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Feature
Emergence of supermarkets has changed India's food retail industry
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Thursday, 17 May, 2012, 08 : 00 AM [IST]
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P G Chengappa and M Arun
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Retailing – the act of final delivery of goods and services to ultimate consumers – is undergoing a revolution. There has been a gradual transformation in the formats of retailing in India from traditional village shandies to kirana shops to the modern organised retailing (the organised retail chains or supermarkets). West Europe and the USA were among the early ones to experience such a transformation, have now reached the stage of saturation and hence are looking at the developing countries to expand their supermarket operations. The size of Indian retail is estimated at Rs 17,497 billion in 2008-2009, with food and beverages contributing 61 per cent. The retail industry considered as a service sector has witnessed an impressive annual growth of 11 per cent since 1991. Accoridng to AT Kearney, India was ranked fourth in the global food retail index in 2011 (two positions ahead of China) and second in terms of the global foreign direct investment (FDI) confidence index (which was next only to China). The organised retail sector accounted for about five per cent of the total retail trade in the country has rapidly evolved over the last ten years, with the entry of organised players like Food World (RPG); Spencers; Tatas; Birlas; Reliance; Rahejas; Pantaloons; Bharti-Walmart; Margin Free; Smart; Namdharis; Trinetra; Heritage, etc. All these players are presently active in certain regions mainly due to the restrictive nature of agricultural market legislations (agriculture/food being a state subject).
Drivers of Change
The growing population and urbanisation with consumptive capacities has led to the growth of retailing sector. Consequent to the consistent growth of economy for the last one decade at around 8 per cent per annum, per capita income is also growing especially after liberalisation and implementation of new economic policies. This, in turn, has changed the lifestyle of people reinforced by exposure to overseas experience via satellite TV and personal visits. Increasing access to education has given employment opportunities for females, thus providing additional income and spending propensity. Unlike the older generation, such working families prefer to have shopping as an experience and buy everything they need under one roof. The tendency among the youth and middle-aged people to ‘spend now’ against ‘save for future’ is pushing consumption levels across income groups. In addition, emergence of shopping malls or supermarkets has increased access to many goods, brands and services in a place with modern facilities. The advent of information and communications technology (ICT) is yet another factor that has enabled online retail in a big way redefining the way things used to happen, with delivery of value for money of goods and services at individual’s convenience.
Trends in Food Retailing
As per the recent National Sample Survey Organisation data on consumption, there is a perceptible diversification of food intake both in urban and rural India. There is a shift towards high-value foods, comprising milk and milk products; fruits and vegetables; meat and fish. Besides, the demand for processed foods is also on the increase. Consequently, the demand for cereals particularly millets are on the decrease. Further, the share of food expenditure to total expenditure is decreasing with shift towards non-food, comfort and lifestyle goods. These changes in consumption are reflected in retail marketing as well. Food retailing is expected to grow with both organised and unorganised sectors co-existing. Many studies indicate that the retail sector is growing at 20 per cent per annum during recent years. Organised retail is expected to grow with more vigour in the coming years, with the better performance of the economy. Concentrating on the untapped rural retail market with huge demand is highly necessary which additionally provides scope for offering other goods and services necessary for agriculture, which in turn will have a positive impact on the production performance of the sector. The unorganised sector is offering keen competition to the organised sector as the overhead and transaction costs of the former are much lower. The organised sector is incurring higher cost due to higher rent; wages; logistic costs; and loss due to shrinkage, wastage and unsold inventory. The kirana stores are also changing to meet the challenges of organised retailers by offering branded products; parking space; customised services such as home delivery and credit facility, etc., apart from providing for bargains. These stores will continue, but their number will slowly come down in the future and they would have to adopt coping mechanisms to sustain in the business.
Changes needed – Backward and forward integration
Supermarkets are viewed as niche markets for high-income urban consumers. Consumer surveys, though limited, have indicated that supermarkets are not the preferred destination for consumers of food items like fresh fruits and vegetables; milk and milk products; eggs and fish, while organised retailers hold considerable share in grocery; processed foods and fast-moving consumer durables. The organised retailers are still experimenting with various formats of supply chain and are finding it difficult to organise backward linkages involving large number of marginal and small farmers in to their business model, making it too difficult for them to source the raw material competitively. The forward linkages are also weak due to the absence of required infrastructure as creating their own requires time and huge investments. Further, despite discounts, offers and advertisement, supermarket chains have not been able to attract the customers significantly. The format has been too novel and it may take some time for supermarkets to experiment and come up with an acceptable model and for consumers to get acceptance. While organised retailers would come up with best offers with efficient supply chain, consumer would develop store loyalty along with their willingness to have shopping as an experience. The maintenance of quality, hygiene and in-house branding by modern retailers has a clear edge over unorganised stores, but has other disadvantages of location (being few); fixed quantities; cash sale and unavailability of home delivery facilities.
Should FDI be allowed in organised retailing?
Presently, FDI per se is not allowed in multi-brand retailing; however, 100 per cent stake in wholesale cash-and-carry, and 51 per cent stake in single brand retail are permitted. Franchising is the main route through which single-brand retail is promoted. Similarly, the foreign companies are allowed to have collaborations like import/consolidation partners through which they can become involved in retailing. There has been a wide and fierce debate as to whether FDI should be allowed in organised retailing for the past few months. In fact, the Government of India had to retract the order passed allowing FDI in retailing due to pressure from its coalition partners. The argument for FDI that it will benefit the modern retailing by providing the latest technology, experience, novelty and more importantly capital is understandable. With their vast experience across the globe, the organised retailers will be in a better position to provide the much-needed dimension for the growth of the sector and help in reducing losses in supply chain. In case of fresh products, it helps in providing modern infrastructure such as cold chain; processing; storage; logistics, etc., that help in the long-run growth of industry. In fact, if the modern retail chains or supermarkets link farmers to markets, it will serve as an additional/alternate market channel which can benefit the farmers in realising higher returns through increased comp
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