Re-engineering in Retail in India.

This project is dedicated to..

To me, this is not an article or an expert paper or even a case study! It is a project to be implemented and by whom, none other than the young and vivacious youth of India. They comprise of more than 50% of the population are a talent worthy of nurture and guidance.

The goal is to give them a fair chance to prove themselves as leaders in the field of small businesses, and help harness their creativity. Either small or big, let them do it of their own and let us guide them to achieve this goal by giving whole hearted support. By allowing foreign giants in the areas (like retail) which does not require complicated technical expertise, we will not be doing justice to the aspiring Indian youth, who may be forced to take up jobs in the large outlets rather than explore and exploit their entrepreneurial capabilities.

As you read you will understand my vision for the Youth, who will be working on this project. They will be interacting and helping Kirana stores, pretty much the hero of my write-up here. The goal is exploit entrepreneurship and nurture it – may more Youth become leaders of their own accord than rather mere workers. 

Preamble

The Indian Retail Industry, over the next 10 years, can see tremendous growth in terms of volume and value! I can justify this point with many published and unpublished reports, which gives an encouraging year-on-year growth statistic and GDP contribution. Yet, there is one contradiction – the current retail format and the way it is operated on – both by large Indian Corporate houses and the International chains, finding every loop hole to set up shop in India – will not help unleash the true potential of the Great Indian Retail Story as it should rightly be written.

Think about it, most investors are wary of touching retail stories. Capital intensive model, long gestation periods, logistical issues and sluggish growth are but a few indicators that scare the living daylights of ‘opportune’ investors, who have other avenues of investments yielding better results.

Big is beautiful in Retail! Most organizations in Retail were and are under the opinion that scale and size is the solution to battle large overheads and tough the dream line of profitability. Sorry we are looking at the wrong end!

If after 3 paragraphs, you are wondering as to why I have not mentioned FDI, given that FDI is almost the twin word to Retail in every public usage, the reason is simple. And the reason is that, in the recent past, the argument about Retail has always been in relevance to FDI – whether it is good or bad – and there was never an alternative arrangement or an isolated focus on the Retail Industry without the FDI even considered. Hence, as you read this paper of mine, you will find less mention of FDI and a more thorough focus on the Indian Retail Industry, with all its uniqueness & complexity and how it needs to be desperately re-engineered.

Focus Kirana!

There is reason that a typical Indian homemaker goes to her neighbourhood Grocery store despite its lack of air-conditioning, lack of neat shelf spaces with prominently displayed products, lack of fancy billing counters and store assistants, save the store owner’s son trying to desperately learn the family business. 50 feet away from this small store is a popular retail chain with all the amenities to make shopping less sweaty and comfortable. After all the brouhaha about the chains wiping out the Kirana, this Kirana survives and continues to service its loyal customers, generations past and possibly generations to come!

The Kiranas are here to stay whether we like it or not. We may slow their growth or take away a few customers, but a complete wipe out is indeed a long way off. Have we wondered what the ‘entry barrier’ is? What is that the customer finds in these Kirana stores that can’t possibly be delivered better by the Organized Retail segment? The answers are largely intangible and it is going to give AT Kearney Market Research a run for their money if they try to put a value to this Entry Barrier.

In fact, after many years of observing these stores, I had one amazing revelation! No one knows the exact requirement – product & quantity wise including preferences – and credit history & capability of a customer better than a Kirana store. Those are good enough entry barriers for me!

The fact is that, in India, the organized retail accounts for only 5% of total retail sales, with independent Kirana stores still the most favoured route for consumers shopping for their day-to-day needs.

The relevance of Kirana in re-engineering the Indian Retail Format

One of the many reasons of an acquisition by one Company of another is to buy customers! This is especially so in the case where cost of switching for a customer is costly for both tangible and intangible reasons. Hence, by acquiring the Company and building business around it, you retain the customers in the name of the vendor they are most comfortable with, nurture them while building a base of new customers.

This is a very common corporate phenomenon. Applying similar logic, the trick of operating a successful retail format in a place like India would be to work a ‘scalable system’ around the existing Kirana, while exploring other traditional formats which will provide a Retailer a very unique and significant advantage.

Building the nexus between Wholesaler and the Kirana and producers/manufacturers

A strong partnership between modern wholesaler  and the Kirana stores is the need of the hour. The goal is to empower the Kirana, which has the solid customer base and customer understanding, while simultaneously creating a strong logistical back-end through the society. To make the Kirana more efficient and organized, the whole saler will need to play a vital role.

I propose the whole saler focus on improving stocking infrastructure, logistics and optimizing space utilization and not worrying about reaching the consumers through owned outlets. That will be the Kirana’s job and the society would empower the Kiranas, who are anyways well-entrenched to do a better job of the same.

So, if you may interrupt and ask as to what’s in it for the wholesaler, I would say everything! In my vision, I see a wholesaler doing what it does best – managing scale, building systems and processes, utilizing bargaining power – but focused on procurement and storage! By stepping into Retail, there is resource blockage, cannibalization and requirement to deploy large capital for long gestations. Now, these Kiranas have been doing this for ages and why not use them, bring them together, empower them and make them Retail agents? The consumer is happy, the Kirana is happy and the wholesaler has saved a lot of money, time and potential long periods of losses!

Now, this still does not solve the puzzle yet! The wholesaler, who has now effectively made the Kirana stores his customer facing champions will now backward integrate to ensure effective sourcing and will harness his purchasing power.

The working of this partnership

In the paragraphs below; the role of the each of the parties shown is explained in detail and how they will add value to the whole set up among them!

 

The role of the Kirana store

Basically a bunch of Kirana stores put together based on some criteria (this is execution intelligence), are grouped together to be adopted by the society. The Wholesaler will empower and build these Kirana stores into modern outlets and use them as his customer facing front.

Wholesaler, the Kirana store under this partnership program need to get enrolled as members with member benefits, all serviced via an intelligent card. The card could be linked to bank assistance for additional capital, investment, credit, etc.  The emphasis will be on door step delivery and on- line ordering. This will allow for minimal spending on ‘shop front’ expenses like display, sales staff etc., it represents a hybrid system, combining the advantages of an e-store with a personalized approach of order collection and door delivery.

The Kirana store, having been in the business for a long period for some, possibly through generations of family business, would be enjoying long association with the customers. This could help in knowing the credit history of the customers – a very critical knowledge. Based on this traditional Kiranas could be empowered with acceptance of credit cards/coupons etc. This will bring additional volume of business to the Kirana. New members/ consumers can be continuously recruited and superior inventory control; the same go down space can be used for a much larger bank of customers through its nexus with the wholesaler. The existing players in the business would be encouraged to open more outlets if they deem fit. Kiranas in the semi urban areas will be provided facilities by the wholesaler make it as a one-stop shop for a whole host of food and non-food products.

An average store will typically carry around 10,000 different products, almost all of which will be sourced domestically. New products could be introduced and the response for these products from the consumers could be ascertained- It is a PULL strategy even for inventory stocking rather than PUSH strategy, hence significantly contributing to overheads management

The emphasis will be on door step delivery and on line ordering. This will allow for minimal spending on ‘shop front’ expenses like display, sales staff etc., it represents a hybrid system, combining the advantages of an e-store with a personalized approach of order collection and door delivery.

The role of the Wholesaler

Enter the Society! The wholesaler, as shown in the illustration, sits right in the middle – adopting the Kiranas and equipping them better to serve their customers. This is forward integration!

The wholesaler will serve as a suburban warehouse, manned by movers and logistics people rather than salesman. Space utilization could also be at a maximum in this model. The wholesaler will not own any outlet of its own; will be a partner to the Kirana.

It will be the endeavour of the wholesaler to upgrade the Kiranas and other retail formats to becoming efficient modern retail outlets, equipped with the knowledge of modern retailing with the help of e-transactions. Each of the stores would be mini-supermarket which in turn will satisfy the needs of growing middle class population.

The wholesaler will have all the facilities like modern laboratories, electronic equipments. Highly motivated young Professionals will run the organization, and will be committed to satisfy the expectations of the Kirana and see to that the customers get their money’s worth.

The wholesaler will also help the Kirana in bulk supplies to hotels, restaurants, hospitals, offices, factories etc.

Now, to serve the Kiranas according to their product/stock requirements, Sourcing is critical! Here again the wholesaler will use it s good offices and purchasing power to source in the most optimal way that will benefit the entire value chain. This is explained in the next section

Sourcing – an important component for this Partnership

The groceries constitute 60% of sales by a Kirana store mainly comprising of agricultural products. Therefore it is essential to source agricultural products from the farmers, who are burdened with cultivation and subsequent marketing, hence giving away a substantial portion of their earnings to the middlemen.  Here the wholesaler steps-in to empower him, like it empowered the Kiranas, in cultivation with modern techniques and procure their quality products for marketing to the Kiranas.

The Wholesaler will assist the farmers in cultivation of agriculture and farm produces they will be assisted with latest techniques to improve their yields, however small their land holdings are. The society will coordinate with the Government departments and the companies that are offering services for improvisation! This helps in putting together a solid base for an effective backward integration.

Investors will be approached to buy farm and agricultural lands for cultivation in their own names or entities, so that large quantities are procured thus reduce the cost products.

 Fresh fruit and vegetable will be procured the farm lands and the cart vendors could be branded and produce duly brought to the consumer doorstep across the city through the value chain. Imagine working this model through thousands of cart-vendors and thus creating another Society bringing all these vendors as members. These vendors, on becoming members, could get free wheeler carts, specially designed for deliveries.

During season, if there is a bumper crop of any fruit and vegetables these vendors could sell vegetable in bulk. Once it gains momentum, this would reduce wastage in the system, bring produce to the end consumer quickly, while at the same time keeping the current players in business and engaged in the system.

At the sourcing end, farmer interactions for farm commodities and encouragement of small manufacturers for FMCG products will help streamline supply chains and disallow possibilities of harmful cartelization. Setting up food processing units near the farms will help to avoid wastages. The wholesaler can play an effective role in bringing much needed technologies like cold storage facilities.

 The farmers’ interests will be protected in getting adequate financial returns by improving maximum yields better margins by avoiding middle men and logistical support. Health care facilities, better standard of living for the family, good educational facilities for children, providing proper insurance cover etc., will create a hassle free life and happiness to whole farmer family!

The Kirana store will always have more customers walk in and never suffer from stagnation in customers’ growth as it is not limited to a geographical area like a hyper market or cash and carry stores.

Under this arrangement huge inventory pile up will be avoided by the Kirana but will be in a position to have access to the stores for drawing for their increased requirements. Kirana will have the advantage of avoiding number of middle men and better buying power which would translate to higher margins to the Kirana. The aim of this concept is to organize the distribution channel before the retail store using modern inventory and logistics systems. Consolidated buying power would also lead to better negotiated prices on grocery and branded products. Smaller manufacturers can get a distribution network to reach the market more easily.

Under an arrangement with producers exclusive brands for the Kirana and wholesaler partnership combine will be produced of selected items.

Textiles, jeweler, footwear, consumer durables, medicals, stationery, books etc., will also be under the scope of the wholesalers for marketing with their respective format of retail out lets under the partnership program.

Note: Wholesaler means cooperative society.  (Like AMUL)

What is the final Vision?

The investment required is not high and no foreign exchange is involved, therefore the fear of reparation of valuable foreign exchange is not there. The foreign investment is required to be harnessed in areas of agriculture, power, and infrastructure.

Organized and disciplined wholesaler and Kirana partnership combined will grow strength to strength to face any competition posed by the outsiders. In the larger scheme of things, it is not just about Kiranas and the wholesaler; it is about creating a value chain that is sustainable and lucrative! This model seeks to work on the strengths of the existing formats and cleverly create a nexus between them rather than finding solutions for all the problems faced by the Retail industry through scale! Hence, it is called ‘Re-engineering’ the Indian Retail and not recreating something new.

The Rs. 20,00,000 crores retail market can be efficiently handled by the wholesaler and the Kirana partnership combine thus avoiding  valuable foreign exchange repatriation by the foreign entities.

On a different note, imagine the impact such a model would have on the millions of middle class people, who are represented as Kirana owners, Farmers and customers at large! By delivering competitive prices, effective delivery, reduced overheads, imagine the savings that we create and need I say the impact of higher savings…..the story continues.

Since the Government has announced the clarifications regarding FDI, I would say that there is lot of scope for domestic companies for expanding its operations in semi-urban and rural areas. By cleverly positioning the company in the mix of different formats. The above is just a small summary of the 400 page execution document that I have created trying to compile my 33 years of experience. I will have more details and revelations to share when the operations begin.

About the Author

Mohan M Gobal is a chartered accountant he has 33 years retail experience both as an entrepreneur and as consultant