Why army canteens have emerged as the most profitable retail format?

As per a report shared by a leading daily, a chain of about 3,900 s of Indian Defence ministry's CSDs have around Rs 236 crore ($55 million) in profit in financial year 2014-15.
Canteen Store Departments

Till now we have believed that Indian retail sector has been dominated by retailer such as Future Group, Reliance Retail and Big Bazaar etc., but breaking the monotony is a new entrant, The Indian Army Services. Yes! This might sound a little strange, but Defence ministry’s canteen store departments (CSD) have emerged as one of the highest revenue generating retail formats. As per a report shared by a leading daily, a chain of about 3,900 s of Indian Defence ministry’s CSDs have around Rs 236 crore ($55 million) in profit in financial year 2014-15.

These numbers have surpassed the earnings of every big/small retail chains which include majors such as Future Group and Reliance Retail reporting a profit of Rs 153 crore and Rs 159 crore simultaneously.

How do they make profit?
i.
The reason why CSDs are outdoing every other retail chains out there is its operating margin which is as low as 1 per cent, whereas for private retailers the number varies anywhere between the bracket of 8-18 per cent.

ii. Another big reason why these CSDs, despite being a non-profit organisation, make huge profit is the tax wave off it gets from the government.

iii. CSDs receive discounts from vendor companies which offer better deals to the Defence Canteens than to local kirana shops. 

iv. Last but not the least is the lower overhead costs of the products available at these stores.

Top Selling Categories
Army canteens are mostly being preferred for fundamental products that are being consumed for daily usage that includes FMCG, F&B, Automobiles, Electronics and White goods products etc. Out of the total sales, liquor contributes to around 26 per cent, toiletries nabbed 23 per cent while automobile and white goods accounts for 20 per cent.

Commenting on the same, Devangshu Dutta, CEO, Third Eyesight, a New Delhi based consulting firm said that these CSD does not have to bear two expenses that are major operational costs for retailers—real estate and advertising. That’s because they are located within easy reach of defence staff, typically inside cantonments and not in commercial locations such as markets or malls.

Staffing and training costs are lower than private retailers since the management workforce is partially shared with the standing armed forces. CSD also has a focused, sometimes captive, audience which it doesn’t really have to fight for, he added.

However, the digital format of retailing has really made the entire ecosystem competitive, but still for a lot of consumer good giants including HUL and United Sprits, these stores account for a bulk of the turnover. As per the daily’s projection, CSDs contributes to 5-7 per cent of the overall sales for some of these consumer good companies.

Inception of CSDs
If we go back into the time when CSD canteen concept was introduced i.e. in 1948, the motto was to provide quality products to Army, Airforce, select paramilitary forces, retired personnel and their families and civilian organisation at a price less than market rates.

The stores have served Indians troops even during wars and natural calamities. As per the report, these stores serve to some 12 million customers annually with over 4,500 products such as television sets, audio and video systems, refrigerators, soaps, shampoos, liquor, and even cars—all at prices considerably lower than market rates.

Looking at the purpose and the growing demand especially in tier II and III cities of country, brand are now leaving no stones unturned to find shelves in these stores. Though eCommerce has made the entire retail ecosystem competitive, projections still says that army canteen will play a crucial role in catalysing sales of these brands. As per Krishna Rao, Deputy Marketing Manager, Parle Products quote on a leading daily, CSD is definitely a critical channel. While the brand is not as focussed as it should be, there is a lot to be done to increase its contribution to its overall sales.

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