Define your value proposition
The first article in our Retail Strategy Series
All India Retail
While the current drop in consumer spending has hit organized retailers, that is not the only reason for their woes. Retailers need to better understand and define their value proposition to their customers. Customer-centric thinking and acknowledging the fact that the kirana store is still a benchmark are key to defining this value proposition. The dimensions to think along include assortment, pricing and customer experience.
The global recession has forced Indian retailers to transition from the land-grab phase to a focus on profitability and cost-cutting rather quickly. Recent media reports have highlighted down-sizing of stores, merging of divisions and scaling back of expansion plans. While the cost focus is essential, retailers need to remember that same-store sales growth (sales growth in stores that have been open for at-least a year) is the metric that they need to keep a close eye on. The key to improving same-store sales is getting customers to spend in your stores, not once, but again and again.
Retailers will readily tell you that the Indian customer is value-conscious. And by value-conscious, they mean price-conscious. And that makes it difficult to get them to spend in organized retail. After all, the cost structure for an organized retailer is still high and how low can it price without risking its own future as a business. While this may have some truth in current times, it is not the root cause for the sector's woes. First of all, one needs to realize that value is not equal to price. The assumption here is that the product-service offering that the customer pays for is standard and cannot be changed. This is certainly not true. I might prefer to visit a large store because of the one-stop shopping experience. I might prefer the electronics store because of their knowledgeable sales staff and flexible return policies. The real question for the Indian retailer is: Do you truly understand what your customer perceives as value?
Today, there is a mismatch between what the retailer is proposing as their value-proposition and what the customer perceives as value. Glitzy buildings and air-conditioned environments do not justify a higher price for vegetables. If she gets tomatoes for Rs 10 per kilo from the vendor who delivers them home, why will she pay Rs 12 just because you have a better display and surroundings? Especially so, when she has to travel to the mall, fight the crowds and stand in long checkout lines. The Indian middle-class consumer has traditionally been over-serviced. We are used to having our clothes washed, floor mopped and produce delivered. So, inherently organized retail starts at a disadvantage when it comes to convenience and customer service. The benchmark for value here has been set by the traditional kirana store.
So, where can organized retail add value? Assortment for one. Along with the growth of organized retail, we should see growth of brands and products that provide a different value proposition to the Indian consumer; new varieties of fruits, new designs in apparel and furniture, new devices that make life a little simpler or more exciting. Organized retail provides the innovative producer with a powerful channel to showcase and sell their products. If a new product does well, both retailer and manufacturer succeed. Today, we have a dearth of such forward-thinking manufacturers. The big boys like HLL and P&G are busy worrying about securing their traditional stranglehold on the Indian consumer. Will organized retail be a threat to their margins? Not if they make use of this new channel to excite the Indian consumer with better and more innovative products. Through private label or otherwise, organized retail should take the lead in helping innovative manufacturers succeed. Consumers will wholeheartedly accept a product idea whose time has come.
Another value proposition is lower pricing. While this is generally not observed today, eventually economies of scale and efficiencies in distribution (through improved supply chain practices) will kick in. Walmart alone has been credited to keep US inflation levels lower by up to 15%. A model of that sort is not just good, but a necessity for India. Whether the customer interface is unorganized or organized, the back-end has to be organized. Of course, there are political and social factors to be considered, but an efficient supply chain should be the highest priority for the government in tapping the power of organized retail. It will be more of a human supply chain than automated western supply chains, since the labor equation works differently in India. But it needs to be more efficient nevertheless. Competition will ensure that the savings are passed on to the consumer. Outdated taxation laws, poor infrastructure and exploitation of farmers are all issues that can be solved with strong government will. Lower prices and consequently higher purchasing power is the single most important benefit that organized retail will bring to the Indian consumer.
The third value proposition that can be offered is customer service. This is where the unorganized retailers are giving the big players a run for their money. With their lower overheads and flexible operations, kiranas are able to offer informal credit, home delivery and personalized service in a more effective manner than any organized player today. This will remain the differentiating factor for the small retailer for some time to come. Organized retailers should learn from their smaller brethren and adapt practices that can help improve their woefully inadequate customer service practices today. An even better approach would be to focus on the complete customer experience. For a large format retailer, that could mean adding value-added services like banking, basic healthcare, personal grooming, etc for their customers. For a specialty retailer, it might mean consultation services, installation, flexible return policies and other value-added services. Remember that a customer is not just buying products from you, but is fulfilling a need.
Whether it is product variety, lower prices or customer experience, it has to start with understanding what your customer perceives as value. Perception of value differs across different product categories and depends on what is already out there, namely the kirana offering. Organized retailers that understand this and adopt a customer-centric approach will be successful. The others can keep blaming the value-conscious consumer for their woes.
Sree Vijaykumar
The author is MD, All India Retail, Knowledge Partner to the Indian retail industry.
Visit www.allindiaretail.com for more details.
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