Retail humbles the big

Mumbai: Immensity, clout, power and big money do not necessarily ensure a complete reign of the market all the time. And fast-moving consumer goods (FMCG) majors have slowly started swallowing that bitter pill.

FMCG biggies like Hindustan Lever and Nestle are set to face a tougher competition from home-grown smaller brands, as organised retail chains are growing in cities and towns across India - along with that private labels, too, are picking up.

For instance Foodworld, which opened its first store in 1996, today operates 72 stores with a total turnover of Rs 300 crore. Subhiksha, started a year later, has 115 stores and clocks a total turnover of Rs 200 crore. Both companies are forecasting a 30-per cent-plus CAGR in turnover, and are busy opening new stores in new towns.

Apart from that, a horde of grocery and FMCG retailers - like Akbarallys, Trent and BPCL - is seriously and effectively wooing customers to their fold. So the trend clearly shows that the winners in the game are those who own smaller brands, rather than the established brands of FMCG majors.

According to a study conducted by the foreign broking firm Merrill Lynch, the reason for the new trend is because distribution barriers have reduced and setting up distribution network has become less formidable due to the organised retailer. This should be a big benefit to smaller brands, which earlier suffered from limited distribution, the report says.

Retailers are developing more profitable in-house brands through a large-scale sourcing base. For instance when Foodworld got into the jam business, its major threat was HLL, which had a market share of 70 per cent. Today Foodworld makes and sells more jams than HLL. Contrary to popular beliefs private labels exist not just in staples like flour and rice, but they are also rapidly growing in categories that are relatively higher value-added, such as detergents.

Foodworld has now launched its own brand of tea, detergents and surface cleaners. In an era of lower income growth and slowing consumer demands, increasing competition from new industry players, like retailers, further adds to the problems of FMCG companies, the Merrill Lynch study says.

But as the retail chains grow, FMCG majors will find it more economical to eliminate the distributor and supply goods directly to the retailer - that way some distributor margins can be passed on to the retailer. Foodworld and Subhiksha indicate that larger companies like HLL and Nestle will soon begin direct supplies to retailers. Thus retailer margins are likely to rise, but not at the cost of the manufacturers margins.

Eliminating cost inefficiencies to benefit the consumer
 This is especially true in the case of groceries and staples, where supply chains tend to be long and inefficient. Organised retailers are eliminating inefficiencies and squeezing inventories through the benefit of scale and better use of technology, thus offering superior value propositions to the consumer, the study says. The better examples for that trend are Foodworld and Nilgiris that now run thriving private label businesses.

Organised grocery and FMCG retailing is growing, but very gradually. India is unlikely to see dramatic changes in retailing formats, as was the case in other Southeast Asian countries. Today organised grocery retailing in Malaysia and Thailand accounts for 25 per cent of the total retail sales. This is up from virtually nothing 10 years ago.

In India, as per broad estimates, the total grocery retailing amounts to US$61 billion, of which organised retailing accounts for less than 1 per cent. More importantly, this percentage is estimated to rise to just 2 per cent over the next five years, based on growth forecasts of established players like Foodworld and Subhiksha.

While organised retailing is here to stay, a number of regulatory issues prevent a runaway growth. Though most industries in India have been liberalised over the last few years, the retail sector remains closed to foreigners. For an industry that requires huge capital and has a long gestation period, no foreign equity is a major stumbling block. Property laws are also working against its growth. Non-availability of real estate and clean property titles is a major problem.

This is further complicated by archaic laws. For instance, the Delhi governments zoning laws restrict the size of the retail outlet that can be set up in various locations. In most areas the stipulated store size will be less than the minimum economic size. High property prices are a significant hurdle in large metros like Mumbai.

With property prices 40-50 per cent times higher than most other metros, profitability will be considerably squeezed. Even if the regulatory environment becomes more conducive, India cannot replicate the Southeast Asian countries retail revolution, the study said.

Significantly, with lower per capita incomes, the Indian consumer is relatively much poorer than his counterpart in Southeast Asia. On a purchasing power parity the per capita income in India is $2,3900 - approximately one-third of Thailand and Malaysia.

Personal transport and road infrastructure are also the key for large-scale retail formats to succeed. In India not only fewer people own personal transportation, the cost of running own vehicles is also much higher. Secondly, paved roads in India account for just 55 per cent, compared to 98 per cent in Thailand. Lack of good roads and horrible traffic jams in bigger cities further deter Indian consumers to reach out to shopping malls that are far away from their homes.

Unlike countries like Korea and Malaysia, where urban consumers account for over half of the population, in India the percentage is a mere 28 per cent. Thailand, too, has a low urban population, but good motorable roads compensate that. Hence in many Asian countries organised retailing could easily become a large part of the total retail sale. The same cannot be true for India, as 70 per cent of Indians live in rural areas.

India is already a highly retail penetrated country
Another difference that we need to appreciate is that unlike the situation in Asian countries prior to the retail revolution, India already has a high density of retail outlets, estimated at 12 million.

While these outlets are typically small with poor ambience they offer a great service - they are typically next-door, offer home delivery and, very often, monthly credit. Clearly, these benefits eliminate the need for a swanky shopping mall, more so in a poor country with terrible traffic jams.