 "Rajiv Lal")
There are four primary costs: people, taxes, utility and real estate. On adding these for both organised retail and for kiranas, one will see the difference is huge, Rajiv Lal tells Devina Joshi
Indian e-retail has attracted billions of dollars worth of funding recently - a feat offline modern retail hasn't been able to match. How does this make life difficult for offine retailers?
E-retail is very attractive in emerging markets due to various reasons. The first is convenience of not having to go to a physical store owing to infrastructure problems. Second, prices are compelling online. Third, for younger people, it is becoming a norm to shop online, as the whole 'touch the tomatoes' or 'feel the fabric' fixation of the older generation doesn't seem to bother them.
On the other hand, the challenges which e-retailers have to overcome include delivering on the promise, concerns about security, meeting expectations etc. Complaints will go away with time. Of course e-retail discounts hurt physical stores but the real problem is, over the long run, this is trying to change consumer behaviour - once those consumers become accustomed to shopping online in these categories, why should they have to walk into a store? On the flipside, data shows that for online shopping, the basket size go down, because it is targeted shopping and there is no impulse purchase, with no opportunity to cross-sell and up-sell.
Your latest book, Retailing Revolution, details solutions for brick-and-mortar players for countering the internet threat. Can you cite an example of a success story?
Certainly in the electronics category, BestBuy is trying hard to adopt new ideas bearing in mind the problems in showrooms. Like people come to your store, try your products, get information and help from the salespersons, get a picture of the SKU and then land up buying it online, because it is cheaper there. What should a Croma or a BestBuy do in that kind of a situation? The solution lies in categories which are more of commodities… so if you look at low-end TV sets for example, you don't need a whole lot of help and you can straightaway buy it online. In those cases, an offline retailer need not even stock those products.
In categories where the consumer needs education and display, the retailer needs to ask himself the question, "Who am I creating value for?" In the electronics example, he is creating value for the manufacturer. Until the offline retailer doesn't provide those advisory and other services, the full value of a manufacturer's product is not going to be realised. The brand then has to compensate the retailer for the value that it has created for the brand. Look at Apple, for example. You may make the purchase online, but you are likely to throng the store to check the products out yourself. One sees this in other categories too; look at food, for example. Many suppliers will grant fees to the retailer for better display and things like that. So instead of getting paid by the customer, the offline retailer starts getting paid by the manufacturer.
Organised retail itself stands at 8 per cent of the overall retail sector. PwC predicts its share will grow to 30 per cent in 2024 and 50 per cent in 2034. Do you really see that happening, considering the stronghold of kiranas?
I think forecast numbers are usually out of line. Most organised retail cannot handle competition from kiranas. I have yet to see a case of the economics of organised retail beat those of a kirana store. There are four primary costs: people, taxes, utility and real estate. On adding up those four costs for organised retail and for kirana stores, you will see the difference is huge. So, sheer economic advantage of kiranas is one.
The second issue is: kirana stores are opening up in tandem with India's GDP rate. If organised retail has to reach 30 per cent, how many stores does it need to open? I don't know of any modern retail store that has the capacity to open so many stores in India. Look at the most rapidly expanding modern retail chain, and see how many stores it opens in a year. The organisational capacity to open, say 50 or 100 stores a year, is just not there, and even if you do manage that for 10 years, given the economic expansion of the country, the ability to gain a market share of that kind is somewhat impossible.
How difficult or easy is it to replicate successful retail strategies born out of head offices, in other markets? While QSRs have done that, what is your advice to the Wal-Marts and TESCOs of the world?
QSRs do that because they have a clear value proposition. They do certain things in a certain way. And there are Indian competitors to that as well. But if you take a look at just trying to sell Coca-Cola or general merchandise or food, what is it that Wal-Mart or TESCO can do in the Indian market that local organised chains or kiranas can't? What do they bring to the table? Just the size argument isn't enough. Yes, at some point Wal-Mart used to have efficiencies of volume. Nowadays people go to a Chinese manufacturer and get the same kind of prices so those volume buying efficiencies may not be there today as much as they used to be. Look at recent trends. TESCO has had to withdraw from many markets because those operations were not becoming profitable and second, their home market is in trouble. Wal-Mart has a huge business in China, yet it is barely profitable. And Wal-Mart went to China in 1996.That doesn't look like it's a home run.
Is increased FDI in multi-brand retail really the magical solution to unlock India's organised retail potential?
Even if India were to open FDI in multi-brand retail, the first question is, who's going to come? The more likely onesare Wal-Mart and TESCO, because the competition is fairly strong with Future Group, Reliance and the Tatas. The likely people to come will be branded retailers rather than multi-brand retailers. When a new market opens up, one can't expect success overnight. But look at the profitability of these multi-brand retailers in some of the markets where they have been present for over a decade, and you will realise the jury is still out.
RETAIL THINKER
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Lal was the Thomas Henry Carroll Ford Foundation visiting professor at Harvard Business School from 1997-98
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He has written extensively on the impact of using the internet as a channel of distribution on a retailer's pricing, merchandising and branding strategy
- His earlier research on pricing, trade promotions and salesforce compensation plans, which originated with his dissertation research, won the award for the best paper published in Marketing Science and Management Science in 1985
