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FMCG Conclave: Key takeaways (Part II) - Views on News from Equitymaster
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FMCG Conclave: Key takeaways (Part II)
Dec 22, 2005

Yesterday, we highlighted the key takeaways from the conference with respect to the FMCG and the food sector in the first part. Today, in this article, we cover the retail sector and the prospects going forward. About the sector
As far as modern retail trade is concerned, the customer is far more ready than what the companies and industry has in offer, with signals emerging from both metros and non-metros. There is immense opportunity, as consumption levels are extremely low and aspiration levels high. Food retail is the area of focus for most players, along with speciality stores. This segment is the most under penetrated segment in modern retailing and caters to all the strata’s of the society. It must be noted that today, leading modern retailers sell fruit juices vis-à-vis carbonated drinks, in the ratio of 1:1 as compared to a ratio of 1:35 in terms of revenues of a Kirana store, indicating the change in the purchasing mix (although fruit juices costing almost 4 times more than fizzed drinks).

Also, with the development of modern retail, FMCG firms are poised to benefit, as direct selling costs are relatively low, thus creating a win-win situation between FMCG companies and retailers. Organized retail is slated to grow at a breakneck speed, and triple in the next 5 years. Growth will mainly come from food, grocery and hypermarkets, while apparel’s will contribute around 40% to total revenues (as per Arvind Mills, apparels account for 3% of total retail space in the organised sector in FY05). There is huge untapped demand as currently, 6 metros and 8 top cities account for 80% of modern retail sales.

FDI in retail - The industry view on this front was that it should be allowed after 2 years, as the opportunity should be given to Indian retailers first, who have been looking forward to it for a couple of years. However, it must be noted that inspite of FDI in retail having opened quite some time back in China, even today, the largest player is a local one.

Challenges of modern retailing
India, being a developing nation, faces challenges on various fronts viz. supply chain, red tape, manpower and infrastructure.

Supply chain

  • No integrated cold chains for perishables and fresh produce.

  • Multiple handling, which results in high wastage in supply chain.

  • Impact costs and presence of a number of intermediaries.

  • It must be noted that one of the world’s largest supermarkets, Tesco, has a stock availability level of 98%, indicating that it does not depend on its manufactures for its supplies. 98% of its goods are transported to its warehouses by its own trucks. In India, this figure is way lower.

Red Tape

  • Decentralized and multi-layered method of tax collection leads to harassment by government departments.

  • It takes almost 6 months to obtain 15 licenses from as many as 11 different departments, to open a new store.

Manpower

  • Retailing is a professional field, and hence requires training at various levels. In our country, there are very few organisations that offer such training.

  • Since retailing is not developed in our country, it is not seen as a career option my many, hence attracting and retaining manpower is an uphill task.

Infrastructure

  • Power cuts is a common phenomenon in our country and hence, it adds to operating costs, which is a large chunk in total cost in retailing.

  • The government has not set any standards for retail spaces.

Conclusion
In our view, modern retailing is the future and partnering modern trade for FMCG companies is the key. Inevitably, modernisation of the retail sector will be reflected in rapid growth in sales of supermarkets, department stores and hypermarkets, because of the growing preference of the affluent and upper middle classes for shopping at these types of retail stores, given the conveniences they offer such as shopping ambience, variety and a single-point source for purchases. Even as modern retailers garner share from traditional channels, there is a larger role that they would be required to play in boosting the overall consumption levels of the Indian economy.

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