Wednesday, June 27, 2007

Today kerala witnessed the closure strike by members of the merchant association opposing the retail entry of the private companies. in this context this article found to be very interesting;

Sunil Jain: Making organised retail work

Sunil Jain / New Delhi June 25, 2007

While the government has begun work on implementing the CPI(M)’s proposal to restrict the spread of organised retail in the country by strict licensing norms which go back to the old licence-permit-raj days (June 19: No idea left behind), the retail industry itself appears in more than a bit of a mess. French retailer Carrefour, which is among the biggest in the world, and was supposed to be coming into the country within “two to three weeks” (to quote Commerce Minister Kamal Nath) in February, has postponed its India plans indefinitely given the political uncertainties associated with large retail. ITC, similarly, plans to wait it out for the next six months, according to a statement in the Press by S Sivakumar, the CEO of ITC’s agri-business division, and probably won’t set up its Choupal Fresh stores this year in several cities it had planned to earlier.
Among the others, Bharti Wal-Mart is now talking about opening its stores towards the middle of next year, a delay of 8-10 months already from what earlier reported launch dates were, and Reliance’s plans appear in a flux as well. While the company had talked of setting up nearly 1,000 (2,000-5,000 sq ft) stores by March 2007, it has achieved just 15-20 per cent of its target.
The government is still hopeful that the few players who are already in will slowly transform the country’s retail sector. That once they start sourcing cheaper fruits and vegetables, they will win over the common man; and once they set up linkages with farmers and assure them higher prices through reduction in the number of middlemen and in the 20-25 per cent wastage that takes place today in most staples and unprocessed fruits and vegetables, they will win them over as well. In other words, the pace may be slower than the government initially wanted, but if it delivers the goods, what’s the problem?
Theoretically, that’s a sound proposition, but it won’t work, for the same reason that small increases in an aeroplane’s power don’t help it take off until it reaches a critical minimum level. In the retail context, the amount of work, and investment, required to develop the supply chain is too big for any single player, and until this supply chain is built up fully, even the single player cannot do well. In other countries, specialised supply chains do this work, leaving the retailers to concentrate just on setting up their shops and selling things, but such specialised players will not come into the country until there are enough retailers who can be their clients. According to Arvind Singhal of retail consulting firm Technopak, some years ago, Snowman Foods tried to set up specialised supply chain services along with Mitsubishi, but had to shut shop as there weren’t enough retail firms doing good business.
Some numbers should help make this clearer, as well as clarify the extent of the loss by not allowing organised retail to take off. According to a recent report by credit rating firm Crisil’s research arm, the total market for staples and unprocessed fruits and vegetables is around Rs 4.7 trillion, or about $115 bn. And on this base, thanks to huge wastages and high storage costs and commissions to various middlemen, according to Crisil, there is an annual loss of Rs 1 trillion, or around $24 bn. Since farmers earn around Rs 1.8 trillion, or $44 bn, from food grains and fresh grocery, Crisil tries to estimate what they would earn if wastage levels fell dramatically thanks to organised retailing and if, once the number of middlemen declined, they got higher margins. This would increase farm incomes to Rs 2.5 trillion, or by around 37 per cent.
So, can a handful of organised retailers, growing at a curtailed pace, achieve these savings? Clearly not. To achieve the cost savings of $24 bn, organised retailers will have to capture the entire sales of around $115 bn. Which means, given a rule of thumb sales-to-investment ratio of around 3.5, organised retailers will need to invest around $33 bn in just this end of the business. Given that, say, a Reliance plans to invest a total of $6bn, of which just around $1.5-2 bn will be in the foodgrains and fresh grocery business, it is obvious its efforts will be minuscule compared to what is required.
If the maths is too complicated, here’s a simpler text explanation: In order to appeal to customers, Reliance Fresh needs to get foodgrains and fruits and vegetables from various parts of the country. Since the company only has access to just so much capital, and in so much time, it will naturally choose to put up its cold chain network only in some parts of the country. Let’s assume this is north India, for the moment. Which means that, if the company needs to bring in some goods from other parts of the country, it will not be able to do so as it does not have a cold chain there. And if it does bring in food from other areas, it won’t be as fresh, or cheap. And, over a period of time, customers will move away.
If the government is serious about improving the lot of farmers, it is obvious it has to develop organised retail. And it is equally obvious that just one or two chains will not do the trick, an entire retail eco-system will have to be created. If not, get prepared to hear India’s retail giants announce further rollbacks in their ambitious plans.

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