Monday, December 31, 2007

RETAIL REVOLUTION - No change can take place without some people being hurt

- No change can take place without some people being hurt

How is the retail transformation that has begun going to affect the over half-million people in wholesale and retail trade, and consumers, and companies marketing to them? There is considerable agitation about the retail revolution. Many hawkers, middlemen and small retailers have protested. Reliance Fresh had to close its operations in Uttar Pradesh.

The revolution began with the malls in large cities and towns, in which different retailers had outlets. Along with these came chain stores. These malls and new stores offered consumers bright, clean and usually air-conditioned environments for shopping, going to the cinema in multiplexes, and eating in food courts. The prices in the cinemas, restaurants and food courts were higher than in their counterparts outside the malls, but competitive for manufactured goods. Those who flocked to the malls paid the much higher prices for cinema and food over time in exchange for cleanliness and comfort.

While the malls usually had outlets selling books, branded luggage, furnishings, garments, packaged foodstuff like chocolates, cookies and so on, they did not sell household articles, foodgrain, vegetables, meat or fish. The multiplexes adversely affected the custom at old-fashioned cinemas but the booming real estate market enabled old cinema houses to convert to other uses. The old crowded bookshops with little space for display and browsing have begun losing out to the new spacious bookshop chains in the malls. This will extend to eye-wear, footwear and so on, as branded goods enter the chain stores.

This happened in the United Kingdom over 40 years ago when the retail revolution began. In 1961, I was working with Lever Brothers in the UK. The retail revolution caused by chain stores, supermarkets and self-service stores that had swept the United States of America in earlier decades had reached the UK. Until a few years earlier, the UK retail trade was dominated by small shops run by the whole family, keeping long hours and stocking a variety of goods with little space for display or for the customer to touch the goods. The retailer enjoyed a personal relationship with his customers and would sometimes give credit. Retail margins were high — well over 20 per cent.

There were a few chains of large departmental stores that were either stand-alone or in chains spread over the country — Selfridges, F.W. Woolworth, Boots. Selling companies employed many motorized salesmen who took orders that were delivered from the company depot and sometimes by the salesman from his car. The salesman knew the retailers on his route and enjoyed a close relationship with them. He would also display the products and put up colourful advertising material to attract customers. Many of these features still exist in the Indian retail trade.

This cosy relationship between retailer and consumer and retailer and the companies was disturbed in the UK when chains like Fine Fare, Sainsbury’s, Tesco and other food stores began to open shop. They had much larger floor areas and shelf space. Their overall sales of any product, per square foot of shelf space or per employee were far higher. Their size gave them bargaining power and they bought cheaper than the old small proprietary stores.

The customer liked the opportunity to choose between the different brands on the shelves. Food products were fresh. Vegetables and fruits were selected and graded by the store so that they were of uniform quality, as were the fresh fish, meat and eggs. They were usually pre-packed. The housewife could complete her shopping at one location. While she might initially have missed the personal service of the corner retail shop, she soon learnt to happily choose for herself. These factors are relevant when looking at the future of the proprietary stores as new self-service stores enter India’s markets.

The coming of these retail chains changed the structure of the retail trade in the UK. The old corner shop gave way to spacious, well-stocked stores. Employment shifted from proprietary stores to these supermarket chains and other self-service stores. Personal relationships were replaced by the formality of the employee at the checkout counter. Computerization helped in better control over inventories and lowered operating costs. Psychological and traffic-flow studies helped store managers to decide how to direct customer traffic in a store for maximum impulse purchases, and of high-margin items. The companies had to restructure so that more educated employees negotiated with high-level purchasing managers who purchased large volumes.

Companies had to rejig their price lists and promotion plans to allow special discounts and special promotions to get more shelf space. Normally, store managers would have restricted the facings on a shelf for a product to its actual sales and market shares. In reaction to this new competition, many proprietary retailers and wholesalers banded together to gain similar price benefits through bulk-purchasing and devised their own promotions and displays to attract and retain customers. This did not stop the closure of many proprietary retailers and wholesalers except in remote locations or in boutique outlets.

In India, where this revolution has started, it is urban not rural, in big towns and cities than in medium and smaller ones. It will be many decades before the new retailers make a serious dent into the number of small retailers, but they will get large volumes. The bigger cities and towns will see sharp falls in numbers of proprietary retail outlets as old customers desert them for the convenience and comfort of shopping in the large chain stores and malls. The proprietary outlet can imitate self-service, and since it makes low margins, it will be competitive if the owner joins others to enhance bargaining power.

In India, fresh fruits and vegetables suffer damage and deterioration estimated at 40 to 50 per cent as they are transported from distant rural areas. The farmer receives only a fraction of the retail price. The middleman, who collects the produce from many farmers, makes a lot more. This is true for fish and meat too. Absence of adequate cold storage facilities to preserve them, and of refrigerated transportation, causes the huge losses.

The Reliance Fresh model seeks to make a profitable business by cutting the losses due to lack of cold storage and transportation and eliminating the middlemen’s margins. The savings would be used to benefit the consumer with standard products of uniform quality, usually pre-packed and possibly sold at lower prices than in the market, while paying better prices to growers. The company will give the farmer scientific agricultural advice and support to improve productivity, quality and uniformity in size and taste.

The model is very logical. With the investments proposed, it is workable and profitable. It does not allow for the immediate adverse effects on many poor people like the small roadside outlets selling fruits and vegetables, and hawkers going from house to house selling them. Their numbers may be added to the census of retail outlets. They buy and sell small quantities. The middlemen, who collect produce from farmers, bring them to the town for sale, will lose their living. These people, whose livelihoods are threatened, lead the agitation against the Reliance Fresh model.

The benefits from consistency, quality and standardization are obvious, even if prices are not lower. The Reliance model must be tweaked to ensure livelihoods for middlemen and petty retailers. This might raise costs and delay the full rollout, but it can neutralize opposition.

The retail revolution will certainly displace many proprietary urban retailers, middlemen, many specialist shops, and petty hawkers and roadside outlets. If there can be found alternative livelihoods simultaneously, the revolution will be quicker. But no revolution can be so smooth as not to hurt anybody.