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.

The politics of retail

The Indian government is today a minority. It's one major ally short of a simple majority in parliament. Two years into it's term, it didn't take any huge scandal or crisis to make this happen,  though there were no shortage of both,  but just allowing FDI in organized retail. How the times have changed.

True,  retail is an indispensable part of civil society and accounts for 11% of our GDP but it has never been a part of any five year plan or government scheme.  With 95% in the unorganised sector,  retail has been growing happily without any government intervention.  If there is demand, whatever it might be for, there will be someone ready to sell it for a profit. Retail as an institution is easily far older than governments themselves.

When big Indian corporations came out with organized retail chains, there were but whimpers of protests. When full FDI was allowed in the back end, it barely made the papers. Why now this hue and cry against foreign investment.

Let us consider the various stakeholders involved one by one, the farmer, the shopkeeper, the retail employee, the customer, the country and the politician. Let us try to remove the hype created by the media and other political instruments and concentrate purely on the normal man's understanding of what is going on around him.

The common small farmer lives in a very micro level society.  Tell any farmer in India about any government initiative and his initial questioning will be limited to four basic questions. Will I lose my land?  Will I get more money for my produce? Will I get loans easily? Will I be able to work less? A positive answer to these questions and the farmer and family are happy. FDI as such will not be able to bring any change that Indian retailers haven't had the opportunity to provide.  The farmer really doesn't care if it's an Indian or a foreign company. Why should he?

The shopkeepers are the ones the media portray as the biggest losers. But are they themselves so worried? A normal kirana owner has the pulse of his customers. He has with him the best of CRM techniques in person to person interaction which no large retailer can compete with.  He understands that his share of the pie is large and growing enough to sustain him.  While the big players cater to the top 20-25 percent of the income pyramid,  he is the owner of rest of it.  While his customers might grow up to visit the nearest Big Bazaar,  there are enough growing up from below to sustain his shop.  McDonalds hasn't exactly destroyed the local tikki-waala has it. Growing congestion and rising real estate prices have already taken the rich metro customers out of his reach. It's again the politician and the trade unions that are doing his worrying for him.

The employee is happy. The unemployment is growing and the job market is not keeping pace.  Any new job opportunities are welcomed with open arms. The country has too many young skilled and  semi-skilled laborers to sustain everyday.  Foreign players are looked upon as saviors providing better pay and better working conditions. But considering the track record of major retailers like WalMart, they may be in for a shock.  Under more liberal labor laws,  retailers are notorious in the west for their treatment of employees. Expecting them to do any better here would be foolish.

The customer is ecstatic.  Rising competition and rising assortments can only lead to cheaper products and more variety.  The monthly grocery purchase now entails more than one option while products all over the world are available through multiple channels. Retailers are beginning to get more customers centric and customer satisfaction and retention are the new buzzwords. Foreign retailers used to serving highly demanding customers will surely bring something new to the table. The customer will remain the king.

The country really needs the confidence of investors. Terrible fiscal management and growing infrastructure needs has left the economy in dire need of foreign capital. FDI will increase FIIs boosting up the stock market as well as bringing much needed investment in infrastructure. More competition and efficient practices might drive down inflation giving the RBI more freedom to control our growing current account deficit. As the Kelkar report has put so explicitly,  growth is no longer an achievement,  it is a necessity our country needs to not collapse on the weight of its growing population. FDI across the board in all sectors previously protected is the need of the hour. We have a huge market. Now is the time to leverage it to fulfill the potential our country holds.

Last and unfortunately not the least are our politicians,  the policy makers.  The ones supporting FDI as well as the ones opposing it seem to have similar reasons and similar arguments.  In the game of politics it is easy to take a stand or raise one's swords on issues whose gestation periods are long and the benefits or losses immeasurable. Thus corruption or price hikes get sidetracked as they might fall prey to immediate action which no politician wants. FDI will be seen as a boon or a bane depending on which side of parliament you sit while larger issues can be swept under the carpet across the board. Sufficient loopholes have been kept for manipulations and the numbers game in parliament has got a safe issue to hedge its bets on. What else do politicians want.

Thus neither is FDI in retail going to usher in any golden age in the country nor will it cause any catastrophic collapse.  But as long as it makes economic sense,  it could benefit the population.  Whatever be the end result,  the politicians rest smug in the knowledge that the Indian will move on and survive come what may.

India needs more such milkmen. Dr Verghese Kurien.

When Dr Verghese Kurien passed away, aged 90, India lost its leading innovator and visionary. One whose vision was able to transform the entire dairy sector, rewarding millions with quality products and all encompassing growth. But the lessons to be learnt from Dr Kurien’s life include more than just the dairy sector. It is an example of how India requires processes customised to our unique demographics and social indices and not custom made solutions peddled by MNCs and unabashed globalisation lobbyists.

  The Indian growth story is unique. While opening up of the economy and a young population has led to excellent economic growth, infrastructure and social development remain bottlenecked in political and bureaucratic red tape and corruption. Compared to India, in China infrastructure and social development comes first, and they become the major force driving economic growth. We wait for the demand to arise and then build the infrastructure to satisfy it while in China the infrastructure is already in place to drive the demand. While this makes our economy more stable and sustainable in the long run, it has led to an income divide proportional to income growth.  Today, strictly in numbers, India has more millionaires than most developed countries while at the same time is straddled with more poor than most under developed nations.

This glaring disparity has led to global corporations making a beeline to India to be a part of the bludgeoning upper-middle and upper class market, especially in the metros. The metros and other Tier 1 and some Tier 2 cities have the infrastructure and a growing population to leverage their global practices and brand values. This upper class market is large enough with enough growth for both Indian as well as global players to grow and prosper. Thus it is no wonder that the lower section, without access to the same infrastructure and purchasing power have been neglected. Even in a cosmopolitan city like Mumbai, census data show that more than 40 percent of the population live below an income of Rs 2 lakh per annum. A market segment that will need innovative processes and long term investments to tap into.

 All the large Indian corporations today are multinational players with access to global resources and able to compete with their western counterparts in their respective fields. They have access to funds as well as technologies available all over the world. But they lack the motivation to get their fingers dirty in the muck of the great Indian cattle class. Business considerations do not lend support to innovative ideas and vision in markets that involve huge efforts and low margins. To expect western MNC’s who built their businesses in developed markets to take this step is unrealistic to say the least. Thus we see that out of the box thinking is limited to small entrepreneurs who do not have the capital or other resources to operate on a large scale.

To ensure that advantages of globalisation reach the lower strata, it is imperative that Indian businessmen and entrepreneurs awake to the potential that these sections of society have. Fresh ideas designed and customised to the specific problem areas are required.  The government, even if they do not build the roads, should ensure they do not build the roadblocks to new ideas. Dr Kurien was able to make a success of Amul incorporating the automatic milk bulk vending system re-engineered from a similar process invented originally by Rowe International of USA. Such a synergy of global technology and local customisation is required. India does not lack to brain power or the technological competence to ensure more such success stories. All we lack is the vision and commitment of the great man.