The term retail probably needs no explanation.

But in the context of the debate on FDI in retail, we should clarify that the term refers to big retail outlets rather than entities like Selvam Stores or Dhanalakshmi Gruh Vastu Bhandar.

It is unlikely that there is any FDI interest in the latter types of outlets nor is there any evident interest among their owners to sell out. Increasingly the term Big Box Retail is used to describe what was formerly referred to as Supermarkets. A possible reason could be that big names in Retail like Carrefour have started differentiating their supermarkets from hypermarkets. For our discussions we will cover only the Big Box Retail formats.

Success of the business model in traditional items like Food and other Fast Moving Consumer Goods (FMCG) has encouraged Big Box outlets in non food categories like Consumer Durables (e.g. Mediamarkt in Europe), and   Hardware (ACE).  In our discussions we will confine ourselves to the Food / FMCG retail outlets in big box format.

Image (C) Outlook

As most of us know Big Box Retail originated essentially in the USA and has since spread to most parts of the world. Over the years the ‘Industry’ has grown rapidly and the 2011 Fortune 500 list has Wal-Mart with an annual turnover of $ 422 billion as the largest company in the USA, ahead of the likes of Exxon Mobil, Chevron, and General Motors.

It is difficult for us in India to visualise More Supermarkets or Spencer’s notching up turnover higher than that of say, Indianoil and Tata Motors!

Among the Big Box retailers, the next four slots are accounted for by Carrefour (France), Metro (Germany), Tesco (UK), and Schwarz (Germany). The #2 company, Carrefour in 2010 reported sales of € 91 billion. Domination of this industry goes beyond just turnover. For instance in the UK, Tesco was the fourth largest advertiser spending just £ 4 million or 3% less than Unilever. Asda, was the sixth largest.

What these huge numbers should definitely indicate is that behind them there should be some very well run organisations with underlying systems, processes and efficiencies.

The Basic Idea:

If we examine the business models common to most of these players and look for one simple formulation of the business idea it can be this:  Generate Cost Savings (largely) through Scale. Further, pass on a chunk of these savings to Shoppers thereby ensuring Scale, in a virtuous cycle of efficiency.

Thus there will be two dimensions, both interrelated: Cost Savings / Efficiency and Shopper (Customer) Satisfaction. Let us examine some of the ways both dimensions work.

Cost Savings / Efficiency Dimension:

Let us briefly look as some of the ways these players drive efficiencies. It should be emphasised this list is empirical, indicative  and by no means comprehensive. A retailer may offer any or all of these benefits. Or they may focus on a different set. The list below is used solely to provide an overall idea into the functioning of these organisations.

  •  Sourcing: Almost all Sales Managers who have dealt with Buyers of these organisations will testify how tough they negotiate on price. Besides price per se, the negotiations cover support such as: a) holding the price line, b) no price increases for say six months, c) supply of stocks at discounted prices to run promotions, d) listing fees (a flat fee that needs to be paid by every supplier just to have their offering sold). For a supplier these outlets offer the immense benefit of scale. Besides in some markets, presence in these outlets is absolutely essential for reaching their Consumers.
  •  Logistics: Leveraging the superior infrastructure in the developed countries, these organisations offer ‘Central Purchase’ or Single Point Delivery arrangements. For a supplier this means delivering all requirements for the country or state in one location. The retailer organises redistribution to the retail outlets on their own using own or outsourced logistics. Typically in the developed economies this offers significant cost savings.
  •  Monetising more inputs than just Service: Business model in Mom and Pop outlets such as Selvam Stores typically involves buying at a price and selling at a higher price. In other words they mark-up the price for providing the service of retailing. Often this is the only service they are able to monetise. Big box retailers monetise a lot more – e.g.  Space within the outlets, Advertising / Promotion / Communication possibilities within their outlets, etc. As a result, for a given Supplier – Brand offering, their ability to sell at a price below the ‘usual’ is greatly enhanced.
  •  Transfer of Costs to Suppliers: In some cases, Big Box Retailers require  Suppliers to provide other services e.g. merchandising support. This takes the form of loading the shelves and ensuring they remain stocked. Typically this is a cost to the retailer; however since there is high interest on the part of the supplier in this area, this interest is ‘exploited.’ Besides the retailer may require the supplier to fund  Price Cutting Promotions advertised through Flyers.
  •  Systems to Cut Costs: Retailers employ Technology and Standardised Operating Procedures that facilitate cost savings. For example tracking of stocks through bar code scanning can ensure lower losses due to product expiry. Standardised Operating Procedures can enable for instance the possibility of employing lower cost part time workers.
  •  Own Labels: The brand value built by a retailer can also be monetised by offering products in their own labels. Suppliers in this case save advertising costs which are passed on in the form of a lower price. Consumers are offered the possibility of buying a brand that assures a certain degree of quality but at a lower price.
  •  Shopper Dimension: On the Shopper’s side, the retailer may offer many advantages apart from passing on the benefit of cost savings. For the retailer these have the effect of generating scale which in turn facilitates Cost Reduction.
  •  Product Range: The bigger floor area in a Bog Box Retail outlet can enable offering of a much wider range – a) choice within a product category, and b) of product categories.
  • Experience: Perhaps the easiest benefit to relate to for a Shopper is that of a superior shopping experience. He / She may compare different products and make a better informed decision. Besides the shopping environment can be enriched with comforts like air conditioning
  • Location: The retail outlet can be in a convenient location combined with other facilities e.g.  shopping mall, cinema hall etc.
  • Augmented Facilities: The bigger floor area and ambience can also facilitate additional facilities to enrich and augment shopping experience – e.g. a bulleting board, finger food café, takeaway restaurant, coffee shop. These too can contribute to the shipping experience.
  • Automobile: Studies conducted on mass retailing in the USA had pointed out that widespread ownership of cars as one of the driving forces for the growth mass retailing. Shoppers need not worry about having to carry their goods over long distances in public transport.

As those large turnover numbers should testify, bulk of retail sales in developed economies is accounted for by the big box players.  In Western Europe for instance Big Box Retailing accounts for 60% and above of retail sales in most categories.

It should however be borne in mind that even in the most developed countries it will be difficult to see 100% of retail sales accounted for by big box retailing. For instance in the Netherlands cheese, fresh vegetables and meat to name a few products are still retailed to a considerable extent through traditional outlets.

The shopper is also known to specialise.

Based on their shopping needs they use different outlet formats. Monthly stocking up needs (e.g. toothpaste, detergents) differ from Everyday Fresh (Eggs, Bread, Milk).  Thus the volume of sales directed through a particular channel is more a function of shopper’s needs than just the presence and power of the big box players.

In Part 2 let us look at how the large scale retailing model fits into the Indian context.

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Girish

 

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