Tuesday, July 19, 2011

Indigenous cost control & Margin Maximization

I am a strong advocate of the conventional neighborhood outlets simply because they display a remarkable amount of ownership and flexibility. I have illustrated this with several posts and also in my book "The INDIAN reTALEs". A few days ago during one of my teaching sessions the familiar debate of how will such stores survive came up. The usual points were covered and I returned to Chennai.

Yesterday we had to purchase a few things and picked it up from a neighborhood medical store. First point to illustrate flexibility; these stores have quickly realized the value of an extended range very similar to how supermarkets evolved into hypermarkets. More range for the existing customer base is equal to obviously more sales.

So, this store too offers a variety of products which are not medicines only.

My first observation was that the carry bag given was actually a branded bag of a national supermarket chain. Simple cost cutting measure for this conventional store. He must have picked up a few bags either during multiple visits to that store or even brought it off from an unscrupulous staff for a pittance. Or the vendor must have offered these extra stocks of bags at a throw away price because they cannot be sold otherwise. Essentially, the medical shop owner spotted an opportunity to cut costs and leveraged it fully.

Next, when I came home and opened the bag to use the purchased products, I was amused to find a price sticker of a different store on the pack. There is a large format discount store in Chennai which is famous for its low prices. The medical shop owner must be picking up a lot of his extended range of products from this store as getting into the distribution system for these products might not be worth it given the low volumes that he can offer. See the picture below. The store name is clear while the price has been struck out. Guess, it would have been a better idea to strike out the store name. But then all his customers might not be a Retailer like me.

This is where the large format store is morphing into cash & carry operations, also. As mentioned in my book, operators interested in India entry might do well to enter this potent segment with potential, instead of lamenting about FDI.

Coming back to the medical store. I cannot but appreciate the remarkable ownership, flexibility and focus that the owner shows and is therefore rewarded with a sustainable business. However, is it scalable? I doubt it. A chain of discount stores used to encourage its buyers to take cash and make opportunity buys from the wholesale markets whenever there was a very attractive trade scheme. It obviously did not sustain as the chain has been closed down.

Regardless one has to appreciate the initiative of the conventional store owner in this as compared to any organizational chain stores wherein cost cutting or margin improvement will result in a whole series of meeting and presentations! The take out is that such organizational chain stores need to bring in more of a trader/ shop owner mentality without compromising on systems and processes to develop a win:win formula.

Saturday, July 2, 2011

Lack of Urban Planning is a bane for Indian Retail

One of the key costs for any retailer is that of real estate. When too many players fight for the same space, obviously the prices go up and very soon reach levels which are unviable for a Retail business. Retailers operate at a 20 odd percentage gross margin compared to say the IT industry which operates at much higher levels. So, the lack of proper zoning laws and enforcement of the same leads to several issues such as –
  • Different businesses with different cost structures competing for the same real estate.
  • Over-crowding and congestion, leading to pollution, etc.
  • Neighborhood penetration of self service modern formats increasingly becoming a challenge.
  • Size having to be compromised and therefore the range. So, in effect over a period of time there is no major competitive advantage over conventional stores.
 And many more such disadvantages and issues.
See the following two pictures which show two separate road names for the same stretch of the street. I am confident that each of these streets would have different valuations and therefore varying financial implications in terms of rentals, etc.

Forget all this. Should the common man have to suffer such confusion?