In the recently concluded Food Forum in Mumbai, one of the aspects that were discussed was whether modern retailers need to be treated differently as compared to the traditional channel by F&G/FMCG Manufacturers.“
Innovation was one of the aspects that was discussed by the various panellists present at the forum; and not just on product innovation by manufacturers, but innovation in terms of communication with customers and in promotions imperative for new categories to emerge and grow. As Kishore Biyani, founder and CEO of Future Group put in very succinctly, for any business to survive and grow, it has to be a win-win for both the retailer and manufacturer; business at the end of the day can only succeed if the productivity is good. Compared to local kirana stores, there is no doubt that modern retailers play a very significant role in launching new products in the market, in making new categories grow and in up-selling.
Sharing his views of whether modern retailers need better benefits from FMCG companies in comparison to traditional retailers, Thomas Varghese, CEO, Aditya Birla Retail Limited, says, “Modern Retailers do much more for the FMCG companies than just sell their products. The benefits that accrue are: Exposure to the entire range of products, tactile interaction with the products, ability to interact with the consumer at the point of sale, ability to influence thepurchase at the most important stage of the buying process. Also, from a distribution perspective, the FMCG manufacturer can supply directly to the modern retailers warehouse facility thus not incurring costs in the traditional distribution channels.”
“All these come at a higher operating costs for the modern retailer and hence the higher compensation by way of higher margins. Consumer promotions lend themselves to a better execution in a modern retailing environment where the customer is able to see the competing products and make purchase decisions. And at the end of the day, an FMCGmanufacturer will look at his ROI on investments in promotions,’ he Adds.
Varghese points out that the modern retail trade and the FMCG companies today in India are at very nascent stages of collaborative working. “FMCG companies spend millions of rupees on consumer research, understanding how the consumer is buying, what she is buying, when she is buying, what influences her buying behaviour and so on. The retailers, on the other hand, hold key consumer data in terms of actual buying behaviour as demonstrated in POS (point of sales) data. Thiscollaborative working between the two to understand the consumer can go a long way. On the commercial side, the FMCG companies must understand that until the time store throughputs justify the investments in stocks by the retailer, the pressure in credit days will exist.”
Viney Singh, managing director of Max Hypermarket India Pvt. Ltd agrees that modern retailers ought to get higher benefits. “Organised retailers such as Spar certainly have a higher cost structure compared to traditional grocery/kirana stores in order to offer customers a truly international and enjoyable shopping experience,” he notes. “This experience is built of the four pillars of Spar, which are: range, value, freshness and service. Vendors are normally always happy to support this experience either through special activities or some monetary compensation as they stand to gain significantly in the process. At the end of the day it all boils down to value addition. Any such initiative must be a win-win effort.”
Pinpointing the kind of differential treatment that FMCG companies need to give to modern trade, Singh further adds, “Any vendor, including FMCG companies, need to evaluate every channel and understand the role it plays for their product and accordingly devise promotional and channel strategies.”
On whether modern retailers need to be treated differently as compared to traditional retailers, especially regarding the much-debated issue of margins, Adityea Kapoor, general manager – modern trade & CSD, GlaxoSmithkline Consumer Healthcare Limited, says, “The Indian retail market is big and accommodates both the traditional retail format and modern trade very well. In a country as large as ours, the traditional formats will continue to dominate the retail scene in the near future. However, the fast growth of modern trade will see the share of the segment in the overall retail pie increasing as we move forward. At GlaxoSmithKline Consumer Healthcare (GSKCH) we work closely with both traditional and modern retail partners by aligning our initiatives with their requirements and plans. We understand the increasing importance of modern trade and have therefore put in place a cross-functional team to work closely with our retail partners.”
“We are constantly innovating, learning and introducing international best practices in order to build strong win-win partnerships with retailers. We – through studies to understand the shopper in this environment – are constantly developing our SKUs, products and activation strategies to deliver results in this channel.” “The Indian marketplace is seeing a rapid development of world class modern retailers – both multinational and aggressive local players; at GSKCH we believe in addressing their needs rather than just offering our product range.”
GSKCH’s innovative in-store promotions are classified in two parts: (1) Shopper promotions that are targeted at the person who is buying a product, not necessarily for his / her consumption (mothers shopping for their children usually fall under this bracket), and (2) Consumer promotions that focus on the actual consumer of the product. These promotion types are routed through either on-pack or cross promotion Mechanism.
“An on-pack promotion for consumers is getting a free gift with the product. For instance, a free pencil box with Horlicks,” says Kapoor, “Similarly, an on-pack promotion for shoppers includes value packs for the shopper to trade up to large packs. We also do cross promotions in-store for shoppers and consumers. For example, offering Sugar Free tablets free with Horlicks Lite, our specialist health drink for adults. We believe that for a promotion to be successful it should find relevance with theconsumer or the shopper basis the target audience.”
Referring to GSKCH’s exclusive initiatives with modern trade, Kapoor says, “Our recent Women’s Day special initiative at select modern retail outlets is one example.
We launched a month-long campaign across seven metros in March to salute the Indian woman in celebration of International Women’s Day. Focused on women’s health, this innovative in-store initiative, in association with our modern retail partners, highlights the importance of women’s health. Creative communication celebrating women was also extended to the men’s section as well, to remind them about the health of the special women in their lives.”
“We have invested significantly in understanding shopper needs and behaviour in the modern retail environment to define our SKU strategy in the categories we operate in. Using insights gathered we continually work with our modern trade partners on new product launches, right SKU strategies and other shopper centric initiatives. Based on our research we have understood that shoppers require value packs in our category. The recently launched 1kg pack of Chocolate Horlicks SKU is an example of meeting this shopper requirement,” he explains, illustrating a case in point of specific product pack sizes being especially introduced for modern trade.
B. V. K. Raju, partner, Q-Mart Enterprises, is in agreement that modern retailers should indeed get higher margins. He says, “The race to organise Indian retail has seen the emergence of different formats and large chains. The restrictions on FDI in India retail have prevented the entry of major international chains thereby giving a major fillip to Indian companies to establish their presence in retailing. However, the recent competitive and economic challenges have put a major strain on the entire Indian retailing framework. When we analyse Indian retailing in the this scenario, we realise that we have been growing too rapidly and too soon without giving importance to a few fundamental issues that will make or break us in the long run.”
“In every conference, every seminar, the common question asked is: ‘How many stores’? Were we ready for this kind of growth? Did we have the wherewithal to operate on these scales without understanding the Indian market? Are the existing retail margins sufficient to absorb the costs and growth?”
Raju notes that there is no question that the modern retail business is a much more expensive proposition than traditional retail, and therefore it is logical for modern retail to root for higher margins. “Modern retail operates over larger areas paying higher rents, higher inventory costs, very high start-up and fit out costs, and higher operating costs in terms of manpower, quality of service, etc. It provides much higher product visibility enabling the customer to look and feel the products and in the process induces impulse purchases. Manufacturers need to acknowledge that,” he adds.
“Some of the benefits that modern retail brings to the manufacturer and the industry can be broadly classified as: shift in buying habits – monthly stock up-purchases from supermarkets, inducing impulse purchases (thereby larger volumes, larger ticket size and higher product movement), super value/ bundled packs, larger packs, lower logistical and distribution costs to the manufacturer, better upselling opportunities, and higher product visibility. Point of purchase promotions, easier product trials, test marketing, communicating directly with end user, concept selling, selling premium products, enlarging product range and SKUs, and better technology innovation are some of the benefits unique to modern trade.”
The genesis of the frequent clashes over preferential treatment may lie in history of a power game. Traditionally, manufacturers, especially multinationals, have been enjoying higher operating margins and have dominated the Indian market. “They built very strong brands and created a seller’s market choosing to supply products that they wanted to. The fragmented nature of traditional retail pushed them to establish very strong distribution networks. However, product and technology innovation grew slowly,” Raju says.
The advent of modern retail is shifting the balance, albeit subtly at present. “Though the balance has not completely shifted in favour of modern retail, this will not remain so for long,” Raju says. “Larger format modern retail businesses will require larger product portfolios, better product innovation, better logistical support and newer categories to fill the large shelf space that they come with. Secondly, they would require better margins to mitigate the higher operating costs. Though these costs can be controlled to some extent with better systems and efficiencies, these alone will not suffice. And given the fact that India has a maximum retail price system, the retailer does not have the luxury of realising some of these costs from consumers. In fact, most modern retail sells products under MRP.”
While a few perks have been awarded to modern traders, they may not be enough, Raju says. “Though some momentum and progress has been made in this direction by some companies, it is still not enough. The system of modern trade supply, which essentially bypasses the regular distribution channels, has enabled manufacturers to pass on some cost benefits to modern retail.
However, the savings in costs are not passed on totally. Similarly, substantial savings in logistic costs that have been gained due to centralised supplies to larger stores also are not being passed on in full. This naturally causes heartburn among modern retailers, who are continuously battling higher costs in terms of rentals, power, salaries etc”.
“Modern retail opens up opportunities for exponentially increasing the number of SKUs to cater to growing consumer aspirations and the large shelf space availability. The natural fallout of this is quicker product response in terms of acceptance or rejection. Secondly directly addressing the customer on the shop floor with the product will result in substantial cost savings. These benefits cannot be derived from traditional retail and as such there is a marked difference that can be passed on to the modern retailer,” he adds.
Raju is in agreement with all modern retailers when he says that the new kids on the block deserve to be differentiated as it makes life much easier to the manufacturer in every which way. In this scenario, the only option is for the modern trade and manufacturers to work together in developing a mutually beneficial cost/margin structure. Both should understand each other’s position and arrive at a consensus.
“Confrontation cannot be the order of the day. It should be realised that the manufacturer is not selling to the retailer but through the retailer,” Raju snotes.