FoodWorld: Pioneering Organized Food Retailing in India

Abstract:
The case discusses the emergence and expansion of the food supermarket chain, FoodWorld (FW) in India during the 1990s and early 2000s, and traces its growth over the years. The strategies devised to establish FW have been examined in detail. The case discusses in depth the issues of store location, store design and promotional initiatives that were given special attention while establishing FW outlets. The case also talks about the rationale behind FW's 'private brand' initiative and briefly discusses how the company made use of information technology for achieving operational excellence. Finally, the case takes a look at the developments in the Indian food retailing industry and talks about FW's future prospects.
Issues:
» Understand the impact and importance of store location, store design, merchandising, and promotional exercises in the success of a retailing initiative

» Examine how information technology tools can be utilized for improving the operational efficiency, especially in a hub and spoke setup for a retail outlet chain
As India opened up post-1990, the availability of products increased dramatically. Indians and Indian families were exposed to new products and tastes, as they started traveling more and processed food started becoming a larger part of the monthly household purchase. We clearly saw an opportunity in retailing. One has to understand that the size of the grocery market in India is huge. A rough estimate would give us something like Rs 4 trillion ." 1
"We are clearly the market makers. We have created an industry, along with huge employment opportunities for a lot of people."
- Raghu Pillai, CEO, RPG-Retail.


Introduction
In July 2001, along with renowned jam brands such as Kissan and Sil, a new brand was prominently being displayed on the shelves of India's leading food retailer, FoodWorld (FW), owned by the R P Goenka (RPG) group of companies.
The jam was sold under the brand name 'FoodWorld' and was priced much lower than the other brands. Within a month of their launch, FoodWorld jams accounted for 17% of FW's sales in that category. This development marked one of the first major instances of the conflict between 'private store brands' and 'FMCG company brands' in India. While the phenomenon was rather common in countries such as the US and the UK, FW became the first retailing chain to challenge the might of leading FMCG companies in the country. Beginning with jam, honey, phenyl and herbal sanitizers, FW soon extended its branding initiatives to other products as well. These products could be placed under three main categories - commodities, processed food items, and non-food items.

FW had launched (or intended to launch) products like dry groceries, toilet cleaners, beverages, dish washing powders, detergents, powder, ketchup, sauces, tea, coffee, bakery products, breakfast cereals, shampoos and many more items in the future under the FW brand. While private brands offered the benefit of higher margins, they also brought with them the burden of brand management, something in which FW did not have to invest in, while selling products manufactured by other companies.

Considering the impact of this move on the confidence of other manufacturers, analysts felt that leading manufacturers might suspect that FW was promoting its own brands at the cost of their brands. However, FW officials stressed that all the products it launched were in segments where there were gaps in its product portfolio, either in terms of price, supply or quality. These developments highlighted the fact that in the early 21st century, organized food retailing in India was catching up with other Western countries. The 'posh' shopping experience associated with FW outlets was far more appealing than the small, unappealing stores at which Indian households shopped for since decades. How FW became the first venture to successfully cover many parts of the country is essentially a story of good timing, business insight and strong strategic support from the promoters.

Background Note
The emergence of the RPG group of companies dates back to the 1820s, when an entrepreneur, Ram Dutt Goenka traveled from Rajasthan to Kolkata (West Bengal), looking for a good business opportunity.
His efforts paid off and very soon, he started doing business with the East India Company. As the business flourished, more people from the Goenka clan joined in and became involved in the company's other ventures such as banking, textiles, jute and tea. Over the decades, the Goenkas became names worth reckoning in the Indian business scene.

However, the credit for laying the foundation of the RPG group (in its present form) goes to Rama Prasad Goenka (Goenka). Over the decades, the group diversified into a number of businesses (refer Table I for information about the RPG group of companies). Many RPG brands formed a part of almost every Indian's life.
With businesses ranging from tyres (Ceat) to cellular telephony (Sprint) and from music records (HMV/Saregama) to retailing (FW, MusicWorld, Health & Glow), the RPG group touched the lives of all classes of Indians. During 1990-2000, the group's compound annual growth rate (CAGR) was 25%.

Since the time it was established, RPG entered into partnerships with many international companies, which included 16 Fortune 500 companies. By 2001, the group had 58,573 employees, a turnover of Rs 66 billion and an asset base of Rs 68 billion. The estimates given by the Confederation of Indian Industry (CII)2 in May 2001 put the Indian retail industry's size at $ 180 billion. According to a CII-McKinsey report, the retail industry had the potential to develop into a $ 300 billion industry by the year 2010. Having realized this potential, RPG had already begun working hard towards establishing itself as the owner of the country's most successful chain of retail outlets. RPG's foray into the retail business had begun way back in 1989, when it took over the retail store chain, Spencers3...


The Foodworld Story
After carrying out an extensive study on the retailing sector, RPG short-listed clothing and supermarkets as the high return areas. However, RPG recognized that the clothing business required expertise and considerable investment for designing, branding and managing independent manufacturers, while it was comparatively easier to manage supermarkets.

Therefore, RPG decided to venture into the supermarkets business. RPG decided to call the supermarket chain FoodWorld for two reasons - firstly, the name clearly signified the range of products the stores would stock, and secondly, it could be easily translated into most of the Indian languages. Following this decision, the group carried out an extensive survey on consumer attitude towards retailing (Refer Table II). The survey revealed that operating and logistics efficiencies were crucial for the success of any retailing venture and that they could be achieved only through the use of superior technology. Since RPG did not have prior experience in this field of business, it decided to take help from an experienced player...


Establishing The Outlets
On the basis of the above information, FW defined its objective as: 'To offer the Indian housewife the freedom to choose from a wide range of products at a convenient location in a clean, bright, and functional ambience without a price penalty.'

Initially, the target customers were identified as neighborhoods that had at least 4000 households with a monthly income of more than Rs 4000. For this kind of a customer base, FW needed to start operations in a metropolitan city. Considering the fact that the cost of real estate was low in Southern India, RPG chose Chennai (formerly known as Madras) and Bangalore as the initial locations for setting up FW stores. The cities were then divided into smaller areas so that the target neighborhoods could be easily identified. Seven localities were chosen in Chennai and the first store was opened at an upper-middle-income residential area of the city, Ramaswamy Road in May 1996. RPG decided to operate on the hub and spoke model wherein it planned to have a cluster of stores across a geographical area...
The Private Brand Initiative

Having built up sizeable brand equity amongst the masses, it seemed to be natural for FW to tap the private brand initiative. Ever since its inception, FW used to sell products like rice and pulses under the brand name FoodWorld.
FW had also launched a sub-brand, 'Great Taste' for its own products, which was dropped later and the company decided to use the FoodWorld brand only. In May 1998, FW decided to introduce a new range of health food and herbal beauty products. However, as by now, customers had started associating the name 'FoodWorld' with grocery products, the company decided to sell the new range under the brand name 'Natures Bounty.' FW's private brand initiative remained rather limited, until 2001, when the portfolio was expanded to include a large number of products under the FoodWorld label. It was considered by industry observers the biggest such initiative ever undertaken in India...


Using Technology For Success
Much before it started its operations, RPG had identified technology as one of the crucial areas for success. This was one of the primary reasons that it did not start FW until a suitable technology partner (Dairy Farm) was identified. RPG noted that item-by-item inventory control would be critical for the success of FW.
So it invested in state-of-the-art cash registers and bar code scanners. At that time, there were no established norms for bar coding in India, so an entirely new bar-coding system was designed and implemented. In December 2001, FW decided to use the Internet and became the first Indian retailer to opt for the reverse auction mechanism for plastic carry bags in association with the leading Indian Internet Service Provider (ISP), Sify. FW usually procured 15 tonnes of plastic carry bags per month. To make the reverse auction process more viable, the quantity was increased to 45 tonnes(three month's requirement). The lowest bid that FW received was Rs 66 per Kg against the Rs 73 per Kg that it was paying at that time...


The Road Ahead
By the end of June 2002, FW had established 81 supermarkets in Chennai, Bangalore, Hyderabad and Pune. More than 1,500 employees served over 600,000 customers per month (refer Exhibit I for FW's presence in India). The focus on private labels resulted in the success of 'Natures Bounty' and 'FoodWorld' brands, together accounting for about 22% of its sales by 2002. New stores were being opened regularly with the latest store opening in early-2003, in Hyderabad. Having stabilized to a great extent by February 2003, FW had begun experimenting with varying retail formats...