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A study on the value chain of domestic multi brand retail in the convenience stores format and their interrelationship at Bangalore

Forschungsarbeit 2012 183 Seiten

BWL - Unternehmensführung, Management, Organisation

Leseprobe

Table of Contents

ABSTRACT

1 Introduction
1.1 Industry Overview
1.2 FDI Scenario in India
1.3 Multi Brand Retail
1.4 Overview of Formats and Channels
1.4.1 Supermarkets
1.4.2 Convenience Stores
1.4.3 Discount Stores
1.5 Regulatory Framework
1.6 Foreign Direct Investment
1.6.1 Foreign Exchange Management Act (1999)
1.7 Business Model in the Convenience Store Format
1.8 Introduction to Drivers, Factors and Variables
1.9 Need for this Study

2 Review of Literature
2.1 Studies Related to Foreign Direct Investment
2.2 Studies Related to Supply Chain and Value Chain
2.2.1 Key Drivers and Facilitators of Back End Operations
2.2.2 Key Drivers for Fruits and Vegetables
2.2.3 Key Cost Drivers for Front End Operations
2.3 Business Model Parameters Operating
2.3.1 Innovations in Retail Business Models
2.3.2 Innovations in Retail Pricing and Promotions
2.4 Research gap

3 Research Design
3.1 Statement of the Problem
3.2 Variables under Investigation
3.2.1 Operational Definitions
3.3 Objective of the study
3.4 Theoretical Framework
3.4.1 Back end Grocery Process Analysis
3.5 Hypotheses
3.5.1 Hypotheses Related to Back end Grocery
3.5.2 Hypotheses related to Back end fruits and vegetables
3.5.3 Hypotheses related to Front end supermarket
3.5.4 Hypotheses related to Front end Fruits and Vegetables
3.5.5 Hypotheses related to Back end Grocery Significant Influence of Factors
3.5.6 Hypotheses related to Back end Fruits and Vegetables Significant Influence of Factors
3.5.7 Hypotheses related to Front end Supermarket Significant Influence of Factors
3.5.8 Hypotheses related to Front end Fruits and Vegetables Significant Influence of Factors
3.6 Sample of the Study
3.6.1 Sample Characteristics (Back End)
3.6.2 Sample Characteristics (Front end)
3.7 Sampling Techniques Used
3.8 Tools Adopted for the Study
3.9 Data Collection
3.9.1 Primary Data
3.9.2 Secondary Data
3.9.3 Statistical Techniques and Tools
3.10 Limitations of the Study

4 Analysis and interpretation
4.1 Overview of Analysis
4.2 Correlation Matrix
4.2.1 Back end Grocery Significance of Variables and Regression Model Fit
4.2.2 Back end Grocery Significance of Relation between Variables
4.2.3 Back end Grocery Significant Predictors
4.2.4 Back end Fruits and Vegetables Significance of Variables and Regression Model Fit
4.2.5 Back end Fruit and Vegetables Significance of Relation Between Variables
4.2.6 Back end Fruits and Vegetables Significant Predictors
4.2.7 Front end Supermarket Significance of Variables and Regression Model Fit
4.2.8 Front end Supermarket Significance of Relation between Variables
4.2.9 Supermarket Significant Predictors
4.2.10 Front end Fruits and Vegetables Significance of Variables and Regression Model Fit
4.2.11 Front end Fruits and Vegetables Significance of Relation between Variables
4.2.12 Front end Fruits and Vegetables Significant Predictors
4.3 Back end Grocery Simulation Original mix
4.3.1 Back End Grocery Simulation One on Original Base
4.3.2 Back end Grocery Simulation Two Back end Grocery Simulation Two on Original Base
4.3.3 Back end Grocery Simulation Three on Original Base
4.3.4 Back end Grocery Simulation Four on Original Base
4.4 Back end Fruits and Vegetables Simulation Original Base
4.4.1 Back end Fruits and Vegetables Simulation One on Original Base
4.4.2 Back end Fruits and Vegetables Simulation Two on Original Base
4.4.3 Back end Fruits and Vegetables Simulation Three on Original Base
4.4.4 Front end Supermarket Simulation Original Base
4.4.5 Front End Supermarket Simulation One on Original Base
4.4.6 Front end Supermarket Simulation Two on Original Base
4.4.7 Front end Supermarket Simulation Three on Original Base
4.4.8 Front end Fruits and Vegetables Simulation Original Base
4.4.9 Front end Fruits and Vegetables Simulation One on Original Base
4.4.10 Front end Fruits and Vegetables Simulation Two on Original Base
4.4.11 Front end Fruits and Vegetables Simulation Three on Original Base
4.4.12 Front end Fruits and Vegetables Simulation Four on Original Base
4.5 Front End Supermarket Break Even Indicators
4.6 Front end Supermarket Sensitivity Analysis on Manpower
4.6.1 Front end Supermarket Sensitivity Analysis on Rent
4.6.2 Front end Supermarket Sensitivity Analysis on Manpower, Rent and Facility
4.7 Business Model Matrix
4.8 Hub and Spoke Concept for Front end Supermarket
4.9 Conclusions

5 Summary and Conclusion
5.1 Need and Rationale for the Study
5.2 Statement of the Problem
5.3 Research Objectives
5.4 Variables of the Study
5.5 Hypotheses
5.5.1 Hypotheses related to Front end fruits and vegetables
5.5.2 Hypotheses related to Back end grocery significant influence of factors
5.5.3 Hypotheses related to Back end fruits and vegetables significant influence of factors
5.5.4 Hypotheses related to Front end Supermarket Significant Influence of Factors
5.5.5 Hypotheses related to Front end Fruits and Vegetables Significant Influence of Factors
5.6 Research Design
5.7 Data Analysis
5.8 Findings from the Study
5.9 Managerial Implications of the Study
5.10 Suggestions for Back end Operations
5.11 Suggestions for Front end Operations
5.12 Contributions to the Knowledge and Understanding
5.13 Limitations of the Study
5.14 Recommendations
5.15 Scope for Further Research
5.16 Conclusion

Bibliography

Appendix

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to God Almighty for bestowing upon me his grace.

This study is a result of many dedicated people who throughout the process consistently motivated and supported me.

I express my gratitude to Dr. Jain Mathew for being a constant source of inspiration and guidance.

My special thanks to Nidhi and Sudha who supported me in the analysis part despite tight deadlines.

A very significant contribution came from many experts, practitioners and consultant with whom I interacted and thank them for the same.

My Profound thanks go to my wife Sashi and daughter Ruchira who willingly sacrificed the time which was justifiably theirs.

A.S.Suresh

ABSTRACT

The main focus of this research is in the area of organised retail specifically in the convenience stores format in India.

The Indian organised retail is growing rapidly but is still in the nascent stage. There are many challenges in terms of infrastructure, supply chain efficiencies, cost structure and customer adaptability to the emerging retail formats.

India is perceived to be a lucrative destination for retail and with opening up of foreign direct investment imminent many multinational giants are eyeing India.

Indian companies are grappling with many challenges and experimenting with many formats in retail. This study attempts to understand the present scenario and the preparedness of domestic companies in consolidating their existing position to evolve a business frame work model for domestic companies to not only consolidate their existing position but also counter threats from multinationals entering into India.

The research revealed that there are not many integrated business models, though there are models on different components of supply chain and retail, Indian companies will certainly benefit from creation of integrated business model which can assist them in taking strategic decisions in terms of managing cost and revenue structure and expansion plans.

Scope of this study is Grocery and staples and fruits and vegetables business as food contributes to almost 63% in the organised retail business and was bifurcated into back end and front end operations.

This study is intended to understand the drivers and factors influencing the back end operations in the area of supply chain efficiencies and the front end operations particularly in respect of costs, revenues and key drivers to create an integrated business model frame work to drive optimisations at all levels. Sample of this study was two major organised retail companies in Bangalore catering to about seventy outlets in Bangalore and having distribution centres.

Tools used in this study was data observation sheets for all the key parameters for both back end and front end operations, in addition to unstructured in depth interview with expert group. However the protocol for the interview was predetermined to capture all key data and elements and involved some qualitative aspect and Linear programming for simulation and trying out various permutation combinations.

Some of the major findings were:

Stock keeping units, cost of procurement and secondary freight emerged as significant drivers to be controlled for efficiency and optimisation link in the back end grocery and staples.

Cost of procurement, net sales value and operations cost emerged as the key drivers of efficiency and optimisation link in the back end Fruits and Vegetables.

Rentals, Sales, Cost of goods sold, Total personnel cost and Total facilities cost had significant influence on EBIDTA in the front end super market.

Break even point for same size stores differed depending upon the location and other cost drivers.

Sensitivity analysis revealed that manpower, rent and total facilities cost had significant impact on EBIDTA in the front end.

Limitations and future areas of research have also been discussed.

List of Tables

Table 1.1 Drivers and variables

Table 3.1 Drivers and variables

Table 4.1 Correlations of factors influencing Backend Grocery and Staples weighted average margin, with Stock keeping units, sales total and sales quantity

Table 4.2 Correlations of factors influencing Backend Grocery and Staples weighted average margin, with cost of procurement, Kgs, warehouse cost and manpower

Table 4.3 Correlations of factors influencing Backend Grocery and Staples weighted average margin, inventory, processing and secondary freight

Table 4.4 Correlations of factors influencing Backend Grocery and Staples weighted average margin, with weighted average margin

Table 4.5 Correlations of factors influencing F&V Back end weighted average margin, with stock keeping units, net sales quantity and cost of procurement

Table 4.6 Correlations of factors influencing F&V Back end weighted average margin, with operations cost and weighted average margin

Table 4.7 Correlations of factors influencing supermarket front end EBDITA with sales, cost of goods sold and total personnel cost

Table 4.8 Correlations of factors influencing supermarket front end EBDITA, with rentals, inventory carrying cost and EBIDTA

Table 4.9 Correlations of factors influencing F & V front end EBDITA with sales, cost of goods sold and total selling costs

Table 4.10 Model summary of regression model fit

Table 4.11 Influence of Secondary freight, stock keeping units, cost of procurement, sales quantity, warehouse cost and sales total on weighted average margin contribution per unit

Table 4.12 The significant predictors are: Stock keeping units, Sales Total, Cost of procurement Total and Secondary Freight

Table 4.13 Model summary of Regression model fit

Table 4.14 Influence of operations cost, stock keeping units, cost of procurement and net sales value on weighted average margin

Table 4.15 Significant predictors are: constant, Cost of procurement, Net sales value and Operations cost

Table 4.16 Model summary of Regression model fit

Table 4.17 Influence of Total personnel cost, Total administration cost, Rentals, Total facilities cost, total selling cost and cost of goods sold on EBIDTA

Table 4.18 Significant predictors are: constant, sales, Cost of goods, Rentals, Total admin cost, total selling costs, total facilities cost and total personnel cost

Table 4.19 Coefficients

Table 4.20 Model summary of Regression model fit

Table 4.21 Influence of Inventory carrying cost, Rentals, Total facilities cost, Sales and Total selling costs EBIDTA

Table 4.22 Significant predictor is sales

Table 4.23 Back end grocery original category mix

Table 4.24 Back end grocery optimisation solution one

Table 4.25 Back end grocery optimisation solution two

Table 4.26 Back end grocery optimisation solution three

Table 4.27 Back end grocery optimisation solution four

Table 4.28 Back end fruits and vegetables original category mix

Table 4.29 Back end fruits and vegetables global optimisation solution one

Table 4.30 Back end fruits and vegetables global optimisation solution two

Table 4.31 Back end fruits and vegetables global optimisation solution three

Table 4.32 Front end supermarket global optimisation original mix

Table 4.33 Front end supermarket global optimisation solution one

Table 4.34 Front end supermarket global optimisation solution two

Table 4.35 Front end supermarket global optimisation solution three

Table 4.36 Front end fruits and vegetables global optimisation original mix

Table 4.37 Front end fruits and vegetables global optimisation Solution one

Table 4.38 Front end fruits and vegetables global optimisation solution two

Table 4.39 Front end fruits and vegetables global optimisation solution three

Table 4.40 Front end fruits and vegetables global optimisation solution four

Table 4.41 Front end Break even point stores operation scenario one

Table 4.42 Front end breakeven point stores operation scenario two

Table 4.43 Front end Break even point stores operation scenario three

Table 4.44 Front end sensitivity analysis stores operation scenario one

Table 4.45 Front end sensitivity analysis stores operation scenario two

Table 4.46 Front end sensitivity analysis stores operation scenario three

Table 4.47 Front end hubs and spoke simple matrix

Table 5.1 Drivers and variables

List of Figures

Figure 1.1 Indian retail projected CAGR

Figure 1.2 Penetration of organized retail

Figure 1.3 Consumption pattern commodities

Figure 1.4 Indian retail market size

Figure 1.5 Personal income trend

Figure 1.6 Overview of retail formats

Figure 1.7 Different stages of retail market

Figure 1.8 Business model cycle

Figure 1.9 Organised retail process

Figure 1.10 Inventory decision Hierarchy

Figure 5.1 Business Model Framework – Organised Retail Convenience Stores Format (2000 to 4500 St.ft.)

Abbreviations and Notations

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Chapter 1

1 Introduction

This chapter highlights current scenario of organised retail in India. Organised retail is growing rapidly and brings along with it attendant challenges and transition issues. In developed countries the organised retail comprises of more than 50% whereas in India the penetration is quite low. Many international giants are already eyeing the Indian market and some of them have already established their base as India is viewed as a lucrative prospect for retail and due to low cost structure can be a hub for sourcing. In this context domestic organised retail companies will face stiffer challenges and there is a need to adopt newer technologies and evolve a strong business model frame work. This chapter gives an overview of the industry and elucidates the areas for contemplation for domestic organised retail.

1.1 IndustryOverview

The retail sector has been at the helm of India’s growth story. The sector has evolved dramatically from traditional village fairs, street hawkers to resplendent malls and plush outlets, growing from strength to strength. According to the Indian Council for Research on International Economic Relations (ICRIER), India is the seventh-largest retail market in the world, and is expected to grow at a CAGR of over 13% till FY12. In FY07 retail sales reached Rs 13,300 bn and amounting to around 33% of India’s GDP at current market prices. According to the Central Statistical Organisation (CSO) estimates, the total domestic trade (both retail and wholesale) constituted 13.0% of country’s GDP in 1999-2000, which has gone up to 15.1% in FY07.

Retail and wholesale trade is the single largest component of the services sector in terms of contributions to the Gross Domestic Product and at 15% it is the largest contributor after Agriculture. As per press release of Reuters of May, 2011, it is expected to rise to 22%. Retail employs about 7% of the total work force. The Retail Industry comprises Organised and un- organised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, which are those who are registered for Sales tax, Income tax etc. These include corporate backed hypermarkets and retail chains, and also privately owned large retail businesses. Un organised retailing encompasses Conventional format of low cost retailing, for example ‘Kirana’ shops, owner operated general stores, paan, beedi shops, convenience stores, hand cart and pavement vendors.

In 2005, FICCI estimated the retail business to be at 11,00,000 crores i.e. 44% of GROSS DOMESTIC PRODUCT, which is currently estimated to have grown to 14,00,000 crores. Indian retail market is growing as is evident by the following chart:

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Figure1.1Indian retail projected CAGR

According to the “2012 outlook India retail”, report even though the income is likely to be depreciated due to inflation and high interest rates, the retail market sales is estimated at $540 billion and the share of organised retail will be around 5%.Traditional retail is growing at the rate of 10% and modern retail at the rate of 25%. In fact larger format convenience stores and supermarkets contributed to 4% of organised retail in 2010.

Currently, food retail Accounts for a large chunk of retail at 63% and requires special focus and attention. India is characterized by a high degree of fragmentation with street markets and convenience stores (kiranas) accounting for more than 96% of retail business. There are over 10 million outlets, 96% of them are very small with an area of less than 500 Square feet.

Organised retail is still in nascent stage, despite impetus provided in the year 2006. The data available with regard to organised retail varies and being an emerging area, not much has been done in terms of end to end Strategic Business Models. Corporate, Companies and independent retailers are experimenting with various permutations and combinations in the formats, they operate in as retail penetration is still relatively quite low as compared to countries like china, Thailand, Indonesia and US which means that is a huge potential for organised retail in India.

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Figure 1.2 Penetration of organized retail

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Figure1.3 Consumption pattern commodities

The Indian retail industry has experienced high growth over the last decade with a noticeable shift towards organised retailing formats. The prime reason for a paradigm shift in the shopping attitude of the Indian consumer is the change in their preferences and tastes. Due to the increasing use of IT and telecom, Indian consumers have become aware of brands and shops for lifestyle and value brands according to the need and occasion. Consumers will continue to drive the growth in the organised retail by expanding the market and compelling retailers to widen their offerings in terms of brands and in terms of variety though consumption of essential commodities have been on the decline. However Indian consumption remains strong.

The industry is moving towards a modern concept of retailing. The size of India's retail market was estimated at US$ 435 billion in 2010. Of this, US$ 414 billion (95% of the market) was traditional retail and US$ 21 billion (5% of the market) was organized retail. India's retail market is expected to grow at 7% over the next 10 years, reaching a size of US$ 850 billion by 2020. Traditional retail is expected to grow at 5% and reach a size of US$ 650 billion (76%), while organized retail is expected to grow at 25% and reach a size of US$ 200 billion by 2020.

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Figure1.4 Indian retail market size

The Indian economy posted a remarkable CAGR growth of 8.9% during FY04-FY08, which increased the per capita income and in turn, the disposable income of a large section of the population. Growth in the retail trade depends on the fundamentals of an economy. The Indian economy grew at a robust rate over the last five years, riding high on the high growth in the service sector (10.5%) and the manufacturing sector (9.4%) as compared with 7.4% and 4.1% during FY99-FY03. The rise in per capita income and the resultant rise in disposable income stimulated consumption during this five-year period, thereby resulting in a spurt in retail trade. As per report of CSO in February, 2012 per capita income has grown by 17.9% to Rs54835 from Rs 46492

Furthermore, according to the Mckinsey Global Institute (MGI), the average real household disposable income is likely to grow by 5.3% during 2005-2025 and reach Rs 318,896 per annum as compared with 3.6% in the previous 20 years, which indicates the huge potential for the retail sector in India. Spend is likely to quadruple from$431.69 billion to $1.77 trillion by 2025 due to spurt in middle class and rise in household income.

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Figure 1.5 Personal income trend

Organized retail which presently accounts for close to 5 percent of total market will increase its share to over 30 percent by 2013, offering huge potential for growth in coming years, says a study, ‘Indian Retailing-The way forward’ (ASSOCHAM, Press release). The US-based global management consulting firm, A T Kearney, in its Global Retail Development Index (GRDI) 2011, has ranked India as the fourth most attractive nation for retail investment, among 30 emerging markets.

India is one of the youngest and largest consumer markets in the world with a median age of around 25 years, which is the lowest as compared with other countries. According to estimates, India’s median age would be 28 by 2020. It is expected that over 53% of the population will be under the age of 30 by 2020, which means that the potential for the Indian retail segment will be enormous. Another plus about this population is that they will be more dynamic than the previous generations because their consumption is driven by wants rather than needs. Thus, the organised retailing, which thrives on lifestyle products, is expected to receive a boost because of the young population by 2020.

With rising income levels, contribution of Indian middle class to retail is likely to increase from existing 20 percent now to over 30 percent in next 3 years. Consumers in this segment are likely to spend a greater part of their incomes on further upgrading and diversifying their lifestyles and moving to higher margins under the age of 25 years. It is anticipated that close to 50 percent of their income would go towards retailing in this age group in future.

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Figure 1.6 Population age distributions

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Figure 1.7 BRIC countries household expenditure

Senthilkumar.S, Shivakumar, P. (2011) elaborates on growth prospects of organised retail in India and trends of FDI post 1991 and how it could impact retail in India. In this report trend of BRIC countries is also mapped to garner insights on household expenditure apart from leading International players in retail and their number of outlets.

Food retail is going to be one of the key drivers of growth in organised retail as about 65% of retail is skewed towards food, grocery and fruits and vegetables. According to profiling done by Market line industry profile(2012) of food retail industry in India, market value of food retailing has grown by 13.9% and valued at $346 billion and expected to grow to $571 billion by 2016.India accounts for 21.8% of food retailing in the Asia Pacific region. Though large hypermarkets, supermarkets, organised retail is still not dominant at 1.8 %, it is expected that 63.2% will be distributed through convenience stores.

1.2 FDI Scenario in India

In 1991, the Indian government introduced the economic policy to attract foreign investments and since then, it has amended the policy from time to time in various sectors to allow higher levels of foreign participation. The government policy in retail sector allows 100% foreign investment in wholesale cash-and-carry and single-brand retailing but prohibits investments in retail trading. In 1997, the government imposed restrictions on FDI in retail sector but in 2006, these were lifted and opened in single-brand retailing and in cash-and-carry formats.

The cash-and-carry business is the easiest mode of entry for foreign retailers into India. Many global players like Metro and Shoprite have already entered the market. WalMart has forged an alliance with Bharti for a cash-and-carry business, and Bharti is concentrating on front-end retail. Similarly, Tesco has entered India through an alliance with Trent (Tata Group). Apart from investing in the cash-and-carry business, Trent will also support the back-end activities of Trent Ltd. Many foreign brands have also entered India either through JVs with leading Indian retailers or through exclusive franchisees to set up shop in India. Louis Vuitton, Marks & Spencer Plc, GAS, Armani are some such operators who have entered India through JVs. McDonald’s, KFC and Domino’s are the retailers who have taken the franchise route. Last year, owing to the global meltdown, investments dropped in all sectors. The government has therefore changed the guidelines for foreign investments to boost investments in the current year. This move is certainly likely to improve the investment climate in the Indian retail space .Government is mulling, allowing Foreign Direct Investment in Multi brand retail and has announced the policy in 2011. However due to political constraints, it is yet to be implemented, but the government is working for a consensus to operationalise the policy.

Foreign direct investment in multi brand retail is imminent and it would be signal for domestic organised retail to re jig its strategy and evolve a business module to counter the same and consolidate its position.

This is expected to fuel aggressive growth, competition in organized retail as many International giants such as Walmart, Metro cash and carry have already set up their back end infrastructure and supply chain

There are both opponents and proponents of Foreign Direct Investment in Multi Brand retail. Opponents contend that most of the developed countries who have organised trade in the range of 70 to 80%, the driver has been the manufacturing which contributes to more than 23% to GROSS DOMESTIC PRODUCT Whereas contribution of manufacturing to GROSS DOMESTIC PRODUCT is languishing at 16% in India for many years. This means it is getting a post industrial profile without being actually industrialised. This could lead to large scale displacement and loss of jobs, if FDI is allowed in Multi Brand Retail, as retail per se cannot generate GROSS DOMESTIC PRODUCT unless there are enough goods to sell.

Shivaji,sarkar (2011) opines that FDI in multi brand retail will have an adverse effect as this could lead to cheap imports, controlling of price and market by MNCS and in real terms job losses or low pay employment.

Mukherjee, arpita (2010) provides insights on the current state of fiscal and economic policies in the retail structure and the barriers in the growth of retail. It is recommended that FDI in multi brand should be allowed which would result in investment in the supply chain and inflow of technical know- how and skills.

Business today (2011) in its article speaks about how Indian corporate have positively responded to the policy announcement of allowing FDI in multi brand retail, as they expect all round development in terms of investment in infrastructure, supply chain efficiencies, better products and economic boost to this sector.

Proponents of FDI believe that it will improve supply chain efficiencies, backward integration, improved quality of product and services, promote inclusive growth and create more job opportunities and even assist in curbing food inflation. Tesco, Carrefour and many more are also eyeing Indian market, as they are constricted in their own countries, due to recession or local regulations.

India is still an evolving market for organised retail and many companies are still trying various combinations and formats.

1.3 Multi Brand Retail

Multi branding entails marketing of multiple products and brands by the same firm which are broadly similar and compete with each other. Multi brand in retail takes shape of different formats such as Super market, hyper markets and the malls.

1.4 Overview of Formats and Channels

The Indian retail industry is categorised into different retail formats on the basis of the retail operation. The formats are basically defined on the basis of the size of the outlet, the pricing strategy followed, the type of merchandise sold, and also the location. This study will focus on few aspects of the following three formats

1.4.1 Supermarkets

The average size of supermarkets ranges from 10,000 to 30,000 square feet. They are a smaller version of hypermarkets that holds multiple lines of merchandise but is limited in number when compared with supermarkets. Supermarkets are spread across the city, are greater in number, but cater to a smaller area (1-2 kilometres). Food World, Food Bazaar and Spinach are some major players in this format.

1.4.2 Convenience Stores

Convenience stores offer easy purchase experience through easily accessible store locations. The stores are basically small in size (500-3,000 square feet), which allows quick shopping and fast checkouts. Subhiksha, More, and Reliance Fresh are some major players in this format.

1.4.3 Discount Stores

The focus of these stores is to offer merchandise at a price that is lower than the market price and to gain profit from volumes. These stores keep merchandise mainly on the basis of its saleability. Usually these are no-frill stores, with simple surrounding and less service. Big Bazaar, KB and Subhiksha are some famous examples.

Given below is the matrix of formats on the basis of the above mentioned characteristics:

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Figure 1.6 Overview of retail formats

1.5 Regulatory Framework

The Indian government has not focused on retail as an industry. Until now, there are no specific rules and regulations that are to be followed by retail companies. However, there are certain laws that the retailers need to follow, which are general in nature and which pertain to the establishment of stores and the conduct of activities. These laws are as follows:

- Shop and Establishment Act
- Standards of Weights and Measures Act
- Provisions of the Contract Labour (Regulations and Abolition) Act
- The Income Tax Act
- Customs Act
- The Companies Act

1.6 Foreign Direct Investment

Foreign investments are freely repatriated, and are regulated under the Foreign Exchange Management Act (1999) (FEMA), administered by the Reserve Bank of India's Exchange Control Department. As it stands today, there are a number of market entry methods available for retailers’ under current FDI policy, for which the most common methods are:

- Strategic License
- Agreements(agreement with domestic player)
- Cash & Carry
- Wholesale trading (100% ownership)
- Joint Ventures
- Franchising
- Distribution and Manufacturing.

Cash and carry is a particularly attractive option for foreign investors as complete ownership (100%) is allowed in this format. Several global players including Wal-Mart and Metro have entered the Indian market through this method. On a more general note of regulation, the governing Act overseeing foreign exchange is the FEMA.

1.6.1 Foreign Exchange Management Act (1999)

The objective of this Act is to amend and consolidate the laws in relation to foreign exchange. Consideration also needs to be given to other policies and regulations that may affect FDI inflows in to India, for example labour or company law. An example is the Payment of Gratuity Act (1972) which provides for “gratuity inter alia to employees in factories, plantations, shops, establishments, and mines in the event of superannuation, retirement, resignation, death or total disablement due to accident or disease.”

Apart from the above Acts, the companies also follow certain regional rules and regulations on the basis of the stores’ location. In some regions regulations are imposed on the organised retailers to restrict their expansion and to promote regional retailers; for instance, the Tamil Nadu government imposed a 10% surcharge on organised retailers; the West Bengal government has been asking mall developers to reserve 10% space for unorganised retailers.

Retailers are also required to take necessary approvals from local bodies to carry on with their business. There is no single window for clearances, and companies have to go to different agencies to get approvals, which is one of the biggest hurdles that the segment faces.

1.7 Business Model in the Convenience Store Format

A Mckinsey, (retrieved 2007), report on ‘The rise of Indian consumer market, estimates that the Indian consumer market is likely to grow four times by 2025. CB Richard Ellis’ values Indian Retail Market at US $ 511 billion. India’s overall retail sector is expected to rise to US $ 833 billion by 2013 and to US $ 1.3 trillion by 2018, at a compounded annual growth rate (CAGR) of 10%”.

India retail report Q1 (2012) on mass grocery retail dwells upon the strengths, weakness, opportunities and threat in grocery retail. However it clearly brings out the fact that considering the opportunities and growth prospects many of the Indian organised retailers are investing on expansion and improving supply chain to counter entry of multinationals.

There are four stages in the organised retail growth which is described as first gear, second gear, third gear and fourth gear .India is in the third stage of strengthening back-end management. It will have to move into fourth stage soon, particularly in view of FDI being allowed.

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Figure 1.7 Different stages of retail market

Diagrammatic representation of strategic perspective of new retail models in India gives us some direction with regard to a business model framework

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Figure 1.8 Business model cycle

However not much literature is available in terms of integrated business model and therefore we have to build framework considering various operations.

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Figure 1.9 Organised retail process

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Figure 1.10 Inventory decision Hierarchy

This study is to identify and understand the cost structures, financial implications of both back end and front end operating costs, and link it with supply chain and value chain to evolve a business model frame work specifically for Indian companies to effectively compete and leverage growth opportunities in the convenience stores format as this segment along with supermarket constitutes 15% of the organised retail in India.

1.8 Introduction to Drivers, Factors and Variables

Organised retail is still an emerging area. Aim of this research is to understand a new dimension of Foreign Direct Investment in retail and develop a business model. There are multiple factors and variables in retail and many will be added or discarded during this study. However, considering the focus is on convenience store format, the following will be included to start with.

Table1.1Drivers and variables

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1.9 Need for this Study

Organised Retail is having immense scope, growth opportunities and challenges. It is not yet fully developed and India is one of the most Attractive Destinations for investment in Retail. With Foreign Direct investment in Multi Brand Retail on the anvil, entry of multinational Retail giants like Walmart, Tesco, Carrefour, is imminent. While on the one hand, there are exciting times ahead for Organised Retail, many Domestic companies have to devise and evolve newer strategies to Counter the onslaught of entry of Multi National Retail Giants and also consolidate their position. Not much work has been done in India to evolve a strategic business model for domestic companies. Moreover, this model will attempt to incorporate an inclusive partnership for small local outlets. Hence this study is an endeavour to fill this Research gap and partially fulfil the need aimed at Convenience stores operating in the space of 2500 to 4500 Sqft.

Chapter 2

2 Review of Literature

This review is conducted to explore the various sources to ascertain status of adoption of integrated business model in organised retail. However as not much literature is available in the context of integrated model, particularly in India, various sources and components of supply chain, retail, value chain, customer preference and impact of foreign direct investment have been studied individually in India and internationally. Some elements of literature do not give a holistic perspective, nevertheless all elements have been considered to get a 360 degree unbiased view on the subject

Context of review:

65% of the retail business is skewed towards food, grocery and Fruits and vegetables and hence it would be worthwhile to analyse the cost drivers specifically of these segments. According to McKinsey report (2007), Indian household spending of income on Food is one of the highest at 48%.One view is growth of organised retail, can adversely impact other stake holders such as mom and pop stores.

Pandey,K.K (2003) mentions that the genesis of organised retailing in India in food retailing was pioneered by Food World (FW) supermarket chain in organized food retailing in India. Before FW entered the food retailing market, it carried out an extensive survey in consumer attitude towards retailing. An important finding of the survey was that in terms of overall satisfaction, traditional Indian grocery stores scored 5 – 6 on a 10-point scale. FW believed that this was largely due to the absence of organized retailing and low brand proliferation. The company thus decided to offer people a pleasant shopping experience and work towards making grocery shopping less cumbersome. The main challenge for FW was to alter the existing mindset of Indians with respect to price and value and add excitement to grocery shopping. Initially, the target markets were identified as neighborhoods that had at least 4,000 households with an average monthly income of more than Rs. 4,000. For this kind of 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, FW chose Chennai, Hyderabad and Bangalore as initial locations for setting up FW stores

2.1 Studies Related to Foreign Direct Investment

In terms of the Retail sector, foreign investment is currently limited to 51% in single brand retail stores and 100% FDI in wholesale cash and carry. No multi-brand retailing is allowed. Subject to these equity conditions, a foreign investor can set up a registered company and operate under the same rules and regulations as an Indian company.

There are many who argue that FDI in retailing will be of benefit to India, and discussions are often seen in the Indian media. In fact, some even argue that if FDI in retail is not allowed, it could be harmful to India's retail sector.

Chari and Madhav Raghavan (2012) discuss and provide a perspective on issues of foreign direct investment in multi brand, stating that despite encouraging signs, India's retail market remains largely off-limits to large international retailers like Wal-Mart and Carrefour. Opposition to liberalising foreign direct investment in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers and infant industry arguments to protect the organised domestic retail sector that is at a nascent stage. However based on international evidence, authors suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems, can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports though a number of highly compelling studies show that FDI has not been beneficial to host countries.

Karmali, (2012) critique the decision of the Congress Party-led federal government to permit foreign direct investment of up to 51 percent in multi-brand retail and 100 percent in single brand retail, in India and discuss, consumer products consultancy Technopak Advisors, recommendations for opening up the retail sector in order to encourage job creation and improving the situation for India's farmers which is opposed by opposition Bharatiya Janata Party (BJP) and is against to foreign investors in India.

Tripathi (2009) states and believes that the technical edge provided Foreign companies will assist in Improving the economy during the downturn. 100% Foreign Direct investment in equity for multi Brand retail is likely to encourage domestic investment into the sector too, and generate further employment opportunities. It will provide impetus to the economy and will have a rub off effect on Large Scale and Smaller Retailers too. Increases in FDI inflows to boost economic growth are supported by other proponents of FDI in retailing.

Kearny (2009) in its report proposes that India is emerging as the third most attractive country for investment in retail. There is a need to research this to evolve competitive business model for domestic retail companies to counter the entry of multinational companies.

Allan (2008) discusses factors of regulation that hinder on India's adoption of foreign retailers in the country. Government policy prohibits foreign direct investments in retail trade unless they comply with trade regulations related to foreign investor equity limit and single brands. It expects the country to become the world's fastest growing economy.

Sundaram and Siddharthan (2008) articulates that despite India's market size and growth trends making it one of the best retail opportunities, gaining entry to India's retail industry will not be easy. Resistance from traditional shopkeepers and merchants has resulted in social unrest and this can be understood in the context of socio economic impact of history Indian Independence.

Singh and Banga (2008) Paper on Retailing brings out the finding that retail is still evolving as an industry and pace of growth is not at the desired level. Foreign direct investment is a new factor in the retail setting which will make the market more competitive and bring in more efficiencies as, India is already becoming a hub for sourcing, for many Industries and by allowing Foreign direct investment, It will create opportunities for export, Inclusive growth, More employment, Job opportunities, besides backward integration with Agriculture. There has been huge concern about migration of rural population to cities and erosion in Agriculture growth, Foreign Direct Investment can not only stem this, but also provide the impetus.FDI is expected to assist in mitigation of food inflation too.

Subbarao (2008) also talks of other potential benefits to host countries, including the generation of employment, raising of productivity, skills & technology transfer, improved infrastructure, increased incomes ,enhanced exports, and contribution to the long-term development of developing economies. Foreign direct investment in multi brand is inevitable. However if we trace the history of FDI, It has not been highly successful is the view point of opponents of FDI. When researching the justifications 'against' FDI in India's retail sector, it should be recognised that there have been many studies that have looked at the strengths and weaknesses of allowing FDI in developing countries in general, of which several of these have focused on India.

Nayak, (2008) in his literature on multinationals in India discussed some of these studies to try to understand the impact of FDI on host countries. Research revealed heterogeneous i.e. different impacts on host countries host countries . It was deduced that there were apparent positive and negative effects from FDI for India.

Gupta, (2007) provides with an insight on implications of the announcement by Wal-Mart Stores of a joint venture with India-based Bharti Enterprises. Although the U.S. retail giant's role in the joint venture is restricted to only providing backend support to its Indian partner, a number of small-scale players in India are concerned they may go out of business. Despite strong opposition to foreign involvement in the retail market, it appeared that India may allow foreigndirectinvestment up to 51% in multi brand retail in specific sectors.In the context of strategy in view of imminent FDI in multi brand strategy of ITC Ltd is worth emulation by other organised domestic retail companies. It is stated that India will witness a retail revolution in spite of the opposition to the entry of foreigndirectinvestment in this sector. In India the middlemen have substantial political clout and are creating problems for some of the retail outlets. Through its Choupal Fresh initiative ITC has created a huge rural constituency of small farmers.

Mehta (2007) in giving an overview of the Indian retail market implied that regardless of the risks to traditional retailers such as the 'mom and pop' stores, FDI would still bring significant benefits to the Indian consumer and give them value for money.

Zhang, Kevin (2006) give insights into the factors that have made China a dynamic FDI-host country in the world and the impact of FDI has had on the Chinese economy which has grown in leaps and bounds in ways that no one anticipated due to the same. This paper focuses on four issues: (a) the factors behind the FDI boom; (b) how China has succeeded in utilizing FDI so far; (c) China's FDI strategy; and (d) its future development. China's special advantages in attracting and using FDI come from three sources: the huge market with cheap labour, the large number of rich overseas Chinese as investors, and the effective FDI strategy and policy implemented by the central government. Indian government can take a cue from this and allow FDI in multi brand in a phased manner.

Kumar (2006) concludes that FDI in retail will improve prospects of growth, will not harm equity and will ensure that monopoly rents are not encouraged, and therefore should be opened up.

Sarma (2005) articulates the need for caution in opening up foreign direct investment in multi brand retail. Taking a cue from what transpired in other Asian countries like Thailand where it led to crisis and displacement of local traditional retail trade, it recommends that India should also provide for safety net packages, capital requirement and zoning. Some of the other recommendations are that initially FDI should be opened up for 49% and over a period of three to five years it should be staggered and taken up to hundred percent.

Paul Etgart (2005) a former director of the giant UK retailer TESCO warned that "Indian retail business should not be fooled by partnership offers by global retail giants because they want 100 per cent control and eventual ownership".

For example a Wal-Mart’s 85,000 sq ft and the average turnover of a store was about $51 mn. The turnover per employee averaged around $1,75,000. In 2004, Wal-Mart had a 9 percent return on assets and 21 percent return on equity. In contrast the average Indian retailer's turnover comes to around Rs 3,33,000 (calculated using AT Kearney projection for 1999). Only 4 per cent of the 11-12 million retail outlets were larger than 500 sq ft in size. On the other hand the total turnover of the organised and un-organised retail trade in India, as per the FICCI study, as on 2003 was Rs 11,00,000 crore or $245 bn and employing 39.5 mn persons. This implies an average turnover of Rs 9,16,000, which seems to be much too optimistic given that the vast majority of Indian retailers, particularly those selling fruits and vegetables do not even have a small shop with a roof on it.

Guruswamy, Sharma, and Mohanty (2005) studied the impact of size of domestic retailers in countering multinationals and found that irrespective of the Size of Domestic Retailers, they will not be able to counter the Onslaught of Multi National retail Giants who have deep pockets and ability to sustain long term losses.

However Japan and China have been successful in managing controlled FDI per se, and also FDI in Multi Brand retail. Nayak( 2005) had concluded “FDI on the whole in India has neither been effective for India nor for the foreign companies in India. (Cited in All India Research report on factors influencing FDI debate 2009)

Chakraborty and Basu (2002) concluded from research that the Indian Government's trade liberalization policy had initially made a positive impact, but as a whole had tended to cause labour displacement.

Nair-Reichert and Weinhold (2001) studied the impact of FDI on over 24countries in different stages of development and found that FDI had a heterogeneous impact. Country specific analyses of host countries show that FDI has not helped them in meeting their national objectives.

Mazumdar, K (2008) observed that foreign direct investment in retail sector is not akin to Foreign direct investment in manufacturing and there is a fear of displacement of jobs, unemployment and job loss. India is Agriculture based country and many fragmented farmers, who have been displaced, take up small time retailing for their livelihood and there could be erosion in this disguised employment. In fact 98% of retail is un-organised and due to lack of many opportunities, Most of the work force is compelled to resort to Retail and it has become forced employment sector and if any multinational giant is allowed there will be large scale.

2.2 Studies Related to Supply Chain and Value Chain

Back end operations and supply chain and its appropriate linkage to front end operations to create an optimum value chain are crucial to the success of any retail format. Organised Retail is still an emerging Area in India, with great potential, opportunities and challenges. Indian companies are still experimenting with various formats, permutations and combinations and therefore, there is not much literature available on end to end Strategic business Model in the Indian context. With Foreign Direct Investment in Multi Brand Retail, imminent, it is pertinent to study the various drivers to get better insight for countering entry of Multinational Giants.

2.2.1 Key Drivers and Facilitators of Back End Operations

More than 65% of the Retail is skewed towards Grocery, food, fruits and Vegetables and hence, this study is restricted to these two segments.

Food and grocery is the second largest segment of the retail trade that constitutes 53 percent of the total private consumption expenditure (US$154 billion) and 70 percent of the total retail sales (KSA Technopak Retail Report, 2007).

Mittal,K.C and Anupama, P( 2010) in their study conducted in Punjab have come up with insights on retail purchase behaviour in diversity of demographics and geographic locations. This study gives insights on the influence of demography and geography on the variation in customers buying decisions. Dismal performance of organised retail in food and grocery has been attributed to blindly replicating western models .This study gives some indicators with regard to management of stock keeping units in the food and grocery segment.

Supply chain efficiencies starting from decision on the stock keeping units, procurement cost, Inventory Management and distribution have to be integrated and coordinated to have a robust back end. Effective supply chain management has become a potential way nowadays to improve organisational performance through matching supply chain practices and competitive advantages in the competitive world. Organisations focus on better supply chain management practices to gain competitive advantage for better organisational performance.

Rajwinder, S, Sandhu, H.S, Metri, B.A. and Rajinder, K(2010) discuss the core of supply chain management practices and identify five secondary constructs viz., technology, supply chain speed, customer satisfaction, supply chain integration and four primary competitive advantage constructs viz., inventory management, customer satisfaction, profitability and customer base identification. Data was collected through survey method and using structural equation modeling aspects of logistics, inventory management as key factors for costs have been explained in organised retail. Article also explains the linkages in the agriculture sector and food processing relating to supply chain efficiencies and practices. Whenever we are analysing the supply chain model, Procurement and sourcing is one of the key factors.

Many a times the Corporate Retail chains Assume the role of Wholesalers and thereby creating inherent inefficiencies. There is a need to balance various, roles and functions of wholesale wherein it would be optimal to maintain a coordinated link instead of assuming the responsibility. This aspect has been brought out in the Paper by Louis.W.Stern (1966).

Prasad,J.S and Aryasri,A.R (2008) elucidate the dynamics of customer relationship management in grocery and food buying and how the changing habits will emanate a shift from kiranas. The fast changing trends in lifestyles, food and eating habits of consumers have contributed largely to the growth and development of organised food and grocery retail formats in India. But, this sector is predominantly (99.2 percent) dominated by the traditional kirana stores, which have strong relationships with the customers for various technical and functional quality benefits extended to them. This posed a great challenge to the organised retailers for customer acquisition and retention of loyal customers in this fierce competition. This study seeks to investigate the influence of relationship marketing cornerstones viz., Customer Satisfaction, Trust, Commitment, Communication on Relationship Strength which further explore the affect on attitudinal outcomes like relationship quality and behavioral outcomes such as customer loyalty. The study further examines an influence of the relationship quality on customer loyalty. This study is purely based upon the primary data and necessary secondary data to reinforce the model. The findings from the study indicated that customer satisfaction has emerged as a significant factor followed by commitment and trust for managing relationship quality and customer loyalty. Various managerial and marketing implications are extensively discussed.

Expansive growth in the Indian retail market is spurred by greater demand for qualitative products and services that heightened competition amongst modern retail formats in the recent years. To understand the key drivers, it is imperative know the purchase Behavior pattern of Customers in the Indian context. Retailing is the most active and attractive sector of the last decade. However, there has been a below par performance by many domestic and global players because of the Westernised formats adopted blindly and then replicated without considering the dichotomy and differences in various macro and micro environmental factors. So there is a need to find identify difference in retail purchase behavior of people with different demographics and geographic locations which is particularly important in case of food and grocery segment.

Joy,M (2006) in a comparative study on supply chain management between large food and grocery retailers, addresses key points in terms of leveraging efficient sourcing, Increasing stock turns, Farm management and innovative logistics solutions.

Chetan, Rajnish and Nidhi (2005) studied the food and grocery market channels and found that most of the food and grocery products reach to consumers through the traditional markets which are unorganised But the very fast changing trends in food and eating habits of consumers have contributed immensely to the growth of Western Retail format such as convenience stores, department stores, supermarkets, specialty stores and hypermarkets for various conspicuous reasons namely, demand, supply.

Joel,H., Steckel, Sunil, G, and Anirvan, B.(2004) examine the impact of interplay between shorter cycle times and shared point of sale information on the inventory management and cost efficiencies. Using an experimental design of ordering and shipping lag, this article explores the bullwhip effect, effect of shorter cycle on inventory costs and looks at possibility of optimality bench marks for decision maker using the sterman mental model.

Charles, M, Jianli, hu, and Meir,J (2003) in their work on conceptualizing teaching and research methods in the realm of costs of uncoordinated supply chain have used numerical examples of real life situations and concepts of economic order quantity and similar theories to elaborate upon how effective communication and coordination amongst supply chain members will cost effectively improve the supply chain efficiencies covering location decisions, centralised warehousing, lot sizing with deterministic demand, demand forecasting, pricing and lot sizing with stochastic demand in a newsvendor environment. They also cover aspects of naturally occurring supply chain inefficiencies and the costs of not eliminating the same.

For Grocery the following Key Drivers which will be considered are: Sourcing, Procurement cost, private label, logistics.

2.2.2 Key Drivers for Fruits and Vegetables

Singla, sukhpal, and dhindsa, (2011) discuss about importance of linking prime producers such as farmers to national and global markets through fresh food retail chain as this will ensure right price and high quality product. Linking primary producers with global and national markets through fresh food retail chains is seen as one of the emerging agricultural marketing practices in India to improve small producer's livelihoods. The fresh food retail chains are investing from farm to fork to buy fruits and vegetables directly from farmers and sell them to retail buyers.

Dasari, and Kurhekar, (2011) deal with leverage of the enormously available customer data for aligning precious resources with customers' needs makes it imperative for retail managers to deploy advanced tools and techniques for data analysis and generation of reports for effective decision-making. While a host of analytical processes and tools are available, a retailer needs to invest selectively and adapt to those applications that are proven to be successful, and resulted in substantial savings in terms of money, time and shelf space. This paper, apart from highlighting the relevance and efficacy of analytics for retail industry in India, also deals with a live study undertaken at Fresh Greens Bangalore, where Market Basket Analysis (MBA) and advanced demand forecasting techniques have been used for understanding the demand associations of different fruits and vegetables and fine-tuning their operations. Based on the findings of this study, certain conclusions, generally applicable to fruits and vegetables retailers in India, have been drawn and suggestions are provided for enhancing the operational efficiency and effectiveness.

Samuel, Vinrald, Shah, and Mrinalini (2009) elaborate on agri food retail in India and conclude that India being the second largest producer of fruits after China India's diverse agro-climatic condition allows production of a wide range of tropical, subtropical and temperate fruits. Retail giants like the UK's Tesco, France's Carrefour, and American Wal-Mart are looking to make a foray into the Indian retail market by providing the Indian customer a unique experience of shopping. Not lagging behind are the Indian cooperatives like Reliance with Reliance Fresh, Aditya Birla Group, ITC, Mahindra & Mahindra, and Adani Group. This research has specifically been carried out to understand the present organized agri food retail sector in India as well as the objectives, strategies, and financial performances of six existing companies in this business. The research paper gives some indicators to assist corporate to decide the extent and level of investment they should venture into this highly fragmented retail market.

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Details

Seiten
183
Jahr
2012
ISBN (eBook)
9783668943377
ISBN (Buch)
9783668943384
Sprache
Englisch
Katalognummer
v465490
Note
73.3
Schlagworte
bangalore

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Titel: A study on the value chain of domestic multi brand retail in the convenience stores format and their interrelationship at Bangalore