Key Questions?

Is organised convenience retail (organised retail) the villain we are all made to believe it is? 

Is the fear that organised retail spells certain death of kirana defensible?

The fact is - Kirana and organised retail are genetically wired differently. How differently the two are wired is evident from the challenges faced by either segment in India.

• So, is there any merit in contemplating they can co-exist? Would it be sustainable? 

• What would the eco-system look like? 

• What role will organised retail play in the eco-system? 

• How will politics affect legislation? 

• How will kirana respond? 

• And many more . . . 

These are but a few questions that have distressed people across the spectrum of convenience retail. This Green Paper attempts to provoke a comprehensive examination of the issues involved and suggest probable solutions. 

And ensure the ‘legacy of kirana’ does not turn into a long and painful death – to be studied in retrospect as part of B-School curriculum.

Challenges abound.

The challenges faced by kirana and organized segment vary, but the aims of both the segments are – making a profit, protecting livelihoods and create new employment opportunities. 

With this belief, it is important to understand - key challenges, the relative strengths and weaknesses of the two segments, and how kirana and organized retail score on these challenges. 

The results of our research are illustrated in the strengths-n-weakness scorecard above. 

Most early entrants in India set up their operations on a Cash-n-Carry basis, the success of which has been elusive - Results: Mixed.

The question that investors’ are asking is: Is there a way in which the relative strengths of kirana and organized segment can be combined to create a net positive position for the players as well as the economy?

The answer quite simply is – YES. There is indeed a way in which this objective can be achieved. The answer to this question lies in a well established business model - FRANCHISING. Let’s hypothesise the future of convenience retail. 

When working together, organised retail can benefit from the Reach of kirana into every neighbourhood in the country, the relative low cost base, customer knowledge, ability to recruit, and manage a local team - and achieve mutual growth.

View from the Top - Macro Economic Impact.

Despite what is being said and done - proponents and opponents of liberalisation in the convenience sector agree that there are macro-economic benefits to be gained. Creating the means to optimising these benefits is a significant challenge and cracking this code is the secret to success. So, what are these macro-economic benefits? 

Executive Summary

Is Death of Kirana a myth?

Death of Kirana’ is a myth. And sooner the industry accepts this truth, the faster it will respond by creating a sustainable eco-system around it. Nothing is further from the truth that: entry of organised retail means certain death of kirana.

The polar positions attributed to both parties (kirana and organised retail) is often times exaggerated, and, both are reluctant to accept the truth.

Can they co-exist?

Both, organised retail and kirana, CAN co-exist. 

This, however, requires organised retail to adopt an inclusive strategy in dealing with India market entry. 

India is at the Inflection Point - between mature convenience retail and, emerging market, mom-n-pop convenience retail (Kirana). The model proposed for future convenience retail herein, may be regarded as an incubation model and implemented in India; to be eventually exported to other emerging markets and even mature markets, with local adaptation.

Would it be preposterous to assume that kirana and organized retail can co-exist? We propose to be audacious in our belief that this eventuality will come to pass - though, with a degree of pain.

And how?

For organised retail to achieve Reach, it will have to Reach Out to kirana and bring kirana into their fold - this task is easier said than done. A holistic Reach Out process, is required to ensure success. Of course, the Reach Out process will have to be duly adapted by individual player as seen fit.

Model of the future!

Yes, death of kirana can be avoided, and at the same time organised retail efficiencies and knowledge can be utilised to  mutual advantage.  The answer is - Franchising.

The success of franchising will, however, depend on understanding quality and availability of resources at the disposal of kirana (the franchisee). In the diagram alongside we illustrate some of the criteria that will help organised retail in designing the potential franchise model. The results of our research (on franchise model design) highlight the type of franchise convenience stores we hope to see in India . We believe that a combination of the three models: owned, franchised and managed will prove an optimal mix, and ensure high rate of success.

Owned stores lay the foundation for kirana / franchisee to emulate store best practices; as well as train kirana / franchisee. Franchised stores help franchisees where they can handle the operations and take direction without affecting the system / network. Managed Stores help kirana, who need hand holding, and for whom infrastructure proposition is critical. For the purpose of this Green Paper, we have created Spice Rack, a hypothetical organised retailer - for ease of reading.

Impact of our Model!

The immediate impact of our model for kirana is - modernisation. The long term sustainable advantage is in augmented product & service offering, resulting in higher revenues and profitability – eventually resulting in overall higher standard of living. However, the more tangible macro-economic benefits of a franchised kirana are:

• Promote regional agro-based industry 

• Introduce best practice supply chain

• Modernise food storage

• Promote an export-led agro industry

• Create employment opportunities

• Augment tax revenue for the government

• Promote investment in real estate

• Promote balanced regional development

• Introduce best practice logistics & distribution

• Improve hygiene standards

These factors are sure to endear Spice Rack and followers of Spice Rack’s market entry strategy to legislators, public in general and kirana in particular. 

Kirana De-Mystified!

A small, sweaty, method defying, family-run convenience store in a dusty neighborhood, juxtaposed with its larger brethren in A-Class cities such as Mumbai and in suburban townships such as Ghaziabad. These little self-employment generating machines have led a ubiquitous existence for centuries. At last count, there were between 7.5 and 12 million such stores spread across India – sustaining over 25 million families. These are the famous – KIRANA.

A Kirana is self-financed, family managed business and highly localized. The physical attributes, the merchandise sold, business practices are unique to the immediate catchment. As the oldest form of convenience retail, is it still as relevant? I believe it is; so suggests our assessment of the market. 

With the GAP between kirana and modern day retail being what it is, it is little wonder that pundits see entry of the organized retail as a threat to kirana, eventually leading to “DEATH of KIRANA”.

Having said this, kirana with its many shortcomings has sown the seeds of it’s incomparable Reach into the fabric of Indian convenience retail. Challenges, however, still abound.

Challenges - The achilles Heel

Resource constraints

Kirana are resource poor. Be it financial, manpower, operational, technology, or aesthetics – kirana is constrained in that it does not have the ability to attract and / or retain resources. The owners are usually not highly educated, do not have formal exposure to organized retail, do not necessarily have the financial muscle and rely on their own sources of financing to meet investment needs. While kirana is a dominant segment with excellent geographic reach across India, it does not have the ability to take advantage of its size due to the high level of fragmentation. This limits its ability to attract world class resources. Credit is non-existent, supply chain networks are archaic, and heavily dependent on the FMCG/CPG companies. Kirana is, therefore, unable to augment its customer offering.

Single store & fragmented

Kirana is extremely fragmented. This deters implementation of best practices and fosters inequal performance. Kirana are single store operations and do not offer economies that chain stores provide. Rightly so, FMCG/CPG companies seek refuge in organised retail to shore up their volumes and visibility. Kirana has poor comparative economies of scale. The challenge, long term, is to look at kirana as a single entity requiring a set of capabilities, probably to be delivered on a shared platform with minimal intervention from kirana. Once the ‘eco-system’ has been built and implemented kirana will act as one whole; and benefits of consolidation will begin to accrue to kirana, and its many owners.

Family owned and managed

Kirana are family owned-and-managed. External employment opportunities are rare and business practices are handed down through generations. Lack of education and exposure, has resulted in kirana remaining a dukandar / baniya while the whole economy has moved on with the help of future technologies. 

Low process focus

Kirana has suffered from lack of PROCESS. Most process improvement that kirana has seen in the last few decades has been ‘push’ed down by the FMCG/CPG companies. It appears that FMCG/CPG companies are augmenting their proposition to kirana, to take kirana onto a new journey. 

Low technology investment

Modern day retailing with all its sophistication around point-of-sale, bar-coding, RFID, just-in-time, security & surveillance, queuing solutions – the list is endless; are alien to kirana. A telephone is as far as the average kirana will go, though things are changing and quite a few gadgets are seeing their way into kirana.

Fortune 500 companies are vigorously mapping legacy technologies with future technologies, in an effort to further streamline their operations in convenience retail. If this be the case in organised retail, then little wonder the uninitiated kirana feels lonely in the age of ‘Bits-n-Bytes’ taking over their livelihood. To compete in the new age, kirana will have to adopt technology, and make technology work for it, in the same way it does for organised retail.

The challenge is HOW? 

Low on aesthetic value

A typical kirana is small in size, crammed from floor to ceiling with merchandise and with rudimentary shelving. There is a certain madness to the whole place, deciphered only by its pervasive owner. When you enter a kirana – forget fancy stacking, cross-selling and up-selling propositions, etc. Instead be prepared to rummage through the store in search of your necessities. Better still – Ask.

One of the reasons cited by customers for their preference of modern retail is  - aesthetics. Kirana have lagged behind in aesthetics. But this is about to change. FMCG/CPG companies are playing a key role in educating and assisting kirana in re-fitting stores, including cash support for re-fit.

Supply chain constraint

Kirana depend on agents of FMCG/CPG companies for their supply chain and end-mile distribution. Agents visit kirana on a periodic basis, review sell through, and replenish. Credit is the outcome of relationship enjoyed between the agent and kirana.

India is a large country with complex tax regimes across States. This has complicated supply chain and is a source of great frustration in industry. The organised segment is attempting to build its own infrastructure, though they are still years away from an acceptable outcome. Kirana on the other hand left supply chain to FMCG/CPG companies.

What would the ideal supply chain of the future look like? 

Operational efficiency

Retail in India is probably one of the oldest industry, but operational practices are still confined to those handed down through generations. The road to achieving parity with global best practices is a long and arduous one. While organised retail is investing heavily in this space, kirana is left on its own.

How can kirana reinvent itself?

Entry of organised retail

Kirana is right to be concerned with entry of organised retail comprised of MNCs and national conglomerates. Organised retail has capabilities / resources beyond the reach of kirana. Having said this, kirana bring substantial REACH across the country which is hard for the organised segment to replicate. In such a scenario, it is extremely important that for a sustainable and thriving convenience retail industry, a combination of organised segment and kirana is most desirable. Which to a certain extent justifies the political will of the Government.

How would this co-existence be achieved? 

Promotion and CRM

A lot has been said about the impact of technology led promotion & CRM on revenues. Kirana have none of these. Having said this, kirana run the most effective 1to1 customer relationship. While most sophisticated solutions fail in understanding the customer or are  partially able to do so, after having invested millions of dollars in technology, the kirana can tell you – to the minute, when a child in the neighborhood is born, when a neighbors son or daughter is getting married and to whom, etc etc. This power of human touch, sans technology, is what one can expect from kirana.

Merchandising

Modern technology has given retaiersl tools to project demand through each stage of the supply chain. Kirana do not have the resources to deploy such technology, however, kirana focus on their immediate catchment and their intimate knowledge of the customer, and are able to pretty much meet the demand of their customer, as and when it arises.

Meeting these challenges is a tall order. Will kirana look at the challenges it faces; recognise this as an Inflection Point; pull together its resources and strengths to embed itself in an eco-system - and rewrite the story of future convenience retail in India?

Who will act as a catalyst to make this transition to modernity / sustainability a ‘reality’?

View from the Top - Customer Perspective.

The unfolding saga of Kirana Vs Organized vis-à-vis customer shopping habit would necessarily prove invaluable to a better understanding of convenience retail in India. Numerous in-depth focus groups (conducted in major cities across the country) gave rise to a series of probable outcomes of this Kirana Vs Organized battle and the jury is still out on customer preference, though it appears the customer wants it all – and his/her way. Snippets of the main themes that emerged from focus group discussions are summarised below.

View from the Top - Vendor Perspective.

FMCG/CPG companies, in recent times, view kirana with the same degree, or probably greater degree, of care when compared to organised retail. The resilience of kirana in a slowing economy has strengthened the belief of FMCG/CPG companies that their investment in kirana is safe.

The Reach that kirana provides to FMCG/CPG companies across the country is hard for organised retail to match and the probability of attainment of Reach looks slim in the short-medium term. In addition, the imminent threat of Private label by organised retail is at the back of every investment decision of FMCG/CPG companies. 

Will this sentiment of FMCG/CPG leaders drive support in future for kirana?

Reviews of industry press give an indication of the leaning of FMCG/CPG companies. While the benefits of working with organised retail are many, FMCG/CPG companies see the rational for supporting kirana. This is evident from the quotes below of leaders of major FMCG/CPG companies.

View from the Top - Barriers to Entry.

A Senior Executive of a leading footwear MNC, on a visit to India, a few years ago commented, “with a population of a billion, we have a demand for 2 billion pairs of shoes. We cannot go wrong here and with our brand already leading the popularity charts, it is a wonder we didn’t take India seriously all these years.” The Executive realised later how wrong it could all go.

This is an appropriate subject for an in-depth analysis on ‘challenges in entering the Indian market’.

This is as relevant in footwear as it is in other sectors – and convenience retail is no exception. So why do companies that do so well in other countries stumble in their India market entry? 

Focus Group Inputs - Customers.

High net-worth businessman from Mumbai.

“All the euphoria about convenience retail means nothing to me. I rarely go shopping for convenience these days and even if I do, I prefer my corner store (kirana). He knows what I need, and without blinking an eyelid he/she serves me. I waste no time going through the store, he picks the goods I want, packs and puts them in my car.'‘ 

“I go to the fish-monger who sold fish to my mother when we were young and we can never dream of buying fish from anywhere else. The flavour elsewhere is just not right. The fish-monger knows exactly the fish my mother buys, and the cuts she prefers, and does the needful without asking. Can modern retail provide this level of personalisation – even with all the technology at their disposal? I don’t think it would show up very well on their bottom lines if they have to invest in this level of personalisation.”

Professional from Bengaluru.

“After a hard week at work we want to enjoy the weekend – and shopping malls provide the means. Though I do bulk shopping for standardised items from modern convenience stores at these malls – convenience shopping is last on the priority list. I do not want to ruin a perfectly good day lugging a trolley through the mall. Also, if I want to eat fresh vegetables, then my kirana buys vegetables, fresh everyday for us. And the price differential is hardly anything. And I don’t fancy waiting in sweaty queues to pay for my shopping.”

Call center worker from Chandigarh.

“I work odd hours and this leaves me with little time for convenience shopping. In addition, I do not get time to cook at home so I have to make do with what I can lay my hands on easily for lunch and dinner. Modern convenience retail gives me the luxury of buying ready-to-eat foods, or pre-cut vegetables / frozen vegetables which make my life a bit easier and I can spend more time with myself once I am home. This service is not offered by kirana. So modern convenience retail is a boon as far as I am concerned. Yes it does cost a bit more, but I pay for convenience.”

Consumers without access to modern convenience retailing.

“It would be great to have access to modern convenience retail. But my kirana is smart, he does all the research for me and tells me what else he can buy for me after looking at what modern convenience retail offers. In fact kirana has become more pro-active which is good for us. I recently saw my kirana stock ‘idly batter’ and when I told my family about it they were all excited – we live in Delhi and making idly is a chore So the only option is a south-Indian restaurant. But you don’t want to go out every time and it’s expensive. So this was a welcome offering from my kirana.

Recently my kirana started selling pre-cut vegetables, and I thought it was a great idea – I no longer have to spend time cutting vegetables – it reduces my time in the kitchen by half. So while I would love to browse around modern convenience retail, I am not sure I would ditch my kirana. Kirana zindabad”

A kirana store owner.

“Modern convenience retail is good for us as an education. All along we did what our forefathers taught us. We now look at these fancy stores and make certain changes to our store, such as putting new fixtures. Our customers like the new clean look of the store and we get commended by customer - so it is good.

We also buy some product that the agents would not typically sell to us directly because we cannot buy in bulk, and we in turn offer it to our customers. We do not make a very high profit from these trades, but it just adds to our overall sale and profitability, so it’s not that bad after all.”

Focus Group Inputs - Vendors.

Hindustan Unilever Limited.

“Kiranas will evolve and reinvent - Kirana stores are not endangered but infact they will evolve and reinvent themselves and will continue to dominate the modern bulk of convenience shopping. Just because a large number of players are getting into retail does not mean the Kiranas are phasing out. Merely six cities contribute 80 per cent of convenience retail turnover.”

Tata Tea.

“Pricing / margin gaps between organised and kirana is thinning - Because of the growing bargaining power of organised retail, Kiranas have a fear of being let down by suppliers. So we're being pragmatic and sometimes are absorbing a hit in the margins. The gap between prices offered by big players and the Kiranas is narrowing to an extent.”

Godrej Consumer Products Limited.

“Moving away from inventory push towards efficiency push - Earlier, we were guilty of forcing them to carry huge stocks. We have realised there's no point in doing that. Apart from the fact that there was damage and obsolescence, their cash flows were always strained,” referring to impact on kirana from FMCG / CPG company actions.

Explicit messages of support such as the ones above, followed by visible action have played a great role in cementing the bond between kirana and FMCG / CPG companies in recent times. 

With these sentiments we set about asking the question – How do FMCG / CPG companies rate organised Vs kirana on twin parameters of revenue per unit and risk of attrition? To answer this question we met numerous FMCG / CPG companies to get their view. The results of our interviews are illustrated alongside.

While the organised segment has the highest revenue potential per unit, the segment is a high risk customer for FMCG / CPG companies from possible risk of attrition. Apart from the risk of attrition, a number of respondents worried about private label. The size of the organised segment makes private label a viable proposition for these retailers. FMCG / CPG companies fear their brands will be used to lure customer, though private label sell through will be higher due to their lower price proposition. A leading FMCGs Marketing Director had the following to say for private label. 

“The scale at which the kirana operate makes private label unattractive, hence kirana is a segment we believe we should invest in and strengthen. Hence our focus on strengthening kirana.”

It appears that the writing on the wall is clear – organised retail have stiff competition, not from one another, or from kirana, but from FMCG / CPG powered kirana. And this will only intensify over time. 

Barriers to Entry.

Legislation.

MNCs censure the Government for their sluggish expansion in India. The Cash-n-Carry (CnC) model was invented by MNCs to try and set up their infrastructure in India in the hope that unrestricted entry will some day become a reality. It has been 8 frustrating years (at the time of writing this report), and there seems to be no sign of easing restrictions. Protectionism or otherwise, it is rightly seen as a means of securing the livelihoods of millions who work in kirana. It would be naïve not to expect this, but the resistance has spread to national brands as well. The proposition of shared best practise and co-existence is desirable. In reality however, the exact opposite - unrestricted competition, has been achieved, to the detriment of local business – in this case kirana. This explains the significant opposition to organised retail in most Indian States. Resulting in a steep deceleration in expansion plans of organised retail. An inclusive strategy would have resulted in greater success.

Supply chain.

Organised retail is as overwhelmed by supply chain as kirana. ‘Farm to fork’ is the strategy tagline. Most operators in organised retail believe this to be the answer to the supply chain challenge. Inroads in building this infrastructure have been made, but success is still a distant reality. The jury is still out on whether this strategy will benefit them in the long run. 

Operational efficiency.

Organised retail is operationally highly efficient. However extensive work is still in the pipeline in adapting global practices to develop local best practices in India. One Professor we interviewed at a leading B-School had this to say for India and its diversity – “this is not one country; this is a collection of 24 mini-countries, each with its own peculiarities. Do not be surprised if you have to invent best practices to fit each of the States in the country”. Though this may be an exaggeration, it is not far from reality.

Reach / expansion.

Nowhere is the question of reach / expansion as challenging as in India. Factors that typically impact reach include amongst others:- real estate availability, licensing requirements, trained manpower, demographic profile, product profile, transport & logistic infrastructure. The list is endless; and the possibilities - numerous; the task - complex. Without attributing a lot of this to the recent downturn, it is a case of adapting to the local requirements at a granular level.

Organised retail, with its multi-billion Rupee budgets, has lagged in their expansion plans due to one factor or another; affecting growth. Organised retail needs to go back to the drawing board and re-strategise their expansion plans using the learnings from the past few years and equipping their teams for the next level of meaningful expansion.

Manpower utilisation.

Organised retail is probably more affected by manpower utilisation than kirana. The lack of adequately trained manpower coupled with the steep learning curve (yet to be navigated) will irk the segment for some time. On the other hand the kirana, with its tight family run model is able to handle resource utilisation better than his/her organised counterparts. 

Mass Standardisation.

The legislation process, the licensing requirements, the political lobby, the farmers lobby, the Commodities lobby – and many more, play an active role in ensuring the barriers to entry are overwhelming. Standardisation in the Indian context means the adoption of a multitude of models all working at the same time to deliver analogous results.

View from the Top - Political Influence.

The Political view on kirana vis-à-vis organised retail debate is: “Entry of organised retail will endanger kirana and kill it. It will lead to obliteration and detriment of kirana, and eventual destruction of livelihoods of millions dependent on kirana”. This viewpoint, with its fair share of genuine concern, has been promoted very effectively at the grassroot level leading to a strengthening of feeling that kirana is at grave risk from organised retail. 

The Political process has probably used the Brahmastra (ultimate weapon of mass destruction) prematurely. Instead of investing in bringing the kirana upto speed with best practice, it dug a hole deeper for kirana to sink in. 

Result – Creating adversaries, in an otherwise cooperative eco-system. Many advocates of liberalisation believe this move would have beneficial consequences for retail and society as a whole. They argue - convenience sector has become poorer in the process, through delay in introduction of best practices by organised retail. In monetary terms this delayed Foreign Direct Investment (FDI) in retail has delayed creation of much needed jobs for fresh graduates, emerging from Universities across the country. Quite like the successful job creation that followed liberalisation of technology sector. In hindsight the decision to open technology sector was a boon to the economy.

Can you imagine the social & economic impact retail liberalisation can have on the economy?

Macro-Economic Impact.

Promote agro-based industry.

Organised retail will give impetus to the agro-industry which has long been neglected to the detriment of farmers in India (the most deprived segment in the country). In line with global practices and trends, especially trends in urban and semi-urban areas, pre-packaged and ready-to-eat food & beverages will form a sizeable portion of demand from organised retail, due in part to the convenience it offers to customers. The organised segment will create demand for pre-packaged and processed food & beverages, which will in turn incentivise investment in expanding agro-industry across the country and building an eco-system around it. 

Best practice supply chain.

Supply chain maturity is a definite advantage that organised retail will bring to India and, not only for retail, since advantages of a mature supply chain will percolate down to manufacturing as well. The multiple efficiencies that supply chain maturity will bring to the economy will (a) lower costs to manufacturers, (b) give better value for money to customer, (c) create employment opportunities, (d) offer better connectivity, and finally expand consumption, a key lever required to further stimulate the economy.

Modernise food storage.

Organised retail will promote modernisation of food & beverage storage, for temperature controlled as well as general storage, primarily as a need for its own business. It is a well acknowledged fact that India is grossly deficient in modern storage facilities for food & beverages. This is the key reason for the colossal waste of fresh agricultural produce. Modernised storage facilities will enhance the longevity of food & beverages giving better returns to the agro-community.

Export agro-produce.

Organised segment, especially MNCs, will use their expertise of working with manufacturers in overseas markets to promote opportunities to source products and services from India. This will propel an export-led agro industry. These manufacturers will meet demands of MNCs in India and overseas, as well as enter the export market earning valuable foreign currency for India and creating much needed jobs.

Create employment opportunities.

On the social level, organised retail will have a significant impact – creation of a plethora of jobs across the country at the local / regional level, thus limiting to some extent the flight of jobs to urban and semi-urban areas and at the same time ensuring families stay together and retain the social fabric of the community. In terms of job creation it will mirror the opportunities technology sector created for young graduates. Having said this, convenience retail will limit the damaging effect of disrupting the social fabric of families through local job creation as opposed to centralised job creation in the technology sector. It will also limit the need for urban cities to invest heavily in re-building infrastructure to cater to mass movement of jobs to one centre. Instead it will promote balanced regional development.

Tax revenue.

Liberalisation of convenience sector will open revenue opportunities for Governments. Governments will earn revenues through creation of an eco-system to support the organised segment in the form of licensing fee, taxes – both direct and indirect, and other revenue opportunities the sector will open up for Government. 

Promote investment in real estate.

Organised retail will add a whole new dimension to development of real estate in the country. The need of real estate by organised retail and the infrastructure around it will throw open opportunities for development in real estate. The experience that organised retail brings from working in mature markets will be a huge source of advantage to the economy. India will attract additional investment in real estate development, regional development, infrastructure development and create job opportunities along the way for individuals and revenue for Government.

Balanced regional development.

Organised retail will foster regional development into Tier II and Tier III towns and cities across India, in part to meet their own need for sourcing, set up best practice supply chains and to achieve Reach – a key requirement in India. An objective assessment of some of the developments initiated in the US and UK by organised retail, point to regional development opportunities organised players bring to the table, and benefits that accrue to local communities. Whether it is in the realm of education, healthcare, or management in times of natural calamities - organised retail with their scale / resources have played a key role in community / regional development.

Best practice logistics & distribution.

Let me repeat an oft quoted line in the retail industry – “Retail is all about having the right product at the right place at the right time and at the right price”. This is possible only when the logistics and distribution infrastructure is sound, dependable and sustainable. Organised retail has over decades perfected the art of logistics and distribution. With their entry into India, cost advantages, waste reduction in transit, lower fuel consumption per kilo of product transported, lower carbon emissions, etc will all start to accrue pretty much immediately. India will be spared the learning curve pains it would endure were it to take the evolutionary route. 

Improve Hygiene standards.

Organised retail will bring with it high levels of hygiene standards, that are a norm in international markets. This will boost the acceptance of Indian made goods in mature markets as well as boost hygiene standards of the Indian population, and reduce pressure on healthcare.

Having said this, let us not hasten to pass verdict in favour of liberalisation of convenience retail. There are considerable advantages of liberalisation, as there are advantages of kirana. The key here is mapping contributions that each one can offer to the economy and aligning objectives of the economy with those of the kirana and the organised segment. Only then can we say we have the ‘Best of both worlds’.

The Model of the Future.

The question on investors’ minds is: 

Is there a way in which, the relative strengths of kirana and organised segment, can be combined to create - a net positive position for the players as well as the economy? The answer quite simply is – YES.

In our example, Spice Rack (a hypothetical convenience brand), will build and provide an infrastructure to attract Kirana to partner with them.

How will Spice Rack achieve its objectives?.

There is indeed a way in which the objective can be achieved. The answer to this question lies in a well established business model - FRANCHISING - that we are so familiar with. Let’s examine briefly how, franchising works in a traditional sense, and hypothesise the future model of kirana. 

Imagine – Spice Rack, to be the seasoned player in convenience retail. Spice Rack proposes franchising as the India market entry model. Spice Rack’s success is in its ability to create a strong value proposition comprising: 

• Increased revenue 

• Lower costs

• Higher margins

• High aesthetics

• Simple, yet effective technology intrusion

• Multi-lingual interface

Spice Rack’s initiative will be one of (a) educating kirana / franchisee and (b) handholding till kirana / franchisee see the benefit of subscribing to the network. An extensive grassroots level effort is required to achieve the stated objective. 

The success of franchising will depend on an in-depth understanding of the character of potential kirana / franchisee, and on the quality and availability of resources. In the diagram below we illustrate some of the criteria that will help organised retail in understanding the potential franchise model. We do believe that a combination of the three models: owned, franchised managed will be an optimal mix to ensure high rate of success.

While most early entrants in India have set up their own Cash-n-Carry stores, there is a lot still to be done. 

Owned stores will lay the foundation for kirana / franchisee to emulate store best practices and help train the kirana / franchisee.

Franchised stores will help franchisees who have some experience in franchising / organised retail – where they can handle the operations and take direction without affecting the system / network.

Managed Stores will help kirana, who need hand holding, and for whom infrastructure proposition is critical.The results of the franchise model design will highlight the critical infrastructure requirements.

Spice Rack’s success in expanding into India is dependent on effective recruitment of kirana as franchisee. A holistic process of recruiting kirana will result in the desired Reach.

Value Proposition.

Economies of scale.

Franchising permits the network to achieve economies of scale rapidly. This helps lower cost barriers and raise profitability across the network. This is a great incentive for kirana to join in the network and spread their risk. 

Secure kirana employment.

Franchising does not jeopardise the existence of kirana. If anything, it further secures the kirana with self employment opportunities and creates additional opportunities for employment in the immediate catchment.

Co-opetition.

Franchising takes the fear of unbalanced competition away, allowing for strong cooperation between the organised segment and the unorganised kirana. Franchising moves convenience retail away from unhealthy competition and replaces fear, with Trust amongst kirana and organised retail.

Best practice sharing.

Franchising lends itself to sharing best practices within the franchise network and across the eco-system. Franchisors learn the dynamics of the Indian market and its customer and kirana get to augment their offering through a process of ‘mutual learning’. Franchising combines the strength of local knowledge and global expertise.  It augments the overall utilisation of resources, benefiting the whole network. Kirana, who hitherto led a reclusive existence, find themselves rubbing shoulders with their mature market counterparts. Kirana literally leapfrog into the next generation of retailing. The transition could happen painlessly or with just about - little pain. 

Create Employment opportunities.

Franchising promotes the building of a franchise eco-system to support the franchise network. New employment opportunities – direct and indirect, are therefore created. These new employment opportunities take the pressure away from existing sources of employee demand. The long term benefits to the economy of balanced employment generation and regional development cannot be under-estimated.

Customer satisfaction.

Exposure to modern retailing has raised the bar as far as customer expectation goes. Franchising, with its focus on standardisation – be it in physical appearance or in customer service, establishes the Customer Service Standard (CSS). Each franchise is judged on this Customer Service Standard. Franchisees are evaluated on the basis of their performance on the CSS scorecard. And customers pay with their loyalty to the franchise network that makes every shopping trip of theirs a memorable experience or meets with the standard they come to expect of the network.

Process centric.

Franchising, at its very basic level, works well when processes are standardised. Product, image or customer service – standardisation is sought across the network. This is best achieved when the franchisor focuses on creating an infrastructure that is implemented across the network. The franchisor develops and owns the infrastructure and is responsible for its upkeep and its deployment across the network. Kirana buy into a franchise because of its distinct advantages and offer to abide by the process in the successful development of the network. 

Phase 1 - Recruit.

Identify.

Spice Rack’s Reach Out initiative identifies kirana as potential franchisee, educates and coaches kirana to become part of the network. It then aligns kirana within Spice Rack’s network. This process is aimed at educating kirana of the merits of being integrated into Spice Rack’s network. It also explains the Value Proposition offered by the network to kirana. This Phase involves three further activities:

Spice Rack’s Reach Out Team identifies potential kirana and initiates initial discussion around the value proposition. At the end of this activity, the Reach Out Team would be able to shortlist kirana interested in aligning with the network. This activity paves the way for an in-depth sharing of the value proposition.

Share Value Proposition.

Spice Rack’s Reach Out Team shares the value proposition of the network with the shortlisted kirana. This activity enables kirana to decide if being part of the network would be in their interest. It would also enable Spice Rack to assess the integration challenges and resource deployment challenges with respect to shortlisted kirana. Spice Rack Reach Out Team will further refine the list to “probables”. This activity paves the way for Coaching shortlisted kirana.

Coaching.

Spice Rack’s  Reach Out Team now conducts coaching sessions with kirana to get kirana tuned to the franchise method of doing business including working with new technology. The Reach Out Team would identify transition challenges and help mitigate them. Spice Rack’s  Reach Out Team would also use this activity as a means of understanding the local market and associated challenges and designing products and solutions to address these challenges. 

At the end of Phase 1 – Recruit, Spice Rack’s Reach Out Team would finalise kirana who have the greatest potential to contribute to the network. An MoU between Spice Rack and kirana is desired at this stage to confirm the partnership.

Phase 2 - Integrate.

Format transformation.

Spice Rack’s Reach Out Team plans the format transformation activity including: store design, fixture design & installation, technology requirement & sourcing, implementation and in-store training. At the conclusion of this activity, kirana is expected to be fully conversant with running the new format. Format transformation paves the way for integration with Spice Rack’s supply chain.

Supply chain integration.

Spice Rack’s Reach Out Team now sets up the supply chain infrastructure and trains kirana in its usage.

At the end of Phase 2 – Integrate, kirana is fully integrated into Spice Rack’s network. The benefits of lower costs and higher margins will begin to accrue at this stage. It is now the beginning of Phase 3 – Augment which focuses on increasing revenues.

Phase 3 - Augment.

New product launch.

Spice Rack’s Reach Out Team initiates new product launch activity through a combination of learnings - comprising local knowledge gleaned from kirana, it’s own understanding of the local market, and Spice Rack’s international expertise. The objective is to introduce new products and services with the aim of capturing a larger share of customer spend and imagination. 

Ongoing support.

Spice Rack’s Reach Out Team has by now, fully integrated kirana into the network. The challenges of ‘continuous improvement’ kick in. Spice Rack and kirana jointly mount counter measures to handle the challenges. These challenges can be both – external and internal. Spice Rack’s Reach Out Team then conducts regular diagnostics of the network as a whole, and kirana catchment in particular to ensure - kirana and network sustainability. The ongoing support is designed to ensure loyalty to Spice Rack’s network and its sustainability. 

This phase enables kirana to evaluate on a consistent basis the benefit of joining Spice Rack’s network.

Spice Rack - Value Proposition.

Spice Rack’s value proposition is to build an eco-system similar to ones built by successful brands in the Quick Service Restaurant (QSR sector) and fashion industry. The success of brands such as Pizza Hut, McDonalds, Debenhams, Marks & Spencer, Next etc, would not have been possible had they not built the eco-system to support their initiative. However, the value proposition that Spice Rack will deliver is probably more complex, in that it deals with a segment of the business community that is not as well versed with best practices as franchisees of Pizza Hut, Debenhams, etc. While franchisors in QSR and fashion, work with a handful of franchisees, Spice Rack’s network will consist of hundreds-of-thousand if not millions of kirana franchisees. And in doing so it’s task of laying the infrastructure will be that much more complex.

Future Perfect.

Spice Rack’s success in India is dependent on:

(a)    Conceptualising and Building the eco-system 

(b)    Ownership of ‘Retail-in-a-box’ architecture

The future eco-system would comprise of Spice Rack acting as a de-facto agent for the network. Spice Rack will act as the buying and distribution outfit of all products and services required for the successful operation of the network. In addition to standardisation, this eco-system will offer substantial advantages in the form of lower costs - through economies of scale. By taking the pressure off kirana / franchisee (of managing the eco-system), Spice Rack focuses it’s own resources on what its best known to provide – operational excellence - across the network and management of the eco-system. In this case - an extended network of own and franchised stores.

The eco-system will comprise of: (a) Vendors of products & services viz. for sale, fit-out, etc, (b) Banks & Financial Institutions, (c) Technology including applications such as supply chain, training, Point-of-sales, etc, (d) Risk & compliance, (e) Assurance, etc.

Spice Rack uses technology to strengthen relations within the eco-system and to ensure seamless delivery of services. A typical map of how the eco-system will work is illustrated alongside.

Spice Rack has a key role to play – it identifies and selects eco-system partners such as vendors, identifies products and services required by the network, negotiates prices and margins on behalf of the network, and puts in place the infrastructure and guidelines to run the business. Spice Rack also provides management and reporting capabilities to its own team as well as to members in the network. 

Vendors comply with agreement entered between itself and Spice Rack on behalf of the network. Kirana act in accordance with their business requirements using the infrastructure set up by Spice Rack.

Retail-in-a-Box architecture.

Retail-in-a-box is a significant design and deployment challenge. It is at the same time an exceptional opportunity to achieve significant savings from use of future technologies. Spice Rack is aware that it will have to provide infrastructure on which kirana / franchisee can operate. 

Spice Rack delivers ‘Retail-in-a-box’ convenience retail in India. The complex resource mix comprising – format, technology, applications, manpower deployment, marketing & promotion, processes, people, etc will all be delivered on a unified platform owned, designed and deployed by Spice Rack. Retail-in-a-box comprises a unified and collaborative web of processes to provide momentum and sustainability to the network. The ‘plug-n-play’ functionality enables successful deployment of infrastructure at optimal cost. 

The ‘future perfect’ scenario is akin to a train – travelling from Station A to Station B, with kirana / franchisees getting on the train and heading towards a common destination. 

Business Process Framework.

The business architecture and technology architecture work in conjunction to deliver the vision of the eco-system.

The diagram alongside illustrates the business process framework wherein ownership of the business architecture is in the hands of Spice Rack and kirana intrusion is limited to plug-n-play capabilities.

Many-2-Many Supply Chain.

One of the most critical functions impacting Spice Rack is supply chain. Spice Rack’s supply chain process involves bringing together all vendors and franchisees onto a common-collaborative platform where they can transact seamlessly. All vendors would come together as one whole, like tenants in a shopping mall, with kirana being their customer.

Conclusion.

More by default than by design, the political debate has delayed liberalisation of the convenience sector. It would be judicious for legislation to direct organised retail resources in augmenting the sector and creating partnership between organised and kirana instead of creating adversaries. It is clear that organised retail has as much, if not more, to gain from taking the kirana with them on this journey to secure the Indian market. While the approach to market entry may seem trecherous, it seems the most likely to succeed in the short-medium term. 

Anyway you never know WHEN or WHAT other DISRUPTION is around the corner. So capitalising on the current, is strategically, in the common interest.