Business | Grocery retailing in India

A long way from the supermarket

Modern food retailing has struggled to win customers from India’s old-fashioned merchants

|MUMBAI AND THANE

ON THE morning of Dussehra, a Hindu festival, Amar Singh is explaining why he stocks “exotic” produce, such as broccoli and iceberg lettuce, at his vegetable stall in Thane, a commuter city north of Mumbai. “I have to keep the customer in my grasp,” he says. Mr Singh has traded hereabouts for 20 years, and seems unperturbed by the supermarket chains whose branches have recently sprouted nearby. They are cheaper, he says, but they cannot match him on quality. As he speaks he sorts a tray of beans, discarding stringier ones. His assistant, Dabloo, has spent the early hours going through sacks of produce at a wholesale market to pick the best stuff.

The 10m-12m small traders like Mr Singh are a protected species. Complex and changeable rules governing foreign direct investment have made it tricky for rich-world chains to set up shop in India. They might count themselves lucky. India’s home-grown supermarkets account for only 2% of food and grocery sales and are struggling to make a profit. Revenues have not kept pace with rising rents. The Thane branch of Reliance Fresh, one of India’s big chains (see table), shut up shop recently. More closures seem likely. The bet made by the chains was that as India became richer, its consumers would abandon kerbside stalls and kiranas (small family-owned shops) for air-conditioned stores with wide aisles and broad ranges. Why has it not paid off?

In large part it is because supermarkets are not a compelling draw in terms of price and service. Most shoppers in India buy dairy products, vegetables and fruit either daily or every two to three days, and the traditional trade has a lock on these frequent purchases, according to research by the Boston Consulting Group (BCG). Its hold weakens a bit (and the appeal of supermarkets correspondingly tightens) on rich consumers and for less regular purchases: packaged foods; soaps, detergents and other groceries; and staples, such as rice and grains (see chart). But in general even affluent consumers prefer traditional stores, because they are closer to home, are usually open longer and offer credit to familiar customers. Many will deliver free of charge.

Traditional traders are also seen as cheaper. In fact, says Abheek Singhi of BCG, a full basket of goods is 3-4% cheaper at the supermarket, in part because it will sell a few vegetables and some staples as loss-leaders. Mr Singh’s stall sells tomatoes at 50 rupees a kilogram. In the local D-Mart, a low-frills supermarket, they sell for just 42 rupees. Yet Mr Singh has a fair claim to having the reddest variety. The chains ought to be able to offer keener prices on branded goods by squeezing their suppliers. But none of the supermarkets has enough muscle to push around Unilever or Procter & Gamble in negotiations. And India has a law that mandates a maximum retail price for packaged goods, which allows manufacturers a degree of control over retailers’ margins.

The supermarkets can offer a greater variety of groceries than the neighbourhood mom-and-pop store or stall-trader. But that is not as big a competitive edge as it may seem, says BCG’s Mr Singhi. Supermarkets compete with clusters of kiranas, which together can offer most of the same products. Next door to Mr Singh’s stall in Thane kiranas sell confectionary, fresh eggs and poultry.

Part of the supermarkets’ problem is self-inflicted. A lot of management effort has gone into the back end of the business to ensure that a broad range of goods reach the shelves in a timely and efficient manner. But the look and feel of stores has been neglected by comparison. Trailblazers, such as Tesco’s Jack Cohen, knew that retailing is part showbiz. In the 1960s his stores were opened by television stars. There is a paucity of that kind of retailing flair at India’s big chains. “Merchandising is lacklustre in terms not only of aesthetics but also of thinking,” says Rama Bijapurkar, a consumer guru. For instance, they miss an opportunity by not stocking flowers during Hindu festivals.

But being so nimble is not easy for the big chains. Mindful of the benefits of scale, they initially built big out-of-the-way stores with huge ranges. “The original thinking was, ‘give the consumer a roomful of choice and he’ll change habits’,” says a retail boss. Aisle upon aisle of global brands did not prove such a big draw. Shopping in air-conditioned comfort has less appeal after a long and uncomfortable journey on potholed roads. India’s shoppers have plumped for convenience over variety. That has forced a rethink by some of the big grocery retailers.

On a Friday evening, Kishore Biyani, boss of Future Group, is visiting one of his convenience stores in Malabar Hill, a posh neighbourhood in Mumbai. The KB’s Fairprice store has four narrow aisles, chilled cabinets and stocks around 1,000 products. Mr Biyani’s firm runs around 180 of these stores and would like to have 5,000 by 2018, in part by selling franchises to kirana-owners.

Smaller is beautiful

This expansion is a part of a bigger gamble. Mr Biyani needs that many stores to sell processed foods from three huge food parks he is building across India. There are not enough food companies that cater for Indian tastes, he says. So he is filling the gap. The first food park, in Tumkur, 100km from Bangalore, was opened last month by Narendra Modi, India’s prime minister. As well as a factory for processing food, it has fruit-ripening chambers, grain-storage silos and a pasteurising unit.

Mr Biyani makes a good case for betting on convenience stores. Turnover per square metre is far higher than in supermarkets. Small plots are also easier to acquire: the Malabar Hill store is in a petrol station. A third of the stock is own-label products, including a brand of fruit-based drink, named “Sach”, endorsed by Sachin Tendulkar, a revered cricketer. Eventually 80% of goods in his smaller stores will be private-label, says Mr Biyani, augmented by a single, must-have brand per category. Limited-range retailers with own-label products, such as Aldi and Lidl, have grown rapidly in Europe and America. He vows: “I’ll be cheaper. They won’t want to come to India”.

The convenience-store format may fit consumers’ preferences but it places greater demands on retailers. It takes three deliveries a day, one each for fresh, frozen and packaged goods, to restock the KB’s Fairprice at Malabar Hill. At that frequency the costs of “shrinkage” (packing errors, pilfering, and so on) can add up, says Mr Singhi, of BCG. Another challenge is to ensure that franchisees give customers the sort of personalised service they are used to from the traditional trade. Despite the pitfalls, other chains are experimenting with smaller formats. Trent, a retail joint-venture between Tata Sons and Tesco, reckons there might be mileage in limited-range supermarkets of 450-750 square metres, as well as smaller convenience stores.

Where will all this leave the traditional traders? “Supermarkets won’t kill the kirana,” reckons Ms Bijapurkar. It is more likely to be social forces: wives who don’t want their husbands working long hours or children who aspire to more than taking over the family store. For his part, Mr Singh wants his son to pursue his studies for as long as possible. “He won’t sell vegetables,” he says with a smile.

This article appeared in the Business section of the print edition under the headline "A long way from the supermarket"

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