While the current drop in consumer spending has hit organized retailers, that is not the only reason for their woes. Retailers need to better understand and define their value proposition to their customers. Customer-centric thinking and acknowledging the fact that the kirana store is still a benchmark are key to defining this value proposition. The dimensions to think along include assortment, pricing and customer experience.
The global recession has forced Indian retailers to transition from the land-grab phase to a focus on profitability and cost-cutting rather quickly. Recent media reports have highlighted down-sizing of stores, merging of divisions and scaling back of expansion plans. While the cost focus is essential, retailers need to remember that same-store sales growth (sales growth in stores that have been open for at-least a year) is the metric that they need to keep a close eye on. The key to improving same-store sales is getting customers to spend in your stores, not once, but again and again.
Retailers will readily tell you that the Indian customer is value-conscious. And by value-conscious, they mean price-conscious. And that makes it difficult to get them to spend in organized retail. After all, the cost structure for an organized retailer is still high and how low can it price without risking its own future as a business. While this may have some truth in current times, it is not the root cause for the sector's woes. First of all, one needs to realize that value is not equal to price. The assumption here is that the product-service offering that the customer pays for is standard and cannot be changed. This is certainly not true. I might prefer to visit a large store because of the one-stop shopping experience. I might prefer the electronics store because of their knowledgeable sales staff and flexible return policies. The real question for the Indian retailer is: Do you truly understand what your customer perceives as value?
Today, there is a mismatch between what the retailer is proposing as their value-proposition and what the customer perceives as value. Glitzy buildings and air-conditioned environments do not justify a higher price for vegetables. If she gets tomatoes for Rs.10 per kilo from the vendor who delivers them home, why will she pay Rs.12 just because you have a better display and surroundings? Especially so, when she has to travel to the mall, fight the crowds and stand in long checkout lines. The Indian middle-class consumer has traditionally been over-serviced. We are used to having our clothes washed, floor mopped and produce delivered. So, inherently organized retail starts at a disadvantage when it comes to convenience and customer service. The benchmark for value here has been set by the traditional kirana store.
So, where can organized retail add value? Assortment for one. Along with the growth of organized retail, we should see growth of brands and products that provide a different value proposition to the Indian consumer; new varieties of fruits, new designs in apparel and furniture, new devices that make life a little simpler or more exciting. Organized retail provides the innovative producer with a powerful channel to showcase and sell their products. If a new product does well, both retailer and manufacturer succeed. Today, we have a dearth of such forward-thinking manufacturers. The big boys like HLL and P&G are busy worrying about securing their traditional stranglehold on the Indian consumer. Will organized retail be a threat to their margins? Not if they make use of this new channel to excite the Indian consumer with better and more innovative products. Through private label or otherwise, organized retail should take the lead in helping innovative manufacturers succeed. Consumers will wholeheartedly accept a product idea whose time has come.