Giant takes a wholesale bite


November 13, 2015

Rashmi Pratap, The Hindu Businessline

Mumbai, 13 November 2015

Chetan Sharma, the owner of Raj Rasoi food court in Agra, cannot stop gushing about the one-stop-shop from which he sources nearly everything needed for his restaurant — from the furniture and groceries to decorative pieces and cutlery. Shopping on alternate days, he saves up to ?3 lakh a month at the over 60,000-sqft Best Price, owned by the world’s largest retailer, Walmart.

In Andhra Pradesh, every Sunday evening, Sambasivarao visits the Best Price outlet located about 45 km from Vijayawada. It is here that he buys the home appliances, furniture pieces, confectionary, cereals and a range of other items that he stocks for sale at his Sri Krishna Best Sale supermarket. The advantage: huge savings in transportation costs and a range of products unmatched by the other wholesalers and dealers near him.

After waiting more than seven years for the elusive government nod for foreign direct investment (FDI) in retail, American giant Walmart is now focusing its energies on the likes of Sharma and Sambasivarao. It has found its mooring in the cash-and-carry wholesale format — where FDI up to 100 per cent is permitted.

Walmart’s target clients include kirana or mom-and-pop store owners, small traders, hoteliers and caterers in a wholesale market that is pegged at $300 billion.

Krish Iyer, who took over as President and CEO of Walmart India after the company called off its joint venture with Bharti Enterprises in late 2013, says, “Growth here (in India) is driven by domestic private consumption and not exports. With the current business model of cash-and-carry, where we sell to business members, we believe there is a great potential with the fairly low penetration of modern retail.”

India will buy

Globally, by 2020 the mom-and-pop-store business is expected to grow by $800 billion, of which $140 billion will be in India, according to industry estimates. “It is an attractive market. We have established a good business model and are happy with our current performance. That makes us bullish about investing further in India,” says Iyer.

He had to virtually rebuild Walmart India after the company was involved in a lobbying controversy, followed by massive staff exodus in 2012-13. “I think it wasn’t challenging (to get moving again), but we needed a focused approach… cash-and-carry was the logical choice.”

Efforts to grow the company’s customer base include a strong digital strategy. “I believe that a vast majority of sales even in brick-and-mortar stores is digitally influenced. We have rolled out a B2B (business-to-business) website where members can check the products or place orders on the Web or call us at the store and make enquires while placing an order.”

More interesting is the company’s hand holding strategy for store owners, which seems to be bringing in loyal customers. For Sambasivarao’s store, for instance, Walmart sales executives helped plan the layout, product category sequencing and even trained store employees on standards for display and audit. “Our business development associates go to shops and hotels to sign up new members,” says Iyer. Members are enrolled within a 20/40-km radius of each outlet to ensure that customers do not have to spend more than 30-40 minutes in commuting.

Moreover, small businesses like Sambasivarao’s are saving a lot of money by using Walmart’s transportation services. For each carton of products, Walmart charges ?11 for transportation, including loading and unloading. “Other distributors and wholesalers charge Rs. 35 per box,” says Sambasivarao. All he has to do is go to the Best Price outlet with a list of items. “The staff pack and ready the items in 25 minutes and I am out of the store in less than an hour. Moreover, the pricing is transparent,” he says.

Cost advantage

For hotelier Sharma, the biggest draw at Walmart is the availability of fresh fruits and vegetables at the most reasonable prices in Agra. “The prices are at least 15-35 per cent lower than market rates. Moreover, they have discounts and periodic promotional offers. Overall, I save Rs. 2.5 lakh a month. Plus, I don’t have to roam around Agra in search of quality products,” he says.

So, how is the retail giant able to offer this pricing advantage? By investing in and maintaining a robust supply chain, says Walmart India’s Vice-President and Head of Corporate Affairs, Rajneesh Kumar. “What works for us is the direct-to-store model. All the suppliers we work with, such as Nestle, Coke and even SMEs, supply directly to Walmart outlets. We undertake joint business planning to make sure that the fill rate [inventory’s ability to meet demand] of the product is good.”

Apart from an annual planning exercise, a Walmart team interacts regularly with the companies to iron out issues on a real-time basis. “Our software, Retail Link, provides suppliers with the information they require around replenishment,” says Kumar.

To strengthen its supply chain, Walmart is moving to procure directly from farmers in all the states where it operates. So it stocks apples from Himachal Pradesh, onions from Nashik, sweet lime from Telangana and a range of vegetables from Punjab and Uttar Pradesh.

“We source directly from farmers to get fresh produce at the right price, so that our members can pass on the savings to the end-customer,” Kumar says. In Hapur, Lucknow, Telangana and some areas of Maharashtra, Walmart is working with irrigation companies and introducing best agricultural practices to farmers. Yet, farmers are free to sell to other regions and retailers and Walmart does not enter into any exclusive tie-ups with them.

As it works overtime to get the backend right, Walmart’s store expansion rate has been slow — 21 stores across India. Iyer explains that the company requires about four acres to build a 50,000-60,000-sqft store. “That takes time. Acquiring real estate is a time-consuming activity in terms of legal requirements and due diligence,” he says. Walmart has leased most of its properties, but Iyer says the company is prepared to buy land also, if an opportunity arises.

Battle for every store

Devangshu Dutta, chief executive at consultancy firm Third Eyesight, says Walmart has a model that works, but not necessarily everywhere.

“It requires a certain type of real estate, which is not easily available in metros and big cities.” That perhaps explains why the giant is focusing on tier 2 and tier 3 cities.

“The penetration of mom-and-pop shops and traditional stores continues to be higher in tier 2 and tier 3 cities. They are attractive opportunities and make sense,” says Dutta.

Walmart aims to add at least 50 stores to its portfolio by 2020.

But can a new player compete effectively with the likes of Metro Cash and Carry, which has been around since 2003, or a local giant like Reliance? “Yes,” believes Iyer. “We have our own membership data and we know what a member would want in Punjab or UP or Telangana. By understanding these preferences and basing the decision on this customer data, we are able to meet the specific needs of buyers,” he says.

Dutta agrees: “At the end of it, retail is a very local business. And it is dependent on how well you address the customer segment in a given geography. Just being a large or established retailer nationally or globally is no guarantee for success. It ultimately comes down to fighting each store battle independently.”

And how well-armed Walmart is will become apparent in the next few years.

(Published in The Hindu Businessline.)