Guidelines & Cautions To Indian Food & Grocery Retailers - A Research Paper by Ganesh Kumar - RA

Guidelines & Cautions to Indian food & grocery “Convenience format” Retailers
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Guidelines & Cautions to Indian food and grocery “Convenience format” retailers
Ganesh Kumar
September 2008
The main objective of this paper is to help food and grocery retailers, researchers, managers
and students to understand current and future shopping behaviors of customers, and furnish
recommendations to improve efficiency, reduce costs, retain customers, and
ensure sustainability in the market.
Guidelines & Cautions to Indian food & grocery “Convenience format” Retailers © 1
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Guidelines & Cautions to Indian food and grocery “Convenience format”1 retailers
Ganesh Kumar2
Abstract
This paper discusses finer points of Indian retail industry and throws light on the “Convenience
store format”1 adapted by retailers in the food and grocery sector.
The organized1A retail industry in the food and grocery sector in India has existed for over 12
years3. It has been observed that very few retail stores in this sector have been able to reach a
break-even point. Even so, the organized retail industry has expanded multifold and different
formats of stores have been established.
Dramatic changes have been observed in the shopping preferences of customers. The number of
customers, shopping for food & grocery, from kirana stores to convenience stores (c-store) has
increased. On the other hand, the migration of customers preferring to shop from larger stores
(Hyper Markets) as compared to convenience stores has been swifter.
Convenience stores and hyper markets maintain a different set of standard for facilities and
services offered by them to sustain in market competition. It has been found through research
that 78 percent4 of food & grocery customers (c-stores) are willing to try any new organized
retail store. This is indicative of the customers’ expectations being much higher than what is
being offered to them by c-stores. A great challenge is posed to convenience store retailers to
capture a consistent customer base.
Convenience stores must now attempt to focus on certain significant factors like store location,
stocking the right merchandise mix, understanding demographic profiles of prospective
customers, providing value added services, providing a great shopping experience and others.
It has been endeavored to create a guideline and alert convenience store retailers towards the
migratory progression of the customers, to ensuring customer loyalty.
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INTRODUCTION
India tops the AT Kearney's Annual Global Retail Development Index (GRDI) for the third
consecutive year5. The Indian retail market, which is the fifth largest retail destination globally,
is estimated to grow US$ 427 billion by 20106.
In this growing market, organized retail has a whopping growth rate of 49.73 percent8. A report
by Images Retail estimates the number of operational malls to be more than 412 by 2010 and
further 715 malls by 2015 in spite of rising real estate costs. In India, currently eighteen retailers9
are playing in the food and grocery convenience format store and some more are expected to join
the race. The numbers of convenience format retail stores of almost all the retailers are growing
tremendously. Big players like Reliance Retail, RPG Group, Future Group, Tata, Wadhawan
Food Retail, Aditya Birla Group, Subhiksha and others are on a nationwide expansion mode; we
can expect over 15000 c-stores by 201010.
From the consumer’s perspective, the expenses on food and grocery are highest in their monthly
household budget. The sales volumes, of stores in general, depend a lot on this factor. MGI
research quotes that the expenditure on necessities11(food, beverages & tobacco) will reduce
from 42 percent12 in 2005 to 25 percent in 2025. This makes the fate of c-stores quite uncertain
and questions arise as to
a) How long this convenience format retail chain lead over other formats?
b) Will convenience retail stores lead as long as kirana stores had led in India?
c) Do better prospects lie for hypermarkets?
The answers lie in the forthcoming sections. A look at the GDP chart gives us a fair idea about
the relation between GDP growth rate and retail sales.
13
GDP, Private Final Consumption Expenditure and Retail Sales Growth, 1994-07
(Compound Annual Growth Rate)
1994-95 to 1999-00 2000-01 to 2002-03 2003-04 to 2006-07
Real GDP 6.6 4.7 8.7
Real private final consumption
Expenditure 5.7 4.0 6.7
Retail sales 13.6 4.8 10.9
As GDP growth rate is indicative of the retail sales growth and income of households. It is likely
that the shift from convenience format to hyper market will be much swifter provided the growth
rate of GDP remains as it is today.
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Researches attempting to investigate this phenomenon have found that 78 percent14 of food &
grocery (convenience format) customers are willing to try new retail store, but at the same time
79 percent15 shoppers are satisfied with service level of current retailers15A. It implies that the
expectations of shoppers are increasing from c- stores. Certain points need to be thought over by
present c- format retailers and those who wish to join the race.
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CHOICE OF STORE FORMATS AND CUSTOMER MIGRATION
The concepts of convenience stores (c-stores) and large format stores (hypermarkets) are firmly
implanted in the minds of the middle class urban consumers today. The retailers are now striving
to provide several services and create unique positive experiences for the target masses.
Nevertheless, the inconsistency of customer base has been a thought provoking issue for the
retailers since customer migration continues at an alarming rate.
The innovative features of large format stores are luring customers to them apart from offering
the basic services available at other organized formats. Today, location has become less of a
differentiator with c- stores springing up close to each other, all trying to target the same
catchment area. Therefore, along with pricing and a wider product range, the In-Store Experience
has become a vital differentiator. This experience affects customers physiologically and
emotionally. The convenience format chains lag far behind in this aspect and this is not viable
for them where as hypermarkets are walking off with their customers while providing the
divergent shopping experience.
Different shoppers will choose different store formats depending upon their personal preferences
and characteristics, and the value being offered to them17. Higher income groups seem to prefer a
patronage of super centers (and away from convenience stores).18 Albeit a shopping basket
comprising of better quality products, research also proves that a higher income group positively
relates to higher service levels and also expects a wider range of assortment in consumption.
(Bawa & Ghosh 1999)
According to the global spending patterns, using food and clothing definition, South Korea’s
share of spending has fallen from 57 percent in 1970 to 22 percent in 200519. India is also likely
to follow the trend as expenses on food, beverage, and tobacco may drop from 42 percent in
2005 to 25 percent in 202520. That again indicates that a shopper may choose the format which
will offer a broad range of products; the hypermarkets may be the first choice of shoppers.
Apart from all these, hypermarkets nowadays are targeting the middle class as well, which is one
of the important causes of customer migration from convenience format stores to hypermarkets.
The rate of migration to hypermarkets from c- stores is much faster than that from kirana stores
to convenience stores. This speedy attrition (from c-stores to hypermarket) rate may hamper the
growth story of convenience format retailers. If not, it will take a longer time for c-stores to
reach break even. However, it is not the break even, which will grant assurance of profitability
rather than the scale21 for convenience format store. This is an additional issue to be managed by
convenience format retailers.
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Let us consider the overall scenario of the retail industry in India. As time went by, the
demarcation between organized and unorganized sectors became apparent.
Kirana stores have ruled India over 100 years22. Common features of kirana stores like
customized home delivery, credit facility and selling products lesser than the maximum retail
price have made sure of a loyal customer base.
The kirana stores have been fighting off other format stores but have been overpowered by
convenience stores that advocate hygiene, wider product range and better service. Hypermarkets,
on the other hand, boast of providing a wider product range, entertainment and shopping
experience all under the same roof. A big chunk of shoppers today choose large format stores
due to shift in income, social economic classification (SEC) and lifestyle.
It may be such that the kirana traders operating at the periphery of the organized sector are the
first ones to bear the brunt of the rapid expansion of organized format stores. These traders might
lose their businesses to the organized sector relatively early. Others who are outside periphery
are likely to get 10 years or so, provided the growth rates in organized retail remain as they are
today23. However convenience format is likely to rule far less period than kirana stores.
As per Technopak Advisors, there will be 1,400 hypermarkets with 66 million sq feet of retail
space by 2010, which will generate revenue of $47.17 billion24
The research also says that 78 percent4 of food & grocery (c-stores) customers are willing to try
any new organized format retail.
As shoppers are also now giving importance to large store format/wide selection, the figures
have risen from 10 percent in 2005 to 13 percent in 200625 and are expected to reach 20 percent
by end of 200826. Shoppers are associating large format with the convenience of finding
everything they want in one store and appreciate the availability of stocks.27
At the same time, distribution of monthly food and grocery baskets of Mumbai residents have
been found very similar among different formats; 33 percent in hyper market, 29 percent in
kirana/local stores, followed by 27 percent in organized small format/convenience format and 11
percent in others28. Also, basket size of food and grocery in a hypermarket was found to be 20.4
percent more than that of a convenience store29. Also, the spread of monthly retail basket (Fruits
& Vegetables, FMCG, Staples, and Bakery) is 24.3 percent more in hypermarkets than
convenience stores30.
On similar lines, sixty percent of the shoppers in hypermarkets have greater than 1000 rupees
ticket size whereas this figure is less than 33 percent in case of convenience stores31. The
hypermarkets occupy a space that is 9.8 percent of the total space allotted to organized retail in
india33. Surprisingly, 10 - 12 percent of Mumbai households buy their food and grocery from
hypermarkets32. It has also been observed that those who have cars end up buying from
hypermarkets and may not come back to convenience stores apart from buying missing items and
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perishable daily usages (milk, fresh vegetables etc).The above figures give enough indication for
future prospects of c-stores and hypermarkets.
It has also been predicted33A that shopping preference or choice of store format will follow like
this :- (implacable for urban India only or where the organized stores have presence)
Stage I Kirana stores

33B
(Buyers ) All households (a)
Stage II Kirana stores Convenience stores

33B
(Buyers ) [i + part of (b to g )] [h + some part of (b to g)]
Stage III Kirana stores Convenience stores Hyper market

33B
(Buyers ) (i) (b+c+d) (e+f+g+h)
Stage IV Kirana stores Convenience stores Hyper market Super Centre33C

(Buyers33B) None (i+b+c) (d+e+f) (g+h)
Classification Deprived Aspirers Seekers Strivers Near Rich Clear Rich Sheer Super Total
(i) (b) (c) (d) (e) (f) Rich (g) Rich (h) (a)
Income Class 5000 -
<90 90 – 200 500 – 1000 – 2000 – >10000
(INR ‘000 PA 200 – 500 10000
1000 2000 5000
2009-10 (HH
in ‘000) 114,394 75,304 22,268 6,173 2,373 1,037 255 141 221,945
Source: NCAER Report “The Great Indian Market 2005”
I agree with experts from the retail industry on the point that we have begun to move from stage
II towards stage III. The convenience stores are likely to get “all deprived” urban households by
2018 – 2020. It is also expected that convenience stores are more prone to make business at the
end of stage III and beginning of stage IV.
This also implies that kirana stores may have only ten years; the last stages of its life. This
would be an era where c-stores will make more profit and hypermarkets will attract largest
number of customers.
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SUGGESTIVE ACTION FOR CONVENIENCE FORMAT FOOD & GROCERY

STORES
Controllable versus Influential versus Uncontrollable factors
Controllable Influence able Uncontrollable factors

All internal factors Suppliers Political (govt. policy etc)
Consumers Technological
Economical
This can be core Almost equal Almost equal

Competence of company impact on all impact on all
Retailers should deem that whenever they move from controllable to influential to uncontrollable
factors, their control over them reduce from 100 percent to zero percent.
Now questions arise as to why retailers are or seeking to establish their stores in high end
residential colony, targeting Social Economic Classification (SEC) A & B, and blaming
influence able & uncontrollable factors for their bottleneck in sales volumes.
The following factors may be considered for customer’s retention in convenience format,
keeping in mind, limitations of consumer preferences, industry trends and purchase power of the
target audience. The following mentioned points are under the control of the company
(controllable).
i) Store size – 34It has been found that when the size of “C” format food and grocery range from
2100 square feet to 2800 square feet, they give the more per square feet sale. A positive
Correlation of 0.7 has been observed between Store Size & Ticket Size. Optimum utilization of
store space can be of crucial significance to the sales volume.
ii) Space and shelf management - Strategies to ensure larger visibility and involvement to a
customer have become critical success factors. These can be effortlessly ensured through space
and shelf management.
iii) Backward integration - 35One step backward integration may change the fortune of store
chains. It has been seen that, this can reduce the cost by 7 to 10 percent, which can be passed on
to customers on grocery items. This, in turn, will attract customers, as this is the main
composition of food and also increases the bill size.
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iv) Demographic factors - There should be right mix of demographic factors to sustain for
longer time in market, as retailers are opening their “C” stores in high end residential colonies to
attract and convert high end shoppers. But research says the other way round, the segment which
“C” stores are targeting is migrating towards hypermarket. So, for long time sustainability, the
catchment area should have mixed demographics not only considering the income class but also
the cultures of the customer base. This will minimize the risk of failure of stores as well.
v) SKUs availability– 36It has also been observed that availability of SKUs to customers play an
imperative role. Unavailability of desired SKUs (especially at the time of promotions, offers,
schemes etc.) leads to attrition of customers in the longer run and projects a bad impression of
the store in the shopper’s mind.
vi) Packet size - 37Some of retailers attempt to optimize customers by not keeping small packet
size/quantity of products. This has its own advantage and disadvantage, which largely depends
upon the catchment area. If the family size of the catchment area would be large, this strategy
will work well. In case of a smaller family size, this strategy can play a critical role in the failure
of stores. Implementing this strategy for a longer period may leads to attrition of customer from
stores.
vii) Ticket Size – Today, the ticket size of most of modern1A food & grocery retailers fall
between 150 rupees to 220 rupees. This is a bigger challenge for c-format retailers to increase the
average ticket size up to 500 rupees or more.
viii) Traffic movement - 38Precise traffic movement inside the stores as well as outside play a
key role in the success of store. Internal movement within the store gives delightful shopping
experience and increases impulse buying, where as outside movement gives comfort of
commuting.
ix) Organization structure - 39Flat organization structure has the power to not only cut the costs
but also help in faster decision making.
x) HR strategy - 40Recruiting employees with an education below 10th for store’s day to day
operation will not only retain employees for a longer period of time but also reduce the costs of
the company. (D – Mart, Mumbai based retailer is best example)
xi) Training – 41Providing informal “on-job-training” (OJT) to the staff may prove to be a good
investment for the store in the long run. Today, the lack of trained manpower in the retail
industry has opened up opportunities for many Indian business houses to train them. The retailers
may train their employees but keeping in mind the c-stores, this may not work in longer run, as
margin in food and grocery is not like apparel business. Retailers need to train the employee in-
house (OJT). Classroom training gives less of practical knowledge and involves more costs and
it may not be viable.
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xii) Minimizing capital expenditure – Retailers, when they are on an expansion mode,
overlook the minimizing of capital expenditure but should understand that a small reduction for a
chain of stores can be very huge amount. This will also direct to lowest operational costs. The
numerous organized c-stores retailers are booking their space for an average of rupees 750 per
square feet in Mumbai; others, at same time, are booking at rupees 450 per square feet. This
variation (750 – 450 rupees) itself can be a decisive factor for the letdown of stores.
xiii) Payment priority – 42To maintain customer loyalty, there should always be an availability
of main components/items of food. It has been seen that the stores following the payment priority
system would have an edge over the competitions.
a) Payment for Grocery vendors
b) Payment for Sugar vendors
c) Payment for Oil & vanaspati vendors
d) Payment to HLL’s products
e) Payment to Marico/Nestle/Amul
f) Payment to Parle/Britannia/P & G/Cadbury etc; respectively.
xiv) Store design – 43Store design, the interior & exterior, have an influence on the visibility of
stores/products, visual merchandising, traffic movement inside the stores, merchandising
planning and others. This can have an aesthetic impact on the customer and enhance sales.
xv) “Societilize™” - 44India is one country, but in reality, it has over 28 very different markets,
each with its own tastes and shopping habits. Understanding this diverse market and the
constantly evolving consumer is the biggest challenge. This would mean catering to the smallest
unit of the society.
xvi) VM – Visual merchandising is one tool which can change the fortune of stores. This is a
tool that can be used powerfully to attract customers. Using visual merchandising does not
require major modifications in the store and hence is cost effective.
CONCLUSION
 Expansion plans for the c-stores must be formulated keeping the above mentioned factors
in consideration
 High end customers cannot be loyal shoppers in c-stores as they would be more inclined
to shop from hypermarkets
 Retailers should concentrate more on internal factors considering these as an 100 percent
area of control
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REFERENCES, DEFINITION AND NOTES

1
Convenience store is a miniature version of super market, its store size differs from place to
place as per catchment area and customer traffic, these stores are located in residential colony,
petrol/gas pump and tourist place. Convenience format has been assumed to be modern1A retail.
1A
Modern retail/Organized stores has been as define as, store having self service, electronic
billing system and have chain of stores.
2
Author name, working with ‘Wadhawan Holdings (P) Ltd. As a Research Analyst, has
completed MBA from ITM Business School, Navi Mumbai in collaboration with EDHEC
Business School- France and ESSCA Business School – Budapest, Hungary. Email Id –
sendganesh@gmail.com
3
IGD Research and Estimates
4
Data base – R. K. Wadhawan Institute for Universal Learning (Research Cell), 78%
Convenience format shoppers.
5
A T Kearney 2007 Global Retail Development Index
6
A T Kearney 2007 Global Retail Development Index
7
MGI (Mckinsey Global Institute) India consumer demand model (2005)
8
http://www.ibef.org/industry/retail.aspx (Indian Brand Equity Foundation)
9
Food bazaar, Reliance Fresh, More 4 You, Food Land, Spencer, 6 Ten, Indiabulls, Vishal Mega
Mart, Nilgiri, Subhiksha, Big Apple, Spinach (Sabka bazaar, S Mart), KB’s Fair Price, Express
City, Magnet, Apna Bazaar, Food World, Fab mall etc.
10
http://retailnews.wordpress.com/2006/05/19/reliance-retail-plans-1575-stores-by-march-07/
http://www.livemint.com/2008/06/29151428/Subhiksha-to-invest-Rs1200-cr.html
http://www.financialexpress.com/news/Spencers-Retail-to-invest-Rs-2500-cr/267887/
http://www.domain-.com/companies/companies_a/a_v_birla_group/20080124_retail.html
http://business.mapsofindia.com/india-retail-industry/aditya-birla-retails-plans.html
http://relianceretail.blogspot.com/2008/08/pantaloons-expansion-unabated-kbs-fair.html
http://www.rediff.com/money/2008/jan/04retail.htm
http://www.thehindubusinessline.com/2007/02/13/stories/2007021302480500.htm
http://economictimes.indiatimes.com/Specials/Retail_Rush/Express_Retail_plans_Rs_100cr_exp
ansion/articleshow/1751344.cms
11
Necessities include food and apparel only.
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12
MGI (Mckinsey Global Institute) India consumer demand model
13
Source – ICRIER retail report, 22nd may 2008
14
Data base – R. K. Wadhawan Institute for Universal Learning (Research Cell)
15
15A
Current retailers may includes Hypermarket, Convenience store, Kirana Stores and Others (It
was not define/asked in questionnaire)
16
Hypermarket is large store of at least 25000 square feet with at least 25 checks –out counters,
selling wide range of products with a lot of customer’s service, facility. Normally this is big
building, tall ceiling, wide eyes, and huge parking space and sells almost all items which a
family buys.
17
Indian Institute of Management, Ahmedabad – Research and Publication, April 2008. (W.P.
No. 2008-04-03), page no. 10.
18
Indian Institute of Management, Ahmedabad – Research and Publication, April 2008. (W.P.
No. 2008-04-03), page no. 12.
19
Euromonitor, India data from MGI India Consumer Demand Model. (The Marketing White
Book 2007 – 08, Page No. 161)
20
Euromonitor, India data from MGI India Consumer Demand Model. (The Marketing White
Book 2007- 08, Page No. 161)
21
http://www.thehindubusinessline.com/catalyst/2008/03/27/stories/2008032750110300.htm
22
It is assumed that all type of stores are part of Kirana store (paan biddi etc), No such data has
been found for inception of first Kirana store.
23
Source – ICRIER retail report, 22nd may 2008
24
Technopak Advisors / New Delhi June 10, 2008
25
Shoppers Trend 2006. India A. C. Nielsen
26
Author has predicted this is based on observation and internal available data.
27
Shoppers Trend 2006. India A. C. Nielsen
28
29
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30
31
32
33
ICRIER Retail report 22nd may 08. (Hyper market occupy 9.8% of total organized space in
year 2006 in India, It is expected to be 12 % or more today, almost equal to percentage of
households shopping from hypermarket).
33A
Based on author prediction.
33C
Super Centre – A large store of at least 300000 square feet, which sell everything except four
wheeler and two wheeler. This is not in India till date, operating in America, Australia etc.
33B
Probable Buyers as predicted by author.
34
Data base – R. K. Wadhawan Institute for Universal Learning (Research Cell) for following
products line. (Foods and Grocery, Fruits and Vegetables, Non Food FMCG, Non Veg, Bakery,
Dairy)
35
Based on discussion with expert, who is consultant with many retail companies of Mumbai.
36
Based on author conversation with shoppers.
37
Based on author conversation with shoppers.
38
This has been observed with some stores (name can not be disclosed due to confidential
purpose)
39
Based on discussion with expert, who is consultant with many retail companies of Mumbai as
well as author personal opinion.
40
Based on discussion with expert, who is consultant with many retail companies of Mumbai.
41
Based on discussion with expert, who is consultant with many retail companies of Mumbai and
author personal opinion.
42
Based on discussion with expert, who is consultant with many retail companies of Mumbai as
well as author personal opinion.
43
Author personal opinion.
44
IDG research and Estimate
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Guidelines & Cautions to Indian food & grocery “Convenience format” Retailers

CHOICE OF STORE FORMATS AND CUSTOMER MIGRATION

Stage I Kirana stores

Stage II Kirana stores Convenience stores

Stage III Kirana stores Convenience stores Hyper market

Stage IV Kirana stores Convenience stores Hyper market Super Centre33C

Source: NCAER Report “The Great Indian Market 2005”

SUGGESTIVE ACTION FOR CONVENIENCE FORMAT FOOD & GROCERY

Controllable versus Influential versus Uncontrollable factors

Controllable Influence able Uncontrollable factors

This can be core Almost equal Almost equal

REFERENCES, DEFINITION AND NOTES

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