Service Retail - An Overview

The Indian organized service retail industry can be considered to have grown from having taken its baby steps to having begun to blossom in its youth. Today one of the major verticals of service retail, the wellness and beauty industry has seen the entry of multiple organized players turning an entirely neighborhood business into a battleground for growth and innovation.

Service retail, to be more specific, the business of selling an intangible service directly to a customer at a fixed location has multiple limitations with respect to its perception and scale-ability while at the same time can boast of numerous advantages, the most important being high margins and lower operational costs.

Brand value for service companies has always been a difficult hill to climb as the common customer fails to register the importance of the brand in the value that has been provided.  With results being intangible (beauty is in the eyes of the beholder while health is always judged on one’s sacrifices to attain it) the credit more often than not goes to the client touch point – the stylist or the gym trainer. Imagine the credit for an excellent perfume going not to Brut or Chanel but to the saleswoman who suggested it. Hence brand building remains a huge challenge, affecting both the valuation of companies as well as single location scale-ability. For example, a successful product retailer can easily build a 50,000 sq.ft. mega-store with multiple SKU’s and brands while even the best beauty and wellness retailer is limited to a maximum of a 5000 sq.ft. carpet area.

This disadvantage is offset by large margins, generated by lower product costs and operational expenses. Saving in logistics, inventory, shrinkage etc leads to much lower bottom lines enabling companies to increase the number of outlets much faster. Thus we see the major players growing in numbers exponentially. In the beauty segment, the major players are easily able to open 50 to 60 outlets in every large city (in some cases more than a hundred) as capital investment costs are low and monthly expenses even lower. The franchise model has ensured that lack of capital need not be a hindrance to brand expansion if the business model adds value to the investor.

But being a localized business, no service retailer can realistically have a customer catchment of more than a few kilometers in a city. Thus the threat of competition is high and saturation in a major threat. The huge margins available have led to heavy price wars hitting the top lines while the importance of word of mouth publicity in brand perception has led to no brand being able to leverage its successes in new markets. Intra-city growth has been easy for all players while inter-city expansion is a major roadblock.

Though there are a lot of problems to be ironed out before any brand in any of the service retail verticals can claim to have reached a level of stability, the outlook for the industry remains highly positive with a growing middle class with deeper pockets driving demand and an increasing number of players driving supply. While product retailers increase their dependence on services to differentiate themselves from the competition, service retail in itself will soon hold its own in the Indian retail space.