Some Myths In Food Retailing - India Explored

The Role of Modern Retail in Foods Retailing

Some Myths explored

M. Sundarraj
Collabrant Incubators Private Limited

Modern Retail Myths Explored. AIFPA Conclave, New Delhi
16th November, 2007
©Collabrant Incubators Pvt. Ltd

What we all know by now

16th November, 2007

16th November, 2007

Then

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Now

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So what’s new?

16th November, 2007

• Store Ambience
• Better Lighting
• Better Ventilation & Sanitation

• Better Displays
• Organized Racks
• Better Inventory availability

• More Branded options
• Including private and store labels

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What the reports would like you to believe

• Modern = Better & Cheaper

• Shorter Supply Chain = Saves Money

• Bigger = More Efficient

• Consolidation Better than Fragmentation
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But is it all hunky dory?

16th November, 2007

Let’s Examine some of these myths

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Myth 1: Modern = Cheaper Cheaper
Myth 1: Modern = Better =

• 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

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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

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A Typical Distributor
His home

His Garage

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A Typical Retailer

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Our Findings- Price stackup
Traditional Grocers & General Stores
MRP 100.00 Basis
Retailer Margin 9.09 10% Mark up
VAT 1.14 12.5% on Retailer Margin
Retailer Landed Cost 89.77
Dist Mrg 5.08 6% Mark up
VAT 0.64 12.5% on Dist. Margin
Dist Landed Cost 84.06
Company VAT 9.34 12.5% Mark Up
Gross Sales Income (GSI) 74.72
C&F Agent / Frt Charges 3.74 5% on GSI
Net Sales Income(Incl ED) 70.98
Excise Duty+ Edu Cess 9.79 16.32% of 60% of MRP
Net Sales Income 61.19 200 Stores/ 3 Cities
16th November, 2007

By comparison, Modern trade takes out 25% of MRP
Excluding Freight, C&F Agent charges / CST
Modern Trade
MRP 100.00 Basis
Retailer Margin 25.00 25% Margin
VAT 3.13 12.5% on Retailer Margin
Ret Landed Cost 71.88
Dist Mrg 0.00
VAT 0.00
Dist Landed Cost 71.88
Company VAT 7.99 12.5% Mark Up
Gross Sales Income (GSI) 63.89
C&F Agent / Frt Charges 3.19 5% on GSI
Net Sales Income(Incl ED) 60.69
Excise Duty+ Edu Cess 9.79 16.32% of 60% of MRP
50 Stores/ 3 Cities
Net Sales Income 50.90
16th November, 2007

Implication?
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?

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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

16th November, 2007

Siemens/ IIM Bangalore Study of Grocery Chain

Value is added only on wastage & handling losses!
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Myth 3: Bigger is Cheaper

• 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

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Our Survey Comparison

Traditional Grocer
Modern Trade
• Better Refrigeration • Less Inventory
• Better Lighting • Less Display and Lighting
• Better Hygiene • More Personalized

– Rent: Negligible
– Rent: 5-7%
– Salaries: 2%
– Salaries : 3-4%
– Overheads: 0.5%
– Overheads: 2%

Who’s going to pay for this additional cost?
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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?
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Implications for Marketers & Consumers

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People can eat only that much
even as they become more affluent!
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So is all this hype about the top?

Top 3 : 6 m HH
3% of Population

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Food for Thought

• 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

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In short-shelf life products , wastage reduction may
move consumers from traditional retail
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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

16th November, 2007

Time to Question,
Validate,
Or Repudiate
some of these Myths ?

16th November, 2007

Some Myths In Food Retailing - India Explored

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Some Myths In Food Retailing - India Explored