Why did Global Retailers fail to break stronghold of Kirana & Local Stores in India

#india #retail #grocery #omnichannel #food #fmcg

India’s humongous?retail?market, estimated to be worth more than $800 billion in 2020, has attracted investments from leading international retailers, the biggest Indian conglomerates, and even first-time entrepreneurs.?Grocery?makes up more than 65% of India’s retail market and has seen intense competition.?Walmart, Carrefour, Tesco, Spar, Nanz Group, Tata, Birla, RPG,?Reliance and Adani are among the corporates to have ventured into grocery retailing. These firms employed various models in the last two decades to crack this market. The intense action has led to expansions, rollouts, mergers, buy-outs and even closures.

The evolution of the grocery retail landscape in India reflects the complexity and contradictions inherent to the country. We find that national and regional chains of hypermarkets, discounters and neighbourhood supermarkets coexist with kirana stores. It was initially assumed that?kirana stores?would not survive the onslaught of modern trade (MT) stores. Two decades later, kirana stores have stood their ground and hold more than 88% share of the retail trade. MT stores have also seen expansion from metros to tier-2 towns and reached close to 10% share of retail.

We are yet to witness the dominance of big-box stores like Walmart and convenience stores such as 7-Eleven like in western countries. The resilience of kirana and the evolution of MT formats in India offer unique lessons to all of us.

Analysing the trajectory of the organised retail sector in the US — often seen as the originator of many MT formats — and comparing it with the evolution of the Indian retail industry can help build a perspective on the evolution of MT stores and their co-existence with kirana stores in India. These learnings can become the building blocks required for the next stage of India's retail industry evolution.

The origins of modern trade formats in the US can be traced to the 1870s, often known as the era of the Second Industrial Revolution. This era — led by railways, roads, cars (internal combustion engines) and telephones — ushered the US into a period of economic development and prosperity unparalleled in human history. It significantly impacted the consumption of food, clothing, medicines, home, transportation, communication, and health services. The US emerged as the world’s economic engine contributing to one-third of the world’s industrial output by the 1920s.

This unprecedented prosperity made the US a land of opportunity, attracting immigrants from all over, especially from Europe. The country witnessed a sharp population increase from 40 million in 1870 to 280 million in a century. The share of the population residing in urban areas increased from 26% to 73.5% during the period.

The Second Industrial Revolution transformed the US from a rural agrarian nation to an urban industrialised one. The rapid industry growth reduced dependence on agriculture as the primary source of income. The population employed in agriculture drastically dropped from 46% in 1870 to an estimated less-than-4% by the 20th century.

Industrialisation and urbanisation led to affluence and a high standard of living. The per capita income of the US increased from $2,450 in 1870 to $15,000 in a century. There was an increase in ownership of automobiles, with Ford Model T costing around $260 in 1925. Close to 90% of households had access to running water, indoor flush toilets, and electricity, making life easy for residents. Refrigerators at homes led to a lower frequency of store visits as people started buying in bulk.

The labour force sex ratio got altered during World War II and kept on increasing in the post-War years. The labour participation of women in the age group of 35-49 increased from 21% in 1870 to more than 76% by the end of the 20th century. Higher labour participation of women inversely affected the time available at home for preparing food. Commercial bakeries, breakfast cereals, and canned, frozen, and other packaged food products emerged as convenience foods to cater to this requirement.

Change in consumption behaviour

Thus, industrialisation, urbanisation, high population growth, high income growth, and participation of women in the labour force increased demand for a wider assortment of processed, packaged and ready-to-cook food. Technological innovations like canning, preservatives, refrigerators, and pasteurisation ensured longer shelf life and the availability of food around the year. Some of the biggest brands such as Coca-Cola, Campbell Soups, Quaker Oats and Hershey's were products of these times.

Railroads and refrigerated supply networks led to the temporal and spatial integration of the vast country. The rise of industrialisation and urbanisation also led to the rapid development of highways with increased automobile ownership, thus connecting rural areas and cities. It also led to the rise of spending time in leisure activities like amusement parks, restaurants, fast-food chains, and suburban malls. The Second Industrial Revolution created a significant “consuming class” ready to enjoy mass production's benefits. They demanded an ever-increasing variety of products in the store, thus leading to bigger stores.

The retail chain revolution in food and grocery complemented the rise of the packaged foods industry. With the promise of lower prices, wide assortment, and the convenience of getting everything under one roof, chain stores saw tremendous success. Higher sales led to economies of scale in negotiating with brands and manufacturers for housing private label brands within the store. As a result, the share of chain stores in the US food market grew from 28% in 1946 to 48% in 1954 and eventually to 69% by 1963.

Contrast with India

A contrast with the prevailing circumstances in India sets a background for understanding the evolution of modern trade in India. It is stated that India is much more complex and layered. While India added the highest number of billionaires in 2022 and has the third biggest start-up ecosystem in the world, it is still a rural-agrarian economy with close to 69% population residing in rural areas (according to the 2011 Census). Around 54% of the population still depends on agriculture as its primary income source (2011 Census). The Indian per capita GDP is expected to reach $1,850 by the end of 2022.

The lower income level, along with a predominantly rural population, provides a challenge for chain stores to establish in India. The world’s largest retail chain, Walmart, had built its initial success by operating in small towns with below 10,000 population. But in the Indian market, volumes are too small to operate large stores profitably in small towns. As a result, small towns and rural areas depend on kirana stores.

On the other hand, women's labour force participation is still abysmally low at 20%. Most Indian families like home-cooked food. So ready-to-eat and ready-to-cook meals, as well as frozen and canned food, have not taken centre stage in Indian kitchens. Indians like to cook fresh meals at least twice a day. Frozen and chilled food means stale or “basa” food for Indians. Hiring a cook or ordering fresh food from the restaurant is preferred over picking up ready-to-eat meals from supermarket shelves.

India’s weather conditions ensure sunlight throughout the year so fresh produce is largely available throughout the year. Availability of fresh produce is independent of large plants producing processed food and operating on economies of scale. India has developed systems to deliver fresh produce daily. For example, a low-cost milk distribution model dependent on kirana stores ensures daily delivery.

Additionally, the metros and other large cities are too crowded, and only 7% of Indian households have a car. Thus, big-box stores like Walmart, which were located outside the city centres like in the US, saw little success in India. In contrast, we have far too many outlets per million than the West, with cigarettes and ready-to-eat snacks available in every nook and corner; unlike in the US, where these goods are largely sold through convenience store chains. We do not have similar conditions for convenience stores to take off like in the US.

The way forward

These differences also explain why even after 20 years of organised retail’s entry, MT stores have around 10% share of retail. In the US, organised retail added more than 20% market share every decade from the 1940s to the 1960s. India does not have a large "urban consuming class" for MT stores to dominate soon.

Given the less-than-optimal environmental context for the growth of MT retail in India, what could be the possible way forward?

MT players must take cues from its formidable cohorts — the kirana stores. The Indian retail ecosystem has rewarded individual retail enterprises like kirana stores as they are grounded in the local community and have a one-to-one relationship with customers. Their ability to customise the offering to the needs of the catchment area and provide services like home delivery and credit at low cost are distinct advantages. They thrive due to their frugality in operation, low cost of the supply chain, and availability of localised merchandise.

Some key aspects should offer invaluable lessons to MT players.

Firstly, Indian kirana stores are extremely low-cost operators. MT players will need a much sharper focus on the cost of doing business. A frugal model of retail is required to fulfil the needs of customers with smaller but assorted offerings. Likewise, staffing, rental and overhead costs will have to be benchmarked to kirana stores. Technology must be employed to build a low-cost model for running store operations.

Secondly, kirana stores have a very low-cost supply chain. Can MT players build a dual model of distribution where local supplies and centralised distribution run hand in hand? MT players need much more flexibility in planning supply chains and distribution. They need to include small city-level suppliers in their assortment planning. Empowering stores to source locally for some categories can tremendously impact the supply chain's cost.

Thirdly, India is a low-value, high-volume market. Can MT players build a much more inclusive and localised model of retail here? From selling only large packs, MT can build a more inclusive model to offer smaller packs and a localised assortment.

Winning combination: Frugal & Agile

Many experts have compared the Indian market to a mini-Europe due to diversity across multiple dimensions. The Indian consumption pattern is far too nuanced based on purchasing power, region, community, and climate conditions. Kirana stores win here on agility and local community connections. In a market as diverse as India, MT players will have to harness the power and treat each store as unique in its own right. Building a model with 20-25% assortment localisation for each state, city and catchment can make a big difference.

We are seeing a growing emergence of standalone self-service MT stores run by competent and intelligent owners. The standalone self-service MT stores combine agility and low cost with a much better range and experience. Can organised MT players partner with standalone self-service MT stores and build a model that offers appropriate technology, and scale economies of MT and still capitalise on their individual enterprise?

Grocery retail in India will continue to be a challenging opportunity. We are too diverse and complex for one model to have a towering presence. We will see models that are unique to India. We will also have a peaceful co-existence of modernity and tradition, new and old, as well as large-scale and individual enterprises. India will continue to see kirana stores coexist with MT stores, and it will always reward frugality and agility.