It is not easy to compete with kirana stores: Rajiv Lal

The fear that kirana stores across the country will wilt under the onslaught of big-bang retailers such as Wal-Mart has long stood in the way of foreign direct investment coming into retail. But some believe the fear is unfounded. “It is not easy to compete to with the kirana stores. Just because you are a big guy with a lot of money, it doesn’t mean that you can compete,” says Rajiv Lal, Stanley Roth Senior Professor of Retailing at Harvard Business School where he supervises the retailing curriculum as well.

“On the consumer side, kirana stores can deliver services. Somebody calls them and asks ‘can you deliver six eggs?’ and the guy runs and delivers six eggs. That’s not something the big established firms can provide,” Lal told DNA in an interview recently. Excerpts:

How has the experience been in countries where foreign direct investment (FDI) in the retail sector is allowed?
I think if you look at China, it has certainly done a lot of good for the retail sector. There are a lot of retail choices available to the consumer. There is a lot of investment that companies are making in the development of the retail sector. In most of the emerging markets, one of the big challenges is to develop infrastructure to support retail.

And if you think about a cold chain for example, these big retail companies have done it and they know how to do it. The same is true for investment. So if you need capital, it is likely that some of these companies will bring in the capital that is needed for the development of these facilities.

There is a lot of fear in India that once FDI in retailing is allowed a lot of kirana stores will close down. Has that happened in other parts of the world?
Not at all, actually. The answer is at a number of different levels. So first and foremost, the answer is that it is not easy to compete to with the kirana stores. Just because you are a big guy with a lot of money, it doesn’t mean that you can compete. Kirana stores have a lot of benefits that established retailers don’t have — first of all, location. What rents do they pay versus what established companies have to pay? Employees, same story.

On the consumer side, they can deliver services, in terms of somebody calls them and asks ‘Can you deliver six eggs?’ The guy runs and delivers six eggs. That’s not something that the big established firms can provide. The kirana stores have a lot of advantages vis-a-vis the established firms. From the convenience standpoint, kirana stores are not going away at all, actually. To the extent that they help you take care of the daily needs, that’s an opportunity that will still be there for the kirana store. So that’s point number one.

What’s point number two?
If you take a look at what has happened in emerging markets, organised retailing can grow from zero to a certain size in X number of years. So think in about five years, where will organised retailing be as a market share? Maybe it’s less than 1% now, and maybe it will become 3% or 5% of total retailing. It will not be
more than that.

In five years, organised retail grows from 1% to 5%; the economy would have grown by another 50%... virtually, it means the number of kirana and mom-and-pop stores are actually growing. They are not reducing by any means. Only when the rate of growth of organised retailing is higher than the rate of growth of the sector itself, then and only then can you say that it impacts the mom-and-pop stores. The third way to think about is that it provides employment to a lot of people who are not necessarily working for the mom-and-pop stores.

Any other points?
Last but not the least, if you look at the emerging markets, there is not even a single emerging market that I know where a foreign entrant is the number one retailer. In Brazil it is Pao de Acucar, in China you have the local Beijing Bailian. In most markets, even when there are foreign entrants, the dominant retailer in the organised sector is still the local retailer.

And these are markets in which Wal-Mart is present?
Of course. Absolutely. In fact in most countries, retailing is a very fragment business because it’s a very local business. Somebody can be strong in south India, somebody else can be strong in western India and on the aggregate, they may have less than 15% market share in the whole country.

So why is there such a fear about allowing FDI in retail?
That’s a good question. The people who should be more afraid should be people who are in the organised retailing sector and not the mom-and-pop stores. The fear could just be about a big guy like Wal-Mart coming in and you know, at least in the western countries, you have heard a lot of stories about jobs being shipped out to China because of imports and things like that. But that’s not the same thing.

One thing that one constantly hears about Wal-Mart is everyday low prices. Does a local retailer in a country like Brazil also bring down prices to compete with the giant?
They are very price competitive. If Wal-Mart is operating in Brazil, there is nothing that Wal-Mart can do in Brazil that the local Brazilian guy cannot do. If you want to procure supplies from China, you can procure supplies from China as much as Wal-Mart can procure supplies.

In fact, the Brazilian guys know the market better, they have a better understanding of the customer and top of that, they have local merchants that they know they can source from and Wal-Mart may not. In fact when Wal-Mart came to Brazil, it made many mistakes for the first 5-7 years before they started to get their act together. Now they have become successful in Brazil, but it took them a long time.

What mistakes did they make?
They made all kinds of mistakes. They made mistakes in terms of merchandising because of global procurement they were shipping products to Brazil that were not necessarily appropriate. Brazil is in the southern hemisphere. So you can end up sending stuff to South America in the wrong season. Similarly, when they went to Brazil, they were harping on everyday low pricing. Well Carrefour, the French retailer, had already been there offering low pricing. So when customers came into Wal-Mart, it really did not matter because they already knew about everyday low pricing.

So these are the kind of mistakes a lot of entrants make before they get their act together. It takes a while for people to learn. Even in India, you have had Metro (cash-and-carry) for how many years now? What has the impact of Metro been in India? Almost insignificant. Or take the case of Bharti-Wal-Mart. They have only two outlets.

For these retailers to grow, especially in a country such as
India where land is not easy to procure, is not easy at all. It’s not easy to open a 150,000 square feet store in India. That kind of space is not available. They can’t open these stores 50 miles away from where the population lives. People in India don’t have the conveyance to go and buy bulk goods, bring it and store it. They don’t have the conveyance and they don’t have the big houses. So it doesn’t work.

Most of the big bang retailing stores launched by Indian companies are either loss-making or have been curtailed. What’s going wrong there?
There are two parts to the answer. One is that Indians are very entrepreneurial. The kirana store owner is a very entrepreneurial guy. He looks at opportunity. He grabs the opportunity. And he runs with that opportunity. They may not have as much capital. But there are enough number of people who can give these big bang retailers a run for their money.

So its not as if you can make money easily because of the fact that the kirana store guy is a small guy and he doesn’t know what he is doing. That is not the case. Second point is that retail is a very tough business. If you make small mistakes, there are huge consequences. It is not a high net margin business. Margins are very, very low. So if you make a couple of bad mistakes — either in inventory or in sales or wherever you might think about — you can go from profit to loss very quickly.

Organising people in retail and organising systems in retail is a very challenging task. Retail is not a trading business. Historical roots of Indian business are in trading. But retail is not a trading business. It’s not about just buying low and selling high. You have to do that and on top of that, you have to do a lot of other stuff. And it’s not clear that people have the wherewithal to put all that stuff together and pull it off.

So they are on the learning curve?
Exactly. And it’s a people driven business. What happens in a retail business is that as you grow bigger, your problems multiply and your margin for making mistakes diminishes. So scaling up a retail business is much more difficult than scaling up a manufacturing business. If you want to move from 500 units of biscuits to 50,000 units of biscuits, it’s not that much complicated. Worse come worse, you can set up ten units of the same thing. But if you want to move from 5 stores to 50 stores in retail, it’s not the same thing. It will have problems in many ways. You will have to cater to the needs of the local market which is different. You have people managing the stores who come from different backgrounds. They don’t have the same ability. They don’t talk the same language. There is no formal training for retailing either.

Do you think there is a certain escape velocity at work in retailing? I mean after you attain a certain scale and size, is it easier to scale up and explode?
Even exploding in India is not easy, because of land. Procuring land in India is very difficult because of the density of population that is there. If you want to run a retail business, you say in this area I should have X number of stores, for example. And in order to get X number of stores, you need to get land. And if land is not available for example, the economics may not work. The distribution costs are very high. The advertising cost is very high. So you have to put a set of stores together in a given area in order to make the economics work.