Why Indian retail is different

 Retail is the oldest form of business. In the context of this article, what I refer to as retail is `Offline, Direct to consumer’ businesses. My experience in retail has been in the Grocery and Food service businesses, but the points I make will be applicable across formats.

The broad principles of running a retail business are well known, because retail has been around for so long. In India, startups have looked to reinvent retail and have largely done so by copying western models – for e.g. traditional mom and pop grocery stores were replaced by Supermarkets, which moved to more niche categories. A few years after supermarkets came online retail, one or whose new avatars is 10 minute delivery.

Each of these models has now been around for several years. None made a profit in the first 10 years of
operations. Those that have now turned profitable, have wafer thin margins. The most profitable supermarket chain – Avenue Supermarkets (D Mart) has a net profit of 5%
The reason for this has been fundamental differences between India and the West in running an organized retail business. These are:

Unorganized sector advantages: Most retail business in India, is not just `mom and pop’ stores, but businesses with a significant cost advantage. A `hole in wall’ shop, or one operating from a home pays a lower rent per square foot than a modern retail store. While organized retail has to pay staff the legally mandated minimum wage (usually more) for a 8 hour working day, with statutory benefits, their unorganized sector competition is often disguised unemployment, with the owner or staff working longer hours and getting paid less than minimum wage. Businesses below a turnover threshold of
Rs 40 lacs per year (which covers most street vendors) are exempt from GST. When transacting in cash, the turnover of GST exempt retailers will be well over 50 lac annually. While this is smaller than the turnover of a large retailer, there are several such small retailers in the vicinity of a large retailer which affects the turnover of the latter.   
The unorganized sector advantage is apparent in other formats. Small scale furniture retailers have
some of their product displayed on the street and provide customization with carpenters paid `off the books’. A wholesale format like Metro has to compete with margins of as little as 1% which many Indian wholesalers, with low overhead, survive on.

While an older generation of customers is comfortable with traditional stores, it has been argued that the younger generation – I define these as people who grew up after economic liberalization in India in 1991, will take to modern self service supermarkets. While this is correct, the same consumers also embraced online shopping. Unlike in the west, where supermarket chains existed for decades before online stores, in India supermarket chains were in operation for less than 10 years, before online portals started targeting the same customer.

High rentals  The consumers for organized retail in India are barely 20 million households (this is the customer base for Amazon or Zomato). Most of these are in large cities, hence that is where retailers have to set up outlets. The competition, coupled with poor urban planning, pushes up rents. Prices for residential property in India are the highest in the world, relative to the income of the buyer. Similarly, rentals for stores are the highest relative to the purchase value of the customer.  

Walmart in the US operates mostly in towns with populations of upto 10,000 where it has near monopoly status. In similar towns in India, the market for an organized retailer is almost non-existent (the few with purchasing power will buy online)

The differential in rent and staff cost between the organized and unorganized retailers is typically around 4% of turnover, which is the net margin the most profitable organized retailers achieve in India.

There is also a `cost of compliance’, which modern retail has and unorganized retail does not. Inspections to ensure compliance with food quality, packaging norms, labor laws are confined to the small percentage of outlets in the organized sector, who incur a cost even if fully compliant.   

Not paying for quality and convenience: Lower purchasing power in India translates to the customer expecting similar prices in the organized and unorganized sector, without paying a premium for `bells and whistles’. Hence, the customer expects to pay the same for a kilo of dal sold in a supermarket, -  which is sorted, packed and complies with packaging norms (weight and expiry date) as the same product sold loose in a traditional store. Perversely supermarkets in India have to offer a discount to the prices charged by traditional stores, instead of charging a premium that the customer should, in theory, be willing to pay for better quality.

Disconnect between buyer and seller: The relationship between buyer and seller (retail staffer) in India is one of master and servant, rather than equals. A worker in a retail store in India can’t afford the product they sell. A car salesman can’t afford a car, a salesperson in an apparel store usually can’t afford the product they sell, not can an employee in McDonalds afford to eat there, except as an occasional indulgence. In this situation, one cannot have a relationship between equals, where the seller has product knowledge to share with the buyer and is respected for it.

Traditional retail stores in India are run predominantly by people from communities that have been retailing for generations and are comfortable adopting a subservient role, while also having an innate knack of understanding the customer and meeting her needs, in a manner that an employee in a modern trade store cannot. If a product is unavailable, a traditional retailer will often get it from a neighboring
store and deliver it home, rather than disappoint a regular customer. The shopper in a modern retail store will either see that it is not available, or be told it isn’t.

In a typical sports shoe store in the west, the salesperson may be high school pass, but will look like an athlete and will actively engage in a discussion - asking you about your stride when running, or how active you are in a particular sport. His Indian counterpart may be a graduate, but will lack the same familiarity with the product – except for what has been learnt by rote and will also resent being treated as the buyer’s servant. A server in a craft beer outlet or winery in Europe will understand their product better than their customers. The Indian customer in both categories is less evolved, but will know more than the server. I’ve been wowed by the product knowledge and enthusiasm of a 16 year old selling burgers in Norway and a 18 year old girl educating me on craft beers in Belgium in a way I’ve not seen in India. This is not a criticism of the quality of staff in India, just the reality that the product is not something they or their families would consume.

When I ran a chain of quick service restaurants, I had interns from well known colleges in Delhi and Mumbai work in our outlets. They dressed and acted no differently from other staff members. Our customers, who were from the same socio economic background as the student interns, instinctively spoke to them in English, rather than in the vernacular and in a more friendly way that they would to our regular staff. It also had a positive impact on sales, though it was not an exercise we could scale.