The Case for "Compact Hypermarkets" in India

Organized retail in a smaller format

Urban India has been a difficult market for organized retailers to tap into. Despite years of trying, modern retail represents just 7 percent of India's roughly $435 billion market. Retailers are still trying to figure out how "deep" their hypermarkets can go into dense cities, and the neighborhood stores just don't have enough products or variety to draw in customers. As urban India remains a coveted market for organized retailers, the "compact hypermarket" could be the answer.

The compact hypermarket is a cross between the large hypermarkets, the small neighborhood stores that many thought were the wave of the future (but now deemed a failure by many), and the local merchants, called kiranas, that continue to dominate the more populated urban areas. A.T. Kearney analysis suggests that organized retailers that use smaller formats can tap into India's significant urban retail opportunities. Compact hypermarkets are just the right size: They are 4,000- to 6,000-square-foot stores, they offer the amenities of hypermarkets but are smaller and easier to navigate, and they can compete head-to-head with the kiranas.

Compact Hypermarkets: Smaller Gains a Foothold

The neighborhood store was supposed to be modern retail's answer to compete with kiranas in urban Indian cities. But many are struggling, evident in the rash of closures over the past three years. Why will compact hypermarkets succeed where neighborhood stores failed?

Proximity: Urban customers want a consistent supply of goods close to home. Neighborhood stores cannot offer the same consistent supply of goods—from food to kitchen and household items—that hypermarkets can. While people in major cities want the advantages of modern retail, research finds that they are rarely willing to travel more than 15 to 20 minutes from home to shop. Proximity will always be a major differentiator. Hypermarkets cannot penetrate every urban area profitably, and neighborhood stores do not carry enough goods to satisfy shoppers, so a smaller hypermarket—the compact hypermarket—is the obvious answer.

One-stop shops bring higher margins. Being the single provider of all basic home consumption goods allows retailers to better meet their customers' needs—and generate higher gross margins. This means expanding beyond food to categories such as apparel, kitchen and household items. The neighborhood store format is not large enough to do this, but the compact hypermarket is.

Improving on Neighborhood Stores

How can compact hypermarkets tap the potential of smaller formats without repeating the missteps of neighborhood stores?

Create lasting customer relationships. Many believed that organized neighborhood stores would market themselves—and this was initially true, given the excitement of new stores. Once the novelty wore off, however, not enough had been done in either pricing or developing private brands to attract and retain customers. In retail—and especially grocery—engaging customers for the long term requires a daily, weekly and monthly strategy that emphasizes the store's unique value, be it price, merchandise, service or location. One way to differentiate is home delivery service, which could neutralize local grocers' advantages while engaging regular customers.

Customize promotions. Different stores and areas have different needs, and a one-size-fits-all promotional strategy doesn't work. Some stores may struggle to convert store visits to purchases, while others may find that customers are buying but not spending very much. In-store promotions should reflect these individual store-level needs.

Manage overhead costs. Overhead costs are a problem for organized neighborhood stores that do not generate the revenues that hypermarkets do and are more expensive to operate than the one-man kiranas. Compact hypermarkets will run into the same problems unless each layer of management is reassessed and only the processes and systems that make the organization leaner are selected. Also, concentrating operations within a city will help absorb some of the costs of smaller formats.

Get the merchandising right. Merchandising remains a challenge in organized retail—how can you capture local and regional flavors while ensuring product availability? When it comes to food, catering to local tastes is vital; shoppers will not return if their coveted regional goods are not in stock. Some areas may require a more nuanced approach to addressing regional tastes. For example, instead of competing head-on against a popular local grocer that serves a certain meat or vegetable, organized retailers could stand out in complementary food categories, including staples and processed foods.

A Comeback Story?

While the neighborhood format hasn't been the answer, modern retailers may yet find success in smaller formats. In the middle ground between small kiranas and large hypermarkets, the compact hypermarket combines the benefits of both to create a new business model and forge a new path for neighborhood shopping.

Authors

Debashish Mukherjee is a partner in the consumer industries and retail practice. He is based in the New Delhi office.

Hemant Kalbag is a partner and head of the firm's consumer industries and retail practice in Asia. He is based in the Mumbai office.

Copyright 2011, A.T. Kearney, Inc. All rights reserved.