Organised rural retail faces speed bumps

Good long-term potential, but long gestation for now, is the feeling

Rural retail was supposed to cash in on the prosperity of Bharat, but the storyline hasn’t really gone the way big corporate houses had hoped.

While some have chosen to wind up business, others have preferred to go slow due to a host of reasons.

Such stores offer products like agri-inputs, cattle feed, plastic furniture, FMCG products, automobiles, banking, crop insurance and other agronomical services.

Setting up an organised retail business in rural towns proved to be challenging. Companies have faced problems with regard to infrastructure, distribution, fluctuating rural incomes and stiff competition from local kirana stores, which operate at much lower costs. However, these factors did not deter companies such as DCM Shriram Consolidated Ltd (DSCL), ITC, Godrej and Triveni Engineering from investing in rural retail.

However, recently, Triveni decided to shut its 42 stores after its retail venture incurred losses of about Rs 19 crore in over five years of operations. The company had not expanded the number of outlets for the past two years. DSCL, with 300 retail outlets under the Hariyali Kisaan Bazaar brand, did not expand in 2009-10. It is not looking to increase the number in 2010-11, either. “Over the last four years, we have grown the business 10-fold to around 300 outlets. Having achieved a critical mass, the company in 2010-11 is focusing on consolidation,” said Ajay Shriram, chairman and senior managing director.

The erratic monsoon in the last kharif season had affected farm incomes. However, rural incomes have gone up consistently over recent years, on regular increase in the support price of crops like wheat, paddy and sugarcane. More, farm income is not taxed.

“As rural retail does not have any benchmarks to follow, we have to keep innovating. Like all retail formats, rural retail also had a slowdown and is now looking at focusing on making its individual formats work. With improvement in the market sentiment after a satisfactory rabi season in 2009, we expect the markets to improve,” added Shriram.

ITC, which operates 24 large format rural outlets known as Choupal Saagar, has not expanded since 2007, due to a reversal in agri reforms. “ITC’s rural retail business is an integral part of the e-Choupal network. The lack of agriculture reforms and regular restrictions on futures trading in farm commodities since 2007 has prevented us from expanding the Choupal network and, consequently, the retail business has not been expanded. However, the business from existing outlets has been growing well since rural incomes have gone up,” said S Sivakumar, chief executive of ITC’s agri business.

According to a CII-Technopak study on rural retail, the biggest bottleneck towards development in the rural markets is excessive dependence on agriculture and, consequently, on rainfall. There is overall slowdown of GDP growth every time there is poor rainfall. The rural consumer is unique and it requires long painstaking efforts to understand, relate to and be accepted by him. Rural marketing involves more intensive personal selling efforts compared to urban marketing.

The industry, however, is confident of exploiting the potential of rural retail in times to come. “The penetration of organised retail is very low in rural India. Approximately 10,000 out of 6,00,000 villages in India have access to organised retail services. The huge market potential is undisputable. The company is optimistic about the business model. It is a long-gestation business; however, it has high growth opportunities ultimately,” said Shriram.