News: Retailers get down to basics for profits

(RTR 27/04/2007) Mumbai - At the entrance of Mumbai hypermarket Food Bazaar there is a sign: "Fresh fruits and vegetables at mandi (farmers' cooperative) prices. Do not buy from general store." It is not an empty promise. Food Bazaar, a part of Pantaloon Retail (India) Ltd., is matching prices by buying from farmers' cooperatives and wholesale markets, a model that new entrants are adopting as they rush to tap the growing market.

"Large retailers are disadvantaged at the front-end compared to small shops as they have higher rentals and overheads, so they have to drive profitability through the back-end," said Raman Mangalorkar, head of consumer and retail practice at AT Kearney. "Having an efficient way of sourcing, storing, moving and replenishing products is going to be very critical to profits."

Reliance Retail Ltd., a subsidiary of Reliance Industries, is investing $5.6 billion in stores, of which a fourth will be in its supply chain, while Bharti Retail Ltd. will spend $2.5 billion by 2015 and is firming up a venture with Wal-Mart Stores Inc. for back-end and cash-and-carry operations.

ITC Ltd., the top cigarette maker, has a network of "choupals", rural collection centres for grain, and is sourcing fruits and vegetables from farmers for its grocery stores. Already, small retailers, who control a lion's share of the market for food and groceries, are feeling the heat. "Earlier, people here would buy all their fruits from me, but now they come occasionally," said Heera, a fruit vendor who sits among piles of fruit on gunny sacks on the side of a busy lane.

Food and grocery makes up two-thirds of India's fragmented $300 billion retail market, which is expected to more than double by 2015. But a lion's share of the market is in the hands of small, informal owners like Heera, who says her earnings have fallen as the supermarkets cut their prices. Indeed, at Food Bazaar, mangoes are sold at 300 a dozen, the same price as in the Colaba market, where vendors have typically drawn buyers with cheaper prices than the supermarkets.

"It's cleaner and everything's packed nicely, so I don't even mind paying Rs 1-2 more here," said shopper Vrinda Dalal, as she handed beans to a Food Bazaar attendant to weigh and pack in a plastic bag in the air-conditioned store. Other retailers hope to lure shoppers like her.

Tata Chemicals Ltd. has a venture with Ireland's Total Produce Plc for selling fruits and vegetables, while the AV Birla Group recently bought regional supermarket chain Trinethra, and the Wadia group plans an entry.

Foreign multi-brand retailers are limited to cash-and-carry and licence or franchise operations now, and analysts say the food and grocery segment offers easy pickings for firms, including Tesco Plc and France's Carrefour who are trying to get a foothold in India.

An estimated 40 per cent of fresh produce in India is lost because of poor transport and storage infrastructure, with many retailers resorting to packing regular trucks with blocks of ice. "Sometimes, it is cheaper for farmers to let the produce rot in the fields rather than get it to the market," said S. Sivakumar, chief executive of ITC's agricultural business division, which advises farmers on soil testing, pest control and management.

"There has to be some intervention to make sure firms invest in the back-end and to prevent foreign firms from getting at the low-hanging retail fruit before meeting obligations," he said. Firms like Bharti, whose Field Fresh Foods, a venture with the Rothschild family for produce, and even fast-food giant McDonald's Corp., which sources lettuce and potatoes from contract farms, are already demonstrating greater efficiencies.

Mangalorkar estimates there could be a 30-50 per cent improvement in landed cost with an efficient supply chain, but warned it would be a drawn-out process. "We are talking about a complete transformation in the process from the seed to the spoon."