Is it really the Kirana?

Foreign FDI has been blocked in multi brand retail on the pretext of protecting the small kirana (mom and pop) stores. Sometimes I wonder if this is the real reason. I strongly believe that the restriction is actually to help the large Indian organised retailers. They are the ones to be first affected by the direct entry of Wal-Marts and Tescos of the world in retailing.

The typical design of the large foreign retailers is that they have a very strong but investment intensive back end. In order to get good returns from their investments, the stores have to be necessarily large formats. In addition, in one given market there have to be a high number of stores.

The high lease rates in urban areas of India make it impossible for retailers to have many large stores inside the city. The Wal-Mart model of having the store outside the city would be difficult given the traffic and road infrastructure bottlenecks. In rural areas the scale of operations is generally very low. Indians typically do not have a spend oriented culture like the Americans. So, it would be difficult for a retailer to set up and sustain a large store in a Tier 3 city.

The kirana stores in India have created a very low cost selling model. A pan shop could sustain itself at a monthly profit of around Rs. 5000 only. This number could be much lower in rural areas. This was not the case in the USA. These players can never be threatened by the foreign retailers. The existing so called organised retailers in India would probably have the most to lose.

Indian organised retailers are still in an experimentation mode. They hastily set up the front end and are now trying to make the back end work. Most have poor systems. Some companies have closed down and most of the rest are not making money. They have tried to copy the IT systems in foreign retail as this can be easily bought. But, the human systems and discipline needed are sadly missing.

By getting the government of India to form rules banning the foreign retailers, the organised players seem to be creating space for themselves. Foreign companies wanting to enter India would be forced to tie with the existing Indian players. It clearly seems that the rule has been created in the first place to benefit these large Indian retail players.

Now suddenly there is a talk about relaxing the rule. Nothing has changed for the small kirana owner. But all the large format foreign retailers have already been subdued to partnerships with large Indian firms – this includes Wal-Mart, Tesco, Woolworths, etc. Having done this, and needing more investments, it seems that the large Indian players are now getting the government to allow more direct investment in multi brand retail.

of Margins, Profits and Collaboration

A manufacturer needs a retail store to sell its products. And, a retail store needs a good agile manufacturer. While this is common knowledge, supply chain practice tends to suggest otherwise. Look at this article in Economic Times:

http://lite.epaper.timesofindia.com/mobile.aspx?article=yes&pageid=1&sectid=edid=&edlabel=ETD&mydateHid=11-03-2011&pubname=Economic+Times+-+Delhi&edname=&articleid=Ar00100&publabel=ET

The Electronic retailers want the manufacturers to raise the margins by 4% from the current 8 -10%. The manufacturers say that the organised retailers give them a lower throughput than the smaller mom and pop stores and hence they can't increase the margins for modern trade.

Gross margin is defined as the buying cost subtracted from the selling price. For all practical purpose, this number is very different from profits. A high margin product can be a net loss product and a super low margin product can be a profitable item.

There is the issue of overheads here. Traders who work on volume products on low margins strive to keep overheads low. This way they can ensure good profits even with gross margins of around 2 - 5% only. For some MNCs on the other hand, profits are not even 10% of the gross margins. MNCs have an expensive bureaucracy to support and pay salaries to. Point that I am trying to make is that increasing margins is not the only way to make more profits.

A vendor who is unreliable would need lot of followups. This follow up is done by a buyer, and this buyer gets her salary from the buying organisation. So, a low cost vendor might actually be a loss making proposition. A bad quality product or a wrong shipment can surely be returned to a vendor. The vendor may also give a 100% credit note against the returns. But, the time lost in creating this return journey is a cost to the buyer. Similarly, a customer who demands frequent deliveries or who keeps changing order commitments is surely more expensive than a customer who lifts material in higher quantity, has lesser frequency of replenishment and also who give stable orders.

Instead of haggling on margins, the electronic manufacturers and the retailers could sit together and analyse these very cost drivers. In a truly modern sense, the modern trade must give up the aggressive postures and come to the negotiating table. Together with the manufacturers, maybe they could work out arrangements of last mile delivery to the consumers homes or offer special after sales service deals.

Same for manufacturing companies. An electronics company has significantly greater efforts in selling to smaller stores than large format chain retailers. Pan country buying decisions are probably made from one office for large format retailers. For smaller mom and pop stores, every small store would need a sales executive from the manufacturing firm visiting every week. The savings in sales effort costs would easily more than make up for the lower throughout in the organised retail.

The key would be for one party to demonstrate maturity and initiate the process. This is not a zero sum game where one firm has to lose for the other to win. There are numerous cost drivers besides the basic price. There can be a truly win win solution here. It is not a fight of the retailer versus the manufacturer. It is actually a relay race where both players have to work together to capture and satisfy the end customer.

Not all customers are equal. Some customers are extremely expensive to serve. Profit for a company is not the direct price of the product minus the cost. There are many overhead expenses. And these overhead expenses are not shared uniformly over every customer.

For a trucking firm, a customer with uniform orders is less expensive to serve than one with sporadic requirements. Few large orders are easier to pick and dispatch rather than many small orders. For an automobile dealership, a flexible customer who buys the vehicle available in the showroom is more profitable than a customer who takes a long time to decide or one who needs a specific configuration.

In spite of this knowledge in most cases we generally charge the same price to all customers. The differential supply chain cost is rarely considered. While in cases there may be some differential in the price, it is rarely calculated from the cost of actually serving a customer. Marketing segments customers according to channels, need of service, etc. Costing segregates costs of every resource and every product. No function looks at cost of serving customers and then creating differential pricing.

Meru cabs is a provider for taxi services in Mumbai, Delhi and a few other Indian cities. Customers who book cabs by using a call centre are billed a convenience charge of Rs. 50 extra. Customers who book online are spared of this cost. The Rs. 50 is clearly an approximate cost for the additional services the customer uses.

Every business needs to think about this idea. By creating differential pricing, businesses can actually direct customers towards specific services. If a customer knows that by placing orders in a certain manner he may get a better rate, the customer might change her behaviour.

With a uniform pricing policy, good customers may feel cheated. In spite of being low cost customers they pay as much as other customers. There is a definite danger of such customers changing vendors. In the end, the business will be saddled with high proportion of high cost customers.

Differential pricing can be created on the basis of various basis. It can be the number of orders, quantity per order, consistency of business, number of delivery locations, number of product variants asked for, etc. Every business will have its own dynamics and the pricing has to be configured accordingly. The aim is to reward good customers and also to motivate other customers to migrate to better relationship pattern. Of course, the ultimate aim is to make doing business easier and more profitable.