Retail & Consumer Industry Strategic Issues for Retail CEOs* Perspectives on Operating in India’s Retail Sector Contents Executive summary 06 The Indian retail sector 14 Six discussion themes: • Supply chain and operations 22 • Strategy and innovation 36 • Private label offerings 48 • Tax issues 54 • Workforce management 60 • Sustainability and green marketing 66 Works cited 84 PricewaterhouseCoopers 3 Foreword Retailing in India is exciting and challenging. In a country where the customer habits change every 100 Kilometers and with citizens speaking more than 2000 languages, it is not easy to build a successful retail business. The potential on the other hand is huge with a growing middle class consuming population. Many of the modern retailers are new in this business and are grappling with mastering the business environment. We thought it apt that we collaborate with PricewaterhouseCoopers and help in disseminating some knowledge about the various initiatives taken by retail companies in the country. Since this report is based on interviews with Chief Executive Officers of retail businesses, it does give a high level view of what companies are doing to maximize market potential. Kumar Rajagopalan Chief Executive Officer Retailers Association of India Preface We are pleased to present the PricewaterhouseCoopers-Retailers Association of India joint thought leadership study, Strategic Issues for Retail CEOs* for release at the RAI Retail Conference 2010. The Indian retail sector is perhaps one of the most challenging, dynamic and exciting markets to operate in currently. To obtain an in-depth understanding of the issues faced by the participants in India’s retail sector, we utilised primary, secondary and internal insights to write this thought leadership study. In this context, we are grateful to the following participants in India’s retail sector who generously provided us with their time, thoughts and expertise - – Thomas Verghese, Chief Executive Officer, Aditya Birla Retail Ltd – Asif Merchant, Managing Director, Catwalk Worldwide – Ayesha Katrak, Managing Director, Colour Lines (Dolphin Kids Wear) – Swarup Chandrashekar, Chief Operating Officer, Deepam Silk Retail Pvt. Ltd – Ashutosh Garg, Chairman and Managing Director, Guardian Lifecare Pvt. Ltd – Amit Jatia, Managing Director, Hard Castle Restaurants Pvt. Ltd (McDonald’s India) – Kishore Bhatija, Chief Executive Officer, Inorbit Malls (India) Pvt. Ltd, K. Raheja Corp. – Sanjay Sahni, Managing Director, JDS Apparels Pvt. Ltd (Ritu Wears) – Shumone Jaya Chatterjee, Managing Director, Levi Strauss (India) Pvt. Ltd and Pankaj Kapoor, SC Social & Environment Sustainability Manager, South Asia, Levi Strauss Pvt. Ltd – Kabir Lumba, Managing Director, Lifestyle International Pvt. Ltd – K. Venkataraman, Managing Director, Mahindra Retail Pvt. Ltd – Mark Ashman, Chief Executive Officer, Marks & Spencer Reliance India Pvt. Ltd and Shalini Naagar, Head-Human Resources, Marks & Spencer Reliance India Pvt. Ltd – Viney Singh, Managing Director, Max Hypermarket India Pvt. Ltd – Raghu Pillai, President and Chief Executive, Reliance Retail Ltd – Salil Nair, Chief Operating Officer, Shoppers Stop – Sukanya Duttaroy, Country Manager (Consumer Goods Business), Swarovski India Pvt. Ltd – Rishi Goyal, Chairman’s Secretariat, Essar Telecom Retail Ltd (The Mobile Store) – Amar Agrawal, Managing Director, The Spa Group – Shailesh Chaturvedi, Chief Executive Officer, Tommy Hilfiger India – Toby Alapatt, Managing Director, Varkeys Retail Ventures Pvt. Ltd The study covers the salient issues faced by CEOs at India’s retail organisations. The topics covered include— – Supply Chain and Operations – Strategy and Innovation – Private Label Offerings – Tax Issues – Workforce Management – Sustainability and Green Marketing It would be our pleasure to guide you through our findings, or answer any questions that you may have related to this study, or other retail-related issues.  Jairaj Purandare NV Sivakumar Leader, Markets & Industries Leader, Consumer & Industrial Products, PricewaterhouseCoopers PricewaterhouseCoopers Executive summary 6 Strategic Issues for Retail CEOs* : Perspectives on Operating in India’s Retail Sector The Indian retail sector is dynamic, exciting and challenging! India’s robust macro- and microeconomic fundamentals, such as robust GDP growth, higher incomes, increasing personal consumption, favourable demographics and supportive government policies, will accelerate the growth of the retail sector. PricewaterhouseCoopers 7 India’s robust macro- and microeconomic fundamentals, such as robust GDP growth, higher incomes, increasing personal consumption, favourable demographics and supportive government policies, will accelerate the growth of the retail sector. As outlined in the PricewaterhouseCoopers thought leadership study entitled Building to Win: How multinationals are structuring to compete in emerging markets, most global retailers, especially in the current economic environment, are looking at India and China to grow, to shore up revenues and to access new customers. India’s retail sector is perhaps one of the most challenging, dynamic and exciting markets to operate in, as based on our discussions with retailers— • Serving a heterogeneous market (CUSTOMERS) - India is characterised by varying consumer tastes, preferences and buying habits. India’s states have unique languages, cuisine, geography, etc. and many retailers believe that consumers’ tastes and preferences vary by state, city, catchment area and even by street! This makes it seem that India is a collection of 28 countries instead of 28 states! • Developing a long-term investment horizon (INVESTMENT) - Domestic and global retailers view India as a long-term investment proposition and suggest that patience, deep pockets and customisation of products and services are required for success. • Focusing on innovation, customisation and new product development (PRODUCTS) - Global retailers are, through the launch of India - inspired products, positioning themselves as international retailers who understand the nuances of serving Indian customers in terms of offering them the right product, at the right price and through the right distribution channel. • Operating within the current regulatory framework (BUSINESS ENVIRONMENT) - Global retailers should realise that international strategies may not always be the best for the Indian market; some amount of customisation may be required to succeed in the Indian marketplace. Retailers need to comply with national- and state-level legislation, tax issues and regulatory frameworks. Selected trends Key challenges • Improving operational • Infrastructure effectiveness • Workforce • Focusing on innovation management • Sophisticated • Value-conscious consumers consumers • Embarking upon a • Supply chain green agenda 8 Strategic Issues for Retail CEOs* : Perspectives on Operating in India’s Retail Sector Discussion theme 1- Improving supply chains and operations will enable retailers in India to enhance competitiveness and successfully deploy growth initiatives. Mastery of supply chain dynamics is a critical enabler for the growth of modern trade. The primary objective of the retail supply chain is to source, store, transport and deliver the right merchandise to the store shelf at minimum costs, in the right condition and within acceptable timeframes. Globally, robust supply chain management is viewed as a competitive advantage. In the Indian context, most retailers are in the early stages of developing their supply chains, although there are specific instances of higher levels of supply chain maturity. Some retailers have implemented cutting-edge IT systems to support and scale operations, enabling them to generate operational efficiency, increase productivity and improve customer experience. Observations pertaining to supply chain, logistics and operations, as based upon our primary research interviews, internal insights and secondary findings are listed below - • Supply chain- Efficient sourcing practices, managing inventory turns and overall supply chain management are important measures to improve profitability. The ability to measure and manage supply chain risks is essential to the success of any retail operation. • Operations - The decision to close stores is a function of unfavourable catchment areas, being located in malls witnessing dwindling footfalls, and a mismatch with the current format portfolios. Primary case examples • Aditya Birla Retail Ltd’s - – Methodology for Scoring Store Success – Best Practices Workshops PricewaterhouseCoopers 9 Discussion theme 2— Strategy and innovation is a holistic concept involving the launch of new products, the creation of unique marketing strategies, the development of new distribution channels, the customisation of products, etc. Innovation, aside from encompassing the launch of new products and services, involves— • The launching of new formats such as shop-in-shop formats, value, etc. • The introduction of customer loyalty programmes from which data can be harnessed to better serve consumers • The expenditure toward IT systems that link operations, drive efficiencies, manage stockouts, liberate costs, etc. • The creation of private labels that will be marketed into well-recognised brands • The development, creation and implementation of customer service standards that delight and excite consumers • The creation of new distribution channels that enable retailers to efficiently and effectively reach consumers Innovative practices that interviewed retailers are embarking upon include creating India-inspired product lines, offering private label products and selecting, and accordingly, customising the global product assortment for the Indian market. Primary case examples • Dolphin Kids Wear’s Efforts to Create a Brand Partnership with Children • Spa Group’s Non-Retail and Digital Channels • Spa Group/Lladro’s India-Inspired Products • Innovation at Swarovski • The Mobile Store’s “Rock with Rolls” Promotion Discussion theme 3— Private label offerings are a major catalyst for growth. Indian consumers are value conscious, more so in the current economic environment. Retail companies are launching a range of private labels products in order to meet the demands of value conscious consumers, to develop product portfolios and to improve margins in a retail environment where efficiency and competitiveness is imperative. Private label brands are important revenue drivers in developing markets and fill a demand gap in terms of range, quality and price. Observations from retailers we interviewed include— • Leveraging a growth opportunity—Most retail organisations believe that private labels are a major avenue for growth in serving both retail and business customers. • Assessing market potential—Some retailers are embarking upon pilot projects to assess the impact of private labels on sales. These retailers want to assess the impact that private labels have on increasing share of space and category, improving visibility and driving sales and revenues. 10 Strategic Issues for Retail CEOs* : Perspectives on Operating in India’s Retail Sector