It’s the color of money, honey. Everything else is but green!

It’s the color of money, honey. Everything else is but green!

 The mere announcement of FDI in multi brand has cranked up decibels and sight of rotten tomatoes aplenty. In the hullabaloo created by it, people have taken for granted that the Walmarts of this world are going to succeed in the Indian market. Green might the color, but if it was money alone that ensured success of retailers, the Ambanis and the Birlas would tell you a different story. We will explore in this blog, that the government might have spread a red carpet, but is the path for the global retailers laden with landmines. 

 Let’s take a small example of Walmart which projects the first foreign direct invested “Walmart” store rollout in 18 months. One of the major reasons of its success is aggressive volume buying, its supply logistics and process efficiency. Combining both, it is able to achieve a high inventory turnover through volume selling.

Also let’s take into account what works well for it in the US:

§  The Walmart supercenters are situated far away from the city centers where there is easy and cheap real estate available; Average size of a supercenter being 98,000 to 261,000 sq. feet.

§  The consumption in the US is not very diverse, with the staple consumption is pretty similar across. So, apart from the few ethnic cuisine sections, the assortment remains similar across the geography in grocery besides the locally sourced vegetables, and merchandise specific to local weather.

§  This is further accentuated by bigger pack sizes in the assortment mix. You would never find a 500gm Tide detergent.

§  The American culture of driving to the store and buying for week/fortnight in bulk contributes to bulk purchases by consumers.

§  All these pieces are very well integrated up by state of the art IT infrastructure and humongous customer data collected over so many years maintained safe in an F-1 Tornado proof facility.

§  The Walmart.com e-store compliments so very well to the entire setup.

 Let’s focus our energies on environment in India now. Let’s assume for the purpose of this article, investments would be made and supplier networks are set-up once states give their nod to allowing FDI once the dust settles.

§  Setting up a cold-supply chain which is almost non-existent is a task that requires enormous investment.

§  The fine print in the multi-brand FDI norm says, 30% of its products have to be sourced locally and preferably from SME’s. If a Walmart sources from a SME, it won’t remain a small or medium sized enterprise for long.

§  The staple diets and consumption behavior in India is vastly different across the length and breadth of the country. Be it the cooking oil or the variety of dal or rice, every region has its own peculiarity of aroma/taste. Hence the demand of merchandise is scattered across the country; making it difficult to buy in enormous quantities.

§  We want our stores nearby and are not ready to drive far to buy our consumables. So forget a 90,000 sq. feet supercenter in the heart of the city. It would always be a smaller store.

§  We like our food fresh and bought frequently. We can’t yet imagine pulling out a frozen pack of okra from the deep freezer and thawing it before cooking our bhindi-do-pyaaza.

§  Our not-so-deep pockets or knack of saving doesn’t allow us to buy a 400gm Colgate toothpaste. We would always prefer a 100-200gm pack of it. And we love our shampoo sachets.

§  Unlike in the US, we have a concept of MRPs on most of our products. Hence, the profit margin is always regulated. To be able to discount deeper will take some doing.

§  The doors for investments in E-Commerce are still shut.

These are few reasons that suggest Walmart would struggle to maintain an abnormally high inventory turn ratio and make huge profits. To enable process efficiency, even the Walmart suppliers needs to be process compliant. Having the smaller suppliers maintain ERP systems seems a distant possibility in the near future. It’s been seen in the current Best Price, the systems may have been brought straight from the US, but it can’t be adopted directly here. The employees have to find workarounds, or find “jugaad” to accommodate in the systems. One small example being- The system assumes all the receiving would happen in pallets and eaches. Far from the reality of gunny bags still so prevalent in India. Recalling a funny incident shared by a friend – The first receiving at one of the Best Price store, where the Walmart executives from US were present to inaugurate, came in a horse pulled tonga!

To be able to give discounts substantially more than its competitors, so as to attract the price conscious Indian customers to Walmart; it would need to make operational margins which more than its peers. This seems a rather daunting proposition.

All this should not scare the existing retailers, be it the Big Bazaars of the small time kiranawallah.

 Indian market is the Holy Grail, which is yet to be decoded. It will be interesting to see if Uncle Sam makes the Elephant dance to the Walmart chant.

-Harshad Deshpande

P.S. The blog was first published at Accenture Blogs. 

Where private labels can't cross the line

Where Private labels can’t cross the line

Private labels are labels typically products manufactured/sold by the retailers under their name. It’s a strategy for backward integration. The prime reason for using this strategy is to piggy back on the retailers brand equity and power to persuade it’s loyal customers to spend more. A private label is a source of increasing margins while the powerful brands try and squeeze more and more on the retailer’s pie.

Typically, private labels are introduced in the categories where the customers are cost conscious and do not have an emotional connect with the brand. Various categories in apparel retail are hence a very soft target where the already existing brand clutter can very easily accommodate a private label. Even in grocery, a retailer’s image plays a very important role in deciding what categories to enter. A logical progression from apparel to food products was a smooth transition.

All the talk about retailer power counts a naught, when it comes to categories like skincare, baby-care which are still out of the reach of retailers. A value consumer/cost conscious consumer would buy non-branded flour, even cereals but would not agree on buying private label baby soap.