Future of Modern Trade in India

What should this channel do to survive the rapid changes in the retail landscape?

Feb 22, 2021

Future Retail is all set to merge with Reliance, thus creating one of the biggest retail chain in the world, with the largest number of stores, spread across the country.

As the country is waiting with baited breath and a lot of trepidation on what this merger will bring, here is my take on where Modern Trade as a channel is headed and what could be its relevance in the retail scene, with e-commerce and traditional trade leading the growth story in the pandemic struck 2020.

The Story:

Retail in India has always been a profitable, albeit messy business, with the retail environment being stable and without many changes till the 1990s. A major revolution, if you could call it that, happened in retail around the turn of the millennium, with the rise of Modern Trade. The name itself -“Modern” -promised to bring about a transformation in how this country shopped for groceries. And at the helm of this revolution was Kishore Biyani’s Future Retail.

The hyper markets promised a shopping experience, variety like what you have never seen before, and the ability to shop everything from clothes to cutleries to vegetables and kitchen essentials all under one roof. It wanted to make monthly shopping from a chore to an experience, and the assumption was that, this would be enough to lure the middle class away from their centuries long tie with the local kirana stores and grocers.

The shopping experience and variety angle worked well for chains that specialized in clothing and accessories where consumers had a very wide selection, they could go through the clothes at their own pace, they had facilities like Trial Rooms, could return the garments and even make alterations at the store itself. And this was largely successful in bringing crowds into the stores.

But in categories like grocery, the experience was not enough to take the consumer away from the local kirana store. The kiranas held an inventory which catered to the local needs and the major selling point was the line of credit which was extended by the kirana store to the household. This line of credit was a masterstroke devised by kirana retailers in India pushing the households to buy more than their purchasing power, moving the Indian retail economy from utilitarianism to consumerism.

To challenge this, and to wrestle the consumers away from the kirana stores, Hypermarkets started the concept of discounting thus bringing into the retail the concept of instant rewards, (MBA Textbooks went crazy with this concept, theories ranging from Zero Moment of Truth to Instant Gratification!) which lives with us even today in the evolving field of Ecommerce. Yes, you had to pay for the groceries today instead of 10 to 15 days later which was the credit period for the kirana store, but you could pay less than the Maximum Retail Price, or the MRP. This also bought into focus for the very first time, that MRP is not sacrosanct, but merely the maximum perceived value for the product, and the retailer could sell at any price less than equal to MRP depending on his profitability. And this mantra of “Every Day Low Prices” was super successful in bringing consumers to the modern trade outlets!

But with discounting becoming the way to bring customers in, Modern Trade stores did not give up on the promises of experience, variety and a one stop solution for everything you would need for the month. This meant that they held inventories for all these categories, and this ballooned costs.

Thus, was born the idea of Brand Partnerships. With kirana stores, there was no way to partner with lakhs of retailers directly to push your brand, but with Modern Trade, brands could tie up with the retailer, and take up preferential spots in stores, pay for better visibility, give exclusive promotions and more importantly, get the sales data about how much your brand was selling vis a vis competition real time instead of waiting on Nielsen’s report which was an extrapolation and came in the N+2 month!

For brands, Modern Trade soon became a very big pillar with many big names entering the picture like Aditya Birla, Apollo, Tata which partnered with international chain TESCO, Reliance Retail and DMart each making this space their own and specializing it in their own way.

Thus, came the two channels in FMCG sales – General Trade and Modern trade, which co-existed peacefully for most part, until the advent of e-commerce.

The Beginning of e-Commerce:

Rediff.com which started e-commerce in India way back in 2000’s, got it wrong in very possible way. They had the most terrible selection, very badly kept catalogue, their sellers were dubious, and their shipping time was between a week to two months, and sometimes, if you ordered a shoe, you got a tutu. But they aroused the curiosity of buying stuff online and having it delivered at your doorstep and opened India to the idea of a virtual marketplace. Companies like Amazon and Flipkart helped to hasten the growth of this channel, with their expertise in technology.

But these ecommerce firms had learnt a big lesson from Modern Trade:

Discount, or broadly instant rewards were the ultimate tool for changing consumer behavior.

Between 2010– 2015, two major trends evolved in the Modern Trade space.

Big Bazaar made acquisitions like Foodhall, Easy Day, Nilgiris in its efforts to diversify into the premium/mass premium market, but none of them managed to make a significant dent in the retail landscape.

DMart, a chain started by Radhakrishnan Damani was a value driven chain. It had a limited assortment but offered the best discounts. It did not focus on consumer experience, but rather utility and rate. Most sales people will tell you, “product sab teekh hai, landing rate batao” is a sentence you would hear either in a wholesale market, or from a DMart buyer! And this was the formula DMart employed all over India to capture the organized retail market space.

From early 2019, distributors and ASMs who handled modern trade started facing a unique difficulty – Big Bazaar which gave them great growths in business over the years started defaulting on distributor payments. The order values were low, discussion with the store and regional buyers went from, “BOGO (Buy one get one) stock hai sir, 500 peti lelo” to “Abhi stock nahi chaihiye, sirf 15 din ka inventory rakhna hai store mein”. Most of the sales fraternity thought it was a phase, this was Big Bazaar after all. So, the distributors thus continued supply, even though the payments were slow, and the brands continued to partner and invest with Future Retail.

The Year of Disruption:

By early 2020, the year that changed so many things in so many fields, it became evident that, in Future Group’s future, a takeover was evident. Covid bought the country to a standstill and made things hard for all of us, but this was especially difficult for Big Bazaar which was laden in debts and consumers had now stopped coming to stores because of the lockdown imposed. For a harrowing 3 months, the distributors and FMCG Companies waited in bated breath, until finally, Reliance announced its plans to acquire Future Group putting an end to an era, but simultaneously beginning a new one in Indian Retailing.

And the rest of the Modern Trade chains, which learnt the business from Future also learnt a few lessons:

Keep a tight track on inventory, dead/slow moving inventory raises costs more than anything else.
Immediate profitability is more important than looking at profitability over a larger horizon, especially when disruptions in the retail environment are apparent (like the evolution of ecommerce, digitization etc). Without its debts, Future Group’s story is nothing short of a fairy tale.
Specialization trumps diversification. Dipping our fingers into many pies just makes things messy, literally and figuratively.
People, and their expertise matters. They are not fungible. What Damodar Mall did with Reliance was basis his learnings at Big Bazaar.

Post Unlock 1, we saw chains take a string of measures keeping in mind the lessons learnt from Big Bazaar, they reduced inventory, started centralized buying to keep a check on stocks, focused on profitability and reduced man power and demanded from brands the best in class promotions and discounts.

For every FMCG Company, while Modern Trade contributes heavily to the top line, the additional costs like higher margins, bigger promotions, costs on additional visibility and manpower ensures that it is not a very big contributor to the bottom line. Simply put, it is more profitable for large companies to focus on General Trade like Wipro and HUL do, and smaller/emerging companies to focus on e-commerce like what was done by WOW partnering with Amazon.

Which really begs the question: What is the specialization offered by Modern Trade in the Retail environment? Are they just a glorified kirana store?

The modernization that they wanted to bring with computerized Cash Counters, Tally system led inventory keeping, discounts and a superior shopping experience is no longer an USP and is being replicated in some way or form by thousands of local supermarkets and general stores across the country.

What is it then that Modern Trade outlets could offer so that the brands can justify the costs for business in these chains?

The focus of Modern Trade chains has now moved to Tier 3 cities where they aim to be the destination store for that town/village. If we look at the new store opening plans for 2021 for ABRL, Reliance and DMart, the towns which they are looking at are have less than 0.5 Mn population.
This shifts the focus from Tier 1 and Tier 2 cities where there is intense competition. More importantly, it gives an opportunity for smaller brands which do not have intensive distribution capability to get their stock to Tier 3 towns through a direct channel, without relying on wholesalers and stockists to get it there.
Modern Trade is now focusing on creating Online to Offline channels (O2O). Reliance has built JioMart, ABRL has partnered with Amazon, DMart is establishing DMart Ready in key markets. Backed by years of retailing knowledge, the venture of modern trade chains into ecommerce will be a big challenger to Flipkart and Amazon and other established ecommerce players.
They would have to build the logistics for last mile delivery, but the network of stores they have across the country will help them provide faster and more efficient hyper local delivery service.
Small format stores, also known as supermarkets, have been the major driver of business in the past year for these chains. With these stores being in the neighborhood, they are easily accessible to the consumer for picking up the daily essentials. And for the chains, they are more profitable because of the smaller inventory, lesser rental and manpower costs.
These stores compete directly with the kiranas and operate in the same fashion catering to our daily grocery needs. They also can serve as the fulfillment centers when the Online to Offline channel picks up. So prioritizing proximity will help Modern Trade chains to win in larger cities and metros.
The theory that “Discounting” as a model is only for customer acquisition, and then the consumers would develop “loyalty” has not come true at all. Consumers are looking for the best price, and if they don’t get it at a retailer, they will move on to the next.
Hence chains should focus on profitability, limited range, low cost store retrofits and not fancy shebang and finally keep ultra-simple and cost-effective operations.
Modern Trade could learn a few things from e-commerce in their partnerships with brands.
They could strike partnerships with FMCG companies for new launches/brand revivals/exclusive launches and be synonymous with that product like what Amazon has achieved with OnePlus, which is exclusively sold on Amazon. Thus, the marketplace takes responsibility for the growth of the brand and co-creates plans with the brand instead of just being a passive retailer.

Advent of Digitization:

The Government of India has made digitization a key priority for this decade. The top tech companies are investing heavily in India, eager to tap into the market of 1.3 Billion people. With the pandemic hastening things up, it looks like we will have a Digital India sooner than we imagined.

With e-commerce building up its expertise on grocery delivery and larger Modern Trade chains setting up O2O networks, this channel may soon cease to exist in its current form. It might become less relevant for consumables and essentials. Modern Trade would still be highly applicable for categories where touch and feel matters. Apparel, Gold, Luxury Items, specialized chains (like Decathlon which focus on sporting gear) would definitely survive this phase.

When the market size shrinks, consolidation seems likely with either a duopoly or a maximum of 3 major players in the Modern Trade market. All that is left to be seen, is who would be those top players and how long we would take to get there!

Final Thoughts:

It is heart breaking to see Kishore Biyani, the man who taught us modern retailing, once touted to be the Sam Walton of India be consumed by his own dreams and ambitions. He introduced concepts which the industry followed – like the Big Day Sale in January and August, the Wednesday discounts to encourage people to shop during weekdays, “Every Day Low Pricing” Model among so many others.

But, the acquisition of Future Group by Reliance brings another revolution to the retail landscape. And brands need to be prepared for this change, because consumers are evolving very fast, and with so many ways to spend money, they want nothing but (pardon me for the use of this ultra cliched marketing phrase) bang for the buck!

This post was written by Chandhni. To give feedback, comment or discuss the article, please say hi to her on LinkedIn here.

Next week, in the last article for this month, another sellout Rahul Yadav discusses the myth of privacy when we have already given away all our data.

Disclaimer: All views expressed are personal and do not reflect the view of any company. All the information copyright is with Chandhni CL and credited authors. Protected under creative commons.

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