See potential tie-ups with overseas companies as an additional temptation
Retailers are taking a relook at cash and carry (wholesale trading) ventures in the hope of tapping millions of kiranas (independent stores). The potential tie-ups with overseas firms – which are allowed to invest freely in the cash and carry business – are an additional temptation, say retailers and consultants tracking the sector.
Indiabulls’ retail arm, Store One Retail, recently announced its foray into the cash and carry segment. Global investor TPG, which has put in a bid for debt-hit Vishal Retail, plans to convert the latter into a cash and carry venture. Aditya Birla Retail, part of the Aditya Birla Group, is also said to be ready with the back end and infrastructure required for the wholesaling business.
According to reports, even beleaguered Subhiksha Trading Services has entered the segment in its attempt to rejuvenate itself, tying up with kiranas as a supplier.
Cash-and-carry was not the business of choice for retailers in the slowdown era. Retailers such as the Future group, Mukesh Ambani's Reliance Retail, the Dhoot-family-led Videocon and Wadhawan Group's Spinach had deferred their cash and carry plans to conserve cash.
"In view of tremendous growth prospectus in the wholesale trading business in the country and in order to take the benefit of this growing industry, your company intends to expand its business activity of wholesale trading,” Store One Retail told its shareholders recently. Its executives did not respond to calls on the subject.
While foreign direct investment in retail is barred, international retailers can own 100 per cent in cash and carry ventures. "Since FDI is allowed in this sector, some of them are positioning themselves to attract foreign tie-ups later,'' said a Mumbai-based retail consultant who did not want to be named.
He also said Vishal, Subhiksha and Store One are looking at this route to salvage their retail ventures.
Though cash and carry forms a miniscule portion of India's Rs 92,000-crore organised retail sector, the vast trading opportunity with the12 million kiranas has attracted both domestic and foreign retailers, such as Metro, Walmart, Tesco and Carrefour. "It is a growing realisation that one needs to cater to the kiranas to thrive in this country. Everybody thought that kiranas will vanish once modern retail comes but it has not happened,'' says Purnendu Kumar of retail consultancy Technopak Advisors.
For those such as Aditya Birla Retail, it is the large back-end facilities such as warehouses, distribution centres and supply chains they own and operate which is giving them confidence to look at the cash and carry venture. "We are ready with the necessary infrastructure. In fact, we have more than 600,000 square feet of back-end space which can be used for a cash and carry venture,'' said Thomas Varghese, chief executive of Aditya Birla Retail.
Wholesale challenges
While retailers are enthusiastic about cash and carry, retail consultants enumerate the number of challenges retailers have to overcome in running the business.
"Since margins are lower, you need to have right merchandise, tight supply chain and super-efficient systems in wholesale trading. While running a large hypermarket is easy, cash and carry is difficult to manage, as it has a large food component,'' says Kumar.
While gross margins in food and grocery retailing are 14-15 per cent, margins in the cash and carry business are about 8-9 per cent. “Cash and carry can never become a large part of Indian retail due to scale issues. It makes sense for kiranas to buy directly from FMCG (fast moving consumer goods) firms,'' says Anand Raghuraman, partner and director at Boston Consulting Group.
A Mumbai-based retail consultant said international cash and carry players like Germany's Metro AG are also treading very cautiously due to mounting real estate costs, supply chain issues amid tight Agriculture Produce Marketing Committee (APMC) laws.
While Metro opened its first store in India way back in 2003, it could open only five cash and carry outlets — in Bangalore, Hyderabad, Kolkata and Mumbai — in the past seven years. In 2006, Metro said it planned to set up distribution centres in 35 cities that have a population beyond a million.
After signing with Bharti in 2007, Walmart, the world's largest retailer, opened its first cash and carry store under the name Best Price Modern Wholesale in May 2009. The company plans to roll out 15 cash-and-carry outlets.
After almost seven years of talks with Indian companies, Carrefour, the world's second largest retailer, last year said it planned to start its cash and carry business in 2010 and is talking to Indian partners for a joint venture.
"Business to business (B2B) needs are very different from that of business to consumer (B2C). It is very complicated; one has to offer differential pricing and leverage supply chains to succeed,'' said Hemant Kalbag of AT Kearney, an international business consultant.
