Madras, IndiaAugust 1996

In May, we opened our first FoodWorld Supermarket in Madras. We were convinced that such a modern concept would work in India, but the early results have exceeded our expectations. We will be opening two more this month and have plans for over 100 within the next 10 years. It is a terrific opportunity!

I am confident overall, but unsettled about a number of issues. After all, this will be India's first national chain of supermarkets. Most people still shop at all the small mom-and-pop stores which almost completely dominate Indian food retailing. Do we have the formula right? Should we adjust the merchandise mix or the marketing plan? Is the store really large enough to generate excitement, and if not, will suitable real estate be available? Will we be prepared to manage such a large chain and adapt to the different market conditions in different parts of India? Will our people be qualified to manage and operate all these stores?

I would like to think that we have all of this resolved. You see, we have no direct experience in food retailing and no significant modern retailing expertise exists in India. We are inventing things as we go along. Things have to be different here, we can't just copy what is done in other parts of the world.

Pradipta K. MohapatraPresident, Retail Group, RPG Enterprises

RPG Enterprises and the Spencers Acquisition

RPG Enterprises (RPG) was the fourth largest conglomerate (called business house in India) in India, with sales of over 45 billion rupees (U.S. $1.3 billion) in 1995. RPG business interests spanned a variety of industries including tires, power/transmission, agribusiness, telecommunications, financial services, and, with the acquisition of Spencers & Co. in 1989, retailing. It boasted partnerships with a number of international companies, including 16 of the Fortune 500 companies.

Spencers & Co. had been founded in 1865 as a small store in Madras offering imported specialty items to the large British expatriate and military population. By 1897, it had grown to be the largest store in India, a 65,000-square-foot enclosed collection of specialty stores. In 1981, this facility was destroyed by fire. Spencers had been at its peak in 1940, when it had 50 stores in virtually all major cities throughout India. Still it offered only imports, and had virtually no Indian customers. When India gained independence from the British in 1947, Spencers' executives didn't believe that the demand for imports would erode. It plummeted, however, and in the early 1970s, the deteriorating chain was sold to an entrepreneur who continued to offer food, clothing, cosmetics and other high-priced specialty items to the expatriate community.

Spencers' fortunes continued to slide. By 1989, it was only a shell of its former self. Only nine stores remained in operation in several of the larger cities in India, including a 20,000-square-foot store in Madras and a 10,000-square-foot store in Bangalore, which were the largest stores of any kind in each city. (Refer to Exhibit 1, Map of India.) The other stores only had 2,000 to 3,000 square feet, but had excellent central locations. Spencers' profits were fleeting and it was offered for sale.

RPG purchased Spencers that year, and established it as a separate division with Pradipta K. Mohapatra, a seasoned RPG executive, at its helm. The decision to acquire this retail company was largely justified by its undervalued real estate portfolio, a distribution infrastructure (which in fact was non-existent), and a profitable travel agency specializing in the distribution of airline tickets.

A number of Spencers stand-alone divisions were obvious losers and were quickly slated for closing: furniture manufacturing, restaurants, manufacturing of air conditioners and other small electrical appliances, pharmaceutical production, and repair shops. The travel agency was clearly a winner and was kept. RPG executives were, however, initially undecided about whether to close down the retail operations altogether.

The "Spencers" brand name was well known throughout India as synonymous with quality, but unfortunately also with high prices. Indeed, there was a popular expression in India: "You don't have to pay the Spencers' price." In addition, RPG had no experience in retailing. They couldn't rely on existing expertise within Spencers, since its employees were poorly qualified at every level and grossly underpaid, even by Indian standards. The general manager of the large Madras store, for example, was only paid the equivalent of about $70 per month. It appeared that it would be most

prudent and profitable to close down the stores and simply rent the space.

Yet Spencers' nine stores still remained the largest chain in India of any kind of retail operation, and it seemed wasteful simply to throw away whatever potential there might be for improvement. The decision was ultimately made to refit one store to test its potential. If the experiment failed, they would close the retail operations.

The store in Bangalore, therefore, was modernized in 1991, retaining its profile as a department store offering hardware, food, kitchen appliances and clothing. When it reopened, sales exploded to four times the previous levels and the store broke even in the first month.

FoodWorld

The following year, interest in retailing among RPG executives derived from the initial success of Spencers' experiment was piqued when a large international consulting firm was retained to assist with the strategic growth planning for RPG. Retailing had been flagged as one of the target industries to consider as part of the RPG engine for growth, along with telecommunications and financial services. It was apparent that an emerging middle class in India might provide a catalyst for bringing modern retailing to India, where retailing had remained virtually unchanged for generations. The consultants, however, stopped short of recommending what kind of retailing to enter, suggesting instead that RPG executives themselves should explore those formats which might be the best match for RPG and mesh with the future growth of India. Several broad objectives were drafted:

Become a pioneer in an organized, large-scale, world-standard retailing operation in India.

Become the largest retail chain in India.

Be willing to make substantial investments to establish a national presence.

Fine-tuning the Spencers format appeared to be the most obvious next step in preparation for expansion, especially since Spencers executives were unfamiliar with alternative formats.

After a careful study of retailing formats in relation to the opportunities in India, RPG executives then narrowed their choice to clothing or supermarkets, wanting to choose the least risky option. While clothing had high growth prospects and margins, it would require, they surmised, expertise in design, branding, and managing independent manufacturers. In addition, a potential threat appeared to loom from current and future competition, making it more difficult to achieve a meaningful scale of operations. Supermarkets, however, offered the same growth prospects and a more moderate investment. While initial margins and entry levels for other pioneering companies might be low, the option of starting a chain of supermarkets seemed to offer the most potential.

A consumer study was then commissioned to assess consumer attitudes toward current retail options and to measure responses in particular to proposed new formats. Nine focus groups were formed in two major cities and 2,110 households were interviewed in depth in six cities. The results were summarized as follows:

Consumers regarded shopping as a chore, although few consumers were familiar with any alternatives to traditional store formats.

Convenience was important since daily shopping and sensitivity to food freshness remained an integral part of shopping habits. Few families had cars with which to carry large quantities of purchases.

There was a growing dissatisfaction with the range of products available. Traditional stores did not have the space to carry a selection of different brands of any item. Increasing television penetration among the Indian population and brand advertising were whetting consumer appetites for choice as international branded goods were now available for the first time in many categories.

Quality was important, but there was a reluctance to pay a price premium.

Added services such as home delivery and credit were desirable, but were seldom actually used.

Trust in the retailer, especially with regard to quality of food and replacement of defective goods, was important.

Self-service was seen as a distinct advantage. An exploding number of new brands were being introduced and promoted (often by international consumer goods manufacturers), generating demand for hands-on comparison shopping.

Given the results of this survey, they decided to focus their efforts on developing a suitable format for a national supermarket chain. They realized, however, that they would have to face the challenge of a steep learning curve. They would need a partner well versed in food retailing technology because of the importance of using technology to achieve suitable operating efficiencies and low cost logistics. Without any experience in modern food retailing, they were reluctant to proceed without such a partner. For almost a year, they traveled abroad searching for a partner, finally negotiating an agreement with Dairy Farm, a Hong Kong-based retail giant with a great deal of experience in multinational operations, a focus on Asia, and familiarity with the operation of both supermarkets and drugstores. Most important, they felt there was a positive chemistry with Dairy Farm executives, who demonstrated the patience to invest in the long-term opportunity presented in India.

The supermarket they visualized would have about 4,500 square feet of selling space, a self-service format in an air-conditioned and pleasant ambience. It would have extensive assortments of groceries, personal care and cleaning products, kitchenware, and tableware. No meat would be offered, but a fresh produce stand would be leased to an independent vendor. It would also incorporate fast food and bakery sections. They would need to deliver outstanding service with an empowered and well-trained staff. They would have to achieve dominance in tightly focused geographical areas. Finally, they would have to achieve suitable margins by developing a scale to negotiate better prices from suppliers and by achieving the efficiencies of regional distribution centers for at least 15 to 20 stores.

India India was the second most populous country in the world, with a population approaching a billion people. It was also one of the densest, with over 724 people per square mile. In contrast, the United States, France, and Switzerland had densities of 26, 265, and 434 people per square mile, respectively. India's geographic diversity was only exceeded by the diversity of its people. From the towering Himalayas to the north to the densely populated alluvial plains in the middle to the plateaus of the south, more than 1,500 languages were spoken. Although Hindi and

English were the official languages, 14 other languages were recognized by the constitution. The population was overwhelmingly Hindu, but there were significant numbers of Muslims (more than 10 percent of the population), Christians, Buddhists, Sikhs, Jains, and Parsis.

While a stereotype of malnourished masses dominated the perception of many Western visitors, the economic diversity of the Indian population was much more complex. While reliable statistics are often unavailable, around 40 million Indians lived in relative luxury, enjoying annual household incomes of over 90,000 rupees, or about U.S. $2,500. The buying power of the rupee, however, was considerable. One study estimated that the purchasing power of this level of income was equivalent to about U.S. $600,000. Another 150 million people lived in households with incomes exceeding 30,000 rupees (U.S. $850 or U.S. $20,000 in local purchasing power). This newly emerging middle class was growing at over 5 percent per year and could afford many of the staples of a middle-class existence, including televisions, refrigerators, and motorcycles or mopeds. Automobiles, however, were generally only within reach of the top 1 percent of the population.

Growth of this middle class was, however, a relatively new phenomenon. Since India had gained independence in 1947, the economy had been centrally planned by a large government bureaucracy which controlled investment,

Rural India, comprising 80 percent of the population, was largely supported by primitive agriculture. Most of its hundreds of millions lived below the poverty level. Urban India, however, was heavily industrialized, although vast numbers of people lived in slum conditions, many of them rural refugees. The population was growing at 2 percent

per annum while becoming increasingly urban. The inflation adjusted gross domestic product of India had been growing an average of 5.1 percent over the previous 10 years.Population Distribution

Population (millions)       Number of Towns

More than 10 3

5-10 4

1-5 4

0.1-0.5 178

Less than 0.1 3,543

Villages 570,000

production, and competition without regard for market forces. A severe financial crisis in 1991, however, forced a liberalization of economic restrictions. This cleared the way for widespread entrepreneurialism, foreign investment, imports without restrictive tariffs, and unleashed market opportunities. Multinational companies like Coca-Cola rushed in to unleash their brands on the Indian marketplace. Indeed, the number of national brands available had exploded in the previous 10 years. The number of tea brands, for example, had grown from 31 to 148, and washing powders from 26 to 61. Since 1991, this foreign investment in India had created so much demand for office space and professional managers that Bombay had the most expensive real estate in the world. Managers' salaries had often grown tenfold within four years while inflation had fallen from over 16 percent in 1991 to under 7 percent in 1995.

Food Retailing in India

Retailing in urban India still remained about the same as it had for several generations. While several larger stores and specialty shops in each major city catered to the less price-sensitive appetites of the most wealthy segments of the population with wide selections of imported goods, virtually all other retailers were small independent, owner-managed shops. Most had no employees other than family members who might assist with cleaning or deliveries. As almost every store sold products at the MRP (the maximum allowed retail price printed by the manufacturers on every item and enforced by the government), very little price competition existed between formats, and since the cost of goods was very similar for all of the stores, gross margins were determined mostly by the mix of products offered.

The one main exception to this rule were the 400,000 fair-price shops, a government-sponsored distribution system which sold medium-quality staple products (mostly rice, wheat, cooking oil, and sugar) at prices generally lower than market. Seventy-eight percent of these outlets were in rural areas, constituting an essential an

d one of the only elements of the government's safety net for the poor. In urban areas, these shops accounted for only 5 percent of total retail food sales.

The number of stores outside the fair-price shops was huge. Estimates varied, but one 1993 survey by Euromonitor suggested that there were over 3.54 million retail outlets in India. This did not, however, include the vast number of vendors and street markets who

did not generally report to the government and were not counted in the census. Unofficial estimates indicated that there might be as many as 5 to 8 million such retailers in the informal economy.

Grocery Stores

Dry groceries were usually purchased by the housewife from small neighborhood grocery stores with an average size of about 250 square feet. Her loyalty was strong, based on convenience and added services such as credit and free home delivery. These grocers sold primarily unbranded staples which were individually weighed and packed. Staples such as rice would frequently be purchased on a monthly basis, coinciding with monthly paydays. Typically, these retailers would also carry a small range of branded cleaning and personal care products. These were often offered in "sachets," or single-use packages. Space constraints often limited the selection to no more than one or two brands. Such stores lined the more heavily traveled streets, often simply counters which opened onto the sidewalk behind which the owner/manager would take orders.

The gross margins of these small grocers ranged between only about 7 to 10 percent of sales, but operating costs were similarly low. Property costs only represented 1 to 2 percent of sales, while labor costs were generally provided by the store owner and his family, working 15 hours a day, seven days a week. Profits before tax, therefore, ranged from 4 to 6 percent of sales. Since most of sales were not formally logged, virtually none of these small grocers paid any income tax. Working capital requirements represented only about two weeks of sales.

Typical Gross Margins by Product Category

Product Category Gross Margin

Staples 3%

Other food products 15%

Furniture 25%

General mechandise and hardware 18%

Number of Retail Outlets in India

Grocery Stores   1,575,000

General merchandise stores   531,000

Convenience stores/tobaconists   276,000

Chemists   212,000

Confectioners   141,000

Supermarkets   30

Other retail   805,000

General Merchants

General merchandise stores (400-600 square feet) were somewhat larger than the small grocery stores and stocked a wider range of cleaning and personal care products, as well as snack foods and confectionery. Groceries were generally prepackaged, but unbranded, and service was still from behind the counter. Services such as home delivery and credit were also available.

Gross margins were several percentage points higher than in the small grocery stores, mainly due to the product mix being skewed toward higher margin items. Since operating costs were somewhat higher as well, however, profits remained about the same.

Convenience Stores

These outlets were found on virtually every street corner and ranged in size from kiosks of 50 to 60 square feet to larger shops of 100 to 150 square feet. Usually run by a single owner from behind a counter, they offered such items as cigarettes, soft drinks, or betel leaf (a popular chewing snack containing tobacco and spices wrapped in a betel leaf). Some might also offer a very restricted range of household cleaning and personal care products as well as biscuits, confectionery, and some over-the-counter medicines.

Convenience stores were generally open every day of the week for 18 hours a day. Their prices were equivalent to those of other stores, and gross margins were a similar 7 to 10 percent of sales. Operating costs, however, were so low that profits were often 5 to 7 percent.

Vendors

Along every sidewalk in the cities were vendors who operated small booths or carts, or simply laid out their products on the ground. They would usually offer only a single product such as fresh coconut milk, bananas, or a very limited selection of clothing, household items, or fruits and vegetables.

Supermarkets

Supermarkets were a more recent phenomenon in India. By 1996, only a handful had appeared in the major cities. These 3,000- to 5,000-square-foot self-service stores stocked a wide range (by Indian standards) of groceries, snacks, processed foods, confectionery, cleaning and personal care products, and cosmetics. They generally stayed open from 9:30 am to 7:30 pm, six days a week. They stocked most national brands as well as a number of regional and specialty brands, as well as their own brands of prepackaged dry groceries. Many had small bakery sections, and some were experimenting with fresh produce and dairy products. Frozen foods were often available as well, although only a very limited selection was available in India. Most consumers were in the habit of buying fresh products daily from local stores and vendors. In addition, freezer space was expensive and limited in both stores and homes.

A typical supermarket carried about 6,000 stock-keeping units (SKUs). Most, however, had no item-based inventory control, still using a cash register at the point of sale and tracking sales only on a category or departmental basis. Supermarket margins were typically in the range of 14 percent to 16 percent. These higher margins were largely due to the ability to get somewhat better prices from suppliers on bulk purchases, and the ability to generate income from selling advertising space and special in-store promotions to manufacturers.

The cost structure of a supermarket was typically 3 percent for property and 3.5 percent for labor. Air conditioning and lighting rose utilities to 3.5 percent, interest costs were 1.5 percent, leaving 3 to 5 percent of sales as profits before tax.

There were virtually no multiunit supermarket chains. One German company, Nanz, in partnership with Marsh supermarkets of United States and Escorts, an Indian engineering firm, had set up a six-store chain in and near the Indian capital city of Delhi. However, this chain specialized in imported and other higher priced foods for the most well-to-do segment of the population. Most supermarkets, like their smaller counterparts, were owner managed.

Most of the supermarkets tried to cater to that portion of the population which sought a wider selection; could afford, had storage space for, and the means of transport for a larger shopping basket; and were not scared off by the typical

perception that large, brightly lit, air-conditioned supermarkets must be more expensive.

Distribution of Consumer Goods

Consumer goods were distributed through a multi-level distribution system. Hindustan Lever (HL), a subsidiary of Unilever, had the most extensive distribution system in India. Its structure, however, was typical of those used by other consumer packaged goods companies.

Forty-seven exclusive HL carrying and forwarding agents (CFAs) transported merchandise from the factory or warehouse to 3,500 redistribution "stockists" or distributors. While the CFAs did not take title to the product, they received a 2 to 21⁄2 percent margin and invoiced the stockists and received payment on behalf of the manufacturer.

The stockists had exclusive geographical territories and a sales force which called on both wholesalers and directly on larger retailers and retailers in urban areas. They offered credit to their customers and received margins in the range of 3 to 9 percent.

The wholesalers provided the final link to those rural and smaller retailers who could not purchase directly from the stockists. Sales to these retailers were cash only. Wholesalers carried a full range of products including brands competing directly with HL. Wholesalers received 2 to 3 percent margins out of that received by the stockists and distributed about 40 percent of the total volume of merchandise handled by the stockists. The remaining 60 percent of merchandise was sold directly to retailers by stockists.

The network was completed by whatever means was required to reach remote villages, including vans, motorized rickshaws, bicycles, bullock carts, and in some areas, boats. It was estimated that through this network, HL reached only about 64 percent of all villages and a total of about 3 million retailers. HL had a 400-person sales force to oversee this distribution network. Each salesperson made about 40 calls a day on distribution channel members.

Gross margins for retailers ranged from to 5 to 15 percent while the total cost of the distribution network represented between 10 and 20 percent of the final retail price. This cost was considerably lower than distribution costs in most Western countries.

Consumer Buying Behavior

The Wealthy

Those within the more wealthy segment of the population with household incomes greater than 90,000 rupees per year (U.S. $2,500) relied almost entirely on domestic help for their shopping. They would buy staples, vegetables and fresh foods from a number of loyal local small grocers and vendors, and other products from a variety of general merchants. This segment was concentrated in urban areas and comprised only about 4 percent of the population.

The Poor

The poorer segments of the Indian population tended to buy basic staples with the first part of their paychecks which typically were distributed on the first of each month. For most food stores, over 40 percent of total sales came within the first few days of each month. During the month, poor customers would buy whatever fresh foods and consumer goods they could afford daily, often filling in at the end of the month with some additional staples purchased on credit. Many consumer products such as soap, toothpaste, or over-the-counter drugs or cosmetics were bought only in single-use packages (sachets). Indeed, many of the smaller stores were festooned with linked packets of such items. Twenty-five percent of the population lived below the poverty level, while another 56 percent enjoyed only modest household incomes below 30,000 rupees (U.S. $850) per year.

The Middle Class

The middle class was comprised of those who enjoyed household incomes between 30,000 rupees (U.S. $850) and 90,000 rupees (U.S. $2,500) per year (about 15 percent of the population). This segment was divided in its purchasing habits. Many families on the upper end often would emulate the wealthy and use part-time domestic help to do their shopping, often necessitated by a growing pattern of households with two working parents. Many families at the lower

end of the middle class, however, would continue to do their own shopping, especially if they had recently emerged from the ranks of the poor and remained extremely cost conscious, frequenting their favorite local shops. They were, however, concerned about quality, often leaving a list with a trusted shopkeeper to pick out and deliver the best quality products. Almost always (92 percent in one survey), it was the wife who did all the shopping for a household.

In a survey conducted by Spencers, upper-middle-class consumers frequented the following outlets for their food needs:

Shopping Patterns

Outlet Type   Percent Who Named Outletas Most Frequently Used

Big grocery store   30

Supermarket   16

Small grocery store   11

General merchant   11

Wholesale dealer   8

Others/no fixed shop   24

The typical middle-class household spent 1,800 rupees per month for those categories of foods which FoodWorld anticipated offering. This did not include milk or fresh vegetables.

Monthly Household Expenditures

Food Category Rupees per Month Percent of Total Purchases

Cereals and breads 779 43.2%

Oils and oilseeds 244 13.6

Sugar 191 10.6

Meat, egg, and fish 189 10.5

Pulses (lentils) 106 5.9

Coffee, tea, spices 104 5.8

Tobacco 104 5.8

Beverages (including alcohol) 83 4.6

Total (Rs/month) 1,800 100.0%

 

The Decision to Start FoodWorld

PK Mohapatra and his staff ultimately made the decision "to offer the Indian housewife the freedom to choose from a wide range of products at a convenient location in a clean, bright, and functional ambiance without a price penalty." It was determined that households with incomes over 4,000 rupees per month would represent the target customers. Choosing locations; sourcing the right merchandise; developing a promotional plan; designing, building, and fixturing the stores; and attracting the best people to staff the stores and corporate office still, of course, remained a challenge.

The name FoodWorld was chosen after extensive research and deliberation because it reflected the breadth of the offering and because it translated well into every major regional language in India. Government regulations also necessitated posting the name in the local language at every location.

Based on their now expanded experience, Spencers' executives developed a pro forma financial plan for the FoodWorld concept. (Refer to Exhibit 2, Operating Assumptions; Exhibit 3, Stand-alone Store Model Pro Forma; and Exhibit 4, Supermarket Project Pro Forma—Five Year.)

Human Resources

Hiring suitably trained people to manage and staff each store offered perhaps the most formidable obstacle to implementing the FoodWorld concept.

Because most retail stores were owner operated and retailing as a career was considered to be at the bottom end of the social scale, graduates of prestigious universities did not want to work in retailing. Therefore, few qualified candidates for management positions could be found. Some could perhaps be attracted from other service industries to run one or two stores, but not enough to accommodate the planned growth. Recruiting and retaining professionally trained managers was and would continue to be a major challenge facing the firm.

Attracting and training enough front-line staff members would also be a challenge, since FoodWorld would need a cast of thousands to implement the full expansion plan. Spencers therefore created a school for retailing, the National Institute of Retailing (NIR). The curriculum consisted of such courses as store maintenance, working the cash register, serving the customer, and self-grooming and presentation. Students for the NIR were recruited from rural high schools, particularly those who had chosen vocational paths and did not plan on or couldn't afford any further education. They were accepted for either a three-month certificate course or a six-month work/study program based on their aptitude to learn, their self-confidence, and their energy rather than on any particular skills they might have acquired.

Given the wage levels and social status associated with a front-line retail position, albeit at a modern supermarket, most of the candidates came from the lower end of the socioeconomic strata of Indian society. Consequently, attending NIR represented a tremendous opportunity for them and generated a high level of enthusiasm. However, because India was a highly stratified society, these employees perceived themselves, as did the customers, as being considerably lower in social status than their customers. A delicate balance was required to overcome this cultural bias. Instilling the confidence to smile, make eye contact, and help customers while not being perceived as cheeky would be a challenge.

Expansion Plan

There were a number of arguments in favor of an expansion plan based on achieving saturation in several cities first rather than starting with seeding FoodWorlds across the country. Certainly, the former model allowed for distribution efficiencies and simplicity in dealing with suppliers and manufacturers on a regional basis. In addition, each state in the country had its own regulations and tax policies, which made it cumbersome to do business in more than one state. Manufacturers, for example, usually kept title to products as they moved into regional warehouses owned by "stockists," the first level in the national distribution chain, in order to avoid paying rather stiff tax penalties on goods moving across state lines. Often, each metropolitan area had its own language or dialect and particular food preferences. While major differences appeared between neighborhoods, for example, when moving from a strictly vegetarian Hindu neighborhood to a Muslim neighborhood, even more substantive differences existed between regions of India.

The areas surrounding Delhi (the capital) and Bombay (the center of commerce) were ruled out immediately because of the high cost of real estate. Indeed, Bombay's prices for commercial real estate exceeded those of Hong Kong, Tokyo, or New York, and Delhi did not lag far behind. It made most sense to concentrate around those areas where Spencers had a strong remaining presence and where real estate prices and availability were within reason. Madras and Bangalore were therefore chosen to become the first epicenters for FoodWorld based on the size of the target population. (Refer to Exhibit 5, Populations and Income Levels of Households in Key Cities.) Each neighborhood within the city was further broken down to reveal target neighborhoods where there were over 4,000 households within a two-kilometer radius of the store with incomes of over 4,000 rupees per month (U.S. $114). On average, there were about five people per household. It was estimated that a store would have to attract 2,000 households for most of their shopping needs in order to break even. In Madras, seven neighborhoods were chosen. Real estate availability then

dictated the ultimate choice of sites.

Ramaswamy Road

The first store was opened on May 9, 1996, on Ramaswamy Road in a predominantly upper-middle-income residential area of Madras where over 8,000 target households were within a two-kilometer radius. The street was heavily trafficked, but less cluttered with small shops than many of the other larger streets in the area. Still, the store's brightly lit and colorful facade stood in stark contrast to its surroundings. Some thought it might even be seen as imposing or threatening, suggesting the higher prices often associated with more modern environments.

Dedicated parking was unavailable, but most customers were expected to live within walking distance of the store. Several spaces were available, however, on the street in front. The store stood back from the street, providing a small courtyard in which a snack-food and a fresh-fruit vendor leased space.

While Mohapatra and his colleagues had wanted a store with between 3,000 and 6,000 square feet of selling space, they found that such large areas were virtually impossible to find in Madras. They had therefore settled on this 2,400-square-foot store. With no room for any back room or storage area, a 600-square-foot apartment on the third floor had also been rented for an office and employee lunchroom, and some storage had been created above the display racks in the store and on the side on the courtyard in front. It was clear that adapting the store design and layout to each available location was going to be a continuing challenge as FoodWorld expanded in different locations and cities.

Inside the store, the aisles were arranged with clear signage and easily accessible arrays of choices of staples, processed foods, health and beauty aids, and dairy products. The decision had been made to offer a selection of all national brands and a more limited selection of the more popular regional and local brands. Since tastes varied so much by city and even by neighborhood within a city, it was important to have just the right products in stock. In order to assure a complete offering, one of each item from competing stores had been purchased from competing stores and a list compiled and shown to a sample of prospective customers who added or deleted items they considered necessary or irrelevant. A final list of 3,500 SKUs was thus created.

The ends of each aisle were rented to manufacturers as promotional displays. Revenue from the seven available end-aisles averaged about 4,000 rupees per month, or about 190 rupees per square foot.

It would have been too labor intensive to offer rice, lentils, and other basic commodities in bulk, so a FoodWorld private label was created for prepackaged amounts of these items. It was expected that up to 25 percent of total sales would be FoodWorld products, lending both customer convenience and image to the store offering.

Every item in the store was marked individually with both a price and a bar code which could be scanned at any of the four cash registers. Believing that item-by-item inventory control would be critical to the success of a chain of markets, FoodWorld had invested in state-of-the-art cash registers and bar-code scanners. Since there was no established norm for bar coding in India, however, Spencers' staff itself had designed and implemented a complete bar-coding system.

Obtaining shopping carts was also a problem, but they were considered necessary to maximize the amount customers would buy on each visit. Imported carts were far too costly an investment, and no company in India manufactured such unusual items. Raghu Pillai, chief executive of FoodWorld, had therefore designed and worked closely with a local metal fabrication shop to develop a cart of their own. While several small problems remained and required fine-tuning before the carts could go in to production, by late August the first were scheduled to arrive in the stores.

Display racks had presented a similar challenge. Imported racks were too costly, and the desired high racks were not available in India, so all of the racks for the new store had to be custom designed and manufactured.

Since customers were used to paying the maximum retail price (MRP) established by manufacturers and enforced by the government for all foodstuffs and packaged goods, FoodWorld prices were set at the MRP.

There was one deviation from this policy. FoodWorld offered something which had never been tried in India, as far as anyone knew. Certain items in the store were offered at prices below normal (5 to 10 percent), and labeled as special values within the store. Four thousand "Value Shopping Guides" (fliers announcing these special bargains along with a series of weekly contests) were delivered by local youngsters directly to each household which fell within the target

demographics and were within a two kilometer radius of the store. The cost for this flier and its distribution was .75 rupees per flier (U.S. $.02), net of the contribution by manufacturers which essentially covered production costs. Another 4,000 monthly fliers were also mailed to target households at an average cost of 5.5 rupees. Customers seemed to respond enthusiastically to these promotional programs.

Each store had one store manager to whom three supervisors reported. Reporting to the supervisors were 10 full-time customer service representatives (CSRs) and 8 part-time CSRs who were attending the work-study program at the NIR. They were all well paid by local standards, ranging from front line CSRs, who were paid 2,000 rupees per month (U.S. $57), to the manager, who was paid 10,000 rupees per month (U.S. $285). A bonus program representing between 10 and 20 percent of total compensation was based on store sales, results of a monthly customer satisfaction survey, and a management service audit. Total payroll was 72,000 rupees per store per month.

At the corporate level, general managers of human resources, operations, and merchandising reported to Raghu Pillai, the chief executive of the retail group. He in turn reported to Pradipta Mohapatra, president of the retail group. A total of 17 professionals as well as an administrative staff supported these executives. It was projected that a total of 110 people would be required in the corporate offices by the time 50 stores were in operation. Corporate overhead was projected to be 1,416,000 rupees per month.

Early Returns

During the first three weeks of operation, 36,000 customers visited the new store. Sales volume and gross margins by the end of the month exceeded pro forma estimates. (Refer to Exhibit 6, Results from the First Two Months.) Some manufacturers and suppliers were showing a willingness to be creative and innovative, even to the point of discussing the implications of a changed relationship derived from dealing with a large chain of stores.

Bolstered by this response, Spencers' executives were eager to proceed with the continuing rollout of the FoodWorld stores. The basic offering, they realized, was strong as was the broad product offering. Sales and margins were beyond expectations. The results from one store, however, were not enough to validate their initial assumptions and conclusions. Another two stores in Madras were already in the pipeline for August openings, and plans were in place for a fourth. A similar rollout scheduled for late fall and early winter in Bangalore would provide a much more meaningful picture and give more direction in determining what adjustments they would have to make to the formula.

David Wylie, Babson College

Prepared under the supervision of Professor Nirmalya Kumar, International Institute for Management Development.

Copyright © 1996 by IMD—International Institute for Management Development, Lausanne, Switzerland. Not to be used or reproduced without written permission directly from IMD.