Thursday, August 30, 2007

Rediscovering Kirana

Retailers are rushing ahead with their plans, but is there enough demand for the merchandise being sold? Asks Shobhana Subramanian today in BS.

With over 130 to 180 million sq ft of new mall space coming up in the next few years, and much of it in the big cities, the catchment for each mall will reduce. And that could completely alter the competitive dynamics. Abheek Singhi, partner, Boston Consulting Group posits that “A throughput of at least Rs 600-Rs 700 per sq ft per month would be required to sustain gross margins of 30 per cent if rentals are around Rs 40-50 per sq ft.” So, higher rentals of Rs 60-70 per sq ft would mean a much larger throughput. Building the store it seems, is the easy part. Getting cutomers to buy might not be that simple.

After factoring in 39 different licences that a hypermarket requires in India and yields on an average an operating margin of just 6%, what explains the rush (Wal-Mart, Carrefour, EON) for such a low margin business? Volumes ? The slice will be too thin when you’ve too many of them around. Large population shouldn’t be an attraction either since footfalls don’t necessarily mean customers.

In this entire melee, it’s the kirana (corner store) guy who gains. We rediscover the street corner vendor who is fast shedding sloth and getting nimbler by the day. Last time I checked, he does some brisk business in his store that no longer resembles the mess it once was. All items were neatly stacked and in full display. And he home delivers stuff on a phone call and I think that’s a sure win strategy. Competition induced innovation, perhaps !

Even if big ticket retail gets large scale supply chain advantage and can use its direct sourcing efficiencies to keep prices low, it would be interesting to watch how they deal with a nagging bureaucracy and rising rentals. The kirana guy is getting smarter and stauncher – quite contrary to the initial prediction that his breed will soon be extinct.

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