India’s evolving grocery market: unorganised vs. modern retail

Date : 08 April 2014

Following a recent trip to a land of ‘unorganised retail’, Laura May looks at how the Indian grocery landscape is evolving as international retail players enter the market.

A stark contrast to grocery retailing as some may know it, India’s millions of market stalls and specialist shops, kiranas and kiosks - collectively known as ‘unorganised retail’ - account for around 98% of the country’s grocery sales. Important not only because of its size, unorganised grocery retail’s long heritage brings with it a wealth of experience and shopper understanding. In contrast, modern grocery retailing has been established for just over a decade.

However, India’s strong growth prospects and eased government legislation make it an increasingly attractive market for foreign investment. This has prompted fears that competition from foreign multibranded retailers may pose too strong a threat to the industry - a hot topic for debate ahead of India’s elections.

Although new partnerships and players in the market will no doubt change the retailing dynamic, unorganised retailers will draw on their core strengths and entrepreneurial skills to be an active part of the evolutionary process.

Building on the local advantage

The second most populous country in the world, India is home to three megacities Delhi, Mumbai and Bangalore, their metros home to over 10 million people each. In contrast to this, around 70% of the population are rural dwellers. Add into the mix the variation of languages, religions, ethnicities, cultures and climates across the country, and the importance of localisation becomes apparent.

India’s kiranas are often described as neighbourhood stores, a moniker that describes how they are embedded in their local communities. Many have been run by the same families for generations. This provides a deep understanding of the local demographic, as well as building rapport with shoppers, some of whom will be following their parents’ routine of where to shop. Long-established kirana retailers often benefit from prime store locations that were secured many years ago - vital in a market where proximity is a driver of shoppers’ store choice.

Finding space in the best site locations is a challenge for modern retailers, with up-and-coming areas offering more opportunities to develop their larger store formats.

Personal service as a driver of shopper loyalty

Without the formality of loyalty cards or programmes, India’s unorganised retailers are experts in forging personal relationships with their shoppers. On one hand, the services they offer are long established, for example, shoppers are offered credit to help balance their budgets. However, on the other hand, unorganised retailers are simulating many aspects of the modern shopping experience: they make product recommendations based on purchase history and offer the ‘endless aisle’ experience by sourcing products not available on the shelf to fulfil shoppers’ needs. They will also deliver shopping to the home free of charge – a challenge for the market’s emerging online grocery retailers, contending with supply chain and profitability challenges.

Whilst deep promotions and leisurely shopping experience are key attractions drawing shoppers to supermarkets and hypermarkets, customer service will remain fundamental in winning shopper loyalty.

Keeping it simple through specialisation

Unorganised grocery retail takes many different shapes and forms in India. It can be as small as a kiosk window selling sweets, as specialist as a chicken shop just displaying cages of live birds, or as informal as a vendor sitting on the street with a pile of onions and a set of weighing scales. The key advantage is that they do not need to be all things to all people.

Modern retailers are developing store concepts that cover a broader basket of goods under one roof. This process is generating innovation and new opportunities, but is also raising many questions too: should they sell alcohol, meat and fish? What’s the optimum balance between food and non-food? Can eye-catching features like an in-store bakery be operated profitability?

Supplier-led innovation driving growth

Manufacturers have built their businesses around the unorganised trade model in India. They navigate a complex distribution path to get products on the shelf, and work intensively to get their products front and centre in the display. Visiting kiranas in the suburbs of Delhi, there is evidence of suppliers making more strategic investments: one retailer proudly displayed a new digital till system that helps him manage inventory, provided by a major supplier.

Modern retail will continue to gather pace in India, with the increasing activity of international retailers acting as a catalyst. As this happens manufacturers will adapt to meet changing business needs and place greater emphasis on the modern trade channel. However, the skills and knowledge resulting from greater competition in the market will provide benefits to both modern and unorganised channels, such as new product development, greater understanding of shopper behaviour and category management strategies.

Tesco’s joint venture: the first of many?

Tesco is the first international operator to capitalise on changes in legislation to operate multibrand retail stores in the market through a joint venture with Tata. This is a significant event in the relationship between modern and unorganised retail, with speculation abounding about which retailers might follow next.

The dynamic between these channels will continue to change. As increasing competition generates mutual advantages, there’s scope for both to grow.