RPG RETAILING - THE SUCCESS STORY

In this, the first part of our interview with Raghu Pillai, CEO, RPG - Retail, we get behind the revolution in organised retailing, to the winning approach that this market leader adopted.

When you look at retail and what is meant by organised retailing... setting up nice glitzy stores on the high streets of Chennai or high streets of any city is not necessarily retailing. Retailing is about what value you are able to extract outside the supply chain, and can you deliver that value in a commercially viable way to the customer? The store is only the delivery mechanism, so you can have a nice glitzy store if that is your delivery model or you can have a hand cart, if that is the delivery model.

As India opened up post-1990, the availability of products increased dramatically. Indians and Indian families were exposed to new products and tastes, as they started travelling more and processed food started becoming a larger part of the monthly household purchase. We clearly saw an opportunity in retailing. One has to understand that the size of the grocery market in India is huge. A rough estimate would give us something like Rs 4,00,000 crore.

When we conceptualised Foodworld, we decided to cater to only a small part of this segment, with an average household income of RS 80,000/- plus per annum, which would be about 20% of Chennai, (roughly 20% of any major city). We were also very clear that while we had to deliver products to the customer in a much more upgraded environment, which is clean, hygienic, air-conditioned, comfortable, pre-packaged etc, for something as basic as this, the customer is not going to pay a price penalty. They are not going to pay a higher price at one end and they are also not going to travel long distance just to do that. You will probably travel a long distance to buy a television or a nice shirt, but you do this once in three months or six months or once in three years. But with something like grocery, you buy almost daily, weekly or monthly. Convenience is a big factor. It has to be near your house.

So the model we conceptualised was a neighbourhood grocery store. The core customer we target is between one-and-a-half and two kilometres of the store. And I believe we got the merchandising right. We got the basics right in terms of focusing on our promotions and obviously the customer liked what we had to offer. We were very clear and focused that we had to get volumes within the context of the state/city. Initially, we were able to set up 30 stores all over Chennai, as opposed to 30 stores all over India. So we were able to aggregate volumes, were able to influence supply chain and deliver across the package, a total value proposition to the customer in terms of range, ambience, cost and service, which obviously the customer likes and that is why the model is quite robust.

In India there is a peculiar problem, as we have static M.R.Ps (Maximum Retail Price), in the sense that even though you have expensive real estate in Mount Road, compared to Tambaram, you still have to sell the product at the same price. This does not happen anywhere else in the world. Abroad, you sell products at different prices depending upon where the store is located.

So given that constraint, when, lets say a small Kirana store buys 5 kilograms of rice from Koyambedu market at 'x' price, but I need larger volumes for my outlets, so I buy from the farmer in Andhra, and I get it at a much cheaper price. So while I am selling at the same price, what I am doing is dis-intermediating the supply chain. I am buying directly from the source or as close to the source as possible. I am able to buy cheaper and therefore sell cheaper. But food retail is a function of volume, you cannot charge more from the customer, unless that is your model. But ours is catering to the basic food stuff. Once you start aggregating volumes, you are able to buy more, your price becomes cheaper, so your able to sell cheaper, more customers come in, so you require more volumes, that is the way the cycle goes.

We have overheads, but its a function of volume. I am able to sell far more, through the store, because I have got better prices than the Kirana store.

It varies from category to category, for something like basic household requirements like rice, dal, personal care products etc. a significant portion of the decision is already made. The customer, if she is a Surf user, chances are, she will buy only Surf, and its particularly more pronounced in personal care products; you tend to buy the same shampoo, the same face cream etc. To that extent a significant portion of the decision has already been made.

But then there is a distinction between a customer and a shopper. Once a customer comes in to the store he/she becomes a shopper, and then is exposed to different stimuli, which is either promotions, attractive stacking or discounts. So that's when we are able to switch. I am not able to put a percentage to it, but I think around 70-75% of the monthly list is already pre-decided. But clearly there is an opportunity, for once the person comes into the store to get him/her to either buy more than what he/she intended to buy when she came in first, which is impulse or get them to switch brands by heavily promoting or merchandising a particular brand or product category.

When you start the store, there are some assumptions that you make: Okay, I am going to sell so much of this and so much of that. And then you look at which are the leaders in the market, and you stock and do face-ups accordingly. As you collate data on what is moving and what is not moving, and in a manner of speaking, the customer actually decides how much space will go for which, the faster moving product gets more space.

Then there is certain portion which we consciously promote. India, one must understand, particularly as far as food is concerned, is an evolving market. It is very rapidly evolving as far as value-added food or processed food is concerned. Look at what has happened to 'Atta' in the last few years. If you look at the variety of convenience foods, products are coming in every other day, or every month, and the process is going to accelerate. Once that happens, stores like ours will have more opportunities. We have got the enabling environment and we have the space. We need a certain enabling environment to display these products. You cannot display and sell processed food in the current retail environment which is there in India - small stores, which are unhygienic. Here we have an opportunity of atleast inducing the customer to try the product. After that, it is upto the product. If the customer likes the product, he obviously comes and buys it again.

Shoplifting or shrinkage as you call it is the cost of doing business, the way we do business. There are two ways to look at shrinkage. One is, what is the shrinkage? You have spent so much. How much do you loose every month? The other is, what is the cost of preventing shrinkage? What we do is we strike a balance between the two. We accept the fact that there would be a certain amount of shrinkage that will happen, because we have opened this place. And at a cost, we can actually bring the shrinkage down to zero, by putting in 50 people inside the store... then you lose sale. So you accept it as a cost of doing business, and through process and systems and controls, we get a little better than we were earlier. Internationally shrinkage in supermarkets is between 0.6 and 1.5%. And we are able to contain it under 0.7%, which is still a lot of products. But its largely trivial items like chocolates, except cigarettes and blades, which seem to be high.

We have very clearly brought retail consolidation into national limelight. People are now seeing the opportunity and the challenges of organised retailing. I think we have more hype than size right now, which is not such a bad thing. We are clearly the market makers. We have created an industry, along with huge employment opportunities for a lot of people. You will continue to see us innovating and raising the level of operations in the next twelve months. We hope to have a very aggressive loyalty programme in place by next year. You will see a lot of private labels. We are going to bring out our own products. Basically to expand the category, which is our own label jams, ketchups, detergents...the works. And we will open a lot of stores and bring in a lot of business.

Watch for the second and concluding part of this Interview which will dwell on the Retailing Market today.

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