Monday, January 12, 2009
Friday, August 10, 2007
What are these retail chains all about?
'Retail Chains, Reliance Retail, WalMart ..' we have been hearing of these names but never thought more about them. Most of us just know that all it is to do is setting up big air-conditioned shops and selling goods which amy also be sold by our nukkad shop (mom and pop stores). The next thing coming to mind may be that it is going to ruin the small-time traders and benefit on the big corporates like Mukesh Ambani.
I have been following the retail scene in India very closely since 2004, mainly because of personal interest. In this post I would like to present the real picture of this retail thing and what it means to India in layman's terms. The article tries to show a glimpse of what all goes on in the back-end of these retail chains (mainly hyper markets) in very simple terms.
Types of Retail Chains
These retail chains setup big, flashy, air-conditioned shops where you can touch, feel and then buy items. Now, there are several formats to it. Different formats are created mainly to cater to different segments. For example
- you can find stores which sell expensive items targeted mainly at not-so-price-sensitive shoppers such as westside, shopper's stop etc
- on the other hand there are stores whose USP is the price they offer, the lowest in the market, such as Reliance Fresh, Big Bazaar etc. The latter ones which fight price-wars are also knowns as hyper markets or hyper-marts.
Hyper Marts
The hyper marts stories interest me more than anything else. Hyper marts are the only thing today which have the capability to improve the conditions of Indian farmers and the whole agricultural scenario. Sounds too preposterous !! Read ahead to understand how.
A retail-chain in general can be broken into two tiers
- Front-end: The interface which interacts directly with the end-customers e.g. the store, the employees handling the counters at the stores etc
- Back-end: Back-end has to do everything from sourcing the stuff, storing them in inventory to delivering them to the stores and alot more. In short, this is where the whole game is played while front-end is just the face.
Front-End: These usually consist of big shops where a customers can buy everything from his/her list. Also, these hypermarts try to price their items below everyone else in the market. This way they plan to grab a big share in the price-sensitive segments. The obvious effect is on the small traders who cannot come up with competitive air-conditioned shops and price their items low as well. To understand how are these big retail-chains able to do this we need to take a look at their back-ends and understand how they work/plan to work.
Back-End: This is where the real game is. The struggle here is to improve the supply chain and make them more and more efficient. Let's first understand what a supply chain is and why is it this important.
Let's take a hypothetical example of a small shop keeper in say a small town somewhere in Karnataka who wants to sell wheat. The wheat is being produced by a small farmer in a small village in Kanpur, Uttar Pradesh. Now, let us try to trace a probable path of the wheat sack starting from the village in Kanpur to the shop-keeper. The farmer had taken a debt from some village money-lender to raise the crops so he is in a hurry to sell-off his produce and pay back. He cannot wait for the right price. He sells all his produce to a middlemen in village at a price which is way below the government fixed Minimum Support Price (MSP). This middleman then takes the wheat produce to the mandi in Kanpur and sells it. A trader then procures wheat from this Kanpur mandi and tries to sell it in other places throughout India. Say, now he sells it to a trader in Mysore. Now, our small shop-keeper may purchase the wheat from this trader in Mysore. The chain can even be longer than this. This supply chain has various inefficiencies. Everyone, at each step will ask for his share. There is a possibility that the supply and demand of wheat in mandi don't match, thereby creating a dead-loss.
Let us now see how a big retail chain (say reliance retail) is expected to work. They have all the data about the sales at their outlets and can accurately estimate the demand for whole year. The are two ways to procure.
- They go out in the usual mandi's and offer the best prices and they may directly goto farmer and buy out his produce. Check out this year's mad rush and how farmers are reaping gold.
- They sign-up with farmers everywhere in India (say also with our poor farmer in Kanpur). The agreement is that they will help the farmer use the latest farming techniques, seeds and all. At the end of the season the retail firm will buy the produce at a price fixed initially
Using either of the above mentioned techniques, the retail chain can procure the required amount of wheat and will store that in it's own godowns spread all across the country. As the inventory levels in a particular store starts dropping the items can be delivered the store using their own transport department. This way the long supply chain has been cut-short making it more efficient than our existing supply chain where the product changes god-knows-how-many hands before reaching the end customer.
We discussed two procurement techniques above in brief. Let us now discuss them in detail.
Buying directly from the mandi: The pros are that you can go ahead and buy as much as you want and don't need to plan right from when the seeds are sown. The cons is that it still has some inefficient links (from village to mandi). Also, the price of procurement is not known accurately before-hand.
Contract Farming: Here, large business houses can enter into contracts with small farmers. The farmers will be provided help in terms of loans and technical know-how. The price is fixed at the time of signing the contract. So, the farmer knows the price his produce is going to fetch right from the start. This reduces the possibility of situations where we have seen that one year we don't have onions in the market and the prices shoot up, then expecting huge profits farmers next year sow acres of onions and the market witnesses a bumper crop and lowest prices. Such, situations have drawn many marginal farmers to commit suicide. Entering into a contract ensures them a price and therefore they can plan accordingly. Through contract farming farmers can also dare to produce crop which require high investments and more technical know-how (such exotic vegetables and flowers etc). These would otherwise be a very risky game for small farmers. The only cons with contract farming is that the procurer has to estimate his requirements well ahead of the harvesting season.
Exports:
Setting up of good quality and efficient supply chains will also result in a mani-fold increase in exports. It will enable the products from small farmers, milk producers, handicrafts and various others to compete globally. At the end of the day, ours is an agriculture based economy and to flourish we should be feeding the world and not importing from them.
Overall long term effect of hypermarts on Indian agriculture.
- Helps farmers in getting better price for their produce
- Reduces the difference in price at what the farmer sells and at what the end consumer buys at.
- End consumers also get better prices.
- Farmers can easily enter into crops which promise them to fetch better returns (such as cash crops, exotics and flowers).
- The biggest difference maker is expected to be the increase in the competitiveness on Indian products in global market thereby fueling the exports.
- We get to see some Indian companies making in big at the global level and an opportunity to be a share-holder in it.
What will the mom and pop store-owners do?
There is no doubt that some of them are going to go out of business. But, this is for the good of the farmers, for the good of consumers and ultimately for the good of nation. Most of them don't add any value to the economy and just make the chain inefficient. My advice is that they should start looking for a different business opportunity where they add some value. The Indian economy is expected to grow tremendously and we need many entrepreneurs to make that happen. And I know that this community has it in them to make this happen. So, there is nothing to fear about. Change is the name of the game and we should be ready for it.
I expect it to take another four-five years before we actually start feeling the positive results of these changes. The biggest risk is from our political community. The biggest reason for India IT industry making it big was that no one in the political community cared about it. Retail revolution promises to a far bigger thing than that just if politicians leave it aside.
Monday, January 30, 2006
It was 6
It was 6 in the evening and the Sun was at the horizon. The four years of ecstasy and struggle was over. I was at the gates and nostalgically beamed my thoughts at some sweet reminiscences which seemed to leave a lasting impression on me. There was pervasive silence or perhaps. I wasn’t ready to listen anything. Breeze was gently playing with my hair and it was lovelier than it had ever been. The barren land around the gates some years ago, was then teaming with green grass and the trees, lining the road to the admin building, grew a bit taller in four years.
I kept standing motionlessly. “It’s over now”, voice echoed. Looking everywhere I found nobody. Voice came from inside me and nowhere else... the Sun went down bringing an era of halcyon times to an end.
It is getting dark and I am not sure if I really know the place. There are two streets ahead of me, neither of them have street lights. Probably because the city has been abandoned by its dwellers or may be it has all been done for me. I have a feeling that it has to be the later one. But, who could be it. Is it my manager at office or S, the other guy who is behind A? Meanwhile I am strolling down one of the streets. The silence is more intense than I had ever felt in my life(?). The buildings on both sides seem to have been abandoned by their dwellers. Am I terrified by the frightening combination dark and silence? Is this place a haunted one? I guess the place is too frightening even for the ghosts. My eyes are getting adapted to the level of darkness or may be it’s just a hallucination. I can see a big gate in front of me.
I hesitantly approached the gates splashing the rain water on the street. Opening the gates gave out a frightening creepy sound which broke the noisome silence in the air. My breathing got brisker and deeper. Moon had never been so dreadful and to make things worse, it began drizzling. The road was long leading to a huge majestic mansion. Silvery moonlight on the mansion rendered a ghostly appearance. Slowly but cautiously, I paced up towards the mansion and frequently monitored the shrubs running parallel to the road. Thunders struck and lightening illuminated the skies. Far off, a few bats encircling the chimney protruding from the roof. Perhaps, I thought, life at office with the irritating manager was better.
The old mansion gives me a hope of meeting someone. Doesn’t matter if I hit into a ghost. Somewhere down the line ghosts have lost grounds against me and I no longer fear them as I used to in my childhood days. A ray of light is coming from the creek of the door. I push open the door. There is a lighted candle which seems as if it had been burning there for years. I can’t actually decide about entering the house. The rain outside didn’t bother me much but the disturbance that I may cause to the residents does. I felt a little hesitant but suddenly strong wind from outside pushes me inside the house. The wind also blows away the candle. Was it really wind? Because it’s very rare to find a lonely stream of wind and that too of such incredible strength. Was it someone pushing me? My manager or S? But, the blowing away of the candle suggests that it was wind. This realization relieves me. Now it’s dark again. But, even at such a moment there’s a silver lining (?), I have a roof on my head. I look up to the roof and to my amazement there’s no roof as I can still see the dreadful moon up there. This weakens my earlier reasoning that wind blew away the candle as the culprit could be the rain as well. Manager or S?
Entering the old creaky mansion gave me the creeps that I never ever had felt. Someone was inside the hallow mansion, am I sure of it? I don’t think so, never ever after I crossed the threshold have I been sure of myself. Am I sure that someone is there or is it something? Something that might have been there since time immemorial. How can one ever be sure? One has to cross the threshold, that invisible boundary to go beyond the edge. I here remember the words of one of my favorite programs, “to go where no man has ever gone”. But then again am I sure that no man has ever stepped here in this mansion. The word “hallucination” means that one has the feeling which might be of hearing, smell or sight without any external stimulus. So is it all real, is there any external stimulus or is it my own imagination?
Here I come to a bend beyond which I see a ray of light.
(This is a novel piece of writing. The writers are sharaf, dr manu and amit srivastava. It all started when sharaf sat down and wrote a couple of paragraphs. I bounced upon the story and decided that i'll continue from where he left. Without any discussions with him, i wrote the next paragraph and ruined his story-line. Now it was his turn. The rule of the game was that no one can discuss/clarify/edit what has already been written by others. dr manu came in between and he too enjoyed the game after writing a para of his own)
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