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Published on: 1 March, 2019
As local kirana stores start winding up in India, the conditions required for organised retail to operate profitably are coming together nicely. Whilst this does not necessarily mean that all organised sector retailers will be as profitable as a Titan or a Dmart or a Trent, it does mean that we will see more profitable listed retailers in India.
“Though not a single household household was wired for electricity in 1880, nearly 100 percent of US urban homes were wired by 1940, and in the same time interval the percentage of urban homes with clean running piped water and sewer pipes for waste disposal had reached 94 percent. More than 80 percent of urban homes in 1940 had interior flush toilets, 73 percent had gas for heating and cooking…In short, the 1870 houses were isolated from the rest of the world, but 1940 houses were ‘networked’, most having the five connections of electricity, gas, telephone, water and sewer…Networking inherently implies equality. Everyone, rich and poor, is plugged into the same electric, water, sewer, gas and telephone network. The poor may only be able to hook up years after the rich, but eventually they receive the same access.” – Robert Gordon in “The Rise & Fall of American Growth” (2016)
The High Street is changing in India
30 years ago when I was a newspaper delivery boy in south London I saw the English high street change. Of the 60-odd shops to whom I would deliver the evening newspaper, the first to shut down were the travel agents (disrupted by the rise in online travel bookings). Then by the early noughties the convenience stores (which used to sell candies, biscuits, bus passes, stamps, newspapers, etc) started shutting down disrupted not so much by online but by: (a) the large supermarket which had opened a couple of kilometres down the road; and (b) the convenience-store format rolled out by the large supermarkets for local neighbourhoods such as the one I grew up in. An additional challenge for the owners of the convenience stores – which were usually run by Gujarati migrants from Uganda (where the despot, Idi Amin, had persecuted these people in the early 1970s) – were that their children were landing lucrative jobs in the City of London and hence uninterested in running the family business.
After that the local restaurants started shutting down and were replaced by franchisees of chains like Papa Johns, KFC, etc. 30 years on from my newspaper delivery days the only survivors are the barber shops/beauty salons, the greengrocers, butchers and florists (people still prefer buying these things from local shops rather than the chain stores). The convenience stores have been replaced by shops selling mobile phones, cafes and charity shops (offering second hand clothes/books for the needy).
In the high street near my flat in suburban Mumbai I am now seeing the same evolution pan out. The local Dmart (the first Dmart in the country in fact) is booming. Another Dmart was opened in the adjacent neighbourhood eight years ago and that too is bustling. The casualties are the local kirana stores. Last month Reliance Stores (no relation of the listed Reliance businesses) wound up. A year ago a smaller kirana store had pulled down its shutters for the last time. Only one kirana store in my neighbourhood has survived – Cheap & Best has remodelled itself into a 7/11-type convenience store format. In fact the owner has acquired the adjacent store, broken down the walls and create a cheap & cheerful format which has allowed him to compete with Dmart.
The local eateries too face rising competition not just from Starbucks and Dominos (which are packed even at midnight) but from the organised ice cream parlours (Haagen Dazs, Baskin Robbins, Naturals) and from Indian fast food chains (Chaayos, Theobroma, Busago). It doesn’t take much to figure out who will win this unequal fight. Of the 60-odd stores in my local high street in Mumbai, only a third are now independent operations; the chain-store format is already the dominant format in my high street in Mumbai. My feeble attempts to keep the local chemist in operation – even as a better stocked chain store (Wellness Forever) down the road empties out his customers – are not going to be successful.
What exactly is the problem ailing the kirana store?
Two years ago I met an FMCG distributor for HUL and Dabur in another suburb of Mumbai. He predicted the end of old-style kirana store retailing in India and therefore of people like him (who supply the kirana stores). As per him the squeeze is being exerted by: (a) modern retailers like Dmart who are buying directly from major FMCG brands at better prices than the kirana store can get; (b) online retailers like Amazon and Flipkart who are supplying basic home essentials (cutlery, crockery, stationary, toys, etc usually imported from China) cheaper than any unorganised local store can; and (c) the modernisation of the supply-chain post GST wherein it has become much harder to avoid taxes and thus boost profit margins. Furthermore, the progeny of kirana store owners and distributors no longer want to toil for 15 hours a day in a dingy establishment; their aspiration is a job in an air-conditioned office – typically a call centre or a KPO.
This distributor understood that it is neither FDI nor Amazon which is killing the Indian kirana store; it is the networking of a vast economy which is hurting the informal sector in general. To quote from my 13th August 2018 piece (click here for the piece:https://marcellus.in/blogs/the-rise-of-indian-smes/):
“Small/informal businesses flourish in an underdeveloped economy where due to the lack of availability of electricity, good roads, reliable communication networks and affordable credit, businesses can operate only a small scale and that too within the confines of their immediate locality. However, as the quote shown at the beginning of the note from Robert Gordon suggests, the installation of “networks” – rail, electric, water, gas and telephone – in America between 1840 and 1920 rapidly formalised that economy and catalysed the rise of consumerism.
India seems to be going through period comparable to what America went through in the 50 years post the Civil War. Over the past ten years, the length of roads in India has increased from 3.9 million km to 5.6 million km (implied CAGR of 4.2%). The number of mobile phone subscribers has increased over the same period from 234 million to 1.2 billion (CAGR of 20%). The number of broadband users has increased from 3 million to 363 million (CAGR of 70%). A decade ago around 50 million Indians were taking flights each year. Now 3x as many Indians are flying each year (CAGR of 12%). 15 years ago only 1 in 3 Indian families had a bank account; now nearly all Indian families have a bank account.
These factors have made it easier for smaller companies to build pan-India franchises. Businesses that were local in nature are trying to become regional; those that were regional are seeking to become national. In fact, from what I see on my travels, many of the passengers taking low cost flights and staying in Oyo Rooms or in 3-star hotels are regional businessmen trying to grow their business elsewhere in the country. GST, looking beyond of the short term disruption caused by it, looks as if it might be another step forward in creating a more integrated economy.”
Investment implications
As the local kirana stores wind up, the conditions required for organised retail to succeed in India are coming together. Whilst this does not necessarily mean that all organised sector retailers will be as profitable as a Titan or a Dmart or a Trent, it does mean that we will see more profitable listed retailers in India. In specific, it is clear that the big Indian business houses (Reliance, Tata, Birla) have now set their eyes on building large, logistically efficient retail operations run along the lines of a Dmart/ Titan/ Trent.
Such an expansion in organised retail is bound to create jobs. Those jobs will be desperately required as the 100-150 million people who work in the informal retail sector face existential issues. Such an expansion will also change the balance of power between manufacturers and retailers in India. So far the manufacturers had ruled the roost as the retailers were small and fragmented. However, as companies like Reliance Retail and Dmart grow, they will pull away profit margins from the big FMCG companies and pass on more of the working capital strain on to the FMCG giants (at present many of the FMCG giants have negative working capital cycles). Therefore, the ROCE hit for FMCG giants might be substantial in the years to come.
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Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.