Long and short of Indian retail

Shorts and longs are terminology used in the financial markets. Going long is synonymous with buying a stock and the expectation that the company would do well. Selling short implies the opposite – expect something to get worse. My colleague Jeremy Levine wrote about his ‘shorts’ and ‘longs’ here. Two recent articles on the Indian retail sector triggered this post on my ‘long’ and ‘short’ views on Indian retail.

Retail in India is an extremely interesting area, where companies are still experimenting to get the right mix of store formats and categories. While Bessemer still cannot invest in Indian retailers due to FDI restrictions, I follow the sector quite closely out of personal interest. Large retailers, with chains of stores following similar formats, are just beginning to make their presence felt and India’s largest retailer is still short of $500 million in revenue.

Here’s an idea that I’d go short on. From the Business India dated November 21 – December 4, 2005:

__ has kick-started the yoga wear segment with its new brand named “Urban Yoga”. What’s more, the brand has two ranges “Body” and “Soul”. In the next six months, __ plans to open at least 10 exclusive outlets across the country. In addition, it also plans to open yoga centres through which it hopes to attract more converts to yoga and, naturally, by extension to Urban Yoga. If __ has its way, Urban India will be moving towards spiritual fitness dressed in Urban Yoga.

I am sure you can trace which company this is, if you want to. This is fantastic news for yoga enthusiasts who are worried that their clothing isn’t as well coordinated as their postures or want that extra performance boost to their suryanamaskars. I am aware of specialty retail and all that, but doesn’t this whole idea seem a little too niche.

Moving on, Food & grocery retail is as non-niche as it gets. This category accounts for nearly half of India’s consumer spend and is still dominated by mom-and-pop ‘kirana’ stores. I read an article that Chennai-based food retailer Subiksha will be opening over 70 stores over the next month in other South Indian cities and is looking to expand into North and West India as well (I cant seem to find the link). I am ‘long’ on Subiksha and view their format to be best suited to the Indian market for food & grocery retail. Their approach combines the local low-overhead front-end of Indian kirana shops with the efficient supply chain of a large retailer. Subiksha’s shops are no-frills (sub-500 sq ft, non-airconditioned), do not allow consumers to walk through the store to browse products (no aisles – no wasted area) and well distributed (they aim to have a store within 1 kilometer of any household – I suspect they are close to this target in many parts of Chennai). The consumer experience is similar to that in the kirana store – no browsing, option of home delivery, proximity of store to their residence allowing frequent buying in small lots. Their USP is a Walmart-style everyday-low-price (5-10% less than MRP and/or their nearest competitor), enabled by combining centralized buying and an efficient supply chain, with their simple (and inexpensive) store format.

The other retail format that is gaining prominence is a big-box type format, adopted by Big Bazaar and Giant. These are large shops with over 50,000 sq ft area that offer a wide range of goods in one location (e.g. food, grocery, utensils, furnishings, apparel, even appliances). By definition, such large stores are fewer in number, and their consumer catchment area could span a 5-10 kilometer radius. Big-box stores also offer low prices, similar to Subiksha. Big-box stores are well suited for retailing apparel and durables, which tend to be more infrequent, larger ticket-size and event-driven purchases. To succeed in food retail, they would require (similar to the US) good roads, cheap fuel, high car penetration, large refrigerators and storage space. Then, consumers could drive to such stores on weekends and stock up in large lot sizes. Almost all these factors don’t hold in India. While the in-store experience is superior to Subiksha’s format, getting to the store and back imposes tangible (Rs. 50-100 per trip) and intangible (inconvenience & time) costs. Further, several of these shops are located in malls that people visit as an entertainment destination. Lugging around large bags of rice and wheat don’t gel well with this. I am told (and haven’t independently validated) that apparel accounts for over 75% of Pantaloon’s profits from their big-box stores, which would be consistent with my expectation. Having said this, I do expect the larger format to dominate categories such as apparel, consumer durables, furniture and home furnishings.

I see two challenges for Subiksha’s format. First, the consumer experience at the store isn’t great. While the average Indian would readily trade this off against savings of several hundred rupees a month on the grocery bill, they could lose upper middle class and affluent consumers who spend disproportionately more. Second, to get to $1 billion revenue, Subiksha would require well over 1000 stores! Handling this many stores (including several that may be franchised) poses an enormous control and managerial challenge. Subiksha has so far adopted a gradual expansion approach, taking care to ensure quality and consistency across its outlets. Hopefully, they’ve now figured out how to manage this complexity, as they expand aggressively outside their home state.