Beginning of the End...

I was in Germany for a month in June 2008. Not on a holiday, but on a mission. I was part of a five member team sponsored by The Rotary International that visited the Stuttgart region as Cultural Ambassador of India to spread friendship and strengthen business relationship between the two countries. We weren’t on vacation but as guests in the houses of German Rotarians. It was a fabulous four weeks and we learnt a lot about the country while also sharing the greatness of our own homeland. During the course of the stay, I had the opportunity to visit a couple of Retail points – a Hypermarket, a Supermarket, a Mall, a famous High Street and a Factory Outlet city. During my course of interactions with various people within the Retail business and outside, I learned one thing – consumers are the same world over! Irrespective of their origin or culture, what they seek when they buy something is the same – “value”. They could have grown up shopping and aspiring for various brands across borders and cultures, but the most important thing that they seek is the product should deliver value and the brand has to stand for its stated attributes. The city that I am referring to is Metzingen, famous for its factory outlets, attracting people from all over the world. Hugo Boss, which was founded in Metzingen and still has its headquarters there, started first with its factory outlet and was soon followed by other companies (e.g. Armani, Joop, Strenesse, Escada, Bally, Puma, Adidas, Reebok, etc.) who offer a range of their clothing and accessories at reduced prices. I was told that shoppers visit this city in large groups and spend a lot of time and money. All this, in the country of Volkswagen, Audi and Mercedes!

It’s quite common to see Retailers and Brands mark-down and sell their products after the season cycle is over. Typically, the fashion cycle is aligned to climatic conditions – Spring Summer from Feb – July and Autumn Winter from Aug – Jan. Once the season is over, the left over stock of the previous batches are sent to specialized shops popularly known as Factory Outlets. Such outlets are located outside the city due to low real-estate costs, provide basic amenities – may or may not provide a/c, nil or minimal personalised staff service, and limited parking for vehicles. The outlets do not stock the full range but shoppers do not complain as the goods are heavily marked down, ranging from 15-60%. While street-wear brands were pioneers in this line of business, premium and even luxury brands have joined this trend since the mid-1990s. It is quite common to see such outlets all over the world and India is no exception. Since mid-2000, a number of such small localities have come up in the city outskirts and attract large crowds, especially during the weekends. Large format stores such as Brand Factory (by The Future Group), Mega Mart (by Arvind Mills) and many such Retailers operate today and are slowly getting near CBD areas too.

While the Factory Outlets are a sure shot dump-yard, brands try their best to liquidate their stocks from within their stores, at lower mark-downs but “higher discounts” that appeal to shoppers. And this was born the concept of “End of Season Sale” or EOSS. Almost every brand across the spectrum offer EOSS twice a year, just after the season is over. The Sale begins as early as Jan and July and goes on for 4-6 weeks. While the discounts are lower during the opening weeks, it gets deeper as weeks pass by, but shoppers may not get their preferred sizes and colours, so stocks get liquidated quite much during the opening weeks.

One would have noticed during the last few days, various brands offering deep discounts at their outlets. While consumers keep track of who is offering what, they usually wait for the big boys – the Department Stores such as Shoppers Stop, Lifestyle, Westside and Central to commence their EOSS. Since the size of stock-holding is substantial, the discounts offered by them are also deeper. India’s largest Department store chain by size, Shoppers Stop (which operates more than 25 stores across the country including at Bangalore International Airport & Hyderabad International Airport) and Lifestyle offer a preview for two days to their privileged customers, their Loyalty card holders (First Citizen and Inner Circle). Westside offers an additional percentage of discounts if shoppers use a particular bank’s credit card. The newest and the most premium Department Store format, The Collective from Madura Garments that stocks brands such as Hugo Boss, Armani, Ralph Lauren, etc also goes on Sale!

The season has just begun and is expected to continue for the next 6-8 weeks. My friends in the apparel business say that the recent Spring-Summer season reflected healthy sales – same store sales growth of over 10-15% YoY and hence the discounts this season may not be very high (unlike last year same time where the average discount was 40% and went as high as 70%). Whichever way, the same product is going to be available at a price lower than before (remember, it’s only the price that is lower and not the Brand value0, so what are you waiting for? Rush to a store near you and I guarantee that you are in for a surprise. Happy Shopping...

FDI in Retail – A never ending discussion!

5^th and 6^th July 2010 would remain etched in the history of Indian Retail for some time to come. While the country witnessed an unprecedented (sic) response to a nation-wide Bandh (shutdown) called by the opposition parties against the recent Fuel price hike (after the Government deregulated Fuel prices) and to show their solidarity against rising levels of inflation on Monday, leading to estimated losses over USD 3 Billion, Tuesday was a green letter day for Organized Retailers. The Government of India (GoI) announced a discussion paper to debate on allowing FDI in multi-brand retail leading to mixed reactions across the country and outside. Everyone who was anyone in the Retail realm in the country had comments to make. Rightly so, as this public debate was much needed; while the fundamentalists have always argued against the entry of foreign multinationals in Retail, those in the business have usually welcomed the idea, although with caution. One of the biggest criticisms against such a move by the country is that the small retailers (Read: Kirana Stores aka Mom-Pop stores) would lose business to the modern, organized retailers.

Currently, Indian Government allows upto 100% FDI in Cash and Carry (B2B), 51% FDI in multi-brand retail and 100% FDI in single-brand retail – that means, the brand can sell various categories of products with the same brand identity – apparel, accessories, watches, footwear, etc. Insofar multi brand retail, the restriction is to ensure that Joint Ventures are formed only with Indian partners, thereby benefitting Indian business houses. Although this was allowed by GoI way back in 1996, apart from the then dominant RPG Group which formed a JV with Hong-Kong based Dairy Farm International to form Foodworld Supermarkets Ltd., not many business houses took advantage of the model. Organized Retail was after all not so lucrative those days and my own kith and kin didn’t take me so seriously when we would discuss the upcoming opportunities. Today, the top business houses in the country including Tatas (Westside Department Stores, Star Bazaar hypermarkets), Birlas (Aditya Birla – Fashion Retail, More Hypermarkets), Ambanis (Reliance Hyper and other formats) and Mittals (Bharti-Wal-Mart) are focussing on this business. Some of the concerns on allowing FDI in multi-brand retail are captured here;

Loss of livelihood for Kirana stores

The biggest and single largest qualm against allowing FDI in Retail have been that Organized Retail would lead to losses of small kirana stores. There are over 12 million retail touch points in India of which more than 90% of them are Unorganized. The estimated size of the Indian Retail Market (as per various sources online) is more than INR 200,000 Crores. So, 90% of those engaged in Retail business, to begin with do not pay necessary taxes to the Government. These small retailers operate on a net margin of 4-7% after all their expenses and hence the Governments (Read Political parties) have remained soft on them. These small traditional Retailers have been serving Indian consumers and their families for over four decades and remain favourites – from buying milk to bread or vegetables. Many of them provide credit facilities and some even deliver at doorstep at odd times of the day (and night), without any additional cost. These Kirana stores have been all time favourites for FMCG Companies to introduce and promote new products, new variants and various consumer promotions. All this changed since 2000 AD when organized retailers started to spring up all across the country. Those days, Organized Retail was less than 5% and was considered pricier and novel, even by urban consumers. However, Organized Retail has come a long way since then. In large cities and metros today, Organized Retailers aren’t competing with Kirana stores anymore, but with those of their own ilk – other organized retailers. It is quite common to see large advertisements in leading newspapers all through the week and weekends advertising various offers and promos to entice consumers to visit their outlets. Having said that, not many small retailers and Kiranas have lost business; In fact, they have got better and more organized than before. Those who are out of business are not because of large retailers, but because of competition in the same league – similar ones are offering better pricing and service, two main attributes why consumers were shopping at Kiranas. When consumers in SEC B and above moved towards Organized Retail, those below moved up from shopping at Govt. Run PDS Stores to small Kiranas. Maslow’s theory of Evolution?

Hence, the logic that small Kiranas would run out of business is not just a myth, but also immature. Remember, we have a billion people to feed, dress and house – there is enough and more opportunity at the bottom of the pyramid.  

Employment opportunities and benefits

Most of the Kiranas are entrepreneurs of their own right – they would have started their business using a small capital, borrowed from friends and family and the shop would actually be a part of a house, either their own or somebody else’s. The husband-wife couple take turns to run the show and some of their relatives’ children or their own add hands for support when required, especially on weekends or for home-delivery. It is amazing to see sometimes, children in their teens explaining fabulously about product attributes and pushing sales (top-ups), even better than Management Trainees of FMCG Companies. One of the biggest qualms of allowing FDI is that it would lead to loss of employment – a strange fact, since it is actually the couple who run the business and usually do not employ outsiders. Those employed are their own kith and kin and hence, the staff cost is less than 2% of their turnover, if not lower. Organized Retailers need to comply with Govt. norms with regard to payment of wages and the staff salary includes health benefits (ESI) as well as long term benefits (gratuity / pension). Therefore, Organized Retail would not only provide higher wages to those working in the front-end but would also ensure continuity of service and job-security. The Future Group along with its subsidiaries and joint-ventures, which manages various formats such as Big Bazaar, Central Malls, Pantaloon Fashion and various other formats employs over 12,000 employees!

Capital infusion and erosion of profits

Capital infusion is considered among the biggest benefits of allowing FDI in Retail. Although large business houses like Tatas, Birlas and Ambanis have enough (monetary) capital to provide, what they need is Intellectual Capital. While it is always good to say that India is a country of entrepreneurs and we know to run the business best, what we also need to know from International partners is ways and methods to run the business more efficiently – simply because they have been running their own businesses successfully across countries and continents all over the world. Having said that, the next concern is that the multi-nationals would send their profits back home to their headquarters situated outside the country. This too, is a far-fetched dream. The net margin EBITDA that Organized Retailers manage is between 4-12%, depending on the nature of their business. Typically after paying taxes of all sorts, what they end up with a single digit or a decimal profit. Note, Retail is a business that gets profitable over a period of time and with scale. So, to increase their presence and run the business across the country, a lot of capital (including profits) gets circulated. So, if there is any one multi-national that would make money and send back home, it would be a long, long time!

Decision-Makers – Final word

While all the razzmatazz of the FDI paper was being discussed in India, Carrefour SA, the French Retailer announced that it is planning to sell of its business and exit South East Asian countries such as Singapore, Malaysia, Thailand, etc. Many would know that US Retailer Wal-Mart had to exit certain European countries after its failed attempt many years ago. Japanese and Chinese Retailers have never stepped out of their terrain since they believe they know their market best. As many would agree in the business, Retail is a very local business. The players need to understand the sentiments of the local and accordingly manage the business. I was at a popular Hypermarket at Bangalore yesterday and while I was talking to their Head of Operations, I learnt that the layout was designed by two foreigners who were experts from Europe. Needless to say, the layout was not only unfriendly but also needs localization, NOW. Consumers have shrugged off the “phoren” theory of Retailing and have embraced local players because of their offering. So, ultimately it is not just Government policies but the consuming public who decide the success or otherwise of any business, and particularly Retail. Time will tell who remains in the business.

Thank you: Karnataka Government; You are the best spoilsport.

The fuss continues – to be or not to be open after 11pm. The excise laws in the state of Karnataka make F&B outlets comply with a silly ruling that was brought into effect a few years ago. Reason? Roadside robbery, Killings, Drunken Driving and other Law and Order issues! This is not just cynical but also stupid, one would wonder. But not our friendly Babus who sit at the Soudha. They believe that the best way to curb the above mentioned menaces would be to shut F&B outlets by 11pm. And it was the same Government that held a Global Investors Meet early June which attracted the likes of Lakshmi Mittal, Vijay Mallya and many other investors from across the country and the world who have committed (although only an LoI) to invest over INR 40,000 Crores in the state. Bangalore is truly set to become a global city but the archaic laws would still prohibit dining after late hours! We are aiming for more BPOs, IT – ITES industries and knowledge workers who would work 24/7/365 and manage businesses but there wouldn’t be a place for them to unwind after work!

Many would have read the recent controversy courted by the Commissioner of Police, the Minister of Excise and the media – initially a proposal which was later converted by the Minister as just a thought – that Five star hotels would be allowed to serve alcohol upto 1am. And those like me who can’t afford such places? – that’s not the government’s problem. Alcohol anyway is not good for oneself and the country! Cynicism apart, the larger issue here is not just keeping restaurants and bars open. It is about projecting the image of the city, its people, its society. I have had the privilege to visit many global cities such as Singapore, Hong Kong, Kuala Lumpur and Shanghai in Asia, Zurich, Frankfurt in Europe and many others. None of the cities shut shop at 11pm. Yes, most of the regular F&B points and Malls close around that time because their main clientèle, the families wind up by then. But for those who want to continue, there are enough and more places where they could visit.

What I find silliest, if not funny is to connect Law and Order to closing F&B outlets by 11pm. The main claim to fame by the city police is drunken driving. While I am always up and against drunken driving myself and have never done such an act for many years now, this cannot and should not be a reason for restaurants and bars to be closed. What we need is more vigilance, which is not something that the Police Dept is ready to provide. At last count, the manpower shortage in the dept. was as high as 30%. And whatever check that the police perform is restricted to weekends, between 10-11.30pm because that’s when most people get out of F&B places. I have always advocated that when a person is caught Drunk and driving, it’s not some basic fine but a steep one that would really work. I always wonder if people in the West or other countries are actually disciplined all by themselves, whether it is obeying traffic rules or other civic rules. Most often I have noticed that it is the fear of Fine, a form of punishment that deters people from committing such acts. In India, one can get away by paying a mere Rs. 100 for over-speeding, parking in an unassigned area or even jumping traffic signals! Shamefully, the basic fine for drunken driving is all of Rs. 1,000 / - . If the sergeant feels so, then he could summon the errant driver to appear in front of a metropolitan court and accept his mistake, pay a fine and then he / she is out. I am told that in some cities in Japan, the bar-man keeps an eye on those who consume more than the stipulated level of alcohol and while the bill is cleared, they are advised to either take a taxi or use one of the chauffeurs who are appointed by the night-club for a small cost. This way, many people get employment part-time and patrons are taken home safely. This is not just customer service but by law. Such an idea was mooted and tried by a few restaurants in the city, but for reasons one could guess, it just didn’t work. We preferred to drive back ourselves.

Wonder what this curb means to F&B business across the city. If the outlets are kept open for 2-3 hours more, the sales could increase by 10-25% depending on the category. The increase in taxes alone one would pay off the additional costs (if any) to maintain law and order in the city. Recently, Delhi Government announced that small joints could sell Beer and Wine, keeping in mind the upcoming Commonwealth Games in Oct. 2010. We are not even asking to increase the number of Liquor points of sale, but just to extend the time until which places that serve F&B are kept open. Will the upcoming global city get truly global? Time will tell. Cheers.