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
Thanks to this scientific analysis I now can understand why prominent grocery chain stores have that 'pinched' look!
ReplyDeleteThank you Dr Vedamani for your erudite analysis and educating us with the 'nitty gritty' of the 'retail industry'.
ReplyDeleteIn the past, in my interaction with the Food & Beverage importers, I picked up that the average margins expected by retailers like Food Bazar and Natures Basket is around 35% and can also go up to 40% with frills. However, the large FMCG cos may be offering much less. I am on thin line here and open to be corrected.
I understand the ONLY organised retailer who has broken even and even turning a profit is D MART. I understand the owner is a low profile share broker who runs a very tight ship. As they have been around for at least a decade, one could even say, they have a sustained business model. What lessons can we learn from them?
The other very obvious question is : would business savvy groups like Aditya Birla and Reliance not have known these facts and still have entered it for the long term? Especially, when both the groups are used to earning very fat margins in other industries they are in. Open for a healthy debate.
Coming to mom n pop stores, thousands of stores are doing phenomenally better than organised retailers. A case in point is a store located near my home at Matunga market ( opp Matunga central rail station) - CHHEDA STORES.The demographic here is dominated by middle to upper middle class Gujaratis and a middle class South Indian population. The location is bang on but so are many other stores located near them. Its a family owned store. More than 90% of the stuff they carry is food and beverages. Obviously their margins are much less than the organised retailers. They have right mix of their own private labels and branded stuff. Though they may not admit it openly, they make serious money! And I am sure there are thousands of such stores across India doing something right.
What lessons can be learn from them?
Appreciate your valid thoughts and insights.
DeleteValue added products have good margins but those form only a meagre part of the merchandise mix. Premium stores like Food Hall, Nature's Basket, etc. sell these value-added and premium products more and their gross margins are also considerably good. But they are located in significant high streets and malls where rents too are extremely high. Best selling products are those FMCG ones always, which have very low margins and they contribute maximum to sales in any food store.
D-Mart follows a good business strategy. The right pricing brings huge footfalls at every D-Mart store. The organization's occupancy strategy is adorable as all the stores are housed in their own properties (notional rents notwithstanding, occupancy cost is low). That's the strategy that McDonald's adopted (In fact McDonalds is said to be the second largest real estate owners in the world, the first being the Catholic Church) for becoming successful. The organization works on a 'no frills' policy where modest resources are chosen and trained. So their employment cost also is lower as compared to many others in the industry. Each D-Mart store has a good number of concessionaires in the categories of Medicine, Sweets, Fruits, etc.and they pay a guaranteed monthly rent as they function as seamless shop-in-shops. The D-Mart store is very thickly merchandised; Co-operative merchandising with chosen suppliers and intelligent sourcing of non-food categories rake in the margins for D-Mart. The store head at D-Mart is empowered to take merchandising and buying decisions based on the strategic framework of the company and so each store has a very catchment-relevant mix.
If stores have a well planned merchandise mix that is customized to cater to its target customers, the organization would do well. Chheda Stores is the right example that you have cited. The products available there are so right for the target profiles that the stores do exemplarily well. Chheda's location is very right as you have mentioned and the store is rightly sized too.
In India, a 'corporate approach' to food & grocery retailing may not work. In large corporates they do central merchandising to get the benefit of scale and local merchandising opportunities are limited. So the customer often does not get what he wants. An entrepreneur would think of his customer always and find ways and means to satisfy him. Business savvy groups often go by 'business intelligence' as thrown up by their systems but an entrepreneur would go by sheer 'customer intelligence' taking into consideration both quality and quantity aspects when it comes to merchandise selection.
So the lesson for big retailers is: Each person responsible for a store must be empowered to work like an entrepreneur and every business decision will fall in place. All the others in the organization should play a facilitating and supporting role and the P&L of each store will become robust to generate internal accruals!
Dr Vedamani, your detailed response is well received. Thank you! This shows the trade is STILL evolving and so much to learn and refine.
ReplyDeleteI would like to meet you sometime. Please do let me know your email ID for follow up.
You are welcome. My email is gibson.vedamani@gmail.com. We'll be in touch!
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