Feeder for retail formats

The organised wholesale business has proven to be an unconventional means of entering this emerging market. A FDI cap of 51 per cent in single brand retail by the Indian government implies restrictions on global players to conventionally enter the market which otherwise offers a 100 per cent FDI in the Cash & Carry (C&C) segment. On other hand, talk is still going on for permitting FDI in multi-brand retail. Thus, Cash & Carry wholesaling comes into the picture as an indirect way to enter India’s high-growth market. So, Indian players are either tying up or will tie up with foreign partners to have large equity infusion or sometimes cash out possibilities.

 

The business model definitely increases scale of economy of existing retail business and helps drive lower back-end costs. Multiple players are still sub scale, which has meant continued losses over years and increasing scale through entering additional format like C&C is seen as a key lever to build the scale.

 

At a glance

C&C operations are currently on the rise in the country which promises future growth in the space. In 2003, Germany’s Metro AG was first to enter the Indian market in this space, and now operates six C&C stores across Mumbai, Kolkata, Hyderabad and Bengaluru. Wal-Mart entered the market in 2007 by forming a joint venture with Bharti Enterprises to create “Best Price Modern Wholesale”, and now has five stores - three in Punjab and one each in Rajasthan and Madhya Pradesh. Bharti Walmart’s Best Price Modern Wholesale stores stand between 50,000 and 100,000 sq ft and stock over 5000 items, including fresh, frozen and chilled foods, fruits and vegetables, dry groceries, personal and home care, hotel and restaurant supplies, clothing, office supplies and other general merchandise items.

 

Booker Group also decided to enter without a joint venture in 2009, but instead chose to expand via the franchising route. French retailer Carrefour SA entered India in December 2010 and has its lone store in Delhi. As per the partnership between Future Group and Carrefour, the Indian giant will pay a royalty for using the French brand. However, the amount for the royalty has not been disclosed.

 

India’s Reliance Industries Ltd (RIL) has chosen Ahmedabad to start its wholesale store that would cater to establishments, including neighbourhood grocery stores, hotels and restaurants. The first store is expected to be operational by August under the brand name of ‘Reliance Market’ and will occupy 100,000 sq ft of area. We also have British retail giant Tesco who has chosen its Indian partner, Tata group firm, Trent, for its C&C business in India. 

 

Why this space?

The Indian retail sector is yet to be fully liberalised. There are permitted modes of entry, aside from franchising, licensing and distribution, including single-brand retail (subject to riders) and wholesale cash and carry (automatic). We spoke to a couple of retail experts to understand it more in depth as to why increasing number of retailers are getting into the C&C space. One of the primary reasons remains to be that the traditional retailer and hence wholesales business is and will remain larger than the modern organised retail for a very long time. Hence it offered a very large and attractive market to all players.

 

There are other important points too. Harminder Sahni, Founder & Managing Director, Wazir Advisors says, “The retail expansions have been hurt due to various reasons and players are looking for alternatives to grow their turnovers and hence the feasibility of their own retail chains too.” Thirdly, large international retail players are entering into wholesale trade as 100 per cent FDI is permitted. Thus, Indian players are concerned that they may end up leaving a large market for free run for MNCs.

 

Moreover, as pointed by NV Sivakumar, Executive Director and Leader, Consumer and Industrial Products, PwC, it is learnt that there are 12 million mom and pop stores in India all of whom need to source food and non-food items for daily operations. “The Indian market is large enough to accommodate both large and small players, and Indian retailers don’t want to miss out on growth opportunities provided by the B2B category,” he further adds.

 

Opportunities it presents

Since traditional retail accounts for more than 90 per cent of the market and even after another 10 years it will account for not less than 75 per cent of the market; hence, today, at USD 500bn (of total USD 550 billion retail), the opportunity to service through wholesale is seriously significant. “Even after its share has gone down, the overall size would have grown manifold in years to come,” avers Sahni.

 

C&C operators will realise greater efficiencies and gains once they reach scale (i.e. create a pan-India presence), are able to localise products to meet local market needs. Apart from this, as pointed out by Sivakumar, there are points like building supply chain capabilities, developing loyalty programmes and then harnessing data and insights from these programmes to create targeted offers for business customers, reduce shrinkage, etc.

Hemant Kalbag, Partner, AT Kearney opines, “It helps existing retailers build greater volumes in specific categories which can lead to improvement in margins and helps create private labels which can further help in margin improvement.”

 

What happens to the unorganised chunk?

As understood, in the long run, this will lead to improved back-end infrastructure, lower wastage and transparent pricing for farmers currently selling to the unorganised wholesale market. It can help better serve the unorganised sector itself – wider assortments and better product availability and better pricing. Sahni points out that given the overall size and scale of market, both (organised and unorganised) will grow simultaneously.

 

Narayanan Ramaswamy, Executive Director, KPMG Advisory Services Pvt Ltd says, “Unorganised wholesale market will have to bear the brunt. The typical middle-man who adds no value will have to go.” Sivakumar shares that as economies evolve, so do their industries, consumers, process, etc. The Indian retail sector is large enough to accommodate both large and small, and modern and unorganised retailers and brands.  

 

Consumer’s benefit

Consumers can benefit, as shared by Kalbag, from a lot of ways including better pricing slabs due to lower back-end costs, higher productivity and lower wastage/dump; reduction in sudden price escalations that currently occur due to market inefficiencies (goods availability at supply point but not at demand centres); greater assortment width and depth and lower levels of stock-outs (better availability). Sahni opines, “Consumers will benefit as through organised wholesale route the traditional retailer will be able to enjoy the efficiencies that otherwise would have been available only to organised retailers. This will lead to pass on benefits to consumers in terms of quality, range, price, availability, etc.”

 

As a part of building the supply base for their Best Price Modern Wholesale stores, Bharti Walmart works with several small and medium suppliers across India. “We work with suppliers to remove any inefficiency in supply chain, enhance their capabilities and improve the quality of products through implementation of stringent systems and processes,” avers Bharti Walmart spokesperson.

 

Two out of the box points referred by Sivakumar are worth mentioning. They are ‘lifestyle parity’ and ‘zero tolerance for inefficiencies’. The initial point implies the equalisation in the standards of living available to consumers between countries.  This parity in product choice boosts consumption and helps level the consumption playing field. Interestingly, modern trade helps usher in new tolerance levels for efficiencies and inefficiencies. Customers are willing to pay for efficiencies but are refusing to pay for inefficiencies due to a wider product choice, increased funding options, etc.  This will bring about a paradigm shift in business practices, the rate of innovation, the availability of products and services, etc.

 

Boost to infrastructure development

As more and more of the large retailers get into C&C business, they will invest in back-end infrastructure (storage, processing and transportation capabilities) to have a strong value proposition. “This would mean increasing investments in supply chain, better integration with farmers and reduction in middlemen leading to better value for farmers and also improvement in farm productivity,” avers Kalbag. Also, in the long run, with greater backward integration, it is also likely to lead to benefits in framing infrastructure to help boost agricultural productivity.

 

However, Sahni points out that the only difference between organised retail and organised wholesale is that the former covers the last point of sales that is store while the latter leaves that to the traditional retailer. Hence the infrastructure possibilities are same in both cases. Ramaswamy sums it up by saying that this can add to the infrastructure development in a big way – by way of larger formats of outlets; storage / inventory capacity; enhanced, organised logistics, including newer variations like cold storage, tagging, hub & spoke warehouses, etc.

 

Bharti Walmart’s initiative for the betterment of services

Retailers, too, are giving their best, contributing to making their business model successful, be it in terms of technology employed or back-end support involved. Bharti Walmart has created an efficient supply chain linking their Best Price Modern Wholesale stores to farmers and manufacturers. “Our supply chain includes distribution centres and agricultural cooperative centres that act as aggregators of food and non-food items from various suppliers, and dispatches these further to the stores,” comments Bharti Walmart spokesperson. Also, for instance, Walmart’s Retail Link Technology is a key technological cornerstone which helps the stores track inventory, sales and work closely with suppliers to create an efficient supply chain.

 

Bharti Walmart’s Best Price Modern Wholesale stores cater to kirana stores, hotels and restaurants, small and medium businesses and institutions. “Our efficient supply chain ensures low prices resulting in better value proposition for our members. Our marketing initiatives are restricted to members of our stores. We have Sales and Business Development teams at each store which looks after member acquisition. The member is informed about the various products and offers available in the store through in-store advertising, mobile messages, pamphlets and one-on-one interaction with store employees. We also do press and radio advertisements to inform our target community about our stores and the advantages of shopping at our stores,” opines Bharti Walmart spokesperson.

 

Even paying attention to the store location is something which forms an important part of the retailer’s concern while reaching out to his target audience. Bharti Walmart spokesperson avers, “Before finalising the location of the store, we undertake a thorough research of the proposed city and area specifically to understand the size of the city’s population and its demographic factors. Other key factors which we consider are real estate availability at a feasible cost, supply chain infrastructure and finally the financial feasibility of the store.”

 

 

Infrastructure Development

THE UNION BUDGET: The Union Budget 2011-12, while it did not contain any large-scale policy changes or announcements for the retail sector (eg. further liberalisation, according to sector status, development of a single-window clearance system), did put in a series of measures that will hopefully assist in the development of a more robust retail ecosystem.  Selected aspects of the budget include-

• The recognition of cold chains and post-harvest storage as an infrastructure sub-sector should enable players to secure better loan terms from domestic banks to expand operations.
• The approval of 15 additional Mega Food Parks should improve the state of food processing in India, by creating infrastructure for farms, food transportation, logistics and centralised processing centres.
• Recognising that food inflation is an issue, the Finance Minister advised State Governments to review the APMC Act. Once repealed in all states, a more unified agriculture market will be created which can facilitate farm to fork integration and enhance efficiencies.

*Source: PwC