Retail 101:
Based on twitter responses to FDI in Retail, a basic
education in Retail seems the need of the hour.
Here we go.
As mentioned in my previous post Big box retail needs key
economic drivers in place to run a successful operation and make a profit.
When a big box Retail store (lets use Walmart as an example)
decides to enter a market (geographically speaking) it has to consider several
factors:
1.
Market size
2.
Economies of scale
3.
Marketing costs
4.
Supply chain infrastructure
5.
Delivery density
6.
Reliable sourcing
7.
Market sophistication
Lacking the infrastructure, these drivers do not come into
play. Having a large consumer class
alone is not enough.
1.
Market size
a.
A large market helps achieve economies of scale,
which in turn allow bulk buying, lowering purchase price on goods
2.
Delivery Density
a.
In addition to market size, big box (multi
brand) retailers need delivery density
i.
A large group of buyers concentrated in a manageable
geographical area
ii.
This density further lowers cost by not only
lowering delivery cost but also Marketing cost
3.
Marketing cost
a.
Even small-foot print retailers cannot expand
randomly
b.
For instance, smaller fast food chains like
Hardees and Backyard Burgers have a regional foot print concentrated in the
south and south east. (Neither of these
chains can suddenly start opening locations in California. The logistics of supplying these stores and
marketing within an isolated area would make the operation cost prohibitive.)
c.
For example: If a retail chain (like IKEA)
places one store in Atlanta and one in Houston the cost of radio marketing
would be wasted.
i.
Instead if two stores are built at two ends of
Atlanta, the saturation strategy allows for much lower marketing costs per
dollar of revenue
4.
Economies of scale
a.
Most big box retailers have very thin margins
(Grocery stores for instance make less than 4%)
b.
Economies of scale become an imperative to
maintain these margins
c.
Though India’s market provides enough consumers,
sourcing on a large scale is severely constrained due to a lack of modern
supply chain infrastructure
5.
Supply chain infrastructure
a.
A reliable source of branded products are key to
any modern day retail store
b.
These products cannot be sourced reliably
without a strong and predictable supply chain
c.
An unpredictable supply chain raises cost
i.
In case of fresh produce an unpredictable supply
chain has a direct impact on the bottomline
ii.
See http://inflextionpoint.blogspot.com/2012/09/fdi-in-retail.html
for a further explanation on SCM in retail
Even a cursory analysis of Indian markets reveals that we’re
nowhere near the sophistication needed to absorb traditional big box retailers.
Instead what is likely to happen is this:
1.
Increase in prices for commercial real estate
2.
Growth of smaller locations owned and operated
by international players which will compete directly with kirana stores
3.
Destroy Kirana stores with no net addition to
the job market or lowering costs to the consumer
So how will a Walmart play the Indian market:
1.
Place stores in dense localities right next to
traditional stores
a.
Which destroys these stores and takes away their
biggest USP – convenience
2.
Use deep pockets to make ‘Loss leaders’ as the
core strategy to put local merchants out of business
3.
Make the minimal investment in much needed
infrastructure
India should instead, invite major infrastructure players
such as Schlumberger, Caterpillar, etc. to help build infrastructure and introduce
modern manufacturing and farming practices to the Indian economy.
This is already happening in Gujarat. Perhaps Gujarat stands on the cusp of
creating its own desi Walmarts.
Move
over Sam Walton, Satish Patel is here.
