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STRATEGIC MANAGEMENT GROUPSTRATEGIC MANAGEMENT GROUP

Retailing In India : Is There An Opportunity For My Company?

Small and mid-sized companies in India could consider retailing as an adjacency to their

existing lines of business or diversify into niche retail areas without competing with large

business houses and retail giants who have announced massive plans in the sector. To

capitalize on this opportunity, companies will need to focus on creating winning retail models

based on superior insights into consumption trends, buying habits, formats and offerings of

large organized players say Pankaj Gupta (Practice Head – Consumer and Retail), Shivnath

Tiwary and Roopa Tarkhad of Tata Strategic Management Group.

Organized retail in India is at an inflection point with most large Indian business houses like

Reliance, Tatas, AV Birla, Bharti, Pantaloons, K Raheja, RPG announcing mega retail plans.

However, retail plans of most big players target mass market opportunities leaving opportunity

gaps for small companies to capitalize.

Companies aiming to carve their own niche have often been intimidated by aggressive retail

plans of large business houses that have access to funding and possess large risk appetite.

Insights on opportunities in retailing provide valuable inputs to small and mid - size companies

aiming to capitalize on the exponentially growing retail sector. Companies can make inroads

into this fast paced retail growth story in two ways, through forward integration in areas related

to the existing business or diversification into niche retail areas.

Forward integration in related areas:

Typically manufacturers forward integrate into retail at customer touch points of product sales

or after sales service. While apparel and consumer durable companies in India are well known

to follow this model, there are many other companies in other sectors who have taken this

route.

Pidilite, a manufacturer of adhesives, art materials and stationery, has come up with an

innovative retail concept ‘Hobby Ideas’. These stores enable the company to make a point of

difference to the consumer by offering a gamut of craft and hobby related products under a

single roof. Simultaneously, the outlet also acts as a sales point for the company to sell its

entire range of consumer products.

Linc Pens, a writing instruments company, has launched the ‘Just Linc’ exclusive retail outlet

chain which offers more than 100 writing instrument variants under one roof. These outlets

offer the advantage to consumers of offering a large product range in a good retail ambience

coupled with a touch and use experience before actual purchase.

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Pergo, a laminate flooring company, has set-up a retail network of 30 exclusive stores to

display and sell its range of floor laminates. The company has introduced a unique concept of

an ‘e – showroom’ within its store. This is an interactive kiosk which assists home shoppers in

choosing laminate flooring designs to suit their living spaces by simulating their wall and

upholstery colouring and design. Thus, it has managed to use the retail space to effectively

showcase a large product range to the customer and provide point of sale assistance in

helping the customer choose the right product for her house.

Himalaya Herbal Healthcare, the retail chain of Himalaya Drugs, serves as a one–stop shop

for the entire range of Himalaya products including therapeutic, personal care, consumer

health and animal health. These outlets stock only Himalaya range of products and offer the

customer the advantage of availability of a wide range of herbal products under one roof from

a reputed supplier.

Internationally, one of the best examples of forward integration into retail is the Apple store.

Apple has built stores that offer a unique customer experience through an innovative use of

store design. None of the products are placed under glass and customers get the opportunity

to test and feel them before buying them. The layout simulates the usage environment at a

customer’s home and office with fewer than 20 products on sale. The reduced clutter enables

customers to go through the entire range of products in a short span of time. Apple has done

away with checkout counters and replaced them with payments made through wireless credit–

card readers carried by mobile salespeople. There is a strong service element within the store

as well. Every store has a ‘Genius Bar’ where trained and highly qualified personnel share

insights, technical advice and technical support on different products. There are also free

training workshops as well as individual training sessions to educate the customers on the

product features. All these activities have resulted in the Apple Stores grossing maximum

annual sales per square feet in comparison to other retail stores like Best Buy, Circuit City etc.

Diversification in niche areas: Global Examples

In the US, organized players constitute over 80% of the retail trade with dominance of large

players. However, small retail companies have developed unique value propositions and

competed successfully against the large players.

For example, Whole Foods Market Inc., with a turnover of $5.6Bn in 2006, is the largest

natural and organic food retailer. The company focuses on promoting the highest quality, most

wholesome, organically grown foods available. Whole Foods Market has successfully

competed against the strong competitors like Wal Mart, Target etc in a competitive food retail

market that is dominated by price focused retailers.

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Whole Foods Wal Mart Target

Revenues (2006, $Bn) 5.6 315.6 52.6

Gross Margins (%) 34.9% 24.2% 33.7%

PAT (%) 3.6% 3.2% 4.7%

ROCE (%) 14.6% 13.2% 12.6%

Market Share (2006) 0.6% 15.9% 1.8%

5 yr Revenue Growth (CAGR) 20.7% 11.6% 7.4%

Similarly, Charming Shoppe, with a turnover of $3.06 Bn in Feb 2007, is a very successful

apparel retailer in the US catering to women’s plus size apparel. The company operates

multiple retail formats offering distinct private labels. The company has grown significantly

faster than the large departmental stores and other fashion and apparel retailers who focus on

the mass market segment.

Charming Shoppe

Federated Stores

GAP

Revenues (2006, $Bn) 2.8 22.4 15.9

Gross Margins (%) 30.2% 39.9% 35.4%

PAT (%) 3.6% 3.7% 4.9%

ROCE (%) 10.7% 5.9% 13.8%

Market Share (2006) 0.5% 3.7% 3.1%

5 yr Revenue Growth (CAGR) 11.4% 4.0% 3.2%

On the same lines Williams Sonoma, a $3.7Bn home improvement retailer in the US operates

multiple retail formats catering to multiple niches in the home improvement category. It

presents destination shops in multiple formats for theme based home improvement needs. For

example, it offers contemporary tableware and home furnishings under the Pottery Barn

format, cookware essentials through Williams-Sonoma format and stylish children’s

furnishings through Pottery Barn Kids format.

Williams Sonoma Home Depot

Revenues (2006, $Bn) 3.7 81.5

Gross Margins (%) 39.9% 32.8%

PAT (%) 5.6% 6.3%

ROCE (%) 18.0% 17.7%

Market Share (2006) 0.9% 19.2%

5 yr Revenue Growth (CAGR) 14.1% 12.3%

Many niche retailers continue to perform strongly at ‘gaps’ in the market – with a strong focus

on selected target customers offering a strong value proposition and initiatives such as

product functionality, superior product assortment, local customization, service orientation etc.

Some of the other retailers in the US who have successfully capitalized niche retail

opportunities include:

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Niche Area Retailer

• The Sports Authority Sports Goods and Accessories

• Dick’s Sporting Goods

• Race Trac Petroleum Forecourt retailing

• Quik Trip Corp.

• Advance Auto Parts Auto spare parts and accessories

• Auto Zone

• WH Smith Books and Music

• Borders Group

• PetSmart Pet care

• Michaels Stores

Globally, successful niche retailers have been the early movers in identifying emerging trends,

need gaps and untapped potential to develop winning business models.

Niche retailing opportunities in India

Going forward, in India, each broad retail segment is likely to be dominated by large retailers.

However, since large players aim for large share of the segment, they are unlikely to tap niche

opportunities. Hence, smaller companies aiming for opportunities in niche retailing should not

be intimidated by the entry of large players.

For example, in food retailing, opportunities in health food retailing, organic food retailing,

ethnic food retailing and specialty ready to eat/ ready to cook product retailing etc. are not

likely to be tapped by large retailers. Likewise, in apparel retailing, kids’ apparel retailing,

ladies apparel retailing, ethnic wear retailing etc. can be profitable niches for small players.

Companies in India could consider retailing as an adjacency to their existing lines of business

or completely diversify into niche retail areas. Developing unique value propositions in the

retailing model is imperative to capture the opportunity gaps in organized retailing.

Across the globe, small retailers have co-existed profitably with their larger counterparts. In

India too, ample niche organized retailing opportunities will exist for companies to target. To

capitalize on this opportunity, companies will need to focus on creating winning retail models

based on superior insights into consumption trends, buying habits, formats and offerings of

large organized players.

________________________________________________________________________ Tata Strategic Management Group. No part of it may be circulated or reproduced for distribution without prior written

approval from Tata Strategic Management Group.

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