Developing a vision and strategic plan for growth of F&G sector

By some estimates, today, the Indian retail market stands at nearly $ 500 billion. At the overall level, Food & Grocery accounts for 60 per cent of the total retail market, but only 10 per cent in modern trade. So, there is a vast opportunity in F&G modern retail segment, writes Walmart India President & CEO, Krish Iyer in The India Food Report 2016…
There is very little doubt that India is now firmly established as an emerging market for global and domestic investors across all sectors, including retail.
Owing in large part to its sheer size, rising disposable income, favourable demographics, rapid urbanisation, increasing consumer appetite and demand in Tier-II & Tier-III cities, and an overall high economic growth trajectory, India is a market that is inviting focused attention.
Starting with the economic liberalisation in 1991, the market opened to global manufacturers for the first time. If I can attribute my own personal and professional experiences, it has, since been an irreversible one. It has become a dynamic and constantly evolving market.
It will not be an exaggeration to say that India is now viewed as an expanding emerging market for products and services – both for exports and for its own domestic consumption.
By some estimates, today, the Indian retail market stands at nearly $ 500 billion. At the overall level, Food & Grocery accounts for 60 per cent of the total retail market, but only 10 per cent in modern trade. So, there is a vast opportunity in F&G modern retail segment.
However, statistics also show that over 14 million outlets operate in the country and only four per cent of them are larger than 500 sq.ft. in size. Most of these outlets are typically family owned, lack capital, know-how, skills and investment to scale. This unorganised nature of the market, itself, presents the most significant opportunity.
The Changing Retail Landscape
There are several trends that characterise the market today. The changing economic geography of the next wave of consumption pattern is moving from top 20 urban centers and major cities to Tier-II & Tier-III cities. While growth will continue to emerge from existing major retail clusters, existing metros have expanded significantly through the growth of peripheral rurban areas (Rural pockets in urban areas), and this has been a key driver of the organised retail segment.
Second, Indian retailers are already making efforts to adapt and create Omnichannel retail experiences for the economically and culturally diverse and an increasingly demanding Indian consumer.
Indeed, while the debate on online versus offline will continue to make headlines, the fact is that both the current limited physical retail infrastructure on the one hand and limited digital access and internet penetration on the other warrant a rationale for hybrid retail strategies which leverage Omnichannel capabilities that meet the consumer in his/her own cultural, economic and digital geographies.
As organised retail changes the way Indians consume across all categories from luxury to white goods, perhaps the most discernable and radical change will come in the food category. From high value organic products for the health conscious and price agnostic urban elite to the value-conscious middle income consumer opting to buy packaged pulses and other basic staple items, the evolving buying behaviour will alter the existing product landscape, sometimes meeting existing demand, and sometimes creating new ones for taste, experiment, choice, value-add, ease and convenience.
For example, the consumer is increasingly preferring cut and packed vegetables and fruits as it saves him/her time; pack sizes are reducing consistently as storage time is being reduced with the consumer avoiding storage of food to maintain freshness; the home meal segment is growing fast with ready-to-serve and processed food gaining prominence in Indian kitchens; niche food segment such as gourmet – imported and exotic food – is seeing a rush; frozen food is undergoing a rapid transformation with the consumer looking for value-added stuff like ready to cook/bake/grill chicken tikka, aloo tikki etc; and most certainly the growth in health food such as olive oil, canola oil, green tea, wheat bran cookies, organic food, etc, cannot be overlooked. And what is most important to note is that it is being tailored for the Indian palate.
Growth of Private Labels
According to the Food & Grocery report in 2014, food continues to dominate the private label market at 76 per cent of total sales, with packaged grocery commanding about 53 per cent share of total sales.
Private Label is also giving an opportunity to regional brands and local food manufacturers to expand to adjacent markets, with a variety of offerings that either has a distinct taste of its own or is localised for homogeneity.
As a customer/consumer, the food service industry too is rapidly transforming, with preference for branded products, introducing new items such as imported fruits and sauces/dips on the menu and, of course, bringing in a whole lot of innovations in cuisine for a differentiated dining experience.
A study in Harvard Business Review says that about 75 per cent of consumer goods and retail products fail globally and are not able to even survive for 12 to 24 years. FMCG players are therefore consistently decoding the formula for successfully satisfying the Indian taste.
The impact and implications for a modern retail revolution, and particularly in food, are fully understood only when they are seen from above and beyond the perspective of the consumer per se. But more so from the macro-economic perspective and all the positive externalities it creates. In other words, only when we see the multiplier effect on all those that are a part of the sophisticated supply chain, which is the backbone of modern retail.
Modern retail and food service modern retail will make a very positive impact in the food service industry by offering ‘safe food’ and through optimised processes and reduced costs (through pre-cuts of meat, larger packs of groceries, instant spice mixes, frozen value-added products, etc). Hence, we could see a reduction in customer selling prices and enhancing the ability of businesses to scale up quickly because of the ability to replicate uniform quality, taste and standards across different geographies.
One of the biggest positive impacts of modern retail will be to improve the farmer’s standard of living. By removal of structural inefficiencies, our farmers will profit from liberalised markets with direct and contract farming practices, more predictable farm-gate prices, transparency of weighing and pricing and steadier income and better access to the evolving consumer preferences from private investors. Additionally, post-harvest management will be improved through investment in supply-chain and cold storage facility, encouraging the food processing industry and facilitating better farmer income.
As per a EY and RAI report, challenges can be
a) business and operational; and
b) tax, regulatory and inter-state movement related.
About 85 per centof warehousing in India is unorganised and have inappropriate levels of automation, which makes it difficult for retailers to track status of goods in transit; wastage levels of agricultural produce and perishables are 40 per cent as the existing cold storage infrastructure can only cater to 11 per cent of total produce; there are as many as five intermediaries in a typical supply chain for perishable commodities such as fruits and vegetables, which cause time lag and increase in the final cost to the consumer.
The study also points that close to 40 per cent of the time lost on road is due to stoppages at state border check-posts alone. Businesses have been pushing for a simplified tax and regulatory framework, which could facilitate free movement of goods across the country.
The implementation of GST, would transform the current indirect tax system as it will help with the standardisation, simplification and automation of compliance requirements associated with the trading and movement of goods across states.
A Mckinensy report indicates that food in India has an economic multiplier of 2-2.5. For every rupee of revenue from food, the economy at large gets Rs. 2-2.50. Therefore there is a sector waiting to be tapped by companies, both large and small; by entrepreneurs, who understand the entire value chain of modern retail and the immense positive impact it promises to have on the Indian economy; and of course by the regulators for the much-needed relief to issues associated with the movement of goods in India.
In summary, the next few years will see the Indian market grow and mature. With the rapid urbanisation, I am expecting food brands, food service industry, retailers and experts to continue innovating and look for ways to leverage market knowledge, experience and learning to tap this huge opportunity. Food Safety and ‘responsible sourcing’ will play a very critical role in the coming years. It would also be very interesting to see how the retail chains leverage Omnichannel capabilities to meet the evolving needs of consumers.