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Retailing: Benefits of shorter supply chain

Sep 3, 2007

Retailing is the final step in the distribution of goods and merchandise - the last link in the supply chain. A retailer in a true sense is an intermediary between the producer and the buyer and the trick of the business lies in curtailing the costs of intermediation. The typical or traditional way of making products available to the end consumer not only takes longer duration, but also adds on to the costs without any value addition to the product or goods. In that sense organised retailing can be considered as a boon. The modern way of selling goods and products i.e. with fewer middlemen reduces costs. As the retailers make bulk buys and eliminate middlemen, goods are sourced at cheaper rates. The benefit of buying directly from the manufacturer or distributor is passed on to the consumer in the form of deep discounts. One must also note that the modern way of selling goods and products have not only benefited consumers but also the manufacturers or producers as they save on commission costs.

In one of our earlier articles on food retail, we have mentioned how logistics play an important role in distributing products to all corners of the country. Also, as per CRISIL, reduced supply chain costs arising out of lower wastage and storage costs will result into better profitability for retailers, higher farm income for framers, low cost for consumers and above all increase in the amount of savings, which may help curtail inflation.

Consider the food segment, where the typical chain is from the farmer to the end consumer. As mentioned earlier several intermediaries who do not add any value to the product but significantly add on to the costs leads to consumers paying prices, which are approximately 30% to 40% higher for zero value addition.

In the above diagram we have considered a 12% mark up at every point of sale. In case of the traditional supply chain, the end consumer ends up paying Rs 32 (approximately 25% to 30% extra) more for the same product. Over here while we have considered a 12% commission, in reality the commission is in the range of 12% to 14% depending upon the products and bargaining power of suppliers and buyers.

Similar is the case for FMCG and consumer goods and merchandise. The chain starts with the manufacturer who sells to the distributor, which is then redistributed to the stockist. The wholesaler purchases from the stockist and sells it to the retailer and who finally makes it available to the end consumer. In this case also the consumer ends up paying extra 30% to 40% on account of a longer supply chain.

Now in case of organised retailing, the goods are procured directly from the farmer at the price decided by the Agriculture Produce Marketing Committee or from the distributor eliminating intermediaries like traders, wholesalers. The cost savings, which happens eventually on account of fewer middlemen, is passed on to the consumer. In case of consumer products, FMCG goods or merchandise the retailer procures it directly from the manufacturer, which helps it to maintain margins while offering goods at discounted prices.

Thus, while retailing in this sense is considered as a boon, there is the other side to the coin that has to be considered namely that the elimination of middlemen, who are there for generations, may result into unemployment. Such issues are hindering the growth of the modern retailing formats. Though these issues exist, one must also note that retailing is the largest employment generator directly or indirectly.

Looking ahead...
For mankind to adapt to any kind of change within the normal or age-old operational system will take time. To put it in other words, the organised retailing concept will gain its foothold in India over a period of time with the changing lifestyle and attitudes of people and accretion to income levels of the rising Indian middle class (represented by the financially independent young population). Consumers are now showing a growing preference for organised retail, resulting in increased penetration.

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