Thursday, August 20, 2009

Rainbow Coalition : Is it feasible?

Did you ever imagine that one day, Aditya Birla, Future Group and few other big shots in the retail industry would be shaking hands together to achieve a common interest??

Well well....................... this is business we are talking about, anything is possible.

Cut-throat competition in India’s organised retail industry seems to have paved way to harmony, with top players such as the Future Group, Aditya Birla Retail, Spencer’s and Reliance Retail coming together to cut operational costs and improve margins. The retailers have formed a rainbow coalition that will align their sourcing operations and share private labels, logistics, warehouses and hiring details on a transactional payment basis.

“We may fight at the front-end but we need not compete at the back-end,” is the norm they have applied. Collaboration is the way forward in retail and they have taken lessons from telecom players that share towers. “Our infrastructure and resources are designed to be shared with others,” said Kishore Biyani, who runs Future Group, the country’s leading retail player. Retailers are hoping to improve their operating margins by 2-3% by sharing back-end resources. Most players in the Rs 30,000-crore plus organised retail industry are affected by teething problems and the economic downturn. Grocery formats have recorded huge losses, forcing retailers such as Reliance Fresh, Birla’s More, Indiabulls and Spencers to shut down unviable outlets and halt expansion.

The retailers clarified that this move doesn’t amount to cartelisation, as the cooperation among players is limited to the back-end . The players are discussing ways to sell private labels to each other and collaborate on shrinkage—essentially a diminution in inventory due to shoplifting, employee theft or supplier fraud. The collaboration can be extended to include sale of each retailer’s power brands, not necessarily store brands. The move essentially focuses on how to cut costs in supply-chain and third-party manufacturing. It is a common practice abroad where the eco systems are far developed. Retail companies are currently focused on bringing down distribution costs by eliminating intermediaries and transport delays between the sourcing point and point of sale.This idea would solve many problems faced by the retailers.

But is it a complete solution?

In grocery, burdened by consumer expectations of more frills compared to no-frills kirana shops, modern formats had to shell out 30% higher costs on rent, energy, bar codes, air-conditioning, bright lights and other aspects. Also, lifestyle retailers were forced to mark down prices to move volumes as consumers traded down to more affordable brands in a challenging environment. The collaboration also addresses issues such as unused furniture or design and completion of shell space—that instead of lying unattended in warehouses can be sold to fellow retailers. Then there is the issue of modern retailers who are keen to promote their own private labels. Under the new concept, retailers may have to sell such labels to each other.

It is a welcome concept but needs to be complemented by developing the systems and procedures as the Indian retail sector is still growing. There are various issues also that need to be tackled parallely for the model to be finalised. Such a joint proposal would also need to address nimble mom-and-pop stores that are swifter in merchandising and understanding local nuances and requirements. Modern formats with their regional and central sourcing structures typically are unable to compete in such a situation. While the plans seem extremely smart, very often issues crop up during the implementation stages. Retail is a business of detail and when there are too many players involved, issues of funding and ownership tends to derail the progress.

So, let us keep track on the moves of the big giants of the retail industry – as to whether they have gone ahead with this model or planning for something new.

Contributed By :
Aasritha Poorna (MBA FT II)

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