Retail Transformation: Changing Your Performance Trajectory: CII National Retail Summit: 2016

Confederation of Indian
Industry
CII National Retail Summit: 2016

Retail Transformation:
Changing Your Performance Trajec tory
January 2016
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The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
development of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in
India’s development process. Founded in 1895, India’s premier business association has around 8000 members,
from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over
200,000 enterprises from around 240 national and regional sectoral industry bodies..
In its 120th year of service to the nation, the CII theme of Build India - Invest in Development: A Shared
Responsibility, reiterates Industry’s role and responsibility as a partner in national development. The focus is on
four key enablers: Facilitating Growth and Competitiveness, Promoting Infrastructure Investments, Developing
Human Capital, and Encouraging Social Development.
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Confederation of Indian Industry
CII National Retail Summit:

2016
RETAIL TRANSFORMATION:
CHANGING YOUR PERFORMANCE
TRAJECTORY
| Abheek Singhi
| Amitabh M a l l
| Namit Puri
January 2016 | The Boston Consulting Group

3
Context
05 Foreword
06 Executive Summary
11 Retail Landscape
27 Winning in Medium Term
39 Fund the Journey
45 Enable the Transformation
53 CEO Speak
54 For Further Reading
55 Note to the Reader
The Boston Consulting Group · Confederation o f Indian

Industry
5
Foreword
Retail industry in India is large and has shown steady growth over the last few years. The industry is undergoing a fundamental change. Today's business environment is characterized by rapid,
extensive change and unpredictability. The combined effects of demographic & economic shifts, the emergence of digital—both in the form of a sales channel as well as proliferation of digital
media, will have a profound impact on the industry. Against this backdrop, it is imperative for retail companies to transform themselves to change their current performance trajectory. The cost of
inaction would be very high and for some, not transforming may no longer be an option. The visible signs for an urgent need for transformation are slowing consumer traction, flat sales,
proftiability lower than industry peers, low employee engagement and an eminent threat from new entrants
In this report, by the Confederation of Indian Industry (CII) and The Boston Consulting Group (BCG), we highlight how a transformation effort that can change the performance trajectory of a
company can be undertaken. Three priorities emerge –Winning in the medium term to establish competitive advantage through strategic/ structural moves, Rapid cash release in the short term
from current business to fund the journey and building capabilities to be future ready. In this report, we have incorporated inputs from leading CEOs on the key trends impacting the industry, and
have leveraged proprietary data and research conducted by BCG.
We would like to take this opportunity to thank all the members of CII National committee of retail for the year 2015-16 for their valuable contribution and providing input for this report. We hope
you find this report interesting and informative for your businesses.
Shashwat Goenka Abheek Singhi

Chairman, CII National Committee on Retail 2015-16 Head Asia Pacific, Consumer Goods and Retail
& Sector Head, Spencers Retail, Senior Partner and Director,
RP Sanjiv Goenka Group The Boston Consulting Group

Industry
6
Executive Summary
The overall retail market in India is estimated to be ~630 Bn USD in 2015. The organized By 2020, we expect
market is estimated to be 9-10% of the total market i.e. ~60 Bn USD. The sector has
• ~650 Mn consumers will be online, of which 350-400 Mn consumers would be "digitally
grown at ~12 % over the last decade and going forward we expect growth to be
influenced" in retail categories
moderately higher. We expect the retail market to be 1100-1200 Bn USD by 2020, of
which organized retail could be potentially 140-160 Bn USD. • E-commerce market to grow to 45-50 Bn USD online. There could be a potential
upside with active steering by the supply side
The overall growth would be driven by significant demographic shifts: 70% increase in
income levels, 100 Mn youth entering the workforce, increasing nuclearization & 35% of • The drivers of buying online would not be just price but convenience, availability of
Indians living in urban centers. a relevant, wider variety. In Tier 2 towns, the relevance of variety would increase,
driven by lack of options in organized retail
In the last few years, retail has been one of the top performing sectors globally from a
shareholder returns perspective. However, in India, retail lags other sectors on key metrics • Pure-play online players would continue to grow and strengthen their business models
of profitability and return on capital. Our analysis of the top 10 companies in key sectors, and capabilities. Retailers who are able to build strong capabilities in omni-channel
shows that the average profitability in retail is lower by 300-500 bps and return on capital would be better poised to win vs pure play in most categories
employed by 500-1000 bps vs other sectors. The same comparison also indicates Indian
retailers deliver lower returns when compared with global peers. However, the growth for organized retail is not a given. The size and profitability of
the opportunity would be driven by both some external uncontrollable factors but also
The sector performance is shaped by by the actions of the players themselves
• Value conscious, digitally connected consumer, who demands lower prices and In order to realize its full potential, it is imperative for players to act on multiple fronts
is getting increasingly digitally influenced. simultaneously. It is critical for senior leadership to craft a large scale transformation
• Supply side economics: Lower margins relative to global peers driven by lower agenda to stay relevant and win in the market place. Senior leadership effort to drive
this large integrated change is imperative. Our research suggests that 2/3rds of such efforts
salience of organized retail and higher rents
do not meet desired results due to lack of senior leadership commitment.
• Competitive landscape Strong value proposition and low cost model of
A typical transformation journey is examined through three lenses:
traditional retailers; Emergence of E-commerce as "new competition "
• Win in the medium term: Identify what the consumer really wants and build the
• Regulatory barriers: Ability to attract capital, running a cost efficient operation
consumer proposition and aligned operating model. This requires a recrafting of the
and ease of doing business constrained by regulation, both at the Center and the State
operating model elements, categories, formats and building new revenue streams
level
• Fund the journey: Generate cash from core operations to support
The one big trend that would shape the industry is the increasing expectations
investments to pursue mid term goals
for retailers to provide a true all-channel experience
• Enabling the transformation: Invest in organization and build new
capabilities to improve efficiency, productivity and improve morale
Retail Transformation: Changing Your Performance Trajectory

7
Winning in the medium term structured playbook approach to COGS reduction using a set of levers that
are accretive in short and long term.
Winning in the medium term entails the following levers
• Retail execution excellence: Relentlessly execute against key dimensions: customize
• Sharpen / Reinvent core proposition: Winning retailers identify and sharply
merchandize to catchment, efficient supply chain, deliver an in- store experience consistent
target a set of shopping spaces—defined as an intersection of shopping mission and
to banner proposition, allocate space effectively and run effective localized campaigns
demographic elements (income, age, location). These winners provide a superior
consumer proposition in the prioritized shopping spaces and align their operating model These moves create significant cash release for the company to fund its medium term
elements to offer a consistent consumer value proposition and experience aspirations and strategic bets
• Win with the omni-channel consumer: Whilst omni-channel is a buzz word today, Enable the transformation
retailers are not very clear on what to offer (and why ) and its impact on the overall
To make the transformation a reality, senior leadership needs to build organization
economics.
capabilities across the following dimensions
Retailers need to take a strategic view of the opportunity and be clear on their
• Creating talent pools across the organization: At senior level, investing early for
aspiration: Potential revenue (& profit pools), right to win vs pure plays, brick & click
cross functional & right experience, enabling middle managers to transition from
propositions and take a de-averaged view by category. Retailers need to then lay out a
functional experts to better leaders and right skilling at the entry level
clear path on how they would evolve.
Finally, retailers would need to build a new set of capabilities through both organic • Building the capabilities for 2020s: The winners of the future will require new
and inorganic routes capabilities—some of which retailers today cannot build easily or organically.
• Customer advocacy: Conventional media is getting less credible as sources of • Adapting smart simplicity principles: Indian retailers would do well to avoid the
recommendation. Creating strong advocacy by leveraging the right advocates (~2% of mistakes that larger retailers in other markets have made as they grew larger. Increase in
the customer groups), focusing on the drivers for advocacy has proven to be far more size and complexity in the marketplace led to complicated and bloated organizations.
powerful There is a need to redesign the organization to be lean, nimble and simple.
Fund the journey A transformation journey is long and a challenging one—it requires a strategic orientation to
define the future goal posts, full organizational commitment, and execution resilience.
Companies need to examine three levers to fund the journey.....
However, results from a successful transformation exercise can change the performance
• Pricing and promotion Optimization: It is critical to take a holistic approach that trajectory and hence it is imperative that retailers put in the right effort and resources to
ensures that the overall perception of pricing is in line with the banner proposition, and reorient themselves to transform
simultaneously monetize opportunities to balance growth and profitability.
• Margin enhancement through COGS reduction: Given lower profitability
and margins compared to global peers, Indian retailers should take a

Industry
9
Retail Landscape

10

11
Overall retail market estimated to be ~ 630 Bn USD, growing at 12-

13%
India's retail market is estimated to be ~

630 Bn USD.
Organized retail market estimated to be ~ USD 60 Bn
We have defined retail to include the
following categories % (total market in USD B)
• Food & grocery 396 56 37 36 35 18 18 18 12 630
100 8-12
• Clothing & Apparel
• Jewellery
• Consumer Durables, Mobile 80
• Food service
• Healthcare 60
• Personal Accessories 560 12%
• Home & Interiors 40

• Beauty & Personal Care
We estimate the organized retail 20

market to be ~60 Bn USD and e-
60 22%
commerce is estimated to be 8-12 0
Bn USD in 2015. Clothing & Consumer Health Home & Total
Apparel Durables, care Interiors
Mobile Food Personal
For the purpose of this report, we have Food & Grocery Jewellery 12-13%
service Accessories Beauty &
focused on the organized retail market. Personal Care
All references in subsequent pages would E-commerce
be to organized retail. Unorganized
12% 13% 20% 13% 12% 13% 15% 12% 15%
Organized
Between 2005-2015, overall retail
Food & Grocery includes Fruits & Vegetables, Poultry, Dairy, Pulses, Cereals, Oils & Fat, Flour, Tobacco, Spices and Sugar, packaged food, beverages, Home-care, laundry care,
industry has grown at a CAGR of surface care etc
12-13% with organized retail growing at Clothing and Apparel includes menswear, womenswear and kidswear
Jewellery includes gold, diamond studded, Pearls, silver and platinum jewellery
~22%. Consumer Durables includes white goods (AC, refrigerator), small home appliances (microwave, mixer) and electronics (laptop, TV, mobiles)
Foodservice includes chain of foodservice outlets, standalone outlets and other unorganized formats Healthcare
includes medicines retailed in hospitals, pharmacy shops or even general stores Personal Accessories includes fashion
accessories, footwear, eyewear, watches
Home and Interiors includes home decore, furnishings (bed linen, upholstery, carpets) and furniture ( sofa set, chair etc) 2005–2015
Beauty and Personal Care includes haircare, skincare, fragrances and cosmetics USD = 65 CAGR (%)
INR
Source: Images India Retail Report 2015, Euromonitor, BCG analysis

Industry
12
The retail sector revenues are estimated to be ~25% of India's GDP
Retail is a large sector and an

important sector for India.
India is over retailed as compared to other emerging economies
The ratio of retail sector's revenue to GDP
in India is amongst the highest in the world. Retail as % of GDP
For most developed markets, retail sector 24-25
25 24.5
revenues are 15-20% of overall GDP,
23.3
whereas for India it is around 25%.
20 19.0
18 .6 18 .8
17.8
16.5 16.9 17.0
16.3
14.8
15
10
0
Germany USA Brazil Malaysia Indonesia Mexico United China France Japan South India
Kingdom Africa
Source: Euromonitor.
Note: Above analysis is for the year 2014. There may be a slight divergence with India retail market size from previous page given the difference in sources.

13
Organized retail is a difficult business in India
Organized retail is a difficult business in

India. As can be seen in the exhibit on the Retail lags other sectors in profitability & RoCE
right, the sector performance lags most
other sectors on key metrics. In this
analysis we considered the top 10 EBITDA % ROCE %
companies across a set of sectors to
40 60 57
evaluate their performance on profitability
and RoCE. 35 51 52
50
30
Profitability (EBITDA): The weighted 30
average profitability of the sector for the 27
26 39
top 10 companies is 8% and is about 6-8% 24 40
lower than other sectors. 24 22 37
32
31
RoCE (return on capital employed): The 20 30
sector has much lower RoCE of 8% vs 18
16 15
other sectors. On an average, the sector 14 Ø 15 24 Ø 23
RoCE is lower than other sectors by 8-10%. 14 20 20
18 19
11 14 16
10 19
8
Challenged economics (profitability) and 10
6 8 12
low return on capital employed has 7 9 10
6 9
constrained the growth of the sector. 5 4
3 3 3 1
0 0
Retail Energy Cap Retail Energy Pharma Cap
IT Pharma FMCG Auto Goods IT FMCG Auto Goods
Max: Highest among top 10 companies in sector Avg:

Weighted average of top 10 companies Min: Lowest
among top 10 companies in sector
Sources: Ace equity, Value science, BCG analysis.

Note: Top 10 listed companies by revenue in each sector considered for above analysis; For retail sector, only pureplay retailers consi dered.
EBITDA and ROCE are 5-year weighted average numbers 3.Comparison is made with top 6 sectors by Market cap as of December 2015 excluding banks.

Industry
14
However, globally retail is one of the better performing sectors
Globally, retail has been one of the better

preforming sectors.
Globally, retail is an attractive business with strong returns
BCG publishes the Value Creators ranking
—an annual report based on an analysis of
Median annual TSR1, 2010–2014 (%)
five year period Total Shareholder Returns
(TSR) of around 2,000 global companies. 108
Historically, retail has been among the High
industry sectors generating the highest TSR 100
96
and has been consistently among top 5 89
Median
industries for shareholder returns.
70 Low
66
During 2010~2014, global retailers
delivered an impressive annual median
TSR of 21%. In comparison Indian
50 44 42
retailers delivered TSR in single digits
only. The difference is explained by the
challenging environment faced by Indian
retailers as compared to their global 24
21 15
counterparts. 16
16 17 16
0 7 7
1
-12 -13 -10 -10

-17
-20
-38
Retail IT Energy FMCG Pharma (Global) Auto Capital goods Retail
Global
Sources: Standard and Poor's Capital IQ; company disclosures; BCG analysis.
Note: 1Five-year average annual TSR (2010-2014) for weighted average of respective sample.

15
Indian retail sector performance is mainly driven by four drivers
The performance of retail sector is

driven by the following drivers:
Drivers of performance in retail
• Value conscious, digitally
connected consumer, who
demands lower prices and is • Value conscious consumer,
Value conscious, digitally
getting increasingly digitally resulting in lower throughputs vs
influenced. connected consumer global peers
• Increasing digital influence
• Competitive landscape Strong
value proposition and low cost
model of traditional retailers;
Emergence of E-commerce as
"new competition".
• Supply side economics: Lower

margins relative to global peers driven • Cost of meeting
• Growing e-commerce
by lower salience of organized retail regulation
penetration
and higher rents. • Ease of doing Retail sector • Competition from
business
• Ability to traditional retailers as
• Regulatory barriers: Ability to attract performance well as ecommerce
attract FDI
capital, running a cost efficient
operation and ease of doing business
constrained by regulation, both at the
Center and the State level.
• Share of organized retail lower in

India vs global markets, resulting in
lower margins
Supply side • Constrained real estate, resulting in
economics higher rent

Industry
16
Indian consumers are value conscious and more demanding
Indian consumers are more demanding

and price sensitive than some of their
global peers.
Indian consumers are conservative in Prices in India for the same product are on average lower by
their spending habits compared to global 10- 30% vs. other markets after adjusting for PPP
Based on our research carried out with
peers
consumers in more than 10 countries, it is
clear that Indian consumers are far more % of survey respondents negotiating prices often Price Index (adjusted for PPP) Illustration: Toothpaste
1.4
value conscious. They negotiate prices 40
1.4 1.4
more often, spend lesser luxury items and
save more than their counterparts in For a common SKU of
20 1.3
European countries. 29 a popular oral care
22 1.3 1.3 brand
0
As can be seen in the exhibit on the right, India 1.2 Price
on an average, for a similar product, prices 1.2 1.2
in India are 10-30% lower vs other markets, EU5 India—USD 6/kg
China—USD17/kg
adjusting for PPP. This results in a % of survey respondents buying less luxury USA—USD 25/Kg
relatively lower throughput for Indian 40
20
1.1 1.1
retailers vs global peers.
21 1.1
4 After adjusting for
0 1.0 PPP,
India EU5 1.0 1.0 Price

1.0 1.0
India—USD 20/kg
% of survey respondents saving more overall China—USD 28/Kg
0.9 USA—USD 25/kg
40
20 38 34 0.8
Deo- Tooth- Soft Dairy
drants paste drinks
0
India EU5 US China India
Sources: BCG analysis, BCG Global Consumer Sentiment Survey May and June 2013.
Note: Select brands considered in each category for price comparison Toothpaste—Colgate Strong Teeth, Deodorants—Adidas Dynamic Pulse, Soft drinks—Diet Pepsi Can.
USD =65 INR, USD = 6.5 CNY, India PPP conversion factor = 0.3, China PPP conversion factor = 0.6.

17
> 350 mn digitally influenced consumers by 2020; they would account for ~ $250 Bn of retail
spend
To assess the impact of digital across

categories, we use two key metrics: digital
influence and digital purchase. Digital Digital influence and purchase in Retail projected to rise exponentially
influence is the fraction of category buyers
that use the internet for product research,
purchase or post-purchase. Digital buyers 2013 2015 2020
refers to the fraction of category buyers who
buy the category online.
Internet
users 170 260 650
Today, ~150 Mn consumers are estimated

to be digitally influenced in Retail, of
which ~90 Mn buy online.
Digitally
influenced 66 155 350-400
retail buyers
As digital age rises (defined as no. of years
a consumer has been online), there is a
significant increase in digital influence. As
an illustration, for apparels, 60% of Retail buyers
consumers who have been online for over 4 purchasing 6 92 200-250
years are digitally influenced compared to online
only 38% of consumers who have been
online for < 1 year.
0 50 100 150 200 0 100 200 300 0 200 400 600 800
Population (Million) Population (Million)

Projecting this forward, we expect that in Population (Million)
2020, 350-400 Mn Indians would be
digitally influenced in Retail, while 200- Estimated spend
250 Mn would purchase online. These 350 These digitally influenced consumers would spend ~ 240-250 Bn 240-250 Bn
Mn consumers are expected to account USD in Retail by 2020 USD
for $240-250 Bn i.e. 20-25 % of total (20-25% of
spend on Retail by 2020. retail)
Sources: BCG CCCI digital influence study 2013,2015, Indicus income distributions; EuroMonitor; BCG income distribution adjustment model; BCG analysis.
The Boston Consulting Group · Confederation of

Indian Industry
18
E-commerce could grow exponentially to become 45-50 Bn USD by 2020 and potentially higher...
E-commerce is already strong and is

expected to be ~45-50 Bn by 2020. The size Growth in e-commerce would vary by category
of the e-commerce market for goods could
be potentially much higher with active Online share by 2019 (%)
steering by manufacturers/ supply side. 100%
"Development" "Growth" "Shake- "M aturity"
out"
Store- Both are
The adaption of online commerce varies by Online is No winner
based is potential winners
category, as is evident from the chart on the winner
winner
right. Some categories e.g. electronics/
Travel
mobiles are further ahead in the curve share >60%
of online, whilst others e.g. grocery would Books &
Electronics
continue to have a relatively small Media
Clothes Consumer 25-30%
durables 13 -15%
percentage in terms of e- commerce. & shoes
10-12%
Beauty 10-12%
Groceries Home 8%
< 1% 8%
We are currently in a development phase in

most categories where online is just 0%
complementing in-store and not necessarily
Time
driving sales growth. Next phase is when Online • <10% • 11-30% • 31-50% • >50%
growth from e-commerce starts kicking in. penetration
During growth phase, companies invest in • Not impacted • Store growth towards • Store growth turning • Markets settle and
capabilities required to win with e- • Online is a complement
Sales zero negative growth rates
commerce. In the next phase of maturity, to stores • Online moving from
growth converge
called shakeout, online competes with in- complement to • Store-based vs. online battle
store for contribution to sales. competition for market shares
• Higher in store- • Lower in store-based • Converging at low • Stabilizing at fair
based retail retail levels levels
Profitability • Gross margins deteriorate • High competition as • Competition normalizes and
while stores are maintained stores restructure and markets settle
online matures
Sources: BCG analysis; HUI; SCB.

Note: Online penetration in each category projected for the year 2019.

19
Traditional / Unorganized retailers are reinventing themselves to compete with modern retailers
Traditional retailers have a better cost

structure vs organized retailers. As the
Traditional stores are more profitable than ..and are reinventing themselves to compete in
exhibit on the right shows, despite having
Modern retailers.. the new reality
lower gross margins than organized retail,
local / organized stores have higher % of Sales
profitability.
30
Supermarket
In addition, last mile access gives them
Improved service offerings through home delivery and
several structural advantages—ability 20 2-3 1
to manage credit, provide quick delivery credit
with lower drop sizes.
11-13
10 21-23
Increasingly collaborating with online players to widen
2
2-4 customer reach
Traditional unorganized retailers are also
reinventing themselves to stay competitive 3-5
0
in line with changing consumer
Gross Rent Store Overheads Store Relay store formats to make them more
expectations. There are several examples of
margin Operations EBITDA 3 contemporary, at times with support from manufacturers
enhancements they have done in consumer
service offerings ( provide last mile service
to online players, reorganizing the store % of Sales
format etc.) as well as enhancing cost
15 0-2%
advantage ( buying in consortiums to Able to avoid deep discounts on non-bulk
Kirana store 4
enhance margins with scale, leverage Cash
purchases & realize higher pricing
& Carry channel to enhance sourcing 6-8
10
efficiencies).
1-3 High touch purchase experience and long-
14-17 5
standing relationships with customers
5
5-7
0
Gross Rent Store Overheads Store
margin Operations EBITDA
Source: BCG analysis.
The
Bost
on
20
Retailers in India have low bargaining power with suppliers compared to global peers
Share of organized retail in India is much

lower compared to other global markets. As a Retailer margins are low in India vs global peers High rentals in India further impact profitability
result, retailers in India have lower of retailers
bargaining power and margins as compared Illustrative for a category Illustration
to their global peers. The exhibit on the
Rent as % of sales
right, shows that retailers in India have
lower like-to -like margins vs other markets Retailer margin % 10 7-9%
by as much as 4-12% depending on the 34 34
35
market concentration.
5
32 1-3% 6-8%
0
30
Another illustration of lower bargaining Global retailer Indian retailer
30 30
power is in high rentals. Restrictive zoning
laws, rent controls and protected tenancies 28
results in scarcity of real estate and high 25 24 Indexed Sales per square feet (USD / year)
rentals. Rental as a % of sales in India is
22 22
higher vs global peers by 100 -15%
600-800 bps. Even after adjusting for lower
throughput (normalizing for spsf) rent as % 20 21 50 100
85
of sales is higher by 3-4% for Indian
retailers vs global retailers. 19 19
0
Global retailer Indian retailer
15
India Malaysia UK
Indonesia USA Australia Rent as % of sales after adjusting for throughput
9% 16% 41% 70% 80% 10

90% 5-6%
5
High 3-4%
1-3%
XX Share of organized trade 0
Global retailer Indian retailer
Low
Source: BCG analysis, Company websites.
Rental comparison carried out for departmental stores as an illustration.

21
Addressing regulatory barriers at central / state level could unlock profitable growth
In the recent past, there have been

attempts to provide regulatory unlocks to Central Government State Government
the industry.
Challenging labor laws
Yet, a lot needs to be done. As detailed • Work hour limits on woman employees, minimum wage laws results in lack of flexibility required for seasonal
retail business
in the exhibit, regulatory barriers at the
Central/ state level have limited sector's Multiple laws, regulations & clearances required for operations
ability to: • Complex plethora of laws e.g. Shops Establishments Act, Essential commodities Act, APMC act etc, restricts
expansion of organized retail.
• Build an efficient operation to • No single window clearance and need to take multiple approvals from different government authorities at central, state and
compete vs unorganized sector local levels
• Grow rapidly to build scalable E.g. hypermarket requires 30+ licenses and approvals, is impacted by ~40 regulations and is governed by various local, state
and central bodies
business
• Access to FDI Inflexible zoning, rent and tenancy laws
Operational Excessive taxation and lack of clarity related to • Restrictive zoning laws, rent controls and protected
barriers taxation policies tenancies results in scarcity of real estate and high
The regulatory barriers, if unlocked, can
• In absence of clear taxation policies, retailers face rentals
provide the sector a much needed impetus • Traditional retailers with controlled rents and protected
uncertainty related to tax deductibility of certain expenses.
to improve profitability, be competitive E.g. In the past, tax authorities have disallowed obsolete tenancy have unfair cost advantage over new entrants, thus
with global peers, get access to capital stock written off in the books and tax deductibility of restricting competition.
and unlock growth. advertisement, marketing and sales promotion expenses
Complexity arising from differing taxation
• On inter-state sales or purchases of goods, retail is not
rates and permits
The sector needs a nationwide FDI policy eligible to credit input central sales tax charged by the seller • Different VAT legislations in various states results in
in the originating state, resulting in higher cost of
that gives confidence to foreign players to increased complexities and costs. Certain states disallow
procurements
commit resources for the longer term. VAT setoff for goods sold at a loss
• Permit requirements for movement of goods impacts
supply chain structure of retailers
High entry barriers with stringent requirements

• Minimum investment of $100Mn restricts entry
• Requirement to source 30% from SMEs increases
operational costs and inefficiencies Low predictability in policy
Restrictions • State governments hold final authority to permit FDI, lack
on FDI FDI in e-commerce The Boston Consulting policies
Group that·assure long-term continuity
Confederation o f for FDI
Indian
• Policy allows 100% FDI in marketIndustry
place model & B2B E-
commerce but not inventory based model. Brick & mortar
22
Potential for organized market to be ~140-160 Bn USD, E-commerce to be 45-50 Bn USD by

2020
We expect the growth in overall retail

market to accelerate going forward. This
growth would be driven by significant Organized retail expected to be big, E-commerce to grow exponentially by 2020
demographic shifts: 70% increase in income
levels, 100 Mn youth entering the
workforce, increasing nuclearization and USD Bn CAGR
35% of Indians living in urban centers. 2015-
1,250 2020
1100-1200
45-50 40-
We expect organized retail to grow at 50%
1,000 140-160
~20% and E-commerce at ~40-50%. By
2020, organized retail would be ~20%
~12% of the retail market and e-
commerce would be ~5%. 750
630
8-12
By 2020, we expect the overall retail market 50-70
to be ~1100-1200 Bn USD. The organized 500
920-980
retail to be 140-160 Bn USD. We expect the 10-11%
e-commerce market to grow to ~45-50 Bn 300-320
USD & potentially higher driven by active 15-20 0.3 540-570
250
supply side interventions. There could be
280-300
some fungability between organized retail
and e-commerce depending on how retailers
evolve their omni-channel offerings. 2010 2015 2020 E
Most retailers have started working Share of E-commerce 1% 4-6%

overall
towards a multi channel environment and
are investing in technology to meet market Organized 10% 12-
increased customer expectations. This 14%
will increase revenue from organized E-commerce Organized Unorganized
retail and e-commerce.
Sources: Images India Retail Report 2015, Value Science, BCG analysis.
Note: E-commerce includes only goods not services.

23
Potential to plug the gap in profitability with global benchmarks
Whilst at a sector level there are several

challenges, our analysis suggests that
there is a significant spread in Gap in performance attributable to strategic / Potential to bridge the profitability gap
profitability across companies. This operating choices and execution
performance variation is explained by
strategic/ operational choices made by
the individual company and ability to EBITDA
execute flawlessly. Strategic choices %
Max. 14%
15
• Consumer value proposition (e.g. 12-14%
Even within the same category, we have Price, convenience, quality,
seen significant variance in the freshness)
performances due to different choices made • Category strategy 9-11%
• Format 10 6%
by company management.
6-8%
Operating choices
Companies face strategic choices and
tradeoff related to convenience, value and • Private label strategy
Average 8% • Network 5
assortment volume. Such strategic choices
• Store layout
influence operational decisions related to • In-store experience
store sizes, merchandize mix and in-store • Product assortment
experience.
0
Execution elements Best-in-class Indian retailers Global Peers
Performance metrics such as sales per Indian retailers
square feet or profitability of the Min. 3% • Supply chain
companies significantly vary depending • Merchandizing execution
upon the selection of choices. • Pricing and promotion
• People training
A focused effort on retail transformation can
EBITDA Margins of
help Indian retailers bridge the EBITDA gap with
Indian Retailers
developed market retailers
Sources: Images India Retail Report 2015, Value Science, BCG analysis.
EBITDA margin is weighted average of 3 to 5 department store retailers in each market.

Industry
24
To realize this opportunity, retailers would need to fundamentally transform their business
A typical transformation journey is

examined through three lenses…
Win in the medium term Fund the journey
• Fund the journey: Generate quickly
cash from their existing operations to Developing a differentiated Extracting cash from the business to fund
support investments required to pursue offering to build medium future growth engines and experiments
their medium term goals. Typical term competitive advantage
methods are to relook at the core pricing
and trade spending models, cost /
sourcing improvement programs, and
driving retail execution excellence and 4 Sharpen retail pricing and promotion
1 Sharpen / Re-invent core banner proposition
with an end-to-end view of the business.
Improve margin through

5
2 Win in omni-channel COGS reduction
• Win in the medium term: identify
the truly winning proposition for the
next few years to build competitive
advantage; sharpen / re-invent core Pursue Retail execution Excellence
3 Create strong advocates 6
banner proposition, win in omni-channel
and create strong advocates.
• Enable the transformation: build Enable the transformation

capabilities, invest in people and
technology to enable the Invest in skills and technology with an integrated business view
transformation to make the changes
that are needed along the way.
7 Leverage big data and analytics 8 Organization and capability building

25
Winning in the Medium
Term

26

27
High performing retailers pivot to sharply target selected "shopping spaces"
Some retailers assume that a little

tinkering with the value proposition is all it
takes to adapt to changes in the
Deliberate methodology supported by proven toolkit will deliver customer-centric profit-improving format
marketplace. Although it is almost always
necessary to keep the value proposition
aligned with shifts in the market, the most
successful retailers strive for clarity in
sharply targeting specific shopping spaces.
We define shopping spaces as an
intersection of demographics & shopping
missions.
..and define operating
Define Banner value.. ..with differentiating pillars
model elements
To craft this value proposition and deliver

against the same, successful retailers Unique features Size of store—small, large,
• Mission of Purchase
• Create the "shopping" spaces map along Map the flagship
• Demographics Examples
with associated revenue & profit pools. • Revenue, profit pool of
shopping
• Prioritize spaces to win in basis the segment
spaces Quality
attractiveness and starting position. Location of store—mid-size
Price cities, mostly big cities
• Developing the store category
concepts. Customer Experience
• Current positioning
• Integrating into a full store identity, Identify
• Competitive
Store layout
proposition and commercial model. landscape
winning
• Conducting pilots; and • How to Obligatory features
• Refining the design, finally rolling- positio differentiate Examples
out to the complete fleet. n
Pricing and promotion policy
Functional • Identify target Hygiene
and consumers and Friendly staff
Technical their mission of Promotions
parameters purchase Product range policy
Convenience
• Preferred format for
the target segment

Industry
28
Globally, retailers orient their operating model to deliver consistently on prioritized spaces
Globally, winning retailers have prioritized

selecting shopping spaces and have
reconfigured their operating model to
Deliberate methodology supported by proven toolkit will deliver customer-centric profit-improving format
deliver against the chosen consumer value
proposition.
Illustrative of Department stores
This allows them to win
disproportionate share in the selected
spaces vs trying to stand everything for
everyone. Fashionable House of Enhanced Aspiration within
value brands Traditional reach
Alignment of the core banner proposition to
Multi tier pricing but Concession of second Full span of Closer to destination
the operating model is imperative to deliver focused on value for tier brands at good categories, mastering shopping with high
consistent consumer experience. There are money with frequent prices; including good a few of them with end brands, good
several examples of successful models offers and own representation of strong and exclusive service and unique
where retailers have communicated and designer brands international brands own brands customer experience
reinforced banner identified through
consistent execution.
E.g. E.g. E.g. E.g.

Debenhams, JC Penney, John Lewis, Selfridges,
Kohls Coin Macy's Nordstrom

29
Winning in omni-channel requires an integrated approach
Omni-channel is the new buzz word today,

with some retailers already investing in
expensive instore interventions. However,
Operating choices, consumer value proposition should flow from the omni-channel
most retailers are unclear on the vision
opportunity and stance to take.
• What is the revenue/profit The strategic objective....

pool? • Financial objective—
We recommend companies take a top-down
• What is your right to win? (Revenue, Profit)
view of the opportunity and answer the • Enhancing digital
• How will you make money?
following questions with a 3-5 year horizon influence
• How will you evolve your
• What is the vision for omni- channel model over time? • Target new customer vs
over the next 3-5 years? • Are you targeting share of wallet enhance SoW of existing
Aspiration
– Target audience of existing customers or targeting customer
new customers • Investment decisions
– Right to win vs. the pure
plays, brick & click informs business model and
– Potential size and consumer proposition....
• Assortment mix—overlap b/w
profitability
online & offline, degree of
– De-averaged view by Business model Consumer value personalization
category proposition • Pricing strategy
• How will you evolve to get Product 1
• Digital influence: Social media etc
flows
2
• Delivery options, convenience

there?
Or ie n t a ti o n
S e le c ti o n
– Wait and watch or

C u s to m e r 3
c ar e
Fulfillment Tr a n s a c t i o n
lead
5
model
D e li ve r y
– Rapidly build ecommerce vs and imperatives on

focus on in-store Capabilities capability build
• Island digital organization vs
• What should be your strategy with
integrated organization
regard to marketplaces? • Managing friction between
– Fight or join? offline & online business
Organisation Analytics / BIG data Operations IT • Big Data and IT Architecture
• What are the immediate capabilities
required to facilitate this evolution?
– IT, supply chain,
organization & culture
– Organic build vs inorganic Source: BCG Case Experience.
growth
Industry
30
Omni-channel retailers are better positioned to offer a seamless consumer experience vs pure plays
Traditional stores have a natural advantage

of having closer understanding of customer
behavior, meet the needs of "touch and Seamless consumer journey across the purchase pathway
feel", instant gratification. An omni-
channel retailer who has built capabilities
is hence better positioned vs pure play e-
commerce players to get a higher share of
consumers wallet.
Research Locate Shop Deliver Post-purchase
Leveraging the multi-channel platform isn't 1 • Website, mobile

just about selling online. It is rather an • Buy on • Returns to store /
app
integration of processes that promise the web/app • Delivery at home • Social media
• Specialist • Loyalty program
customer a consistently smooth experience home • QR scanning
Brick and websites
and seamless execution of their needs mortar—
• Pick-up at
through the purchase journey as they toggle omni- store
between physical and online channels. channel • iB eacon
• Online reviews
tech. • Complaints
• Personal • Browsing, researc
• Click and collect (own/other) communication in-store
Transitioning from traditional channels to
multi channel processes requires deeper
understanding of the customer purchase
2
journey. Simply replicating the old ways of
functioning into the new environment may • Product comparison,
• Delivery at
result in failure to capture synergies present • Check reviews, purchase and
• Reviews, blogs, home • Returns—pick up
across channels such as those of scale. Pureplay inventory, checkout on web/app
advice on from home
ecommerce options on
website/app • Brick and Mortar pilots; Collect+ models
web/app
Pure offline Pure online Online + Offline
Sources: BCG analysis.

31
Role of stores need to be reimagined in the omni-channel world
Defining consumer journeys and clarifying

the strategic role of each channel are
important parts of the equation; so, too, is Consumer proposition Digital offerings should be customized by role of
separating the “need-to-haves” from the channel & underlying economics
“nice-to- haves.” This means getting a
solid grasp on the economic implications
of cross-channel assortment and pricing
decisions, options in customer relationship Features Flagship
Next Tier Tier 1 Tier 2
management, and various delivery EBOs
Basic Sophisticated MBOs MBOs
scenarios.
Basic
Store locator
• Store locator • Digital wall
As can be seen in the exhibit on the right, • Mobile Wallet • Social sharing
Tablets for sales
there is a wide continuum of assistance
• Tablets for sales • Real time inventory
in-store experience elements to cater to the
assistance Instore pick up
needs of instore consumer. • Consultative advise
• Instore pickup
• Personalization Loyalty apps
Retailers need to customize their digital • Endless aisles
offering depending upon role of the • Virtual reality / -
channel, and economic implications. • Loyalty Apps Visualization
-
• Extended
proprietary -
This would effectively translate into content
-
spreading the entire spectrum of cultivated
• Click and Collect
digital capabilities ranging from basic to Social sharing
sophisticated across stores. Most best in • Self check out Digital
class companies offer the full suite of Wall/RFID
Advanced
offerings in their flagship stores for
Virtual reality
experience delivery.
Source: BCG Case Experience.

Industry
32
Omni-channel supply chains need to handle fragmented and less predictable flows, more returns
Omni-channel supply chains need to

handle more fragmented and less
predictable flows, more returns.
In a traditional supply chain, a company

faces at best a few hundreds of orders per Optimize supply chain flows for costs and customer service levels
day, with forecastable one-way flows and a Channels Factors affecting flows
few delivery points. The range handled is of operation
Store
relatively smaller, picking typically happens Click & Collect
at a carton level. Internal processes are less Click & Collect from Click & Collect from Click & Collect from Customer demand
customer facing. store DC supplier • Willingness to pay for offer
• Expectations regarding
lead time
The omni-channel supply chain deals with • Importance of store
significantly higher number of orders/ day, network
Home Delivery • Assortment per
has non-predictable two way flows with Home Delivery from Home Delivery from Home Delivery from channel
potentially thousands of drop off points. The store DC supplier
SKU range handled is much wider, mostly Channel economics
handled at the inner packaging level. • Delivery cost
• Inventory cost
• Picking and handling cost
Returns • Level of investment
To manage this complexity, companies need Return to DC
Return to supplier • Absolute gross margin per
to think through the trade offs between cost, Return to store through parcel
(exceptional) item
customer service and inventory they carry. company
Companies, need to hence clearly define

the flow paths by category & customer
type based on the underlying economics,
competitive offer and the retailers starting
position. Store pick DC Supplier
Fulfillment model

Note: Delivery to pick up points treated as a subset of home delivery.

33
Seven capabilities required to have effective and cost efficient omni-channel supply chains
We believe seven core capabilities are

Capability building in supply chain
required:
• Inventory information: Accurate • Cost pressure on small orders
and reliable store, DC and supplier • High availability requirements • High quality requirements with
1
inventory information, real-time • Real time and accurate in-store Lean strict cut-offs time
Accurate and real
information warehouse • Multiple automation options to be
inventory tracking across channels. time end-to- end
operations
inventory chosen from
• IT Platform: Transaction platform for e-comm
accommodating online sales and orders
• Strong cost pressure on
channel agnostic returns with real time returns... 5 6 7
2
tracking capabilities. • Integrated omni-channel store
• ... while customers expecting free IT
Efficient and Flows Adapted experience to attract, retain and
• Warehouse operations: Efficient returns de- averaged system
develop consumers
optimiz-
DC picking for piece picking orders, • Discrepancy between store and return flows
meeting strict shipper cut- off time. on-line ranges store
• Store operations: Procedures for ation

• SKU availability to be de-
• Impact beyond e-commerce operations
efficient order fulfillment in stores with Optimized for3 omni-
averaged across channels
platform
mini backrooms. 4 downstream channel flows • Multiple and fragmented flows
• Need to build upon legacy systems delivery
• Returns management: Efficiency of requiring advanced optimization
typically not real time
return flow to facilitate shipment from
customers, re-stocking, defined • Strong cost pressure to optimize deliveries
procedures on cashback, reselling,
restocking. Building an omni-channel supply chain is a journey...
• Flow optimization: Optimized de- Full integration to
averaging of SKU availability, omni-channel player
inventory pooling with sophisticated Scaling-up in new channels Optimize E2E omni-channel
safety, optimized de-averaging of return supply chain
flows. Expansion in new channels Expand offer • Integrate inventory across channels
• Develop Home Delivery options ("one SKU")
• Down stream optimization: Get the basics right • Gain scale in existing channels • Optimize cross-channel flows
Optimized delivery cost by dynamic • Enter online by leveraging existing • Ensure in-store omni-channel
capabilities Develop sustainable solutions
routing systems, delivery fleet • IT system to include stores in supply customer experience
utilization. – Basic Home Delivery
– C&C from DC chain
• Use workaround solutions • DC automation
Define capabilities roadmap

Source: BCG Case Experience.

Industry
34
Creating strong brand advocates is the most effective source of growth
In survey after survey, we observe

consumers say that they trust
recommendations from friends/ family Advocacy is the most effective source of sales Advocacy has strong correlation
and colleagues, more than mass media leads and rapid growth with revenue growth
or celebrities.
(%) of purchasing decisions based on... Revenue growth (%)1
Conventional marketing wisdom believes 120
that strong word-of-mouth is ultimately 10
R = 942 %
driven by the consumer's experience and Company I
cannot really be influenced. Company H
+18%
8 Company G
100
Recent work in this space has shown that Company F
92
not only can advocacy be created, but it can
also have a strong long term effect on brand
6 Company B
relation with consumers. We have
developed the BAI index (Brand Advocacy 80 78 Company E
Index) which measures the drivers of
product recommendation, and brand -24% -25%
4 Company C
performance across multiple product
62 61 Company D
categories.
60
2
Our research suggest a strong correlation 47 Revenues
46
between growth and BAI. Companies with ($M)
Company A
high BAI scores tend to grow at a
differential growth rate vs others. 0 0
Recommendations TV Print 0 10 20 30 40
from friends and 50
For retailers, ability to influence the family
Brand Advocacy Index2 Customer (%)
consumer down the purchase pathway
using this insight can be a compelling Sources: Nielsen Report—Global Trust in Advertising and Brand Messages, April 2012 (3Q2011 data) 28,000 internet users from 56 countries participated in the study; IntelliSurvey
source of advantage. (~30,000 respondents, USA, UK, France, Germany, March-April 2013; ~2,000 respondents, Spain October 2012); BCG Analysis.
1 2007 data for recommendations from friends and family; 2Brand Advocacy Index is a BCG proprietary framework in which BAI customer (% of
customers)= Advocates(% of customers)-Critics (% of customers); 3Impact od advocacy on purchasing decisions compared for 2011 vs 2009; 4Revenues of US grocery retailers in 2012
considered for correlation analysis.

35
Effectively creating strong advocates requires working on multiple levers, simultaneously
Rather than just leaving brand perception to

chance, companies can use these insights to
develop a brand strategy that proactively 1
influences how they are perceived in the
marketplace. We advocate a three step Identify target consumers
approach: • Requires identifying consumers with highest influence potential
Within the consumers, 2% can allow reach to 90% of the

Recruiting
• Recruiting effective advocates: community
effective advocates
Identifying right advocates requires
rethinking consumer segmentation—
on the basis of influence and not 2
consumption. Our research suggests
that 2% of advocates can reach 90% Build a powerful message around product experience
of community. • Message should deviate from original expectations to pique people's curiosity, make them
want to talk
• Pinpoint the drivers BAI reveals Engage with consumers altruistically expecting nothing in return
what really motivates people to • Increase affinity with the brand by giving gifts to community and individuals
Powerful
advocate for a brand. For example, messages
variety and value-for- money drive
advocacy in grocery retail. These need
3
to be uncovered by the retailer for their
specific context.
Develop sustainable 3 way relationship between brand and consumers
• Continuous relationships and Be relationship oriented rather than campaign oriented
viralisation of a powerful message:
This entails creating a powerful Be multichannel: Leverage both offline and online channels to target
message centered around the drivers and consumers and maximize advocacy effectiveness
then make it viral in a multichannel Continuous relationship and
environment. viralization

Industry
37
Fund the Journey

38

39
Pricing is a complex topic and often executed poorly
A host of issues comes up for

consideration in retail pricing: the nature
of the local competition; product Pricing is a complex topic in current retail in India... ...and is often poorly executed as retailers take a
discounts; and defining the rules of short term view
pricing by store catchment, geography and
product hierarchy.
Our experience of working with retailers in

India suggests that most retailers today Focused on securing margin at expense of long- term
1
take a fairly simple benchmarking-based Multiple prices... perception registration
approach with pricing without considering • Regular
the ability of the consumers in the • Promo 2
Prices set against competitor prices instead of
catchment to pay, or the historical price • Online... customer's willingness and ability to pay
elasticity.
Promotions are introduced to boost sales
3
tactically, simply to match previous sales
This approach falls short of identifying ...depending
Prices set by focusing on item-level
opportunities to drive both price perception on store
4 or category-level sales instead of overall impact
and profitability. Price perception plays a uniqueness...
• Local competition on store, customer loyalty
key role in deciding choice of shopping ...and multiple item
relationships • Geography...
destination. True logic of pricing quantity or quality hierarchy
• Size, brand, PL relationship 5
• Category role is unknown
• Key value item
The pricing model needs to be well Private label plays a major role
synchronized with the overall banner 6 today and getting pricing (and different sizes) right
proposition along with tools to handle large are critical to drive it
amounts of data to drive benefits in a short
A typical hypermarket retailer with ~20,000
time. items in 50 stores has 1 million prices to set Transactions data is not leveraged enough to make
7
accurately every month micro-decisions on pricing

Industry
40
Winning retailers use an integrated approach to pricing
The key for deriving short and long term

value from pricing is to win both price and
price perception. It is equally critical that 0
the principles behind the pricing model are
closely linked to the core banner Strategic role
proposition. Strateg
y Price positioning and perception
A dynamic pricing model requires looking at

a wide gamut of levers. It also requires 1 2 3 4 5 6 7
institutionalizing the use of multiple
Private Assortment Promotional In-store/ Advertising/ De-averaged Customer
objective techniques such as customer price Label price build-up strategy POS out-of-store pricing specific
discovery, benchmarking and elasticity and price tag communi- comm. pricing
analysis. Levers of cation
price
Our experience suggests that a holistic perceptio
n
pricing strategy encompassing the elements
laid out on the right, can result in an
EBITDA upside of 100 -300 bps whilst
significantly driving up footfall & spsf.
8 Enabling business model / drivers of cost
leadership
Execution &
9 Enabling pricing processes, tools, (IT)-infrastructure, monitoring and tracking
capabilities
10 Enabling organization, roles, capabilities
Price perception (example—driving a value perception)
Levers to build perception In-store initiatives External initiatives

• Direct comparison vs. • Promo display locations • Marketing initiatives
competitor or national brand • Daily deals (coupons,
• Deep vs. wide discounts • Price cut announcements pamphlets...)
• Bundling • In-store signage
Source: BCG.
Note: IIP=Individual item pricing, OPP=opening price points, EPP= exit price points, KVI=Key value items.

41
Retailers should look at seven key levers to drive COGS improvement
Given lower profitability vs developed

markets, it is imperative that retailers use a
playbook based rigorous approach to drive BCG playbook on COGS improvement
COGS reduction and create a stronger
negotiating rationale with suppliers.
Private Brand • Input costs, time, quantity and geography for sourcing
Play • Working capital management
We advocate retailers to pursue the
following seven themes.
Cost • Input costs, time, quantity and geography for sourcing
• Driving private brand profitability and and profit • Working capital management
share in line with the overall banner gaps
proposition.
• Indexing margins to share and space
across categories, products & suppliers. Assortmen • Use PL to maintain profit umbrella / negotiating position
t • Rationalize supplier portfolio, SKUs to enhance profitability
• Optimize portfolio for profitability in line
balancing
with overall strategic role of the category.
• Win with a few suppliers—strategic
Strategic • Strategic partnership with net margin leader
partnerships with some suppliers for partnershi • Improve speed to shelf
preferential treatment. p
• Leveraging scale for increased
efficiency, and price negotiations. • Assess scale efficiencies
• Discovering a wider base of Scal • Negotiate holistically across categories
e
suppliers closer to source.
• Maintaining parity across markets and
zones. Supplier
• Identify wider supplier base to get low cost / best sourcing
discover
y
• Drive cost parity across different markets of buy

Parit
• Increase sourcing from tax / logistics friendly options
y

Industry
42
Winning retailers execute relentlessly on five dimensions
BCG's experience reveals five key

dimensions along which best in class
retailers differentiate vs competition. In our
experience, flawless execution on five
dimensions can add upto 600 bps of
EBITDA. Are we keeping the right merchandise?
1. Customization to catchment
Are we driving consumer engagement?
These include the following: 2. Minimum credible option width & SKU density
17. Local marketing initiatives
• Ensuring the right merchandize: 3. Collection replacement frequency / depth of buy
18. Campaign management
Customized assortment to 4. Initial assortment allocation (% of Options to Buy)
19. In-store experience & visual merchandising
5. Age of merchandise in stores & Mark down /
catchment, credible width of 20. Leveraging multichannel (omni-channel)
outlet policy
assortment, role of non-core portfolio. functionality to drive engagement
6. Role of non core e.g. accessories &
• Efficient supply chain: Ensure in extent of play
store availability for depth of E A
assortment on time for season.
• Focus on the right products: Optimal
Retail Is the merchandise available?
space allocation, virtual merchandising, Are we delivering the full
Excellenc 7. Essentials availability
right zoning of "hot spots". brand experience?
D B
13. Interior design, Atmosphere &
e 8. Prompt & on-time replenishment for high
• Delivering the banner experience: demand, unpredictable assortment e.g.
Product carriers
In-store experience (store design, layout, 14. Experience of brand signature
fashion
staff etc.) in line with brand experience. C 9. SKU sizes e.g. Size curve
15. Window & hotspot presentation;
differences across stores
• Driving consumer engagement: 16. Knowledgeable store-staff
10. Timing of season launch
Localized activation & campaign Space Allocation
management, omni-channel
experience.
Are we focusing on the right product?
11. Zoning (# / size of sales areas & hot spots, size entry area,
cash desk and fitting rooms, Relative position worlds &
themes)
12. Space allocation to sub-brands & product categories

43
Enable the Transformation

44

45
Several opportunities for leveraging analytics for retailers
Vast amounts of new data is being created

from internet and smart devices on a daily
basis. Synthesis of this data can produce Analytical Scope across various elements of value chain
valuable intelligence that can help retailers
make smarter decisions across various
processes of the value chain.
Customer Marketing Logistics Merchandising
Operations
The exhibit on the right shows how
retailers can leverage analytics and BIG
data across the value chain to create
significant value.
As an illustration, for the customer

analytics, retailers can:
• Creating segments beyond 1
rudimentary characteristics to create Predict Assortment
differentiated shopper experience behavior/ Segmentation Inventory Profitability Assortment
Planning Product
and drive behavior differentially. events (ex- and Profiling
Affinity
Management Analysis Optimization
• Target with specific content, ante)
channel and type of offer
differentially. Promotion Route Market Basket
Sales Drivers
• Carry out sentiment analysis from social Customer Effectiveness Optimization Analysis
media platforms e.g. Facebook.
2
• Assess customer value based on
recency, frequency and monetary Price Elasticity Supplier Workforce
Lifetime Cross-sell/Up-sell Cross Sell
and Optimization Performance Optimization
purchase value and arrive at customer V
life cycle value. 3 a
• Assess by segment drivers of Audit l
behavior/ u Market Mix Go-to-market Fraud Detection / Regular Price
customer loyalty and retention. events (ex- Retention/Loyalty
e Modeling advantage Loss Prevention Optimization
Alert
post)
(now)
Source: BCG
Case Experience. The Boston Consulting Group · Confederation o f Indian
Industry
46
Retailers in early stages of maturity should prioritize opportunities with BIG data
Although some leading companies have

become deft at data handling, most retailers
haven't yet built analytical capabilities and Illustration: Enhancing promotion effectiveness
internal processes. Merchants and
marketers often recycle old tactics and fail Vendor funding
to leverage contextual information around as a direct
transactions that could potentially effect Lift in contribution Value of new Incremental
sales. sales traffic from supply-
from a the "halo chain costs Real incremental
promotion effect" margin
Price
We believe for retailers who are in the discount Incremental
early stages of the maturity curve there are marketing
Cannibalization of sales Incrementa
three large opportunities: cost l store-
Baseline of other
from substitutable items, and
• Enhancing effectiveness of s labor costs
sales the "pull forward effect" of
promotions: 30 -50% promotions reduced sales following a
have no positive effect on sales/margins. promotion
Retailers need to build the right
baseline, tease out cannibalization and
'halo' effect to gauge true impact. Before the geoanalytics approach, pricing zones Analyzing customers shopping behavior
• Surgical pricing: Moving from largely mirrored state boundaries led to better pricing across a region
geography based pricing to pricing zones
based on customer segments.
• Understanding value of networks
and partnerships: Retailers often
don't view their network as an asset.
BIG data allows retailers to map their
network to the core target segment of
suppliers and partner effectively to get a
disproportionate share.

47
Retailers need to build analytics capabilities around six dimensions
To realize the potential from analytics,

companies need to systematically Capability building required across six key dimensions
build capabilities:
• Platform: Use a standardized, scalable
data platform, that allows internal and
external applications to access the data
securely, cheaply and effectively. • Build a scalable, low cost and flexible IT structure
Platform • Integrate data across multiple sources to create an integrated view
• Organization: Ensure access to high
quality skills, embed a rapid learn test
approach.
• Opportunity identification: Identify • Build talent pool of high quality analytical skills
innovative opportunities to use data Organization • Nurture data culture with leaders committing to agreed sources of truth.
• Embed rapid test and learn approach
through new insights, process
improvements, new operating models.
• Ecosystem: Lead or take part in a • Use new and existing data sources to generate new revenue streams, business units or
ecosystems made up of suppliers/ peers, Opportunity businesses based on the data
to share scale and capabilities. Identification • Use internal/external data across enterprise for real time decisions
• Culture: Create an open culture and
structure with clear rules and
incentives. • Develop ecosystem partners with clear view of power and profit pools
• Trust: Maintain trust of customers, data Ecosystem • Understand key roles, identify suitable partners and negotiate commercial terms
providers and regulators to ensure that
captured data can be used to enable the
opportunities. • Agree rules, incentives and IP to align efforts in ecosystem
Culture • Build digital infrastructure to enable data sharing
• Develop KPIs and monitor performance closely and regularly
• Ensure data accuracy and security: invest in necessary technology

• Give users/partners control and confidence on data usage
Trust • Demonstrate compelling value exchange: Explain how and why data is collected
and how customers benefit

Industry
48
Need to address shortage of talent pool across levels
Growth in business has created greater

and superior opportunities for available
Shortage of talent pool key concern for organizations
talent pool however retailers are finding
it increasingly difficult to find and retain
Index (2000=100)
right resources.
1.000 Wage rates
(manufacturing)
This may be attributed to intense 'Cost of
competition, misalignment of skills, manpower ' Nominal GDP
500
limited investment in personal growth and increasing per capita
development of employees and legacy rapidly
systems.
0
Employees today are ambitious and aspire
to work for companies which provide them 2000 2005 2010 2015
the highest level of financial,
psychological and intellectual satisfaction.
• Inadequate pipelines / succession plans
• Limited global exposure
It is in the interest of organizations to • Cross functional exposure very late in tenure
redefine the proposition & capability build Senior
m anagement
program for their employees to develop the
right talent pool to meet their growth • "Stretched" supply pool
aspirations. • Inexperienced and unprepared for future
Not easy to Mid
find the challenges
management
• Technical people expected to play managerial roles
right
talent /
skills
• Low employability due to lack of quality
education
Entry level grad • Acute shortage due to limited technical /
skilled labour vocational training
• High attrition
• Attracted by new emerging sectors
Source: RBI, BCG analyses.

49
Retailers would need to build a new set of capabilities in the new world
Whilst retailers would witness strong

growth over the next few years, the shape of
this growth would be very different. In the Basic Advanced
emerging reality, retailers would need to 1
 Basic e-commerce capabilities  Curated, personalized content and assortment
build a new set of capabilities to win. We
 Immersive websites and mobile app with  Target microsegments
would like to call out four such capabilities: Omni-channel
rich, immersive content  In-store experience with social sharing, virtual wall,
• Omni-channel: Ability to meet the ( includes digital
 Track basic KPIs across consumer endless aisles etc
consumer needs across the purchase marketing) pathway  Multiple delivery and pick up models
pathway. Consumers would increasingly  Updated catalogue online
demand curated/personalized offering,
any time and across channels in a 2
 Secure, accurate data captured with  Analytics used to create new revenue streams,
seamless manner.
process to ensure data hygiene business models
• Analytics/ Big Data: Build BIG data  Legacy based models for driving  Data sources integrated to create one view of
capabilities to leverage the terabytes of efficiencies in the business the customer/supplier
data for superior decision making in the Big Data and
 Customer analytics team works in silos  Specialized, high quality analytical talent pool
context consumers make choices. analytics
 Rapid, test and learn approach as a part of the culture
• Agile IT platforms: Create low cost,  Scalable, Eco-system partnerships
scalable IT platforms with a learn, test
develop approach.
• Supply chain: Create omni-channel 4
 Core ERP and stand alone applications—  Low cost, scalable IT with agile platform
fragmented supply chains capable of
mix of legacy platforms and "bolt ons" of  Incubator approach to use IT for disruption
handling unpredictable bi- directional new applications
Agile IT  Real time update of transactions across
flows.
channels
6
 Accurate real-time inventory in DC  Integrated inventory in stores, DC, stores, online
 Efficient product check and repackaging in and supplier
store and DC  De-averaged flow paths—basis SKU, customer type
Supply chain and economics.
 Handling capabilities for inner packaging in
Warehouse

Industry
50
Adapt smart simplicity principles to manage complexity in organization structures
Most retailers have made changes in their

organization in a piecemeal manner to
respond to a change in the environment e.g.
addition of new centres of excellence or
adding an omni-channel team now. They +
have solved for complexity by adding more Leadership
• Managerial
complexity. It is not uncommon for
value-added
companies to believe that the solution to the
problem lies in adding more KPIs, more
+
governance and more coordinators—
resulting in what we call as
complicatedness.
Engagement + +
• Value-adding
Three symptoms indicate increasing execution Cooperation
complicatedness: • Each one's behavior increases the
+ effectiveness of others
• Slow decision making
• Proliferation of coordination
meetings and roles 1 2
• Silo working or repetitive work
3
being done Organization design
A. Structure—line and support A. CriticalProcess excellence
business processes and A. Critical enablers
Leadership
B. Delayering interfaces B. Engagement
To address this, retailers should adapt what
C. Individual and shared B. Critical support processes and C. Collaboration
we call Smart Simplicity which involves interfaces
accountabilities D. Critical capabilities
three steps: C. Corporate policies and practices
D. Decision rights
• Less Structure: Focus on value- E. Forums and overlays
adding roles and removing layers
• Less Bureaucracy: Eliminate waste
in processes while ensuring suitable
systems support All five interventions in parallel Change embedded and Equal emphasis on 'soft-side' of
• More Capabilities: Create new to make the organization institutionalized in key business change to enable behavior
capabilities at individual, team and model effective processes and policies change
organizational levels

51

52

53
CEO Speak: What would shape retail industry in the next decade?
BS Nagesh Shailesh Chaturvedi

Founder Managing Director
TRRAIN Tommy Hilfiger India
Non Executive
Vice chairman
Shoppers' Stop
,,
Collaboration between online players and brick and mortar players
especially the smaller unorganized family run shops. These shops are
getting their next generations into the business and therefore for them
to adopt omnichannel as a technology will be easier and faster
,,
While ecommerce may be a ready answer, premiumization and upgradation of
consumption may also be a very strong force going forward. With growth of
Indian economy, discretionary spends will rise faster and premium product
will gain share, as seen in other emerging markets of Russia and China.
Indian consumers will become more sophisticated, discerning & demanding
and will be ready to pay bit more for their choices.
Shashwat Goenka Pushpa Bector

Sector Head—Spencer's Retail Ltd. Executive VP and Head
RP Sanjiv Goenka Group DLF Mall of India
,,
With the expected exponential increase in digitally savvy consumers
over the next decade, technology will play a key role in the
development of the Indian retail sector. Retailers will have to adopt
technology in both back-end and front-end, to bring the digitally savvy
,,
Experiential way of retailing shall be the trend forward. Stores will invest in
technology to make it an experiential zone. It could be in ways of
1. Embracing omni channel retailing—endless aisles (online & offline
salesconverging)
consumer into the mainstream retail fold. 2. Digital media—single platform to present fashion across continent
3. Digitized trial rooms—with digitized color changes, body mapping &
styling
4. Merchandise influenced by technology—such as Uniqlo's heat tech

Industry
54
For Further Reading
The Boston Consulting Group publishes reports, articles and Retail 2020: Retrospect, Reinvent, Rewrite— Staying Ahead of the Customer: Retail
books on related topics that may be of interest to senior Leadership Perspective on Trends in Indian Transformation and Reinvention
executives. Recent examples include those listed here. Retail A focus by The Boston Consulting Group, September 2013
A report by The Boston Consulting Group in association
with The Retailers Association of India (RAI), February
Street-Level Segmentation in India: Winning Big 2015 Winning with Uncertainty
by Targeting Small A report by The Boston Consulting Group in association
A focus by The Boston Consulting Group, December 2015 Four Digital Enablers: Bringing technology into with Confederation of Indian Industry (CII), June 2013
the retail store
A focus by The Boston Consulting Group, February 2015
From Buzz to Bucks: Capitalizing on India's
The Return of Growth—The 2015 Consumer "Digitally Influenced" Consumers
Value Creators Series The Retail Revival Series—Succeeding with a A focus by The Boston Consulting Group, April 2013
A report by The Boston Consulting Group, Store-led strategy
December 2015 A focus by The Boston Consulting Group, September 2014 The $10 Trillion Prize: Captivating the Newly
Affluent in China and India
Rocket: Eight Lessons to Secure Infinite Growth A book by Michael J. Silverstein, Abheek Singhi, Carol
A book by Michael J. Silverstein, Dylan Bolden, Rune In omnichannel Retail It's Still About Detail Liao and David Michael, 2012
Jacobsen, and Rohan Sajdeh, 2015 An article by The Boston Consulting Group, August 2014
How Retailers Can Improve Promotion

Effectiveness: A Four-Part Approach to Changing Your Orbit: The Handbook for
Generating Growth Transformation in FMCG and Retail Businesses
A focus by The Boston Consulting Group, July A report by The Boston Consulting Group,
2015 June 2014
Winning at omnichannel Pricing—Maximizing
Growth While Protecting Margins The Evolving Convenience-Store Consumer—
A focus by The Boston Consulting Group in association with Drivers of brand differentiation and Customer
Boomerang Commerce, May 2015 Choice
A report by The Boston Consulting Group,
February 2014

55
Note to the Reader
About the authors Acknowledgements For Further Contact
Abheek Singhi is a Senior Partner and This study was undertaken by the Boston Consulting Group (BCG) with support If you would like to discuss the themes and
Director in the Mumbai office of The from the Confederation of Indian Industry (CII). content of this report, please contact:
Boston Consulting Group and is the Head of
Abheek Singhi
BCG's Consumer and Retail practise in We would like to thank Mr. Shashwat Goenka—Chairman CII National Committee on
Senior Partner and Director
Asia Pacific. Retail 2015-16 and Sector Head, Spencers Retail, RP Sanjiv Goenka Group for his
BCG Mumbai
support and guidance while developing this report
+91 226749 7017
Amitabh Mall is a Partner and Director in
We would also like to acknowledge the contribution of Kanika Sanghi, who is a [email protected]
the Mumbai office of The Boston
Consulting Group. Principal in the Mumbai office of the Boston Consulting Group and co- leads the Center
for Consumer Insight in India.
Amitabh Mall
Namit Puri is a Principal in the New Delhi
We are grateful to the BCG Consumer Practise for providing invaluable insights, Partner and Director
office of The Boston Consulting Group.
concepts, and frameworks that shaped the key themes of this report. BCG Mumbai
+91 226749 7079
[email protected]
We would like to thank Vinayak Tendulkar, Roshan Harish, Anurag Mishra
and Indira Ghagare for their assistance in writing this report. Namit Puri
Principal
We are thankful to Jasmin Pithawala and Maneck Katrak for managing the marketing BCG New Delhi
process as well as Jamshed Daruwalla and Pradeep Hire for their contribution to the +91 124459 7339
editing, design and production of this report. [email protected]

Industry
© The Boston Consulting Group, Inc. 2016. All rights reserved.
For information or permission to reprint, please contact BCG at:

E–mail: bcg–[email protected]
Fax: +91226749 7001, attention BCG/Permissions
Mail: BCG/Permissions
The Boston Consulting Group (India) Private Limited.
Nariman Bhavan, 14th Floor
227, Nariman Point
Mumbai 400021 (India)
For information or permission to reprint, please contact Confederation of Indian Industry at:
E–mail: [email protected] • Website: www.cii.in
Tel: Fax: +911145771000 / 24629994–7
Mail: +9111 24626149
Confederation of Indian Industry The
Mantosh Sondhi Centre
23, Institutional Area, Lodi Road,
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To find the latest BCG content and register to receive e–alerts on this topic or others, please visit bcgperspectives.com. Follow
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01/2016
Confederation of Indian
Industry

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CII National Retail Summit: 2016

CII National Retail Summit:

January 2016 | The Boston Consulting Group

27 Winning in Medium Term

39 Fund the Journey

45 Enable the Transformation

54 For Further Reading

55 Note to the Reader

The Boston Consulting Group · Confederation o f Indian

Shashwat Goenka Abheek Singhi

The Boston Consulting Group · Confederation o f Indian