In October last year, the metal shutters came down on the Cuffe Parade branch of Subhiksha Supemarkets. The chain, one of India's supermarket pioneers, had taken premises on the edge of a shanty town in this up-market district, home to billionaires like Anil Ambani, to try and cut rents. But it was still unable to make a profit. "When they started, they had very high sales," Surendra Nair, who runs a scrap paper business next door said. "They were giving 10 per cent discounts, and many stores in Cuffe Parade were complaining because they had very less sales. Then slowly, slowly, sales became less, and it became loss-making."
For Vinod Gala and Girish Veera, who run Mahavir Provisions and Ketan Stores, two small grocery shops in Colaba market, the nearest shopping district, this is a cause for no small amount of satisfaction. From the moment Subhiksha opened, customers came into their shops carrying receipts from Subhiksha and demanding the same prices. Subhiksha was selling lentils at just 48 Rupees per kilo, Gala said, whereas he could only make a decent margin at 56 Rupees a kilo. "They sell one thing cheap, and the customers buys other things more expensive," he shrugged.
Subhiksha was only the start. At the time, Reliance Industries, India's largest company, was planning to open one of its Reliance Fresh chain just across the street. Shops like Mahavir and Ketan looked certain to be undercut by a competitors with huge efficiencies of scale, and the ability to squeeze much better prices out of suppliers. Subhiksha's failure was the first concrete sign that this was unlikely to happen. "The big companies can't eat us up because we are unprofessional," said Gala. "We are not unprofessional! I started work in this shop in 1972 when I was 11 years old."
When India's biggest business groups launched into food retailing in 2006 and 2007, the 'kirana stores', the local name for the grocery shops who make up 95% of India's retail market were dismissed as 'unorganised retail' or 'ma and pa stores', the implication being that their traditional approach would not be able to match the business strategists behind Reliance Industry's Reliance Fresh, Aditya Birla Group's More, and Godrej's Spencer's supermarkets.
The companies expected to rapidly triple their share of a market that McKinsey consultancy expects to be worth $450bn by 2015. Corporate retailers' opponents, meanwhile, issued dire predictions that millions of livelihoods would be lost as modern retail advanced. But the close of Subhiksha in Cuffe Parade was a sign of deeper problems, both at Subhiksha and in the wider industry. On January 31 this year, Subhiksha managing director R. Subramanian confessed that the group was mired in financial crisis.
He has since closed all 1,600 of Subhiksha's stores, and is now casting around for a way to rescue his company. "It is sudden collapse," he admitted in a long press statement. Subhiksha is the first major casualty of corporate India's attempt to do battle kirana stores. Kirana stores have reacted unexpectedly fast. "The kirana-wallahs are learning the terms of the trade very fast,"said an analyst at a European investment bank. "Maybe the big retailers did not imagine them to change this quickly."
Veera and Gala are both impressively well-informed. They know the whereabouts and layout of every modern supermarket in South Mumbai, and are up-to-date on the major financial news about their owners. When Subhiksha opened, Veera visited it to understand the threat. ""Customers kept coming to me and comparing prices," he says. "So I went to Subhiksha, so I can explain their strategy. Often when they have discounts, it is because the products are expiring."
Gala changed the layout of Mahavir Provisions. "I've opened up my shop and made it so that consumers can come and browse the aisles and buy things that they choose to buy," he says. Before, customers would simply hand over a shopping list to the an attendant at the front. There's not much Subhiksha would have supplied that they can't get hold of. Anuradha Kalhan, an economics professor at Jai Hind College in Mumbai, says: "Kirana stores have everything that you need, and some of them are quite enterprising: if you keep asking for something they get it for you."
The shelves at Ketan and Mahavir are packed with Quaker Oats, English mustard, and American snacks, all goods requested by the cosmopolitan local population. And, unlike the supermarkets, they give consumers credit and will deliver something as small as a toothbrush directly to their doors. Corporate retailers have also been their own undoing. The speed of their expansion left them with crippling cost structures. "It's not cheap to do retail in India," says the analyst. "The associated costs in terms of rent, in terms of salaries, in terms of the interest you pay, is very high. These kirana stores are actually running on a very low cost they've been operating these stores for the decades, so they don't have rent, and they're run by families, so no staff costs."
When modern retailers announced their expansion plans three years ago, they said they would replace the five to six middlemen between the farmer and the consumer with efficient supply chains, reducing the estimated 30 per cent of fruit and vegetables that perish on the way to the market in India. But they have failed. "No one has succeeded in building an efficient supply chain yet," says a strategy manager at one of India's big corporate retailers. "If they had we would be able to see it in their offerings: they would be offering cheaper and better goods."
Today, most supermarket chains buy from the same traditional supply network they sought to replace. And if they have succeeded in building their own, they are not managing to cut wastage levels or costs much below existing levels. "If you look at the levels of 'dump', which is what is wasted, they're not doing much better," says the strategy manager. Reliance Retail, the venture which had the highest ambitions for its supply-chain was last August forced to seek help from Wincanton, the UK supply chain specialist. But Wincanton backed out in September.
Ironically, reliance on the traditional supply chain is now proving an advantage. Shops at the end of a corporate retail chain have to accept whatever goods are delivered, whereas small shopkeepers only buy those fruit and vegetables that make it to wholesale markets in good shape. "Customers have found out that their stock isn't fresh," Gala says with satisfaction. And as no retailer has managed to establish monitoring systems such as companies like Tesco have, management is rarely in the know about the state of their wares. "The problem with the big stores is they don't have their proprietor sitting inside them, the way I do," says Gala. "They just have employees."
The Subshiksha store on Cuffe Parade suffered heavily from pilfering from staff. Surendra Nair, the scrap paper merchant by Subhiksha, says that was the immediate reason for its closure: "I spoke to the supervisor, who was my friend, and he said staff remove the goods from the store and put them in their house." Each of the many middlemen in the traditional retail chain has a long-established personal relationship with the next. Corporate retail has done away with this, leaving it prey to dishonest employees and contractors all along the route.
So far only Subhiksha has collapsed. But others are scaling back. Reliance Retail originally planned to roll out 3000 Reliance Fresh supermarkets by 2011. Today, with less than 800, it is looking at closing up to 30 of its least profitable shops. Aditya Birla has already shut around 50 unprofitable stores. Spencer's said in December it would close 56 stores and if it does not start making operating profits by the end of this year, its owner Godrej plans to leave the retail business entirely.
Kishore Biyani, whose Future Group pioneered modern retail in India, put it nicely in an interview at the start of the year: "Kiranas have clearly won the first round. The story of 'modern retail versus kirana' is over."