by S Karthik

About five years back, I spent a brief period of time working for a management consulting company. Back then, we had been told that “retail” was “big” – if not in anything else, because it was potentially going to bring a great deal of consulting business to my firm. There was a partner or two who had moved to India from the US specifically to lead the retail practice. In my last week in the company I had even written a paper on what was ailing organized retail in India back then.

Around the same time, friends in competing consulting firms also told me that their firms, too, were bullish on retail. Naturally so, for it was around the time when this whole idea of FDI in retail had come up. Unfortunately back then the UPA government wasn’t particularly keen on any reforms, and the idea died. The only good thing that happened in 2006 was that FDI in wholesale was upped from 51% to 100%. Unfortunately that doesn’t seem to have had much of an impact.

I’ve mentioned several times in the past that I’m not a fan of modern retail. I think the service there just sucks, that they are staffed by a bunch of imbeciles and the systems (both IT and otherwise) are designed so badly that it is more likely for the customer to come out of there disgusted rather than delighted. Where organized retail does trump unorganized retail is in their superior sourcing practices and supply chain systems.

In this context, I had predicted back then (no this wasn’t consulting advice I sold to a client) that the winning formula would be with the front end (basically retail) remaining with the kiranas, who would then be backed up by an efficient wholesaling channel that would do all that was required to put efficiencies into the channel. Unfortunately that doesn’t seem to have taken off. Metro Cash and Carry, the first multinational to set up a wholesale shop in India has been stuttering, with only about a dozen stores. Bharti-Walmart is supposed to be doing well, but very restricted in terms of geography.

There are two fundamental problems here. On one hand, there are several laws that prevent the development of an integrated supply chain system in the country. In several states, farmers are forced to sell produce to the APMC (agricultural produce marketing committee) yards, which have a virtual monopoly over procurement of produce. There are curbs on inter-state movement of goods to complicate things (octroi is all but gone, but ohter barriers remain). Then, there is the human element with existing vested interests in the “channel” trying to block entities such as Walmart-Bharti or Metro from functioning efficiently.

On the other hand, I guess organized wholesalers suffer from precisely the same problem that plagues organized retail today – that they don’t have an efficient salesforce and customer relationship strategy that can wean retailers away from the existing channels. The existing wholesalers offer retailers credit (Metro on the other hand is “cash and carry”), deliver goods to their shopfronts at regular intervals so that they can manage inventory effectively and come up with periodic sales promotions which the retailer prefers.

In the face of this barrier, the wholesaler would have to offer significant price discounts to the retailer for the latter to give up his existing set of wholesalers, and they don’t seem to be achieving that. This is perhaps the reason the strategy I thought would win has completely failed to take off.

Then you have the consultants. With the presence of retail specialists in practically all top management consulting firms in India, it would have been expected that by now they would have transferred the foreign “best practices” in retail to their Indian clients. Given that it hasn’t happened, it could mean two things. Either Indian retailers weren’t really interested in engaging their services (unlikely, given the networks these firms maintain), or (more likely) the consultants recommended cut and paste formulas from the west and those have failed.

If the latter is the case, then the Walmarts are not going to have it easy in India. If consultants, who are generally known to be smart and typically know the worldwide best practices, working with Indian organized retailers, who know the markets well, haven’t been able to crack the code for organized retail in India, one may not be too optimistic about how the foreign firms would fare.

PS: coming back to the current failure of foreign-owned wholesalers, the new regulations will mean that these wholesalers will have “captive” retailers to sell to. So you’ll have retailers who will actually have low costs in terms of purchase prices (inclusive of supply chain costs). But I’m not sure if they’ll crack the customer service bit which hardly any current existing organized retailers have cracked.

S Karthik is an independent quant consultant and a research associate with the Takshashila Institution. He blogs at Pertinent Observations and an be found on twitter @karthiks


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.