Do Companies Require Organised Retailers or Organised Retailing?
By:Prof.Ashok Sinha
Every where we are talking about retail, retailing, organized retailers. But whether we actually doing an organized retail? This question in mind gave me an idea and a view to see the actual scenario of organized retail. The article in “Deloitte Review, issue 7, 2010” “The Battle for Brands in a World of Private Labels” by Pat Conroy and Anupam Narula, illustrated by John Euland, gave a food for thought. This article suggests that the organized retailers are not promoting the sales of the branded products by the branded companies. They are developing their own brands or private labels and are promoting the same. Because they get more profit on to their own labels in comparison to the branded products.
Branded companies cannot reduce the prices as they are buying the raw material from different parts of the country and then they spend money on the product attributes (packaging, colour, design and other aspects). More over they are spending money on Branding and sales promotion of the products. This leads to higher prices of the finished goods because of high price of supply of raw material, standardized processing, attractive packaging, high expense on branding and a reasonably good expense on the sales team leading to “lower margins” to retailers.
Now let us check the expense of Organised Retailers. Fixed assets of high cost (because of big area requirements), increased variable cost (high expense on electricity, sales personnel, uniform, customer relations, parking facilities etc.). It has been identified that if one organized retailer is earning about 1.3 Cr an year then they have an expense of near about Rs 10 Lakh/ month on fixed and variable costs, so the earning after investing 1.3 Cr. Is Rs.10 Lakh only. So the ROI is very low just 6%. The return is not even enough than putting up the money as a FD in bank. Now they have two choices 1, to de-invest the business as per the BCG Matrix 2, to run the business and find an another way for earning more profits.
Most of the organized retailers are choosing the second option and have started developing their own products as Private Labels. They buy the products from the local areas; pack it in a normal packaging and sell it at their own retail outlet. Their salesmen promote these Private Labels in the stores where the branded products are also lying. These branded products just keep lying there and private labels go to the consumer houses. As the consumer find these private labels cheap in cost and “OK” in quality. More over an extra sales effort is being given to sale such private labels.
Now, whether the companies are actually getting any benefit from these organized retailers?
A BIG QUESTION BEFORE COMPANIES???????
Actually these retailers are only big retailers not the Organized Retailers. Because if they are actually organized retailers they must be capable enough to maintain their supply chain in such a way that they should be able to reduce the prices may be not upto 48% of the product ( what is a general approximated calculation of supply chain cost) but may be somewhere near to it. That money will be a big margin for them.
The retailers that are supposed to increase the sales of the branded product, for what the company pay them are now becoming the competitors of the branded product company (Outside Industry Competition) .If the big retailers are not capable to be organized retailers , companies do not require such retailers that are hampering the sales of their products. Companies need to be an “Organised Retailer” by itself.
Companies can use their Wholesaler also as a retailer and can join hands with other companies for the supply chain management. The major cost incurred in the supply chain can be reduced by using a joint supply chain. Companies can identify:
a) Their maximum running products and the products of other companies may be in the same or the different product segment.
b) The supply areas of their own products and of other company’s also.
Now this the company’s choice to select their supply chain partner and the cost in percentage, what the company’s are willing to bear in the ratio of products supplied of each company.
Company
Products Categories
Choice of Product categories made for the Joint Supply Chain
Choice of Company made for the Joint Supply Chain
Choices to the company in case product segmentation is different
Area of Distribution
1
A, B, C,D
B, F, G, H
1,2,3
A,B,C,D,E,F,G,H
North
2
C,D,E,F
F,G,H
1,2,3
A,B,C,D,E,F,G,H
West
3
A,E,G,H
C,D,G,H
1,2,3
A,B,C,D,E,F,G,H
South
Illustration :
Company “1” can send one of its product categories “B” with the product “F” and products “G&H” of companies “2” and “3” respectively for the Northern supplies. Suppose the cost of supply is Rs 100/- to the North 25% will be borne by company “1”, 25% will be borne by company “2” and 50% will be borne by company “3”.
If we consider that the segmentation is different of all companies and all product categories then all companies can send all the products together and can share their expenses. The cost of supply chain will be divided on all products making the cost of distribution per piece very low for all companies.
All companies can decide the supplies in the same way as stated above. In this way the companies will be able to organize their supply chain and can become an Organized Retailer. This will not only increase their distribution network and sales but also reduce their dependency on the big retailers for bulk buy. As well as companies can share the expertise of distribution of different companies at a reduced cost than earlier.
Suppose some company has an upper hand in distributing the products on hilly areas, other company have a better distribution in coastal areas. Now the company that has a good distribution system in coastal region can use that expertise of first company to distribute their products in hilly areas and in the same way another company can also distribute their products in the coastal region. With sharing of expenses both the companies will enjoy the reduced cost of supply chain, availability of the products in a vast region and off course increased sales. This will also help them in reducing the cost of developing a sales channel like- in appointing new wholesalers and distributors.