Booz&co

Booz & Company Mumbai, February 2013 Executive Summary

Successful Innovations in Indian Retail –
How smart ideas translate into profitable
business

Raghav Gupta
Principal, Consumer and Retail Practice

Booz & Company Prepared for Retail Leadership Summit - 2013

The Indian Retail industry is today at cross-roads – many
challenges threaten the true potential for “profitable growth”
Projected Organized Retail in India Key Challenges faced by Indian Retailers
US$ Bn % responses, RAI – Booz Retailers Survey 2013¹

1) RAI-Booz survey was conducted in January 2013; total no. of respondents was 410
Source: IBEF, Centrum Research, Literature Survey, RAI – Booz Retailers Survey, Booz & Company analysis

1

Evolution of Organized Retail in India has been led by Apparel &
Footwear, unlike other markets where Food & Grocery leads

India USA China
Retail in India, 2012 ~ $ 500 Bn Retail in USA, 2012 ~ $ 4,500 Bn Retail in China, 2012 ~ $ 1,200 Bn
% Share of Org. Retail : 8% % Share of Org. Retail : 85% % Share of Org. Retail : 20%
Organized Retail Share (%)

Organized Retail Share (%)
100 100 100
80 Organized Retail Share (%) 80 80
60 60 60
40 40 40
20 20 20
0 0 0
0 20 40 60 80 100 0 20 40 60 80 100 0 20 40 60 80 100
Years Since Inception Years Since Inception Years Since Inception

Super/Hypermarkets Home Pharmacy & Wellness
Apparel Jewellery & Watches Books, Music & Entertainment
Note: Apparel includes departmental stores; list of retail categories is not exhaustive
Source: Secondary research, Euromonitor, IRF, Booz & Company analysis Consumer Electronics Footwear

2

A joint RAI-Booz study was conducted to identify key innovations
in Indian retail; and develop learnings & implications
Approach and Criteria for Evaluation

Focus was on ‘Adapt’
and ‘New’ innovations
and not on ‘Adopt’
Identified
Innovations
A
B Consumer Key
Impact Relevance Learnings
C
D
E
F
..
Economic Implications
Impact Scalability
40 for Retailers
“ideas”

Source: Booz & Company analysis

3

There are four key lessons that these innovators offer us, bringing
forth fresh perspectives on innovation in Indian Retail

Key Lessons that India’s Retail Innovations Offer

A simple, well executed idea can lead to successful innovation; large
1 investments are not always necessary


4

1 2 3 4

Tanishq launched the ‘Karat Meter’ and provided a premium retail
experience, thereby changing the paradigm in jewellery retail
Trust Building Innovation – Other Key Success Factors Implications for Tanishq &
The ‘Karat Meter’ the Jewellery Industry

Launch of Tanishq with
1995 mainly diamond jewellery
Retail Experience of Titan
Tanishq has grown revenues to
over Rs. 7000 Crores
Launch of ‘Karat Meter’
with a wider gold jewellery
collection
Success of Tanishq led to
Tata Group’s Image growth of organized retail in
1999 ‘Karat Meter’
jewellery

Higher transparency in quality
Focus on Continuous
led to gold jewellery carratage
Improvement
Market leader with 150 moving from14 to 20 karats
2012 stores across India

Source: ICMR India, Primary interviews, Booz & Company analysis

5

1 2 3 4

Chitale Bandhu’s innovation to reduce billing time is an example
of how even smaller retailers implement simple innovations
Innovation in Billing Process – Usage of RFID Technology

Opportunity Impact
Customer uses
Issues faced by RFID card at Customer Impact
12345 each counter
mithai shops Reduced billing
RFID Card Counter I Counter II
Crowded and high given at time
waiting times entrance
Customer
Customer gives RFID
Poor service quality at billing counter satisfaction
Customer and bill is generated Customer curiosity
dissatisfaction Retailer Impact
Billing is a major Increased footfall
Significant
bottleneck
reduction in time Reduced
Manual account of Customer Billing Counter turnaround time
all purchases
Low manpower
Increased need for
Finding the right technology Lower training
manpower Enablers
Willingness to try out new technology

Source: Primary interviews, Booz & Company analysis

6




Successful innovations need not only be ‘new & path breaking ideas’
2 but can be an adopted model tailored to meet specific market needs


7

1 2 3 4

GreenDust adapted an innovation in reverse logistics to offer high
quality branded refurbished products at 25-30% lower cost
GreenDust’s Innovation on Reverse Logistics
Returned Product
Consumer Refurbished Product

OEM
Opportunity Value Added Impact
Retailer
Center
4-6% stock returns Products at 25-30%
from CDIT OEMs discount with warranty
Online Sales
Low priority area for 50% sales from Tier
OEMs or Retailers 2/3 cities
Customer
Stock currently sold to Warehouse 60% repeat buyers
scrap yard dealers Achieved 9x growth in
Franchisee
Opportunity valued at last 2 years, revenues
~ INR 75,000 Cr. OEM sells to GreenDust through Revenue Sharing and of over Rs. 500 Cr
Outright Purchase Models at 40%-80% discounts
Equal sales volumes through franchisee stores and online store

Extensive knowledge of global reverse logistics
Enablers Propriety reverse logistics technology platform
Reduced franchisee set up cost & pan-India service
Source: Retailer Interviews; Online Research, Booz & Company analysis

8





Supply-side innovations can lead to as high a consumer impact as
3 Demand-side innovations


9

1 2 3 4

Fabindia’s supplier co-ownership model, though focused on back-
end, enabled growth in rural, ethnic & handloom products
Fabindia’s Innovation: Co-ownership Model Impact on Industry & Fabindia
Fab India Product Selection Committee
Creation of
Ethnic
Segment
Business Community
Owned Designers
Experts Company
(COC)
Premium
Retail
Experience
Artisans
Artisans Craftsmen
Craftsmen Weavers
Weavers
Artisans Craftsmen Weavers

• Enables financial independence of artisans
Strong
• 80,000 artisans are part of 17 COCs Brand
• Fabindia limited its stake to 49% in COC with Loyalty
suppliers holding at least 26%* 0% DISCOUNT
Employed by Fabindia Self-employed
*Fabindia is moving to a model where suppliers will be given ownership in the Fabindia company rather than COCs
Source: Secondary Research, Company sources, Booz & Company analysis

10

1 2 3 4

Kovai Pazhamudir has achieved success in the challenging ‘fresh’
segment through strong sourcing & lean store operations
Innovation in Sourcing and Store Operations

Opportunity Impact
+
Profitability in Fruits & Preferred destination
Vegetables a challenge Local Mandi Exotic F&V Collection Centre Kovai Stores
for consumers
for organized retailers: 38+ stores and
Preference for local Sourcing: Local/ regional Mandis and import exotic varieties growing*
sellers Distribution: From collection centre (Coimbatore) to Kovai High average
Organized Retail stores all over Tamil Nadu monthly sales
stores used mainly Higher gross margin
as top-up Store Operations: Stand alone stores of avg. size 2500 sq. ft.
of ~20% compared to
Loss leader at most – Staff lives at store site in dormitories other players (11-
major retailers but 15%)
Product: Wide assortment of 125 SKUs of quality F&V
drives footfalls
– Serve fresh fruit chat/ juice to utilize inventory, reduce wastage

Clear understanding of target consumers
Capabilities &
Enablers Focus on F&V segment, strong sourcing and lean
retail
*A total of 80+ stores can be found in Tamil Nadu modeled on the Kovai Pazhamudir Nilayam format managed by different groups
Source: Primary interviews, Booz & Company analysis

11





Supply-side innovations can lead to as high a consumer impact as
3 Demand-side innovations

Innovations need to evolve and keep themselves relevant to
4 continuously deliver value; it is not a ‘one-time’ play

Source: Booz & Company Analysis

12

1 2 3 4

Big Bazaar’s success can be attributed to continuous innovation
from the original bazaar format to the current evolved formats
Consumer Perception in Original Big Bazaar Format Evolution of Formats
the mid-90’s
Big Bazaar Family Center
Smaller
Aisles

Air I am paying for
conditioning their fancy Big Bazaar Express
means it is lights and Loose
expensive salespeople Products

Original Big Bazaar Store
Products
in Bins

These English Food Bazaar
It is a big speaking
store; it must Granite
salespeople
be exclusive are intimidating Floors

Fashion at Big Bazaar
Deals

Source: Primary Interviews, Booz & Company analysis

13

The following takeaways emerge from the 40 innovation cases

40 Impactful Innovations in Indian Retail
Incremental Substantial Break-Through
Innovation Innovation Innovation
Total Key Takeaways
Sectors
Apparel &
Dept. Store
10 Clear need to innovate, given
Food &
various challenges for retailers and
Grocery
7 strong co-relation between
Food
6
innovation and business success
Services
Jewellery & Apparel leads in innovation; Food &
Watches
4
Grocery and Home are under
Pharmacy &
Wellness
3 indexed
Electronics &
3 High number of cases focused on
Durables
marketing / promotions; fewer
Online
Retailing 3 examples of business model,
Books & product or supply chain innovation
Music 1
Rich discussions on “what was the
Footwear 1
innovation”, however “how the
Others (Home+
2 innovation was delivered” not as
Rural)
clearly understood
Total 11 22 7
LOW Level of Disruptiveness HIGH

14

Booz & Company Mumbai, February 2013 Executive Summary

Successful Innovations in Indian Retail –
How smart ideas translate into profitable
business

Marco Kesteloo
Senior Partner, Head – Global Retail Practice


The retail sector has seen many innovations across the globe, both
in value chain and commercial functions
Food Retail Innovations
Europe, 1945 – 2010

Supermarket
Premium PL
Online shopping Non-food only store
Budget PL Self scanning Online non-food sales
Self service store
Compact Hypermarket
Barcode scanning
Express stores

1960 1980 1994 1996 1998 2000 2002 2004 2006 2008

Bubble size represent stretch Bubble color represent
of innovation scope of innovation
Substantial Value Chain
Source: Company websites
Incremental Commercial

16

Such innovations have had significant business impact; with new
players often over taking the incumbents
Specialty Retailer vs. Fast Fashion Player Electronics Retailer vs. Online Player
Gross Margin Productivity: Sales per sq. feet Cost to Sell: Typical Flat Screen TV

Gap Zara $/UNIT
Amazon Best Buy
958
960 Returns
Zara’s margin 5
13
56% greater Card Fees
940
than Gap
25 Above Store
~15% Price advantage 920

898
$ (Indexed)

$ (Indexed)

900
17
880 77 Labor
20
860
25
20% cost disadvantage 840
10
820 14
48 Real Estate
800 23
2 Shipping
790 790
Laid down cost at DC
Sales / Sq. Foot Sales / Sq. Foot 0

COGS Margin
17

Booz & Co’s research shows that innovation & success are co-
related; however higher spend does not ensure innovation success
Example analysis showing link Example analysis showing link
between innovation and success between R&D and financial performance

High
Indexed
Sales Growth
5 y = 0.032x + 1.2914
R² = 0.0114
Success

0
0 1 2 3 4 5 6 7

-5 Indexed R&D / Sales
High

Low
Low High
Innovation

More details on Booz & Company’s Innovation Studies can be found at: http://www.booz.com/global/home/what_we_think/global-innovation-1000
Source: Booz & Company Global Innovation 1000, 2006

18

The process & sources for idea generation are partly determined by
the strategic choice of being a “first mover” or “follower”

First Mover Idea Generation Scope Follower Idea Generation Scope

Research
-ers
Compe Other Compe
Employees
-titors Markets -titors
Customers Etc.

Examples Examples
India examples: FabIndia, Big Bazaar India examples: GreenDust, COD
Intl examples: IKEA, Amazon, Zara Intl examples: Hypermarket (various)


19

Our research and discussions with Indian retailers have
highlighted 5 key “hows” to make innovation successful

“WHAT” “HOW”
“Execute well on small ideas 1 Leadership and Resourcing
•
while evaluating the big bets”
“An Adapt Model works as well as 2 Culture
•
new and path breaking ideas”
3 Capabilities
•
“Supply focused efforts can also
deliver consumer and business 4 Direct Consumer Insights
•
impact”
“Continuous and evolving 5 Process Discipline
•
innovation is key to sustain value”


20

1Leadership and Resourcing: Innovation needs to be a C-Level
agenda to ensure adequate sponsorship and resourcing

Innovation Matrix Leadership and Resourcing
Visible commitment and explicit support from
High senior leadership
Break Adequate and tailored resourcing and also
away capability plays a key role in driving success:
Innovation
– Breakaway Innovations: away from the
Level of “green” operation
Disruptiveness Substantial – Incremental Innovations: close to
Innovation operationals for speed & applicability

Examples:
Incremental
Innovation – Big Bazaar: Visionary leadership of Mr.
Low Biyani to push the boundaries, reinvent the
High
wheel and take risks
Low
– On-line food groceries – addressing last
Predictability of Outcome
mile economics; Pick-up-Point

Source: Oxford Institute of Retail Management, Booz & Company

21

2 Culture: Aligning organization culture and innovation strategy
can help deliver superior results
Gross Profit (5 year CAGRA) by
Cultural Alignment
50 49 Cultural Attributes
Strong identification with customers
45 44 45 Culture of collaboration across geography /
42 functions
Openness to ideas from external sources
40
Culture fostering experimenting and risk taking

35
India example: Big Bazaar
o Ceremony to appoint ‘store kartas’
o Mrs. Iyer Audit
International example: pursuit of low cost
30
Low Alignment Moderate Alignment High Alignment
in e.g. German discount
Cultural Alignment to Innovation

(A) Normalized 5 year CAGR for gross profit and enterprise value were considered for analysis
Source: strategy + business 2011: Why Culture is Key; Booz & Company analysis

22

3 Capabilities: Retailers will have to identify / build capabilities
that enable them to deliver on innovation aspirations
Capability Set for Example UK Retailers
Planning,
Supplier Demand Planning Operations and
Consumer & Merchandising Category
Development and & Inventory In-store Customer Service
Market Insights & Marketing Management
Sourcing Management Execution
Strategy

Customer Analytics Operational Excellence

Format Differentiation

Merchandising Excellence Service Excellence

Private Label Execution


23

4 Direct Consumer Interaction: Listening to customers helps
develop innovations that have maximum impact
Sources of Innovation (1)

Recoded Mean
Examples
0% 10% 20% 30% 40% 50%
India Example: Big Bazaar
Direct Customer
42%
– Understanding consumer trends via.
Observation
kitchen audits, market visits, etc.
Traditional
Market Research
31% – Mapping consumer usage patterns to
tailor product offering e.g. bundled tea
Feedback from
22% time offering
Sales & Customer Support
– Product assortment based on local
Idea Work-Out
19% preferences e.g. Private label ‘Ektaa’
Sessions

Technology
Road Mapping
18% International example: Self service
All other invented in IKEA in ’70s
categories 15%
(<15% each)

1) Based on survey responses from ~ 700 global companies in the 2007 Booz & Company Global Innovation Study
Source: 2007 Booz & Company Global 1000 Innovation Study: The Customer Connection Booz & Company analysis

24

5 Process Discipline: A structured and phased process that leads
from innovation strategy to implementation is essential

Defining tomorrow Winning tomorrow Winning today

Innovation Innovation
Innovation Integrate in
Portfolio Project
Strategy Operations
Management Execution

Align innovation directly Manage portfolio Achieve executing Implement innovation
with business vision – Idea generation excellence Manage incremental
– Speed: first mover / – Selection process Manage hand over to innovation
follower – Innovation timing operations
– Scope: commercial
innovation / value
chain innovation
– Stretch: incremental /
radical innovation

Results in a strong Results in flawless
Results in a clear Results in
and balanced execution and
innovation strategy capturing value
portfolio of projects handover


25

Finally, we believe retailers in India should consider the following
key questions related to innovation in their business
Key Questions on Innovation for Retailers in India

1 What role can innovation play in driving success and creating value in my
business?

2 What models for innovation should my business consider?
Adopt, Adapt or New to the world
4 themes from the RAI – Booz study
First Mover Idea Generation or Follower Idea Generation

3 What is the right balance between a formal and informal process (the “hows”)
for my business?

4 What investments would be required? What capabilities to leverage / build?
Internal and / or external expertise?


26

Marco Kesteloo Booz & Company RAGHAV GUPTA Booz & Company (India) Pvt. Ltd.
Apollolaan 151 11th Floor, Building 9B
Vice President Principal
1077 AR Amsterdam DLF Cyber City
The Netherlands Gurgaon 122 002
Tel.: +31 20 504 1900 Haryana, India
Fax: +31 20 504 1990 Tel: +91 (124) 499 8700
Mobile: +31-20-504-1942 Fax: +91 (124) 499 8701
marco.kesteloo@booz.com Mobile: +91 99585 22993
raghav.gupta@booz.com

27

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