Traditional wholesale and Organized retail

In my earlier post I had suggested that Semi Organized Retail will succeed in India.To build upon the idea I am presenting another case below.

India is a uniquely different from the west if we consider the following factors :

1.While the Retail stores big and small have been there for almost a century now,Organized chain stores are a new phenomena to the Indian market

2.In the absence of pan Indian chain stores we had bazaars and whole sale and retail markets which catered to the needs and  lifestyle  of the Indian Public.By virtue of their long innings these have a place of prominence in the mind of the Indian shopper.Their value preposition too is quite clear and each bazaar caters to a different taste and wallet size.This is something that organized retail is struggling with at the moment.image118

3.While Labor is in short supply and is therefore costly in the west,its in abundance in the country of more than a billion people.This has shaped the Indian wholesale and Retail Market very very differently.

For cash and carry models I believe that they will not be successful unless they target institutional clients and offer door to door delivery.In India if you have cash ,you don’t carry someone else does it for you.Large number of house holds are still serviced by Deliver ‘boys’ across neighborhoods.This service is free of charge and many a times if you are a regular the bill value does not matter.

4.While there may appear to be very little method in the madness and chaos seems to be buzzword if you scratch a little deeper you will find  self aligning systems very similar to those found in primitive life forms.They may look like randomly moving around but a pattern emerges as soon as you put them under a scanner and start to study their behavior.

Go to any ‘Mandi'(wholesale market) and you will know what I mean.

They may not be carrying Laptops and have fancy accounting systems but they know their business well partly because that’s what they do 24X7 and partly because it has become a part of their DNA.

5.In Organized retail we work on SOP’s and MOU’s to forge  supplier and buyer agreements but in case of traditional retail these are handed over from generations to generations.The buyer and the supplier are not only business partners but they are friends who sometimes even marry their siblings into each others families.

It is very difficult to replicate that level of trust and understanding and the spirit of co creation.The MBA’s in organized retail learn about segmentation,customer focus and value creation but in the traditional whole sale business they KNOW that that’s the only way.Survival to them means continuously reinventing themselves keeping an eye on the pulse of the market.They get their information through informal channels but the actions that follow them are fast and practical.

6.On the other hand the Organized retail lacks many if not all of the above attributes.The systems and processes neatly laid down in SOP’s and charts and tables remain there and very few retailers have been able to drive them down in the organization.The team members are young and new to the trade so while they may not do it deliberately the understanding of the importance of each step of the business process is missing.

7.Organized Retail does offer to its customers a neat and clean ,friendly shopping environment and a certain level of trust of quality as most are backed by big corporates of multinationals.

Another aspect which is important here is that of customer service and window shopping which is a big Grey area as far as traditional retail is concerned.The salesmen are often rude and do not have the finesse to deal with different class of customers.The idea of being confronted and not being able to just ‘have a look around’ does not appeal to many customers especially women.

The point that I am trying to make is that in a way both these entities can not only co exist but they can partner together for creating a unique value for the customer.How ?

Traditional wholesale  can serve as the supply chain for modern retailers as they stock bulk quantities which can ordered as per the sales lift on the image116shelves.

For trial runs of new products this could be great idea as you do not have to commit yourself to quantities upfront.A organized retailer can continue buying from wholesalers as long as the quantities become so large and predictable that owning a production line is the best option to enhance and retain higher margins.

This model will work very well for new retailers with young and image117inexperienced buying teams as they can use the skill and expertise of wholesalers who have been in the market for decades.Their understanding of local taste and price points will be far more than someone who has just passes out of college.

In fact what I am suggesting is nothing new.Almost all big retailers in the developed economies depend heavily on importers for their business.The concept of category captains is akin to what I am proposing.

In India we do not have ‘importers’ and also the organized retail market is not so big to support such operators but that gap can easily be filled by wholesalers.Those who have been touted as the biggest adversaries by an ignorant media can in fact bring a lot of value on the table for themselves and for the customer too.

I have been experimenting with the above in my business and it as worked quite well so far.

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Student Politics in UP – HAASIL

The film is a realistic portrayal of Student Politics in UP which to a certain extent explains the absence of educated young people in the Political arena.Caste politics is quite evident from the scenes in which Ran Vijay Singh(Irrfaan khan) is a Thakur and Badri shankar Pandey(Ashutosh Rana) is a Pandit.

Personally the film brings back a lot of memories from the time when I was a student at Lucknow University.

Watch it.It’s just amazing !

This song is a treat too.Don’t miss out.

The complete movie is uploaded on You tube numbered sequentially 1/15 through 15/15.Type haasil Movie in search and see it if you liked it so far.

How to act

Have been some time since I posted under Meditations.I am publishing below the 5th paragraph from chapter 3.

How to act :

Never under compulsion,out of selfishness,without forethought,with misgivings.

Don’t dress up your thoughts.

No surplus words or unnecessary actions.

Let the spirit in you represent a man,an adult,a citizen,a roman,a ruler.Taking up his post like a soldier and patiently awaiting his recall from life.Needing no oath or witness.

Cheerfulness.Without requiring other people’s help.Or serenity supplied by others.

To stand up straight – not straightened.

Shatranj ke Khiladi and Lucknow

Satyajit Ray’s Shatranj ke Khiladi is one of my favorite movies.It not only takes me back in time to an era which transformed the fate of the people of Awadh but is also a treat to the senses with brilliant research,narration and performances.

I am giving below a few scenes that would help you appreciate the Nazaakat,Nafaasat and Tehzeeb (culture) of Lucknow which was called the constantinople of the East.

Munshi Premchand’s story,Screenplay and direction of Satyajit Ray,Narration by Amitabh Bachchan and some brilliant performances by Sanjeev Kumar,Syed Jaafri,Victor Banerjee and Amjad Khan.It could’nt get any better than this.

Scene 1 :

Its the opening scene along with casting and a superb narration by Amitabh Bachchan.In his book Premchand has described the Lucknow of those times so beautifully that I have read the paragraph many times.I am reading a book by Sharar called ‘Gujistaan Lucknow’ which has vivid details of life in those times.I can now realize the genius of Premchand and satyajit Ray to have captured the mood so brilliantly.

The residents of lucknow had built a world of their own which was centred around the idea of pleasure in all its forms.They flew kites,sang Ghazals,watched dance performences by nautch girls as well as Kathak Ustads,had animal fights,ate the best of food in their dastarkhwans and of course played chess.

It is believed that Wajid Ali Shah ‘s dinner camed from Six different Kitchen out of which the the main Kitchen had an expense of Rs 800000 annually in those times.There were other Nawabs who were famous for their taste and used have as many as 25 types of Pulav’s every day for dinner.

By the way there is big difference between Biryani and Pulav and Lucknowites belived Biryani to be a food of lesser mortals.It was considered a tuaheen if Biryani was cooked instead of Pulav for dinner at someone’s place.

You have a taste of the Nawwabi of Lucknow’s public in the scene below

Scene 2 :

This is a scene from General Outram’s study.He came to be known as Sir james Outram later.The scene has a dialogue between General Outram(played by Sir Richard Attenborough) and Sargeant Weston ( played by Tom Alter).I read in an interview with Tom Alter that he was chosen for  the role by Satyajit Ray when he visited NSD on the convocation day.He was impressed by Tom’s knowledge of Urdu and told him that he would hear from him soon.In the same interview Tom revealed the level of detail that Satyajit Dada would go into making his movies.He sketched General Outram’s study for the shot so that there were no objects that were out of place.Each article that you see on the Table or on the walls was well researched.Same is the case with all the scenes in the movie,if you watch closely.The level of detail is just amazing.

Sargeant Weston describes the lifestyle of Wajid Ali Shah and seems to be quite impressed with his knowledge of the arts and Music.He even recites a couplet of Generals insistance.It’s a treat ..

Scene 3 :

This is a must watch.It is the best performance of Amjad Khan ever.For those of you who remember him as Gabbar of Sholay it will be real eye opener.Amajad Khan fits the character of Wajid Ali Shah to the T and with his impeccable urdu pronounciation and effortless dialogue delivery he just captures your heart.You feel sorry for the king who sang songs of love and freedom but lost his thrown to British Politics even though his subject loved him to the extent that they sang his songs in the streets of Lucknow.

I have used one of his other songs as the title of one of my posts on Lucknow – Jab chhod chale Lucknow nagri,kahen haal ke hum par kya Guzari.

It is said that when British army came upto his palace all his servants ran away and he just kept asking’ Koi hai joote pehnane waala?’


I strongly feel that even though times have changed the Mijaaz (temprament) of the residents of this laid back city has not changed.As soon as you step into the city the mannerism,cultured talk,fondness of food and of all other good things in life will be evident to you.

I could never decide whether it has done more harm or good for Lucknow but as far as its peole are concerned they still look down upon other cities in thier cultural development. The more I read the more I am convinced that they are right.They may have lost out on material side of things but as far as appreciation of art forms and sheer good taste is concerned it is dificult to beat this city of Nawabs.

मरीना बीच पर

मरीना बीच पर

बरसों पेहले एक ब्राम्हण ने कहा था

तुम में सूर्य का अंश है                                     sunset-large

दूर शितिज पर डूबते सूरज से

मैं कुछ केहना चाहता हूं

मगर क्या ?

जो मायने नहीं रखता

उसे केहने के क्या मायने

और जो मायने रखता है

उसे केहने की हिम्मत नहीं है मुझमें

तो बस बैठा हू इस इंतज़ार में

कि कब एक बडी सी लेहर आये

और मैं भी डूब जाऊं मेरे सूरज की तरह

धरती की गोद से निकला समन्दर मुझे ऐसे घेर ले

जैसे मां अपने बिलखते हुए बच्चे को

अपने आचल में समेट लेती है

और तब केहने के लिये मेरे पास

कुछ नहीं रहेगा

~ ब कलम खुद

You can’t escape Big Bazaar

The latest issue of Business world has the cover story on how Biyani is in a bad shape and it will take his company more than innovation to stay in business.

http://www.businessworld.in/index.php/Retail-FMCG/The-Burden-Of-Debt.html

pantaloon_figures2

The reason cited for the downfall was a high unserviceable debt in a recession scenario.As customers choose to stay away or downtrade(read buy at discounts)  profitability will be the first victim.Retailers will try to save face by at least showing some top line growth by either adding stores or increasing top line by giving exceptional value to customers through promotions,deals and offers.

Many analysts have already dubbed Pantaloon retail a Satyam in the making due to their refusal to be transparent and their deftness at creative accounting practices.In the cover story I am talking about Kishore Biyani refused to talk about any Financial details.I fail to understand what’s the big secret.If I have shares or a house that I have to sell to be in business that I built over the years,so be it.

Anyways,you can read all that in the magazine.This blog is to bring to you more sinister secrets of the corporate world.

Just think about the below scenario :

1.Where does your money go ?

a) You Spend it

b) You save it

c) You invest it

d) You give it away but that’s small one  so we will leave it

Let us take Pantaloon retail and you as a case.

No matter what you do you will be at a loss just as in Casinos.If you spend your money you will pay Pantaloon a hefty Margin – as much as 40-80% in case of Apparel.That’s twice what the product is worth !I am assuming that you still got value for your money which is not the case else Retail would not be falling apart like it is.The biggest reason why sales and margins are falling is that retailers in India are offering over priced products from a costly platform.Wal Mart is a success for a number of reasons but the biggest one is that when you pick up a product and you think that it should be worth X ,you flip the tag to find out that it is much less.That’s when you are compelled to buy more and more.It is estimated that Wal Mart keeps the US economy in check and saves Americans billions of dollars not only at their own stores but basically by being the benchmark for the retail industry – like a price index.Which retailer in India does that?So much so our friends even jack up the prices in SALE and then give you schemes such as Buy one get one free etc.But ‘customer is no moron,she’s your wife’ as David Ogivly said during a session at Sam Walton Institute for retail.Many of them have realized this Quickly and have decided not be lured by such cheap tricks.

Having established that it does not offer exceptional value and takes away unjustified amount of profit from your pockets let us see what they do with that money.

In a race to have more floor space,roll out faster and borrow more money Big B will be prone to buying products from inefficient supply chains and will have to stock them at  stores in expensive malls with crazy rentals.Keep in mind that they have no long term partners and every new factory they walk in will try and fleece them just like they did with the customers.With a highly leveraged working capital position Big B’s ability to pay on time is compromised and suppliers add interest cost to their own margins,making the product costly to start with.Big B is still doing a good job on negotiation partially because it has better reach and scale but it is nothing when compared to ‘Buy, build,own and operate” model of Wal Mart.If the pace of roll out was not an issue even Kishore Biyani will agree that the best way to focus on your retail Model and not worry about shifting value preposition and cost disadvantages is to own the stores.But Reliance came and spoilt the Party.I know that’s another sad story.

Now where does Big B go for money? To one of the Banks.And why would they give him cash? For interest.And whose money was it – Your’s. But there is a small catch here.There is big gap between the interest rate that banks pay you and what they ask from you let us say when you take a Home loan.Now it is fine that you will save money and the banks will lend and give you interest but what will you do when you have a substantial chunk.Buy  a house or a car right? Remember Alice in wonderland” Come into my parlor,said the spider to the fly” You will get a loan at a floating rate which will keep going up ap and away.In my case my home loan EMI increased from 9000 Rs 4 years ago to 14000 Rs now even with my term getting increased from 15 to 25 years !

So what ? ICICI bank will make profits .The truth is ,in this particular case it won’t.Remember we are not talking about overall banking but Big B ,you and banks.ICICI Retail Ventures has a huge stake and so do a lot of other Banks in other Retail companies.Venture funds stand to loose if the investment does not yield good results or if the value is not unlocked in an FDI deal or an IPO.Venture capitalists also have a substantial knowledge of the businesses they invest in and nurture good start ups and growing companies.This is not the case clearly in India.

Now how will ICICI bank cover up.You are damn right- by upcharging you on your outstanding loans.That explains their tendency to make a fool of everyone who was unintelligent enought to take a home loan from them like me.

It is for these Venture funds that Enterprenuers get pushed against the wall and not having enough resoures of knowledge,expertise,manpower,merchandise and supply chain go bankrupt like Subhiksha did.Subbu promoted his brand like anything so he can somehow get to do an IPO and get a good valuation so everyone gets a chance to party at the cost of the investor but I guess the Gods were in your favor so he had to walk away empty handed.Had he got a chance even he would have opened his stock at a price of Rs 350-400 just like Vishal retail did and the investors would now be weeping their hearts out while the share languishes at Rs 43 falling further with each bad news.

Sorry I went a little of the story.Well not really I think I was able to set the stage for what comes next.Option c) You invest in Pantaloon shares.The market capitalization of PRIL has fallen from Rs 12000 crores to Rs 2400 crores in just about 18 months.It simply means that a ruppe that you invested in PRIL share has become about 16 Paise only.And all the while you thought that what great saving I am doing by buying at Big Bazaar.The equation is quite simple.You shop for Rs 5000 ,think you saved Rs1000,comes back and invest Rs 2000 in PRIL.It becomes Rs 320. – a net loss !!!!

No matter what you do spend,save or invest you are bound to get jacked.You know why ?There is no real value being generated and so in the long run we are all dead.In hindi they say Jab tak Topi Ghum rahi hai gaadi chal rahi hai.Satyam would have never happened if the ball kept rolling but Raju was pushed into buying Maytas as he had no more money to support operations with the fall in share market.It could be the same for the retail players too. As per Warren Buffet ‘s suggestion we may see a lot of naked folks running around as the tide of high share markets withers  away.

Moral of the story -Next time you go shopping please do not bother about this article and enjoy the ride while it lasts.

(wanted to use another word starting with R but my Kapersky blocks my own blog if I did)

Semi Organized retail will succeed in India

After being in the Indian retail market for close to 3 years now and having some sort of an understanding of this business I have realized that it will be very difficult for Organized business to succeed and sustain in the Indian retail scenario.This has been demonstrated by the recent fall of some of the most talked about stories – Subhiksha,Reliance and now Vishal retail.I am not even talking about scores of others in  the pipeline.

The very reason for which the customer shops and makes a choice in favor of a particular retailer is flawed due to the uneven playing field between the organized and unorganized retail – Experience,Taxes,Quality of manpower,customer understanding,relationships all go in the favor of unorganized sector.The fact that they have been there for ages and rule consumers mind adds further to the woes of someone setting shop with neat fixtures,air conditioning and smiling Service associates who know very little about the product.

On some counts the Organized sector does have an advantage -hygiene,ambiance,trust of larger brand names that back the store fronts,courteous and polite staff,transparent exchange policies,promotional schemes,scale and scope of operations and width and depth of merchandise offered,Supply chain etc.The biggest challenge they face however is that while these cost the retailer a good amount of money on a recurrent basis the customer is not ready to pay for them.

She wants the best of both worlds :

  • Fixed prices which can be bargained
  • Clean ambiance but low prices for F & V
  • Smiling CSA’s who know them by name
  • Relationship without the CRM cards
  • Fashion consultants who don’t cost a fortune
  • A personal touch that is not backed by computer data

And that is what we need to give her.Indians are value conscious regardless of their social status and earning capacity and spending money wisely is still considered to be a great virtue.One of the Highest rate of savings( 30 %)explains this behavior to a large extent if one does not already know it from his/her upbringing.Splurging on costly branded merchandise is considered an act of ostentatious stupidity and you always end up congratulating yourself on the ‘graet deal you had at the mall or bazaar as the case may be.

I am presenting below and excellent aricle by William Bissel MD of FAB Indian Overseas which has a similar thought process.It was published on Retail Angle Website on 24th march2009 :

William N. Bissell: Retailing Indian Style
Posted On: 23-03-2009 21:28:2 PM

William Bissell is the Managing Director of Fabindia

Organized Indian retail has copied the Western Retail Model at a time when the conditions in India are not developed as in the West.

Western Retail Environment Indian Retail Environment
Cheap Land Expensive land
Good high street shopping environment No high streets/ no pavements to walk on
Expensive Staff Costs Cheap Cost of Staff
Low cost of energy – heating and cooling High Temperatures 6 – 8 months a year with high energy costs – especially when you have your own generators.
Lots of parking and easy access to peripheries of towns with good public transport facilities Limited Parking and peripheries of towns difficult to reach
Excellent Supply Chain Infrastructure in place with UPS – national cold chains etc Little existing supply chain infrastructure in place NO UPS, No Cold Chains etc.
Simple regulatory environment – Low taxes Complex regulatory environment; high taxes with VAT; frequent hassles with visits from Government inspectors
Low interest rates High Interest Rates
Higher GPs Low GPs

Most Efficient Retail:

1. Self or Family Run.
2. Minimal regulations.
3. Cash and Carry
4. Small space stocked efficiently.
5. Takes goods mostly on consignment basis with weekly deliveries therefore little cost of holding inventory.

This is a true story – I’ve only changed the name of the person to Ramu.

Ramu’s Shop Organized Indian Retailer
Tiny space – uncomfortable yet has everything tucked away – Rent 2500 per month Large Centrally AC floor plate in a swanky Mall with 50% space efficiency Rent 1.5 lakhs a month
Staff of Ramu, his son or daughter and Nepali boy who sits in stock room located in the top part of the store and throws down anything required by customer – Salary Rs 2000 per month Manager, 1Asst. Managers, 4 Customer Service Associates and 5 externally leased “outsourced” staff – Salary 1.25 per month Not including head office costs.
Uses his Rs. 1000 a month cell phone to restock, order and communicate with distributors and vendors. Has SAP software to ensure Just in Time (JIT) delivery pays for each terminal and for licensed software etc. Cost 30,000 per month.
Keeps 1.5 ton AC on only when customers are there – bill is 2100 per month AC running 11 hours a day – 14 tons – Electricity bill 80,000 per month
Little or no dead stock – anything that doesn’t sell goes back to stockist 10% of inventory is unsalable – average inventory is 35 lakhs or 3.5 lakhs
No borrowings as 80% of stock is on consignment or ordered by Ramu when a customer needs it Interest on Inventory @ 12% per annum is 4.2 lakhs per annum or 35,000 per month
No capex as the interiors are simple and are small Interiors done up at 1500 a sq ft x 2500 sq ft = 37.5 lakhs the interest alone is 37,500 per month
Sales are 5 lakhs a month Sales are 15 lakhs a month
GP is 20% GP is 30%
GP 100,000 GP 450,000
Head Office Costs (nil) its only Ramu and his kids Head Office is 8% of sales
Profit at store level 100,000 Profit at Store Level 450,000 – 120,000 = Rs 330, 000
EBIDTA 100,000 – (2500 + 2000 + 1000 + 2100) = 92,400 EBIDTA 330,000 – (150,000 + 125,000 + 30, 000 + 80,000 + 35,000 + 37,500) = (-127,500)
Annualized profit/Loss = 92,400 x 12 = 11,08,800 PROFIT Annualized Profit/Loss = 15,30,000 LOSS
RETURN ON CAPITAL EMPLOYED = 100,000 I’ve taken Ramu’s capital at 100,000 as he bought an AC recently and built some new shelves and a little inventory. 11/1 X 100 = 1100% CAPITAL IS BEING DESTROYED

Ramu is the salesman, CFO and the CEO – in the organized sector, our professionals tend to be conscious of their designations and very few feel that shop floor selling is a worthy job. Small family run Asian outlets are doing extremely well in the UK and have survived the onslaught of the large retailers – in fact large retailers have been forced to extend their working hours to compete with the corner shops. ( There is a joke that Asian teams fail in hockey in the UK because every time they got a corner, they built a shop!!). Ramu works 24×7 by 365 organized retail cannot offer him much competition.

India is built on the 12 – 14 million Ramu’s and the surplus capital they generate. We just don’t notice them because of the glitz of big retail

If the Government could find a way of letting investors invest with Ramu instead of “big retail” Capital would earn a phenomenal rate of return.