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BW Businessworld

Retailing It Right

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Is India finally ready for foreign direct investment (FDI) in retail? While the government is still perusing the pros and cons of allowing FDI in the sector, large Indian retail players are pulling up their socks. Last week, Reliance Retail poached two top executives, Rob Cissell and Shawn Gray, from Walmart China and appointed them as CEO and COO, respectively.

The appointments may be high profile, but will they improve the fortunes of Reliance Retail? One argument is that this could change the way the Mukesh Ambani-promoted company operates. In the past, under the leadership of the late Raghu Pillai, the company scaled up to 900 outlets across India, most of them supermarkets of about 3,000 sq. ft each in size. The model brought brand equity, but it spread itself too thin and margins were hurt.

So, what will Cissell and Gray bring to the table? Will they follow Bharti-Walmart, which is building its chain in India, or will they replicate the Chinese Walmart model? It will be difficult to implement the China model because it allows up to 100 per cent FDI in retail. Also, its supply chain is far more efficient than India's.

Reliance is likely to follow the Bharti-Walmart model, where large distribution centres (DCs) support cash-and-carry businesses and retail stores. In fact, Reliance already has plans for the cash-and-carry model, which is becoming a lucrative business for retail chains. It allows firms to aggregate farm and dairy products, and offer discounts for bulk purchases, which attract small businessmen. Reliance Retail is likely to start its cash-and-carry business in the south, where most of its outlets are located.

Reliance can learn a thing or two from Walmart, which is strong in technology and processes. Walmart uses its own software called Retail Link, which tracks orders from the shelf level to the purchase department in the DC on a real-time basis. This tells you what is sold and how much is on inventory. Reliance Retail, on the other hand, uses a mix of its own technology and other premium retail software.

In all probability, Reliance Retail's new honchos will try to standardise processes in the company and bring in a procedure to capture live sales data. However, this will not be easy, as integration of new technology will take a lot of time and investment. These are some pains Reliance Retail will have to go through if it has to turn profitable.

Private labels are an important factor in a retail chain's revenues — and its competitiveness. Walmart's private labels account for as much as 45 per cent of its global sales. Reliance already has a huge portfolio ranging from milk to staples to farm produce. What it could now do is reposition its own brands in its stores.

The Indian retail industry is now dominated by mom-n-pop stores, most of which are in residential areas and thrive on the ‘local' advantage. Large retail players who do not have local knowledge will need to depend on better pricing and excellent customer service. The weakest link in the retail chain is the supply side. Also, process management has been a big problem with Indian retailers and technology usage is limited.

Unless such systemic issues are settled, a mere change of guard might not be enough for Indian retailers, including Reliance Retail.

(This story was published in Businessworld Issue Dated 18-07-2011)