Five Supply Chain Strategies for Winning in Indian Retail

India is a large, fragmented country with an absence of strong infrastructure and logistics. This makes it difficult to reach consumers in urban, semi-urban and rural India leading to product costs increase due to the diverse location of suppliers and the presence of several large intermediaries. This results in decreased margins for retailers. The majority of retailers lack the ability to effectively manage less than truck load (LTL) sized shipments.

In the current scenario, efficient management of logistics and the supply chain is not just important for survival, but a necessity for retailers to gain a competitive advantage. The following five strategies will enable Indian retailers to develop robust supply chains, cut costs, create better customer value propositions and provide fresh/better product assortments to customers.

1. Integrating Vendor Managed Inventory (VMI) with planning and forecasting systems:
With sub optimal forecasting, factors like seasonality, promotions and sudden increase in demand are not taken into account leading to either high inventory levels or stock-outs. In case of VMI, the vendor takes complete responsibility of maintaining the inventory at the retailer’s premises which also helps the vendor gather important information regarding market trends. VMI and auto replenishment programmes enhance planning efficiency and enable retailers in maintaining appropriate levels of inventory. VMI also helps reduce the problems of stock-outs and excess inventory. This collaborative planning, forecasting and replenishment (CPFR) approach, where retailers synchronise their demand forecasts into a single one, reduces the risk of unsold inventory and increases profits.

2. Logistics:
India’s large geographical distances and fragmented nature of transporters are one of the main reasons for high lead times and transportation costs. The absence of long-term relationships with transporters and the advance agreement on spot rates during peak season also increase costs. Currently, a majority of goods in India are transported through the extensive road network. A multi-modal transportation network involving a combination of road, rail, air and water needs to be explored. This could help overcome some of the bottlenecks experienced during road transportation.
Indian retailers need to exploit the benefits of aggregation and appropriate route planning. By consolidating the goods to be distributed to various distribution centres, retailers can limit the number of times the goods are handled, thereby reducing the damage to the goods. ‘Cross docking’ or direct transfers from inbound or outbound trailers without extra storage and ‘back-hauling’, which allows transportation of unsold merchandise from the stores to the distribution centres on trucks that have just dropped the inventory, are a few other techniques retailers could use to gain efficiencies and cut costs.

3. Technology Deployment:
Modern logistics and supply chain management are not limited to the flow of merchandise in packed boxes and packets, but are dependent on the flow of information. Monitoring and controlling appropriate and authentic information can enable retailers to match demand and supply. Companies should invest in technology to store and retrieve key data for successful forecasting. The need of the hour is to adopt best-in-class IT systems across the retail value chain such as merchandise; financial planning and forecasting systems; vendor and merchandise management systems; warehouse management systems; logistics and channel management systems; customer relationship managements systems; RFID, etc. These are also essential in generating efficiencies for retailers.

4. Integration of IT systems:
IT optimisation and effectiveness is another area most retailers need to focus on. As the retail market evolves and becomes more crowded, supply chain systems and IT optimisation will be critical to remaining agile, reducing costs and being successful in the long term. According to Cisco India, of the total investments made by Indian retail companies, approximately 4 to 10% is invested in IT and within this, approximately 30 to 40% is meant for networking infrastructure. Most Indian retailers need to use advanced IT products and solutions like replenishment planning; world-class supply chain and logistics management system; business intelligence and analytics systems; warehouse management systems, etc. The growth of the Indian economy is bringing about several changes in consumer demand and purchase patterns. The Indian retail market is difficult to predict; consumers are evolving and retailers are expanding operations, further driving the need for IT adoption.

5. Integrating components of the value chain:
It is also important for participants in the value chain to integrate activities and work together. Manufacturers should work in close association with service providers, distributors, wholesalers and retailers. Indian retailers can follow examples set by global retailers like Wal-Mart, who have embarked upon backward integration and have developed captive logistics, transport and warehouse capabilities.

In my opinion, to succeed in Indian retail, retailers not only need the right business strategy, but also the mastery of supply chain as illustrated. what do you think? Please feel free to give your insights and opinions in the comments box below….

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Is FDI the Only Cure for Indian Retail?

FDI in multi brand retail in India has become one of the most contentious topics of today. Government flip flops on policy decisions have only added fuel to the fire of the FDI debate. There is huge political opposition to FDI, with some sections of the polity claiming that it will drive small traders out of business thereby creating mass unemployment. Is there any truth in this or is it just fear-mongering?

Modern Retail in India today is reeling under the weight of debt and looking for capital injection to fund the supply chain, cold chain and logistics development. International retail giants are looking to expand their operations in India due to poor growth in their home markets and are keen to invest in India to exploit the market. India could be their best hope with a market potential of $470 billion coupled with strong economic growth and consumer spending.

What are the benefits of FDI in retail? India needs huge investments in infrastructure development for sustained GDP growth. International retailers are keen to invest in the areas of supply chain, cold chain and logistics to develop the retail ecosystem. They also want to bring modern technology to farming to increase the output and partner with farmers to provide them market access. The supply-side changes they envision will improve efficiency, reduce intermediation and increase competitiveness. Competition is a good antidote against price increases. Some of the likely benefits of these investments are:

  • Reduction of post- harvest losses for grains, vegetables and fruits.
  • Efficiency gains due to dis-intermediation
  • Reduction in transportation costs
  • Increase in export volumes due to efficiency gains
  • Creation of direct and indirect employment to millions of people

What are the arguments against FDI in retail? The protagonists argue that the international giants, through their sheer buying power, will dictate terms to suppliers on quality, quantity and price. They also argue that these retailers will push prices paid to farmers and manufacturers down rather than raising them, and the suppliers, who are unable to accept such concessions, will simply go out of business.  There is also opposition from small traders to the entry of international retailers for the fear of losing their livelihood.

Everyone latches on to FDI in retail because it makes headlines, but there are other anti-competitive policies pursued by the state and central governments such as APMC (Agriculture Products Marketing Committee) act and ECA (Essential Commodities Act) which equally impact Modern Retail. There are physical government-imposed restrictions on production, marketing and distribution. Some of these impediments are:

  • Until recently organised retailers were not allowed to source agriculture products directly from farmers and instead have to go through state APMC intermediaries
  • Intermediaries’ costs are very high with farmers’ share being just only 40-60% of the final price paid by consumers. Direct sourcing alone could reduce the consumer price by 26%
  • Inter-state level barriers, which are particularly serious for perishable agricultural products like fruit and vegetables. Removal of these alone could contribute to 1% GDP growth
  • Central and state taxes which amount to 20% require retailers to have multiple warehouses to save taxes. This loading/unloading of goods not only increases lead times, but also increases the cost of goods sold. Implementation of GST will align supply chain systems, reduce storage, handling and transportation costs for Modern Retailers

Taking the above impediments into account, it is naïve and dangerous to think that FDI in retail alone is going to cure all the problems. FDI in retail will solve supply-side problems, reduce intermediation and check food prices; it is only small piece of the jigsaw. The bigger challenge is that of harmonisation and unification of the country’s market with proactive reforms in GST, APMC and other anti-competitive laws.

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How videos can improve customer experience and S E O

Insightful analysis and an eye opener on the role videos play in the digital era of today. The author highlighted the importance of product videos for retailers. I would go one step further to add that any brand that wants to connect with their target audience should incorporate video as a key part of their digital strategy. When a picture is thousand words, the multiplier effect for videos is another thousand. Product videos are one of the most cost effective way of engaging customers and make them spend time on the website.

Also many organisations forget that You Tube is the second largest search engine after Google. Incorporating product videos will not only help customer experience, but also helps websites with their S E O ranking. With the new Panda update, Google is placing a lot of importance to user experience and any feature that enhances user experience ranks high in Google search.

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Is it the end of Modern Retail in India???

Modern Retail in India has become one of the most talked about topics in recent times. Some analysts have even commented that ‘It is the end of Modern Retail in India.’ The issues such as FDI in retail, GST and Supply Chain problems have taken centre stage in the media. No other sector has come under as such close scrutiny as Modern Retail with its leaders criticised for being reckless and committing some strategic/operational errors.

 In my previous blog, I highlighted some of the past failures of Modern Retailers. While they are due some criticism, it is also important to understand the dynamics of Retail in India. Indians have become used to shopping in un-organised retailers like Mom and Pop stores.  Modern Retail in India is relatively new and its adoption can be best explained through the Roger’s Diffusion of Innovation as shown in the figure below:

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In the early days of Modern Retail adoption, innovators drove the market; they wanted a new way of shopping.  Despite driving the market in the early days, they only represented a small percentage of it. The bigger market share was with the pragmatists and conservatives who wanted solutions and convenience. These consumers wanted value for money, convenient locations, shopping experience, and prompt service and were not willing to compromise on product quality. To win the segments of early majority/late majority and to build economies of scale, Modern Retailers struggled to employ a different marketing strategy to that of innovators and early adopters.

 So what is the current scenario? Retailers have learned their lessons from past failures and started taking initiatives to address some of the problems [refer to my previous blogs]. They started to:

  1. Strengthen the supply chain and cold chain by building huge warehouses in key locations based on hub and spoke model.
  2. Use analytics for catchment selection, format selection and also to gain insights into consumer behaviour.
  3. Focus more on private labels to improve profitability.
  4. Close unprofitable stores and streamline formats to improve profitability.
  5. Negotiate rentals on a profit sharing basis.

 The steps taken by Modern Retailers to rationalise their operations and to drive the efficiencies will bring the costs down which should enable them to pass these savings onto consumers enticing them to spend more in the stores.

 And what is the future outlook? The future is looking bright for the sunshine sector. The Indian economy is estimated to grow to USD 2 trillion by 2014-15, with per capita income to grow at 12% CAGR. This would change the shape of income distribution from a pyramid to a diamond, with a massive consuming class in the middle. The Indian retail sector is currently estimated at around US$ 350 billion and growing between 15-20% CAGR, with Modern Retail itself growing at around 35% CAGR. Consumer sentiment is improving and after bottoming out in 2009, sales growth is showing signs of recovery.

 To conclude, Modern retail in India is in its nascent stage, with a wide gap between it and Traditional Retail. Traditional Retail still holds 85% of the market while Modern Retail accounts for only 15% with a penetration of 5-8%. The challenge is to bridge the gap between the two and make Modern Retail a success story.  It is too premature to write an obituary to Modern Retail in India as it is still evolving. It could be a case of survival of the fittest.

Is it the end of Modern Retail in India?  Personally, I think it is just the beginning…

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Is Tesco’s refusal to honour its iPad price glitch the right decision?

In my opinion, it’s not so much about honouring the deal or not; it’s all about how they handled the situation. From a branding and PR perspective, Tesco committed a blunder. Everyone makes mistakes. When you admit your mistake and apologise to your customers, the situation is diffused. Customers tend to advocate for brands that demonstrate humility and humanity rather than arrogance.

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Five Reasons why Modern Retailers failed in India

1. Hyper Frenzy for Space Addition:

During the hyper growth phase of 2005-07, retailers got carried away and went about adding as much space as possible to have high visibility without proper research about the catchment area or mall density. Some cities had too many stores very close to each other causing store cannibalisation resulting in poor footfalls with a knock on effect on store viability.

2. Unviable Formats: 

In their attempt to get a higher share of the customer wallet and increase the market share, retailers experimented with numerous formats without researching the Indian consumer’s shopping behaviour. They simply copied western retail formats attempting to replicate them in India.

3. Poor Supply Chain Management:

Back-end, systems and processes constitute the backbone of any retailer. They ensure the smooth running of the business, control the inventory and reduce costs. Retailers concentrated their efforts on store openings and did not consider the importance of back-end operations like vendor development, logistics, inventory management and wastage management. The result was high logistics cost, poor fill rates, stock outs and low inventory turnover which resulted in lower ROCE and ROE.

4. High Lease Rentals:

Due to high real estate costs, Indian retailers followed the lease rental model. Normally, lease rentals should be between 3-6%. In their race to acquire prime real estate, retailers pushed these rates to unsustainable levels affecting profitability.

5. Debt Funded Growth:

Most of the retailers’ growth was primarily funded by debt. To chase high growth in the boom days, they continued to expand using debt. As growth slowed down, retailers found themselves saddled with huge inventories, high costs and cash flow problems due to high working capital requirements making it increasingly difficult to raise capital as investors had become wary of ROI.  Retailers like Vishal Retail had unsustainable debt equity ratio and had to undergo a debt restructuring program, while Future Group’s profits were eroded by high debt servicing.

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How Brands can leverage Timeline to drive Engagement

Interesting and eye opening analysis from the author. Many brands forget that Social Media demands immediacy. Most of them think it as a medium to bombard users with promotions. The need of the hour is to think outside the box and engage the audience with content that makes them want to comment and share with their network. 

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