Unused to modern, organized retailing, the Indian consumer is still figuring out how to extract value — beyond lower prices — from the stores, supermarkets and shopping chains that are popping up everywhere. Meanwhile, retailers face other challenges: Indian consumers shop frequently and are used to travelling short distances to their stores; brand penetration is lower compared to developed-country markets; and interstate goods movement is fraught with taxes, delays and other inefficiencies. All that means warehouses have to be closer to stores, which in turn have to be closer to their so-called “catchment” areas, where the new retailers have to build store-specific customer loyalties. Training large numbers of employees in such virgin territory, and promoting retailing as a respectable and attractive career path, are other challenges, according to senior executives from Best Buy, Staples and Aditya Birla Retail, who participated on a panel titled, “New Paradigms in Indian Retail,” at a recent Harvard Business School conference. “Indian consumers themselves don’t know what they want,” said Sumant Sinha, CEO of Aditya Birla Retail, which has rolled out 500 stores across India in the past year and is part of the $24 billion Aditya Birla Group. “They are evolving,” he said, especially those in urban settings. “You put a hypermarket in front of them; they’ve never seen it before. So there’s no way they can understand the concept. You really have to go with your gut in India and wait for the reaction.” The Aditya Birla Group began considering a foray into retailing after it was approached by Wal-Mart a couple of years ago, Sinha recalled. Those talks didn’t progress “because they were looking only for a front-end partner. We like to control our businesses.” But the group found the numbers compelling. “India is a trillion-dollar economy, of which retail accounts for about 40%,” he noted. “Of that, 40% to [nearly] 60% is spent on food and groceries, and of that, about 60% is rural and 40% is urban.” The group recognized that “the food and grocery business was under penetrated from a retailing standpoint,” and that drove its decision to enter the business. Within a year of launching operations, the company has 500 supermarkets, employs about 10,000 people and is hiring at the rate of a thousand employees each month, he added. What struck Sinha right away was “the fact that Indian consumers are extremely value conscious.” For them, “value is not just price” and includes other connotations such as “quality, convenience and trust.” Most other Indian retailers are going after price to build customer loyalties, and are perhaps getting it wrong, he said. “It’s not as if they haven’t been shopping before organized retailing arrived — they have been shopping for decades and decades at mom-and-pop stores. It’s about shifting these consumers from their existing shopping behavior into a different shopping behavior; they are also testing the new format. At this point of time, you have to just go with what you think will work. It’s very early days to figure out how that will play out.” Lukas Ruecker, who oversees emerging market business as vice president at Staples, the office products retail chain, agreed with Sinha’s assessment. “The market is changing so rapidly in India that we haven’t even invested in consumer research,” he said. “This is going to be an ongoing experiment. The Indian consumer doesn’t know what he wants; you have to shape his opinion.” Describing Staples as a cautious strategist that would “rarely be caught being first at anything,” Ruecker noted its first international foray was into China in 2004, followed by Brazil, Argentina, Taiwan and then India about six months ago. He expects Staples to open 11 stores in India by the end of this month. Staples’ Indian business is made up of both retail stores and institutional customers it serves with “the only pan-Indian delivery system for office products,” he said. It partners with the Mumbai-based Future Group, a fast-growing diversified business house with prominent organized retail banners including Pantaloon and Big Bazaar. “When you enter emerging markets like India or China, you really learn only through experimentation,” said Kal Patel, executive vice president of emerging business at Best Buy. He recalled that when he worked on Best Buy’s China launch a few years ago, “we had to throw away consumer research. The assumptions you have from a top-down marketing standpoint don’t stand up in these markets.” In developed markets, “you can sit down in a corporate office with a whole bunch of analytics and make predictions for next year,” Patel said. “In [China], we’re asking our store managers and store employees to tell us what they think they can grow if we give them more tools and the things they need. They are coming back with three or four times more optimism.” That strategy is ideal for Best Buy in its new markets, according to Patel. “The general principle is: The more local you go, the more front-end you go and ask the people who are serving [customers] — whether in rural markets in India or in big cities somewhere else — the better is your understanding of emerging trends,” he said. “Fundamentally, we engineer our company based on the demand we get from the very, very different micro segments.” Half-empty Stores Harvard professor of business logistics Ananth Raman, who moderated the discussion, asked Patel and the other panelists about their experiments with the design of their stores in India and how that might be different from those in their home countries. Best Buy has yet to enter the Indian market, but Patel recalled a conversation with his company’s store designer who was tapped a while ago by an aspiring Indian retail group to replicate Best Buy stores in India. He refused to do the work, because using an American design in an Indian context made no sense to him. “The interesting thing is that Indians in India are bringing American assumptions into India,” Patel said. Ruecker said Staples did not copy its conventional store design for the Indian market, but created a wholly new one to suit local tastes. “We used our technology platform and ideas from our experiences in Portugal, Germany, the Netherlands and the U.S., and then modified them for India.” He noted that Staples in India has its own logo, different color schemes and other variations “to make them a little more Indian.” The response has been mixed. “Some people in Bangalore said it doesn’t feel like the U.S. Staples; some others said it was fantastic and they liked it.” Unlike in western markets, the Indian store cannot be as big as 15,000 to 20,000 sq. ft., said Sinha, explaining that the markets there don’t have as many brands to be stocked. “That, unfortunately, is the reality of India — you just do not have enough branded products out there. If you put up a big store, it’s probably going to be half empty. You have to think of a smaller-size store.” Smaller stores also fit in well with the average Indian family’s shopping experience. “For many, many decades, Indian housewives have been used to buying things almost on a daily basis. You have vendors who come in push carts to your house,” Sinha added. Such observations lead to other questions, he noted. “You would assume that this behavior is borne out of a desire to buy fresh food and cook it every day. Or is it because the supply chain for fruits and vegetables is so poor that the food would become spoiled the next day?” Other reasons for buying food on a daily basis may include a lack of storage space or ways to keep food fresh for extended periods of time. “They don’t have big houses or big refrigerators. And even if they have refrigerators, very often the power goes off.” Since the daily shopping habit isn’t likely to go away soon, Sinha predicted that stores that are far away but have large catchment areas may not work; they have to be closer to customers. “Most Indian housewives don’t have easy access to transportation, so going long distances to shop doesn’t work for them,” he said. “A supermarket in the Indian context is going to be a lot closer to customers and will have a lot more footfalls on a daily basis with much smaller basket, or ticket sizes.” Building Supply Chains from Scratch Raman wondered if the supply chain in India is ready for organized retailing, or if a wholly new infrastructure has to be developed. Ruecker said for Staples, it was a major challenge in both India and China to move products from its warehouses to stores. “The overall logistics is so much more difficult from a port in Chennai or a port in Shanghai to stores,” he said. Yet, unfathomable as it was, the system worked. “You rely on the fact that Indians have always figured out a way to do it. Stuff gets into the stores, it gets there in time, and all our stores are well stocked.” But he is not taking too many chances. “We are willing to live with the faith, but we need modern warehousing (in India).” According to Sinha, the logistics and supply chain infrastructure “has to be built from scratch; it’s really about creating a new industry.” He said his company started by outsourcing the logistics and warehouse management from third party companies, but eventually decided to bring those functions in-house. It turned out that the main problem the third party logistics suppliers faced was not a lack of expertise, but difficulties getting trained people to track and ship orders, which resulted in lost sales and excess inventories, he said. Aditya Birla Retail decided to take on the training responsibilities. Sinha added that it takes about three months to get new hires up to speed with the requirements. Sinha said Indian municipal taxes (called octroi) and other laws governing interstate movement of goods also make things difficult. “You can’t set up five large warehouses across the country to serve the market,” he said. “You have to set up [very small] warehouses wherever you open each store. And so the profitability of each cluster becomes a function of [that arrangement]. The Indian supply chain infrastructure has a ways to go before it becomes efficient. Unless some laws change in India, it is not going to happen in a hurry.” What’s more, many Indian companies, including arms of multinationals, are used to inefficiencies in delivering goods, according to Sinha. “In India you had companies always delivering half of what you asked for, and you don’t know which half is delivered,” he said. “They are not used to organized retailing. They recognize the value and benefits of modern retailing, but it’s hard to get the discipline that is required.” “The reason we are in China and not in India is because of supply chain,” said Patel of Best Buy. In preparation for its plans to enter India, Best Buy brought together consumer electronics suppliers and posed them the problem of generating efficiencies. “We told them to give us higher gross margins,” he said, adding that Best Buy had bargaining power because it went about its sourcing globally. All the suppliers at the meeting recognized that “it was in everybody’s interest to bring in efficiencies.” At the consumer level, Patel said he is acutely aware of how customer loyalties work in the Indian market. “You have mom-and-pop [stores] that have relationships with consumers — they have a relationship with the family and the community. What we would do differently is we want to leverage that. However, at the back end you have so much inefficiency.” Best Buy has a retail academy in China in partnership with a couple of universities, “and that’s how we are going into India and that’s how you create self esteem for a retail job in that country,” said Patel, citing Best Buy’s 11,000-strong “geek squads” in the U.S. as one of his models. “Essentially, geek squads are about bringing high self-esteem to computer repair,” he said. “We are going to use that [model] in India in sales and service.”