The food and grocery retailing segment is estimated by Technopak to have a market size of $686 bn by 2020. That means just this segment alone would be larger than the economy of Switzerland, Saudi Arabia or Sweden today. This will be a massive market and is still highly unorganised. Estimates vary for what percentage is in the official sector between 10-30%.
The unorganised sector is dominated by mom and pops stores locally called kiranas. These are small independent grocery stores where the owners usually work in the shop themselves and handle the day-to-day running of the business. The organised sector is comprised of foreign and domestic chains of usually larger supermarkets.
Many companies have tried and failed to assert dominance in this segment. They have been hindered by the millions of small shop owners who operate the kiranas. These shops often have a limited range and small retail spaces but dominate most areas of India. As shop owners are so numerous, there is obvious incentive for a government to please them. The most visible aspect of this protection was the law preventing foreign companies from taking stakes larger than 51%. It is a political issue in India where people have fierce loyalty to their community and can have an unfavourable view of large corporates.
Domestic chains such as Big Bazaar have struggled with finding suitable locations at a reasonable cost. They have yet to seize an advantage that prevents others from following their path.
Optimistic technology entrepreneurs believe India could skip organised bricks-and-mortar retail and go straight to online retailing. The most prominent start-up, Big Basket, has a distribution network set up in 18 cities already.
Kiranas vs Organised Retail
Kiranas usually hold small inventories thus shoppers may have to visit multiple shops to get all of their items. Supermarkets tend to have a much wider range of goods on sale, which increases choice for consumers. It makes them a one stop shop. Indians that use both tend to choose supermarkets for planned purchases and kiranas for unplanned ad hoc spending. For these consumers, both serve separate needs.
As kiranas buy their goods from wholesalers in relative small purchase quantities, the owners do not benefit from any economies of scale. This means prices are generally significantly higher in kiranas. Chain stores can offer more discounts and incentives for customers because their profits are spread over more goods. It is very difficult for an independent kirana to compete with a chain based on price. This advantage is critical in India where consumers are price sensitive and many do not have the means to choose convenience over money.
In the developed world, refrigeration and freezer systems in supermarkets are taken for granted. These have high initial capital costs which many kiranas are unable to afford. A supermarket can take on this initial burden and pay it off in the long term through funding from other areas of the business. Food wastage in a country where swathes of people are malnourished is an unacceptable consequence of the current industry structure.
The kirana shops are traditionally family businesses and passed onto children. Some parents may feel children don’t need a proper education because they want them to take over the family business. Employees are often family and friends. By providing a certain source of income for these people, it meant these opportunities aren’t open to others. The owners are further removed from the hiring process in organised retail thus employees tend to be hired on merit. The downside is the classic principle-agent problem where it takes time and effort to find a store manager whose interests are closely aligned with the owner.
The kirana owners tend to have a very strong relationship with their neighbours and community. This strong bond manifests in benefits that it would be very difficult for a chain to reproduce. This is important for many Indians where owners can predict their usual demand and ensure they are stocked. They can offer free home delivery informally because of the hyper-locality of their customers. Kiranas offer interest free credit because they personally know the customer and there is a greater level of trust. Supermarkets can mimic this relationship by training employees to be personable with customers but they would not be able to control a free credit system.
Convenience is the other main benefit of kiranas. As they take up little space, they can be set up anywhere whereas traditional retail store locations are much less numerous. Many Indians would need to travel some distance to reach a store of this size. Most Indians, 70%, live in rural areas where large stores are practically non-existent. Even in the cities, it’s difficult to imagine a large corporate supermarket store in the middle of the Mumbai slums.
How Organised Retail could overcome Kiranas
Foreign companies were limited to 51% of a multi-brand retailer and to succeed they need to leverage their Indian partner. Arrogance that what worked abroad will work in India has been many companies’ downfall. The Tesco-Tata joint venture is refreshing in its initial slow growth while it is working out the market.
The initial strategy is to focus on large standalone stores in major cities. These stores are clearly aimed at the affluent middle class who have disposable income. While this tactic is likely to bring some success, it is only a tiny part of the overall Indian market. If successful, it can be used as a springboard to a wider customer base. A player having just 10% of the overall market in 2020 would have revenues of nearly $70bn. While this is unrealistic by 2020, there is clear incentive to think big in the long term.
Earlier this year, 100% Foreign Direct Investment was permitted for food multi-brand retailers. However, the complexity of the Indian market means that regardless, any new joiner should partner with Indian companies. For domestic companies, it opens up the possibility of offering a controlling stake to a foreign investor to raise money and acquire skills from abroad.
India recently introduced the ‘Goods & Services’ tax, which is a boon for players who want to expand across state lines. It means the tax system is more transparent and reduces bureaucracy. It diminishes the opportunity for corrupt officials to take a slice of the profits. This reduces one of the roadblocks for large grocery chains.
Retailers could mimic the variation of store sizes used by Tesco in the UK. There are large stores in the suburbs where the population is more affluent and will be able to drive to the stores easily. Then there could be the equivalent of Tesco Express stores, which are similar in size to kiranas, in more dense areas. A one store size fits all approach will not work in India. It would be wise for companies to buy several kiranas in a local area and streamline the logistics. They could keep top performing former employees to keep familiarity for customers and local area knowledge.
Coca Cola’s success in India is a model for grocery chains to follow. Coca Cola decentralised their distribution network using a spoke and hub model. Bottles are delivered to hubs, which are then delivered to spokes in large towns. From there, they are passed onto local Mom and Pops stores. An impressive array of vehicles reaches hard-to-access areas including cycle rickshaws and auto rickshaws.
Other major global fast moving consumer goods target India such PepsiCo, Mars, Nestle, Kraft and Danone. Combined with big Indian brands such as Parle Products, there are many potential partners for a nationwide grocery chain.
Imagine a grocery company that could offer Coca Cola’s distribution network to all grocery brands. This would save the brands from building complex, expensive networks and the grocery store would deal in larger deliveries thus more efficiently. In Coca Cola’s model, sometimes a single crate needs to be delivered to a remote village located miles from the town acting as a spoke. A hub that contained many different products could instead deliver an entire week’s supply at once.
Greater sophistication in transport of fresh food yields many benefits. If a company can collect food directly from farmers, they can ensure less food goes rotten in transit and they cut out a series of middlemen. In an ideal world, this would lead to greater compensation for the farmers and greater profits for the supermarkets. It will be crucially important to forge fair agreements to avoid reputation damage. While kirana owners are a large portion of the electorate, it pales in comparison to farmers. Politicians will be aware of this and will want to spin themselves as on the side of the farmers. Domestic companies have the advantage of knowing the political backdrop to prevent themselves being demonised.
This sounds easy in theory but in practice local tastes vary widely within India. This is the great challenge for any nationwide grocery retailer in India. Consumer research is vital to make sure core needs are being met. There would need to be strong regional management who could steer the nationwide management to the right direction.
Nationwide chains may have to be built town at a time in a slow and arduous process. Buy a kirana, assimilate into brand and logistical structure repeat. Many savvy entrepreneurs could slowly establish small grocery chains and increase the value of each individual store then sell onto a bigger player. Even without the goal of selling on, consolidation at a locality level makes sense. It increases the size of orders from wholesalers thus decreasing the cost of goods sold. If shop owners were willing to cooperate with each other they can form a partnership thus obtaining some of the benefits of being a chain without relinquishing control.
Online: the Kirana and Supermarket killer?
Mom and Pops shops in the developed world were out-competed by supermarket chains before the internet had set the world alight.
However online grocery shopping hasn’t caused a storm in many developed countries. The UK market has stood out for consumer behaviour shifting but in the US, the industry is still in it’s infancy. In the UK, home delivery is causing headaches with customers wanting the service for minimum price which is not sustainable.
In India, some companies such as Grofers attempted to create apps which allow a way to order items from the local kirana for home delivery. These companies have recently struggled for funding as the profitability potential just isn’t there. The apps add an additional cost to retailers for something they were doing anyway by getting junior employees to deliver goods after receiving a phone call.
Pure online retailers like Big Basket have had more success with over 1 million orders a month. It currently operates in at least 25 cities. Like all e-retailers, the focus is currently on the Tier 1 and 2 cities with large dense populations. They put their success compared to their rivals down to experience in the offline retail segment, which helped them build their comprehensive supply chain. Technology features too such as laser-perforated bags to keep vegetables fresh. Their marketing and brand awareness has been another strength with Shah Rukh Khan, the biggest draw in Bollywood history, named their brand ambassador. As recently as March 2016, they raised $150 million from investors.
The appeal of online retailing lays in the difficulty in doing big shopping trips in India. Indian traffic is world famous yet their penchant for convenient parking spaces is not. It is understandable for busy Indians, especially young Indians, to have a less stressful experience.
It is not all plain sailing though. Many of the problems that have prevented grocery chains from taking off will impact e-grocers too. Some Indians will remain loyal to their local kirana and simply not see a reason to change the way they do things now. Some will feel uneasy about spending their money elsewhere as it affects the income of the store owners they have known for many years.
Particular to fresh produce, many Indians like to pick their own items as they can use their own senses to verify quality before purchase. The ability to choose the best ingredients is a source of pride and there is a lack of trust that a person in a warehouse would be their equal.
Ironically, the biggest danger to the e-grocer industry is itself. Amazon Pantry has been allowed to operate in India and is promising low prices. Amazon can subsidise its losses through revenue elsewhere in the world, a luxury not available to domestic players. A price war would damage all sides and if Amazon appeared to be winning, it is likely the Indian government would intervene. This would tarnish the reputation of the whole industry. Indians would be aware that the domestic firm was outcompeted while foreign companies would be less willing to invest. At this fledgling state of the market, a premature price war would be mutually assured destruction.
Most of the developed world initially had unorganised retail that was gradually supplanted by oligopolies. The benefits of the economies of scale are too large to be ignored. In India, the kirana model does deliver benefits to customers that will be lost. Kiranas can survive by modernising and forming partnerships. In the medium term, the organised sector will steal market share especially in affluent neighbourhoods. In the long term, there is potential for large scale consolidation, that will eventually lead to the market structure we see in the UK. The online industry looks promising but is yet to be fully established and in Amazon Pantry, any new entrant faces formidable competition.