Would Pricing alone entice Customers?

This is my 21^st year in Retail and I am still not amused that the Indian consumer’s love for discounted prices has never waned. Back in the late 90s when I first encountered a modern Retail outlet at Mandaveli at South Madras where my mother sent me to check out the new Store since the Sugar that was sold there was cheaper and of better quality than at the Ration Shop we would buy regularly, I was quite amazed at the whole set-up. It was a nice shop on RK Mutt Road with a bold red signage and white font which read “Subiksha” meaning prosperity in Sanskrit language. That the Indian Consumer has been price-conscious is known, but what’s interesting that almost all products in the country is today is sold at MRP – of course there are exceptions.  In categories like Electronics, the concept of Maximum Retail Price is just for Statutory Prices – to satisfy the Tax authorities. It’s been more than a decade since Electronic items were sold on MRP, barring new releases of Mobile Phones – Apple retains MRP for quite a long time since launching new product ranges while most other Brands cannot and do not retain MRP for more than 2 weeks since launch. 

In Fast Moving Consumer Goods (FMCG), MRP has always existed and will remain so, thanks to the MRP Act which governs pricing of consumer products. However, most Retailers of all sizes – S, M, L or XL or XXL (pun intended) offer or atleast promise to offer products below MRP. Subiksha’s initial success was due to a Brand promise that “Every product was priced below MRP” including Medicines which was an instant hit. The Retailer carefully priced products a rupee or more below – but at least One rupee lower than MRP which was a rarity those days. Even Kiranas wouldn’t reduce so much from the price of products, however would offer credit to consumers which was the first example of ensuring “Customer stickiness” a buzzword today. Over the years, most other Retailers have played on the Price and used it to their advantage. India’s first organized Grocery Retailer Foodworld had exciting price-offs on special days and this would draw crowds to the stores. Foodworld also launched Private Label products – “different cover, same product” which was cheaper by 10-20% across Spices, Ketchups and so on. A few years later, Food Bazaar came up with the premise of EDLP, a term coined originally by Sears in the 1960s USA which was popularised by Wal-Mart later on. 

Every Day Lower Price by Food Bazaar meant that there was no need for the consumer to worry about price change gimmicks; prices were low every day on a whole lot of items which kept / and keeps driving footfalls to the stores till date. On 26 Jan. 2006, Big Bazaar celebrated “Maha Bachhat Day” or “Big Savings Day” which was sort of similar to Black Friday and Thanksgiving weekend shopping in the West. The result was overwhelming and the Retailer has steadily increased it to 3-4 days now culminating with a weekend. In 2012, Flipkart ran “Big Billion Day” which was a runaway hit while also upset thousands of customers because they couldn’t get their hands on many products which were sold out in seconds and the delivery of products took more time than usual. Proof, that Indian consumers are extremely price-sensitive and will embrace price offers all the time. While this article is mainly focussed on Grocery, the competitive / discounted pricing works for every other product that’s sold in retail – from Agarbathis to Audi Cars, Furniture to Apartments (sans GST, as they advertise!).

I happened to visit D-Mart at Salem in Tamil Nadu, India this week. I have visited one of their outlets in Mumbai 8 years before while exploring setting up CCD within their premises. I was awed by their offering. Almost every product was on discount – below MRP to be precise. No crazy promos, no confusing promotions, buy this and get that and so on. Simple, straightforward discounts as we Consumers like it. In no time, I was carrying a basket and when I went to the Billing counter, I was informed by the girl I was to pay Rs. 901. Unbelievable that I picked so many things. But frankly, there was more to do than pricing which stuck me – the store was spic and span. For a grocery cum Hypermarket in a Tier 2 town with a population of less than 20 lakh population, that was surprising. The girl, when I asked said the store was seven months old and is filled up to the brim on the weekends with Customers shopping till late in to the night after the city is shut. Says something about us.

J for Jacking up Prices

Worldwide, it’s a common practice for Retailers to increase the “Selling Price” of products and then offer a huge discount to Customers. This works well in most countries where there is no MRP regime – Maximum Retail Price. MRP is fixed in certain countries like India and even has an Act passed by the Parliament. According to the MRP Act in India, any product that has been packed and sealed must carry an MRP – a price that’s the maximum fixed for that product. The manufacturer or the seller is free to fix the price but there are a lot of governance issues around this. For example, a product that has to be sealed must go through certain formalities with various Government Departments. Although prices keep fluctuating from time to time, especially for essential items such as Grocery, the Retailers can keep changing the price but after prior information to the concerned Government Authorities.

A packed product could mean a premium shirt from Louis Philippe or 1 kg of Rice or Atta and everything in between. This applies for Cars, Bikes, Consumer Durables, Alcohol, Packaged Drinking Water and almost everything that can be packed and sold. However, there are exceptions for Fruits & Vegetables, Meat, Flowers, etc. which are not covered under the MRP guidelines. Therefore it is quite common to see Organized Retailers playing around with the F&V category which is not only demand & supply dependent, but also on various other external factors such as a Traders strike or a Truckers strike.

Small Retailers, especially the semi organized ones do not follow the MRP guidelines strictly. I had an experience just yesterday at a premium Toy Shop in Chennai. Being summer time with holidays for kids, I visited the shop to pick some board games and toys for my kids. There were items which were pegged at high discounts – 30% - 50%. But most of these items didn’t have an MRP. It seemed most of these items were being imported by the Retailer directly from the Manufacturer or an International source. And therefore had the liberty to adjust the prices. Interestingly, the law allows Retailers to do so. The prices can be arbitrarily changed for most products (except alcohol which is governed by the State in TN) by the Retailers and hence the practice of “jacking up prices” is quite common during such times.

While there was no real discount to the customer, it was a sort of a “made-up” discount that the Customer is expected to perceive as a value offering. With the increasing availability of products, customers are quite aware of such malpractices and have taken the Retailer/Seller to the courts. One such recent example was how a consumer in Hyderabad won a case against INOX multiplex for selling Drinking Water above Market Prices although with a different price printed on it. The Court was of the view that the same product cannot be at different prices in different locations and the Customer won hands down.

So how does the Retailer manage to still offer huge discounts (especially to match online prices) and still be profitable? Indeed, it’s a tough call. With markets still in a limbo, it has been a challenge for Retailers to survive but they come up with various tactics such as product diversification or even a new format. Some have pulled down their shutters but the show goes on. 

G for Grocery Retail – Then Vs. Now

From shopping grocery at Kirana stores to Government Ration Shops to one of the first organized retail shops in India to the supermarkets and hypermarkets and finally now with my own mobile Apps for Grocery, I would say I have been lucky to see them all. My tryst with Grocery shopping is cut to the early 90s when I would accompany my father to the state-run TUCS shops and PDS shops and bring, rice, dal & kerosene kept on the back of our bicycles. During the late 90s, a retail shop named Subiksha opened in the heart of South Chennai – a store similar to a PDS but a bit modern with staff in uniform who assisted customers with their shopping needs and a computerized bill to support the transaction. I remember cycling 5 kms to buy 3 kgs of sugar, which would save us 10-12% than buying from the neighborhood Kirana shop. I used to be amazed at how shopping was revolutionized in the late 90s with the advent of “Shop n Stop” a modern retail store close to my house in Royapettah that encouraged self-service, which was not just a fancy thing but also a very convenient one.

I was fortunate in the early 2000s to join and work with RPG Retail’s Foodworld Supermarkets, which was one of the earliest organized retail stores in India. From consumer offers to world class shopping experiences, the company paved the way for future entrants with this format of retailing. When I joined the Future Group, I witnessed how a humble 1,500 sft of a supermarket had morphed itself into a hypermarket with Food Bazaar spread over 10,000 sft at its largest outlet then in 2004 and that too on the fourth floor of India’s first seamless Mall, Bangalore Central. Till date, our family has shopped only at Food Bazaar in over 95% of cases. That’s some loyalty, rather just the convenience of shopping the entire household I would say. Late 2000s was the challenging periods for Retail, although not as worse as what we’ve been witnessing for the past 24 months. Hypermarkets reduced their sizes and have found the 4,000 sft model as their sweetspots and are still tweaking their models.

Since the turn of the decade in 2010, we have seen online retailers come and go and behemoths like Big Basket stay on with a supposedly proven model. I would like to cite the example of IBuyFresh.com which was the online effort of Kovai Pazhamudir Nilayam, a Coimbatore based Retail store that started with fresh Fruits & vegetables and later moved on to the Grocery & Household segments. The e-commerce start-up, which was serving over 800 orders a day in just 6 months of commencing shut down abruptly one day due to viability issues. Others like Peppertap and Local Banya raised millions of dollars to eventually shut down their ventures leaving smaller players like my own Hyperlocal start-up Oyethere.com in jeopardy, what with Investors sitting on the fence not wanting to experiment on new models any further.

Much has been spoken about Amazon’s self-service, self-check-out store in America which is a dubbed as a smart-store where customers pick products off the shelves which get billed while picking-up and the check-out is super quick with just a tap of their credit cards or mobile phones (NFC payments). Grocery shopping worldwide and in India has been seeing a lot of new opportunities, of course with challenges but perhaps, remains the most interesting retail format.

Retail horoscope 2017

There have been predictions written about sun signs and moon signs. So, I set-out writing one for the Retail Industry in which I complete 20 years this year . These are not purely fictional but I see things going this way. Take a look and let me know what you think.

Kirana Stores

The largest Retail segment, the sem-organized and unorganized Kirana Stores are set for a huge overhaul. With the onset of demonetization, Kirana stores do not have a choice but to go digital. All this while, most of them have been collecting cash for sales which mostly go unaccounted causing a great loss to the exchequer. This will change in 2017. From Bank EDC machines to Mobile Wallets, they will start accepting every form of money other than cash. A robust y-o-y growth is also seen in this business model.

Supermarkets

Neighborhood Supermarkets from large retail chains have already been making a comeback. Nilgiris is leading from the front through Franchising, while Aditya Birla More seems to merge with Future Group, and so would Heritage Retail this year. None of the supermarket chains have an online presence due to reasons best known to them. I don’t see any change here. Heritage is experimenting something but I am not sure if they would be scale up like the Hyperlocal players. Margins will be strained and even store profitability will be a challenge. I see more consolidation in 2017 among the medium sized players.

Hypermarkets

The most abused retail format of the last half a decade, the Hypermarkets have come a full circle. As I write this article, the store sizes have come down from 25,000-45,000 sft to as low as 8,000 sft. While poor availability of retail space is one of the reasons, the sheer ability to sell higher volumes like in Western markets is the core reasons. Indian customers prefer fresh products, be it rice or atta or oil or vegetables and fruits. Also, the households are smaller in size, so are the kitchens and refridgerators. Quite obviously the trolley size will be smaller. With most Mall spaces exhausted and almost no new Mall of any significance across major metros, Hypers may look for standalone sites in suburban areas.

Apparel Retail / Specialty

With a chunk of this format having moved online, from Diapers to Accessories to shirts to dresses, this offline retail format would see more store exits in 2017. The franchisee-dominated model will find few takers and loss making / average performing stores will be closed or consolidated. Malls are already operating at an average 15-25% vacancy of Vanilla Store locations and this year will be worse with burgeoning rent and maintenance cost (the CAM Scam!). Consumers will move towards E-Commerce for specialty retail and will be fine to shop even with limited or nil discounts due to the convenience it offers. Bad year for Retailers in this space which will see many small and regional Brands winding up.

Consumer Durables Retail

With E-Commerce already swooping a majority of consumer durable retail sales, such Retailers will be left in the lurch. Brands, who have initially supported offline retailers in the mid-2000s have started balancing their act with e-commerce. 2017 will see a swing in their loyalties towards e-commerce players. With tighter margins, higher rentals, surging operating costs, many such Retailers dealing in Consumer Durables will consolidate their store count while many would shut stores which are not making enough profits. Overall very challenging year for retailers in this space.

Jewelry Retail

The most affected sector after Demonitization is this retail format. Various media reports suggest how some leading players made a killing on 8^th and 9^th Nov. 2016 after the Prime Minister made the historical announcement. With 90% or more of their business in cash, and it’s quite well known how much of them get accounted, Bullion retailers will face heat the most. A significant number of stores would be thrown out of business. Large chains which have PE Investments made based on PPTs and Excel File projections will face a blank wall, with valuations diving deep and would find the going very tough. Extremely tough year for Retailers in this space. The market will dictate terms in May around Akshaya Trithiya when consumers go bonkers buying bullion.

Food & Beverage

With the Industry having matured in the last decade, it is time for consolidation for F&B Retailers. With scale in place, players like CCD, Dominos and McD will now consolidate their presence and focus on store EBIDTA. New initiatives such as Home Delivery and signing up with delivery companies will bring more business while a tired economy will put pressure on attract store footfalls. Outlet sizes will reduce by 30-50% across formats. There is a sudden upswing in specialty bars and pubs and this trend will continue. A growing and discerning set of gastro-enthusiasts will mean new entrants and new formats are on the anvil. Interesting space for Startups in this space.

 E-Commerce

It’s been 10 years since Flipkart the market leader was born. Sadly, this year would be the most challenging to the company that made e-commerce take off in this country where less than 10% of the Retail Industry is organized. With 1,000s of e-commerce companies of various sizes and shapes, names and offering in the market, the space would see a blood bath this year too. Most such companies which did not have a significant differentiator will have to bid adieu. Less than a Billion Dollar will go in to investments in existing companies while new startups will find the going tough. Amazon will consolidate itself in the market and will become a household name with higher market share and mind share. Hyperlocal Market places which connect offline retailers online will have a good run, since this model is reasonable new to customers. There will be some consolidation in this space too but new entrants will carve a niche. Reasonable investments are expected in this space.

Consumer

A weak economy, struggling to grow since the last 5 years will mean strained purses for consumers. They will be cautious this year on spending and will demand quality and service from Retailers than ever before. 

Is it Game Over for Malls?

Whose fault is it, I wondered, when I entered this iconic location last weekend. The Mall was nearly empty on a sunny Saturday afternoon. Car Parking area, which is the core identity of any Mall or Shopping centre such as a Retail Store or a Hypermarket was barely full, with a few cars parked intermittently.

The ground floor has a Mercedes Benz Car parked in the atrium, with curious onlookers not even sure if they would like to go closeby. Basics, which has won the hearts of Chennaites being a local brand with an International appeal has shut store. And so have so many stores. Lifestyle Department Store, the Anchor store of the Mall wears a dull look. The security guard at the entrance seems unhappy and bored with almost no visitors for a while. Even some of the food outlets and a café which were doing some basic business seem to be shut. I walked up the Escalator and was surprised to see empty stores all over!

The Foodcourt was the saddest. Half the counters were shut. The one or two who were functioning were neither providing tasty food nor were bothered about customer service. They were just serving a need, of thirst and hunger and nothing beyond. The dining areas was hardly populated, with many tables not even having chairs, forget patrons. Those who were having a meal were merely passersby and I couldn’t notice even a few of them with shopping bags.

McDonalds continues to attract crowds, perhaps the brand pull makes all the difference. The play area did have some crowds, but not sustainable to send them to other parts of the mall.

Inox Multiplex with half a dozen screens was barely empty, with 4 new releases this week. That food prices in the canteen area of Inox is a put off is another blog column by itself! Even then, people should come to watch a movie in the weekend? That was also not to be seen.

Despite being in the centre of the city (and hence its name), why is the mall so empty? What went wrong with the Mall which was once the pride of Chennai? A decade back, rental costs in the mall used to hover around Rs. 180-300 per sft. Now there are hardly any takers. Retailers have shunned the mall. Food Outlets, which would anyway attract crowds and make some decent revenues seem to dislike being in the Mall. Whose fault is it anyway? Is it that the customers walked away from the Mall to bigger and better options such as Express Avenue Mall which is about 5 kms away? Or have they gone farther to the likes of Phoenix Market city or Vijaya Forum Mall?

This Mall has huge potential given its location, a stone’s throw from the Marina Beach and easy access from the rest of South Madras. It has enough parking space for shoppers, enough shopping space, cinema, foodcourt, play areas, what not. With a little bit of effort, this Mall can be turned around. Will the authorities get a good consultant and work in the renovation? Time will tell.