West's Way Of Groceries Doesn't Sell

Tucked away in a middle-class neighborhood here, the Arora Store is hardly a showcase of modern retailing. But this and other mom-and-pop grocers are the bane of foreign supermarket chains trying to bring the concept to India.

"I never go to the supermarket,'' says Mohini Bahl, a housewife in the cramped Arora Store. Shoppers here are not treated to wide aisles where they can browse neatly stacked shelves in the comfort of air conditioning and Muzak. Instead, Mrs. Bahl often has to jostle for space at the counter and ask owner Ajay Arora or his helper to retrieve items from glass-enclosed shelves.

Still, "Whatever I want, he has got,'' says Bahl, clutching an Indian women's magazine. "If I ring him up, he'll send things over. He's very obliging.'' Home delivery is free, and accounts are settled at the customer's convenience, interest-free.

Across town, a young American eagerly eyes India's 1 billion mouths to feed - but wonders how his supermarket chain can compete. "The corner grocer is so entrenched, he's part of the Indian culture,'' says Andrew Holloway, senior representative of Nanz Food Products Ltd., a chain started in 1994 by Marsh Supermarkets Inc. of Indianapolis, Nanz Group of Germany, and Escorts Goetze of India.

India is Marsh's first foray overseas. The family-owned chain operates 90 supermarkets and 190 convenience stores in the American Midwest. It introduced laser scanners at checkout counters in the United States.

But its pioneering practices will be put to the test in India. Small grocery stores continue to proliferate here and are expected to dominate food retailing for the foreseeable future, according to Org-Marg, a leading Indian market research firm. So far, international grocers, lured by India's rapid economic growth, have made few inroads in creating a market for supermarkets.

Neither Nanz nor a chain called FoodWorld, run by the Indian conglomerate RPG Enterprises, has managed to break even since opening in 1994 and 1996, respectively. But both are bullish enough to continue expanding. That's the only way they can generate enough volume to deliver what modern supermarket chains have delivered in the West: lower prices.

"Supermarkets simply cannot match the [lower] cost base of the corner grocer,'' says Rama Bijapurkar, a marketing consultant in Bombay.

In India, hefty operational costs, due to poor infrastructure, make running a large supermarket very expensive. The cost of electricity, for example, represents about 3 percent of sales, compared with less than 1 percent in the United States. Frequent power outages make it necessary for Nanz to install diesel generators - usually two - in every outlet. And because of old laws that limit urban development, real-estate prices in Bombay and New Delhi are higher than in many American and European cities. Most mom-and-pop shops have been passed down for generations: Property costs are not a factor for their owners.

Even calling India's first modern food stores "supermarkets" is misleading. The average size of a Nanz outlet in India is 3,500 square feet, compared with 55,000 square feet for the average Marsh store in Ohio and Indiana. To Western visitors, the stores are not distinctive, but for Indians they represent improvements that have swept the country since the economy began opening up in the early 1990s.

After several decades of striving for economic self-reliance, New Delhi began allowing foreign companies to invest. As a result, Indians increasingly can buy foreign brands of goods, from shampoo and disposable diapers to electronics and modern cars.

Nonetheless, "We are a long way away from a time when organized retailers truly become a threat to small retailers,'' says Pradipta Mohapatra, president of RPG's retail group.

AFTER 2-1/2 years, FoodWorld stores account for about 2 percent of all sales of household goods in the southern city of Madras. The chain has introduced promotions such as coupons, fixtures in local newspapers in the West. And, for the first time in India, manufacturers are teaming up with retailers. Both FoodWorld and Nanz have started sourcing, packaging, and branding Indian staples such as lentils and rice. This has helped lower prices for consumers and boost the chains' margins.

In a developing country such as India, the advent of advanced food retailing can play an important role in raising the quality of fresh and packaged products. Corner grocers generally stock fewer brands than the supermarket. But if a client desires a particular product, they are happy to stock it.

Mr. Arora, for one, keeps green olives for a handful of clients, and is happy to find just about anything to satisfy his loyal customers. His store stocks everything from basic food and household items, such as rice and laundry detergent, to film and Hindi musical tapes.

The chains will have to change consumers' behavior to see profits. Even as it opens new stores, Nanz has had to put some local innovations on hold: It abandoned selling fresh produce after it couldn't compete with pushcart peddlers who roam New Delhi's neighborhoods.

Reluctant consumers are not the only hurdle for supermarkets. Nanz faced a baptism by sledgehammer because of unclear zoning regulations. The municipal government in New Delhi dispatched a demolition team to Nanz's first store after notifying the chain that the site it had leased could not be used for commercial activities. A year later, authorities tore down the top two stories of a building where another outlet was located, alleging illegal construction.

Despite such setbacks, Nanz and FoodWorld are hopeful that their efforts will pay off when the market matures.

But Arora is already taking steps to stay ahead of the competition. He plans to invest in a computer and an air conditioner, and has applied for another telephone line to ensure his customers are not kept waiting when they call.