The food and grocery retailers of
India are not performing well. There is a big struggle for survival every year.
Casualties have been on the rise. The Subhiksha chain of supermarkets gave up
the ghost when it was on its expansion spree. Rating agency Crisil recently
reported that the top ten food retailers of India, viz. Reliance Fresh,
Aditya Birla Retail, Bharti Retail, Walmart, Max Hypermarket, Hypercity
Retail, Metro Cash & Carry India, Trent Hypermarket, Heritage
Fresh and Spencer's Retail have registered accumulated losses of
over Rs 13,000 crore in the last fiscal.
Who
kills these retailers even when there is an increase in consumption in India?
There is no dearth of footfalls and buying conversion. Analysis rightly
revealed that the food and grocery retail business has the lowest gross
margins. The categories that these retailers sell constitute more of Fast
Moving Consumer Goods sold by national and international brands. These brands
offer retailers a meager margin of 8% to 10%. That means the difference between
MRP and the Cost price for the retailer is in the range of just 8% to 10%. The operating expenses for
retail stores sum up to just 14% to 15% to Sales, throwing profitability
clearly out of gear. In a scenario like this, as there is a clear deficit of 7%
to 8%, how could one expect retailers to make both ends meet? One may argue
that gross margin returns could be more and it would yield better margin
returns if stock turns were done in aggressive measures. Yes, but more often
than not, suppliers in India pump up the stock levels of retailers by offering
Quantity Purchase Schemes that usually amount to an offer of an additional
meager 2%. The Gross Margin Return on Inventory in branded grocery and FMCG
products always remain at low ebb. To increase sales and to satisfy customers,
food and grocery retailers always sell at prices less than MRP.
Large
retailers try to get income from visibility fee charged to suppliers by
offering them the retailer’s vantage points, hot spots and end-caps, but that
is not enough to make both ends meet. The merchandise mix is tweaked to the
extent that an attempt is made to increase the contribution of in-store labels
and private brands. But there is no bold step taken by retailers to bargain
with FMCG brands to obtain gross margins equivalent to the percentage of
operating expenses to Sales. National brands and FMCG suppliers can easily give
better margins to retailers. If only they plan their expenses well, these
brands could easily afford to help retailers not only survive, but grow as well.
There
is fear that the foreign retailers might invade the country and spread their
wings in a manner that it might kill domestic retailers. But it is the FMCG
organizations that kill retailers in India. We are in an MRP regime.
Manufacturers have to declare MRP (Maximum Retail Price) on every product,
which includes all taxes. On the one hand it is beneficial for customers to
know what they should pay at the most for any product and on the other it is
detrimental for retailers as it squeezes gross margins a great deal. In earlier
days products used to be marked with basic prices with a mention that taxes
could be collected extra. For every product it was difficult to understand the
percentage of taxes to collect and many retailers were profiteering out of
taxes often willfully collected more. The
Weights and Measures Act and Commodities Rules were amended appropriately by
the Government of India to specify MRP on products. This on the flip side gave
an edge to manufacturers to dictate gross margins to retailers.
The
plight of small retailers in India is worse. Small retailers are soon becoming
victims of poor performance. Respite for small retailers comes from regional
and local brands that usually offer more than 20% of Sales. These products
contribute a great deal to the gross margins of small stores. Many small
retailers survive because of the considerable sales of local brands that offer
good gross margins.
The
death knell for food and grocery retailers is tolled by national brands and
FMCG suppliers who advertise their products heavily to create consumer pull.
These products prove to be a necessary evil to retailers, without which they
cannot satisfy customers. National and International brands and FMCG suppliers
are reluctant to increase the percentage of gross margins to retailers. Retailers’
expenses are huge in India. Occupancy and employment costs constitute a major
portion of operating expenses of any retail store in India and they are often
in the region of 10% to 12% put together. Though a few large stores are
commissioned as anchors in malls at low occupancy costs initially, the tables
are turned when its time for revision of rent post the expiry of lease
agreements. Stores may cease to exist in these locations as new rentals may
become unaffordable!
Marginalized
gross margins in food and grocery retailing in India need to be relooked at
with an objective to revitalize store performance in the long run and make
retailers profitable! Should retailers take a hard negotiating call on gross
margins with suppliers so that they may survive and grow?
- Dr. Gibson G. Vedamani
