Modern Retail in India has become one of the most talked about topics in recent times. Some analysts have even commented that ‘It is the end of Modern Retail in India.’ The issues such as FDI in retail, GST and Supply Chain problems have taken centre stage in the media. No other sector has come under as such close scrutiny as Modern Retail with its leaders criticised for being reckless and committing some strategic/operational errors.
In my previous blog, I highlighted some of the past failures of Modern Retailers. While they are due some criticism, it is also important to understand the dynamics of Retail in India. Indians have become used to shopping in un-organised retailers like Mom and Pop stores. Modern Retail in India is relatively new and its adoption can be best explained through the Roger’s Diffusion of Innovation as shown in the figure below:
In the early days of Modern Retail adoption, innovators drove the market; they wanted a new way of shopping. Despite driving the market in the early days, they only represented a small percentage of it. The bigger market share was with the pragmatists and conservatives who wanted solutions and convenience. These consumers wanted value for money, convenient locations, shopping experience, and prompt service and were not willing to compromise on product quality. To win the segments of early majority/late majority and to build economies of scale, Modern Retailers struggled to employ a different marketing strategy to that of innovators and early adopters.
So what is the current scenario? Retailers have learned their lessons from past failures and started taking initiatives to address some of the problems [refer to my previous blogs]. They started to:
- Strengthen the supply chain and cold chain by building huge warehouses in key locations based on hub and spoke model.
- Use analytics for catchment selection, format selection and also to gain insights into consumer behaviour.
- Focus more on private labels to improve profitability.
- Close unprofitable stores and streamline formats to improve profitability.
- Negotiate rentals on a profit sharing basis.
The steps taken by Modern Retailers to rationalise their operations and to drive the efficiencies will bring the costs down which should enable them to pass these savings onto consumers enticing them to spend more in the stores.
And what is the future outlook? The future is looking bright for the sunshine sector. The Indian economy is estimated to grow to USD 2 trillion by 2014-15, with per capita income to grow at 12% CAGR. This would change the shape of income distribution from a pyramid to a diamond, with a massive consuming class in the middle. The Indian retail sector is currently estimated at around US$ 350 billion and growing between 15-20% CAGR, with Modern Retail itself growing at around 35% CAGR. Consumer sentiment is improving and after bottoming out in 2009, sales growth is showing signs of recovery.
To conclude, Modern retail in India is in its nascent stage, with a wide gap between it and Traditional Retail. Traditional Retail still holds 85% of the market while Modern Retail accounts for only 15% with a penetration of 5-8%. The challenge is to bridge the gap between the two and make Modern Retail a success story. It is too premature to write an obituary to Modern Retail in India as it is still evolving. It could be a case of survival of the fittest.
Is it the end of Modern Retail in India? Personally, I think it is just the beginning…