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.

Management Jargon Demysitified

If you cannot explain it to your 6 year old daughter,you have probably not understood it yourself ~ Albert Einstein

Ram charan,who has been named as “The most influential consultant alive” by Fortune magazine believes that the basics of doing business are not complicated at all and are just common sense. He says :

Business acumen is not an arcane or complicated skill.Every successful business person has business acumen,including unschooled vendors who sell their wares in third world open air markets.

If you think about those business fundamentals in their simplest terms,the way a street vendor selling fuit and vegetables might think about them,I believe that the concepts are easy enough for anyone interested in business to understand.

He adds :

Revenue is the amount of money that comes into a company from the sale of its products or services.For a street vendor it is the money he collects for selling his fruits and vegetables.

Profit is the money left after deducting the cost of those goods.

Profit margin, is the money you get to keep as a percentage of total revenues.                          mumbai-street-vendor2

Sales – $150

Cost  – $135

Profit – $15

Margin – 10 % ( $150-$135 = $15 , $15/$150 = 10 %)

Any business is started with an intention to make money which can be expressed as the Profit Margin Target.

The street vendor makes many decisions during the day to achieve his profit margin goal,beginning early in the morning when he decides how much fruit to buy and what to pay for it.This is his sourcing strategy.

Should he buy one variety or several ?This is the “Product Mix”.

He sets up his cart and decides how to price the fruit as it will affect his margin.This is his Pricing Strategy.

I will chip in:

The way he arranges them on the cart is his Visual Merchandising Planogram.

Back to Shri Ram Charan

During the day he takes some tough trade off decisions about what price cuts he should make to unload his inventory so he ends the day with enough cash to buy merchandise tomorrow.These are Mark downs.

He learns to make these decisions through trial and error therefore the clearer his view of his customers,the better his decisions will be.We call it Consumer behaviour.

Just as street vendors need cash,so do companies.A dwindling flow of cash from operations can get them into trouble even if the financial statements show a handsome profit.

The next fundamental that concerns your business is Velocity,what some people call asset turns.

Assets often include buildings,equipment,computers,receivables and inventory.

Velocity is how much annual revenue the company generates for each $ it has invested in assets.

Annual sales  – $ 1 billion ,Assets – $ 100 milion,  Therefore Velocity – 10

For a retailer If :

Revenue $700 million, Average Inventory – $100 million, Velocity is – 7

Velocity 7 is quite good in retailing.

Margin and velocity can be combined into one measure that most investors use to assess a business,its called Return on Investment(ROI).

ROI – Margin X Velocity.

Retailing ( we are talking about a street vendor selling F & V) is a low margin,high velocity business.a retailer may have a 3 % margin but a velocity of 7 will yield a respectable return of 21 %.If you put the same money in bank the max that you can get is 9 %.

That’s why you are doing the business.

Lets look at growth.A growth that sacrifices margin for revenue is not desirable.A real growth is the one in which the revenue as well as the margins grow.

Finally we will talk about the most important entity – the customers.A growing market share shows that customers are choosing your product over your competitors in increasing numbers every day.

So if you are growing your share of the market, in a market, that is by itself growing then it is a great position to be in.If cellphone market is growing by 30 % and your share has doubled from 10 % to 20 % from last year it is exciting and you are doing something right for your customers.

But if your market share is growing in a market that is on a free fall For example CD’s then it simply means that your competition has moved to greener pastures and you are left to tow away the burden.

Bear in mind that business acumen is not a matter of being able to calculate numbers to the 9th decimal place but about being customer centric, focussed and intelligent.

End quote.

Further I want you to consider this :

Trial and error are called insights from Consumer behaviour in a board meeting and mapping the pschycographic mindscape of purchase decisions executed in a competitive environment by measuring the dynamics of inter relationship between product and price by consultants from Bogus Consulting Group.

All three basically mean that you have messed up with your customers last year and are going to grapple with it in the coming year too.meeting-mock

PBA -Paralysis by analysis is a favorite game played by bored corporate citizens.If you have 2 two rupee coins and you keep counting them till the clock strikes 6 PM and  they will still add up to 4 rupees only.You can  make them 5 rupees by doing something about it – I will suggest that you go to the nearest signal and beg for it if there is no other strategic or tactical move that you can plan within the limited time constraints.

Will leave you with a powerful thought by Ralph Waldon Emerson :

Common sense is genius in a work man’s clothing.