunexploitedandunder-penetrated. Favorabledemographics,steadyeconomicgrowth,easyavailabilityof credit,andlargescalerealestatedevelopmentswerefuellingthegrowth ofIndia’sapproximatelyUSD25billion3 organizedretailmarket.The opportunitywasthereforalltoseeandIndiawasthedestinationof choicefortopglobalretailers.Inthisenvironment,India’sownbluechip companieslikeReliance,BhartiandRPGdiversifiedtoaddretailtotheir sectorportfolio4.Allthingsconsidered,itwasagoodtimeforIndian retail. Thiswasthescenariotillafewmonthsago.Entertheglobalmeltdown andIndiadidnotfinditselfcompletelyinsulatedfromitsharsheffects. AspertheCartesiansurvey,almostallkeyindustriesinIndiahavebeen negativelyimpactedbytheslowdownandretailisnoexception. Industry-wise Impact

Source: Cartesian Economic Meltdown Survey, Dec 2008 An impact score of 0-15 indicates low impact An impact score of 16-50 indicates moderate impact An impact score of > 50 indicates high impact

3 IBEF 4 Reliance, Bharti and RPG group websites

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WiththeQ3growthnumbersofFY2008-09at10-12percentasagainst 35percentofthepreviousyear,the‘happygrins’arefastturninginto ‘nervoussmiles’.Whilethesectorisstillregisteringdecentgrowth,the heavyinvestmentsmadeduringtheboomperiodmayweightheretailers down. Organized retail penetration - Gap created by slowdown

Source:KPMGAnalysisandRetailersAssociationofIndia

Organized retail penetration, which was expected to touch 16 percent by 2012 from the current 5 percent, is likely to trace 10.4 percent only

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LIVING IN UNCERTAIN TIMES

As per KPMG’s survey, even though almost all retailers believe that the current uncertainty is only near term and is likely to persist for 12-18 months, there exists certain degree of skepticism in achieving targets. This is clearly indicated by the Cartesian study where 53 percent of retailer’s confidence levels have been shaken. Retailer’s Confidence level in achieving targets

Source: Cartesian Economic Meltdown Survey, Dec 2008

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Disappointing Footfalls Alargenumberofretailershaveexperiencedadropinfootfallswhichis mirroredbyslowingSameStoreSales(SSS)growthfigures.Thisalso adverselyimpactsthetimetakentobreak-evenfornewstores.SSSat someofIndia’sbiggestretailgroupshavebecomenegativeforthefirst timeinsixyears. Althoughretailersaretryingtheirbesttocombatthisslowdownthrough constantpromotionaloffersanddeepdiscounts,consumersare expectedtocutdownontheirdiscretionaryspending.Withtheglobal recessionhavingnoclearendinsight,consumersseesenseinsaving forarainyday.

According to KPMG’s survey, 70 percent of the respondents stated that the slowdown has adversely affected their footfalls. Year-on-Year Net Sales Growth

Source: KPMG Analysis, Prowess

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Liquidity under pressure Theslowingsalesareresultinginlowerinventoryturnoverandincreasingworkingcapital requirementsforretailers.Thisinturnhasresultedinliquiditypressuresformanyretailers.To freethecashthathasbeenlocked,alargenumberofcompanieshavebeentryingtoreduce theinventoryontheirbooksandshortenworkingcapitalcycles. Working Capital on the rise

Decline in Inventory Turnover

Source: KPMG Analysis, Capitaline Note: Retailer Average

Margin contraction- Interest burden adversely impacts profits Ontheirpart,retailershavebeentryingtocompensateforfallingsalesbycurtailing expenses.Thishascounteredtheeffectofthetoplineonoperatingmarginsleavingitlargely unaffected.However,withworkingcapitalrequirementsandexpansioncapitalbeingfinanced throughsizeabledebt,interestcostshavesignificantlydentedthebottomline. Operating Profit Margin

Net Profit Margin

Source: KPMG Analysis, Prowess 8

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Funding constraints Alargenumberofretailersarehighlyleveragedandrelyonfreshequity fundingforgrowth,whichisdifficulttocomebyinthecurrentmarket. Banksareincreasinglyhesitanttofinanceretailersinthecontextof fallingdemandandlowprofitability.Workingcapitalrequirementshave alsobeendifficulttomeetas60percentofKPMG’ssurveyrespondents confirmedthedryingupofcredit.

Roll out delays to compound problems Theorganizedretailspacewasexpectedtoreceiveinvestmentstothe tuneofUSD25billionoverthenext4-5years5.Howeversignificant delaysinretailrealestatedevelopmentandoppositiontoorganizedretail hasresultedindelaysininvestment.Alargenumberofretailershavenot beenabletomeettheirstatedexpansionplans.Currently,withhigher costoffundsandaslowdownindemand,developersarelikelytodelay moreprojectsinthenearfuture.

“The slowdown and delay in development of quality malls have hindered our expansion plans to a large extent.” -- Amit Kumar, Head, Retail, Fashion@bigbazaar

Pantaloon Retail: Delay in plans

Source:Edelweiss Research

5 www.ibef.org

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Besides the weak economy and the feeble consumer sentiments, the disappointing retail growth is also attributed to… Poor supply chain management and weak support infrastructure •Poorinfrastructure–Underdevelopedsupplychains,lackofstrongcold chains,poorwarehousingfacilities,badroads,etc.havebeen contributingtoincreasedlogisticcostsfortheretailers.Globally,the logisticscostcomponenttothetotalretailpriceisaround5percent, whileinIndiaitisashighas10percent.6 • AbsenceofamatureThirdPartyLogistics(3PL)industry–Poor infrastructure(roads,communicationandpower)makeslogisticsand transportationinIndiaextremelydifficult.Further,internaloperationsof retailers,suchaswarehouseprocessesanddistribution,areusually fairlyadhocandinefficient.Retailersarekeentooutsourcetheir logisticsto3PL.Butthereisanabsenceofamature3PLplayer providinghighservicelevelsatcompetitiveprices. • Fragmentedsupplybase–Thesupplybaseishighlyfragmentedwitha largenumberofintermediariessqueezingthemarginsofallinvolved, whichalsoincludestheretailer.Thisnotonlyhasanadverseaffecton themarginsbutalsoresultsincasesofmishandling,theftand increasedinstancesofshrinkage. Rentals – skyrocketing to all time high Asrealestatepricesskyrocketed,retailrentalsalsotouched unsustainablelevelseatingdirectlyintotheprofitmarginsofretailers. Untilafewmonthsback,storerentalswere300to400basispoints higherthaneveninternationallevels.RetailrentalsinLinkingRoadin Mumbai,SouthExtensioninDelhiandBrigadeRoadinBangalorehave risenabout50percentinthepast3years7. Rentals eating into profit margin of retailers

Source: Jones Lang Lasalle Meghraj Report on India Retail 2008, KPMG Analysis 6www.cmai.in 7JonesLangLasalleMeghrajReportonIndiaRetail2008 10

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Mistakes by retailers have also added to external troubles Crowding in unattractive locations Anotherreasonforslowgrowthinorganizedretailispoorchoiceof locations.ClusteringisacommonthemeinretailinIndiaandretailmalls appearwhereverrealestateisavailableratherthanwheretheyare actuallyneeded.Thishasresultedinattractivecitycentersbeingdevoid ofmallsandnewlydevelopedareashavingtoomany. Inability to compete with traditional retail Organizedretailershavenotbeensuccessfultoprovideservicesthat matchthoseofkiranastores.Thetruereasonoftheirtroublesisthatthe businesscapacityofthekiranashopownersandbuyersishighinIndia. MomandPopstoresalreadyhaveamodelthatispreferredby consumersandisalsocostefficient.Thebigstoresarestilltryingtoget theirmodelrightinprovidinganalternativetoneighborhoodretailerswho offerconvenience,creditandpersonalizedservice. Over reliance on debt funding Therapidexpansioninretailspaceinrecentyearswaslargelydebt funded.Thishasresultedinsubstantialleverage,whichhasaddedto retailersfinancingrisksintherecentscenario.Thedeclininginterest coverageclearlyindicatedthatalargenumberofretailersarehighly leveragedandarebattlinghighinterestpayments. Interest coverage declining across players

“Funding is the biggest issue for us. We are borrowing at 14-15 percent and this high cost of borrowing has forced us to keep our major expansion plans on hold,”- Ambeek Khemka, President, Vishal Retail. Source: KPMG Analysis, Capital IQ

Whateverbethereason,webelievethatplayerswhotakeimmediate strategicmeasuresarelikelytobethedarkhorses.Beitstore rationalization,changeofsupplychain,consolidationofoperations, improvementinITinfrastructure,retailersneedtothinkquicktoprotect theirmarginsandtoughenupformorechallengingtimes.

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STRATEGIES TO HELP RETAILERS COPE WITH THE SLOWDOWN

“Consumers are currently sitting on the fence and the challenge for retailers will be to offer the right baits to get them back to stores. Retailers have to focus on growing profits through sales growth and not mere cost-cutting strategies. There will be a sharp cut in overall sales growth this year, but a marked improvement in bottomlines with players focusing on efficiencies"- Kishore Biyani, Chief Executive Officer, Future Group Source: The Economic Times, 30 January 2009

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Toughen internal efficiencies

Managing Costs: Subduedquarterlyresults,staffingcutsandfrozenbudgetshave increasedthescrutinyoneachrupeespent.WhenKPMGaskedits respondentstonamethemostimportantfocusareainthecurrenttimes, about90percentoftheretailershighlightedcostsastheirfocalpointand theremaining10percentmentionedevaluatingstoreviabilityandrevision ofexpansionplansastheirmainconcern. • Cost Cutting: Costcuttingisinevitableinadownturn,butstrategic decisionswithalongtermviewshouldbethekeyfocuswhilemaking costcontainmentchoices.Manyretailershavemadethemistakeof cuttingthosecoststhatareeasiestandfastest.Aneffectivestrategy shouldbeonethatidentifiesthecostsleastimportanttodelivering whatcustomersvalue.Thisrequiresadeepunderstandingof customers’needsandre-evaluatingthebusinessactivitiesthatactually deliverwhatcustomersvalueandtheonesthatdonot.Thisensures thatthecostscutnowdonotharmthefuturepotentialofthe business. Inmid2008,KishoreBiyaniannouncedanewstrategyforhisgroup: “Garv se bolo hum kanjoos hain” -Translated“Say ‘Yes, I am stingy’ with pride” Withthiscampaign,thecompanyaimedtosaveUSD36.5millionina periodofoneyear.Theideawastoopenlyacceptthatcost-cutting needstobeimplementedandthenaggressivelyeliminate inefficiencies.Themoveensuredthatinternaloverlappingoffunctions wasavoidedwithinvariousdepartments.Attheback-end,human resourcesandinformationtechnologywereintegratedinanorganized manner. Source:MumbaiMirror,Sep2008

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• Resource optimization: Aretailerwantstobettermanageitsbackendcenters,supplychainandstoreswhileimprovingitsprofitability. Eachcustomeramongsthismillionsisdefinedbyadifferentbuying history,adifferentbuyingpropensity,andadistinctservicingcost.This raisesseveralquestions. • Giventhecapacityandcostsforeachchannel,whichofthe customers,shouldreceivewhatkindofoffers,throughwhichofthe channels? • Whatwillhappenifsomepartsofthebusinessareoutsourcedas againstbuildingin-housecapabilities? • Woulditbeviabletoinitiateanewmodel? Ineachcasetheansweris“itdepends”.Thebestwaytoallocate resourcesdependsonthenatureoftheresourcesandtheconstraints athand: Forexample,inordertoconserveresources,VishalRetailtoohas decidedtolookatcentralizingsomeofitsoperations.Ithasalready closeditslargedistributioncentersinMumbaiandKolkataandopened acentralizedwarehouseinGurgaon,nearDelhi.* FutureGrouphasmergedtheback-officeoperationsofitsdifferent storestolowercostsamidtheglobaleconomicslowdown.“Ourbackendoperationshavebeenconvergedtocatertomultipleformatsasa partofourcost-cuttingandefficiencyenhancingexercise,”Rajan Malhotra,ChiefExecutive,BigBazaar.Thegroupisalsoconsidering reducingthesizeofsomeBigBazaarstores,andclosingtheworst performingones.** Companiesneedtoreviewtheiroptimizationstrategiesinthe changingenvironment,aswitheffectiveoptimizationtheyarelikelyto beabletobringaboutsavingsleadingtoimprovedcompetencieseven inanunfavorableclimate. • Improving labor productivity: Retailersareturningtheirattention towardsemployeeproductivitytoboostsales.Manyretailersaregoing slowonhiringinback-endoperationswithtrainingstaffhighontheir agenda.

Koutons Retail has increased the performance target for its employees to deliver more. “We have motivated our employees to give that extra 25 percent in the quality and quantity of work they do,” --D P S Kohli, Chairman, Koutons Retail India. Source: Business Standard, November 2008 *www.indiaretailbiz.com,March2009 **LiveMint,Jan2009

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Vishal Retail is planning to start a performance-based remuneration process in its back-end operations, whereby employees will get higher perks and salaries based on their performance. “Though we can’t do much about labor cost at front-end operations, we are considering performance-based remuneration at the back-end. We are encouraging our people to work harder so that they bring in more efficiency into the system,” Source: Business Standard, November 2008

Manpower retention and training: Inspiteofadownturn,the requirementforskilledmanpowerstillpersists.Companiesneedto understandhowtoretaintheirmostdesirablestaffwhileensuring theirfuturedevelopment.Thisbecomesabiggerconcernparticularly whenmanagementdevelopmentcostsareunderpressure,asthisisa leadershipchallenge. Oneofthecommonproblemswithretailfirmsisthattheyhirefresh graduateswithoutanyexperienceintheretailsector.Thishasledto over-ambitiousexpansionplanswhichhasleftthefirmsstruggling.The currentdownturnhashighlightedthisissueandmadefirmsrealize thattosucceedtheyneedexperiencedtalentwithanunderstandingof thegroundrealitiesfacedbytheIndianretailsector. Withscarcityofanexperiencedtalentpool,talentdevelopmenthasto bebroughtin-house.Theneedistofocusonselectedsenior managers,todeveloptheircapabilitiestocoachandmentorothers. Indianplayershavealreadystartedtotakestepstocurbthisproblem andareopeningacademiestomeettheirmanpowerneeds. In2008,twocompanies—BhartiRetailandVishalRetail— announcedthelaunchofretailtrainingacademiesinLudhianaand Delhirespectively.The2facilitiesareexpectedtochurnaround5,000 trainedpersonseveryyear.Thenewschoolsareinadditiontothe existingacademiesincludingSpencer'sPragati,SubhikshaRetail InstitutesinMumbai,Delhi,BangaloreandHyderabad,andFuture LearningandDevelopmentAcademiesinAhmedabad,Bangaloreand Kolkata.8 • Inventory Management: Inanyretailoperation,restraininginventory costisofutmostimportance.Improperinventorymayresultinstockoutsforsomeofthecategorieswhereasexcessstockforothers. LowerinventoryturnsarelikelytohavenegativeimpactonROIand moresoforcategorieswheregrossmarginisquitelowlikefruitsand vegetables,milk,staples,mobiles,etc.Inaddition,higherinventory mayresultinobsoletestock,marginleakages,damagesandhigh carryingcost(interest,space,handlingcosts,etc.). 8BusinessStandard,April2008

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Retailers should aim to:

Whenaniteminnotavailableitreducesdirectsalesandcan leadtocustomersshoppingelsewhere

Reducestock-outs

Avoid bargainhunting

Buyinghugequantitiesofgoodsatlowpricesbutthenbeing unabletosellthestockmayleadtoincreasedcostofinventory.

Increase Inventoryturnover

Increaseinventoryturnoverand,inturn,reduceexcessinventory stock-Thisisbothimportantanddifficultasitmayrequirea changeinretailermindsetandtoughdecisionsintermsofwritedowns.

Controlshrinkage

InIndiashrinkageisequivalentto2.9percentofretailsalesandis thehighestintheworld.Reducingshrinkagethroughwell-defined processesforphysicalcountingofinventory,digitalsurveillance, Electrictags,etcmighteffectivelysavecostsandimprove

Source: KPMG Analysis, Technopak's Retail Summit 2008

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• Bringing down Real estate costs: Realestaterentalsconstitutethe biggestcostitemforretailersatabout10-15percentofsales.Quite frequently,ithasbeenobservedthatoneofthemajorcostsforretail storesi.e.rentalcostisignoredbyretailers. Renegotiating Real estate costs: Thecurrentenvironmentis conduciveforretailerstore-negotiatetherentalsandbringdownthis cost.LargeretailersliketheFuturegroup,RelianceRetailandAditya BirlaRetailareinthemidstoffuriouslyrenegotiatingrentalstobring downcosts.Someplayershavemanageda40to50percentreduction instorerentals9.

Rent constitutes major chunk of retailer’s cost

“The rentals have fallen dramatically in the past few months, bringing retailers and the developers on equal footing. Now, the developers are ready for flexible revenues instead of fixed rentals,” - Samar Shekhawat, Vice-President, Spencer’s Retail. Source: Business Standard, November 2008

Source: KPMG Analysis

Entering into revenue sharing model as against fixed rental model: Althoughpreviouslydevelopersandlandlordswereunwillingto enterintorevenuesharingmodel,theyarenowreadytoleaseout theiremptyspaces.Themodel,underwhichretailerssharea percentageoftheirsaleswithrealestatecompanies,isseenasafair wayofsharingrisksbetweenthetwostakeholders.Revenue-sharing modelincreasestheresponsibilityofthedevelopertobringinfootfalls inthemallbyprovidinggoodupkeepoftheinfrastructure.Themodel issustainableduringthedownturnastheretailersdonothavetotake thehitalone.Playerscanleveragethisopportunitybycollaborating withdeveloperstoworkoutawin-winmodelandarevenuesharing deal.

“We believe this is the way forward for all the retailers as it is beneficial for both the developer and the retailer,” - Kishore Biyani, Chief Executive Officer, Future Group. Source: Business Standard, November 2008 9HinduBusinessLine,February2009,Companywebsites,KPMGAnalysis

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Leveraging Information Technology OrganizedretailinIndiafacesmanyhurdlesintheabsenceofproper supply-chaininfrastructureanddevelopmentofeffectiveelectronic paymentanddeliverychannels. Thetechnologiesthatretailershavedeployedovertheyears,toserve theirdistributednetworks,arewithoutstandards.Goingforward, technologyislikelytobeakeydifferentiatortobringaboutefficiencies, saveoncostsandofferbetterservicestocustomers.Theproblemwith oldtechnologyisthattherearenostandardsandinmanyinstances,one doesnotintegratewithanother. Alltheelementswithintheretailindustryrightfromdatawarehouses, logistics,supplychain,storemanagement,pointofsale,etc.arelikelyto getimpactedpositivelywiththeusageoftechnologybeitRFID,GPS, intelligentvideoanalytics,point-of-salesterminalsorsensor-basedshop carts,etc. AlthoughIndianretailchainshavestarteddeployingthesetechnologies, therestillexistsachallengetoimplementthemsimultaneouslyandmake theprocessmoreefficient. Theadvantagesofimplementationoftechnologycouldbescaled manifoldbycarefullychoosingsolutionsincontextofthesaidbusiness andbyuseoftechnologyinfollowingdomains: • Manpower training: Retailersneedtogearupwithgoodpeople managementprograms.Onewaythiscanbedoneisthrough certificationprogrammes.Suchprogrammesarelikelytoenable employeestoupgradetheirbasicskillsinretailoperationsandresult betterutilizationoftheavailableresources. • Real Estate Management: Informationtechnologycanbeleveraged toprovideprojectmanagementcapabilitiestomonitortheprogressof storelaunches.Timelylaunchofretailoutletscanprovideagoodheadstartforretailersandsavesignificantfundsaswell. • Supply chain visibility: ITcanhelpretailerssetupbasicforecasting, replenishmentandsuppliermanagementsolutionstoimprovesupply chainmanagement.Startingfromsensorbasedinventory managementtoRFIDbasedcontrolovertheinventorycoupledwith GPSbasedtracking;ITcanhelpinmaintainingtheoptimallyminimal inventoryenablingreducedinputcosts.

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• Store operations: InnovativeuseofIntelligentVideoAnalytics,pointof-salesterminalsandsensor-basedshopcartscanhelpretailers enhancecustomerexperienceandsimultaneouslyreducecostsby controllingshrinkage. • Logistics management: RetailerscanleverageITforback-end supportand3PLcompaniesforphysicalinfrastructuresuchas warehousespaceandatransportationfleet.GPStechnologyis extremelyusefulinrealtimetrackingofthegoodsmoment.

Case Example Shopper’s Stop: FifteenpercentofShopper’sStop’snetworthis investedinIT.Thecompanyhasreapeditsbenefitsthroughreduction inshrinkagelevelsandenhancingcustomer’sexperience.Shopper’s Stophasoneofthelowestshrinkagelevelsintheindustry(0.4 percent) “We have found that 50 to 55 percent of a customer’s experience revolves around two components: The availability of merchandise, and the ease and speed of a billing process. Out of the two, the availability of merchandise is more important. Here, I see IT playing a much more important role.”--B.S.Nagesh,ManagingDirector,Shopper'sStop FuturePlans:SincethebaseofShopper’sStopITstructureismoreor lessinplace,progressivelyalargepartoftheirinvestmentsis expectedtobeinclinedtowardsusereducation.Thecompanyplansto investinunderstandingitscustomersusingCRMtechnologiesby buildingdatawarehousing,data-mining,andCRMcapabilities.Thereis alsolikelytobefurtherinvestmentsinenhancingcorporate governance,informationinsight,scalingandmanagingSKUs,network andinfrastructuremanagement,anddisasterrecovery. Source: CIO India

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Reevaluating store viability and expansion plans Withcatchmentsturningunviable,rampantstoreclosuresandformat rationalizationisonthecards.Rationalizationislikelytointensifyin comingquarters.Retailersmayneedtoshutdownunviablestoresto conservecashandinventory. Givenhighdebtlevelsanddormantequitymarket,capitalforgrowthhas becomescarce.Expansionplansneedtobere-lookedbecauseofcapital scarcityandcatchmentreassessment.

Source: KPMG Analysis

Efficient store management

Issues facing retailers

Evenaftersettingupstores,retailersmayfaceissuesinrunningstores efficiently.Therearecurrentlynostreamlinedanddefinedprocessesfor allocationofproducts/categories,inventorymanagement(bothonshelfand inbackroom),workforcemanagementandstoreinfrastructuremanagement.

New Customers

• Marketinginadequate:-Insufficienthypeduringstorelaunch,lackofregularinstoreevents • Storevisibility:-Storenotdistinctlyvisiblewithinmalloronstreetoutside

Loyaltyand Spend

• Staffknowledgeandmotivation:-Highattritionrates,lowproductknowledge,poorcustomerinteraction skills,inadequatecompetitionandincentives • Productrange:-Wearrangeofcertaincategories • PricePerception:-PricecommunicationnotstronglybroughtoutthroughVMandproductadjacencies • LayoutandVM:-ReducedshoppabilityduetolayoutandVMnotbeingoptimal • GCmanagementnotaggressive:-InadequatemonitoringandincentivesonGCrecruitmenttargets

Costs

• Rent:-Veryhighrentals,poorretailtocarpetandcarpettochargeableratios.Lowpackingdensityof options • Power:-Absenceofmonitoringmechanismsandmetricsforpowercontrol • Personnel:-Largenumberofidlepersonnelleadingtohighcosts

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Players need to take multiple initiatives to fix retail basics and ensure growth to meet the targets.

Decode consumer behavior Indiaisadiversenationwithmulti-lingual,crossculturalpopulation spreadacrossdifferentgeographicalregions.Retailershavetorecognize thefactthatastrategythatholdstrueforaparticularregionandsetof peoplemaynotholdtrueforothers. WhileIndiahasagreatmarketpotential,mostretailerstendtoignorethe basicfactaboutthediversityofitscustomerbase.Anyretailerwhodoes notdohisgroundworkintermsofunderstandinghiscustomerneeds standsagreatriskoffailingevenwithoneofthebestmodelsathand. AcaseinpointisdiscountshoppinginIndia.Indiandiscountshoppingis stillfragmentedbecauseofdiverseculturewhilewesternretailersare abletotreattheentirecustomerbaseasone.Thishelpsthemgain benefitsoflargescalepromotionsandoffers.Theopportunitylieswith theIndianretailerstocustomizediscountseasonsbasedonfestivalsof differentregions.However,annualplanningofsalesbasedongeography andfestivalsisstillatanascentstageinIndia.

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Retailersshouldrecognizethatconsumeristhekingandcannotbe ignored.Thetruemetricofsuccessmaynotbeintermsofnumberof newstoresaddedbyacompany,rather,increaseinsamestoresales throughathoroughunderstandingofconsumerrequirements. AccordingtoKPMG’ssurvey,whileattractingthecustomerswasoneof thetopconcernsoftheretailers,investmentinconsumerresearchwas notamongsttheirtoppriorities.Retailershavestartedespousing differentapproachestoseizeashareinconsumers’wallet.Someofthe strategiesadoptedbyretailers:

OfferingDiscounts

Mostretailershaveadvancedoff-seasonsalesplansandsome haveextendeddiscountsalesperiodsfrom15daystoamonth. Thediscountsonofferhavegoneupfrom25-30percentto40 percent,evenhigherforcertainlifestyleproducts

LoweringPrices

Certainretailersaremovingtowardsadopting“FirstPriceRight“ approach.Underthistheretailerdoesnotofferdiscounts,rather directlycompetesonthesellingpricebyofferingbestprice withoutanymarkdowns.

OfferingValueAdded Services

Companiesareofferinginnovativevalueaddedserviceslikehappy hoursonshoppingdeals,offersforseniorcitizens,contestsfor students,lotterygains,etc.

Leveraging partnerships

Withanaimtokeepcustomerslongerontheshopfloorand increaseconversions,retailersarenowpitchingtopartnerwith manufacturers,serviceproviders,financialcompanies,etc.to createabuzzaroundcertainproductcategories

KPMGbelievesthatcompaniesthatinvestinCRMandconsumer researchanalyticsmaystandtogainagainstthosewhotakecustomers forgranted.BigBazaarhassetupCustomerAdvisoryBoards(CABs)asa measureforreceivingvaluablecustomerfeedback10.ThroughCABsthe managementaimstogetclosertocustomersandgivethemaplatform tovoicetheiropinionsaboutthestores.CABsconsistof8-10influential peopleofthecommunitylikelocaldoctorsandlawyerswhohold meetingandcollectfeedbackfromconsumers.Thefeedbackisthen assessedandimplementedbymanagementtodevelopbettercustomer relationships. 10www.ibef.org

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Entering into alliances and leveraging expertise Inthecurrentscenarioretailersshouldbeonlookoutforopportunitiesto partnerwithforeignretailersasitcouldpossiblybringinthemuchneededcapitalandexpertise.Therelationshipcouldinvolvejoint contributionbypartieswithsharedcontrol/ownershipandhassome degreeofexclusivityattachedtoit. Retailerscanalsoconsiderenteringintoanalliancewith: • Aretailerfromthesamechannel • Aretailerfromadifferentchannel • Vendors • Back-endserviceproviderslikethirdpartylogisticsplayersandIT serviceproviders Alliancesenableretailersinenteringnewmarkets,categories,expanding valuepropositionandcapturingnewconsumersegments.Whileglobally, it’sacommontrend,Indianretailersareslowlyrecognizingthe importanceofsuchpartnershipsandthereforeactivelyseekingfor opportunitiestounlockvalue. Tapnewconsumer segments

Extendintonew categories

Enterintonew geographies

Enhancevalue proposition

Relianceretailhastied upwithPearleEurope tolaunchachainof opticalstoresinIndia

FutureGroupis leveragingBlueFoods expertiseinfoodand beverages(F&B)

Fabindiahasacquireda 25percentstakein UK'sbohemian women'swearretailer EAST,tohelpFabIndia sellitsgarmentsinUK

Shoppers’Stophas enteredintoanalliance withMothercareUKto expanditsvalue propositioninmother careandkidswear section

Fortappingthekids segmentinIndia, Spencerretailhastied upwithWoolworthsfor marketingitsChad Valleyrangeoftoys

Spencer'senteredinto partnershipwith specialistslikeSankalp, Rajdhani,YoChinaand SingaporebasedBread Talktoopenchainof foodoutletsinits stores

ABRetailacquired90 percentstakein TrinethrafromIndia ValueFundstogaina strongretailfootprintin SouthIndia

Trent,hasenteredinto ajointventurewith InditexGroupto developandpromote ZarastoresinIndiaand thusleverageonZara’s internationalexperience

Source:Companywebsite,EconomicTimes,October2008;BusinessStandard,September2008;HinduBusinessLine,March2008; KPMGAnalysis

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It’s the time of Private Labeling Privatelabelsenableretailerstoofferqualityproductsandearnhigher margins.Theretaileralsoderivesmanyadvantagesofusingprivate labels.In-storelabelsareatleast5-20percentcheaperacrossvarious categories11.Thisisbecausetheycutoutmiddlemencostsandpasson thebenefittotheconsumer.Privatelabelsenhancethebargainingpower oftheretailerwhilenegotiatingwithmanufacturer(national/international) brands.Inthelongrun,theretailercanusethePrivateLabelstoattract customerstohisoutlet.Thus,manyretailersareconsideringincreasing theirprivatelabelofferingssignificantly. AdityaBirlaRetailisaggressivelypursuingthestrategyofpromoting salesofprivatelabels.Currently,thesegmentaccountsforaround3 percentofitstotalsales.ABRetail,whichoperatessupermarketand hypermarketformats,under‘MoreforYou’foodandgrocerychain,is targetingtoincreaseprivatelabelsalesto10-15percentinthenext2-3 years.12 WhenweaskedMr.AmitKumar,Retailhead,Fashion@bigbazaaron privatelabeling,hesaidthatheplanstoincreasehisprivatelabelsfrom 60percentto90percentinthenextthreeyears.Accordingtohim privatelabelsprovidefourkeymerits: • Givestheopportunitiestostandoutfromthecrowd • Helpsmaintainconsistencyinstocks.Outsidebrandsmayormaynot beavailableinthefutureleadingtoapotentiallossofcustomers. • Enablesretailerstocontrolmarginsbyimprovingtheirbargaining power • Facilitatesmovementintoaplannedenvironment.Sinceprivate labelingrequireslongtermplanning,itenablestheretailersto understandallthenuancesofitsproductsasagainstanopportunity stockwhichcouldturnintoanopportunitycostinthelongrun Globally,ownlabelbrandscontributeto17percentofRetailSaleswitha growthof5percentperannum.InternationalRetailerslikeWal-Martof USAandTescoofUKhave40percentand55percentownlabelbrands representationintheirstores,respectively.InIndiathereisanincreasing trendtowardsacceptanceofPrivateLabelbrandsandthustheir 11ImagesRetailReport,2009 12IndiaRetailing,February2009

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penetrationisontheriseespeciallyintheApparel,ConsumerDurables, HomeCareandFMCGsegments.Overall,inIndia,PrivateLabels constitute10-12percentoftheorganizedretailproductmix.13

Private label penetration (%)

Source: Images Retail Report 2009

PlayerslikeShoppersStop,TataTrent,Pantaloon,Reliance,Spencers, Subhiksha,andVishalhavemovedtowardsadoptingprivatelabelsto addressconsumerneedsandtoincreaseprofitabilityoftheirretail businesses.14 InIndia,veryfewplayersareintoownmanufacturingofprivatelabels andaredependentonthirdparties–Forexample,VishalRetailis increasinglyshiftingfrommanufacturingtothirdpartysourcingprimarily becauseofincreaseincategoriesforprivatelabelingandvolumes.

13ImagesRetailReport,2009 14ImagesRetailReport,2009

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Recession spears private label appeal Privatelabelsarelikelytocontinuetogrowinthecurrentfinancial environmentascash-strappedconsumers'perceptionoftheproductsas a'cheaperoption'changes.Partofprivatelabelgrowthinarecessionis permanentlysustainable.Asconsumerslearnabouttheimprovedquality ofprivatelabelsinrecessions,asignificantproportionofthemarelikely toremainloyaltoprivatelabels,evenafterthenecessitytoeconomize onpurchasesisnolongerrequired. Higherprofile,quality-focusedprivatelabelbrandsarelikelytoprosperas consumersbegintoreassesstheirviewsofown-brandgoods.Also,with increaseincompetitionandrisingpressureonmargins,privatelabelare increasinglygettingattentionduetotheaggressivemarketingofretailers atparwithbrandedgoods.

“Today with the margins that the FMCG companies offer, no one can survive. Even global retailers such as Wal-Mart, Carrefour and others are successful because of their strong focus on private labels. No retailer can survive on high rentals and low margins, adding that margins on private labels are higher, as much as 3540percent”- Thomas Varghese, Chief Executive Officer, Aditya Birla Retail

Private label sales growth (%)

Source: Images Retail Report 2009

Snapshot of retailer’s depth of private labeling

Source: Images Retail Report 2009

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Build a competent supply chain management system Strengthen support infrastructure WiththelargeplayerslikeReliance,Bharti-Wal-Mart,Tata’senteringinto inretailmarket,thereislikelytobeenhancedfocusonimprovementsin logisticsandsupplychaininfrastructure.Retailersaswellasthirdparty logisticsprovidersmayincreasetheirinvestmentinlogistics infrastructure.Togaincostleadershipinthemarket,bigplayersmayhave tominimizecostsbydevelopingsupplychaininfrastructure.Warehouses, distributioncentersandtransportationarelikelytoseemodernization.

Warehouses Alargenumberofplayersinthisindustryaresmall/medium entrepreneursrunningthewarehouseforoneormorecompanies.The scaleofthesewarehousesisnotlargeenoughtotaplargescale economiesorjustifyinvestmentsinhigherstandards.However,going forward,theimplementationofVATregimeisexpectedtodrive consolidationandhencelargerscalewarehouses.Alsotherapidgrowth oforganizedretailisexpectedtodrivesophisticationandefficiencyin warehousingpractices.

Cold Chain ThereisanuntappedpotentialofUSD2.6billionforprovidingefficient coldstoragefacilities.15 Drivenbyagrowingdemandforconvenience foods,weexpectretailerstopartnerwithlogisticsspecialiststomeet theircoldchaininfrastructureneeds.

Third Party Logistics (3PL) 3PLmarketinIndiaisstillinarelativelynascentstage.However,realizing thecostbenefitsthatthesecompaniesbring,retailersaregearingupto use3PLservicesfortheirlogisticsfunction.Asthesizesofretailers growwithapotentialforscaleeconomies,weforeseethemtomoveto 3PLserviceproviders.

15InhousemagazineofgroupTCI2008,KPMGAnalysis

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Backward integration Thereisaneedtoreducethenumberofintermediariessoastoincrease theefficiencyandprofitabilityofretailers.Oneofthewaystodothatis tointegratethefunctionsinthesupplychain.Therehavebeeninitiatives inthisregardinruralIndiafollowingthegovernment’sapprovalof contractfarmingandlandleasing.Thisislikelytoallowaccelerated technologicaltransfer,capitalinflowsandassuredmarketforcrop production.Thisislikelytoeliminatetheintermediariessuckingawaya largechunkofthemargins.Pepsico’scontractfarminginPunjab,ITC’sechaupalandMahindraShubhlabhservicesareexamplesofthisvertical co-ordinationleadingtoanincreasinglyefficientsupplychain.16

Optimize Processes ITcanhelpretailersoptimizetheirprocessesinalotofwaysincluding improvingforecastingaccuracy,reducingstock-outs,increasingsourcing efficiency,increasingproductmovementvisibility,reducingleadtimeand optimizingtransportation.Startingfromsensorbasedinventory managementtoRFIDbasedcontroloverinventory,ITcanhelpin maintainingoptimalinventoryresultinginreducedinputcosts.

Venture into under penetrated markets: Rural Retailing Indiahaswitnessedarapidincreaseinincomeswithpercapitaincomes soaringtoUSD1000in2008fromminisculeUSD418in1998.The growthhasnotbeenrestrictedtourbanIndia,asthepercapitaincome inruralIndiahasgrownby50percentinpast10years.17 Amongkeyreasonsforthelatterarerisingcommodityprices,improving productivityandhigherproduction.Theincreasingavailabilityofbasic infrastructure,improvingaccesstofunding,employmentguarantee schemes,betterinformationsystemsandgrowingliteracyaretogether

16 New Farm Supply Chain Initiatives in Indian Agriculture, Article by Dr. Rakesh Singh, Professor of Economics, Great Lakes Institute of Management 17 Business Standard

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ITC-CHOUPALSAGAR:ASuccessfulRuralRetailingModel CONCEPT HubandspokemodelinvolvingengagementwithfarmersinruralIndia. Aruralshoppingmallwherefarmerscanselltheircommoditiesandcan buyalmosteverythingincludingcosmetics,garments,electronics, appliancesandeventractors. Itservesasanagri-sourcingcenters,shoppingcenters,andfacilitation centers IMPACT ChaupalSagarstoreshavebecomemeetingpointforfarmers totransactcommerceandexchangeusefulinformation. ITCawarded“InnovationforIndiaAward2006”fore-Choupal intheSocialInnovationscategoryforbusinessorganizations. e-ChoupalspeciallycitedintheGovernmentofIndia’s EconomicSurveyof2006-07foritstransformationalimpacton rurallives. e-ChoupalisoneofthetopfivealternativechannelsforLIC Policysales,andaccountsfor10percentofthenational weatherinsurancemarket Source: ITC’s Website, KPMG Analysis

helpingbringprosperitytoruralhouseholds.Withadditionalfiscal incentivesprovidedbythegovernment,ruralIndiaissettowitness furtherboostinoverallfarmincomes. Overall,thereisahugemarketwhichiswaitingtobeserved,readyto splurge,willingtoexplorenewproductsandservices.Retailerscantap ontheirwalletsgiventheydotheirhomeworkwell. AccordingtoIndiaRetailReport2009byImages,"India'sruralmarkets offeraseaofopportunityfortheretailsector.Theurban-retailsplitin consumerspendingstandsat9:11,withruralIndiaaccountingfor55 percentofprivateretailconsumption." AsperIBEF,ruralIndiaaccountedforalmosthalfoftheIndianretail market,whichwasworthaboutUSD300billion.Withmostoftheretail marketsgettingsaturatedinTierIandTierIIcities,thenextphaseof growthislikelytobeseenintheruralmarkets.

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Majordomesticretailershavestartedsettingupfarmlinkages.Few examplesinclude,DCM’sHariyaliKisanBazaars,PantaloonGodrej’sjoint ventureAadhars,ITC’sChoupalSagars,Tata’sKisanSansarsandReliance Fresharesomeoftheestablishedruralretailchains.18

ManyretailplayersarecapitalizingonruralIndia’spotentialbypartneringwithfarmers

Triveni (Khushali bazaar) •Triveniaimsatincreasingthe associationofrural communities.Currentlythe companyhas2ownedand4 franchisesstores.Eachstore providestofarmersagri inputs,agriequipmentforsale andrental,irrigation equipment,cattlefeeds, FMCG,petrol,diesel,two wheelersandtractors,and othergoodstocompletethe farmer’sbasketofgoods

Godrej Agrovet (Aadhar) • Completesolution providertothefarmers renderingfarmadvisory services,creditfacilityto farmers,providingupto dateinformationon weather,price,soil& watertestingfacility, FMCG/consumer durables,etc.tofarmers. Reliance Retail (Fresh & Fresh plus) • Focusingonsourcing directlyfromfarmgate forFresh&FreshPlus. • Aimedatconnecting farms&unorganized retailbysettingup1600 farm-supplyhubsacross thecountry.

ITC (e chaupal) •IITCprocuresallmaterials directlyfromtheproducers, therebycuttingdownthe middlemenalltogether •Itpaysupfronttothe producers,meaningthereis nocreditsystem

Tata (Tata Kisan Sansar) • Provideend-to-end solutions,rightfromwhat cropstogrowtohowto sellthemforthe maximumreturns

HUL (Shakti) • Accesstotheremoterural areasandmarketpotential • Sellitsproductsthrough womenself-helpgroupswho operatelikeadirect-to-home teamofsaleswomenin inaccessibleareaswhere HLL'sconventionalsales systemdoesnotreach.

DCM (Hariyali Kissan Bazaar) • Catersforabout15-20,000 farminghouseholdsandat least70,000acresof agriculturalland.

M&M (Shublabh) • Shublabhinterfaceswith bankforthefinancing w.r.tthefertilizerand seedsfirm,aswellasfor thedeliveryofproduceto theendbuyerand paymenttofarmer

Source: Company websites, www.ibnlive.in.com, KPMG Analysis

18 Company Websites and IBEF

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Innovate: categories, services, business models… Intoday’sworldofinternettechnology,globalizationwheneveryoneis connectedandwellinformed;retailershavetoensurethatthey continuouslyunderstandthepulseoftheircustomersanddesigntheir offeringsaccordingly.Thisrequiresnotonlyin-depthunderstanding customerrequirementsbutalsothinkinglaterallytocomeupwith innovativesolutionswhichwouldmaketheretailersstandoutofthe crowd. Withrapidglobalization,increasedconnectivityandheightened awarenesstheconsumerismuchmoreconsciousabouthisneedsand requirements.Henotonlyseekstopurchaseaproductbutalsothe entireshoppingexperience.KPMGbelievesthatplayers,whocan customizetheirofferingsaccordingtothespecificneedsoftheIndian consumer,arelikelytoemergeasaleaders.Retailershavetostart appreciatingthisfactandtakeouttheirthinkinghatstoplaninnovative solutionsfortheircustomers.

“Innovation and newness should be the name of the retail game in India. As an industry we have to be radically different in our approach towards consumers, product offering, market segmentation and competition. This would create demand within the target segment and in turn help attain viability for the business model. Instant gratification as envisaged by the promoters in the past actually reduced the share of the pie resulting in the repelling impact as witnessed today.”- Anurag Rajpal, Vice President (Apparel),

Thecurrentenvironmentisagoodtimeforgeneratingtrials;the consumersareactivelylookingforthebestvalueandmaythereforebe morethanwillingtoexperiment.Internationally,withconsumers currentlydebatingoverwhetherornottospendtheirhard-earnedmoney onthatnextcupatStarbucks,McDonald'shasaperfectopportunityto provethattheirPremiumRoastcoffee—astepupinpricefor McDonald's,butstillcheaperthanStarbucks—isaprettytastybrew.19

Spencer’s Retail Source: www.indiafashionforum.co.in 19 www.chiefmarketer.com

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Mom & Me Stores: A Unique Specialty Retail Model Business Model

Target Audience

AspecialityconceptstartedbyMahindra& Mahindra'sinJanuary2009 Storesize:Rangebetween5,000and10,000sq.ft

Theprimarytargetforcompanyincludes‘-9to9’ whichmeanswomenwhoareexpecting,to motherswhohavekidsuptotheageof9years, andkidsfrom0-9years.

StorestobelocatedinMetros,majorcitiesat highstreetormalllocations Theconceptprovidesvariousfunctionally importantproductsthatoffersafetyandquality productsthatarecurrentlylackinginIndia Product Offerings

MOM & ME

Productbasketwouldcompriseofmaternitywear, fashionapparelforbabies,toddlers&youngkids, toys&games,wellnessproductsformothersand babies,nurseryandfurnishings,travel&safety products,personalproducts,foods,etc. Partnershipwithinternationalbrands: Startrit,BrainyBaby,MaryMeyer,CAM,Bugaboo, Evenflo,andAvado

Add on’s

Valueaddedserviceslikefeedingarea,playarea forkids,nappychangearea,andotherfacilities likeastrollertouseatthestore,readinglounge, etc. M&Mwillconductmorningcoffeemeetings, consultationswithexpertsandmanysuchmore eventstobeasourceofknowledgeandexpertise forcustomers Thewebsitewillalsoserveasaforumfor customerstoshareinformation

Source: Images Retail, 2009

BigBazaar’sChaosTheoryevolvedtocatertotheIndianMindset Concept Avalueformoneyhypermarketthatsubscribes tothenotionthatchaosinstoresincreases sales. Mr.KishoreBiyanirealizedthatinabroad hypermarketshavelong,narrowaisles,suitable forindividualsshoppingaroundcartswhichwon’t workinIndia,soinbigbazaarhecreated multipleclusterswithineverystore. Thestoresaredesignedasanagglomerationof bazaarswithdifferentsectionsellingdifferent categories. TheU-shapedsectionandislandshaveprovedto bemoreappropriatefortheIndiancontextthan longaisles. Broughtintheinnovativeconceptof‘sabse saste3din‘whichoffers,dealsanddiscounts, helpingensurethatthereissomethingfor everyoneinthefamilytoshopfor,and customersget'value-for-money'.

Impact BigBazaarandFoodBazaartobe hivedoffintoindependent companies. BigBazaariseyeingaturnoverof USD1700millionbythenextfinancial year. In2007-08,Bigbazaarclocked110 millionfootfalls. KishoreBiyaniawardedthe'Retail FaceoftheYear’atImagesRetail Awards2007.

Sources: www.retailigence.wordpress.com , September 2008; Economic Times, January 2008; Book on Kishore Biyani’s autobiography – ‘It happend in India’; company website; KPMG Analysis

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FUTURE OUTLOOK

"We predict an increase in 'value for money' category and a decline in lifestyle category. Also we might see lesser aggression in stores expansion and focus on store productivity, shrinkage and loss reduction"Narayanan Ramaswamy, Executive Director, KPMG.

Shift from lifestyle to ‘value for money’ Retail

Everydayusage •Valueformat •Groceries/FMCG/ Beverages

Not effected

Highticketretail

Impulsepurchase

Highendluxury

• HomeFurnishings/ Electronics

• Books/Music/ Stationery/Travel

• Apparel/Fashion wear

• Peoplearebuying productswhich givesvalueinthe longterm

• Retailersare givingdiscounts toincreasesales

• Retailersare offeringdiscounts

Adversely effected

Adversely effected

Not effected

Thepastsixmonthshavebeendifficultfortheretailindustry.Retailhas beenoneofthesevenindustriesinthecountrythathavebeenseverely impactedbythedownturnineconomicconditions.Thesectorhas enteredintoamodeofcorrectionremovingsomeoftheflabthathad accumulatedoverthepast5yearsofrapidexpansion.Almostallretailers thatwemetwithwereredrawingtheirexpansionplansandseriously evaluatingoptionstocloseoutpoorperformingstores.Theseeffortsare expectedtointensifyoverthenextfewmonths.Therecouldbesome MergerandAcquisition(M&A)activitythathasbeenmissingoflatewith thelong-termplayerslikelytoconsolidateandmoveaheadstrongly.

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Thereisaconsensushoweverwithinthesectorthatthisrestructuring exercisemaycontinueforthenext12-18monthsbeforeretailersbegin anotherseriousroundofexpansion. Thelongtermprospectsforretailchainexpansionarestillveryattractive andthisperiodofuncertaintyisseenbyretailersasanimportant consolidationimperativeforanindustrythathasbeengrowingat30-40 percentp.a.overthepastdecade.Therelativelylowratesofpenetration oforganizedretailinmostcategoriescoupledwiththesheer attractivenessofIndia’sdemographicandeconomicenvironmentis expectedtocontinuetoaddmomentumtooverallprospectsofthis sectorinthelongterm.

Short term outlook • Thecurrentslowdownisexpectedtolast12–18monthsconditional ongovernmentincentivesinincreasingspendsoninfrastructure, developmentinitiativesandotheractivitiestostimulatethe economy. • Inlightoftheeffectsoftheslowdown,weexpectanincreased focusonvalueretailinthecomingmonthsandashiftawayfrom lifestylegoods. • ThefocusislikelytoshifttowardsfoodretailingandFMCG productsasthissegmentislargelyinsulatedfromtheslowdown. • Retailersmaystartfocusingoncostreductionbyclosingthe unprofitablestoresandrationalizationofcapitalexpenditure. • Churninmallsislikelytoincreaseintheshorttermwhensome retailersmayfinditdifficulttosustaininthecurrenteconomic situation,insteadoptingforlowrentpremises. • AsTierIcitiesbecomesaturated,retailersarelikelytomovetoTier II,TierIIIcitieswhereprofitsarehigherduetolowerrentalsand operatingcosts. • Therearegoingtobeincreasedinvestmentsinshorteningofsupply chain.Thisismainlyduetotheincentivesofferedbythe governmentandthepotentialforhigherprofitmargins. • Thefrequencywithwhichretailersliquidateslowmovinggoodsby offeringdiscountstoreduceinventoryareexpectedtoincrease

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in.kpmg.com

KPMGinIndia Mumbai KPMG House, Kamala Mills Compound 448, Senapati Bapat Marg, Lower Parel, Mumbai 400 013 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Delhi DLF Building No. 10, 8th Floor, Tower B, DLF Cyber City, Phase 2, Gurgaon 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101

KPMGContacts Pradip Kanakia Executive Director Head - Markets e-Mail: [email protected] Tel: +91 80 3980 6100 Ramesh Srinivas Executive Director Head - Consumer Markets e-Mail: [email protected] Tel: +91 80 3065 4300

Bangalore Solitaire 139/26, 3rd Floor, Inner Ring Road, Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chennai No.10 Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad - 500 034 Tel: +91 40 6630 5000 Fax: +91 40 6630 5299 Kolkata Park Plaza, Block F, 6th Floor 71 Park Street Kolkata 700 016 Tel: +91 33 4403 4000 Fax: +91 33 4403 4199 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3058 5764/65 Fax: +91 20 3058 5775

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