By Vishal Krishna

Businessworld, 24 May 2010

A change in rules may have put a pause on organised retail's expansion

Just as French retailer Carrefour prepares to launch wholesale cash-and-carry (C&C) operations - a key part of the supply chain - in India, the government stunned the organised retail companies with a clarification on the rules that govern the C&C business. Now, any retailer tying up with foreign C&C wholesale businesses can source only 25 per cent of the stock keeping units (SKUs) from such a venture.

By implication, the C&C business will effectively have to supply 75 per cent of the SKUs to kirana stores. Analysts estimate that there are more than 50 million of these small and medium businesses in India; 90 per cent of them are kirana or mom 'n' pop stores.

The announcement reiterates an election promise that the Congress party made, since organised retail business was perceived as a threat to the kirana stores - apart from a host of middlemen - whose owners make up a vote bank too large to ignore. The announcement also comes amid rumours that Carrefour could tie up with Kishore Biyani's Future Group to help build their retail outlet Big Bazaar.

"This decision can affect those retailers whose front-end businesses are supported by the cash-and-carry business," says Devangshu Dutta, chief executive officer of consultancy Third Eyesight in Delhi. Bharti Wal-mart has one cash-and-carry unit that supports its front end 'Easy Day'. There are nine such stores in the Delhi and Punjab regions.

Even Trent's Star Bazaar, which has more than 50 stores across the country, will have to wait for its UK partner Tesco to begin C&C operations by end of this year. The government's rationale is that letting C&C tie-ups with organised retail make sense only when kirana stores collectively are part of India's retail growth story - estimated at $350 billion by global consulting firm Ernst & Young (E&Y).

"The wholesale C&C business will effectively give kiranas a chance to modernise and organise their stores," says Pinaki Ranjan Mishra, partner, consumer practice, at E&Y. Even then, India's retail business will be driven by the kirana stores supported by distributors, agri-middlemen and traders.

"The policy will hurt those players who have cross holdings in both retail and C&C business," Mishra adds.

But will organised retail chains actually drive costs so low that they could wipe out the middleman through the C&C business? True, supply chain efficiencies are dismal. Kiranas, on the other hand, have very low operational expenditures on fast-moving consumer goods (FMCG) - they do not include power and labour. That allows them to drive costs way down and yet stay profitable. And with food and produce, kirana stores can mark up transport costs and still deliver cheap goods to customers, something organised retail is unable to do. Organised retail does not make profits from food; they mark down food products, but gain through impulse purchase of FMCG items.

Although tying up with the C&Cs drops supply chain costs, the government still puts organised retail on the back foot. "By 2013 all the top global retailers will be here. The success will depend entirely on changes in shopping habits," says B.S. Nagesh, vice-chairman at Shoppers Stop and interim chief executive officer, HyperCity, in Mumbai.

But the current note on what a C&C business can actually do will make front-end retail merchandising teams go back to the drawing board and realign business strategies. The C&C businesses, which include Germany's Metro, Bharti Wal-mart, Star Bazaar-Tesco, Shoprite and Carrefour, have invested over Rs 2,500 crore in India so far. Changing the rules may not necessarily derail organised retail's ambitions.

(From Businessworld.)