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.

11 comments on “Semi Organized retail will succeed in India

  1. mclodha says:

    Hi !

    It is quite interesting ,what you have shared.

    And another thing is a Indian consumer by and large
    doesn’t buy in large quantities. And going to malls or
    hypermarkets for few things needed for everyday. And most of the small retailers have changed their formats of the shops like big bazaar and people are ok with it. And you are also true about the kind of treatment we get from CSAs . Long story short ,mom and pop stores are here to stay forever.

    • aahang says:

      You are right – in order to succeed retailers will have to do in rome as romans do and an imported model in cut , copy paste mode will just not work for INDIA.

  2. Solid internet site. Will definitely come back again:D

  3. Tania says:

    Ugh, I liked! So clear and positively.
    Thank you

  4. रजनीश जी, यहां अहमदाबाद में अभी वालमार्ट नहीं आया है। इसलिए कह नहीं सकता कि वे कितने तेज काम करते हैं, अन्य सभी रिटेल वालों में स्टाफ बहुत समय गंवाते हैं और ग्राहकों के प्रति बिलकुल भी संवेदनशील नहीं होते। शायद उन्हें केवल अंग्रेजी बोलने का ही प्रशिक्षण दिया जाता है:-)

    • aahang says:

      You are right.It is quite frustrating to deal with inefficient staff that has a chip on their shoulders.The Indian organized Retail is quite new and it will take time to come up to the level of service and business efficiency as in the case of TESCO or Wal Mart.
      In fact those who train the CSA’s are themselves learning this new business so we cannot expect much.I am sure things will change for the better but it will be survival for the fittest for sure.

  5. Anwin says:

    Yeah man, i know what you are talking about. Even I missed two great concerts even though I was in Bangalore – Jethro Tull and Aerosmith. But they will be back I am sure 😉

    Cool dude, will call when we come to Hyd. However, there are quite a few bloggers in Hyd. When we came there last year we got more than 100 participants even though only 76 registered.

  6. Anwin says:

    Thanks for the comment dude on my blog.

    I am a great fan of The Doors and Dire Straits too. I was there in Bangalore when Mark Knopfler came down for a concert. It was amazing I tell you, magical 🙂

    Of course, the IndiBlogger team will be coming soon to Hyderabad and we shall definitely meet for a drink. Cheers!!!

    • aahang says:

      Anwin,you have rekindled the fire of envy within me.I was working in Bangalore that time and even though I had arranged to go to the show I could’nt make it some silly reason.I always regret it.I hope life gives me second chance.
      Give ma a call when you are in HYD at 9989040500.It seems I am the only blogger around so it will be nice to talk to you about the triumphs and trials of pouring your heart out.

      क़ैस जंगल में अकेला है मुझे जाने दो

      खूब जमेगी मिल बैठेंगे जो दीवाने दो

      So long my friend…..

  7. मैं आपसे सहमत हूं। भारत में संगठित रीटेल नहीं चल पाएगा। रामू के पक्ष में एक बात और ठहरती है, वह है सर्विस देने में लगनेवाला समय।

    रामू की दुकान से में पांच मिनट में सामान लेकर बाहर निकल सकता हूं, पर रिलाएन्स फ्रेश, रिलाएन्स मार्ट, मोर, सुभीक्षा आदि में जहां बारकोडिंग, कंप्यूटर आदि का इस्तेमाल होता हैं, कम-से-कम आधा घंटा लग जाता है।

    किसके पास इतना समय है? मैं स्वयं पहले मोर, रिलाएन्स फ्रेश आदि में जाता था, पर इस एक कारण से अपने नुक्कड़ के सब्जीवाले और किराने की दुकान पर लौट आया।

    • aahang says:

      Subramanyam ji,

      The way you have linked our two discussions is amusing.You certainly made a point there.
      The reason why you have to wait in line is that the staff is not well trained and inefficient.If you see some of the legendary checkers at Wal Mart you will be amazed at the speed,efficiency and courtesy they have.They can bag a 100 items,make the bill,say hello and smile genuinely,all in a matter of a minute.
      With RFID retail should be able to address the long wait at the check out points.And if you go these days I can promise you will be all alone at the counter.
      Thanks for your comments.Really appreciate it.
      हिन्दी में स्पीड ना होने के कारण जवाब अंग्रेज़ी में दे रहा हूं.इसके लिये माफ कीजियेगा.

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