Six Men, Elephant and FDI in retail….

Watching the circus on TV  for the last two days since FDI in Retail has been announced I could not but help comoparing the situation to the famous parable of the elephant and six blind men. While each has its own opinion based on what part of the elephant they are holding ( like the opinions of our learned media,business men and politicians) , no one exactly knows what the animal ( in this case quite literally ! ) looks like. For someone like me who has worked closlely with the farmers as well as in retail for a long time the picture is quite clear. We are talking two different business models here : one is based on scale and the other is based on service and convenience. If you just look around : has a single mom and pop store closed down even when you have a number of so called organized big box retailers are all around them. Within a Km radius of my place in Bangalore I have a Big bazar super centre, a More Super centre and a number of Nilgiris, MK Retail,Reliance and others but I still order from the store next to my place or go and buy it from there for day to day needs : No ques therefore quick transaction or homedelivery that gets the store to your doorstep being my simple drivers.

For farmers there is absolutely no link between FDI and what they will get for the price of their produce. They sell to the mandis governed by APMC act today or just sell their produce to anyone that gives them a better price. On what basis are people debating that farmers will be adversly effected beats me completely.Typically in all economies with dominance of organized retail farmers realize 2/3 of the retail price of their produce vs. just 1/3 or lower in economies where such a mechanism does not exist.It’s quite simple if You know that at what price the retailer is going to sell what he buys from me and if all farmers know what price their produce sells in organized retail are they fools that they willl give it up to a Wal Mart just like that ?? It is this non transpareny that kills them today.When we are buying Onions at Rs50 a Kg the farmer is still getting just 5 Rs for it , so where does the Rs. 45 go ??No one knows or those who know are crying wolf wolf !! I don’t even want to go into the efficiencies in supply chain etc which will of course add a lot o value to consumers, producers and retailers alike. I have seen Wal Mart very closely and I know that it is one of the most hoenst, forthright and efficient companies in the world. What a lot of people say about Wal Mart is mostly out of ignorance or their own selfish interest. It’s a giant that competition is afraid of and fear always brings in insecurity.

Anyways you enjoy the poem and try to figure out which of the blind men is Politicians, Media, Businessmen, shopkeepers, farmers and general public :

It was six men of Indostan

To learning much inclined,

Who went to see the Elephant(Though all of them were blind),

That each by observation

Might satisfy his mind

And so these men of Indostan

Disputed loud and long,

Each in his own opinion

Exceeding stiff and strong,

Though each was partly in the right,

And all were in the wrong!

So oft in theologic wars,

The disputants, I ween,

Rail on in utter ignorance

Of what each other mean,

And prate about an Elephant

Not one of them has seen!

For the complete version click here : http://www.wordfocus.com/word-act-blindmen.html

Let’s first see the elephant and then we can talk about it.

Customer pricing – Price vs value

“A retailer prices a product,a customer values it for what it is worth”

This Quotable quote originated nowhere else but in my own mind after being subjected to several incidences of winning and loosing the customer and getting her nod and nay,not for me.

While doing a presentation on Retail pricing strategy I came across a lot of material Differential pricing,Mark up Pricing,Competitive pricing,Penetrative pricing and so on.

But my experience in real life told me that something was amiss.What about the customer ? You are talking about your business model,Your costs,Your margin targets,Your competitors,The market scenario and all else but what about the actual customer who will shell out money from her pocket and take a purchase decision in your favor.I am sure there will be a lot going on in her mind when she decides to part with that hard earned currency note or gets indebted for the next few months to the bank and pay high interest charges.

Are we even asking her what do you want ?                DSC01694

How about a customer pricing ? What’s wrong is creating a product and asking a hundred of them what they would be willing to pay.I have no opposition to the pricing strategies  traditionally in practice but I am just saying that something is missing specially in the context of retail.

Let’s see and example :

What would pay for a  plastic slipper in a hyper market – May be Rs99

What would you pay for the same plastic slipper if it has a good brand name printed on it – May be Rs 149

What would you pay for the same plastic slipper in flea market – Rs 49

what would you pay for a plastic slipper with a house brand of top luxury retailer – Rs 199

The function is the same and it is just possible that all the product is being sourced out of the same factory and the same assembly line but the customer will only pay so much at different locations.

And location is just one on the dimensions that plays in a customers mind.There could be so many others Festive season,Comfort,utility,distance/cost of acquisition etc etc.

Every retailer positions itself to serve a certain niche or target segment and that is perfect as an idea but where we continuously go wrong is that we fail to recognize is that while your customers are saying yes to many products in your store they are also saying no to a  lot of products.This may impact profitability through loosing customer preference in terms of reduced shopping trips and increased frequency and intensity of markdowns on your product mix.

I strongly feel that retailers tend to loose the grip in the sense that what they feel is a great product or price turns out to be a damp squib with their customers.What should be transaction by transaction,customer by customer approach soon becomes a game of probability so much so that the buyers start building in for markdown in their business plans.While mark downs may not go away they can be substantially reduced by asking the customers what and how they feel about offerings.

Typically, a buyer will get in a product or a line of products and the DMM’s,the store managers,The operations guys will all sit in a room  and decide its fate.They will debate amongst themselves and the guy with the loudest voice and the heaviest weight will win.If you have a ‘yes’ man culture you can kiss your winter 2010 range good bye.The problem is that even if most people will know it they will not say it.

In contrast if we have panel of customers of different hues,age,sex,color,lifestyles and we get their opinion we may just find out to our horror that  the so called ‘winners’ did not excite the audience and they ended up picking up stuff from the ‘dumped’ corner.

When a retailer is ‘pricing’ he is building up the stake of the entire company,his business plans,his growth projections,his stock price,his career path and everything else in between into it.His decisions cannot be but colored.

But when the customer ‘ valuing’ a product she is deciding based on aesthetics comforting her eyes,the softness that her hand feels,the freshness that here senses smell,the utility that here mind perceives,the price that she paid for a comparable item some time back.She is not bothered about what the Ex factory price is,how much it cost to get the product from the Jungles of Africa or how much you pay your 26 vice presidents who have nothing to do with her moment of truth.She will just see what’s in it for me and what I need to pay for it.If she fels that the transaction is in her favor she will go for it else you can put it on discount so it is up for revaluation when the second chance comes.

Again she gives two cents for your negative margins,vendor markdown supports,company policy so please be careful in repricing.You may discover that your Buy One get one offer is a cold turkey as no one wants to buy a yellow color T shirt with Parrot green collars with which you wanted to make a fashion statement in your boardroom.

Our customers are our biggest and most valued assests,let not keep them out of our business plans.

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.