STRATEGIC ISSUES IN RETAILING

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STRATEGIC ISSUES IN RETAILING

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

• 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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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

Organized sector

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

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

Supply chain management

• Product availability

• Inefficient transportation systems

• Makes modern retailing difficult

• Absence of economies of scale

• Impacts cost

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STRATEGIC ISSUES IN RETAILING

Sourcing economies

• Absence of large scale retailers

• Diseconomies of scale

• Unable to negotiate large discounts with suppliers

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

Infrastructure

• Parking limitations

• High local government taxes

• Frequent power failures

• Efficient logistics difficult

• Adds to costs

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STRATEGIC ISSUES IN RETAILING

Middle class psyche

• Consumer psychology

• Larger stores are expensive

• Partially a myth

• Local grocer still cheaper

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

• Shoppers Stop

• Future group

• Entry of large houses

• Deeper pockets

• Success of cooperative chains

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

• Mall culture setting in

• New players

• Restrictions on foreign retailers

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STRATEGIC ISSUES IN RETAILING

FUTURE SUCCESS IMPERATIVES

Clear value proposition

• Big Bazaar

• Clear value propositions

• ‘Is se sasta koi nahin’

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STRATEGIC ISSUES IN RETAILING

Plain imitations of western models

• Tendency to imitate western models

• Will not always work

• Different environmental conditions

• Failure of Nanz

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STRATEGIC ISSUES IN RETAILING

Strong cost focus

• Higher costs for organized sector

• Low-margin business

• Cost control critical

• Longer gestation period

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

Building royalty/CRM

• Building loyalty

• Identifying profitable customers

• Use of CRM techniques

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STRATEGIC ISSUES IN RETAILING

Price

• As market matures

• Price a key differentiating factor

• Higher value for money

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

• Local suppliers

• Diversity of customers

• More suppliers

• Local suppliers have advantage over traditional suppliers

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STRATEGIC ISSUES IN RETAILING

Trends

• International trends

• Food and grocery

• Largest segment

• More than 40% of the market

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STRATEGIC ISSUES IN RETAILING

FAILURE OF SUPERMARKETS

• Why Nanz failed

• Poor understanding of consumer behavior

• What went wrong

• three factors

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STRATEGIC ISSUES IN RETAILING

Three factors

• Lack of clear value proposition

• Falling prey to sourcing diseconomies

• Ignoring the merchandizing mix

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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

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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STRATEGIC ISSUES IN RETAILING

Ignoring the merchandizing mix

• Profitable products

• Working on average gross margin

• Cannot be same on every product

• Sourcing from farmers

• Eliminating middleman