The retailerEY’s publication in consumer products and retail sector

January - March 2014

ForewordDear reader,

We are delighted to present to you the January–March 2014 edition of The Retailer, our quarterly publication in the consumer products and retail sector.

As the Indian consumer market shows signs of a slowdown, several consumer companies are increasingly looking at expanding their portfolios to sustain their growth momentum. The article on “decoding the formula for successfully entering into new categories” provides an overview of a tested and proven approach for introducing a new category in the Indian market.

The movement of goods has been posing a challenge for consumer product companies for decades. The article on “goods movement in India” is a summary of a joint report published by EY and RAI that aims to highlight key opportunities and challenges in the movement of goods in the retail sector.

In our interview feature, Mr. Mark Ashman, CEO, HyperCITY Retail (India) Limited, shares his views on the Indian retail market and his key takeaway from working in the Indian market.

Finally, we continue our featured section, the “Innovation board”, where we attempt to present to you snapshots of recent innovations that have emerged in the Indian and global retail and consumer products sector.

We hope you enjoy reading this issue of The Retailer and look forward to your valuable comments and feedback.

Pinakiranjan Mishra

Partner and National Leader, Retail and Consumer Products EY, India

Celebrating five years of The retailer

Contents

Involve yourself:

We look forward to hearing your feedback and suggestions.To contribute to editorial content, please contact Ashish KakwaniT: +91 22 6192 0423 E: ashish.kakwani@in.ey.com

Decoding the formula for successful entry into new categories 4

Goods movement in India 9

Interview with Mr. Mark Ashman CEO, HyperCITY 15

Innovation board 17

4 | The retailer

Decoding the formula for successful entry into new categories

1

EY works with consumer products companies to enable them to mark a successful entry in new categories. To start off with, it builds a detailed understanding of the value chain for the particular category and works on a structured internal assessment to identify gaps in the capabilities needed to operate successfully in the category.

Category selection and opportunity assessment

Opportunities for entry in new categories are identified based on the context of the organization in question and are classified as per the following framework:

1. Core: opportunities in present categories of operations, with no new product creation; e.g., new SKU launch with the same product/formulation

2. Adjacent: new products in categories with current operations; e.g., hand and foot lotions by an existing skin care/personal care major

3. Unrelated: categories with no relation to the current business; e.g., GSK’s foray in biscuits from malted beverages under the Horlicks brand franchisee

Among these three, expansion in unrelated categories offer the maximum opportunity for revenue growth; however, it is relatively more time consuming and expensive, and entails a higher risk of failure.

A study published in a Harvard Business review states that nearly 75% of consumer good and retail products globally fail to mark a successful entry and are withdrawn within 12–24 months of launch.

Indian consumer product companies sail in the same boat. With growth slowing down in existing categories and increasing competitive pressure, companies are looking at entering newer categories. Multinational players are targeting to introduce a larger part of their global product portfolio in India. However, they are challenged by increasingly sophisticated and mature home grown players aiming for a similar consumer base.

A quick assessment of a few consumer product companies in India reveals a trend of expansion in new categories over the past five years, as follows:

• Leading Indian FMCG company: 8–10 new categories including skin care, hair care, biscuits, instant noodles, chips and extruded snacks

• Leading global FMCG company: Even with presence across 20 consumer product categories, has expanded in niche categories including liquid detergent, fabric softener and fabric whitener

• Leading global FMCG company: Oral care, air fresheners and hair color

• Leading confectioneries company: Biscuits

FMCG players have had a varying degree of success in their attempt to enter new categories. This is despite a dominant trend of increasing branded consumption in the country, driven by favorable demographics, increasing trend of indulgence, growth in per capita income and the spread of an organized retailing environment. In the case of companies that have not registered the expected growth, their failure could be attributed to:

Reasons for failure

►Gaps in understanding the market landscape for the particular category

►Inability to decode the value chain

►Internal operational capability gaps

A detailed category assessment is undertaken for the shortlisted categories to understand demand drivers, local market dynamics, product segments, channel structure and the regulatory environment.

EY has assisted a multinational food player in developing its portfolio expansion strategy for its India operations. A detailed assessment of each category was undertaken based on the following framework:

Topl

ine

exp

ansi

on

Core strengthening

Adjacencies

Unrelated diversification

Present categories

Adjacent businesses expected to be profit generators

Unrelated businesses that promise growth

Non-coreCore

5The retailer |

Category deep dive

Category Dynamics

• Size, growth, penetration & profitability

• Branded vs. Unbranded play

• Price Segments (Commodity/mass/premium) & shares

• Category pricing structure

• Players & market shares

• Regional shares and trends

Category Evolution

• Changes in penetration

• Changes in pricing

• Meaningful regional trends (if any)

Channel Structure

• Distribution reach ( Total , Urban & Rural)

• Channel shares

• Modern trade penetration

Regulatory Enviornment

• Govenment policies

• Taxation structure & Sops

Competitive Assessment

• Key players & financial assessment

• Product range & pricing

and sourcing, the ideal route to market and the requisite IT capabilities to create a winning proposition in the market.

The common practice is a sequential assessment of the capabilities. It is important for the capabilities across the value chain to reinforce each other to ensure a coherent business model. This makes the decoding process an iterative exercise.

While decoding the optimal business model for a likely category of interest, it is imperative that no constraints on the organization’s existing capabilities are factored in. This ensures that the value chain proposed reflects an organization’s best chance of success.

Portfolio mix Sourcing Manufacturing Logistics GTM Marketing /

After-sales service

Value chain decoding

Value chain assessment is undertaken via an exhaustive examination of each leg of the chain ranging from product conception to after-sales service. A detailed assessment of the value chain helps us answer the fundamental question in terms of what it takes to win in the chosen category. These assessments typically involve rigorous secondary research, backed by primary discussions with a diverse base of industry practitioners. Decoding the value chain helps create responses to critical questions on product development, manufacturing

6 | The retailer

Organization maturity assessment

Having created the winning formula for a category of interest, it is equally important to lay down a roadmap for the capabilities needed to translate the intent into reality. For this, EY uses a proprietary maturity assessment framework that measures the maturity of each business functions vis-à-vis an industry’s best practices. The exercise helps unravel the most critical issue of any gap between organization capabilities and the industry standard.

The maturity assessment tool is used as a quick fire but structured way of evaluating each function’s readiness to take on the new responsibilities. The process involves the assignment of scores to the current capability, against the desired capability needed to operate in the category.

Let us examine this with an example of the sourcing and manufacturing capabilities of an organization.

Each individual capability is a sum of multiple factors, which are individually rated. Each measure is scored on a 1–5 rating scale, with the measures being defined basis the industry best practices.

An internal maturity assessment is undertaken in the form of a workshop with the organization’s functional teams. The workshop entails EY providing inputs based on the industry best practices. The score for each measure is then put against the industry rating to identify gap areas.

Value Chain component to be examined

Sourcing and manufacturing

Capabilities needed in the organization

Procurement of finished goods

Manufacturing setup

Operational capability for manufacturing

Vendor management process

Managing RM complexity

Working capital mangement

Product development and customer lifecycle

management

Sourcing and manufacturing

GTM and logistics

0.01.02.03.04.05.0

Procurement of FG

Setting up manufacturing

Operational capabilities for manufacturing

Vendor Management process

Managing RM complexity

WC management

Industry Rating Org. Score

Fig 3: Output template – maturity assessment

Maturity assessment summary — value chain elements

• Each value chain element is made up of various capabilities that are to be examined

• Each capability rating is a weighted measure of scores for each of the constituent measures

• ►The importance of each constituent measure can be modified by giving them different weightage in the overall score, making the model applicable across various product segments

• An organization’s existing capabilities are rarely compatible with the “asks” of the newer opportunities. An organization typically evaluates all of the opportunities at one go, which are then to be prioritized using multiple frameworks.

7The retailer |

Figure 5: Prioritization framework for each opportunity

Low

HighLow High

Ease

of

impl

emen

tatio

n

Category attractiveness

*Size of the bubble indicates projected category size

The framework is developed by articulating category attractiveness and ease of implementation, based on the opportunities’ parameters. The opportunities are then scored in the context of the organization’s capabilities and goals.

Parameters for evalution

Category attractiveness Ease of implementation

• Scale and profitability

• Returns on capital expenditure

• Strategic fit

• Strategic risks - regulatory | consumer demand | competitive risk

• Market cannibalization

• Competitive intensity - the share of the top five players | degree of unorganized play

• Consumer proposition

• Investment in sales promotion

• Distribution - width and depth

• Manufacturing complexity

• RM/PM complexity

8 | The retailer

A detailed assessment of the incumbent’s capabilities examined against the requirements of new operations helps an organization design the best entry option, with “long-term” imperatives and an assured growth path.

Ravi Kapoor Associate Director

Ravi is an Associate Director with the Performance Improvement practice of EY India. He has over 14 years of work experience, out of which he has spent 8 years in the consumer products and financial services sectors with

organizations such as Colgate Palmolive, PepsiCo and ICICI Bank.

He has advised several local and MNC consumer product companies in the Indian market and has assisted in developing their growth strategies and transforming their supply chain, and sales and distribution functions.

E: ravi.kapoor@in.ey.com P: +91 22 6192 1595

Akshat Srivastava Senior Consultant

Akshat is a senior consultant with the Performance Improvement practice of EY India. He has over 6 years of work experience in consumer products domain of which he spent 3 years with ITC limited.

Over the past 3 years with EY, he has worked with several multinational and local players helping in portfolio expansion and value chain assessment and transformation of sales and distribution functions.

E: akshat.srivastava@in.ey.com P: +91 22 6192 2325

Fig. 6 illustrates the framework used to examine potential entry options in a prioritized category (from the previous step), factoring in both long- and short-term imperatives. Critical success factors for each option are identified to ensure the inclusion of “must have” industry beating capabilities.

Entry in a new category is a critical decision for a company, given the costs and risks of failure. We have seen multiple examples of companies failing to achieve the desired results due to gaps in category understanding and the attempt to address distinct segments in a category with standardized product and service offerings.

Scope of operations

Option 2

Option 1

Product Group A

Product group BPor

tfol

io fo

cus

Large potential exists regionally to increase penetration

Narrow Regional

WidePan-India operations

Build a national brand of category B to build equity with consumers Extend brand to Category A with a regional portfolio sourced through local players

Build portfolio of strong regional brands and extend equity to RTC/RTE space – challenge to handle portfolio complexity; migrate to central brand subsequently

Mode Organic, sourcing arrangements/JV for Category A foray

CSFsInnovationMarketingSourcing

Mode Acquisition

CSFsManufacturingMarketingSourcing

Extend portfolio to product group B and migrate to mother brand

Regional market – no national brands

9The retailer |

Goods movement in India2

About the report

Ernst & Young LLP and the Retailers Association of India released the publication, Movements of goods in India, at the annual Retail Supply Chain Summit in Mumbai on 5 December 2013. This article is a summary of the report and aims to highlight key opportunities and challenges in the movement of goods in the retail sector. It attempts to provide a base for discussion among industry stakeholders to help them navigate the complex structure of movement of goods in India, and make them aware of related challenges and opportunities.

Current state of goods movement in India

The existing road transport system

India has the second-largest road network in the world, spanning over 4 million km. Roads constitute the most important mode of transport in the country, carrying 60% of the country’s total freight traffic and 85% of its total passenger traffic.

Road freight volume and the number of road vehicles are growing at a CAGR of 9.1% and 10.8%, respectively; however, the growth rate of the length of roads lags behind at 4%. This indicates that the growth of road infrastructure is not keeping up with the increase in demand.

India vs. other countries in terms of goods movement

Logistics efficiency indicators India — ranking

Logistics performance index (out of 155) 46

Quality of overall infrastructure (out of 148) 85

Quality of road infrastructure (out of 148) 84

Efficiency indicators in road transportation

India Global

Average truck speed (in kmph)

20–40 60–80 (developed countries)

Average truck distance covered in a year (kms)

60,000– 1,00,000 4,00,000–6,00,000

Average truck distance per day (kms)

250–400 500 (BRICS)

700–800 (US & Europe)

Total length of expressways (kms)

~1000 74,000 (China)

States Octroi Entry Tax Waybill/Permits

In-bound Out-bound

Andhra Pradesh

No No Yes Yes

Delhi No No No No

Gujarat No Yes Yes Yes

Karnataka No Yes Yes Yes

Madhya Pradesh

No Yes Yes Yes

Maharashtra Yes No No No

Punjab No Yes Yes Yes

Rajasthan No Yes Yes Yes

Tamil Nadu No No No No

Uttar Pradesh

No Yes Yes No

West Bengal No Yes Yes Yes

Source: State Legislations

10 | The retailer

The tax and regulatory landscape in India

The respective state governments have the authority to impose taxes on the sale of goods within a state (where the movement of goods sold is within a single state’s jurisdiction). The Central Government is empowered to tax the inter-state sale of goods (where the movement of goods sold takes place between and across one or more state boundaries, with sales having occasioned this movement of goods), as well as pan-India supply of services (by levying Service Tax). The multiplicity of indirect tax-related legislations is, therefore, a direct consequence of the constitutional structure of taxation in India. It is a significant source of complexity for taxpayers in India, and leads to substantial overlapping and sometimes double taxation of various transactions.

Given the tax structure, goods being transacted within India are often exposed to multiple taxes. The sale of goods within a state is subject to a state-level VAT, which may vary from 4% to 15%. Inter-state sales of goods are subject to Central Sales Tax (CST), which varies from 2% to 15%. Furthermore, transportation charges incurred on the movement of goods are subject to service tax at an effective rate of 4.8%.

A number of state governments also levy an Entry Tax (ET) of 2% to 5% on the entry of (notified) goods into a local or municipal area in the state.

In India, goods in movement, in addition to being subject to taxes, have to contend with intra-state and border check-posts and have to deal with associated documentation including road permits and waybills.

On the compliance front, every state has its own requirements in relation to registration and payment of tax, as well as tax returns, forms, permits, audits, assessments, etc. Processes and procedures can differ significantly across states.

Movement of goods in India — challenges and opportunities

We have segmented the challenges into two major sections:

1. Business and operational

2. Tax, regulatory and interstate movement-related

Business and operational challenges and opportunities

1. Infrastructure-related

Road network:

• Close to 40% of the time lost on road is due to stoppages at state border check-posts alone.

• The share of surfaced road in the overall road network is a mere 54%. India loses a significant amount of goods every year due to congestion (and wastage of fuel) and the slow speed of freight vehicles.

• Trucks ply at a slow average speed of 20 kms per hour on Indian roads. Moreover, they ply for 20 days a month, against an average of 25 days a month in other developing countries.

11The retailer |

Warehousing Infrastructure

• About 85% of warehousing is unorganized in India and has led to a dearth of quality warehouse infrastructure in the country.

• India’s warehousing sector is plagued by low capital and operational efficiencies (low utilization and poor throughput/unit space).

• Most warehouses are manually operated or have inappropriate levels of automation.

Cold chain and other infrastructure

• India’s cold chain market is highly fragmented, with organized players constituting only ~8%–10% share.

• Wastage levels of agricultural produce and perishables are ~40%, and it is estimated that the current cold storage infrastructure can only cater to 11% of the total produce.

2. Supply chain – related challenges

• Multiple intermediaries in supply chain

• There are as many as five intermediaries in a typical supply chain for perishable commodities such as fruits and vegetables. Not only do these intermediaries result in a significant time lag in products reaching stores from farms, but they also increase the cost to the final customer by adding their own margins.

Collaboration and vendor management related challenges

• There is no common information exchange platform between retailers and their vendors, which leads to the lack of collaboration in the end-to-end supply chain.

• Retailers are unprepared and unaware of the delivery schedules of suppliers.

• Another common issue is the non-availability of return loads.

• The practice of sending advance shipping notes is not being widely adopted in India.

Demand forecasting complexities

Retailers find it difficult to forecast demand for products in different regions due to:

• Seasonal fluctuations in demand patterns for certain products

• Regional/Local variances in demand patterns

• Geographically widespread nature of the market

• Low adoption of forecasting tools

Inefficient supply chain management

• The pilferage of goods is a major concern for Indian retailers. The quantity of products received in warehouses falls short of the ordered amount. Moreover, once out of a vendor’s location, retailers cannot track the status of goods in transit.

3. Logistics service provider – related challenges

• Unorganized and fragmented road transport market

• Around 75% of the trucking industry is dominated by small transport operators with a maximum of five trucks. At the other end of the spectrum, only about 4% own more than 20 trucks.

• This fragmentation leads to overloaded trucks and fatigued drivers, since only one driver per truck is deployed on long trips.

Only a few logistics service providers with pan-India reach

• A limited number of players have a pan-India presence in the country. Retailers frequently have four or more logistics providers catering to different regions.

Dearth of 3PLs specializing in specific product categories

• A few logistics providers have the requisite experience and expertise in handling products in specific industry segments such as food, apparel and fashion.

• E-tailers are facing challenges in their search for logistics service providers that can cater to the former’s specific needs in terms of reach to several pin code areas, last-mile deliveries, processing of cash on delivery and reverse logistics capabilities to manage inventory returns.

Several retailers are on the lookout for logistics service providers that could provide a variety of value-added services in the form of warehousing capabilities, inventory management, packing and assembly, cross-docking, customs clearance, etc. Most providers only cater to a particular component of the logistics value chain — transport or warehousing, translating into a significant demand for integrated end-to-end logistics service providers.

12 | The retailer

4. Shortage of skilled manpower

According to a National Skill Development Corporation report, various skill gaps in the road transportation sub-segment include:

• Inadequate knowledge of procedures, paperwork for inter-state movement and taxation-related aspects

• Lack of knowledge of modern warehousing and inventory management practices

• Inadequate knowledge of new technologies such as RFID, GPS and vendor-collaboration platforms

• Inadequate availability of drivers to handle increasing tonnage and high-capacity trucks, and understand and follow GPS directions

• Drivers’ ignorance of safe driving practices and special precautionary measures

Tax, regulatory and interstate movement challenges

Most of the state VAT legislations and CST legislation and compliance requirements were put in place between the 1950s and 1970s. These are in line with the then-prevailing “manufacturing” practice, which involved the bulk movement of goods in a full truck/container load format. Unfortunately, in India, the basic concepts of the movement of goods’ regulations are still outdated.

a. E-commerce incompatibility

• E-commerce retailers adopt various models of sale and delivery. The essence of survival in the marketplace is gauged by the speed (and accuracy) at which the ordered goods reach consumers. As a result, it is difficult to fix one set of governing legislations for the same set of goods. This is because the various VAT/CST legislations are not able to effectively accommodate the unique features of the e-commerce industry. On account of these gaps, e-retailers face regular routine issues at check posts, etc.

b. Check posts

• While check posts are not directly a serious hindrance to the movement of goods, the associated regulations, lack of automation (with the exception of a few states), inadequate staffing, unexplained and in-ordinate delays in clearance consignments, unbridled powers of the check post officer to detain goods/levy penalty, detention of goods for inconsequential reasons, etc., have, for decades, burdened transporters. This has prevented the free movement of goods across the country.

c. Compliance management cost

• Eligible input VAT is creditable with VAT payable, but the credit of CST and ET paid is not available as an eligible input tax credit, posing as an additional cost in the supply chain. Furthermore, the lack of inter-creditability of VAT, service tax, CST and ET leads to credit leakages, adding to the supply chain tax cost.

• The regulatory complexity associated with the movement of goods in India, coupled with a lack of clarity in legislations, leads to businesses spending a large amount of money on third-party consultants, legal counsels, etc.

d. Lack of procedural clarity

• Every state in India has put in place various forms, permits and other documents that need to be produced/verified for the unhindered movement of a consignment. Paperwork includes the necessary invoice, self-declarations, permits from tax authorities and forms (in the case of specified goods).

• Businesses are plagued by the lack of clarity in the nature of documents required for movement, the process of obtaining these, as well as the items and persons liable to pay ET. Transactions such as sales, leased goods and intellectual property complicate matters further.

e. Automation

• Some states have made significant efforts to automate processes pertaining to forms’ procurement, permit procurement, online self-declaration, etc. However, the process remains a manual one, or a combination of electronic and manual in a large number of states, resulting in the dealer spending substantial time and effort.

Possible interventions by state/Central Government (s)

Businesses are pushing for a simplified tax and regulatory framework; however, the federal structure of the country, political conditions and the division of legislative power make this a very onerous and cumbersome task. Nevertheless, the Central and state governments could look to step in and facilitate the free movement of goods across the country.

13The retailer |

a. GST

• GST, by design, would transform the current indirect tax system from an origin-based model to a consumption-based one. GST is expected to replace the central excise duty (or CENVAT), service tax, CST, etc., as well as state taxes such as VAT and ET. GST is expected to facilitate the availability of full-input tax credit on input taxes paid at the time of purchase (of goods and services), as well as utilize the amount toward output GST liabilities.

• GST might come as a breather and help with the standardization, simplification and automation of compliance requirements associated with the trading and movement of goods, especially inter-state movement of goods. GST, when implemented, is expected to automate most of the compliance requirements (including of forms/permits/way bills, etc.), thereby reducing the cost and effort for the industry.

• The GST structure has been the focus of discussion and debate for the Central and state governments for a number of years. It is imperative that the governments find a collective solution soon to the disputes on the GST structure and proceed with implementation for the benefit of the industry and the country at large.

b. Self-declaration

• Given that GST might still be a couple of years away from implementation, state governments can adopt measures, in the meantime, to simplify and strengthen the process of moving goods across the country.

• Some states that have tested the model of self-declaration by the dealer moving goods into and outside the state, without intervention by VAT authorities, have been successful in simplifying the goods movement process.

• In the self-declaration model, the dealer moves goods based on a self-declaration (with the details of the goods moved), which is available to the VAT authorities on-line for review/scrutiny at any point in time. Such self-declaration can be assessed for accuracy during the course of the annual assessment process or during any of the audit/investigation process.

• Given the success story of the self-declaration model, VAT authorities in all of the states could consider its implementation to expedite and simplify the movement of goods.

c. Cross-state automation

• The current requirements of statutory Form C (for charging concessional rate of tax on inter-state sales) and statutory Form F (for supporting sales tax exemptions on account of stock transfers) are driven by the need of the VAT authorities of the sending states to validate whether the concessional rate and the exemption from CST on stock transfers have been fittingly claimed.

• The lack of visibility into the dealer database in the buying state triggers the need for the sending state to demand manual copies of Form C/Form F (which have to be procured by the dealer from the VAT authorities of the buying state) to validate the claims to concession and exemption made by the sending dealer.

• Automation of the VAT/CST registered dealer database (dealer database) across the states and of the buy/sale transactions in the sending and buying states, along with on-line inter-connectivity between the states, could provide visibility to both the sending and receiving states on the transaction being undertaken. A review of the dealer database, either during the process of assessment or at any other point in time, would prove the eligibility of the transaction, along with allowing dealers to avoid the cumbersome process of procurement and issue for statutory forms for every transaction/consignment.

• Regardless of the implementation time of GST, states could explore the suitability of undertaking robust cross-state automation.

d. Check post improvisation

• Check posts have largely remained the same since their creation. Nevertheless, a few states have managed to bring in reasonable computerization to hasten the clearance of goods and provide online data to VAT authorities for scrutiny. State governments across the country could think about the benefits of investing in deploying suitable computerization at check posts, ensuring adequate staffing for speedy clearance of goods and avoiding unwarranted/unjustified detention of goods.

14 | The retailer

ConclusionIndia is positioned to become an economic super power in the near future. However, the poor road infrastructure, inadequate technology and service levels, scarcity in manpower skills, and complex tax and regulatory policies, especially with regard to the movement of goods within the Indian boundaries, threaten to slow down this growth.

In this backdrop, corporate entities could consider reviewing their supply chain and logistics operations. They would then be in a position to identify improvement opportunities in terms of collaboration with vendors, enhanced sales and operations planning, and technology deployment. The need of the hour is for the Government to rapidly improve road infrastructure and take bold steps to streamline the movement of goods in India.

Immediate and structured steps in the implementation of GST may provide the much-needed relief to issues associated with the movement of goods in India. Indian businesses can only hope that GST is introduced at the earliest and would pave the way for a simplified tax and regulatory structure for the movement of goods in India.

e. Legislative prudence

• Central and state legislations governing the movement of goods in India have not kept pace with the growth and evolution of the marketplace, especially in the retail industry. The legislations have not adequately accounted for and adapted to the explosive growth of retail trade and e-commerce.

• Another concern is that existing regulations are ambiguous about documentation requirements. The resulting consequence is open interpretations at the ground level, leading to perceivably random delays and possible detentions.

• With GST in sight, it seems to be the right time to ramp up rules and regulations to provide clarity on procedures and simplify the movement process.

Janak Patwari Senior Manager

Janak is a Senior Manager in the Performance Improvement practice of EY India and is based out of Bengaluru. He has over 12 years of consulting experience across India, the UK, the

Middle East and North Africa. He holds an MBA from IIM Calcutta and has worked extensively in the consumer, industrial and real estate sectors.

During this illustrious career, Janak has advised several consumer and logistics companies across the areas of strategy, business processes reengineering, cost reduction, supply chain, among others.

E: janak.patwari@in.ey.com P: +91 80 6727 5398

Inputs from Avik Sarkar and Anoop Nagendra

Deepak V Associate Director

Deepak is an Associate Director in the Tax and Regulatory advisory practice of EY India and is based out of Bengaluru. He has over 18 years of experience across the Fast Moving Consumer

Goods (FMCG) sector and indirect tax consulting. He has hands-on experience on various indirect taxes including customs, excise, service tax, value added tax and the foreign trade policy in industry and consultancy.

He is a commerce graduate and a member of the Institute of Cost & Works Accountants of India, as well as of the Institute of Chartered Financial Analyst of India (MBA –Finance).

E: deepak.v@in.ey.com P: +91 80 6727 5072

Inputs from Shradha Sancheti

15The retailer |

Mr. Mark Ashman is the Chief Executive Officer of HyperCITY Retail (India) Ltd. He is an intuitive retailer with his pulse on changing consumer needs. During his time at HyperCity, he has focused on smaller hypermarket formats of 50 k sq. ft. and 30 k sq.ft, which are well suited to the Indian market and high-margin categories such as apparel, home and private label. He has increased the level of promotions to ensure that customers are able to enjoy great value at HyperCity.

Furthermore, his initiatives of substantial operating cost reduction and business remodeling have achieved nine quarters of store-level profitability and have put the business on track to achieve company-level profitability.

Under his leadership, the company has won “The Most Admired Retailer – “Hypermarket” award at IRF 2012 and continues to offer its customers a truly international shopping experience.

Previously, Mark was the CEO of Marks and Spencer Reliance India Pvt Ltd, where he was instrumental in the roll out of Marks & Spencer’s retail strategy in India, having researched the Indian market and established a joint venture between Marks & Spencer PLC and Reliance Retail.

Interview with Mr. Mark Ashman CEO, HyperCITY

3

Given the current economic and political situation, what is your view on the growth of the India retail sector?

There are as many predictions for the number of future consumers, as there are languages in India, 16m affluent, 160m middle class, 350m aspiring. All one can say with certainty is that the Indian consumption story is happening now and can only gather pace over the next decade. India has shed its pre independence “consumption guilt” and has started to consume, which is evident across multiple sectors, including retail.

Indian consumers share the same aspirations as consumers the world over: to experience new products and services, to live more convenient lives and to enjoy a higher standard of living than their parents. Government policies or market sentiments can, at worst, only slow down this exciting consumption story.

In India, the model for apparel retailers, either domestic or international, is proven. Multi-brand food players will take a little longer to refine their models and to correct some of their past mistakes; nevertheless, within the next 15 months, profitable

hypermarket formats will emerge. However, foreign retailers are likely to wait until they are confident that government policy supports their entry in India and has the long-term interests of multi-brand food operators in mind, which looks unlikely in 2014.

Do you expect global retailers to foray in the India hypermarket and supermarket segment in 2014? If yes, how would it impact the market structure?

This will not happen until the new government is in place and the ambiguities in the current FDI policies are cleared.

Opening up the market to new international operators will only help build capability and infrastructure for the industry. A vibrant retail sector is good for consumers and for the economy. Internationally, retail is the first step in the workplace and provides part-time employment for many women and rewarding careers. Many of today’s international retail CEOs started on the shop floor. What is practiced today in modern retail quickly finds its way into my local kirana. Having the infrastructure required to

16 | The retailer

support and operate modern retail stores, along with customers’ demand for new products and services, means that a larger economic value is created in the support and supply industry for modern retail.

What could be some of the concerns/challenges faced by foreign hypermarket and supermarket chains in India?

Assuming that government policy in FDI in retail becomes much more transparent and aligned to supporting long-term industry growth, the only challenge for international chains will be the time taken to build a viable business of scale in India. Doing business in India is hard work, ranking globally toward the difficult end of the spectrum. What might be a simple straight line from point A to B in other markets often becomes a zig- zag of uncertainty, complexity and ambiguity in India. The trick is to leverage the positives of the market, which will enable you to get around the barriers.

In a country of shop keepers, a larger number of regional players, particularly in the supermarket space, inspired by international players, will operate dominantly. Primarily due to their local connect and by being more flexible in location and store size, they will be able to quickly build a critical number of stores. Because they source and operate regionally, they will have a better understanding of local customers and of product offerings and service levels that would help attract and retain customers.

What is your opinion on the opportunity for hypermarkets in metros vs tier I cities? What are some of the key differences in the consumer buying behaviour in metros vs tier I cities?

HyperCity has stores in both tier 1 and tier 2 markets. For us, consumer behavior is similar, but we have to understand that the type of rice, or brand of pressure cooker varies by city, whether it is a tier 1 or tier 2. We made a decision to focus our expansion on metro cities, firstly because the sales ramp up after opening is quicker in tier 1 markets and, secondly, because focusing more stores in less cities makes sense from both a brand and operating perspective. Shopping remains a family activity, and the traditions of the past continue to play an important part in what and where our customers shop. Opening a Hypermarket surrounded by new high-rise residential will always create a win-win situation for retailers and consumers.

16The retailer |

How do you expect the Indian retail sector to evolve in the next five years? Do you foresee consolidation in the sector?

The new government in May 2014 and the new policies will define what will happen over the next five years in this sector. I anticipate in future a couple of national domestic players and a couple of international players. A round of consolidation is inevitable.

Today, we are all focused on international hypermarkets entering India. One or more of the low-cost discounters will certainly enter the market.

The other significant change will be the on-line delivery model/ multichannel retail. Non-store revenue for retailers is less than 3%, which indicates a huge potential for growth.

I see this as being a natural fit for big operators to add scale and reach for their existing physical stores and expand to new markets. Putting down more physical space may not be practical or affordable, as demand for good retail space will certainly outstrip supply.

Customers currently visit hypermarkets twice a month on average. Traffic congestion, lack of infrastructure and a time-poor customer mean that there is significant opportunity to gain a higher share of existing customers’ monthly spend through online ordering and home or office delivery. Tablets and smart phones are making the car, as well as the home and office ideal places to shop!

What is your mantra of success for the hypermarket business in the India market?

Given the infrastructure challenge, high cost of real estate and unique shopping patterns in India, our hypermarkets will need to be smaller, with a more tailored product assortment and a food mix of 55%. Margins are thin, implying that operating costs have to be tightly controlled. The mantra would be to build your cost base for a recession and reap the benefits in boom years.

The principles of retailing are the same in India as anywhere else in the world. We need to understand our customers’ product and service needs, offer them great value, be aware and be able to respond to competition. At the end of the day, the answer as to what is selling and what is not can be found in your stores, not in an excel chart or power point presentation.

For India, players should be prepared to adapt, as blindly replicating business models from other markets will not work. India has taught me a lot, not least is the unique Indian skill of jugaad, which I will always carry with me!

17The retailer |

1 Greendust has created a market for refurbished consumer durables

Gurgaon-based reverse logistics company, GreenDust, refurbishes rejected/defective/unsold/returned products from OEMs and sells them as factory seconds through its brand, GreenDust.

Factory seconds from Samsung, LG, etc., are inspected by GreenDust. The problems are then fixed using genuine parts from the company, followed by certification with a GreenDust sticker.

The reverse supply chain brings down supply chain costs by 25%, allows overall blocking of capital, helps capture lost profits, improves cash flow from systematic asset recovery, increases asset recovery by 50% and improves inventory cycles, thereby lowering costs. Products on the verge of being scrapped are brought back to the “new” condition and are sold after reducing their pollution level. This allows manufacturers and retailers to comply with e-waste regulations.

Challenges include treating reverse supply chain as a necessary evil of the back-end process of a logistics process, lack of commitment on the part of senior management in the form of a dedicated team, lack of preparedness in terms of processes, systems and infrastructure of the company to handle returns and the amenability of customers.

http://articles.economictimes.indiatimes.com/2012-11-22/news/35300753_1_hitendra-chaturvedi-logistics-business-logistics-cost

Innovation board4

E-commerce firm HomeShop 18 and Delhi International Airport have introduced a virtual mall, Scan N Shop, at the Delhi Domestic Terminal, T3. Premium products can be ordered from the wall display by scanning the QR code using smartphones or by calling HomeShop18’s call center.

http://yourstory.com/2013/06/10-in-store-innovations-from-emerging-countries-the-future-of-retail/

2 Virtual Shopping Wall at the Delhi International Airport, India

18 | The retailer

3 Leveraging social media for operations 4 Pour your own beer

Parle Agro launched a Twitter campaign in February 2010, asking consumers and retailers to tweet about Hippo’s availability on retail shelves to a specified Twitter web address to increase the involvement of consumers. A core cell was set up to pass information in the tweets to the respective areas’ sales and distribution teams.

The company claims to have received stock-related tweets from 25 cities. The number of people tracking Hippo stocks on Twitter was estimated to have equaled 45% of Parle Agro’s foods sales team, and sales reportedly jumped by 76% after February.

The responses were mostly from consumers in cities where Hippo is present but temporarily unavailable. Retailers who do not stock Hippo can be convinced to stock it, based on consumer demand. The initiative also helped Parle Agro identify markets where Hippo sells out fast.

http://trak.in/info/1196-indian-brands-innovative-advertising-social-media/

The Beer Café, a beer café chain, which opened its first large format outlet – Biggie – in Delhi is the first one to bring in the Pour Your Own Beer (PYOB) concept to India. One has to sign up for a RFID- (radio frequency identification-) activated beer card (for a minimum of INR500) at the cafe and swipe it against the tap for a beer of choice to be served into the pre-chilled mugs available at the counter. The idea is to offer varieties of beer. The RFID gets charged only for the amount of beer tapped out of it.

Beer Café is the sole partner of DraftServ, the US, in India, which has pioneered PYOB, a cloud-based technology. Post-paid RFID cards are offered elsewhere in the world. In India, Beer Café has introduced pre-paid RFID cards, which can be filled and refilled and used in all of the Beer Café outlets. With this PYOB technology, outlets will be able to achieve considerably higher efficiency in terms wastage reduction.

http://www.hospitalitybizindia.com/detailNews.aspx?aid=18809&sid=24

Our offices

Ahmedabad2

nd floor, Shivalik Ishaan

Near C.N. VidhyalayaAmbawadiAhmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru12

th & 13

th floor

“UB City”, Canberra BlockNo.24 Vittal Mallya RoadBengaluru - 560 001Tel: + 91 80 4027 5000 + 91 80 6727 5000 Fax: + 91 80 2210 6000 (12

th floor)

Fax: + 91 80 2224 0695 (13th

floor)

1st Floor, Prestige Emerald No. 4, Madras Bank RoadLavelle Road JunctionBengaluru - 560 001Tel: + 91 80 6727 5000 Fax: + 91 80 2222 4112

Chandigarh1

st Floor, SCO: 166-167

Sector 9-C, Madhya MargChandigarh - 160 009 Tel: + 91 172 671 7800Fax: + 91 172 671 7888

ChennaiTidel Park, 6

th & 7

th Floor

A Block (Module 601,701-702)No.4, Rajiv Gandhi Salai, Taramani Chennai - 600113Tel: + 91 44 6654 8100 Fax: + 91 44 2254 0120

HyderabadOval Office, 18, iLabs CentreHitech City, MadhapurHyderabad - 500081Tel: + 91 40 6736 2000Fax: + 91 40 6736 2200

Kochi9

th Floor, ABAD Nucleus

NH-49, Maradu POKochi - 682304Tel: + 91 484 304 4000 Fax: + 91 484 270 5393

Kolkata22 Camac Street3

rd floor, Block ‘C’

Kolkata - 700 016Tel: + 91 33 6615 3400Fax: + 91 33 2281 7750

Mumbai14

th Floor, The Ruby

29 Senapati Bapat MargDadar (W), Mumbai - 400028Tel: + 91 022 6192 0000Fax: + 91 022 6192 1000

5th

Floor, Block B-2Nirlon Knowledge ParkOff. Western Express HighwayGoregaon (E)Mumbai - 400 063Tel: + 91 22 6192 0000Fax: + 91 22 6192 3000

NCRGolf View Corporate Tower BNear DLF Golf CourseSector 42Gurgaon - 122002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

6th

floor, HT House18-20 Kasturba Gandhi Marg New Delhi - 110 001Tel: + 91 11 4363 3000 Fax: + 91 11 4363 3200

4th

& 5th

Floor, Plot No 2B, Tower 2, Sector 126, NOIDA 201 304 Gautam Budh Nagar, U.P. IndiaTel: + 91 120 671 7000 Fax: + 91 120 671 7171

PuneC-401, 4

th floor

Panchshil Tech ParkYerwada (Near Don Bosco School)Pune - 411 006Tel: + 91 20 6603 6000Fax: + 91 20 6601 5900

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in.

Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016

© 2014 Ernst & Young LLP. Published in India. All Rights Reserved.

EYIN1403-030 ED None

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

RS

EY refers to the global organization, and/or one or more of the independent member firms of Ernst & Young Global Limited

Ernst & Young LLPEY | Assurance | Tax | Transactions | Advisory