Monday, March 9, 2009

Turning Retail On It's Head

The travails of Subhiksha  have got me thinking recently. Organised retail, I think it is fair to say, has not quite taken off in India the way it was envisaged.

Retail giants the world over aren't exactly beating down the gates trying to get into this space, and the local players have been feeling the heat in recent months as well. Bharti's foray hasn't made much waves, Reliance has had more than it's fair share of problems, and Subhiksha, as I mentioned earlier - well, it's not a pretty story.

Most of the problems stem from what is now assumed to be an incorrect business model. Rentals in major cities across India mean that margins are wafer thin. Other input costs can be managed, apparently - but the rate of return on this business is negligible given your rentals.

The kind of scale that a hypermarket needs to succeed can only be obtained in urban sectors, of course - leaving organized retail a veritable non-starter - in retrospect, unfortunately. These business models were at the very edge at the best of times, and the recent recession has been the last nail in their coffins.

So here's a contrarian thought - I don't think organized retail is a bad idea in itself, and especially so for the Indian market. There exist innumerable inefficiencies that can be far better managed by a centralized distribution model, and there are certainly economies of scale to be exploited.

So where is the problem? To my mind, in two places.

One, and I can personally attest to this, is the sheer inconvenience of having to go to the supermarket. The drive through the congested streets, the inevitable crowds at the place, the long line at the checkout - it simply isn't worth it. Whatever savings I generate because of the (somewhat) lower prices are far outpaced by the feeling of sheer exhaustion. And anyways - why go through all that trouble when the neighborhood bania will give you everything you want - home delivered?

Second, and I've already pointed this out - given the real estate bubble that had formed in this country, setting up operations at scales necessitated by a hypermarket was always going to be an inexpensive proposition. Too many business models would have been focussed on generating so much revenue per customer - and once that metric didn't live up to it's expectations, the whole thing came crashing down.

Try this on for size then - turn these problems into advantages, why don't you?

Why shouldn't organized retailers use their expertise to get a world class supply chain in place, all over the country? A hub-and-spoke model with a centralized location for the country, and mini-hub-and-spoke models in each city. The end-nodes for these models are not hypermarkets though. They're not big shops, they're not shops at all.

They're local warehouses in suburbs all over the city.

Think about it - your retail operation does not have a front end at all. You simply have large warehouses staffed by local manpower (which is really and truly cheap, especially as a replacement for high rentals), who stand ready to deliver goods straight to home. There's call centers (perhaps on a city basis), there's an efficient delivery system (off the top of my head, small Bajaj tempos should do just perfectly), there's a one hour self imposed limit for time required for delivery - and you're ready to go.

There's no rental cost, there's plenty of scope for optimization of inventory at each stage, and the scope for incremental improvement is virtually limitless.

Well - why not?

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