the Big Retail dilemma

He is a happy man. My friend’s wife is pregnant. But the other day, he was cribbing about shortage of apples in Kochi. He says the big red ones, the not so sweet ones, they flood the market in May – which is a yearly phenomenon. This year the apples didn’t come. His research tells him the Big guys are buying up the apples at the source and releasing the bad ones back into the market. He blames Big retail. Everybody blames Big retail. I don’t really share my friend’s anger at the bad apples, I like oranges.

Here, Bhavani – the Talkies Retail Correspondent, has a very confusing take on the issue. Bhavani has several years of experience in retail or so she claims.

Bhavani writes (on invitation),

It has a striking similarity with the Narmada story. Right from Nehru to the neighbor hood politician, they all have urged the people of the valley to sacrifice for the bigger good. It is like saying –

Hey, ya, you over there, jump into the water. We know you don’t know swimming. We neither. But if you jump, the boat won’t be capsized. In that way, you will be saving other 10 people.

(And the story goes on to say that Nehru later on regretted his haste decision).

As I type this, sprawling malls with retail giants in them have replaced mega-dams as the new “temples” of India. (Whose India is it anyway?). Call it the retail revolution (Whose revolution is it anyway?) or India coming of age, it is here to stay. End of day, farmers benefit, the consumers benefit and maybe India would Finally Shine. But what are we supposed to do with nearly 4 crore people employed in our neighbor hood stores and the weekly village markets? Who is right, who’s wrong, do facts lie?

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Its Women’s day at Big Bazaar

Some fact:
The USA has a retail market 13 times bigger than ours. But they have only 0.9 million outlets catering to the whole market. India has 12 million outlets scattered over the country. Together, they contribute to nearly 11% of our GDP. Of these, organised retail is only 4%.

That means, the Subhikshas, Food Worlds and Pantaloons of the world fall under that 4%. The remaining lot – the 96%.Who are the rest of the people? Have we ever heard of them? Do they have a name or any identity at all?

By 2010, Organised Retail will be a $23 billion industry, eating into 10% of the whole of retail. 4% to 10% in 3 years. Once they are established, before we even realize, we will no more be seeing those handcart and pavement vendors. They will become a thing of the past. Some lucky ones might become characters of Booker winning novels.

I hate maths:
Google tells me that Wal-Mart has added 50 million Sq Ft to his total retail space in 2004 (in US only). They had a total of 1.2 million employees at the end of 2003. An employee turnover of 45% gives us a figure of 0.54 million leaving Wal-Mart every year. They hired 0.6 million new employees. That means, after filling the gap, only .06 million was hired for 50 million Sq Ft. Means 0.24 employee per Sq Ft.

In India, only 4% of retailers use more that 400 Sq Ft of space. Let us assume, the rest use an average of 200 Sq Ft per store. Every store, let us assume again, must have at least 1 store owner/keeper and 1 helper. 2 employees per 200 Sq Ft or 1 employee per 100 Sq Ft.

With the latest of technologies and customer being more self sufficient, the employee ratio here in India can not be drastically different. Being magnanimous that we are, let us round off 0.24 as 0.5. Still, there is only 50% job generation.

The Indian business houses that are already in the run will not be using a business model inferior to Wal-Mart. After all, the key to success is resource management and efficiency. The counter argument here to justify the loss of jobs is that, the total retail space might increase drastically; thereby maintaing or increasing the numbers. A plausible argument. But the ones who gain aren’t the ones who are losing. They will be REPLACED by the new workforce.

The Story :

bp.jpgBut is it as frightening as it is projected to be? Maybe. May be even more.

Reliance has opened its first store in November 2006. And today they have more than 200 stores in 9 months. Close to one store a day. (Wal-Mart opens stores at the same rate, too).

If the media is to be believed, Reliance has drawn up plans for a presence in 784 towns and 6,000 mandis (wholesale market) by 2010. They are targeting a turn over of 40000 cr in the next few years. The whole of retail is estimated to have a turn over of 400000 cr at the moment.

This is just about Reliance. We have Bharti, Birlas and Tatas in the fray and Wal-Mart and Woolsworth, having already made a back door entry.

On an average, one store will cost these big wigs 10crs to open. Break even might be 2 or 3 years down the line, sometimes even more. They can afford it; the 96% we mentioned earlier cannot.

One scoffing remark here is that we are childishly assuming the whole of India will flock to these new stores. Well, they might.

The NEW stores:
They are not coming in one format. From the neighborhood store to the big hypermarkets; from 500 to 40000 sq ft stores.

Big Retail acquires your existing local super market chain and retain the name without you even knowing it. You step out of your house and the nearest store you find must be a small air conditioned store of the Birlas or the Tatas.

They wear colorful uniform, they have an enticing display and you get everything there. Why should you go to the guy from whom you have bough all these years? What does he offer for the same money?
Real Estate (The space factor):

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There is a relatively less talked about issue too – Real Estate. The rate at which the big players are buying or leasing realty is pushing the industry to an explosion. To gain the first mover advantage, the ones who have money, are accumulating all available space. A recent KSA Technopark survey estimates that the available mall space will be exhausted in near future itself.

The Great Indian procurement Act:

The trump card of the big players is the Supply Chain. Logistic cost is in the range of 10-12% of our GDP; no wonder considering the size, geography and variety of our country.

The fact that Wal-Mart is partnering with Bharti as its Logistics & Technology expert might give you a feel of how important it is to be good at it. That is where you organise and optimise. That is where you have to be extremely efficient and save money. It is a small part of that money what you offer the farmers and customers.

Big Retail will build their own cold storages and other necessities. Produce will flow from farmer to the retail chain’s distribution centers. Less of shrinkage too. ( Pilferage, other known & unknown loss; can be theft, expiry date due etc). Better Business Intelligence. Less of grey market and black money.

The “poor farmer” is bewildered. After the interest he has generated everywhere with suicide sagas, now he is in demand. Everyone is talking about his benefit. Sure, we should. All the while it was the middlemen who reaped the benefit of the huge price difference between the cost of production and the final selling price.

A study done by Assocham says :-

The difference between wholesale price (WSP) and minimum support price (MSP) is as high as 45 per cent while that between WSP and the final retail price is as high as 60 per cent.

Consider a farmer selling his produce for Rs 100 to a wholesaler. The latter sells it to a retailer for Rs 133. But the consumer is made to pay close to Rs 210, which is 60 per cent over the wholesale price. Effectively, the consumer purchases a product for double the cost that a farmer gets.

The new boom promises to circumvent the middlemen. Farmers get more money. Consumers pay less money. It will be a win-win. It feels good to think that way. What a smooth ride!!

So, what is the issue? The only issue is that, in the long run, will the benefit that farmers are supposed to be enjoying sustain? Or is it just an initial euphoria?

The “small farmer” will be extinct. The bigger ones, who can sustain the pressure of consistent performance, might stay. The sheer buying power of the big corporate houses is intimidating, to put it mildly. Contract farming, if it is to happen in the large scale, is the end of traditional farming.

While the ailing Indian farmers will initially benefit from the inputs, credits & technology the new opportunity offers, we have no provision to protect them from being exploited by the same in the future. The farmer might not be allowed to try a new crop or a new technique on his own. He will be just an employee of the giant he sells his produce to.

Looking at the pace of growth, Reliance is far ahead of others at the moment. If others don’t catch up fast, the entry barriers they erect will be too high; thereby monopolizing the whole sector. Even if they don’t, in a few years’ time, the whole of the sector will be controlled by 3 or 4 big names. In the absence of adequate regularization, they will control the quality & quantity of our agriculture, will have a high stake in our employment level & real estate process and many more crucial issues.

I am not offering a ready formula. I don’t have the expertise We probably can’t wait to set everything right before we give a green signal. We have people who starve to death. We have Ambanis and Mittals too. They are all part of “us”. There has to be a parallel growth. We can, sure, share and grow.

Organised Retail is not an impending threat. That is a ridiculously myopic view. It is an inevitable reality that has already happened. It is not about how to thwart it or ban it. It is all about how to make it an inclusive growth.

Note:
This is a layman’s point of view. All the figures mentioned are taken from the internet.

– Bhavani, Retail Correspondent, the Talkies.

(Bhavani has several years of experience in retail. She sells posters of Manmohan Singh and Charu Majumdar at AKG Nagar on Nariman Point, of course nobody buys. You can’t contact her)

3 Responses to the Big Retail dilemma

  1. Dash August 3, 2007 at 3:40 am #

    A small erratta : in the I hate maths section.
    “That means, after filling the gap, only .06 million was hired for 50 million Sq Ft. Means 0.24 employee per Sq Ft.”
    have to be corrected to 0.12 employee for 100 sqft or .24 per 200 sqft.
    (i love maths.. 🙂 or am i missing something here?).
    So effectively as per the calculation, it is just 12% job generation per sqft added not 50%.

  2. Jay August 5, 2007 at 6:28 am #

    Congrats Bhavani!!! Very good post. 🙂 Are you an MBA? I think that kind of number crunching is misplaced at Nariman point roadside… 😉

    Organised retailing, as you mentioned, will change both the ends of the supply chain. Contract farming will change the way agriculture is viewed today. I think totally new products, which were earlier irrelevant in the Indian scenario, might well be produced in bulk; if not for us, then definitely for some other end point of the supply chain. And if certain groups take over the produce of certain goods, that might well lead to a hidden monopoly once the elimination of the kirana stores is complete.

  3. bvn August 6, 2007 at 11:30 am #

    Dash, Welcome 🙂 and hey you are right. But maths comments are not enjoyed at all 🙂 see it took me three days.

    Bhavani says “Oops .. ypu are right. Its .12 per 100 Sq Ft. See the next para …

    Being magnanimous that we are, let us round off 0.12 as 0.5. Still, there is only 50% job generation.

    That why the 50%. :)”

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