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Modernization of Kirana Stores in India

kirana stores

Over the last ten years, the retail market in India has experienced significant growth and transformation. The overall market size of the Indian retail market was $275.8 bn in 2008-09 and has grown to $700 bn as of 2019. India is currently the 4th largest retail market in the world and is further expected to grow to $1.1 to 1.3 tn by 2025. The retail landscape in India is largely unorganized and holds 88% of the overall retail market; it is a nation of shopkeepers. This unorganized segment, otherwise known as the informal segment, consists of ~13 million Kirana and neighborhood stores. These stores play a pivotal role in the Indian retail sector which contributes almost 11% of the GDP in India and 8% of its total workforce.

Over the past few years, however, there has been a shift in the shopping patterns of consumers. Consumers are increasingly buying online, shopping at supermarkets or larger modern stores and as a result, Kirana stores are losing their customer base. By 2021, the share of trade managed by Kirana stores is expected to reduce to 75% from the current level of 88%. Some of the reasons contributing to the decline in share include but are not limited to lag in adoption of modern retailing techniques such as digital payments, inventory management or even an official store layout. This disruption emerging in the informal segment of retail can be ameliorated through modernization of Kirana stores.

Factors contributing to the need for transformation of Kirana stores:

  1. Change in industry structure – Retail modernization began in India in early 2000s. The launch of affordable 4G services by Jio and the rise of digital wallets after demonetization paved way for newer business models to emerge and rapidly grow. Udaan, a B2B e-commerce company became a unicorn in just two years. IndiaMart was able to turn profitable and B2C players like BigBasket spawned similar business models aimed at making grocery shopping extremely convenient for consumers through the use of apps. Food and grocery items account for more than 65%  of the retail sector in India and are majorly sold in kirana stores. Hence, rise of startups and even digital natives like amazon contribute to declining share of kirana stores.
  2. Growth in consumption – Growing affluence in India will transform India from a lower-income-class-led economy to one driven by the middle class by 2030. Over 100 million households will be added to the high and upper middle classes and will drive 60% of the consumer spending (almost $3 tn of consumption).
  3. Evolving consumer preferences – Rising adoption of new retailing formats shows new buying preferences of Indian consumers. Online players have created brand awareness even in the smallest towns. Malls have come up in Tier II and Tier III cities such as Lucknow, Kanpur, Panaji and Udaipur to name a few. Discretionary spending is expected to rise as the number of women in the workforce will likely grow by 40% to touch 10 million over the next five years.

During the COVID-19 lockdown in India, larger stores struggled to deliver due to supply chain disruptions and consumers depended mostly on Kirana stores for buying daily essentials. Due to their links with local distributors, Kirana stores were able to meet the demand of the consumers. Many Kirana stores accepted digital payments during this time through patym or other digital wallets indicating their willingness to upgrade to modern digital practices. While only 3% of Kiranas were tech enabled in 2018, 70% Kirana stores in urban areas and 37% Kirana stores in tier 2 cities are ready to embrace technology to scale up their business.

While mobile internet, software solutions, and unified payments interfaces are some of the key drivers for modern retail, they can also be used to make Kirana stores an important growth channel for the industry. Many large players and startups in the industry have taken initiatives to help modernize Kirana stores. FMCG companies like Hindustan Unilever and retail giants like Reliance Industries, Walmart India, and Metro Cash & Carry, startups like Kirana King, ShopX and even digital payments companies like PhonePe have created a range of engagement models to work with Kirana stores to modernize them, providing them tech solutions for customer-facing and backend operations or meeting their working capital needs. In 2020, Google announced a $10 bn  ‘Google for India Digitisation Fund’ to accelerate India’s digital transition. Amazon plans to invest $1 bn to bring 10 million small and medium businesses online through services like e-commerce on-boarding, imaging, and cataloguing and warehousing.

Through such initiatives, more and more Kirana stores are now participating in the transformation process. With rising adoption of e-commerce, Kirana stores have begun to incorporate tech-driven features such as mobile commerce, loyalty programs and rewards, and digital inventory management with the help of B2B platforms.

Such initiatives have benefitted the stores in the following areas:

  1. Efficient Inventory Management: Most store owners enjoy limited visibility into their inventory and this often leads to damaged and expired products. Efficient inventory management can be a challenge for most Kirana stores as 98% of them are operated and managed by a single person. However, the increase in the usage of apps by Kirana stores to procure daily goods has provided them wider access to products without increasing working capital. Prior to transformation stores largely sold grocery staples however, as per a study conducted by Accenture, post-transformation, stores witnessed expanded sales in all FMCG segments.
  2. Organised Transaction System: 95% of Kirana store transactions are below INR 200 and more than 80%  of India’s retail stores continue to be cash-intensive. Transactions done in cash can be time consuming. Switching to digital modes of payments has addressed this concern for Kirana stores and streamlined the transaction process. Majority of retailers said that 30% to 50% of their sales were happening through credit card/digital payment methods. These methods enable these stores to maintain an organised record of transaction data. More than 60% of retailers in rural areas indicated willingness to go cashless driven by factors like customer interest, peer pressure and the perceived value of cashless transactions. The Reserve Bank of India has set up Payments Infrastructure Development Fund with an initial contribution of INR 500 crore to boost usage of POS services by small vendors and retailers in tier 3 and tier 6 cities.
  3. Higher turnover: As per a study conducted by Accenture, every Kirana store that went through the transformation process experienced revenue growth between the range of 20-300% while profits grew by 30-400%. In the midst of lockdown, 40% of Kirana stores polled in a survey were willing to partner up with online delivery and supply platforms to help them grow.

Furthermore, modernization of Kirana stores will also benefit the economy in the following key areas: 

  1. Rural Consumption and GDP: In under-served semi-urban and rural markets, consumption demands are largely unmet consequently forcing residents to visit nearby towns for their grocery needs. Retail modernization could boost consumption largely in these markets and therefore also provide a large boost to the GDP.
  2. Formal retail economy: 1.4 million stores out of 13 million Kirana stores are expected to undergo transformation. This could expand the formal economy by approximately 250% with computerized billing and ledger systems thereby enabling the government to have better visibility and traceability.
  3. Tax contribution: Tax contribution from transformed Kirana stores grew by 50%. Overall estimated transformation of 1.4 million stores would then lead to a 240%  jump in income tax contribution.
  4. Employment: 3.2 million jobs are estimated to be created through the transformation of 1.4 million stores as the retail industry can support low-skilled jobs at a mass scale.

In conclusion, the potential for reduction in unemployment, boost to consumption, tax collection, and GDP coupled with rising adoption of e-commerce make this process of modernization inevitable. Through collaborative efforts and initiatives of both the public and the private sector, the Kirana stores of the future will be more connected, digital, and engaging.