Evolution of Food Retail Chains: The Indian Context

P.G.Chengappa, Lalith Achoth, Arpita Mukherjee, B.M.Ramachandra Reddy

and P.C.Ravi

5 - 6th November, 2003

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Evolution of Food Retail Chains

(Contd.…….).

• Food Chains were viewed as shopping destination for rich and affluent. This is no longer true.

• Super markets are fast expanding in developing countries.

• Among developing countries, Latin American countries are the pioneers in establishing supermarkets.

• There has been an explosive rise in supermarkets in the Latin American countries in the past 5-10 years that has transformed agri-food markets.

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Evolution of Food Retail Chains

• The “take-off” stage of supermarkets in Asia started 5-7 years behind that of Latin America, but is registering a much faster growth.

• Share of Super markets in sale of fresh and packaged foods:– Latin America - 50 per cent– Southeast Asia - 30 per cent– China - 48 per cent

• Retailing is a sunrise industry in India with many challenges like exclusion of small farms, management of processing and distribution chains

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Evolution of Food Retail Chains in India

• Evolution of super markets and fast food chains is a recent phenomenon in India.

• Various demand and supply side factors have contributed towards this growth.Supply Side:– liberalization of the economy in 1990s led to boom in

consumer goods industry with reductions in custom duties and shift from quota to tariff based system

– entry barriers on multinationals were largely removed -Kellogg’s, Heinz, Tropicana, etc. have entered the Indian food industry

– development of sophisticated supply chain & logistics– growth in food processing & packaging industry

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Evolution of Food Retail Chains in India

(contd..)

Demand Side

– increase in the income levels of middle & higher income groups in the 1990s together with the reduction in poverty levels

– changing consumer lifestyles-increasing time value, nuclear families

– increasing level of quality awareness

– advent of cable television and overseas travel

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Opportunities of Retailing in India

• In India, the share of household’s spending on food is one of the highest in the world around 48% of income. Also Indian consumer are increasingly spending more on eating out as compared to 5 years ago which clearly indicates that there is high potential for food service players.

• Provides opportunities for realizing higher incomes, employment generation, improving marketing efficiency, increasing the demand for agriculture products and risk minimization

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Types of Retail Outlets

The emergence of new sectors has been accompanied by changes in existing formats as well as the beginning of new formats:•        Hyper marts, typically 8,000 sq.ft and more•      Large supermarkets, typically 3,500-5,000 sq. ft.•        Mini supermarkets, typically 1,000-2,000 sq. ft.•        Convenience stores, typically 750-1,000sq. ft.•        Discount/shopping list grocer

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Super Markets are popular because

-   Economies of Scale- Track customer needs through CRM- Tight inventory control- Proper sourcing of products- Product range- Working housewife- Traffic congestion              

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Retailing in India

• Retail sales now accounts for 44 per cent of the GDP.

• Food sales accounts for 63 per cent of the total retail sales, growing to 10 lakh crores from 3.81 lakh crores in 1996.

• The organized retail food and grocery sector constitutes the largest opportunity for growth and account for 2% of total sales at present.

• Urbanization, working spouses, increasing household disposable incomes and convenience of one stop shop with good ambience drive growth of retailing in India.

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Growth of retail outlets in India

‘000 outlets

1996 1997 1998 1999 2000 2001

Food retailers

2769.0 2943.9 3123.4 3300.2 3480.0 3682.9

Non-food Retailers

5773.6 6040.0 6332.2 6666.3 7055.5 7482.1

Total Retailers

8542.6 8983.8 9455.6 9966.5 10535.4 11165.0

•Number of retail businesses grew by 26% in past 5 years (1996-2001)

–Food & food services outlets grew by 33%

–Non food outlets grew by less than 30%

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Performance of India’s Top Food Retailers for 2000-2001

Company Name

Group Name Format Number of Stores

Total Sq. Ft.

2000/2001 Sales INR Crores

Big Bazaar Pantaloon retail Hypermarket Opened mid 2001

1,00,000 150

Foodworld RPG Group (51%) Dairy Farm Intl. (49%)

Food supermarket 89 2,60,000 212

Giant RPG group Hypermarket (sells to both retail and trade)

Opened mid 2002

50,000 50

Margin Free Markets

Independent Retailer

Discount grocery chain

240 3,60,000 540

Nilgiris Bangalore based Nilgiris group

Food supermarket 50 89,000 230

Subhiksha Independent retailer

Discount grocery chain

112 - 162

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Food World • With 89 stores in Chennai (30 stores), Bangalore

(27 stores), Hyderabad (17 stores) and Pune (7 stores), two stand alone stores in Coimbatore and Mysore.

• Merchandise is divided into six categories, fresh food, dry groceries, processed and canned foods, household cleaning, health and beauty and general merchandising.

• Follow tight inventory, ensure quality and restricts margins to the minimum for stables.

• Each store employs about 16 well trained persons and the man to women ratio of 1:5.

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Subhiksha

• Discount store started in Chennai, by 2000 over 112 stores across Tamil Nadu.

• Control price by direct sourcing from manufacturer and farmers, tight inventory control and logistics through the use of information technology

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Nilgiris

• Bangalore based chain started as a dairy in 1904 having 50 franchisee retail outlets.

• Operated as a store for decades till the mid 1990’s, saw opportunity in retailing and expanded all over south India.

• Have a different strategy in that has a stress on convenience and promoting its own brand. It caters to the needs of higher income bracket.

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MTR • Produces a wide range of food products that have a good

demand both within and in US, Europe and Gulf countries.

• Leaders in ready mix, ready to eat and spices.• Maintains very high quality standards right from

procurement to sale.• They have HACCP certificate and it is an ISO 9002

company.• They procure the raw ingredients from places that are

reputed for its production and process the same in their plant in Bangalore.

• Made a beginning in retailing through a chain of “Namma MTR” stores.

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Janatha Bazars & HOPCOMS

• Cooperative Departmental stores were started with Government patronage in the early 1960's at a time when shortage of basic goods was the order of the day. Poor marketing strategies hindered their progress in the field.

• Total membership - 11,680 farmers, with 100 tonnes of horticultural produce being traded per day in eight districts.

• In 1998, each cooperative society was made independent, sixteen of which were subsequently federated at the state level, as members of the Karnataka Horticulture Federation.

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Suguna Poultry Products • Poultry farmers suffered losses during the last three

decades due to fluctuation in prices and raising production costs.

• Suguna Poultry Products and Venkateshwara Hatcheries came forward with the concept called Integration (contract farming).

• Suguna has a wide network of branches and farms at various locations are well connected by telephone, fax, wireless and modem.

• In integration, these hatcheries gave all facilities of free-chicks, free feed, free medicines followed by regular technical services.

• Buy-back arrangement of mature birds at a pre-fixed price.

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Metro AG

• Opened its first Indian outlet in Yeshwanthpur, Bangalore on a sprawling 6,500 square metres area.

• Proposed to open one more centre in Bangalore during November 2003.

• Capital expenditure for these two centres is Rs.176 crores (35 million euros).

• Employ 300 local people and head quarter will employ 750 local people.

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Government Policy on FDI in retailing

• FDI in retailing in not allowed per say, foreign retailers can operate in India through– Joint ventures, where the Indian partner is a

export house (such as Total Health Care)– Franchising/Local manufacturing/Sourcing

from small-scale sector (for example, McDonald’s)

– Cash and carry operations (for example, Giant in Hyderabad)

• The McKinsey report states FDI will help the retail businesses to grow from the present $180 billion to $460-470 billion by 2010.

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Government policies impeding growth of supermarkets & retail food chains

• FDI is not allowed in retailing- slowing the growth process of organised retailing in India.– Growth of supermarkets in most developing countries (Brazil,

China,etc.) has taken off in 1990s after FDI was allowed in this sector.

• Retailing is not regarded as an industry, very few banks are willing to invest in this sector.

• Shortage of warehousing facilities, cold storage and large scale processing units.

• Supply chain is fragmented & marked by existence of large no. of intermediaries– APMC Act has failed to achieve the desired objective of

improving conditions of the farmers

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Government policies impeding growth of supermarkets & retail food chains

(contd…)

• India is still in the second and third party logistic provider mode while fourth party logistic models have become global standards for logistic providers.

• Retailing is subject to plethora of laws and regulations at central, state and municipal/local level– Restrictive zoning legislation limits availability of land for

retail/ commercial purposes– Restrictions on interstate movement of food grains deprive

farmers from getting remunerative prices.– Restrictive Labour laws

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Government policies impeding growth of supermarkets & retail food chains

(contd…)

– Urban land ceiling regulations, restrictions on shop opening timings, requirements for shops to close once a week

– There is no uniform tax structure - multiple layers of taxes.

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Critical issues to be researched

      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?

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  In a labor surplus economy like India where the retailing industry employs a considerable amount of labor, will the development of super markets chains lead to the displacement of labor due to the excessive mechanization?

 Traditionally marketing employs a large number of women for the post harvest activities. Will the creation of food chains lead to the displacement of this important source of employment to women?

 What are the bottlenecks that face the food super market chains in their entry and operations?

 Are consumers benefited by the entry of food chains?

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      Will retail food chains serve as the panacea for India’s agriculture to compete against global competition through the increased efficiency that food chains bring to Indian markets.

      What safety nets needs to be devised to ensure that food chains compensate society for their harmful externalities like displacement of jobs etc.

Thank You!