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AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
The Role of Modern Retail in Foods Retailing
Some Myths explored
M. SundarrajCollabrant Incubators Private Limited
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
What we all know by now
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Then
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Now
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Then
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Now
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Then
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Now
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
So what’s new?
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
• Store Ambience• Better Lighting • Better Ventilation & Sanitation
• Better Displays• Organized Racks• Better Inventory availability
• More Branded options• Including private and store labels
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
What the reports would like you to believe
• Modern = Better & Cheaper
• Shorter Supply Chain = Saves Money
• Bigger = More Efficient
• Consolidation Better than Fragmentation
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
But is it all hunky dory?
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Let’s Examine some of these myths
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Myth 1: Modern = Better = Cheaper
• Did you know that India has some of the cheapest distribution systems in the world ?
• Where part carton pack is the standard
• Where you can buy a single stick of cigarette or a sachet
• Did you know that in traditional stores, the margins from Factory to Customer are still less than 20% ?
• Including Freight, C&F Agent charges/ CST, where applicable
Myth 1: Modern = Cheaper
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
How does that obtain?
• Our traditional distribution systems are driven by self-employed people
• Often operating from home servicing about 400- 500 stores in a small 5 kilometer radius
• Operate on low overheads
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
A Typical Distributor
His home
His Garage
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
A Typical Retailer
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
MRP 100.00 Basis
Retailer Margin 9.09 10% Mark upVAT 1.14 12.5% on Retailer Margin
Retailer Landed Cost 89.77Dist Mrg 5.08 6% Mark up
VAT 0.64 12.5% on Dist. MarginDist Landed Cost 84.06Company VAT 9.34 12.5% Mark Up
Gross Sales Income (GSI) 74.72C&F Agent / Frt Charges 3.74 5% on GSI
Net Sales Income(Incl ED) 70.98Excise Duty+ Edu Cess 9.79 16.32% of 60% of MRP
Net Sales Income 61.19
Traditional Grocers & General Stores
Our Findings- Price stackup
200 Stores/ 3 Cities
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
MRP 100.00 Basis
Retailer Margin 25.00 25% MarginVAT 3.13 12.5% on Retailer Margin
Ret Landed Cost 71.88Dist Mrg 0.00
VAT 0.00Dist Landed Cost 71.88Company VAT 7.99 12.5% Mark Up
Gross Sales Income (GSI) 63.89C&F Agent / Frt Charges 3.19 5% on GSI
Net Sales Income(Incl ED) 60.69Excise Duty+ Edu Cess 9.79 16.32% of 60% of MRP
Net Sales Income 50.90
Modern Trade
50 Stores/ 3 Cities
By comparison, Modern trade takes out 25% of MRP Excluding Freight, C&F Agent charges / CST
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
If
• Cost of Manufacturing is given
• And if Modern Trade takes larger margins
Then
• As % of sales from Modern trade goes up, Surely MRP will go up?
Implication?
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Myth 2: Shorter Supply Chain= VFM
• Typical Freight cost in most FMCG/ Processed foods companies is less than 5% of ex-factory price
– At current prices, India works on 0.75% per day of transport.– No part of this country is more than 7 days from any other part
• Shrinkage of chain in processed foods ???
– Too many regional variations in cuisine for 1 national supplier– Not enough volumes to justify consolidation of capacity with national
supply chain– No national supply chain can improve on the ability of the local
distributor to predict the requirements of his locality
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Siemens/ IIM Bangalore Study of Grocery Chain
Value is added only on wastage & handling losses!
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
• Most traditional Indian stores are owner run• Staff are often relatives & home-town folk
– Both result in lower overheads
• Most Indian grocers are operating out of owned, not rented premises
– Lower cost of operations
• By Comparison, Modern Format retailers spend upto
• 7% on Rent• 3% on Salaries & Admin
Myth 3: Bigger is Cheaper
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Our Survey Comparison
• Better Refrigeration
• Better Lighting
• Better Hygiene
– Rent: 5-7%
– Salaries : 3-4%
– Overheads: 2%
• Less Inventory
• Less Display and Lighting
• More Personalized
– Rent: Negligible
– Salaries: 2%
– Overheads: 0.5%
Modern Trade Traditional Grocer
Who’s going to pay for this additional cost?
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Myth 4: Consolidation is Better
• Even Metro SEC A and A+ working women (Who count only for 6% of Metro audience) do not bother
– 70% still shop at traditional grocer
– On an average, make 4 visits to the store,
– Over 50% keep monthly “khata”- Credit
• If Urban infrastructure / travel is becoming more congested
Would you rather travel 2km or 200 yards?
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Implications for Marketers & Consumers
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
People can eat only that much
even as they become more affluent!
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
So is all this hype about the top?
Top 3 : 6 m HH 3% of Population
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
• If Retail rental rates stay crazily high– As they are in India right now
• If there is herd mentality in rush to retail
– As evidenced in India right now
Food for Thought
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
In short-shelf life products , wastage reduction may move consumers from traditional retail
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
But in ambient temp, shelf stable products, Kirana will remain king
• For most FMCG / processed product companies, price-value economics require to keep addressing the base of the pyramid
• To address even the middle of the pyramid, wide-spread reach and availability at the nearby grocer at low costs of supply chain will remain critical
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd
Time to Question, Validate,
Or Repudiate some of these Myths ?
AIFPA Conclave, New Delhi16th November, 2007
Modern Retail Myths Explored. ©Collabrant Incubators Pvt. Ltd