14.1 Before we begin

I must apologize for the long delay between this chapter and the previous one. I was occupied with other projects. I know some of you have been waiting for far too long for me to write this chapter. So, let’s begin. 🙂

Try recalling the last time you were buying groceries at a supermarket.

  • Where were items like rice, wheat, and oil kept?
  • Where were instant noodles, sauces, biscuits, shampoos, and soaps displayed?
  • And lastly, did you pick a chocolate or two? From where did you pick it?

From what I have observed at most supermarkets, 

  • Groceries like rice, wheat, cereals, and oil are kept in a far corner. 
  • Noodles, sauces, biscuits, shampoos, and soaps are placed on the shelves in the middle lanes.
  • Chocolates are usually placed near the billing counter.

Is there any reason behind this? Is this some strategy by retailers? Let’s explore the retail sector!

14.2 Introduction

Retail is a vast sector. When we buy something for personal or domestic use, it is usually through a retailer. Groceries, clothes, shoes, medicines, furniture, jewelry, toys, cars, and bikes are all sold through retailers. All these products are produced by businesses in different sectors but sold by retailers. Even a fuel pump is a retail store. Cafes and restaurants constitute the retail sector, too.

Strange that we have our first conclusion in the introduction, but it is that when you analyze a company in the retail sector, make sure you compare it with a business in the same retail category. You may compare an apparel retailer with another apparel retailer, not with a chemist. In fact, comparing a value apparel retailer with a luxury apparel retailer may not help.

There is more – there are multi-brand outlets and single-brand outlets. Shoppers Stop, Reliance Trends, and Pantaloons are examples of multi-brand apparel retailers. Louis Philippe, Allen Solly, Jockey, Nike, and Puma have single-brand outlets. You will find these brands in multi-brand stores, too.

E-commerce has given rise to many digital retailers. Amazon, Flipkart, and Nykaa are multi-brand digital retailers. Boat, Mama Earth, and The Souled Store started as single-brand digital retailers. We call them Direct-to-Consumer (D2C) brands. They sell through Amazon and Flipkart as well. Now, they also sell in physical stores.

E-commerce also gave rise to quick-commerce retailers like Blinkit, Zepto, and Instamart. These retailers take pride in 10-minute deliveries. They may not have a vast variety of products like Amazon or D-mart, but they have all the essentials and more products that you might need urgently. Quick-commerce is mainly available in large cities.

Physical retail stores can be traditional or modern-format. The grocery store in your neighborhood is a traditional retail store. Dmart and Reliance Mart are modern-format retail stores. Almost every modern retailer now has a digital presence. Traditional stores have digital visibility by selling on Jio Mart. Local electronics stores also sell digitally through Amazon and Flipkart.

A large part of the retail sector is unorganized. The local jewellery or apparel stores, shoe shops, and salons in your town or city are part of the unorganized sector. Chain stores such as Tanishq, Kalyan Jewellers, Bata, Jawed Habib, and Lakme Salon constitute the organized sector.

14.3 The retail sector in India – some numbers

A joint report by Boston Consulting Group (BCG) and Retailers Association of India (RAI) estimates India’s retail sector to grow ~10% every year to reach a total market size of $2 trillion by 2032.

The average Indian consumer still spends almost 50% on essential items such as food and groceries. India has over 1.3 Cr grocery retail stores and 90% of those are traditional stores. While modern-format stores can offer a much wider variety and range of products, traditional stores offer neighborhood convenience. Traditional stores also offer credit facilities, which modern retail stores simply cannot.

India has the third-largest pool of e-retail shoppers. Although online retail makes up less than 10% of total retail sales in India, it is expected to constitute over 15% by 2030. If you live in a city, you might think 10% is a very small number. If you live in small towns or villages, the same 10% miight look too big to you.

When I first saw the figure, I thought 10% was a very small number. But then I looked around my apartment and noticed all the things I bought online or offline. There are still a lot of things we buy offline. 

Now, let’s get to exploring how to analyse a retail company.

14.4 What to look for in a retail company?

Retail companies have different approaches to:

  • Where and how they want to be visible
  • How they sell their products
  • How they display their products
  • Design the shopper’s experience both online and offline. Some have even tried to integrate the two modes

Therefore, when you are studying a retail business, check its strategies with respect to the following.

14.4.1 Merchandising: 

Merchandising is mostly a qualitative term and not a quantitative term. It involves any activity meant to present or place products in a manner that influences the buying behavior of shoppers.

The placement of groceries, packaged food items, and chocolates that I discussed at the beginning of this chapter is a merchandising activity.

The supermarket operator knows that rice and wheat are essential items. You mostly don’t buy rice and wheat at a whim. These are mostly planned purchases. You will buy them if you have planned to buy them even if they are placed in the far corner of the store. The retailer hopes that you will notice all other products placed before the essentials and remind you of other products you might need but didn’t remember or even tempt you into buying stuff you do not need.

Chocolates are mostly unplanned purchases. You buy them on an impulse. If you are waiting in a queue at the billing counter and spot some chocolates placed next to the queue, you will likely buy some. Better still, if you have gone with a kid, the kid will ask for the chocolate. Even if you want to discourage your kids from eating chocolate, it becomes difficult when you are stuck in a queue with a crying kid.

Items like instant noodles, sauces, biscuits, shampoos, and soaps are primarily sold in branded packaging. There are multiple brands for each product. And each product comes in various flavors, types, and tastes. You would usually have a specific preference for the brand of shampoo or instant noodles you want to buy. 

You will observe that the popular or most-liked brands may be placed not at eye level but on the lower or higher shelves. The retailer knows that popular brands will be sold even if they are not optimally displayed. Therefore, in order to add visibility, the not-so-popular or new brands are placed at the eye level on the shelves.

An average grocery retailer usually sells milk, a perishable and very thin-margin product. The absolute profit on milk is so low that even large quantities do not make much of a difference. So why do they sell milk?

Milk is an essential item, and people like to buy it fresh every day. Every time a shopper walks in to buy milk, the retailer has the chance to interest them into buying other, higher-margin products. The logic here is the same as placing essential groceries in the far corner of the store. The shopper might themselves remember items they need when they see them on the shelves. Not selling milk means missing out on the opportunity to sell other products.

Retailers sell biscuits, shampoos, matchboxes, and chocolates in thin-margin packets worth INR 1, 5, or 10 on the same principle. These are called loss-leader products. They may bring absolute losses but attract profitable customers.

Ever seen a local supermarket offering potatoes at INR 2 per kilo, or sugar at INR 5 per kilo? Such offers are limited by conditions such as a minimum purchase of INR 1500. The retailer will basically sell the potatoes or sugar at a loss to attract customers to buy other products. These are loss-leader strategies.

Merchandising assumes a more complex position in e-commerce. When you open Amazon or Myntra or any other shopping app, what products you see on the home screen and how they are placed on the home screen are all a function of merchandising.

A vendor might also pay these e-commerce platforms to appear higher on search results.

14.4.2 Shrinkage: 

Shrinkage suggests loss of inventory. It occurs whenever inventory declines without a corresponding increase in revenues. Accidents, shoplifting, or reporting errors could cause inventory to decline.

Retailers don’t seem to have a standard way of reporting shrinkage, but you can still look at each retailer’s shrinkage numbers over the years. It could be reported as a percentage of revenues or in absolute numbers. You can see how this percentage or absolute number has moved over the years. A declining shrinkage figure is always good. It suggests better control over operations and security.

This is how Trent reported the shrinkage of its fashion and lifestyle retail business in FY24.

14.4.3 Private Labels: 

Have you seen some brands that you will find exclusively at Reliance Smart, Vijay Sales, or amazon.com?

  • Reliance Smart has some in-house brands for tea, coffee, ketchup, cosmetics, etc. 
  • Vijay Sales’ in-house electronics brand, Vise, sells TVs, refrigerators, washing machines, etc.
  • Amazon sells groceries under its Vedaka brand and furniture and household items under its Solimo brand.

From being just a retail company, Reliance Smart and Amazon have dabbled into becoming an FMCG company. Vijay Sales has become an electronics maker apart from an electronics retailer. The brands that these retailers own are called private labels.

Is there any motivation behind having private labels?

You will see that most private labels have packaging very similar to that of a popular competitor and maintain prices below those of their competitors. Their instant noodles pack will perhaps be comparable to and cheaper than Nestle Maggi’s pack. Or they might have chocolates that look very similar to Cadbury’s. Private label goods don’t spend on marketing. They just piggyback on the marketing efforts of the leading brands. 

So, they do not have to spend on branding and distribution, and there is no intermediary, either. Effectively, retailers can sell their private labels at slightly lower prices and much larger margins.

It is a different discussion that only some retailers have been successful with their private labels. When you are studying a retail company, check out its presentations and annual reports to see if it has private labels. Next, determine how much private labels contribute to total revenues and profits. If their contribution is substantial, it is worth analyzing further.

14.4.4 Business Model

While KPI numbers tell you a lot, you must also study what differentiates a retail business from its peers. They may have different target markets or ways of communicating with current and potential customers. Some might cut costs, while others might use premium pricing to achieve profitability. 

Some retail stores, such as Shoppers Stop and Reliance Mart, use loyalty points to draw repeat customers. Others, like D-Mart, offer discount pricing. Some focus on markets—V-Mart mainly operates in tier-2 and tier-3 towns. The Collective, a chain of multi-brand luxury stores, mainly operates in tier-1 cities.

As someone studying this sector, you might want to understand the macro trends in the sector. Historically, a premium retailer might have higher profits, but better monsoons and an agricultural harvest last season could indicate higher volumes at a discount retailer in a tier-3 town.

Reading the Management Discussion & Analysis section of a retail business’s annual report could give you insights into its target market and business approach.

We will next look at the Key Performance Indicators (KPIs) of retail businesses. However, for the sake of brevity, I will discuss them in the next chapter. See you. 🙂

 

Key Takeaways

  • Retail is a vast sector. There are modern-format retail stores and neighborhood convenience stores, as well as multi-brand retailers and single-brand retailers. Retail stores can be physical and online. Fuel pumps, salons, and cafes are also retail stores.
  • When studying the retail sector, compare only grocery stores with grocery stores or jewellery retailers with jewellery retailers.
  • While India is the third largest market for online retail, offline retail still forms a significant majority of the market.
  • Merchandising is a critical function for any retailer. It involves any activity meant to present or place products in a manner that influences the buying behavior of shoppers.
  • Shrinkage occurs whenever inventory declines without a corresponding increase in revenues. Accidents, shoplifting, or reporting errors could cause inventory to decline.
  • Many retailers sell private-label goods to piggyback on the marketing efforts of the leading brands. 
  • Retailers within a sector could have different business models. Some grow by focusing on geographies, while others grow by focusing on a particular type of customers.



6 comments

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  1. Ramanathan seshan says:

    Thank you. What are the sectors in pipeline for release?

  2. Annu Kumar says:

    What are the upcoming sectors for release?

  3. Annu Kumar says:

    Oh No! You mentioned it in the next chapter. “FMCG Sector”. Thank you.

  4. Chidrup Jain says:

    Please cover infrastructure sector if possible

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