Retailing Fever: Bring in the Customer

The Economic Times - January 29, 2007

If supply chain perfection leads to a lower cost or better quality or both, then it must be translated into a customer benefit of a unique price performance point, says Rama Bijapurkar

THERE is a retail fever raging through India, and as in the dot com days, you cannot go a hundred yards without running into someone who plans to get rich on retail or has got rich on retail. The game, as was the case in dot com, is about a temporary suspension of good sense on current and future valuations because of the blind belief that there is a gold mine accessible to anyone who has made the effort to buy a pick and a shovel. This is further exacerbated by the FDI rules and their mosaic of exceptions.

The unquestioned assumption nowadays is that with the creation of more and more supply, more and more consumer spend would be routed through modern retail, ensuring a "do nothing, just be there" top line growth for all. This betting is that supply will automatically create demand makes me nervous. It reminds me of the mid-1990s when so much new capacity was created based on this assumption, and so many industries ended up operating at less than 50% capacity utilisation. We used to joke about the desperate conduct of many businesses, and say that soon a three-bed room house would come free with the purchase of a refrigerator!

However, even if I were to concede that for the next five years demand will be ahead of supply, the truth also is that net margins in this business will always be low for the large top line mass retailers - because the promise of modern retailing is 'better for cheaper'. Of course if you are a specialty retailer, you may actually be able to charge more for better or much more for unique. But then the top line would be small.

And the only way to get a decent-sized top line and a decent net margin would be if you could offer some very compelling proposition to a very interested set of consumers. So it's back to customer segmentation (who am I going to target and why have I chosen this target) and back to razor-sharp rivalry propositions "why buy me and not someone else", and in general, back to good old fashioned marketing 101 constructs.

Today, thoughts like customer needs or behaviour situations or living methods based segmentation (beyond the useless catch all definition of SEC AB, modern), thoughts like "why buy me "(not as in "see how wonderful my format is", but as in "what do I do for you more than others"), thoughts of "brand personality" ("if Food Bazaar and Reliance were people, what kind of people would they be, and who would you rather buy from"), etc., are not of high concern in the Indian retail ecosystem - yet.

The basis of competition seems to be store size and supply chain. However, these must result in some consumer benefits that they value. If supply chain perfection leads to a lower cost or better quality or both, then it must be translated into a customer benefit of a unique price performance point.

Further, there is no real entry barrier to setting up a retail operation, since it doesn't cost so much, and funding is easily available - there are a whole lot of investors who also want to ride the retail boom. That makes it all the more important to go back to marketing 101 and think about what makes for customer loyalty, and for customer pull.

TODAY, retail strategy is described in terms of format, location, type of real estate, merchandise mix and a number called sales per square foot that is assumed to be determined almost entirely by location and format and category of goods retailed. So it isn't unusual to see business plans showing that with huge square footage stores, the sales will automatically be huge too. That isn't the case unless the proposition is compelling enough to pull in people from far and near. Locating something in a crowded and rich catchment area does not mean that sales per square foot will happen. When people tell me that being located in the right mall is the key to success because footfalls are the "why buy me", I wonder if that is a robust business model at all.

Retail strategy needs to be described more explicitly in terms of its front end or market strategy - who is this meant for (and not meant for), what does it offer in terms of consumer proposition (not product list but benefit arena, both functional and emotional benefits) and in terms of price-performance point, why should anyone buy from it and not from somewhere else? Therefore, what kind of brand personality should it have? What kind of relationship with the customer? Trusted friend? Style guru? Role model? Once the front end has been described, then the product design needs to be done to walk the talk - what store size design? What ambience? What customer experience? What merchandise overall strategy, and what mix?

The business design to support the market strategy and the product design needs to be done next. The product design, out on a limb by itself, cannot be given either the title or the stature, as it is today, of strategy.

The larger retailing community (and I include all their investors in this too) is very clued into international retail and what we can learn from there. It always strikes me that in addition to importing the formats, it would make sense to import the strategy and brand disciplines that international retailers have. If American Eagle, Gap, Old Navy, Abercrombie & Fitch were all people, we would know exactly what kind of people they were; and we would know who amongst our friends would not be likely to shop there and who would love to be there, and we would know if they were all invited to a party, who would make what kind of conversation with each other.

Of course, it could be argued that he who has real estate and he who has lots of money would be king. So why bother with all this customer stuff? Creative stores, well stocked stores, malls with footfalls, mammoth size - isn't that the name of the game? Not as competition increases. The day of reckoning may be five years down the road, but the dot com experience tells us that it definitely comes one day. And only the likes of Amazon and e-Bay designed with the customer religion survive!