The Hindu Business Line : `Retail markets full of promise'

Krish Iyer is the Managing Director and Chief Executive Officer of Piramyd Retail Ltd, the retail arm of the Piramal group which comprises Piramyd Mega Store offering lifestyle products and TruMart dealing in food and personal care. Iyer is a director on the governing board of the Retailers Association of India. Excerpts from an interview to Catalyst in the context of the India Retail Summit held at Mumbai last week:

What were the key areas that the retail summit deliberated on and what are the key takeaways?

India Retail Summit was conceived with the objective of bringing in some of the best minds in the business of retail, in India and abroad, from the fields of retail operations, logistics and supply chain, design and architecture and retail real estate. The Indian retail markets are full of opportunities — for growth through expansion of existing as well as new markets, categories and formats. The key areas for deliberations included strategies to build retail brands in various categories, success factors for various business models, pricing strategies, and strategies for managing logistics and supply chain.

Retail is rapidly transforming from being a transaction to an experience and quite rightly, service excellence as a strategy for market leadership is gaining due importance. The summit deliberated on methods of managing the service expectations of customers through people skills. One of the hottest topics today is foreign direct investment (FDI) in retail. There are divergent views on whether FDI should be allowed or not. We thought it fit to get the views of some of the best consultants, researchers and investment bankers in the country on the subject.

Which segments of the organised retail business do you see gaining pace in the next few years? Lifestyle or grocery? Why?

Retailing in India in the lifestyle segment as well as the value retail segment is in the nascent stage. The opportunity is really big for any player in the retail sector. Having said this, I must admit that the penetration of organised retail has been somewhat higher in the apparel segment. The overall market for food and grocery is estimated to be Rs 6.7 lakh crore, of which the share of organised retail is estimated at Rs 4,000 crore, which is less than 0.6 per cent. This segment is estimated to grow at a CAGR (compounded annual growth rate) of 33 per cent over the next five years. Another segment which has negligible penetration in organised retail is health and beauty care. The books and music segment is expected to grow 25 per cent. The growth in apparel is expected at 16 per cent per annum over the next five years.

The highest growth will probably be witnessed in consumer durables, electronics, furniture, home decor and furnishings considering the fact that nearly five million homes are being sold in the country every year.

Do you recommend a staggered approach to allowing FDI in retailing? Are there any retail models from South-East Asia that India can follow?

The overall retail market in India is estimated at Rs 9 lakh crore, which is growing at about 7 per cent per annum. Organised retail, at Rs 28,000 crore (a little over 3 per cent currently), is expected to grow to about Rs 1.1 lakh crore by 2010, taking its share to 10 per cent. If you assume a capital to turnover ratio of 1:5 (without taking into account the real estate investments and working capital), total incremental capital requirements would be about Rs 17,000 crore to Rs 20,000 crore. Clearly, funds of this magnitude need to flow into this sector both from domestic and international sources.

FDI has two parts to it. One relates to FII investment in primary market issues or in unlisted companies as venture capital. This is very important. Currently, this is not allowed in the retail sector. However, FIIs are permitted to buy shares of retail companies in the secondary market up to 24 per cent. This is an anomaly which must be corrected. There is no logic in not allowing FII investment at least up to 24 per cent in unlisted retail companies. This will provide domestic retail entrepreneurs access to cheap funds and enable them to invest more aggressively in retail infrastructure.

The other part is FDI by foreign retailers such as Wal-Mart. Here, my view is that a more calibrated approach is necessary, much the same way China and other South-East Asian countries had done. In the initial phase, FDI can be opened up in the lifestyle retail segment wherein foreign brands (including those currently operating in the country through franchises) may be allowed to set up outlets in any part of the country without any restrictions (including even 100 per cent ownership) as this is not likely to cannibalise any other retailers' business. In fact, there will be incremental growth in consumption as the target customers will start shopping for these brands within the country.

There are other categories such as health and beauty which will only lead to incremental growth in consumption and bring these products to the masses. As far as food and grocery is concerned, there is no dearth of retail expertise, entrepreneurship, technology or products. What is needed is access to cheap capital for the domestic entrepreneur to grow rapidly.

While there is a lot of brouhaha about allowing FDI in retail, all the major brands which want to have a presence here are already here, through franchises. Also, if the argument is that foreign capital can kill the corner store, it could already be happening with the large Indian-owned stores as well. Will allowing FDI change the picture dramatically?

I personally think that the size of opportunity is very large and neither the foreign nor the large domestic retailers are a threat. They have their own USP in terms of convenience due to their proximity to the customer, personalised service, home delivery and a deep understanding of their customers' behaviour and lifestyle. Those who adapt and improve their operations will survive and grow.

With the `mall-fication' of India gaining speed, do you think that is a good model to follow? Most malls are sub-optimally planned - or can Indian brands look for some other way of reaching out to their customers? Are the brands present in most malls running a profitable operation with their stores? Do footfalls translate into buying?

The development of shopping malls in different parts of the country is a very positive development. The retail growth in India is clearly being driven by the increase in supply of quality retail space. The only word of caution is about the cost of construction. Mall development, marketing and management is not just about glass facades, marble flooring and escalators. It is more about tenant mix, adjacencies of tenants, circulation, parking facilities, promotions to drive relevant footfalls and making quality retail space available to the retailer at a reasonable cost.

The cost of space in the mall is judged by any shrewd retailer not in terms of per square foot of retail space but in terms of cost per relevant footfall generated, which eventually translates into rental cost as a percentage of the retailer's turnover. Therefore, it is extremely important for a developer to focus and divert resources on those aspects of mall development and management which will maximise the retailer's business.

The retail industry is competing with other industries for talent. What is the industry doing about training and recruiting fresh talent?

Till recently, retail was not considered by management graduates as a preferred career option. Things are changing. Salary packages are improving due to the demand for retail professionals. Retail is emerging as a science.

There are some good retail schools coming up. Indian School of Retail in New Delhi and Wellingkar School of Retail in Mumbai are cases in point. The industry is constantly communicating with management institutes on the need to introduce retail management as a discipline and not just as a sub-set of marketing management. MICA, Ahmedabad, recently introduced a retail communications programme. Some industry players, such as Pantaloons, have tied up with some management institutes to train their professionals.

How has consumer spending changed to favour the growth of organised retailing?

More than 53 per cent of our population is less than 25 years of age. Nearly 26-27 per cent of our population is in the age group of 20-34 years, which is the population of the New Age consumer. This consumer is influenced by the West due to media. There is a clear shift from savings to spending on lifestyle.

Today, with aggressive lending by banks and finance companies at fairly low rates of interest, the need to save has decreased. Rising levels of income have led to increase in discretionary income of the consumer. Cash is giving way to credit cards.

Urban consumers gravitate towards an enhanced shopping experience today, both consciously and sub-consciously, and are willing to pay the extra price for it. With the Internet and increased focus on retailing in the mass media, bargain shopping has become much easier and, ergo, more prevalent. So, if they don't go for a bargain, it's not for lack of information, but their weighing of other attributes.

As their pockets fill up, consumers are more willing to take greater risks in investment, employment and purchases. Impulse decisions have entered the arena of big-ticket shopping as well. The urban shopper is almost obsessed with here and now!

Flouting convention, men have begun to approach shopping more indulgently than before. They tend to spend almost as much time and thought on shopping as women traditionally have.

What turbo-charge do you think can give organised retail a big boost?

First and foremost, retail must be given industry status so that the funding becomes easier and cheaper. Allowing FII investment in unlisted retail companies will increase availability of funds. Infrastructure improvements are of paramount importance to enable profitable retail growth and improve supply chain efficiencies. Finally, a well-calibrated approach to the opening up of retail sector for FDI will ensure balanced regional development without cannibalising the business of domestic retailers.

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