Discount stores

The discount store fancy has now caught up in India with Reliance Retail planning to open its no-frills stores. And there can never be a better time than the present recessionary period to open such formats. Around the world, the fastest growing retailers are the ones who sell products at discounted prices. For the first time, global discounters like Lidl and Aldi have a place amongst the top 10 retailers according to a recent report published by Deloitte. Discount stores as a concept were invented by Theo and Karl Albrecht who founded Aldi Discount in 1960. Their low-cost business model is a huge success even now in Germany and abroad.

These formats are not only catching the fancy of the urban middle class families across the world who have seen their disposable income falling but it is also attracting savvy rich people who have no qualms doing value shopping for their daily needs. These stores sell goods on an average 20-30% less than a regular superstore, proving to be a big hit with consumers. No wonder, internationally major retailers like Tesco and Carrefour in a bid to capture market share are coming up with their own versions of discount format stores or are introducing value products in their assortment to attract customers who have been hurt by recession.

India has not been new to the concept; down south Subhiksha was the first modern retailer to have a discount model. It offered all products at a 10% discount and up-north D-Mart introduced a blanket 5% off discount on all products. Although D-Mart looks to be profitable the same is not the case with Subhiksha. The company owes its financial mess due to bad capital management and opening up of large number of stores without proper focus on supply chain management. Some of the initiatives that Indian retailers can implement to be profitable viz a viz its western counterparts are a) limiting the number of SKU�s to 1000 -2000 per store. This will ensure that these items are sourced cost efficiently and the high turnover of these most selling SKU�s will ensure that capital is used effectively and b) Notching up properties at reasonable prices. With the recent downturn, a lot of properties will come up for distress sale and it is a good time to rent these properties or renegotiate on old agreements.

Irrespective of how the economy behaves in the near future, one thing is clear that the discount format is here to stay.

Price Indexes

Price indexes are a normalized average of prices for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ between time periods or geographical locations.
Price indices have several potential uses. For particularly broad indices, the index can be said to measure the economy's price level or a cost of living. More narrow price indices can help producers with business plans and pricing. Sometimes, they can be useful in helping to guide investment. (Source: Wikipedia)
Some of the major price indexes are listed below:

Wholesale Price Index (WPI): The index is used to measure the change in the average price level of goods traded in wholesale market. A total of 435 commodity prices make up the index. It is available on a weekly basis, with the shortest possible measurement lag being two weeks. Because of this, it is widely used in business and industry circles and in Government, and is generally taken as an indicator of the inflation rate in the economy.

Producer Price Index (PPI): It measures average changes in prices received by domestic producers for their output. It is one of several price indices calculated by national statistical agencies.

Consumer Price Index (CPI): It is a measure of the average price of consumer goods and services purchased by households. A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, and regulated or contracted prices. They are weighted this way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Others: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI computation.

By August 2010, the Indian government will have a new Consumer Price Index, in order to address a situation of increasing prices to rise even as the inflation rate is tending towards zero, the government has initiated action to introduce a new consumer price index (CPI) by August next year. The new index would be available with four sub-sections to reflect prices at national, rural, urban and state levels on monthly basis. The data collection for rural as well as urban India would start by July, and the new CPI would be out exactly one year after that in August, 2010. This would be done by engaging 2,400 postmen for collection of retail price from 1,200 villages in the country by June end. The postmen would be identified in May and trained them in June. Preparation for the new CPI for urban India has been completed in March. The CSO is ready for collecting data from retail outlets in 100 cities and town.

The travails of the retail industry.

A lot has been talked about the viability of the industry but given the nature of this industry and that too in a developing country like India it is bound to take some years before someone can start deciding on its fate.

Some of the present concerns are

Rental costs: the rent paid for occupation is very high and at present constitutes almost 4% of a retailer�s turnover. Whereas they constitute only approx 1-2 % of the turnover in developed nations.

Utility costs: The electricity charges are also high at almost 5% of the turnover whereas it�s less than 1% in developed countries. A Store of size 4000 sft might have to shelve an average of Rs.10 Lakh for rent alone.

Margins: Even the biggest retailer here has very little say when it comes to negotiating with its vendors. This has led to lesser margins for the Indian retailers to operate upon. The situation is completely the opposite in other countries where the retailers calculate the final price by demanding to know the price of every ingredient.

Aggregation: Fruits and Vegetables continue to be the biggest footfall driver for a retail business, but the retailer still goes to multiple sources for procurement of these items. The average farmer in India owns � acre of land whereas the minimum land owned in developed countries is 400 acres. With this kind of setup cost efficiencies are over looked, quality takes a hit and supply chain management becomes a daily headache. Although these conditions will continue to be present, government should atleast chip in with infrastructure development in terms of building cold chains, building distribution centers, helping farmers generate better yields and incentivising retailers who create such an environment.

Multiplication: Retail is a game of multiplication and the industry is hardly 2 years old. Even the largest retailer has 600 outlets whereas the country can take a minimum of 20,000 outlets. It will take some time before economics tilts the favor in the retailer�s hands.

Standardization: Servicing India is like servicing 26 different countries with 750 modern towns (towns with more than 50,000 populations). Spread over different geographies with different statuary laws and bizarre governmental policies it takes more than experience to set up and run stores. With different festivals for different towns and different climatic conditions engulfing different states it becomes but complex to devise marketing plans that fits all.

IT systems: The key to retail is information and information comes from data provided by the consumers who shop. It will take atleast a couple of year�s data to forecast demand and therefore providing the right product, at the right time, at the right place, to the consumer remains a challenge. With changing tastes of the new consumer class it is but difficult to give the customer what he/she wants.

Supply Chain model: Retailing in India has traditionally been a multiple hub and multiple spook model with cheap labor to service these multiple points. It is very well entrenched in the Indian psyche (be it communities or be it traditions) and is difficult to dislodge them in a short time. These communities with their distribution capabilities have been able to service the different cities and more specifically districts and towns seamlessly. When a new retailer wants to set up an efficient supply chain model in smaller cities or towns or districts it becomes economically unviable to service stores.

All the above are serious problems, business houses which can work around these issues or come up with innovative solutions will gain the first mover advantage. And this advantage cannot be replicated for a long time.