Retail Business Plan

A report
Submitted to
Prof. S. Govindrajan

In partial fulfillments of the requirements of the

course
Retail Management
On
01.03.09

By

Arihant Singhi
Pratik Gupta
Vijay Leon

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 Executive Summary

The Indian retail market has around 15 million outlets and has the largest outlet
density in the world. However, most of these outlets are basic mom-and-pop
stores with very basic offerings and fixed prices, and lack good ambience. The
Indian retail scene has witnessed too many players in too short a time, crowding
several categories without looking at their core competencies or having a well
thought out branding strategy.

Although the organized retail sector has come up in a big way in India, of late,
the local kirana stores are still far from phasing out. The kirana stores have much
lower operating costs than an organized retail store. Organized retailing is
spreading and making its presence felt in different parts of the country.

With the entry of very large corporate houses like Reliance Fresh, Vishal, AV Birla
group, Bharati Wal-Mart joint venture and the existing Biz Bazaar, Spencer, Food
Mart are also in large scale expansions across the country. India has been rather
slow in joining the Organized Retail Revolution that was rapidly transforming the
economies in the other Asian Tigers. Though with a population of a billion and a
middle class population of over 400 millions organized retailing (in the form of
food retail chains) is still in its beginning in the Country.

When a new idea whose time has come arrives, it cannot be bunged by anyone.
Especially when it proposes an essentially finer monetary and behavioral value
scheme to its clientele, it gradually takes over the old way, and other
stakeholders have no option but to acknowledge and transform accordingly.
Modern retailing is one such inevitable reality which has started taking a spin in
the traditional retail scenario and is soon liable to capture the retail sector and
further enhance its compass. The question which then arises in the face of this
foreseeable change is the future of the traditional outlets (Kiranas) with a
network so intense that most of us have a kirana store within five minutes of our
residence. The kirana also operate on a low-cost model with family-owned
properties (an extension of the house), with most of the family working in the
store itself. They cater to impulse needs at short notice, and early opening and
late closing times which suit many families.

In the last five years (2001-2006) Indian retailing industry has seen exceptional
augmentation. Where the country was in the dominance of unorganized retailing

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the organized retailing sector has now emerged in a momentous way and is
contributing significantly to the growth of Indian retail sector. It is predicted that
organized retail will form 10% of total retailing by the end of this decade (2010).
Cultural and regional disparity in India is the major challenge in the face of
retailers. Due to this factor the retailers in India are deterred from adopting a
distinct retail format. And so there is a scope for a variety to formats to co-exist
in India. These are the few reasons why we have chosen this format.

In order to move ahead with our plan, we’ve had to make certain assumptions
and get a fair idea of the market. For this, the group conducted a primary
research on the local kirana stores with respect to their financials. The
assumptions for the model store EBITDA are based on the research findings. The
sample size was of 20 kirana stores of size of approximately 200-250 sq. ft. The
research frame was around the areas of Bowbazar, Sealdah, Kalighat,
Bhawanipore and Kasba.

While calculating the EBITDA assumptions were made on sales, gross margin
percentage and operational expenses. Finally, the per square feet EBITDA
worked out to around Rs. 95.

Apart from this, the 4 P’s of marketing – Place, Promotion, Price and Product –
have also been covered in this project.

We are setting up 55 stores in 11 tier 2 cities to reach the mass and attract
footfalls. A category mix with space allocation , sales and sales/ sq.ft, GM%, RGM
% has been calculated.

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 Table of Contents

Stage 1 05

Stage 2 39

Rollout Strategy 57

People Strategy 58

Franchisee Vs. Own Store Strategy 59

RO/DC Costs 60

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History of Retailing

Retailing as an occupation came into existence when farmers started producing

more food than they required. Trading was an important part of daily life in the
ancient world. Different people had different skill sets, and people who had a
surplus of one good desired the goods they did not have or could not produce.

In India, the existence of the current kirana format and other shops can be traced
to the Manuscript and Kautilya’s Arthshastra. These texts provided guidelines for
dealing with customers, after sales- service, and quality and price guarantees.
Such scholarly works provided the equivalence for exchange in case of barter.
They also defined the tax structure for retail and wholesale transactions.
Kautilya’s commented on the location of stores dealing in specific products in a
city. He also discussed manner in which funds and investments could be
managed for better results. Memoirs of traders who came from Europe indicated
that Indian merchants carried out business with low margins in order to enhance
sales. Indian history and archeology record the existence of markets during the
Harappan civilization also. Elaborate descriptions of local and periodic haats have
also been found. These were the places where commodity exchange was carried
out and people congregated and derived several non- economic values. The new
retail formats that are now seen in India have their genesis in Europe. The
earliest traders were believed o be Cretans who sailed the Mediterranean and
carried on trade with the people of the area.

Indian Retail Industry – Introduction

Whether the changes taking place in the Indian retail landscape represent
evolution or revolution is a matter for conjecture. However, nobody can doubt
that a dramatic transformation is underway. Due to its unorganized nature, the
Indian retail industry is one of the most fragmented and challenging in the world.
Retail sales in India amount to $500 billion and account for 10-12 percent of the
gross domestic product (GDP). The Indian retail market has around 15 million
outlets and has the largest outlet density in the world. However, most of these
outlets are basic mom-and-pop stores with very basic offerings and fixed prices,
and lack good ambience. These stores are highly competitive due to lower land
and labor prices. Also the stores usually save tax as they belong to the small
industry sector.

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Over the last decade, India’s middle- and high income population has grown at a
rapid rate of 10 percent per annum, even as the large low-income base has
shrunk. The changing identity of Indian women and the structure of the family
are driving the demand for convenience. Customers are demanding better store
ambience and are looking for solution provider and external guarantors of quality
and usability. The Indian consumer is increasingly focusing on value,
convenience, variety, and a better shopping experience. The increase in variety,
quality and availability of products as well as an increase in spending power has
resulted in consumers increasingly using supermarkets and hyper markets for
their personal shopping.

There are a significant number of new competitors in the retail market, and the
established players are seeking opportunities to expand rapidly. Currently, the
government does not allow 100 percent foreign direct investments (FDI) in the
retail sector. However, it is on the anvil and the entry of multinational retail
chains would change the entire retail scenario. The government has allowed
single brand retailers to make direct investments.

India is the country having the most unorganized retail market. Traditionally it
was a family's livelihood, with their shop in the front and house at the back, while
they run the retail business. More than 99% retailers function in less than 500
square feet of shopping space. Global retail consultants KSA Technopak have
estimated that organized retailing in India is expected to touch Rs 35,000 crore
in the year 2005-06. The Indian retail sector is estimated at around Rs 900,000
crore, of which the organized sector accounts for a mere 2 per cent indicating a
huge potential market opportunity that is lying in the waiting for the consumer-
savvy organized retailer. Purchasing power of Indian urban consumer is growing
and branded merchandise in categories like Apparels, Cosmetics, Shoes,
Watches, Beverages, Food and even Jeweler, are slowly becoming lifestyle
products that are widely accepted by the urban Indian consumer. Indian retailers
need to advantage of this growth and aiming to grow, diversify and introduce
new formats have to pay more attention to the brand building process. The
emphasis here is on retail as a brand rather than retailers selling brands. The
focus should be on branding the retail business itself. There is no doubt that the
Indian retail scene is booming. A number of large corporate houses —Tata's,
Raheja's, Paramus’s, Goenka's — have already made their foray into this arena,
with beauty and health stores, supermarkets, self-service music stores, new age

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book stores, every-day-low-price stores, computers and peripherals stores, office
equipment stores and home/building construction stores. Today the organized
players have attacked every retail category.

The Indian retail scene has witnessed too many players in too short a time,
crowding several categories without looking at their core competencies or having
a well thought out branding strategy. The growth rate of super market sales has
been significant in recent years because greater numbers of higher income
Indians prefer to shop at super markets due to higher standards of hygiene and
attractive ambience. With growth in income levels, Indians have started spending
more on health and beauty products. Here also small, single-outlet retailers
dominate the market. In recent years, a few retail chains specialized products
have come into the market. Although these retail chains account for only a small
share of the total market, their business is expected to grow significantly in the
future due to the growing quality consciousness of buyers for these products
.Numerous clothing and footwear shops in shopping centers and markets operate
all over India. Traditional outlets stock a limited range of cheap and popular
items; in contrast, modern clothing and footwear stores have modern products
and attractive displays to lure customers. With rapid urbanization, and changing
patterns of consumer tastes and preferences, it is unlikely that the traditional
outlets will survive the test of time. Despite the large size of this market, very
few large and modern retailers have established specialized stores for products.

There seems to be a considerable potential for the entry or expansion of

specialized retail chains in the country. The Indian durable goods sector has seen
the entry of a large number of foreign companies during the post liberalization
period. A greater variety of consumer electronic items and household appliances
became available to the Indian customer. Intense competition among companies
to sell their brands provided a strong impetus to the growth for retailers doing
business in this sector. Increasing household incomes due to better economic
opportunities have encouraged consumer expenditure on leisure and personal
goods in the country. There are specialized retailers for each category of
products (books, music products, etc.) in this sector. Another prominent feature
of this sector is popularity of franchising agreements between established
manufacturers and retailers. A strong impetus to the growth of retail industry is
witnessed by economic boom and driver of key trends in urban as well as rural
India.

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Key Trends in Urban India:

• Retailing in India is witnessing a huge revamping exercise.

• Estimated to be US$ 200 billion, of which organized retailing (i.e. modern

trade) makes up 3 percent or US$ 6.4 billion.

• India is rated the fifth most attractive emerging retail market: a potential
goldmine

• Ranked second in a Global Retail Development Index of 30 developing

countries drawn up by AT Kearney.

• India is rated the fifth most attractive emerging retail market: a potential
goldmine

• Food and apparel retailing key drivers of growth.

• Organized retailing in India has been largely an urban phenomenon with

affluent classes and growing number of double-income households.

Key Trends in Rural India:

• Rural markets emerging as a huge opportunity for retailers reflected in the

share of the rural market across most categories of consumption

• ITC is experimenting with retailing through its e-Choupal and Choupal

Sagar – rural hypermarkets.

Key Drivers:

Changes in demographics: India has the lowest median age of 24 as

compared to developed countries like USA, UK, and Japan etc. The composition of
the Indian population is shifting towards the age group of 20-49 i.e. the working
population with purchasing power. Approximately 60% of the Indian population is
below 30 years of age. Thus, India has the largest ‘young’ population in terms of
sheer size and this young segment is the major driver of consumption as they
have the ability (disposable income) and willingness to spend.

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Rising income levels: India is the second fastest growing economy in the
world. A larger number of households are getting added to the consuming class
with growth in income levels. Increasing instances of double incomes in most
families coupled with the rise in spending power is further fuelling the growth of
retail sector.

Changes in consumer needs, attitudes and behavior: The growth of

modern retail is linked to consumer needs, attitudes and behavior. Rising income
levels, education and global exposure have contributed to the evolution of the
Indian middle class. As a result, purchasing and shopping habits have been
inculcated and are increasing day by day. Historically, Indians have not been the
ones to splurge on luxury items. Today, people are willing to try new things and
look different, which has increased spending on health and beauty products
apart from apparels, food and grocery items.

Increased credit friendliness: There has been a radical change in the Indian
consumers’ mindset regarding credit. With the easy availability of credit and
declining interest rates, personal credit has witnessed growth. The boom in
financing has resulted in an increase in spends on housing and consumer
durables such as two-wheelers and cars. The use of plastic money (credit and
debit cards) has increased significantly in the last 3-4 years. In fact the ease of
payments (ability to spend without cash) due to the use of credit and debit cards,
has also led to an increase in total spending on shopping and eating out. The
total number of debit and credit cards issued in India in FY06 was estimated to
be around 47 m and 18 m respectively. Indians withdrew nearly US$ 50 bn using
credit cards from ATMs in 2005. This includes US$ 26 bn through Visa credit
cards alone. Visa saw a 36% growth in the number of cards issued, making India
the third biggest card market for Visa, after Japan and Korea (Source: IBEF). With
the acceptance of and the increase in the number of electronic data converter
machines installed in retailing outlets, credit and debit cards will provide further
fillip to organized retail.

Increasing awareness of Indian consumers: Over the years, as a result of

the increasing literacy in the country, exposure to the west, satellite television,
foreign magazines and newspapers, there is a significant increase in consumer
awareness among the Indians. Today more and more consumers are selective
with regards to the quality of the products/services.

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Customer Expectations: consumer value expectations from markets and
shops have changed dramatically in the last few years. This threw up new
challenges for retailers, such as increased pressure from the other product
categories that are vying for a share of the same wallet of the target consumer;
changing ‘value’ equations and a sharper focus from retailers.

Growth in Indian retail has been driven by the country's economic fundamentals
over the past few years. Increasing number of nuclear families, easy financing
options, increase in the population of working women and emerging
opportunities in the service sector during the past few years have been the key
growth drivers of the organized retail sector in India. Consumers are now
showing a growing preference for organized retail, resulting in increased
penetration. The retailing sector is at an inflexion point where the growth of
organized retailing and growth in consumption by the population is expected to
take a higher growth trajectory. Going forward, we believe that accretion to
income levels of the rising Indian middle class (represented by the financially
independent young population) and the consequent rise in disposable incomes
will fuel growth of the retailing sector.

Key Challenges:

High Costs for the Organized Sector: traditional retailing has been
established in India for some centuries. It has a low cost structure, is mostly
owner operated, and has negligible real estate and labor costs and little or no
taxes to pay. In contrast, players in the organized sector have high expenses to
meet and yet have to keep high prices low enough to be able to compete with
the traditional sector. The kiosk type of shops operates on the assumption of
zero land and labor costs. For organized players, the land can cost up to 6-10
percent of sales as compared with just 3- 5 percent globally. Although manpower
costs are lower at 5-6 percent of sales as against 6- 10 per cent globally, energy
costs are high at 1.5- 3 percent against 1.5 percent internationally, and so are
the working capital costs. (Source: Mc Kinsey report on retail in India 2006-07).

Poor Infrastructure: in India, infrastructure such as cold- chain infrastructure is

primitive, affecting the modernization of the food sector. In order to succeed,
supermarkets would require volumes to be cost competitive, which would require

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operations with hubs all over India. Indian infrastructure is not fully developed
yet. Roads and rail infrastructure need to be developed. The efficiency in supply
chain is far below the international standards. It is also difficult to find suppliers
for a large quantity as would be needed by a national chain. A strict quality
control increases the prices of the merchandise and the gap between demand
and supply.

Strong IT Support: the backbone of retailing is IT. It would require large

investments that connect every aspect of the operations seamlessly, from
suppliers to cash counters. For instance, a store like Food World generates about
a million bills every month. Similarly, a other stores like Pantaloons, Piramyd,
Shopper’s Stop can track sales and place orders based on scientific demand
projections.

Specialization: According to experts, the real boom in organized retail will

come once the supermarkets start selling daily need goods at 90 percent of the
regular prices, as Carrefour is doing in China. The key will be a national scale
presence build on strong sourcing networks that connect the business directly
with farms, and sell fresh food at attractive prices.

Lack of trained workforce: Workforce employed for the retail industry is not
well trained when compared with the Western countries. A skilled person can add
on to the productivity. Training the individual lies in the hands of the retailers.

Bottlenecks for retail growth:

Factors Description Implications

Barriers to FDI FDI not permitted in Absence of global players
pure retailing
Franchisee Limited exposure to best
arrangement allowed practices
Lack of Industry Government does not Restricted availability of
status recognize the finance
industry
Restricts growth and scaling
up
Structural Lack of urbanization Lack of awareness of Indian
impediments consumers

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 Poor transportation Restricts retail growth
infrastructure
Consumer habit of Growth of small, one-store
buying fresh foods formats, with unmatchable
cost structure
Administered pricing Wastage of almost 20%-25%
of farm produce
High cost of real Pro-tenant rent laws Difficult to find good real
estate estate in terms of location
and size
Non-availability of High land cost owing to
government land, constrained supply
zoning restrictions
Lack of clear Disorganized nature of
ownership titles, high transactions
stamp duty (10%)

Supply chain Several segments Limited product range

bottlenecks like food and
apparel reserved
for SSIs
Distribution, logistics makes scaling up difficult
constraints –
restrictions of
purchase and
movement of food
grains, absence of
cold chain
infrastructure
Long intermediation High cost and complexity of
chain sourcing & planning
Lack of value addition and
increase in costs by almost
15%
Complex Taxation Differential sales tax Added cost and complexity of
System rates across states distribution

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 Multi-point Octroi Cost advantage for smaller
stores through tax evasion

Sales tax avoidance

by smaller stores

Multiple Stringent labor laws Limits flexibility in operations

Legislations governing hours of
work, minimum wage
payments
Multiple Irritant value in establishing
licenses/clearances chain operations; adds to
required overall costs

Customer Local consumption Leads to product proliferation

preferences habits

Need for variety Need to stock larger number

of SKUs at store level

Cultural issues Increase complexity in

sourcing and planning

Availability of Highly educated Lack of trained personnel

talent class does not
consider retailing a
profession of
choice
Lack of proper Higher trial and error in
training managing retail operations
Increase complexity in
sourcing and planning
Increase in personnel costs

Manufacturers No increase in Manufacturers refuse to

Backlash margins disintermediate and pass on
intermediary margins to

Reasons for choosing Organized Kirana Stores:

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The new format of grocery stores are likely to be 3,000-5,000 square feet in size
and serve a catchment area spread over a 2-3 km radius as opposed to the
kirana store which serves not more than a kilometer away.

"They will offer a better range, assured quality and better prices in a superior
shopping environment. Like the kirana store, they too will leverage cheap labor
for convenience services like home delivery".

The proliferation of mom-and-pop stores offering home delivery and long working
hours makes a top-up convenience-based proposition difficult to implement. In
order to survive, such stores need to create a chain that enrolls a number of
existing retailers as franchisees and add value through superior sourcing,
logistics and merchandising.

Stating that supermarkets or hypermarkets is the world's most successful

grocery retail format, the report points out that such stores require large space.
Given their space requirements, it may not be economical to locate such stores
in or near dense residential localities, it says.

Reflecting on the "mandi" (the wholesale market) mentality of Indian consumers,

the report says that the club warehouse format is set to emerge in the near
future. "In India, as in other parts of the world, this format is likely to capture
around 10 per cent of the grocery retail market," it says quoting a survey that
over 30 per cent of a village's expenditure on food are made at nearby towns.

The warehouse format is ideally structured to capture this opportunity. To really

succeed in the rural markets, however, a warehouse visit needs to be perceived
as a bigger social occasion than a "haat", and to compete with the latter on
merchandise, pricing and costs.

Grocery constitutes over 50 per cent of the Indian retail market and has an
annual turnover of over $80 billion. Though it is an extremely large market, the
organized sector's share of this market is very small. Grocery has three
components, branded products including packaged foods, soaps and detergents
and toiletries and household items; dry unprocessed grocery including grains and
cereals; and fresh grocery including fruits and vegetables, meat, dairy and deli
products.

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According to the report, if India reaches the level of consolidation achieved in
China, i.e., 10 per cent of its total market size, the organized grocery retail
market will be worth $18 billion by 2010, where a leading player, with 5-10 per
cent share of the organized market, could be a $1-2 billion company.

As per an estimate, there are about 6.5 million grocery outlets in the country in
various formats. In value terms, the total sale of the sector is estimated at $90
billion, over 50 per cent of the total Indian retail market.

Almost the entire grocery retail market is unorganized and fragmented. Despite
efforts of the government and the co-operative sector, for example, Super
Bazaar and Mother Dairy, Safal and Sahakari Bhandar in metros, the modern
formats constitute a mere 2 per cent of the total sales even in urban areas.

Despite the advances and efforts of a few retailers over the five years, the
nascent organized sector in grocery retail still has a long way to go. The turnover
of Food world is less than one-sixth the sale of a single Carrefour hypermarket in
China. Even in terms of profit margin, leading Indian retailers earn a gross
margin of 18 per cent compared to an average gross margin of over 25 per cent
overseas. To maintain a good margin, the McKinsey-CII study suggests that
retailers must be extremely efficient in their operations and design as Indian
consumers are extremely value-conscious who will not pay more just for a
superior shopping environment.

For better profit margins, the study goes on to advise retailers to convince
skeptical consumers of their low-cost position through promotions and branding
and maintain a superior cost structure to offer low price while maintaining their
profitability.

Also, with their strong financial backing and streamlined processes, they would
be able to better the services offered by the local kiranas. The local kiranas
suffer from cash crunch and hence are not able to scale up to the required levels.
The organized players with their financial muscle will be able to do that and in
the process will be able to pass the economies of scale to the price conscious
consumers.

Other Options that were rejected:

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Toy Store:

The idea was to open chain toy stores on a pan India basis. The differentiating
factor was the size, product offerings and services provided. Following are the
main characteristics of the store:

• Size: 30,000 sq. ft. (average)

• Product offerings: Toys and accessories for all ages including sections for
collectors

• Play area: Play area for kids to test any toys they may want to.

We rejected the idea for the following reasons:

• The spending mentality: In India, the spending on toys is not as much. The
Indian parent still prefers to buy his child the toy from the local store. Also,
other organized stores like Pantaloons and Shopper’s Stop have a
dedicated kids’ section within them and hence this takes away the
feasibility and uniqueness of this option.

• Financial Reasons: High end toys are slow moving items. This would result
in the blockage of a large amount of working capital. This in turn would
require huge financial muscle power which might be difficult to obtain for a
start up.

• Other Reasons: The average spend on toys in India is about Rs. 200, which
is significantly lower than the western countries. This low basket size also
makes this an unfeasible option.

o A large number of toy stores are already present in the market.

o Stores such as Shopper’s Stop and Pantaloons have a toy section

available within them.

o All malls have an average of 2 -3 toy shops within them.

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Organized Tea Retail:

We decided to go for organized tea retailing. Tea is almost a necessity and that
would have taken care of repeat purchase. The concept was that we would get
into yea retailing and the customers could taste the tea and then buy the tea of
their choice.

This option was rejected because:

• Niche: This is a complete niche that might not be big enough or attractive
enough at this moment. The market might not be fully ready for this
concept.

• Working Capital: Again this is a working capital intensive business and

loose tea is not a very fast moving item. This would mean that the
inventory levels would remain thus blocking huge chunks of working
capital.

• Untested: One more deterrent factor was that this concept is a complete
untested one. Also, in these times, the preference is more towards having
packaged tea and they are readily available in other formats of organized
and unorganized retail.

• Lack of differentiation: The group also realized that there was not much of
scope for differentiation which is the name of the game in organized retail.
This meant that we were not being able to provide anything extra that
would lure the customers into our store.

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Global Scenario:

The US$ 9 trillion Retail industry is one of the world’s largest industries and still
growing. 47 of the Global Fortune 500 companies & 25 of Asia’s Top 200
companies are retailers.

Even as the developing countries are making rapid strides in this industry,
organized Retail is currently dominated by the developed countries with the USA,
EU & Japan constituting 80% of world.

Retail is a significant contributor to the overall economic activity the world over:
the total Retail share in the World GDP is 27% while in the USA it accounts for
22% of the GDP. The share of organized Retail in the developing markets ranges
between 20% to 55%.

Traditionally, local players tend to dominate in their home markets. Wal-Mart, the
world’s leading retailer, has about 8% of the US$ 2,350 billion market in the USA.
Similarly, Tesco has a market share of about 13% in the US$ 406 billion UK
market.

The main value propositions that most large retailers use a are a combination of
low price, ‘all-under-one-roof’ convenience and ‘neighborhood’ availability.

Globally the grocery portion accounts for close to 40% of all organized retail
sales. In the global scenario grocery also includes items like fish and meat.

The grocery industry consists of food retailers in supermarkets, hypermarkets,

cooperatives, discounters, convenience stores, independent grocers, bakers,
butchers, fishmongers and all other retailers of food and drink for off-the-
premises consumption. The industry is relatively fragmented with a few large
global players. In facing the fierce competition against foreign giant players, a
relatively large numbers of domestic retailers were consolidated with localized
operations. Globalization effects have also accelerated and altered the cross-
border trade, linking new suppliers and retailers across geographical boundaries.
The competitive landscape has made it very hard for local small retailers to
manage the market

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The global food retail industry was exciting for the period 2001-2005 with a
compound annual growth rate (CAGR) of 3.5%. The market is set to grow at 3-4%
for the current year and towards 2010. Last year, the lucrative food retail sector
generated a market value of almost $3 trillion. Increased sales of premium and
luxury items such as the supermarket's own premium brands and organic and
health foods, largely boosted the food retail industry against a backdrop of
strong competitive landscape, where most retailers find it hard to control pricing.
The increased popularity of luxury items adds good market values to the food
retail industry as those items are typically higher priced. Health-enhancing foods
and organics are likely to be major growth areas for the more developed Asia-
Pacific markets in near future as consumers are prepared to pay a price premium
for such products. Customers’ shopping patterns in the food retailing business
has changed over the last few years.

Customers are increasingly purchasing their products from hypermarkets and

supermarkets rather than at smaller grocery stores. The leading revenue source
for the global food retail industry comes from the supermarkets segment. The
segment generated total revenues of $1.2 trillion in 2005; carving out 40% of the
food retailing market value. In comparison, the hypermarkets took up 12% of the
market value share.

Geographically, Europe is the largest food retailing market with a global share of
38%. The Asia-Pacific market is slightly smaller with 34%, accounting $1 trillion
market value that is mainly due to the rapid expansion of food retail in India and
China. Japan is currently the largest contributor to the Asia-Pacific industry
accounting for 38% of the regional industry’s value. The second largest market
goes to China with 33.4%, followed by India at 16.4%, Australia 4.9%, South
Korea 4.8% and Taiwan 2.3%. The compound annual growth rate (CAGR) of the
food retail industry in the Asia Pacific was 4.7% Singapore represents just 0.2%
of the Asia-Pacific food retail industry's market value. Singapore’s industry share
is not expected to change by 2010. The Singapore food retail industry registered
a compound annual growth rate (CAGR) of 0.9% for the period 2001-2005. This
was significantly below the average CAGR for the wider Asia-Pacific region of
4.7%. It shows that the life cycle range of the Singapore food retail industry is
reaching a matured stage, exhibiting marginal levels of growth and decline. The
industry registered a negative growth of 2.3% in 2005 with a market value of
$2.2 trillion.

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Supermarkets dominate the Singapore food retail industry driving its 60% market
share. The provision shops segment and the mini-markets retail equally occupy
its remainder of 40 %. Aggressive marketing strategy recently employed by the
international retail chains has expanded the supermarket and hypermarket food
retail floor-space in Singapore significantly.

In the Asia-Pacific region, foreign interest speeds up the development pace of

many domestic food retailing industries particularly in China3 and India. Major
international players like Wal-Mart and Carrefour are pursuing rapid expansion in
China in an effort to fortify their regional presence. Large population size of over
1.3 billion with the rising levels of disposable personal income is fueling the rapid
food retail growth in China. However, China remains a price conscious consumers
market. Wal-Mart's low cost image offers a key value proposition to Chinese
consumers. The company worked closely in partnership with Chinese players to
gain competitive advantage in local knowledge and expertise. The China grocery
retailing registered a compound annual growth rate (CAGR) of 11.1% for 2001-
2005, with a market value of RMB 1.3 trillion. Hypermarkets, supermarkets and
discounters are the major retail formats that drove the growth of grocery
retailing business in China for the period 2001-2005.

The Indian Scenario:

The neighborhood kirana store is as common in India as the various numbers of

festivities it indulges in. If one looks down a street, he will come across the
omnipresent neighborhood kirana store round the corner. Although the organized
retail sector has come up in a big way in India, of late, the local kirana stores are
still far from phasing out. Quotes one of the sources from Technopak KSA, a
leading research firm operating in the retail sphere, “''Kirana stores are not
endangered but in fact they will evolve and reinvent themselves and will
continue to dominate the modern bulk of shopping. Just because a large number
of players are getting into retail does not mean the kiranas are phasing out.
Merely six cities contribute to 80 per cent of the retail turnover,''

The average size of a local neighborhood kirana store is anywhere between 200-
700 square feet. The catchment area they cater to is normally about a
kilometer. They are normally located in busy residential areas that are well

20 | P a g e
connected and have proximity to the households. The merchandise mostly
consists of FMCG staples, FMCG foods and FMCG non food like cosmetics among
others. They do not store fancy or very high end items. The look and feel of these
stores is very pedestrian. The décor is also very utilitarian. They also provide the
very important aspect of the look and feel factor for the consumers. The scale
at which they operate is much lower than what an organized retail format store
does. The margins are almost similar to the organized sector but where they win
hands down are the operating costs. The kirana stores have much lower
operating costs than an organized retail store. This leaves them with a higher
operating margin. They are till date preferred to the organized retail formats.
There are a host of reasons for this affinity. The various reasons that make the
local kirana stores so popular are:

• The trust factor: This is a major factor behind the phenomenal popularity of
the local kirana stores. The trust stems from the long standing relationship
that the consumers have with the stores. This leads to a quality and price
assurance that the kirana stores enjoy and this comes from no extra cost
being incurred.

• Customized Service: Due to higher operating margins, the kirana stores can
afford to customize and personalize their services. They also have a mental
note of the tastes and preferences of their customers and they can customize
accordingly. This is not possible for an organized retail store as the opex is
already too high and further personalization further affects their margin.

• Discounts: This is another big reason behind the popularity of the local
kirana stores. Due to their lower operating costs, they enjoy a higher
operating margin. As a result they are able to pass on the benefits to the
customers. This also makes them hugely popular. The bigger stores on the
other hand have very high opex and as a result suffer from compressed
margins. As a result at best they can rub special schemes but not price
discounts.

21 | P a g e
• Other Benefits: There are a host of other benefits that the local kirana
stores offer. There are services like home delivery, credit facilities etc that the
local kirana stores offer.

• Other Reasons: According to a survey done by The Economic Times, the

consumers perceive organized retail malls and stores as a destination point.
However, they prefer their local kirana stores for their day to day purchases,
planned as well as unplanned.

Some facts and figures with respect to the local kirana stores are:

• There are about 7.85 million retail outlets in India catering to a population of
about 1027 million.

• Most of the kirana stores are in the unorganized sector.

• Most of them are proprietary based.

• Also, they are normally small players with a working capital crunch.

• Mostly, the kirana stores in India deal with FMCG staples and non food items
like cosmetics along with FMCG foods.

• They are characterized by a dedicated set of customers, who shop from these
stores every month for their planned as well as unplanned purchases.

Global Players in the business and their financials:

Some of the major grocery store chains in the global context are:

• Wal Mart

• Tesco

• Carrefour

• Ave Market Inc.

• Adams & Sullivan

22 | P a g e
 • Alco Store etc.

Stores like Wal Mart, Tesco and Carrefour are supermarkets that also store other
items like apparels, accessories, electronic items etc. In the western countries
online grocery shopping is also a big thing. Tesco has a dedicated section
towards that. However in India, the dependence is still on physical shopping. We
have analyzed one of the major stores.

Carrefour:

The Carrefour Group achieved its goals in 2007 despite a fiercely competitive
environment in Europe and against the backdrop of deflation in France for the
first three quarters of the year:

• Sales net of tax rose by 6.8% at current exchange rates (or 7.0% at constant
exchange rates), which represents the company’s third consecutive year of
accelerating growth;

• Activity contribution rose by 3.4%, a growth rate similar to that achieved in

2006.

• Growing markets confirmed their role as an engine for growth within the
Group. These markets represented more than 25% of Group sales in 2007,
versus 21% in 2004.

• Activity contribution before depreciation and amortization grew by 5.8%,

while activity contribution after IFRS 2* reclassification rose by 3.4%.

• Financial expense showed a net expense of 526 million euros, an 11%

increase over 2006. This increase was the combined effect of rising interest
rates and increased average financial debt, notably due to acquisitions which
occurred this year.

• The taxation rate was essentially stable at 28.7%. After the integration of
companies consolidated by the equity method and minority interests, the
Group share of net income rose by 0.7%. In a snapshot:

23 | P a g e
 EBITDA (2007) - 2005.2 Million euros

Sales (2007) – 82148.5 million euros

Grocery Contribution - Approximately 15%

Hence on account of grocery,

EBITDA- 300.78 million euros

Sales - 12322 million euros

The India Story:

India has been rather slow in joining the Organized Retail Revolution that was
rapidly transforming the economies in the other Asian Tigers. Though with a
population of a billion and a middle class population of over 400 millions
organized retailing (in the form of food retail chains) is still in its beginning in the
Country. This was largely due to the excellent food retailing system that was
established by the neighborhood Kirana (Khandani traditional business) stores
that continue meet with all the requirements of daily needs without the
convenience of the shopping as provided by the retail chains; and also due to the
highly fragmented food supply chain that is cloaked with several intermediaries
(from farm-processor-distributor-retailer) resulting in huge value loss and high
costs.

24 | P a g e
This supplemented with lack of developed food processing industry kept the
organized chains out of the market place. The correction process is now
underway. Big daddies of Indian corporate sectors are now jumping to establish
the retail chains across the country. The systems are being established for
effective Business-to-Business (farmer-processor, processor-retailer) solutions
thereby leveraging the core competence of each player in the supply chain.

Spread of Organized Retailing in India:

Organized retailing is spreading and making its presence felt in different parts of
the country. With the entry of very large corporate houses like Reliance Fresh,
Vishal, AV Birla group, Bharati Wal-Mart joint venture and the existing Biz Bazaar,
Spencer, Food Mart are also in large scale expansions across the country, the
spread of the organized retail is going to reach soon the small populations towns
of 1 lac to 5 lacs after covering all big, medium and small cities.

The trend in grocery retailing, however, has stated with a growth concentration
in the South. Though there were traditional family owned retail chains in South
India such as Nilgiris as early as 1904, the retail revolution happened with
various major business houses foraying into the starting of chains of food retail
outlets in South India with focus on Chennai, Hyderabad and Bangalore markets,
preliminarily. In the Indian context, a countrywide chain in food retailing has
been pioneered by Big Bazar and Reliance fresh only.

Retail Models in India: Current & Emerging:

The Indian food retail market is characterized by several co-existing types and
formats. These are:

Kirana Stores and Hawkers:

1. The road side hawkers and the mobile (pushcart thela variety) retailers.

2. The kirana stores (the Indian equivalent of the mom-and-pop stores of the US),
within which are:

a. Open format more organized outlets

25 | P a g e
b. Small to medium food retail outlets.

Emerging organized retailers:

Within modern trade, we have:

1. The discounter (Subhiksha, Apna Bazaar, Margin Free, Reliance Fresh)

2. The value-for-money store (Nilgiris, Big Bazaar, Cooperative Stores)

3. The experience shop (Foodworld, Trinethra)

4. The home delivery (Fabmart)

5. Super stores & wide reach stores (Reliance Fresh, Spencer, and Food Mart)

Kirana/Grocers/ Provision Stores:

Semi-organized retailers like kirana (Khandani stores), grocers and provision

stores are characterized by the more systematic buying from the mandis or the
farmers and selling from fixed structures. Economies of scale are not yet realized
in this format, but the front end is already visibly changing with the times. These
stores have presented Indian companies with the challenge of servicing them,
giving rise to distribution and cash flow cycles as never seen elsewhere in Asia.
The model is very antithesis of modern retail in terms of the buyer (retailer)-
seller (FMCG) equations. It is not unknown for MNC leaders to link the supply of
one line of products to another slower moving line of products. These retailers
are not organized in the manner that they could challenge the power of the
sellers, most protests have been in the form of boycotts, which really haven't hit
any company permanently.

Hawkers 'mobile markets':

This unorganized sector is characterized by the Thela vendors (also known as

“mobile market”) seen in every Indian by lane and is, therefore, difficult to track,
measure and analyze. But they do know their business these lowest cost retailers
can be found wherever more than 10 Indians collect a rural post office, a dusty
26 | P a g e
roadside bus stop or a village square. As far as location is concerned, these
retailers have succeeded beyond all doubt. They have neither village nor city-
wide ambitions or plans their aim is simply a long walk down the end of the next
lane. This mode of “mobile retailers” is neither scalable nor viable over the
longer term, but is certainly replicable all over India. Most retailing of fresh foods
in India occurs in Mandis and roadside hawker parks, which are usually illegal
and entrenched. These are highly organized in their own way. Hawking of food
products, cooked food and FMCG products is a very interesting model of retailing.
Much has been written about these roadside “malls” from social security issues
to their nuisance value. However, if you put these hawkers together, they are
akin to a large supermarket with little or no overheads and high degree of
flexibility in merchandise, display, prices and turnover. While shopping ambience
and the trust factor maybe missing, these hawkers sure have a system that
works. Organized retailing is spreading and making its presence felt in different
parts of the country. Today the food retail sector in India is about Rupees Fifteen
Lakh Crores (USD 250 billions) of which the organized food retail segment is
about 2.5 per cent and increasing at a pace of over 25% y-o-y. To be successful
in food retailing in India essentially means to draw away shoppers from, the
roadside hawkers and kirana stores to supermarkets. This transition can be
achieved to some extent through pricing, so the success of a food retailer
depends on how best he understands and squeezes his supply chain. The other
major factor is that of convenience shopping which the supermarket has the
edge over the traditional kirana stores. On an average a supermarket stocks upto
5000 to 7000 units against few hundred stocked at an average kirana stores.
Though with excellent potential, India poses a complex situation for a retailer, as
this is a Country where each State is a mini-Country by itself. The demography's
of a region vary quite distinctly from others. In order to appeal to all classes of
the society, retail stores would have to identify with different lifestyles. Hence
one may find more of regional players competing with nation wide successful
retail chains. It can be observed that the most popular retail format in India is the
'supermarket', beside the corner shop/grocery store. Hypermarkets have very
recently come into being and are negligible in number though most retail chains
do intend to expand their presence through this format as well very soon.
'Discount chains' are also substantial in number and are growing at a fast pace
throughout the country. Given that organized retail has been registering growth
rates of approximately 40 per cent over the last three years, it is expected to

27 | P a g e
grow to about to Rs 90,000 crore in 2010. If projections were to be made
considering the current trends in food retailing in India, some years down the
line, food and grocery stores will become dominating trade partners for the food
industry, which, in turn, will be forced to offer special discounts and trade terms
for them to get the shelf space in such stores. Also, once established, in-store
label brands will become a real threat to the industry as manufacturers will have
to compete with the store label brands that are generally very price-competitive.
As for the spread geographically, strong chances stand that the major chains
would spread to the next grade of cities in the country over the next 5 years or
so and then progressively start covering every corner of the country. Most chains
have already started developing their own unique supply chains that would suit
their needs precisely.

Technology Trends:

A successful retailer's winning edge will come from sourcing - how best it can
leverage its scale to drive merchandise costs down, increase stock turns and get
better credit terms from its vendors. There are obvious and hidden areas where
costs can be pruned and the benefits of this lower cost of retailing can be passed
on to customers as lower prices, which in turn should fuel demand. One way of
trimming costs is use of the latest technologies in supply chain, inventory
management and use of IT tools to rack the consumption pattern and the
changing habits of the consumers. The present food supply chain in India is full
of inefficiencies - a result of inadequate infrastructure, too many middlemen,
complicated laws and an indifferent attitude. To combat and improve efficiency
in the supply chain Corporate are taking NGO interventions at the farm end in
the form of Farm Management Services to ensure quality and timely supply of
produce for the operations. The Farmer-Corporate relationship has helped both
the farmers and the corporate in bringing the high quality low cost product to the
retail shelf. To ease the burden of the corporate in setting up farm management
services, several leading NGO bodies have taken up this activity essentially due
to the fact that their operations are mostly at the farm end. The other important
aspect of retailing relates to technology. It is widely felt that the key
differentiator between the successful and not so successful retailers is primarily
in the area of technology. Simultaneously, it will be technology that will help the
organized retailer score over the unorganized players, giving both cost and
service advantages. Retailing is a `technology-intensive' industry. Successful

28 | P a g e
retailers today work closely with their vendors to predict consumer demand,
shorten lead times, reduce inventory holding and thereby, save cost. Wal-Mart
pioneered the concept of building a competitive advantage through distribution
and information systems in the retailing industry. They introduced two innovative
logistics techniques - cross-docking and electronic data interchange. Today,
online systems link point-of-sales terminals to the main office where detailed
analyses on sales by item, classification, stores or vendor are carried out online.
Besides vendors, the focus of the retailing sector is to develop the link with the
consumer. `Data Warehousing' is an established concept in the advanced
nations. With the help of `database retailing', information on existing and
potential customers is tracked. Besides knowing what was purchased, by whom,
during which time of year, festive seasons shopping pattern, all these
information are compiled, analyzed and future shelf planning, discount offer or
season sales planning is made.

Supplier Retailer Relationships:

Traditionally the supplier-retailer relation in India comprised several layers such

as the national distributor, the regional C & F , wholesaler and the end retailer.
However this scenario is fast changing with the organized retail increasing its
presence in the country where the relationship is directly with the manufacturer.
However this new model has been affecting the relationships that the
manufacturer enjoys with the traditional system which is still the most dominant
in the entire retail sector. However with technology replacing the supply chain
and improving distribution and logistics chain, the role of these middle chains
would slowly fade away and there will be direct manufacturer retail chain
combine to offer each party try to squeeze maximum margins out of the other.

Innovations in Transportation Logistics The logistics service providers have been

innovating several interesting formats and models for the retail sector. As retail
chains begin to focus more and more on the retail end, the logistics support
would begin to get outsourced. The cold chain involving nationwide cold
storages, refrigerated vans to transport food articles and specialized logistic
companies offering the fleet for these services to organized sector big retails is
now a reality in India in modern retail environment. With IT support logistics
service providers would continue to innovate and develop effective distribution
systems for the retail sector.

29 | P a g e
Social Trends:

Changing Social trends in India will fuel growth of food retailing in a country.
India is geographically vast and culturally diverse. The ICT revolutions, double
income families where husband and wife both are working and more and more
Indian women are now moving into education and jobs, packaged food, ready to
cook food and shopping convenience in organized retail ambience under one roof
would be the increasing replacing the corner kirana shop / traditional grocery
shop shopping .Increased income levels and more women willing to make use of
their education by joining work has increasingly affected the shopping pattern
that is moving towards fulfilling the need of convenience shopping in the form of
Supermarkets (now graduating to Hyper format) home deliveries. Indian
consumer is quality and price conscious and this awareness would drive the
retailers to rework their supply chain relationships.

Food Safety Issues:

As awareness grows about food safety issues, the need for countries to provide
greater assurance about the safety and quality of food also grows. The increase
in world food trade and the advent of the Sanitary and Phytosanitary (SPS)
agreement under the World Trade Organization (WTO) have also raised interest
in food safety requirements. To ensure a strong presence in global markets, India
realizes the need to meet these challenges and keep pace with international
developments .In India, it has come to the notice of general public of late that
very “popular” food companies could also go way ward as far as food-safety and
public health issues are concerned. This has triggered off a drive by the public
and the Government to put more stringent food safety and public health
measures in place while manufacturing, storing and packaging of foodstuffs
takes place. Most foodstuffs pass through the organized retail channels on their
way to the purchase baskets of consumers and therefore the retailers are
beginning to realize the need for food safety and security. Grading and
standardization measures are being taken at various stages of the
manufacturing, processing, packaging and storing of all kinds of food materials.
To ensure food safety and maintain product integrity from the source to the
customer (farm-to-plate) the Food Companies are establishing a totally
integrated infrastructure and services package. This connects and maintains the

30 | P a g e
flow of food from the source (farmers/food growers, farm service centers, market
yards, processors and importers) to the customer (food service outlets, food
processing units, food retailers and food exporters). This package will help
eliminate or prevent identified hazards or reduces them to acceptable levels.
This trend is slowly beginning to take shape with the efforts to integrate and
consolidate the supply chain in Indian Food Retailing.

The Codex, HACCP (Hazard Analysis Critical Control Point), ISO 22000, Bar coding
(adoption of EAN systems) and food-hygiene standards have been increasingly
adopted by the food processing units in India as prerequisite for becoming
vendor for big retail chains.

Critical issues:

Do food chains improve the marketing efficiency of agricultural commodities and

benefit both the farmer and the consumer? Does the marketing arrangement
work to the exclusion of the small and marginal farmer or are there ways to
include these vulnerable groups of farmers in the production process?

Will regional specialization induce by food chains lead to unsustainable farming

practices by adopting mono cropping etc? What impact will it have on the
farmers’ incomes and sustainability in use of natural resources? In an economy
like India where the retail Kirana industry employs millions of single man
entrepreneurs business, will the development of super markets chains lead to
the closure of these Khandani kirana /grocery shops? What about the present
distributors, C & F and dealers chain employing millions of people which will
surely be extinct business soon making them unemployable? Are consumers
benefitted by the entry of food chains? or creating big monopolies by forcing
closure of thousands of small retails shops?

The group chose to focus on the details of Foodbazar as a part of Pantaloons

Retail

Food constitutes 62% of the total consumption expenditure of Indian consumers,

forming the single largest category spend. Considering the size, opportunity and
challenges in this segment, the company has outlined a strategic roadmap for
developing a formidable and profitable business in this category. Leading the
company’s presence in this category, Food Bazaar witnessed healthy expansion
during the year 2007-08, by adding 47 stores during the year under review. The

31 | P a g e
total count of Food Bazaars as on June 2008 stood at 136 stores. In order to build
a dominant presence in the food category, the company decided to explore both
the premium and bottom-end of the market, in addition to the mid-market
presence through Food Bazaar. In the premium segment, Food Bazaar piloted
‘Gourmet’ in Delhi for the discerning customer seeking richer experience. This
store celebrates lots of impulse and destination categories packing in wide
assortment of foods (both local and imported).

The store also presents fresh food experience with an extensive assortment of
bakery and customized snacking options. Food Bazaar private brands have been
very successful during the year 2007-08 and have provided tough competition to
established brands. Private brands of Food Bazaar created a strong hold in the
consumer mind-set, offering better value for money proposition, and resulting in
the company deriving better margins in the business. In order to cater to the
very mass segment, a crucial development during the financial year 2007-08 has
been the launch of KB’s Fairprice and its aggressive expansion plan.

KB’s Fairprice is designed as low-frills, small format convenience store located in

low-income neighborhoods in metros. Similar to immensely successful Aldi chain
in Germany, KB’s Fairprice stocks only 300 SKUs, comprising of basic necessities,
isn’t air-conditioned and works on a very low operational cost structure.
Launched in August 2007 in Delhi, by June 2008, the company operated 101
stores in Delhi, Mumbai, Hyderabad, Bangalore and Ahmadabad. Having met
with a very enthusiastic response from its target customer group, the company
intends to have a very aggressive expansion plan for the format with a planned
opening of 20 stores every month. The format is expected to garner a large
share of the customer segment, yet untouched by modern retail formats.

Adding more value to the food business is that the share of own brands as a
percentage of total Food Bazaar revenue has increased significantly and
comprises nearly 60 merchandise categories with more than 320 SKUs across the
FMCG landscape. During the year under review, 14 new products with 32 SKUs
were launched, through private brands. The buying teams of FMCG were re-
structured around brand relationships to exploit full potential of category growth
initiatives in FMCG world. Perpetual Inventory system was set up across all stores
to regularize weekly stock take of Top 100 high shrink articles. This has built
rigor into the stock integrity of the stores. Building the Food Ecosystem: A
number of new businesses and strategic steps taken at the group level is helping
32 | P a g e
the company derive more value in the food category. The most crucial
development has been the group’s acquisition of a controlling stake in Godrej
Adhar, a rural retail chain in 65 villages across India. This network not only
provides a channel to capture rural consumption but is also being scaled up an
efficient sourcing network for rural agri-produce that can serve Food Bazaar.

In addition, the group’s partnership with MyDollar Store franchise in India is

helping our network offer new, aspirational imported brands to consumers. The
group’s logistics arm, Future Logistics is also exploring tie-ups with major
international food brands for distribution in India. The group, through its venture
capital and private equity arms is exploring opportunities to invest and partner
with small and medium food brands and manufacturers that will help build
synergies for its food business. An investment has already been made in Capital
Foods, a company that markets brands like Smith & Jones and Ching’s Secret. In
the forthcoming financial year, Futurebrands will signify scantly increase its
investments in the private brands in the food category. Thus, the critical aspects
of the food chain, sourcing logistics, brand development and supplier
engagement is helping the company build a more consolidated strategy towards
dominating the food consumption space.The financials of Foodbazar is shown
below:

Pantaloons Retail:

Sales (2007)- Rs. 5048.91 crores

EBITDA- Rs. 494.8 crores

Food Bazar’s contribution to Pantaloon Retail’s revenues-60%

Hence on account of Food Bazar,

Sales (2007) - Rs. 3029.46 crores

EBITDA- Rs. 296.88 crores.

Market Size in India:

33 | P a g e
Retailing in India is currently estimated to be a US$ 230 billion industry, of which
organized retailing makes up 3 percent. By 2010, organized retail is projected to
reach US$ 30 billion with an expected growth rate of about 400%.

A study conducted by Fitch, expects the organized retail industry to continue to

grow rapidly, especially through increased levels of penetration in larger towns
and metros and also as it begins to spread to smaller cities and B class towns.
Fuelling this growth is the growth in development of the retail-specific properties
and malls. According to the estimates available with Fitch, close to 25mn sq. ft.
of retail space is being developed and will be available for occupation over the
next 36-48 months. Fitch expects organized retail to capture 15%-20% market
share by 2010.

While organized retail makes up for over 70-80 per cent of the total business in
developed countries, the Indian organized retail segment pales in comparison
with other Asian countries such as China, South Korea and Thailand. Retailing is
the largest private sector industry in the world economy, with the global industry
size exceeding $6.6 trillion, according to Euromonitor. In China, the organized
retail segment accounts for about 20 per cent of the overall business; in
Thailand, it is around 40 per cent, while in Malaysia it makes up for nearly 50 per
cent of the total business, according to the data.

The retail sector in India is highly fragmented and organized retail in the country
is at a very nascent stage. Of the 12 million retail outlets, more than 80 per cent
are run by small family business, which use only household labor. China and
Brazil, took 10-15 years to raise the share of their organized retail sectors from 5
per cent to 20 per cent and 38 per cent respectively. India too is moving towards
growth and maturity in the retail sector at faster pace, according to Ernst and
Young India.

According to the E&Y India Retail Report:

• Hypermarkets to be the preferred format for the international retailers

entering India
• Malls to move beyond the metros, increase presence in tier II cities
• Organized retail penetration highest across footwear, clothing segment.
• Franchising gaining steam with retailers.

34 | P a g e
Retail sales in India amounted to be about Rs.7400 billion in 2002, expanded at
an average annual rate of 7% during 1999-2002. With the upsurge in economic
growth during 2003, retail sales are also expected to expand at a higher pace of
nearly 10%. Across the country, retail sales in real terms are predicted to rise
more rapidly than consumer expenditure during 2003-08. The forecast growth in
real retail sales during 2003- 2008 is 8.3% per year, compared with 7.1% for
consumer expenditure.

Modernization of the Indian retail sector will be reflected in rapid growth in sales
of supermarkets, departmental stores and hypermarts. Sales from these large-
format stores are set to expand at growth rates ranging from 24% to 49% per
year during 2003-2008, according to a report by Euromonitor International, a
leading provider of global consumer-market intelligence.

Retail Trade 200 2006 2007 2008 2009 2010

5
Retail Sales (Rs Bn) 15.4 17.36 19,46 21,71 24,21 27,107
0 5 5 5
Retail Sales (US $Bn) 349. 385.8 421.3 467 516.3 564.7
4
Retail Sales Volume Growth 6 7.5 7.7 6.9 6.8 7.3
(%)
Retail Sales US$ Value Growth 13.6 10.4 9.2 10.8 10.6 9.4
(%)

The trends that are driving the growth of retail sector in India are:

• Low share of organized retailing

• Falling real estate prices
• Increase in disposable income and customer aspiration
• Increase in expenditure for luxury items

The Total Retail market size in India at the end of 2007 was Rs 12,781
bn. The country's retail market will grow to Rs.18.1 trillion ($395 billion) by 2010
as organized retail is expected to be 13 percent of the total market, according to
a report.

35 | P a g e
The organized retail market, which is expected to grow at 45 percent, will be
worth Rs.230,000 crore (Rs.2.3 trillion) by 2012," said the India Retail Report
2009, released by the New Delhi-based research group Images F&R Research.
Food and grocery dominated the retail segment with 59.5 percent share valued
at Rs.7.92 trillion, followed by clothing and accessories with a 9.9 percent share
at Rs.1.31 trillion.

A break up of the Indian Retail Turnover (Organized and Unorganized) in 2007 is

given below:

The organized retail market breakup is as shown below. Clothing and Textile has
the largest pie of organized retail market since Grocery [Reliance Fresh etc] are
facing protests on opening new outlets in the backward states of India such as
Uttar Pradesh, Orissa, Bihar etc.

36 | P a g e
Key Drivers of the Business:

• Size of Market

As of now the Indian consumer prefers going to the traditional kirana store
for their daily needs. Today, this market is much bigger than that of the
bigger and organized retail outlets like Reliance. This will not change in the
near future as it requires changing the basic mentality of people. The
average Indian has always been going to the kirana store in the corner all
his life. This is something we cannot change that easily. Thus, as of now
there is huge potential in investing in the kirana store model.

• Indian Mentality

The Indian mentality as mentioned above is characterized by the kirana

stores. The kirana store is a culture that has developed over the years and
culture cannot be changed easily. The kirana store represents
convenience and familiarity – both factors that make the kirana store
something that one cannot do without. The relationship between the
kirana store owner and the customer is very deep – they are like an
extended family where each of them would know what’s going on in each
other lives. Thus, as the saying goes, “If you can’t beat them, join
them.”

• Financial Muscle

The kirana store market is huge but the kirana store owner does not have
the ability or the financial backing to scale up operations. By scale up
operations we mean that a kirana store owner does not find it profitable to
open a chain of stores. But in our case, we not only have the financial
capability, but also the ability to scale up operations. We plan to serve
customers on a pan India basis. Therefore, wherever in India a customer
travels, he or she will always find our store.

• Up selling

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 Up selling is a method of moving the consumer from a lower end product
to a higher end product. In this case the kirana store is on the lower end
while the supermarket and hypermarket are on the higher end. Currently
the major chunk of customers prefer going to the kirana store rather than
a supermarket for various reasons. Thus, we’re starting from the bottom of
the pyramid. We’re offering customers what they want – a kirana store.
The difference here being that this is a chain kirana store. With this chain
of kirana stores, over time we plan to slowly move the consumers towards
the bigger retail formats. Therefore we are preparing a customer base for
ourselves for the future – we would have served them as a kirana store
and we will be there to serve them as a bigger format.

• Reach

The problem one faces with a large retail format is reach – the consumers
have to come to us. This is something they do not want to do. Thus, key
here is convenience. Therefore with our kirana stores we take the store to
them, we become the store around the corner. The only difference in our
case is that we are a pan-India chain kirana store which we will use to our
advantage and a differentiating factor.

• Presence

Trust is one of the factors we can play with here. In today’s dynamic world
we have a large number of people travelling frequently for various
reasons. Wherever this person goes, he or she will at some point or the
other need to visit a kirana store. Thus, when the customer sees our chain
of stores, it will be something that he or she trusts.

• Latent Demand

There is a number of things which a kirana store does not cater to. With
our financial backing, we will be able to cater to these demands. Some of
the latent demand are:

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 o Pan India presence

o Pan India credit facility

o Home delivery at all locations

o Imported foods

Key Challenges for the Business:

• Established System

We would be cutting into an already established system where people

already have a rapport with the existing kirana stores. This would be like
introducing a new cog in a well oiled machine. The challenge here would
be to get people out of their comfort zone with their local kirana and move
them to ours. The challenge here is to differentiate from these kirana, but
this in itself poses a challenge as they offer a host of services ranging from
home delivery to credit facilities and most important they have a rapport
with the customer which has been formed over years.

• ROI

One of the biggest challenges to running such a business would be to get

a good ROI. Traditional kirana have a high ROI as their operating costs are
low. In our case, being an organized player our operating costs would be
higher. Operating costs pose a challenge in the following areas:

o Real Estate

Traditional kirana are based either out of homes, illegal properties,

a property which has been rented by the owner over a long period
of time (leading to a very low rent) or a small place say 300 sq. ft.
(leading to lower rent). Since we cannot resort to any of the above
mentioned methods and are be entering the market now, the
rentals would be on the higher side. Thus apart from fighting the
higher rentals we have to make sure that we utilize our space
efficiently.

o Infrastructure
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 Once again traditional kirana use locally manufactured and low cost
infrastructure and have no air-conditioning. We on the other hand
have to maintain a particular standard over all locations and provide
air-conditioning at select outlets.

o People

Traditional kirana are owned and run by the same person. The
owner employs one or two people to help in the daily running of the
store but he is in control of the store. We on the other hand employ
someone to run the store. This person has to be trustworthy and
competent enough to run the store and interact with the customers.
An employee with such characteristics will be available at a higher
cost.

o Technology

Unlike the traditional kirana stores our stores would have some
presence of technology. This would range from billing machines to
internet access. Thus, adding to our capital and maintenance costs.

• Facilities
The biggest challenge is to provide the customers with the same facilities
that are provided by the traditional kirana stores. The problem is not to
provide the facility but to do it in a cost effective manner while also
differentiating from what they provide. Following are some of the
challenges faced when providing facilities:

o Credit Facility

Almost all traditional kirana stores provide credit facilities. This they
do on the basis of the rapport they form with the customer over a
period of time. The problem that arises with us is that of onus – who
decides to which customers credit can be given and secondly who
takes responsibility for the credit that is given. Unlike the kirana
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 store owner who first maintains a rapport with the customer and
then gives the credit, we will not be able to follow the same model.

o Home Delivery

Home delivery is again something provided by all kirana stores and

that too without a minimum purchase criterion. With our higher cost
of operations, it would add to our cost if we went about offering
home delivery service for any small amount.

o Rapport

The biggest challenge is that of rapport. As mentioned before, the

average kirana store owner is like an extended family to most of his
customers. Both parties would know what is happening in each
other’s lives. This is a major barrier which we would have to break
when we enter the market.

o Familiarity

The kirana store owner normally knows what his customer wants,
thus he is able to stock accordingly. Being the owner and the person
who runs the store, he is able to make decisions quickly and adapt
almost immediately to consumer tastes and preferences.

o Discounts

The kirana store owner also gives discounts to his customers on

almost every product. This he does according to the customer and
his transactions or rapport. He can give high discounts as his
operating costs are low. For us, our operating costs are higher due
to which we may not be able to give discounts as high as the kirana
store.

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 Stage 2

Current Competitors:

Unorganized Format- “Kirana Stores” or the Mom-n-Pop Stores

Positioning: The kirana stores or the mom-n-pop stores operate on a low-cost

model with family-owned properties (an extension of the house), with most of the
family working in the store itself. They cater to impulse needs at short notice,
and early opening and late closing times which suit many families. The kirana will
have a low cost structure, convenient location and customer intimacy.

The importance of kirana stores is emphasized in the fact that consumers need
convenience in retail. The neighborhood kirana store will forever maintain a
favorable factor of convenience. Unlike a developed market where consumers
travel some distance for shopping, Indian consumers have the kirana stores to
service them on all days, all through the year.

The Indian Retail market has around 1.5 crore outlets and has the largest outlet
density in the world. Most of these outlets have very basic offerings and offer
over-the-counter service. These are highly competitive stores due to cheap land
prices and labour. In common parlance they are known as mom-n-pop stores or
the kirana stores.

Informal Retailing Sector, consists of typically small retailers who most of times
organize the things through sole proprietorship type of organizations. Due to
their small size and lack of capital investment they were mainly suffering from
inefficient supply chain management and approximately no monitoring of labor
laws. Even from the government's point of view, there was enough tax evasion
as the tax enforcing mechanism could never be applied over then due to their
complex structure.

Kirana stores" the traditional retail outlets work with an age old set up of a shop
in the front & house at the back. More than 99% retailers function in less than
500Sq.Ft of area. The producers distribute goods through C & F agents to
Distributors & Wholesalers. Retailers happen to source the merchandise from
Wholesalers & reach to end-users. The merchandise price gets inflated to a great

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extent till it reaches from Manufacturer to End-user. Selling prices are largely not
controlled by Manufacturers.

The mom-n-pop stores look for smaller consumer segments rather than the big
tickets and choose a location so that they can serve the customers with a
targeted merchandise mix, price, and other services. A large number of them
tend to specialize in a particular product or service category. These stores are
labour intensive with a very low level of technology. Most of the work related to
buying, merchandising and fund management are carried out by the owner.
Independents tend to allocate limited time and resources to long-term planning.

Independents have limited bargaining power with suppliers as they often buy in
small quantities. They are largely influenced by the other channel members. Due
to low economies in buying and maintaining inventory, the transportation,
ordering, and handling costs are higher.

“Independents account for more than 80 per cent of the total retail
establishments. However, their share is based on the development of economies.
While in the US these firms account for just 3 percent of the total US store sales,
in developing countries such as India, their share is almost 95 percent”.

Competitors- Organized Retailers (Global)

Wal-Mart:

Wal-Mart the world's largest retailer, next to only Exxon Mobil, with an 8.9%
retail store market share in the US and a global turnover of $312 billion is the
most famous example of a successful retail strategy. However, Wal-Mart's
international operations spread across 14 markets outside US, has been a mixed
bag of experiences for the company. Despite Wal-Mart's impressive track record
and strength, the question is, "How can it stay ahead?" given the rapidly
changing retail landscape, newly emerging markets and aggressive global
competitors.

Business Model:

Wal-Mart operates under nine different retail formats through primarily three
retailing subsidiaries: Wal-Mart Stores Division U.S., Sam's Club, and Wal-Mart
International.

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As per the Generic Strategies Framework of Michael Porter, Wal-Mart has
adopted a strategy somewhere between "Focused Low-Cost" positioning and
"Cost Leadership" where-in,

• Market scope— Global operations cater to a diverse customer base. In the US

price conscious low and middle income consumers with a focus on smaller
towns.

• Source of competitive advantage-—consistently low prices with high

customer service and stringent cost control measures.

Global Strategic Intent:

• Dominate the retail space across the world

• Cash on the retail boom in emerging economies and capture market share

• Replicate the success achieved in the US markets and become the world's
largest retailer

TESCO:

Tesco is an international grocery retail chain that is based on the United

Kingdom. It is the fifth largest retailer in the world, with over $80 billion in sales
and 2,800 stores in 13 countries. Tesco originally specialized on food but later on
expanded to selling clothing, electronics, and internet and financial services.

Mission

Tesco aims to “create value for customers to earn their lifetime loyalty”[9]. The
company claims that their success depends on their consumers and their
employees. This is the reason why Tesco is making a regular effort to understand
the needs and wants of their customers and staff, and learning to respond onto
these.

Positioning:

Low Price Strategy: Tesco believes that consumers want value for their money,
and this is the reason why they try to keep their prices as low as possible,
without sacrificing product quality. Between 2000 and 2005, they were able cut

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their prices down by 15%. The company claims to sell its products based on a
national price list which is available on their website.

Customer relationship management:

Tesco claims to make a regular effort to understand the needs and wants of their
customers, and learning to respond onto these. This strategy has helped them
tailor their products and services to changing consumer needs, such as an
increasing concern for health, a growing number of working mothers, etc. They
are able to do this by having annual forums which they call “Customer Question
Time”. Twelve thousand customers attend these yearly meetings and give their
comments and views on Tesco’s products, services, pricing, and quality. Also,
they have a customer service help line that consumers can call for important
matters.

Five Store Formats:

Unlike the “one size fits all” strategy of Tesco’s main competitor Wal-Mart, Tesco
appeals to upper, lower, and middle income consumers, calling it, “an inclusive
offer”. Tesco offers five different store formats, each tailored to fit their various
consumer needs and complement their lifestyles. These include Extra,
Superstore, Metro, Express, and Homeplus. Extra Stores. These stores are 60,000
square feet in size. They aim to be a one stop destination store and so they sell
food and other items such as electronics, clothing, beauty products, seasonal
products, and hardware. · Superstores. These traditional-sized supermarkets (20-
50,000 square feet) emphasize on food, but also sell various products. The
store’s product line is extended on a regular basis.· Metro Stores. These small
sized supermarkets (7-15,000 square feet in size) sell ready-made meals. They
are located at the center of the city and cater to busy customers. · Express
Stores. These convenience stores (3,000 square feet in size) emphasize on
produce, alcohol, and fresh-baked goods. The stores are located near residential
places and corporate offices, aimed to offer convenience to nearby residents and
employees home. These stores are 35-50,000 square feet in size and emphasize
on non-food products, including clothing.

BIG BAZAAR:

‘FOR THE GREAT INDIAN MIDDLE CLASS’

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It is a unit of Pantaloon Retail (India) Ltd and caters to the Great Indian Middle
Class. It was started as a hypermarket format in Mumbai with approx. 50,000
sqft of space. Its values and missions are to be the best in Value Retailing by
providing the cheapest prices and hence goes the tag-line

It sells variety of merchandise at affordable rates, the prices of which it claims

are lowest in the city but the level of services offered is also very low. Usually the
items are clubbed together for offers as on the lines of Wal-mart and Carrefour
and it also offers weekend discounts. It currently operates out of 64 stores and
top 15 stores register a cumulative footfall of 27 lakh a month on an average.

The following graph shows the retail life cycle and we can say that Big Bazaar is
currently at the Growth Stage.

Cash flow
Flows

Maturity

Growt
h Decline

Introductio
n

Time

POSITIONING STRATEGY:

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Big Bazaar’s has positioning and target audience caters to masses beginning
from the low-end of the hypermarket format and attracts its consumers by the
discounts which they offer to customers as they procure products in bulk from
the suppliers.

Factors taken into account to determine our positioning strategy

• Target Audience- Sec B, Sec C, and women. The Age Group is between 25-
50

• Need Satisfaction- Satisfying the household needs of the consumer

• Benefits- Convenience, Personal Touch, Credit Facility and Discounts

• Pricing- EDLP

• Availability- Every nook and corner and at an arm’s length of desire

Our Positioning:

To serve Sec B and Sec C, women and audience between age 25-50 so that their
household needs are satisfied by offering credit, personal touch by being present
in every nook and corner of their locality.

Product: Merchandise Strategy

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A kirana store, supplies products for daily household purposes, thus our product
range will include these types of products. The range of products that are to be
stored will be under the following heads:

• Food and Beverages

• Staples

• Meat and Poultry

• International Products

• Personal Care/Beauty Products

• Household Products

• Healthcare and Hygiene

• Mobile Recharge

Every store will have different needs and this will depend on the type of
customers we serve. It makes no sense to store products according to what we
feel would be right. There will be a select range of products which will be
standard in all stores. These are those products which do not have much demand
and will have less margins but will have to be stored as there will be few
customers who will demand it. Apart from this there will also be some products
which we can be sold through push. But, the exact brands and product range
that is to be stored will be decided by the store manager depending on the
customer demand. Thus, the store manager has to interact with the customers to
find out what they want, track daily sales to decide which products are in
demand and finally make the decision as to which products to store.

Price: Pricing Strategy

We are positioned as an everyday kirana store, a shop round the corner. When it
comes to pricing, most of these types of kirana stores offer a small discount
which they give out of their margin. This is done for two reasons – to attract
more sales and to gain and maintain a rapport with the customer. In order to
succeed we not only have to provide what they’re providing but also differentiate
ourselves from them.

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Thus, we will price our products lower than the maximum retail price, i.e., we will
follow a discount store model. At this point a very important question can be
raised – how do we sustain a discounted store model when our operating costs
are high and margins are low? In order to answer this let us look at a Big Bazaar
or a Food Bazaar – how are they able to offer discounts? This is possible for them
because they sell in bulk which gives larger number of turnovers and also gives a
higher bargaining power with the suppliers. In our case we are running a small
store format, not a big one like the above mentioned. On the other hand we will
have a large number of stores, the sales effected from which will be large
enough to not only have a large number of turnovers but also will give us a
higher bargaining power with the suppliers, enabling us to sustain a discounted
store model.

Our model will also include volume discounts. The higher the customer
purchases, the higher the discount we will give. This is done in order to induce
higher purchases. We want the customer to do all of his or her household
shopping from our stores.

Place: Location Strategy

Large format retail stores like Spencer’s or Food Bazaar are facing problems
mostly due to the traditional kirana stores. The traditional kirana store offers the
customer with convenience of location and having used these stores for a long
period of time, it has entered the consumer’s comfort zone. Thus, since at
present it is difficult to get the consumer to the store, we plan to take the store
to them and operate within their comfort zone which would be the store round
the corner.

Our stores would be located within residential areas where consumers can easily
access our store. Our catchment area would be around 2 kilometers with the
service of home delivery restricted to this 2 kilometers.

The shop should be on the ground floor and in a visible location which is easily
accessible to customers. This may translate to a slightly higher rent but for us
most of our advertising is on the basis of visibility. Apart from this we will also
have to look at the density of customers around our catchment area. The higher
the density, the larger is our customer base. For example if we have a few high
rises around our store, our customer base would be larger. We will also have to

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look at a location which is easily accessible to the suppliers in order to ensure a
seamless supply.

Promotion: Marketing and Promotion Strategy

First let us look at the traditional kirana store’s marketing and promotion
strategy – they do not have any marketing or promotional strategy as such, they
basically leverage their rapport with their customers to market and promote their
goods. Apart from this they offer discounts as mentioned before to keep their
customers coming back and satisfied. They use the services they offer such as
home delivery as a marketing tool.

As for us, our marketing and promotional strategy will be in the following
manner:

• Creation of a push and pull

In the initial stages when no one will know us we would have to create a
market pull. This market pull can be created through billboards, flyers,
mailers and advertising in the local cable network. Apart from this, since
the store will be in the midst of a locality and will be in a visible spot, the
store itself would be a form of an advertisement attracting customers to it.
Once these customers start visiting the store, it is the responsibility of the
store manager and his assistants to create a rapport with the customers
and in turn create a push.

• Advertising

When we launch our stores we will have to advertise in order to educate

the customers about our store. This can be done through mailers, flyers
and advertising on the local cable networks. Since we will be operating in
a particular area, mailers and flyers will be a low cost method to inform
customers about our store. Local cable networks advertise at very low
costs on their channels. This would another method to communicate about
our stores to the customers.
Once the stores are set up, the store and the store manager himself would
be the mode of advertising.

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 • Personal selling & sales force

The sales force which is effectively the manager and the assistants will be
our main source of advertising. They would not only communicate about
our services but will also form a rapport with the customers to advertise
and sell the products and services. A traditional kirana store operates in
this manner. The main source of advertising is the store owner himself.

• Sales promotion

Sales promotion is another form of advertising which we will adopt. As

mentioned before, we will have a higher bargaining power with the
suppliers due to the numbers we will churn. Thus, like the bigger format
stores we will run promotions offered by the suppliers on a daily basis. For
example one day a company might offer a buy one get one free offer or a
discount on purchase offer. Apart from this, at certain intervals we will
bank on certain sales promotions offered by us.

Pentagon and Triangle Elements:

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Within the pentagon we have the triangle elements which are all internal to the
organization and include the systems, the logistics and the suppliers. Let us look
at each one of these elements individually.

Systems:
When we talk about systems we are referring to the IT infrastructure in place.
Every store will have instead of a PC a Thin Client Solution. A Thin Client Solution
is a device like a PC which runs minimal computing functions as well internet
accessibility and can run USB supported programs and devices. This dramatically
reduces our cost as a Thin Client Solution costs around Rs. 5000. This device will
run a CRM cum ERP software which will be connected to our central server
through an internet connection. All sales promotions, discounts and offers will be
updated through this system. As the above mentioned device can support USB
devices, we can have scanning and billing through the same device.

Logistics:
Since we will operate on a kirana store model, our stores will be located all over
the city and most locations will be deep within residential areas. Thus, for us to
procure directly from the company and supply to our stores would include huge
transportation costs and storage costs. Thus, we plan to procure from the
supplier of the respective area we are located in. For goods that are not available
or supplied in that particular area, we will procure directly from the supplier and
supply the goods directly to the respective stores. The storage would be taken
care by the stores themselves.

Suppliers:
Even though most of our goods will be procured from the respective suppliers of
the area we are present in, it is important for us to have a tie up with the
respective companies in order to get discounts, sales promotions. Being
organized we have data about customer profiles and customer preferences. Over
a period of time we will have data which can be used by these companies.
Companies invest large amounts of money in order to get this data. Thus, the
relationship can be mutual.

The pentagon elements comprise of people, value, product, place and

communication. These are elements which are customer facing.

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People:
Our whole model runs on the basis of the decisions taken by the respective store
managers. Thus, not only is it important for us to select the right people but also
make sure they’re trained properly. The store managers will maintain a rapport
with the customer, gain their trust, bring them into a comfort zone, push
products and find out what the preferences of the customers are. The way the
store manager acts and serves a customer is a service in itself which apart from
other things would require a huge amount of knowledge about the products.

Value:
We not only provide the customers with household products for their daily needs
but also give them value for the money they spend by way of a comfortable and
friendly environment but also by way of the services that they receive from our
stores. Apart from this there is also the assured quality of the products we
provide.

Product:
The products we offer our customers will have to carefully chosen so we do not
leave out anything that they may desire. Being a kind of a daily needs store we
will have a wide variety of assortments varying from daily need products to
household necessities to certain international products which are not available in
the traditional kirana stores.

Place:
It is important for us to choose the right place to place our store in. Not only
should it be in an area where there is a large density of customers but it should
be in a place which is easily accessible.

Communication:
Communication is very important as it is for any business. In our case it is
important for the store manager to communicate to the consumers what offers
are available and what products are available and the store manager must also
be able to get information from the customers about their needs and their
preferences.

MODEL STORE EBITDA:

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The group conducted a primary research on the local kirana stores with respect
to their financials. The assumptions for the model store EBITDA are based on the
research findings.

The sample size was of 20 kirana stores of size of approximately 200-250 sq. ft.
The research frame was around the areas of Bowbazar, Sealdah, Kalighat,
Bhawanipore and Kasba. The logic for choosing these localities was that all of
them are proper residential areas where the population is mostly SEC B and C.
The research findings are given below:

i) The monthly turnover is around Rs. 4, 00, 000.

ii) The Gross Margin on sales is approximately 10-15%.

iii) Pilferage is about 1% of sales.

iv) Operational expenses vary according to the floor space. For a 250 sq. ft.
store it is approximately to the tune of Rs. 25, 000 -.

v) There is high level of customization according to the location and

consumers’ tastes and preferences.

vi) The catchment area of a store is about 1-1.5 kilometers.

vii) Most of the stores are owned property.

viii) The average bill value of a SEC B customer is about Rs. 4000- Rs 5000 per
month.

Assumptions for Store EBITDA:

1) Sales: The monthly sales for a store of the size of 500 sq.ft. will be
approximately Rs. 7,00,00. This figure is arrived at after doing a primary
research of the local kirana stores. The finding was that for a store of
approximately 200-250 sq.ft, the average monthly turnover is about Rs. 3,
00,000.

2) Gross Margin Percentage: The research indicated that the local kirana stores
(of size about 200 sq.ft) operate on a margin of approximately 15%. The
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 group has decided to take a more conservative figure f approximately 12% as
the Gross Margin Percentage. Also, the margins for different SKUs would be
different. The Gross Margin Percentage would be an average of all the SKUs.

3) Operational Expenses:

a) Rent: The rentals for a 500 sq.ft plot. as found out through primary
research is approximately Rs. 5000 per month. We are not going for the
revenue sharing method immediately. The industry norms for revenue
sharing in organized retail is anywhere between 3-20% of turnover. Going
for this agreement will affect our initial profitability. With sales expected to
be to the tune of Rs. 5, 00, 000 per month, even a 3% revenue sharing
would mean paying triple the actual rent. The rentals however also depend
on the location, and hence for all practical purposes we are keeping a range
from Rs. 5000-Rs. 8000 as monthly rentals.

b) Electricity: The store would be approximately 500 sq.ft. The store would
have refrigeration facility, computers, signage boards etc. The average
electricity bill per month is assumed to be to the tune of Rs. 3000.

c) Salaries: There will be a store manager and two store assistants. The store
manager would be responsible for the billing as well as all the other store
level decisions. The store assistants would assist the store manager at the
store and also look after the home deliveries.

A ballpark figure of Rs.20, 000 has been taken o/a salaries. The break up is
shown below:

Position Number of Salary Per Total Salary

people Month
Store Manager 1 10, 000 10, 000
Store 2 5, 000 10, 000

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 Assistants
Total 20, 000

d) Repairs and Maintenance: There will be minor repairs and maintenance that
will be required at the store. A ballpark figure of Rs. 1000 per month has
been decided on this account.

e) Phone Charges: This item has been dealt with separately. This is because
taking orders over the phone and the internet will be commonplace. Hence,
the usage will also be high. The figure has been taken to be approximately
Rs. 2, 000.

f) Pilferage: Our store will not be a self service store. It will be very much like
the kirana stores where the servicing is done by the store assistants. This
should keep the pilferage level down. However there will be a certain
degree of pilferage which has to be accounted for. Pilferage has been
assumed to be approximately 0.5% of sales, which turns out to be Rs. 2500
per month.

The Model Store EBITDA is shown below:

Particulars Amount (Rs) Amount (Rs)

Sales 7, 00, 00O
Gross Margin % 12%
RGM (A) 84, 000
Opex
Rent 8, 000
Electricity 3, 000
Salaries 20, 000
Phone Bills 2, 000
Pilferage 2, 500
Repairs and Maintenance 1, 000
Total Opex (B) 36, 500
Store EBITDA (A) - (B) 47, 500
EBITDA per Sq. ft 47, 500/500 95

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Capex Decisions:

The capital expenditure of our store will be lesser as compared to the bigger
formats of organized. This is obvious due to the smaller size of our stores. Also,
the property would be on rent basis and will not be bought or leased. Although
this will lead to higher operating expenses, the capital expenditures will be kept
in check.

The other items of capital expenditure would be building up the shelves and
racks. The layout of the store would account for a significant portion of the
capital expenses. The layout has to look better and be jazzier than an
unorganized retail store. The infrastructure costs would be kept under tab
because of the decision to operate on a rental basis.

Our store, as said earlier, will also provide home delivery facility within the
catchment area. For this purpose, two scooters will have to be kept. This will also
add to the capital expenses.

The store being a part of organized retail will be connected to all the other stores
of the same chain. This will call for a substantial investment in IT infrastructure.
Also, the fact that we would be providing online shopping would also contribute
towards this aspect. Servers need to put in place at the central level. At the store
level, computers, printers, scanners and all the other accessories need to be
installed.

Interior decoration and decor will also be part of the Capex decision. The decor
will not be as fancy as a large format store but at the same time , it will be better
and more beautiful than a kirana store. This will call for some amount of capital
expenditure

INVENTORY DECISIONS:

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The inventory decisions will be taken mostly at the central level. However, some
part of the decision making power will also be kept with the store managers at
the store level. This is because we want to leverage the inherent strength of
unorganized retail. Ina kirana store, the shopkeeper exactly knows what his
customers want. Similarly, we will also customize our inventory. The
customization will be according to the location. e.g. a store in a Muslim
dominated area will not store pork. The SKUs that will be stored along with their
turnaround time is given below:

a) Staples- 30 days

b) F&B- 15 days

c) Meat & Poultry- 15 days

d) Health & Hygiene- 30 days

e) International Food - 45 days

f) Mobile Recharge - 30 days.

REASONS FOR CHOOSING THIS FORMAT:

Several kirana shops across cities are coming up with innovative ways of getting
the best deals from FMCG companies. Worried about the long-term effect on
their businesses, kirana owners have gone in for an image-makeover and have
begun building up personal relationships to woo the consumer. Setting aside
their preference for cash purchases, several such kirana shops have also begun
accepting credit cards from customers and passing on their business margins on
MRP to consumers. Boards stating the 'best buys' of the day are being put up
outside such transformed stores and freebies like a bar of soap, a bottle of cola
or a chocolate bar are being offered with purchases of a certain amount. In
several areas, 20-30 small kirana owners have come together to form
associations and source their purchases collectively from manufacturers for
higher discounts.

A new idea whose time has come when arrives cannot be bunged by anyone.
Especially when it proposes an essentially finer monetary and behavioral value
scheme to its clientele, it gradually takes over the old way, and other
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stakeholders have no option but to acknowledge and transform accordingly.
Modern retailing is one such inevitable reality which has started taking a spin in
the traditional retail scenario and is soon liable to capture the retail sector and
further enhance its compass. All elements in the delivery chain better accept it
and prepare, rather than trying to rob the customers of a superior way of life by
promulgating fallacy and protecting vested interests.

The question which then arises in the face of this foreseeable change is the
future of the traditional outlets (Kiranas) with a network so intense that most of
us have a kirana store within five minutes of our residence. The kirana also
operate on a low-cost model with family-owned properties (an extension of the
house), with most of the family working in the store itself. They cater to impulse
needs at short notice, and early opening and late closing times which suit many
families. The supermarkets on the other hand propose an elite ambience with
economy for all sectors of the society.

In the last five years (2001-2006) Indian retailing industry has seen exceptional
augmentation. Where the country was in the dominance of unorganized retailing
the organized retailing sector has now emerged in a momentous way and is
contributing significantly to the growth of Indian retail sector. It is predicted that
organized retail will form 10% of total retailing by the end of this decade (2010).
Cultural and regional disparity in India is the major challenge in the face of
retailers. Due to this factor the retailers in India are deterred from adopting a
distinct retail format. And so there is a scope for a variety to formats to co-exist
in India.

As the present-day retail sector in India is mirrored in expansive shopping

centers, multiplex- malls and huge complexes offering less than one roof -
shopping, entertainment and food, the notion of shopping has tainted in provisos
of format and consumer buying behavior, escorting in an upheaval in shopping in
India. This has also added to large scale investments in the real estate sector
with major national and global players investing in mounting the infrastructure
and construction of the retailing business.

The organized retail boom in India has mostly taken place at the big malls and
the hyper markets. Here, it should also be kept in mind that most of India's
population is below the traditional SEC A classification. The reason why organized
retail has not seen the penetration it wanted is that they have not been able to

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bring themselves to the customers. The traditional kirana store wins hands down
in this aspect. This why we decided to make a foray into this format. The whole
idea is to make the shoppers upgrade and graduate to organized retail. In order
to achieve that they have to be first given what they are used to, albeit in an
organized manner. Also, the hyper and the supers have a psychological barrier.
Research shows that these places are considered to be destinations by the
shoppers, where they like to spend some time, but not necessarily shop. The
idea is to overcome the psychological barrier by tweaking their preferred
services.

Working Capital:

The retail business is a working capital intensive one. Managing one’s working
capital is very important in this line of business. If not managed well, it can lead
to cash blockages. Inventory, Debtors and Creditors account for the major chunk
of working capital. This is because inventory is mostly on cash and even if it is on
credit, the days allowed are less. Hence, cash management becomes here.

Our format is that of a kirana store. The merchandising will similar to what
similar stores often. The sourcing will be done centrally. The inventory turn cycle
(approximate) is given below:

Food & Beverages – 15 days

Staples – 30 days

Meat & Poultry – 15 days

International Food – 30 days

Personal Care – 30 days

Household Products – 30 days

Healthcare & Hygiene – 30 days

Mobile Recharge – 15 days.

There will be a safety stock of 5 days for products like F&B, Meat & Poultry, and
Mobile Recharge that have a faster turnaround time. On the other hand SKUs like

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Staples that have a slower turnaround time will have a safety stock of 2-3 days.
This will prevent stock outs. There will be an inventory management system that
will allow inter store transfer in case of stock out at any particular store.

The average inventory turnover is around 20 days. Primary research shows that
the credit allowed to purchase inventory is around 15 days. Also, average period
for credit given to customers is around 7 days in case of a small kirana store.
This is where, we being an organized player, can leverage that. As said earlier all
sourcing will be done centrally. This is where we can leverage our size. We will
have better bargaining powers than the unorganized kirana stores. This will allow
us to get a greater credit period from our suppliers. Also, since the credit allowed
by us will be through membership cards, it will allow more efficient collection.

For our working capital requirements we will plough back our profits and also
take bank financing.

Key aspects that get derived from the positioning

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 Stage 3

Roll Out Strategy:

Marketing Communications:

1) Newspaper Insertions: Insertions will be placed inside newspapers in the

areas where the stores will be opened. The insertion will let the consumers
know about the store opening date and the exact location of the store.

2) Advertisements on local cable channels: We will have a tie up with the local
cable television service provider for advertising on the local cable channel
with respect to the areas where the stores will be launched. The
communication will be to make the customer aware of the date of opening
and the location of the store. Also, it will cover the SKUs that will be stored.

3) Hoardings: We will also advertise through hoardings. The hoardings that will
be selected will be strategically placed at points of maximum visibility in the
areas where the stores will be launched.

4) Promotional Activities: There will be some promotional activities that will take
place on our behalf. We will sponsor the activities of the local clubs. Also,
whenever possible, we will roll out in a festive season, e. g. Durga Puja in
Kolkata. This is because during these times, the interest levels are high and
also the local activities are at their peak. It becomes easier to attract
attention during festive periods. Also, the purchase budgets are higher.
Hence, our format can actually give them more value.

Number of stores per city (pilot phase):

The number of stores in the pilot phase will be 5 per city. The cities that have
been selected for the pilot launch of our store are:

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 a) Chandigarh

b) Ahmedabad

c) Vadodara

d) Pune

e) Coimbatore

f) Ludhiana

g) Faridabad

h) Bangalore

i) Patna

j) Hyderabad

k) Bhubaneswar

The reason behind choosing these cities to launch our store is that these cities
are the highest spenders on FMCG (in that order). Also, as discussed in our
location strategy, most of the cities are Tier II cities and they go well with our
kind of store format.

We are not going for ATL marketing communications as the launch will be in
select cities initially. Also, our store format will be opened in select locations
initially. ATL communications will create a greater buzz than we can service
initially. This is true to the motto of having a neighbour round the corner store.

People Strategy:

Our whole model runs on the basis of the decisions taken by the respective store
managers. Thus, not only is it important for us to select the right people but also
make sure they’re trained properly. The store managers will maintain a rapport
with the customer, gain their trust, bring them into a comfort zone, push
products and find out what the preferences of the customers are. The way the
store manager acts and serves a customer is a service in itself which apart from
other things would require a huge amount of knowledge about the products.

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Number of people per store: There will be 3 people per store. There will be a
store manager and two store attendants. As discussed in the earlier stages, we
will also have a home delivery facility. The two store attendants will also take
care of the home delivery service.

Employee Training: The training programme for the employees will cover the
following areas:

a) Product Training: This will train the employees on the various SKUs that
are there in the store. It will also train the employees on the margins that is
there on the various product categories.

b) Technology Training: Our store will deploy technology to a considerable

extent. The inventory management system will be automated. Also for the
credit facility we will be using prepaid cards which will again call for
technology deployment. Hence it becomes important for the employees to be
conversant with technology in order to be able to put it to optimum level.

c) Soft Skills Training: This is a very important part of employee grooming.

The people on the shop floor need to have good soft skills to deal with the
customers. This service differentiation will also be a core competence and a
USP of our store.

d) Operational Training: This will enable the employees to have a hang of

how to manage and run a store. This becomes important in the absence of a
store manager.

Franchisee Vs. Own Store Strategy

Managing a brand that has both franchised and company-owned stores is like
walking a tightrope. The two business models are like oil and water, thus they
just don't mix. When franchisors own and operate stores themselves it presents a
conflict of interest. This arises from the temptation to favor one's own stores with

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better locations and support. Even if a franchisor remains fair, having a large
chain of company owned stores carries with it the risk of perceived bias.

On the other hand, company-owned stores give franchisors invaluable and

ongoing insight into the market, which in turn benefits the franchisee system.
Also, having company owned stores work to an advantage as they can be a cash
cow, and thus our income is looked after. These stores can also be used to train
franchisees and for the trial purposes of new products, so poor product isn’t
inflicted onto the chain of franchisors.

One of the well-known benefits of franchising is having motivated owner

operators on the job. For this reason, company owned stores are rarely as
profitable as franchises but as mentioned before they're really useful as a testing
ground and to understand the dynamics of running a store. Also this is a very
useful tool to train new joiners.

One of the ways to avoid conflict would be to make sure that company stores are
not in direct competition with franchisees. The other challenge in running both
models is creating different management structures.

Despite the challenges, many retailers continue to dabble in both models.

Recently there has been a trend towards large corporate retailers turning to
franchising. For these companies, the challenge of setting up a second
management structure to incorporate a franchising arm is even more onerous
than usual.

Finally, when it comes to brand reputation, one bad apple can spoil the whole
basket. This holds true for both models but in the case of company owned stores,
the control still lies with us.

Keeping in mind what we have mentioned above and the fact that we are a new
brand entering the market, we would initially like to start only with company
owned stores. It would help us to understand the market dynamics and the entire
scenario with regards to competition, supply chain, logistics, and customer
relationship management.

This way we can learn the business, identify glitches and more importantly ways
to solve these problems. Apart from this we will also be able to establish our
brand name and reputation in the market not only with customers but also with

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parties interested in associating with us in the form of franchises. Once we have
settled down with our business, say in 2 – 3 years time, we will move towards a
franchisee model. The objective then will be to bring down the number of
company owned stores and move to a franchisee model. Even then we will not
move to a wholly franchisee based model; we will maintain a certain number of
company owned stores.

RO/ DC Costs

Regional Office Costs include all the overheads and administrative expenses
incurred by the organization. Departments include payroll processing, human
resources department, finance department, market research team, market
development team; vendor development process takes place in the regional
office. Overheads and administrative expenses include salary, electricity,
telephone bills and maintenance costs etc. These expenses are usually fixed
costs.

Since, we propose to open our outlets in eleven tier two cities covering all the
four zones; we will have four regional offices. They are

Ludhiana North

Faridabad North Chandigarh

Chandigarh North

Bangalore South

Hyderabad South Bangalore

Coimbatore South

Bhubaneswar East
Bhubaneswar
Patna East

Ahmedabad West

Vadodara West Pune

Pune West

The cities selected for the initial launch of our outlets has significance as the
mentioned cities population have been top spenders in FMCG segment in the last

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financial year. The regional offices have been selected on the basis of the
availability of place, repute, manpower in the city.

The Regional office hierarchy is depicted in the following chart

Distribution Costs

Establishing a DC will raise our costs, thus in order to keep our costs low, we will
not establish a DC. Also maintaining a DC would mean having our own logistics
system which adds to the costs. In our case the costs would be higher as our
stores would not only be over a large geographic spread but would also be
located in the bowels of localities.

As for storage, facilities will be maintained within the respective stores.

Therefore, we are faced with the challenge of maintaining a constant supply to

our stores. This problem can be taken care of in the following manner:

• For most products we will get our supply from the supplier or the
wholesaler of the area in which our store is located but this will be on a
special tie-up with the respective brands.

• For other products, we will procure our goods directly from the company.
The company will supply the goods directly to our stores.

• As for imported products, their demand will be much less than our other
products. Thus, there is no need to maintain a constant supply. These
products can be stored in our store itself. Procurement of these products
can be done through the local supplier or through direct procurement from
the distributor.

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