ISBInsight: What motivated you to investigate the Indian retail industry? What are some of the unique aspects of the Indian retail industry?
Siddharth Singh: There is a lot of academic research in Marketing on retailing and most of it looks at the retail industry in North American and European countries. The retail industry in emerging economies such as India presents challenges that are typically not seen in these contexts. The learning from the developed world cannot be applied directly to the retail industry in the emerging economies.
The Indian retail industry has certain key features that make it unique. First, the retail space is dominated by traditional kirana stores. Walk through a street and you will find more kirana stores than organised retail outlets like Big Bazar or Reliance Fresh.
Second, the government regulation requires fast moving consumer goods (FMCG) manufacturers to print the “Maximum Retail Price” or MRP on the package of the product. In the US, the retailer decides the price paid by the consumer but here the MRP is printed on the package. This anchors the final retail price for a product.
Third, you often see retailers offering extra price and quantity benefits at the store level like discounts or bundled products. Manufacturer-led promotions are relatively infrequent. Very rarely would you see Unilever India or a Proctor & Gamble offering a 15% extra for their regular 180ml shampoo.
Finally, we have the diversity of rural areas and cities of different sizes spread across the country. Increasing urbanisation, increasing incomes, and rising aspirations for a better quality of life are reshaping the Indian retail space.
Most FMCG manufacturers do not picture the Indian retail landscape this way and often either disproportionately allocate resources depending on the size of the city or extensively focus on strengthening their supply chain and sales infrastructure in large cities rather than building new supply chain and sales infrastructure in the rural areas.
Another common mistake most global FMCG manufacturers make in India is to ignore the traditional kirana stores. Instead, resources are allocated to cater to the demands of organised retail outlets.
Q. There are more than 15 million traditional kirana stores in India. Is a focus on organised retail justified on the basis of profitability or volume rationales?
The traditional kirana stores are here to stay and FMCG manufacturers should not neglect the huge potential of this channel. We analysed over a million sales transactions of a large FMCG manufacturer with traditional kirana as well as organised retail channels for over three years. The results show that the difference in monthly sales to a distributor across different city size tiers, i.e., metropolises, mini-metros and other cities and rural areas is decreasing over time, while profitability is increasing across all classes of cities over time. Contrary to common belief, the profitability of traditional kirana stores is already higher than that of modern trade outlets.
Our results show that FMCG manufacturers must cultivate the traditional kirana channel and help strengthen their business. In doing so, the direct benefits through increased sales are obvious. However, a strong traditional channel would provide an indirect benefit as well: it would check the power that large organised retailers have over the manufacturer.
Q. A large chunk of potential in terms of customer relationship personalisation offered by the traditional kirana channels remains relatively untapped by the FMCG manufacturers. Could you tell us more about this?
The traditional kirana channels might have very limited bargaining power due to constraints in assortment, products, price or location. But what is unseen is the enormous consumer goodwill garnered by these stores. The traditional stores are very flexible and have often built personal relationships with members of the local community that they serve. They provide personalised services such as ordering special items/quantities for consumers or allowing purchases on credit. These unique value-added services create superior value for many consumers. These consumers might not be attracted to organised retail stores. FMCG manufacturers should understand, and many of them do, the consumer goodwill and flexibility of traditional kirana channels. They should strategise effectively to incorporate these channels into their mainstream distribution network.
Q. In your paper, you mention that promotions have both within-category and cross-category effects. Could you explain?
A promotion in the pasta category can not only affect pasta sales but also the sales of other categories such as pasta sauce and canned vegetables. Many FMCG manufacturers underestimate the cross-category effects when designing promotions and expect that promotions will lead to higher revenues. Understanding how the intensity of promotions in one category affects that category and other category revenues is important for an effective and profitable promotion campaign.
Q. What would be the key insights that your research can provide to FMCG manufacturers in India?
FMCG manufacturers can take advantage of the Indian retail landscape and achieve higher profits if they stop excessively focusing on premium products, larger cities and organised retail. FMCG manufacturers should train their sales-force personnel to be more receptive to the needs of the traditional kirana stores. Salespeople should be trained to offer specialised services to build a better relationship. Manufacturers can customise their products based on size or packaging. Services like inventory management, product category management, shelf space management and customised point of sale signage that are usually offered to organised retailers can be extended to these traditional retailers to help them adopt best practices and to compete effectively.
A common mistake is to allocate the advertising budget and sales-force personnel based on the size of the city. Although this strategy seems reasonable and may have worked in the past, our results highlight the need for a more balanced approach. For FMCG manufacturers, the differences across cities in terms of sales in traditional kirana channel and organised retail channel is decreasing. All classes of cities are growing equally when it comes to profitability for the FMCG manufacturer. Therefore, a skewed approach focusing primarily on the large cities is no longer justified.
About the Researchers:
Ashutosh Patil is Assistant Professor of Marketing, Robert J. Trulaske, Sr. College of Business, University of Missouri.
Sharad Borle is Associate Professor of Marketing, Jones Graduate School of Business, Rice University.
Siddharth Shekhar Singh is Associate Professor of Marketing and Associate Dean – RCI Outreach and Engagement at the Indian School of Business.
About the Research:
Patil, A., Borle, S., Singh, S., 2018. An Empirical Investigation of Unique Aspects of Retailing in India: The Perspective of Consumer Packaged Goods Manufacturers. Working Paper, Indian School of Business.
[This article has been reproduced with permission from the Indian School of Business, India]