Govt of India has decided to allow 51 percent FDI in retail chains. This will certainly make the sector more attractive to foreign retailers who want a controlling stake in their Indian ventures. Retailers who are comfortable with ownership rather than franchises may look at the Indian market with greater interest.
Entry of large foreign retail chains like Wal-Mart will have profound effect not just on small retailers and Indian retail chains but also on business to business (b2b) trade. Introduction of b2b cash-and-carry outlets by Wal-Mart, Metro and possibly other retailers will bring significant changes in large and fragmented Indian supply chain. Middlemen like wholesalers and stockiest will increasingly be under pressure. Where does small and medium manufacturers/exporters stand in this changing scenario ?
What is Cash-and-Carry Scheme ?
Targeted at and open only to business customers - cash and carry scheme focuses on small-wholesale customers who buy in bulk and pay in cash. Unlike hypermarkets where any consumer can walk-in and buy goods, cash-and-carry outlets allow only authenticated bulk buyers to transact business. Medium-sized businesses such as retail stores, hotels, restaurants, caterers, exporters etc can buy from cash-and-carry outlets at prices much cheaper than market rate.
In its original form, owners of cash and carry outlets (i.e. large retail chains) buy from producers directly at very high volume, dispensing with middlemen like wholesalers and stockiest. They also establish their own brands - asking producers to manufacture as per their product and packaging specifications. Volume purchase and removal of middlemen result in substantial cost reduction - a part of which is passed on to b2b customers. So, b2b customers get products of assured quality throughout the year at less than market price.
How Does Cash-and-Carry Outlets Affect your Business ?
Large scale introduction of Cash-and-Carry outlets will definitely affect and influence various players in Indian b2b supply chain. While it may prove to be a boon for business buyers, manufacturers and producers such as small-scale units and agricultural producers' cooperatives which are not big or savvy enough to be able to dictate terms to established supply chains - it may adversely affect wholesalers and other middlemen.
De-layering of Indian distribution system may pose threat to middlemen, many of whom may be rendered redundant in the supply chain. Increase in competition and cost cutting will bring more efficiency in the market place - benefiting businesses.
Where does Small Scale Manufacturers and Exporters Stand ?
Though its too early to predict possible changes - large retail chains may bring new opportunities for Indian manufacturers and exporters. While small scale manufacturers may enter into collaboration with retails chains - allowing them the chance to join a modern procurement chain that thrives on efficient suppliers, it may have interesting influence on Indian exporters.
Fragmented and largely un-organized sourcing channels pose a formidable challenge to small and medium exporters in Indian sub continent. Some of the major hurdles in any export transaction are - lack of assured and uniform quality standard, uncertainty about round the year availability and wide fluctuation in market price. Exporters lose lucrative overseas orders because of deficiency in supply chains - factors completely out of their control. Organized supply chains such as Cash-and-Carry outlets may bring new opportunities for small business owners.
Exporters sourcing from organized channels such as Cash-and-Carry outlets will benefit from more predictability in business, reducing inventory levels and competitive price. The resultant cost benefit, if passed on to buyers, can make Indian exports that much competitive
Happy and Productive Surfing
Dr. Amit K Chatterjee
FAIDA - Newsletter on Business Opportunties from India and Abroad
Vol: 6, Issue 22
; February 17' 2006