When India entered its first COVID-19-triggered national lockdown in March 2020, 54-year-old housewife Lata Chellappan, didn't reach out to her relatives in other cities but instead called Family Stores, her local grocer. She urgently requested essentials ranging from salt to soap, and within two hours, her supplies were delivered to her doorstep.  

By the second week of the lockdown, regular patrons of Welcome Stores in South Mumbai began receiving daily WhatsApp updates with lists and photos of available products. These updates were based on customers' previous purchases and current needs, all without the aid of any automated algorithm.

Family Stores, Welcome Stores, Prabhu Stores, Bansal Store, Apna Store, and over 12 million other small retail outlets known as 'kiranas'—mom-and-pop general and grocery stores—are ubiquitous across every Indian city.  

Grocery purchases constitute half of India's total retail consumption, with kiranas commanding 90% of this market, or more than 12 million outlets.

Emerging markets are projected to surpass the GDP of developed economies, sparking an interest in the structure of various industries within these regions. The consumer packaged goods (CPG) industry in emerging markets presents a stark contrast to its counterpart in developed Western economies. In these developed areas, retail is predominantly controlled by large multinational chains. In contrast, emerging markets still depend significantly on small family-owned stores, despite the presence of organised chain stores.

The USD 110-billion organised retail sector, representing 12-15% of total retail, grew 25-30% in FY23 and is projected to reach USD 230 billion by 2030, with significant expansion in rural areas. Despite this, large retailers like Reliance Retail and Aditya Birla Retail have not overshadowed regional stores, which remain dominant in their local markets across various categories.

The food and grocery sector was the largest segment within the Indian retail market, accounting for approximately 65% of the market share, equivalent to USD 525 billion, in the fiscal year 2019. This is followed by the apparel and footwear segment at 9.8% and consumer durables and IT at 9.2%. Despite this, organised retail's penetration in the food and grocery sector was just 3.6% in 2019, highlighting the significant role of unorganised retailers, who held about 61% of the market share.

In rapidly growing India, traditional stores and modern trade outlets (MTOs) vie for market dominance, particularly over lower-priced goods. Traditional stores, widespread and offering personalised services like credit sales and home delivery, build strong loyalty among local customers, especially within low-income households that frequently purchase on credit.

On the other hand, MTOs, typically located in urban centres, serve middle-to-higher income groups who prefer making larger, less frequent purchases. These stores carry a wider variety of products, including premium items not usually available in traditional stores.

In 2010, there was scepticism regarding the future of kirana stores due to the rise of supermarkets and hypermarkets. However, over the last decade, this ecosystem has undergone significant transformations due factors such as rise of modern trade, the introduction of cash and carry formats, the explosion of e-commerce, and the emergence of new-age B2B providers have all played a role in reshaping the landscape.

Kirana and small stores continue to thrive, buoyed by their personalised service, the offering of monthly credit, and their proximity to consumers. A separate 2011 study showed that modern retailers must adopt these strategies to compete with traditional kirana stores effectively.

Packaged goods in a developing economy

Mature markets such as North America have a well-established product distribution infrastructure and consumer purchasing power. The challenge for retailers is to replace existing goods, services, and experiences with innovative new ones to drive growth. Since basic consumer needs are already met, retailers must focus on fulfilling higher-order needs and creating superior value through innovation.

For example, the U.S.-based toy company Build-A-Bear had 2018 revenue of USD 468 million. The company allows customers to create customised stuffed animals, offering an interactive retail-entertainment experience. This innovation combines product customization with entertainment, giving Build-A-Bear a competitive edge in a market saturated with standard products.  

This is not the case in a developing country like India. But by 2030, India's consuming class is projected to grow significantly, increasing from around 340 million people today to approximately 825 million. This expansion offers CPG companies substantial opportunities to cater to an ever-growing customer base.

Urban consumers have higher disposable incomes and are more likely to adopt new products, making them an attractive target for CPG firms.  

Despite such a high demand, developing markets often grapple with inadequate infrastructure, which hampers the distribution capabilities of CPG firms and restricts consumer access to media, thus limiting product awareness.  

Operating in highly unorganized and unstructured retail environments poses significant challenges for brand managers. They must rely heavily on local intermediaries, such as wholesalers and retailers, to promote their brand in the market and leverage it across various retail formats to ensure success.  

The decision-making process for distribution becomes particularly challenging due to the lack of structured data, making it difficult for managers to make optimal distribution choices. This complexity is further exacerbated for CPG manufacturers, like P&G, that manage multiple brands and product forms across diverse distribution formats, including small retailers, large retailers, and mom-and-pop stores.  

Consequently, CPG managers face the daunting task of aligning brand strategy, store format, and product form to maximise profits. Although previous research has identified some challenges of retailing in emerging markets, most proposed solutions have been conceptual, lacking in empirical application.

Urban v. Rural

Rapid urbanisation also leads to increased competition among retailers, both traditional and modern. CPG firms must navigate this competitive landscape by leveraging their distribution networks and ensuring consistent product availability across different retail formats.

Poor transportation, limited internet access, and inadequate media penetration are prevalent in many emerging markets. These issues pose significant distribution challenges for CPG firms and impact consumers' purchasing behaviours. The lack of reliable infrastructure often results in increased product spoilage and damage during transportation, leading to higher costs for CPG firms.

In rural areas, where infrastructure challenges are more pronounced, consumers have limited access to new products and rely heavily on traditional retail channels. These consumers often make frequent small purchases rather than large one-time purchases due to financial constraints and the lack of storage facilities. This behaviour necessitates CPG firms to offer products in smaller pack sizes and at lower price points to cater to the needs of rural consumers.

For example, a 2007 study showed that the residential background of consumers influences their buying decisions. The findings indicated that rural consumers find packaging more helpful in purchasing decisions, associating better packaging with better products and prioritizing ease of storage more than urban consumers. However, factors like ease of carriage, package weight, simplicity, transparency, and packaging similarity have a greater impact on urban consumers' purchase decisions. Additionally, rural consumers are more critical of packaging, viewing it as potentially misleading and environmentally harmful.

The regulatory environment in emerging economies can also differ significantly from that in developed markets. For example, many emerging economies have legal requirements for CPG firms to print the maximum retail price (MRP) on product packaging. This regulation aims to protect consumers from price gouging but also limits the pricing flexibility of CPG firms.

In contrast, developed economies often follow the Manufacturer Suggested Retail Price (MSRP) model, which allows retailers to adjust prices based on market demand and competition. The MRP regulation in emerging markets can impact the profitability of CPG firms, as they need to carefully consider the maximum price they can charge while ensuring their products remain affordable for consumers.

Debates about the efficacy of the Maximum Retail Price (MRP) system in the country have been ongoing for years, according to a 2020 article. European companies such as IKEA, Hennes & Mauritz AB, and Decathlon sought exemptions from marking MRPs on their products, arguing that it hinders their business operations. Today, these companies, along with single-brand retailers such as Nike and Adidas, are exempt from printing MRPs on every product. However, multi-brand retailers and Micro, Small, and Medium Enterprises (MSMEs) still have to follow this rule.

MRPs particularly affect smaller businesses, especially MSMEs in remote or smaller towns, which face higher logistical costs due to poor distribution networks. Conversely, retailers in central business districts face higher real estate costs. The MRP system squeezes their profit margins, often leading to the closure of longstanding neighbourhood businesses, the article adds.  

In contrast, most countries do not have an MRP system. Retailers set prices based on demand, supply, and competition within their local markets. For example, the US avoids MRPs, viewing them as trade restraints that limit merchants' ability to price products optimally for their business and give manufacturers too much control.

“MTOs need to develop a dual-channel strategy that caters to both traditional and modern retail formats, tailoring products, pricing, and marketing to meet the distinct needs of each channel,” Indian School of Business’ Associate Professor Siddharth Singh said. “Improving distribution networks is essential to address infrastructure challenges, ensuring product availability and minimising spoilage, often by partnering with local distributors who understand regional markets.”

Compliance with regulatory requirements, such as the MRP mandate, is crucial for maintaining profitability. Additionally, targeted marketing efforts are necessary to raise consumer awareness and drive product adoption, using both traditional and digital channels to reach diverse consumer bases. 

 

References

  1. https://brandequity.economictimes.indiatimes.com/news/industry/kirana-stores-where-real-india-shops/76159205 
  2. https://pubsonline.informs.org/do/10.1287/orms.2023.01.01/full/ 
  3. https://www.fortuneindia.com/long-reads/regional-retailers-come-of-age/113570 
  4. https://pubsonline.informs.org/do/10.1287/orms.2023.01.01/full/ 
  5. https://www.fortuneindia.com/long-reads/regional-retailers-come-of-age/113570 
  6. https://www.mckinsey.com/~/media/mckinsey/industries/retail/our%20insights/the%20state%20of%20grocery%20retail%20in%20india/the-state-of-grocery-retail-in-india.pdf 
  7. https://sajm-amdisa.org/sajm_journals/SAJM_18.1.pdf#page=118 
  8. https://www.sciencedirect.com/science/article/abs/pii/S0022435911000388 
  9. https://www.mckinsey.com/featured-insights/future-of-asia/the-shifting-consumer-packaged-goods-market-in-a-diversifying-asia 
  10. https://doi.org/10.1016/j.jretai.2014.08.005 
  11. https://doi.org/10.1016/j.jretai.2014.08.005 
  12. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1470-6431.2007.00629.x 
  13. https://www.entrepreneur.com/en-in/news-and-trends/the-relevance-of-mrp-in-modern-india/360783

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