Organised retail to form 18% of overall retail pie: McKinsey

This may be good news for leading global retail players waiting to enter the Indian retail bazaar scene: the organised segment of the retail industry is expected to grow from the current 5 per cent of the total market to about 14-18 per cent of the expected Rs 18-lakh crore market by 2015. But a report by leading management consulting firm McKinsey and Co cautions global players waiting to enter the great Indian retail bazaar that a ‘cut and paste’ format of their stores elsewhere would not work here.
“They need to have innovative formats based on where to participate in the retail value chain, which geographies to play in and what price points to offer. They also have to craft a customer-insight driven merchandise strategy and create an efficient retail operating platform,” suggests the report. Indian shopper
McKinsey’s retail report also talks about the uniqueness of the Indian shopper vis-À-vis the rest of the world: least loyal to a single retailer, dislike for pre-packaged fresh foods, willingness to pay more for convenience and services but not a premium price for a brand and demands ethnicity in apparel accessories. And, in the absence of quality control, information about the product and trust in retailers, brands serve as a proxy for all these factors.
Of the current 204 million households in India, the report estimates that only about 13 million households have the income to patronise organised retail. The great news is that this relevant consumer segment will grow five fold from 13 million to 65 million households in the next eight years but mom and pop stores would continue to be relevant across the country, in both small and large towns.
The report, titled ‘The Great Indian Bazaar: Organised Retail Comes of Age in India,’ also suggests retailing in India would require an approach that is distinctively different from the rest of the world. To achieve leadership position in the sector, players would have to integrate real estate into the business model, create an effective and scalable supply chain, increase basket size by shaping consumption, develop and retain talent, influence regulation to ensure healthy development of the sector and to de-risk margins.
“Given the nascent state of organised retail and the rapid evolution of the industry, it is imperative for retailers, manufacturers, real estate developers, logistics providers and partners along the value chain to work in a collaborative spirit,” says Mr Laxman Narasimhan, Director, McKinsey & Co and leader of the Consumer, Retail and Media Practice in India.

Hotspot and Mobile NXT new strategy

Organised mobile retailers like HotSpot and Mobile NXT have found a new way to deal with competition from mom & pop stores: make neighbourhood retailers their franchisees to sell mobile phones and accessories under their brand.

Currently, more than 70% of the mobile retail sector is unorganised and market analysts believe there is a huge potential for the franchise model. “The return on investment (RoI) for the franchisee is somewhere around 60-65%.

It will allow us to expand our presence and enter deep into the cities,” says HotSpot CEO Sanjeev Mahajan. HotSpot has recently adopted the franchise model with 25 stores operational in Delhi alone and has plans to expand to 100 such stores besides the 400 company-owned, company-operated (co-co) stores across the country.

“Customer experience and pricing is the crux of this business. Therefore, we provide stock management, professional training for the in-store sales team, and an after-sales customer support at all our franchised stores. The role of the franchisee is restricted to the operational level,” says Mobile NXT CEO Vijay Menon.

Mobile NXT adopted the franchise model in tier-II and tier-III cities across India in 2007. The company operates more than 55 stores all over the country.

Mr Menon, however, concedes that the franchise model in mobile retailing is difficult to adopt since there is no uniqueness in the product and the return on investment is not very attractive.

That is why players like Subhiksha and Mobile Store are refusing to join the bandwagon. They believe the franchise model is not profitable at this stage, given the low profit margins and low market penetration.

“We are concentrating on a co-co model based on pricing. We don’t think franchise model is the way to go, since the business already accounts for low margins; expanding through franchise would dent the margins further,” says Subhiksha president-marketing Mohit Khattar. Subhiksha operates the largest chain of mobile stores with around 1,300 stores all over the country.

Mobile Store CEO Rajiv Agarwal also feels that the franchise model in the current scenario does not hold much ground. “There is the risk of our brand value being diluted. This is a business where you cannot allow your service proposition to get diluted,” says he. Mobile Store has significant presence in the country with more than 800 stores.

However, RPG Cellucom head-marketing Biswajit Pandey feels that with improving margins and marketing strategies, the franchise model may take the front stage in future. The company currently operates over 25 stores.

“It’s a win-win situation since it allows rapid expansion and presence in local areas for the franchiser and an opportunity for the traditional retailer to enter the newfound trend of organised retail. Moreover, the operational costs in case of franchise model is low in comparison to co-co model, giving both the parties a better RoI,” says global management consulting firm Technopak chairman Arvind Singhal.