Retailers tread warily into cash-and-carry

“There are roughly about 12 million small retail outlets,or kiranas,as we call them in the country,and that is the customer base they are trying to target,” said Anil Rajpal,vice-president consumer goods and retail at Technopak Consultants.

“Also,the existing distribution models held by FMCG companies have been able to saturate only the metro cities,and as far as tier-2 and tier-3 cities are concerned there is ample scope for penetration levels to increase,” he said.

Indiabulls’ retail arm Store One Retail last month approved a venture into wholesale trading,while global investor TPG,which reportedly put in a bid for debt-hit Vishal Retail plans to convert it into a cash-and-carry.

Future group,which runs India’s biggest retailer,Pantaloon Retail,is said to be in tie-up talks with French retailer Carrefour,which plans to start operations in India by setting up cash-and-carry outlets.

Aditya Birla Retail,part of the Aditya Birla Group,with large back-end facilities such as warehouses,distribution centres and supply chains has also lined up similar plans.

“We are ready with the necessary infrastructure. In fact,we have more than 600,000 square feet of back-end space which can be used for a cash-and-carry venture,” said Thomas Varghese,chief executive officer of Aditya Birla Retail.

Indian allows foreign retailers to enter retail through franchise arrangements with local players,and are allowed to own up to 51 per cent in single-brand retail,while 100 per cent ownership is permitted in cash-and-carry ventures.

“A lot of these Indian firms are looking for foreign investments and so they are converting into this format. It will be hard for them to operate as a single entity and compete with foreign retailers,” said a Mumbai-based consultant who did not wish to be named.

CHANNEL CONFLICT

However,supply-chain bottlenecks and the low-margin nature of the business are a dampener,industry participants said.

“Pricing is the key because if a kirana has to buy from a cash-and-carry they will only do so if they get a better deal,else they will procure from FMCG companies,” said Anand Raghuraman,partner and director at Boston Consulting Group.

“For this the FMCG has to give a better pricing to the cash-and-carry which then becomes a channel conflict,” he added.

However,FMCG sales until now have not been affected as their volume offtake is very low,officials said.

“The cash-and-carry format won’t really hamper our sales because although we are giving it at a cheaper rate to them the volumes of cash-and-carry for us are really low,” said a senior official from Emami Ltd who did not wish to be named.

“But there is a problem we are facing with small retailers complaining to us about giving discounted rates to cash and carry and are demanding the same,but we are working on a strategy to address that,” he added.

Low margins of 7-10 per cent in this business compared to 14-15 per cent in front-end food and grocery retailing also pose a challenge for aspiring entrants,industry watchers said.

“Foreign retailers who have entered the space have also been very cautious in their approach because of supply-chain problems,real estate issues and tight laws,” said the Mumbai-based consultant.

Germany’s Metro AG has set up just five cash-and-carry outlets since opening its first store in India in 2003. US retailer Walmart,after a deal with Bharti Enterprises in 2007,opened its first store in May 2009,and plans to roll out 10-15 such outlets over the next three years.