Modern Food Retail: A tough balancing act


July 20, 2009

By Diwakar Kumar

20, July 2009

The primary challenge in food retail, no doubt, is its supply chain, which is making things difficult for retailers and food processors to procure quality produce at competitive costs directly from farmers in India. Last year at the India Retail Forum held in Mumbai, this prime challenge was centrestage for retailers to sidestep efficiency bottlenecks of the modern marketplace. The Indian supply chain for fresh and processed food is extremely poor and characterised by panoptic wastage and poor handling. A food retailer’s supply chain must be short and tightened by professionally-drawn efficient practices to avoid long chain of products from farm to fork, failure of which costs a retailer not just efficiency and just-in-time inventory control, but also results in a higher cost-of-operations burden.

Last week, we posted an open question for our audience to poll on, on our sister website — Food retailers should adopt the following strategy to stay out of financial trouble in a slump: 1. Cut costs, 2. Increase revenue, 3. Combination of the two. Over 19.05% of the respondents supported cost cutting, 33.33% were in favour of increasing revenues and 47.62% polled for a combination of the two strategies.

Food safety and security are essential concerns for grocery retailers of all sizes. But the main challenge lies in boosting revenue, even as the cost of operations rise and sales appear to be slowing. A good retailer respects the value of always being in-stock, which in turn depends on highly efficient supply chain, inventory management and demand forecasting. In many cases, maximising square foot returns can entail additional spends – on upgraded cold chain systems, technology-enabled SCM, shopper data mining or hosting promotional events in alliance with suppliers, among on others.

Sunil Sanklecha, managing partner of the Chennai-based supermarket chain Nuts ‘n’ Spices, points out that every penny a retailer spends is out of profits, but every penny of the revenue is not profit. Cutting cost while simultaneously increasing the revenue is the mantra of any business model. "To increase the revenue is every businessman’s challenge; retailers must rework their strategies very frequently as today’s strategy may not work after one year. One has to constantly work on strategising the business model in alignment with market shifts," he suggests.

He further adds, "We must also understand that cost cutting does not work everywhere; cutting down on the basic infrastructure and basic customer services is a no-no. We need to cut costs only in the areas where the input is not productive."

Devangshu Dutta, chief executive of Third Eyesight points out that in many cases, business projections are also unrealistically high; there are locations where the expected change-over from the kirana to modern retail has been over-estimated, and the business has been modelled with costs that are in line with the over-expectation of revenue. "Rather than trying to fit the world to our business model, we need to fit the business model to the real world that exists," he says.