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BW Businessworld

Narrow Margins, Longer Cycles

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Discounted sales and the festival season may have boosted the unit sales of the Indian retail industry. However, retailers such as Pantaloon, Shoppers' Stop and Trent say the absolute value of sales has not really gone up. Discounted sales mean that retailers have lesser stock coming through from suppliers because the payment cycle has been going up from 40 days to 90 days (see ‘Finishing Touch'). This clearly signals that the retail industry is not out of the red yet. "The booming top line is actually not booming," says Pinakiranjan Mishra, partner for retail & consumer product service at Ernst & Young (EY). He says that even though the cash cycle could be improving because of festival sales, retailers could still delay payments to suppliers.

"We are now working with 500 suppliers to understand how one should manage stock and reduce inventory," says Govind Shirkhande, CEO of Shoppers' Stop. He says this partnership allows suppliers to understand the sales cycle and plan supplies accordingly. Sources in the industry say the credit period to suppliers has increased from 30 days three years ago, to 90 days recently. An EY report on working capital management says that manufacturers typically negotiate and agree on the terms of a commercial agreement with each retailer based on five key elements. The emphasis varies depending on the industry segment, the company's objectives and the nature of the relationship.

 These elements could be purchasing conditions such as price and volume, price adjustment conditions and rebates, discounts and other incentives; trade terms such as credit terms and cash discount; stock policies such as stock location, vendor-managed inventory policies and product return. One of the reasons why modern retailers find it hard to negotiate with large vendors is modern retail accounts for only 5 per cent of consumer goods sales. "If you look at the debtors of the larger FMCG (fast moving consumer goods) players, their debtors are very less. This means organised retail is still not a very big segment," says Ajay D'Souza, head of Crisil Research. He says the creditors' cycle could be high in the case of private label apparel and private label food products, where the retailer has the muscle power to extend the credit terms from the manufacturer. But analysts say that during the slowdown, vendors have instead chosen to reduce supplies to organised retail.

"We have a higher credit period with our suppliers, this allows us to manage our cash better," says Shirkhande. Even Croma, a subsidiary of Infiniti Retail of the Tata Group, has negotiated terms with vendors and is working on a partnership model with them. "We work with the vendors and use data on different geographies to plan store needs. It is easier to manage inventory and save cash," says Ajit Joshi, CEO of Croma. A similar trend is emerging in the FMCG segment, which will eventually allow modern retailers to manage their working capital cycle better, instead of sitting on a pile of inventory. Marico is also talking to retailers about sharing store-wise data to avoid stock outs. "We are talking to retailers about data sharing. It allows both parties to manage their working capital cycle," says B. Sridhar, head of sales at Marico. For now, though, most FMCG players say retailers delay payments. With heavily discounted festival sales, vendors will be made to wait for their payments to come through.

(This story was published in Businessworld Issue Dated 19-10-2009)