Organised retail fails to blunt inflation

Farm-to-fork model proves to be expensive, with prices higher than in neighbourhood stores. 

On January 5, a Spencer’s Retail store in south Kolkata was selling onions at Rs 30 a kg. The comparable price at a kiranawala in the same locality was Rs 26 a kg. In the local wholesale market, from where the onions were sourced by both, the price was Rs 18 a kg. 
 

On January 4, Reliance Fresh (part of Reliance Retail) charged Rs 23 for a kg of onion in Nashik. In the city’s vegetable market, a kg of onion was available at Rs 20. At the Agricultural Produce Marketing Committee (APMC) yard, a hub for all agri trades, a kg of onion was available for Rs 14. 
 

On January 4, Big Bazaar, a hyper-store run by Future Group, sold onions at Rs 26 a kg at its Lower Parel store in Mumbai, while a kiranawala nearby sold onions at Rs 22-24 a kg. At the wholesale mandi, where both buy onions, the price was Rs 10-15 a kg. A similar price gap was seen in potatoes, too.

There seem to be no signs of organised retail blunting food inflation. Prices at organised retail outlets for key commodities, like onions and potatoes, are higher than at the neighbourhood store.

This belies the original promise of the “farm-to-fork” model, which envisaged a higher price for the farmer and a lower price for the consumer on the back of efficient supply chains.

The higher prices could be due to a deliberate premium pricing strategy, or the impact of high overhead costs or lack of an efficient supply chain, or a combination of all three, say retail industry analysts and executives.

For starters, there are not many food retailers who are sourcing directly from farmers. Some who tried sourcing produce from farmers directly could not sustain it, due to regulatory and viability issues. Now, most retailers buy from the Agricultural Produce Marketing Committees or APMC yards, where various commodities are auctioned.

“Their (retail chains) supply chain and retailing overheads are very high, and consumer reach and customer base is low. Hence, costs along the supply chain are very high. They are finding it very hard to compete with unorganised retail, who are highly efficient, and low cost,” explains Vikram Puri, chief executive officer of Mahindra ShubhLabh Services Ltd (MSSL), the agri business division of Mahindra Group that supplies fruit to international and domestic retailers.

“There are other challenges in setting up an efficient supply chain. Volumes are insufficient to justify large investments in cold chain infrastructure and transportation,” says Naimish Dave, director of OC&C Strategy Consultants.

Future Group has, therefore, outsourced sourcing and retailing of fruit and vegetables at its Food Bazaar and Big Bazaar stores to third-party vendors due to viability issues.

“Nobody makes money in fruit and vegetables. They have to keep it just to drive footfalls. Sourcing and selling onions and potatoes is a very complicated and specialised business. It requires both financial investment and managerial attention. They thought it is better to focus on other areas than losing money,” says a former Future Group executive who did not wish to be named.

“But, when you outsource this, the vendor may not have efficiencies that will creep into the price,” the executive added.

Big Bazaar President Sadashiv Nayak, however, says the tie-up with vendors has resulted in the creation of new categories like exotics, cut fruit and salads, and helped both the parties.

Premium products?
Some argue that the higher prices at organised retail chains are the result of huge margins that they operate on when compared with neighbourhood kirana stores, which work on a gross margin of 10-12 per cent on foods and groceries.

Retailers, however, say their superior quality justifies their pricing.

Says an executive at Spencer’s Retail, which is part of the RPG group: “We are not a discount retailer. We provide the same prices available at the local markets wherever our stores are. But in terms of quality and assortment, we provide much better than the local kiranawalas,” he adds.

Adds a Reliance Retail executive: “We price products depending on the stock available, and it changes everyday. We have seen many kiranawalas buying from our stores and selling at higher rates.”

Industry analysts also aver that retailers are not in a position to extract huge margins.

“Retail is a high volume and low margin business. They cannot extract huge margins,” says Pinaki Ranjan Misra, partner and national leader (retail), Ernst & Young.

Prices of some key commodities are sometimes deliberately kept low by the organised retailers to drive footfalls. “In many places, we can see sugar at lower prices than other items as it is a big footfall driver,” he says.

Impact of overheads
Retailers say unlike neighbourhood kiranas, they do a lot of value addition such as processing, packaging and grading of commodities, which adds to the sale price.

“For example, fresh onions are always cheaper if they are not subjected to the drying process, because they have high moisture content and deteriorate within two days. At our stores, commodities like onions are sold after following the drying process. Similarly, when a product is perishable, you will find a price difference in the morning and in the evening, with vendors very often selling products at discounted prices towards the end of the day,” says Nayak of Big Bazaar.

Look at the cost structures of a modern retailer: If a kg of onion costs Rs 10 in a wholesale market, with loading and unloading charges and weight loss, 10-12 per cent is added to the cost by the time it reaches the distribution centre of a retailer. With cess and freight, and processing, sorting, grading and wastage, costs go up to Rs 15.50 and the retailer also has to get some margin.

“While the per kilo price shoots up from Rs 10 to Rs 15 for a retail chain, it changes from Rs 10 to Rs 12 for a kiranawala,” says an executive from the food and grocery retailer Spinach.

(With additional reporting from Pradipta Mukherjee and Tushar Pawar)