Over the past few weeks, we have been subjected to a huge hue and cry over the FDI in retail announcement and its sudden roll back – both the GoI and the opposition have presented their PoV – let’s try and make sense of the key arguments from both sides and examine the issue from a balanced perspective.
1) Large retail will improve supply efficiencies and give better prices to the farmers – mostly correct – provided i) they get the rights from the APMCs to procure ii) Given the 1 mn population rider, conveniently located sources for a range of products may not be easy to find.
A possible solution – get them to set up their own farms – start contract farming – this would ensure focus on productivity, better farm techniques and conservation efforts being made for the environment.
2) Prices for consumers will go down – Not too sure about this one – Given our creaking road network, where it takes five and a half hours to cover 250 km – (Delhi – Agra) – and the ever increasing costs of fuel – one cannot be too sure whether this would be an enduring phenomenon –but prices at Cash and Carry centres would definitely be lower than traditional kirana – of course – the consumer will have to spend time and money (and fuel) to go and shop from the Cash and Carry – which would be located at city outskirts !
3) Small retailers would get wiped out – Easier said than done –
a. Finding real estate cheap at prime locations would not be easy – rent is one of the largest overhead of a modern retail outlet. All the prime locations – near residential colonies, high rises – are occupied by either our neighbourhood Lala ji, or by Indian modern retailers ( who had burnt their fingers in a mad store expansion race in 2007 – and are still struggling to recover from that adrenaline rush)
b. Store operating costs – Manpower, Electricity – are huge in a modern retail shop as compared to Lalaji. An anecdote – During a market visit in Hyderabad, a consumer complained to the store staff about the lack of air conditioning. This was in peak summer, and the chain was on a cost cutting drive – hence only fans were operational. Bottomline – glitzy exteriors will raise consumer expectations and consequently, operating costs. Given the erratic power supply situation in most of our cities, generators are only going to add to the confusion.
c. Convenience and friendliness of the kirana – most kiranas maintain credit accounts of the families they service. Can you even imagine that happen in a modern retail outlet ? Add to it the benefit of free home delivery, service on phone , and the occasion for gossip at the Lala’s counter !
d. Don’t underestimate the Lala’s ability to innovate – in the past five years since Modern retail has started expanding, a quiet revolution has been happening in the kirana outlets as well – they are becoming modern, adding self service and accepting credit cards too! Large retailers will not have it so easy!
e. The Journey to profitability at store level could evolve along two possible lines – franchising (like the Nilgiri’s model – which upgrades existing kiranas to self service) or rapid expansion of the Hyper format – which would allow for lower operating costs per square foot, higher range display, and a heavy mix of apparel, consumer durables and other high margin categories.
The Modern retail outlet would also need critical support from a few, “non policy” factors to be able to really succeed – namely –
Readiness of FMCG companies to service modern trade –
a. Modern retail today contributes nearly 5-7% to a typical FMCG cos’ sales. Given the strong reliance on traditional trade and wholesale, the SKUs available for a large number of products are suited for this environment
b. To really drive business in the modern retail format, companies will have to introduce innovative packs (bulk packs – as the latest Nielsen shopper survey suggests), invest in shopper research and consumer understanding, deliver exciting promotions and the whole shebang – to really make modern retail work.
c. We have to remember that unlike the Lala who has no qualms in selling whatever he is dispatched, Modern Retail is very finicky about Fill Rates. ( % of stocks supplied to order received) – levying penalty on firms who drop below agreed service levels. Managing this complexity would not be easy for FMCG firms as well.
d. Plus, Modern Retail works on high margins, and credits!
Availability of cost effective work force and labour – A possible drawback of a large number of malls / hypers opening up would be on labour – people would be more keen to work in an AC environment, cleaning floors and toilets, but not be willing to be employed as labourers / loaders / unloaders – which would mean additional costs for the suppliers, coupled with delays in servicing.
It is also possible that it would do good to the government to organise this sector, as this would do away with “kachcha” bills and impact tax revenues too.
To sum up, while the government, the consumers and commodity suppliers would stand to gain from the advent of modern trade, a magical, overnight transformation would be difficult to achieve – given the challenges faced by the suppliers, the infrastructure and the external environment – this, of course, is the “dhande” ka perspective !