Interesting. It proves the point that if repeated often enough the most outlandish idea can become gospel truth!
When the first Foodworld store opened in C P Ramasamy Road, Chennai there used to be a street vendor of fruits who had set up shop on the platform. He would sell from the usual small stalls found by the road side which would not be larger than your average computer table. This was in 1996. We soon realized that he had a simple competitive strategy. He would ask customers what was the price of the fruit at Foodworld and offer to sell it at a Rupee or two less. Plus his personal attention and assurances of quality ensured that he survived. This is in spite of repeated instances of encroachment clearance drives by the corporation and police officials. See for yourself how his business is today!
Hope you noticed how close the fruit vendor is to the store and also how he has grown from a stall to what he is today.
How is this possible? Simply because of the huge disparity in the cost structure of corporate retail Vs conventional traders, leave alone street vendors.
A corporate retailer has to pay rentals at market rate which could be as high as Rs.40 to Rs. 50 per sq. ft. or even higher. Employees are paid as per the labour law which means minimum wages, PF, etc. All the required licenses and fees have to be paid, including a special fee to keep the store open for 7 days. This is because as per the shops and establishments act, a store has to have a weekly off. This in turn is because retail is not recognized as an industry and hence specific needs for retail are not addresses. It’s a long story and best told separately.
Now compare this to the conventional trader.
I have known of instances where the shop keeper pays a rental of a few hundred rupees because the shop has been there for years and the rent was subject to the erstwhile rent control act. This would translate to a rental of less than a rupee per sq. ft.! Of course, we have also seen various stores operating out of what was originally a garage or the front part of a house, modified for a store. Rent accounts for as much as 5 – 6% of a corporate retailers cost break up. Imagine the buffer that a conventional trader enjoys in this single cost structure alone!
The next largest share of cost is with regards to manpower. Again being roughly 5% of the total cost. We have all seen the kind of staff/ helpers that are present in conventional outlets. They are usually relatives or known people from the native village of the shop keeper. They would be paid a meager amount, plus provided food and minimal clothing. Usually they stay at the shop or at the shop keepers home and also double up as domestic help. Talk of enhancing productivity!
Do you really think that conventional traders would spend so much on manpower as compared to a corporate chain?
Plus you have a whole host of smaller cushions to be leveraged like savings on licenses, commercial tax rates for electricity, etc.
As part of an earlier assignment I was tasked with registering conventional traders and businesses for membership. The initial criterion was sales tax registration. When my team came back and reported that a majority claimed not to have that a few other business licenses were included after getting approval of the same. Imagine my surprise when repeatedly I would hear that stores did not have even weights and measures registration, leave alone shops and establishment licenses. I was personally present when we walked into a old, well established, large saree shop. The owner was outraged when we requested his sales tax number for issuing the membership. He said “No one has dared asked me for sales tax registration for decades. Who are you to suggest that I should have a sales tax registration”.
I rest my case!
Where is the real advantage? The conventional trader requires a far lesser sales turnover to break even as compared to a corporate chain. As also, they are equipped to fight on the pricing front by discounting and still make money.
The only disadvantage would be in terms of scalability which would enable some cost benefits due to aggregating volumes. However, given the current scenario the cost structure advantage is in the advantage of the conventional and corporate chains would require a far bigger level to volume aggregation to counter that.
Lastly, we don’t have clearly demarcated Central Business Districts (CBD) and residential zones. As such requirements for an "around the corner" conventional store would never cease. At least, in the foreseeable future.
I wonder who the helpless one is!
11 comments:
This post essays the predicament of organized retailing in India. This also underlines why the unorganized sector does not want the retail sector to be liberalized. If retail is considered as an industry then most of these establishments would be forced to take up licenses, and their current infrastructure will need a lot of overhauling for that to happen. Now, one of leading national parties, has made "disallowing FDI in Retail" part of its election manifesto. We do have a long way to go.
As our economy grows and world gets flatter, i see our markets getting more organised. The organised retailer in 2009 might face many a hurdle. The sunk costs and cost of operations are so high that consistent high volumes can only justify its presence and ROI viz-a-viz a kirana shop; who manages a steady flow of business and had already broken even. But when more and more customers shop for variety and value add products - as they move up the need chain/hierarchy, the only place of solace could be the organised retail. This will drive traffic and build a consistent loyal customer bank. After all, it is built up by operating in the same market for a substantial number of years.
I feel right now we are in a transition phase and the retail chains should be buzzing as the general mood of economy starts to buzz again. As they say it, 'Necessity is the mother of innovation' and i expect to see some innovative practices by retails chains.
This is a question that comes from curiosity. The way I see it, the cost advantage for organized retailers comes from their supply chain efficiencies as they can source large quantities as well as the negotiation prowess they have due to the bulk sales that's possible for large chain retailers. Are we saying then that establishment costs are much more than cost benefits accrued from the supply chain efficiencies and bargaining the prowess of the large retailers? In that case, since in India service in organized retail isn’t as good as it should be, what is the real advantage of organized retail?
In btw, you might remember be as a junior from SOM who joined Foodworld in the second batch of management trainees recruited by Spencer’s. I am now faculty at Icfai Business School Hyderabad. Nice to see you writing so prolifically about retailing, especially the specific operational problems with organized retail in India.
http://vidya-woe-be-gone.blogspot.com/
i think besides the cost advantage, unorganised retailers have already made an impression. This is from a true experience. My mother tried shopping her regular groceries at a supermarket close by. It is a 5-minute longer walk than the local grocery store and shopping there is more time consuming. Now, if after investing so much of time the veggies she buys, especially leafy stuff like coriander, turns out to be of poor quality when taken home n used, she will never risk it again. And needless to say, is now back shopping at the regular grocers. Also, the haggling gives shoppers immense satisfaction and is now a default shopping behavior. Plus, she can complain to the grocer whenever she goes next (in a couple of days) and get the veggie returned at no extra cost. This kind of service is difficult to get in a supermarket yet. and quality control is something we need to look at, especially when catering to women.
@ Vidya, i believe, as you said, 'SCM' is exactly the weak link in the profitability of retail chains. Either they should manage to spread their high overheads over large number of items sold (volume increase) or they should bring down the actual overheads. As far as the real advantage of modern retail is concerned, the variety of product offering at one single place is the most significant selling point, according to me. Assumption here is that this would be spurred by growing affluent population demanding greater value added products, which could not be provided by a Kirana store.
Vidya - to introduce myself, i am also a graduate out of SOM and I infact had filled out one of your survey forms recently.
A few comments/ views -
Corporate retail definitely leverages economies of scale. However, the cost disparity is so huge that it would take far more to be able neutralise this.
For example, take only rentals. A kirana operates a 1000 odd sq store and might pay a maximum of Rs. 10,000 or so of rent. Whereas a corporate retailer operates a 3000 sq. ft store and pays an average of Rs. 30 - 40 per sq. ft. Can one see the disparity.
VR, few thoughts:
I agree that a high fixed cost take a heavy toll on bottom line of modern retail, when the contribution remains low. On the contrary, marginal cost of modern retail should be low compared to a kirana shop, since modern retail outlets demand a better credit cycles. So if they can look to maximise throughput, ie sale value/sq.ft, then i think modern retail will show a better contribution and hence a better ROI.
Rental, Manpower, etc are not fixed costs. They are variable as they change YOY. In fact the irony lies in that. In most cases rentals become a fixed n a very low fixed cost for convetional stores.
Of course increasing sales per sq. ft. is one of the solutions. But there are deeper issues involved.
The response from both of you - VR and Anba, only goes to prove that organized retail is quite bogged down by its cost structure and that it's operations are not economically justified unless it makes sure that it has enough sales to offset it.
Given that Kirana stores operate, and quite efficiently at that - of course that is not to say that organized retail offers no benefits - organized retail actually has no chance of sustainability in the current environment. In addition to the cost issues we are already familiar with, the recessionary economy is also causing high debt/equity ratio.This in addition to slowing sales. Several chains apparently are finding it hard to keep their heads over water, eg: Vishal Mart and even Panataloons.
Organized retail, especially in groceries, in India can definitely add value, but I think it really needs to come up with innovative business models suited to our conditions – in all ways - cultural, economic and infrastructural.
A very interesting topic and conversation. I am not from the retail industry (however, also a SOMite - 1993), but have been interested inthe industry for a while and hence got drawn towards this thread.
While I cannot argue on the facts that you have been mentioning, as a consumer I will tell you why the local Kirana is losing out. We tried to pick our stuff from the guy round the corner and the biggest advantage was the one month credit he used to give - khatha concept. The kids used to enjoy it because they would go and pick up whatever they want and the bill would come to me at the end of the month.
However, on 2 aspects, this system failed for us and we shifted back to the Big Brother Supermarket.
1. Maybe because of our short stint in the US, or maybe because we see the price differential as a driver, we usually go in for larger sizes of commonly purchased items - e.g. a 500g of Bournvita, instead of the smaller one. Similarly, we prefer refill packs of these stuff, whereever available. Now, I cannot offer a reasoning behind it as well as VR does, but my kirana fellow would fail on both these counts. Smaller sizes and mostly always bottles instead of refill packs.
2. The second is not price but perception that drove us back to the supermarket. Maybe we were simply hooked on and didn;t want to change. My wife's biggest complaint would be that at a kirana shop, you had to do your homework, in terms of draw up a list of things you want. Also, you were never sure of the latest offerings or special discounts being offered on competing products - which we were happy to shift to, since on those products, we were not loyal to any brand. E.g. we usually bought Rexona soaps, but if Lux had an interesting offer, I would shift to that. Now, at a supermarket, my wife browses through the aisles and shelves - checking things out from memory and deciding which she needs and how much. Also, new product launches, special offers, etc. are easier to catch.
So, while I agree that the older conservative generation will always be hooked to the local kirana, the GenX, more tuned to the glamour quotient, would definitely prefer the Supermarkets...
Pavan
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