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Global retailers scaled down their dream of opening stores in India because they can’t own more than 51 percent and have to meet onerous local sourcing requirements. Instead, Walmart Inc and Germany’s Metro bet on their wholesale arms to tap consumption in the world’s fastest-growing economy since that allowed 100 percent ownership.
But they now face the risk of losing pricing edge.
Not due to an adverse policy change, but because consumer goods makers treat cash-and-carry stores and hypermarkets on par, at least on discounts. The gap between pricing—called terms of trade in retail jargon—for wholesale companies and large-format retail has either narrowed or vanished.
“Both mediums buy directly from the manufacturer and the level of discounting is almost the same,” said RS Sodhi, managing director at Gujarat Co-operative Milk Marketing Federation Ltd., India’s largest dairy company that makes Amul-branded products.
BloombergQuint’s sample survey of products threw up similar results. A pack of Parle G 800-gram biscuits is priced at Rs 60 at a Metro Cash & Carry outlet in Mumbai. A Reliance Smart hypermarket sells the same pack at Rs 53. Similarly, a pack of Tide detergent is available in combination of (4+1) kg for Rs 439 at the Metro store compared with Rs 379 at the Reliance outlet.
Hypermarkets sell directly to consumers, while cash-and-carry stores can only supply to retailers who provide goods and services tax registration number. Not getting better pricing than retail chains puts them at a disadvantage. That’s because then they can’t offer kirana stores, which procure inventory in bulk, a better deal.
There’s a reason why fast-moving consumer goods companies don’t yet offer cash-and-carry stores more lucrative terms. India’s retail industry, according to a report by Assocham and MRRSIndia.com, is expected to grow from $672 billion to $1.1 trillion by 2020. But organised retail, or sales through supermarkets and large-format stores, according to another study by Technopak Advisors, contributes only 9 percent. So, for the FMCG industry, their own distributor network contributes most of the sales.
Higher discounts to cash-and-carry stores will bring them on a par with distributors who still comprise 90 percent of the market, said Mayank Shah, category head at Parle Products Pvt. Ltd. [The company] doesn’t intend to disturb a set distribution ecosystem.”
Moreover, traditional distributors offer stock on credit while cash-and-carry stores need upfront payment.
Metro Cash & Carry, however, said the size of stock keeping units, or items at its stores, is different from the ones sold at hypermarkets. “Cash-and-carry outlets sell smaller units, typically sachets or low-priced products on which we offer heavy discounts,” according to Arvind Mediratta, managing director and chief executive officer at Metro Cash and Carry India. That’s what sells the most at mom-and-pop stores who buy smaller SKUs at bulk, he said, adding that such units are usually not found at hypermarkets in that quantity.
Hypermarkets, he said, are not impacting cash-and-carry business.
One reason for cash-and-carry stores not being able to drive deeper discounts from FMCG companies is that they are still a small part of India’s retail industry. The cash-and-carry format has been in existence for little over eight years, while hypermarkets have been around for at least two decades.
Metro and Walmart together have 50 large wholesale stores in India. By contrast, there are more than 500 big-format Reliance Retail, Big Bazaar, Hypercity and D-Mart outlets in India. Then there are other players like More and regional retailers with large stores. What helps them get deeper discounts from consumer goods companies are their higher volumes, said the chief financial officer of a retail chain who didn’t want to be identified.
Proximity Kills Differentiation
Unlike globally, where cash-and-carry stores are located on the outskirts of the city, in India, they are in close proximity of hypermarkets. That ensures direct competition for volumes. Local retailers have the option of either buying from cash-and-carry stores or hypermarkets in bulk.
Metro and Walmart look to counter that by offering value-added services. Metro provides doorstep delivery to mom-and-pop stores, Mediratta told BloombergQuint in September. It’s also offering credit cards to its clients to help them buy stock, and also their household products, on credit.
The German wholesaler also helps mom-and-pop design their outlets and display products to turn into modern trade stores. It started a pilot in Bengaluru and the service will be later extended to other states where it has stores. Walmart too offers a similar service called Mera Kirana.
Both Metro Cash & Carry and Walmart are optimistic about their wholesale business in India. That could pay off once the foreign direct investment norms are eased as they will have a supply-chain ready to expand.
It’s only a matter of time that more cash-and-carry stores open across the country, Prashant Agarwal, joint managing director of retail consultant Wazir Advisors, said. “Then they will be able to get deeper discounts and offer a better deal to their buyers as volumes emerge.”
Agreed Arvind Singhal, chairman of Technopak Advisors, stressing that the future of cash-and-carry format is not at risk. “Cash-and-carry outlets and hypermarkets address a very different set of customers and both will continue to co-exist.”
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