STRATEGIC ISSUES IN RETAILING

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STRATEGIC ISSUES IN RETAILING

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At the end of this module, the learningoutcomes are• Understand the history of Indian retailing

sector• Emerging trends• Understand the strategic drivers of this

industry• Understand the challenges the organized

retailer faces

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Background

• Organized retailing

• New to India

• Excess of 5 million retail outlets

• Comprises of both organized and unorganized sector

• Organized sector market share is less than 10%

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• Large market

• Fragmented

• Only 7% of the 5 million retail outlets have annual sales in excess of 10 lacs per annum.

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Barriers to entry for organized sector• The unorganized sector• Retail margin• Supply chain management• Sourcing economies• Automobile ownership• Infrastructure• Middle class psyche• Large-scale diversity

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The unorganized sector• Unorganized retailing• Long history• Many centuries• Local kirana/grocer dominant• Low-cost structure• Saves on real-estate/labor costs• Little or no taxes to pay• Consumer familiarity

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Organized sector

• Large overheads• Compete with grocer on prices• Facilities• Airconditioning• Power backup• Home delivery• High inventory costs• taxes

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Retail margin

• 10 to 12% average for grocers in India• 25-35% in developed countries• Grocer can survive• How organized retailer will survive with 10-

12% margin?• High overheads

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Supply chain management

• Product availability

• Inefficient transportation systems

• Makes modern retailing difficult

• Absence of economies of scale

• Impacts cost

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Sourcing economies

• Absence of large scale retailers

• Diseconomies of scale

• Unable to negotiate large discounts with suppliers

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Automobile ownership

• Limited to 4% of the population

• Makes out-of-town shopping difficult

• Limits large scale purchases difficult for customers

• Large scale shopping is the essence of shopping in organized retail stores.

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Infrastructure

• Parking limitations

• High local government taxes

• Frequent power failures

• Efficient logistics difficult

• Adds to costs

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Middle class psyche

• Consumer psychology

• Larger stores are expensive

• Partially a myth

• Local grocer still cheaper

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Large scale diversity

• India, a culture of diversity

• Diversity leads to dependence on local suppliers

• Match local tastes

• Discourages economies of scale

• Unfavorable to organized sector

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Early entrants in organized sector

• Bata

• Raymonds

• Vimal – Mostly franchisee route– Overcome high real estate costs

• Later new breed of players

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• Shoppers Stop

• Future group

• Entry of large houses

• Deeper pockets

• Success of cooperative chains

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The Changing scenario• Changing lifestyles• Increasing disposable incomes• Lesser and lesser time to devote to numerous

shopping trips• Lesser trips• Larger size of purchase per trip• Concentration of middle class• Moving away from city to suburbs

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• Mall culture setting in

• New players

• Restrictions on foreign retailers

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FUTURE SUCCESS IMPERATIVES

Clear value proposition

• Big Bazaar

• Clear value propositions

• ‘Is se sasta koi nahin’

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Plain imitations of western models

• Tendency to imitate western models

• Will not always work

• Different environmental conditions

• Failure of Nanz

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Strong cost focus

• Higher costs for organized sector

• Low-margin business

• Cost control critical

• Longer gestation period

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Private labels

• Popular in western countries

• Why retailers promote

• Higher margins than national brands

• Threat to national brands

• Source of additional revenue to retailers

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Building royalty/CRM

• Building loyalty

• Identifying profitable customers

• Use of CRM techniques

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Price

• As market matures

• Price a key differentiating factor

• Higher value for money

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Value cost leveraging• Create greater customer value at higher

costs• Leverage that value proposition to

generate volumes• Repeat purchases• Greater volumes means greater

contribution• Leads to higher profits

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• Local suppliers

• Diversity of customers

• More suppliers

• Local suppliers have advantage over traditional suppliers

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Trends

• International trends

• Food and grocery

• Largest segment

• More than 40% of the market

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FAILURE OF SUPERMARKETS

• Why Nanz failed

• Poor understanding of consumer behavior

• What went wrong

• three factors

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Three factors

• Lack of clear value proposition

• Falling prey to sourcing diseconomies

• Ignoring the merchandizing mix

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Lack of clear value proposition

• Nanz a late entrant

• Large unorganized retail players

• High real estate costs and other overheads

• Low efficiency

• No clear positioning to customers

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Consumer insights

• Staples and perishables

• Major part of the budget

• Decides whether outlet is cheap/expensive

• 70% of the consumers do their daily shopping at one place

• If staples are not bought, consumers are unlikely to buy other products

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Falling prey to sourcing diseconomies• Imitating western models• Centralized warehouse• Use of technology• High overheads• High volume required• Difficult in single stores• Major reason of failure

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Ignoring the merchandizing mix

• Profitable products

• Working on average gross margin

• Cannot be same on every product

• Sourcing from farmers

• Eliminating middleman

Documents

STRATEGIC ISSUES IN RETAILING