Key insights to understand the modernisation of the Indian retail market

As the Indian conglomerate Future Group wins approval from market regulators to sell its retail businesses to Reliance Retail, Fiona Briggs speaks to Future Group’s head of strategy & communication, Dipayan Baishya, about the Indian grocery market – the challenges and opportunities

Last month (January), the Securities and Exchange Board of India (Sebi) approved Reliance Retail’s acquisition of Future Group’s retail assets. They include the flagship retail brand, Big Bazaar; the premium lifestyle food superstore, Foodhall; plus a growing chain of convenience stores – EasyDay and Heritage Fresh – and the newly acquired 7-Eleven franchise.

It’s a portfolio that truly challenges preconceptions Western retailers may have of modern retail trade in India, the world’s third largest grocery retail market and tipped to account for nearly a quarter (23%) of all new sales in Asia between 2019 and 2024 (IGD)

Baishya, who joined Future Group in 2006 after a four year career as a journalist, has been on the company’s transformation journey, helping to shape the modern retail space in India. He’s even co-authored a best-selling business book (It Happened In India) with Future Group founder and CEO Kishore Biyani, which charts the business’s role in pioneering modern retail in India.

While initially Baishya spearheaded corporate branding and communications, the bulk of his career has been focused on future ideas and research, deploying ethnographic tools in order to understand the diversity of customers in India.

And that’s no mean feat, as Baishya explains.

“The longest and lingering challenge in India is dealing with the diversity of the population. With over 22 major languages, eight major religions, thousands of castes and communities, dealing with India is probably more challenging than dealing with the whole of Europe at one go,” he says.

“Our food habits, languages or Gods we pray to, changes every few hundred kilometers. Despite many changes, the biggest drivers of consumption in India are marriages and festivals. Both of these vary from community to community and region to region, as every community follows different almanacs. Gathering deep insights on communities of India and combining these with cutting-edge abilities in data science is probably the only way to operate in this market, especially in food and grocery where age-old habits and preferences matter the most,” Baishya says.

For the last five years, Baishya has been based out of Bangalore, home to the Future Group’s design and innovation centre. Here the company has been garnering that vital knowledge and insight and it has enabled Future Group to scale up much faster, Baishya says.

Innovative loyalty programmes have rolled out across its retail formats, as a result, he adds.

“Now we are able to collect consumer data, we can work across a larger number of cohorts and we can segregate and create hundreds of cohorts and use them to run specific promotions on certain days or to move consumers towards a certain behaviour.

“Technology is opening up new opportunities. With technology you are able to deal with customer as cohorts and then individually. In a couple of years every individual customer will have a different engagement with us,” Baishya maintains.

Look East not West

Technology is driving the pace of change but more so in the East than the West these days.

Twenty years ago, retailers turned to the US and Europe for inspiration and Sam Walton’s Made in America text book was a staple every retailer used to read, Baishya recalls.

“In the last 10 years, it’s amazing the amount of change and especially in China, South Korea and Japan where the stuff they are doing and the way they have been able to integrate new technology has convinced me that if you need to look at what’s going to happen, look at what’s happening in the East,” he says.

Baishya points to the tremendous growth of life streaming and social commerce in China as a case in point – China Channel’s Matthew Brennan tipped live streaming as the next big thing two years ago – and reckons that it will migrate to Western markets in the next couple of years. Physical retailers will be forced to adapt to markets like China and South Korea, he says. We also interviewed Brennan recently about the rising attention economy.

Context will be key however. “Not everything will be coming to us in the same way but there will be more Tik Toks, for example, and, as retailers, we should be more cognisant about that and tracking these markets more,” Baishya says.

China has also been able to build categories like no other, Baishya continues.

Dairy, for example, was not a large category in China and a large part of the population is lactose intolerant. Today, it’s one of the largest sectors and tipped to be the world’s largest dairy market by 2022. Growth has not been without scandal, but the way China has built the category has been phenomenal, Baishya says. “China has been able to create a categories of consumption across every segment. It’s a socialist country, but a shoppers’ paradise,” he adds.

Consumption and modern trade

While India has the second largest population in the world with 1.4 billion people, it is often misleading to assume that there is a huge middle class customer base that is just waiting to consume, Baishya states.

Only 3.2% of the population or 9.5 million households have an annual disposable income above GBP £18,000.00.

Around 10% of the population or 29 million households have an annual disposable income above GBP £11,000.00.

“Only customers above this income threshold have the ability to regularly spend on discretionary purchases or at modern retail formats,” Baishya says. “People below these income levels are rare or infrequent purchasers at modern trade and buy/consume a very limited number of SKUs that are well-served by unorganized trade.

“At 29 million households, it translates into almost 130 million people (our average family size is 4.5) – which is still comparatively large but is far away from the 500 million middle class talked about in many pitch documents,” he continues.

The share of modern trade in India is estimated to be around 8% of total trade, Baishya adds. However, in large cities like Delhi or Mumbai, this goes up to as high as 25-30%.

Consumers who shop in the modern retail channel will do a big stock up once a month and make weekly top ups at the mom and pop stores, he reports.

Most customers and homes are within a 500m radius of a mom and pop (kirana) store. These sell grocery products but no chilled goods and carry a limited number of SKUs.

Online and last mile challenges

Online is an emerging channel but the economics in India stack up very differently to Western markets too.

The average order value for grocery ordered online in India is around Rs 600 or lower, which is approximately GBP £6.00, Baishya reports.

“Even though costs of last-mile delivery or labour is comparatively lower than in developed markets, our average ticket sizes are even lower. Customers expect, and are offered free home delivery by every online retailer. Thus, everyone incurs heavy loss on every order and these are currently being funded through capital investments. Solving the puzzle of making last-mile delivery for grocery cost efficient is the holy grail of modern retailing,” he says.

Despite the online challenge, digital is a hygiene factor, Baishya says.

“You can’t live without a digital strategy but it has its own limitations ie how much can you influence a customer’s behaviour. You can grow categories when you have a very strong digital presence but a great physical presence is essential too,” he maintains. “It’s also very difficult to sell a new product online – the purchase is more pre-decided,” he adds.

Convenience formats

In the convenience sector, Future Group has developed a membership-led model in order to successfully compete. Baishya reports Future Group’s rivals have struggled with smaller stores as real estate is very expensive, particularly in the large metros and; if you are dealing with CPGs, the margins are notoriously low.

Future Group’s EasyDay and Heritage Fresh formats, for example, charge a £10.00 joining fee but offer members discounts every time they shop, as well as at other Future Group stores, plus free delivery and mobile ordering. The stores offer approximately 2,000 SKUs with a 40-50% share of higher margin, own brand lines.

Baishya describes this channel as “work in progress”, as rentals are high and there’s a need for a certain density of stores in a specific geography in order to break even. Future Group has a decent presence in Delhi, for example, and the format is working in other areas, he adds.

In February 2019 Future Group signed a franchise agreement with 7-Eleven to develop and operate 7-Eleven stores within India – the convenience brand’s first entry into India.

Baishya reports Future Group will open 10 stores in Mumbai in March and expects Reliance, who will be operating this format moving forward, to scale it up at a rapid pace.

7-Eleven India will be a fresh food-led format, a first for the country since other convenience stores sell mainly packaged goods.

“7-Eleven will have commissaries to supply these stores and the stores will be located in high transit areas,” Baishya says. “It’s a modern format abroad but in India no one has really tried it.”

Post pandemic and future opportunities

While life in India is slowly returning to “normal” in the wake of the Covid-19 pandemic and restrictions are being lifted, the economic impact is still immense, Baishya reports.

There have been considerable job losses and few businesses are yet to get back to pre- Covid levels, he states. Grocery is almost there.

While multiplexes, movie theatres and restaurants are in a bad shape, home delivery businesses have grown significantly with the ratio of pick up (20%) to seating (80%) largely reversed.

Hotels and airlines are beginning to bounce back but there will still be a number of lean months until April when the season of festivals and marriages kickstarts commerce again.

As to the future of modern retail in India, digital is key, as already stated, and businesses will need to put resources behind their digital transformation, Baishya says.

They must consider new channels such as social commerce and live-streaming but, importantly, how they handle digital and physical channels together.

Store design must be optimised to work both for customers walking into store and online orders, he says.

“We are trying to work on that approach, so that the physical and digital can coexist in the same store.

“We also have to ensure that we do not lose the opportunities that physical provides – the fundamentals that make physical so great such as in-store theatre and experience and an opportunity to try new things.

“In a market like India, the way to win a larger share of a customer’s wallet is to introduce new categories, so the physical store becomes more relevant,” Baishya maintains.

Fresh – prepared meals and ready to eat prepared foods – will become a lot more important and be a huge area of focus moving forward. Alongside own label, it will help to improve retail margins.

“Indians don’t buy fresh,” Baishya says. People embarking on a two-day train journey will take their food for the entire two days with them and they will take their lunch into work, for instance.

“But habits will change and the younger generation are exploring fresh food at convenience stores. There’s a huge growth opportunity for fresh food,” Baishya says. “To date, modern trade has been more dependent on packaged products and even fruit and veg has not had a large share. But retailers will learn how to handle wastage and freshly prepared meals better,” he says.

India will also continue to look East for inspiration, Baishya suggests. He points to Alibaba’s Hema stores, which double as distribution centres for online orders. Here assigned staff pick product for online orders and place them in bags on conveyor belts, which run through the roof of the store.

“We need such innovations in design and layout to allow online and offline orders to work efficiently,” Baishya concludes.

GCSF’s passage to India

Global Convenience Store Focus’ interview with Dipayan Baishya was facilitated by Scott Annan.

Annan is a food and convenience retail industry guru. He is based in the UK and Irish marketplaces and has a global reach in hosting peer-to-peer exchange events.

He maintains regular connections with c-level heads within retail forums, challenging thinking and sharing insight and knowledge. They include the Retail Leaders Forum, a group of invited top-tier UK and Ireland food and convenience retailers. In 2019 Annan and the Retailer Leaders Forum travelled to Mumbai, India and were hosted by Baishya at Future Group’s upscale Foodhall.

A trusted advisor for companies, Annan’s contributions cover strategy development, management coaching, keynote addresses, industry panels, facilitation and media.

Annan has also partnered with members in his network to deliver industry papers, including the latest, The Big Five Itches, which details how India’s neighbourhood stores are harnessing new digital technologies and why retailers should look East for technological inspiration. The papers are available to download here.