Archive for June 2011


Organized Agri-Food Retailing in India – Nabard Case Study


Following are the findings from a recently concluded study on Organized Agri-food retailing in India.

1.  Indian retail has grown nearly at the rate of India’s nominal GDP since 1990-91

The sum of Private Final Consumption Expenditure at current prices (nominal)2 on durable, semi-durable and non-durable goods is perhaps the closest estimation of aggregate size of Indian retail. On the basis of this, the size of retail in 2008-09 is estimated at Rs. 17,497 billion. Since 1990-91, the Indian retail industry and India’s Nominal GDP has grown at a compounded annual rate of 11.06% and 13.85% respectively. Past data also indicate that period of accelerated per capita income results in accelerated growth in retail (2004 – 2008 period).

2. Food retailing forms about 61% of the total retail

The value of food retail was expressed as a sum of contribution of PFCE (classification by objects) towards food and beverages. Accordingly, the size of food retail in 2008-09 was estimated at about Rs.10700 billion, 61% of the total retail. Analysis of the past five year data reveal marginal decline in the share of expenditure towards food and beverage. It is in line with the international trend wherein with the increase in income level, the proportion of expenditure on non-food items (lifestyle goods and services) increases.

3. Organised agri food retailing is still urban centric, miniscule albeit growing at one and a half times as fast as food retailing

Based on estimates of value share of purchase of food in organised retail among the primary survey respondents (22% and 14% respectively for class A and class B cities) of over 1,160 consumers from across the country and based on the share of population of the surveyed regions in the total population, it is estimated that share of organised food retailing is about 1.44% of the size of food retailing, valued at Rs 154 billion for 2008-09. Thus, the size of organized food retailing is very small compared to the size of food retailing. However, it is growing at nearly 150% as that of food retailing on the back of favorable drivers such as higher disposable income, growing proportion of youth in overall population, gradual increase in the share of population living in urban areas and increasing proportion of enrollment of women employees into the job market.

A regression model with the historic data indicates the relationship between retail growth and per capita GDP growth to an extent of 84%. It is also seen that per capita income growth had a variability of 25 % around the mean. Thus while the retail growth is expected to be high, it is also expected to be irregular and volatile in the future

4. Organized Retailing is learning to do the right things to sustain, survive and grow

Multi-brand organised retail industry is less than 10 years old. As per our findings, the total organised retail market is estimated to be worth Rs. 855 billion equivalent to 5% of total retail size of Rs. 17,497 billion.

Huge growth projections on the back of favourable demographic, attracted the attention of all major corporate houses into organised retail. The rush to capture market share and mind share lead most of the initial entrants into committing a series of strategic, and irreparable mistakes such as non sustainable cost structure, skewed sourcing decisions, focus on front-end without streamlining the supply chain, short term borrowing to fund fixed asset and so on. Absence of fresh equity, economic slowdown and inability to estimate demand correctly, quickly corrected the situation with almost every players scaling down operation and expansion plans and changing the business model for survival.

A general consensus is slowly emerging on a few growth-oriented and sustainable business models for food and multi-category organised retailing. Based on the discussions with the players, it appears that a store of about 3,000 sft (a sub-2,000 sft Subhiksha store model is ideal, if supply-chain can be managed) for food retailing and a hypermarket format with a floor space of 20,000 – 25,000 sft with multi-cate- gory merchandise is more likely to survive and grow in future. All-in-all ‘irrational exuberance’ is being replaced with ‘cautious optimism’.

5. Food retailing essential but not very profitable for organised retailers

It is unfortunate that no multi-category organised retailer has had any prior experience in food. Most organised retailers in fact are from apparel business. Thus, the complexities of dealing with supply chain issues of food were under-estimated. Especially, issues of perishability, wastage and shrinkage, dealing with large number of small suppliers besides volatile and raising prices greatly increased costs and risks and reduced returns. However, quality and range in food retailing meant regular customer footfalls. Thus, although food as a category is painful and relatively low margin, it is an attractive proposition for organised retailers as it ensures regular footfalls into the store.

The long-term implication of this could be that food part of retailing could be entirely outsourced to a supply-chain specialist company under a profit sharing arrangement. In this case, the customer would be given the choice, the organised retailer would have transferred his risks to a third party in exchange for lower but predictable returns. In fruits and vegetable already some organised retailers are working out such arrangements.

6. Organised and unorganised retail would coexist

Multiple needs and utility functions among various socioeconomic classes would ensure that both organised as well as unorganised retail would coexist primarily in the food sector.

The consumer survey results indicate a clear segmentation of categories purchased at organised retail. Here, purchases are clearly skewed towards unorganised outlets in fresh fruits and vegetables and milk, meat, poultry and eggs, the organised retailing takes a significant share in grocery, F&V and processed food.

Cluster analysis of consumer groups in A1 and A class sample indicates that largest group of customers constituting about 60% of the sample have a low preference for organised retailer when it comes to food.

In our survey, about 60% of unorganised retailers in A class sample and 38% in B and C class sample reported increase in turnover in the last one to two years. There is clear indication that a part of the growth of overall food retail has been transmitted to unorganised retail.

7. Unorganised retailers choice of cost control over scale has endured them well during slow-down

As per the survey, the average monthly turnover of an unorganised retailer in A1 and A class and B1, B2 and C class cities is about Rs. 2.57 lakhs and Rs. 1.8 lakhs respectively. For organised food retail, a comparable matrix is revenue per sft per month, which is in the range of Rs.700 – 1,000 per sft per month.

The cost structure of unorganised retailer is in the range of 5 to 8% of the turnover, taking into consideration rent as well as imputed cost of own labour. About 25% of the total surveyed sample used their own premises for retailing.

In case of organised food retailer, the cost structure varies between 17% and 25% of the turnover depending on scale of operation, store format and merchandise mix. Higher cost structure is mainly on account of higher rental, higher employee costs, logistic costs, and costs due to shrinkage, wastage, theft and unsold inventory. Most of the costs of organised food retailers are outside the control of the firm. Although rentals have dropped and have been renegotiated in many cases after the economic slow down, the rules pertaining to tenancy are largely in favour of the owner and not the tenants

Low cost structure and control over costs have enabled unorganised retailers to survive.

8. Growth levers for organised food retailers are largely outside the industry

Organised food retailers have relatively less hold on investment, revenues and costs. This may affect the growth of the sector going forward.

Restrictions on foreign direct investment are likely to affect directly the expansion plans. This would also delay the knowledge transfer process, which is crucial for moving up the learning curve fast and with least costs.

Investments are also required at the supply chain end and logistics. Though FDI is allowed in this area (51% in single brand retailing and 100% in cash and carry wholesale), the incentive structures are not in place and the operational hassles are too many.

Key challenges in costs are managing rental costs, employee costs and sourcing costs. Changes have been noticed in the rental structure from fixed to fixed plus variable to variable structure .When it comes to employees, it is more of cost of quality (trained) and committed manpower. Sourcing and merchandising have undergone substantial change. It is more integrated now and new metrics such as contribution per sft, attempts to integrate sourcing, merchandising and inventory turnover are being attempted.

On the external cost front, reforms in agricultural marketing systems could greatly simplify procedures and compliance requirement and thereby costs. In the same fashion, introduction of GST at both state as well as central level and doing away with a plethora of other taxes would not only simplify but also lead to cost savings through set-off (estimated conservatively at 0.5% of the sales)

On revenue front, some retailers have opined that doing away with the Maximum Retail Price(MRP) restrictions could enable retailers to differentiate their products and services through correct pricing. Again, it is regulatory and outside the control of the industry.

9. Credit requirement, availability, affordability and risk perception

The lending decision of the banking institutions to organised food retailers has been based on the strength of the group (parent company) and not on the project. The bankers admit that the metric for performance evaluation for organised retail is still not in place. Thus, quantification of risk and pricing is still not practiced on a stand-alone basis.

Banks and institutions are however comfortable with lending against stocks, collaterals and other tangible assets whose value can be reasonably assessed.

In terms of risk perception, bankers are relatively more comfortable with unorganised retailers as their requirement on a single store basis can be objectively assessed. Besides, size of exposure is also small. However, cash dealing and lack of maintenance of books of accounts are major irritants that come in the way of lending.

Access to informal credit and own fund is the norm in unorganised retail, while sourcing equity through the parent company and debt from banks is the usual practice observed in the organised food retailers.

Debt is not the preferred source of fund given the thin operating margin and unpredictably in demand and sales. Despite this, some of the national level retailers are heavily leveraged.

10. Challenge to growth – supply chain

It is observed in the survey that direct procurement of fruits and vegetables by organised food retailers from farmers has not only resulted in farmer realizing better share of consumer spending but also has reduced cost to the consumers. However, certain pre-requisites are needed to make such models work. (1) Organizing farmers into clusters or groups to aggregate produce, bring in scale effect and increase bargaining power; (2) Basic infrastructure at the place of produce for grading, sorting and cleaning; (3) Organised retailer who has the required scale of operation to lift the quantities offered for sale.

This involves engagement of stakeholders, a sponsor (typically government agency) and creation of public infrastructure at rural level to be managed by the beneficiary.

11. Challenge- are organised food retailers responsible for high gap between wholesale and retail prices?

When it comes to groceries other than staples, local sourcing from the nearby wholesale market is adopted by every retailer. All such products suffer a mark-up of 25 – 30%, so as to absorb the cost structure. Thus, in many sub-categories, the price levels of organised retailers are much above unorganised retailers and more than the wholesale prices by as much as 25 – 30%. This could trigger an unsuspecting debate. Though organised retailers have a small share in the overall food retailing, price set by some organised retailers are taken as benchmark by not only other organised food retailers but also unorganised retailers.