Tuesday, March 13, 2012

Why Indian grocers' biggest worry isn't the Walmarts

Last year, Chandan, a 60-year-old grocery store on MG Road, Pune, was revamped. It wasn't just a face-lift. A new floor was added, walk-in aisles were widened and advertising spaces carved out in strategic spots.
The results were immediate. "My monthly sales surged by 30-35% to cross Rs 13 lakh," says Manish Chandan, the 42-year-old, third-generation owner of the store. But Chandan is not popping the champagne. Instead, he is rethinking his investment.

"Sometimes, I wonder if we would have earned higher returns by parking the money in a savings account," he says. Stumped? This is the paradox of tradition retail: growing steadily by 4% a year—there are 9.8 million stores in India now—yet not generating enough revenue to keep store owners happy.
It is not that demand is down because of the 'Walmart factor'—supermarket shopping. Mom-and-pops remain on the speed dial of families for home delivery of bulk buys. And when you need a popsicle or are out of toothpaste, the kirana around the corner is the most convenient stop.
The problem of traditional retail is not competition. The challenges lie at home, within their business model. Though footfalls and phone calls haven't lessened much, profitability of mom-and-pop stores is hit by rising operating costs. They pay higher rent and wages but profit margins on various products have either shrunk or remain stable.
Hoping for a surge in sales is unrealistic. Mom-and-pops target customers close to their location. This number is largely stable over five to ten years. Limited by capital, few can offer an exclusive deal or inventory that compels customers to drive long distances to shop at their store.
This is the aim of organised retail. Mom-and-pop stores do not want to match up to the supermarkets. Their goal is humble: to regularly take home more income. Yet, for several years they have been tethered to the brink: neither folding up, nor earning big money. Why?
/photo.cms?msid=8131176 To find out, ET on Sunday went shopping in kiranas and grocery stores in metros and small cities. Our analysis was anchored by a Technopak Advisors' study of 750 traditional retail stores in Tier I cities. What emerged from both is a list of four key challenges that traditional retailers must overcome to build a business with a promising future.
Rising Real Estate Prices
"You can't make great profit from a local grocery store. Not only are margins low, expenses are too high. Worst of all, rent," says Lucky Mangtani, co-owner of Lucky General Stores, Delhi. He cites several examples of small stores which shut down after 10-15 years because the rent spiralled out of control. "We own the property. Else, we would have exited the business too," he says.
According to the Technopak study, 73% of all mom-and-pop stores are owned, not leased. The math suggests this is not a coincidence. When a kirana is rented, the average annual operating profit dives by 34.7% to Rs 76,000—barely enough to sustain a family of four in a Tier I or Tier II city.
All is not hunky dory for those who own stores too. They contend with a seductive source of easy money: letting out the property. Shops of all sizes have takers: banks can want just 70 sq ft for installing an ATM, small fast food franchisees are on the hunt for 1,200-1,500 sq ft spaces and fancy showrooms lap up anything larger in size. "The rentals vary according to size and location of the store.

For a small one in a Tier I city, the rate is more than Rs 15,000 a month. Combine it with a salary of at least Rs 10,000 a month (average for a graduate), and the total income shoots to about Rs 25,000—two times of what a small kirana earns," says Sarvagna G, a consultant with Technopak Advisors.
So why aren't more store owners taking the easy way out? "True, I would earn more from rent. But my brother Anil is taking care of the shop and is comfortable with his career. Plus, I build goodwill from regular interactions with customers. This is handy for my other business—property brokerage," says Mangtani.
For store owners without an alternative career, Sarvagna suggests letting out a portion of the shop to small vendors to supplement income. If the space cannot accommodate even a kiosk, inventory can be optimised to free up storage area for display racks stocked with merchandise high in demand. These shelves are also in demand by FMCG companies willing to pay 'rent' to showcase their products prominently. They also buy advertising space on shop windows and customer-facing walls
Waning Interest of Gen Y
Chandan was 15 years old when he started working in his store. In those days, mom-and-pops were true to their name: any member of the family who could add was qualified to work at the store. Chandan pursued his Bachelors in commerce and a diploma in taxation laws.

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