Walmart: Back To The Front


December 11, 2010

Business World,11 Dec 2010

Vishal Krishna

Sundar Ramamoorthy, managing director of the Rs 36-crore Nitsun Garments in Tirupur, knows precisely how fast his “George” brand of T-shirts is moving in the five Bharti Walmart Best Price cash-and-carry stores and the 111 Bharti Easy Day stores on any given day. He only has to log on to Retail Link, Walmart’s proprietory software linking up vendors with its stores (and those of Bharti’s Easy Day stores) to find that out. As one of Bharti Walmart’s 2,000-odd approved suppliers, Ramamoorthy has been given his own log in id and password for Retail Link, and checks not only how goods are moving in particular stores, based on five days’ sales data for his product, but also other things such as payment schedules. This is to help him plan his production schedule and match despatches with Walmart’s needs.

Meanwhile, Bharti Walmart’s logistics vendor is slowly getting used to the concept of “appointments”. That means the retailer’s warehouses in Banur in Punjab and Palwal in Haryana will accept shipments from specific manufacturers only on specific dates and times, all of which are frozen in advance. The suppliers to the retailer adhere to exact schedules and they have allotted spaces in warehouses. The warehouses, in turn, log on to the Walmart network to check replenishment schedules of the five cash-and-carry stores and the 111 Easy Day stores. By keeping track of the data, the warehouses ensure delivery is never in excess of demand, and that no inventory is piled up. The trucks leaving the warehouse are coded and sealed and can be opened by only the store managers — a first in Indian retail.

“We want to be ready when FDI opens up; it will allow us to scale up front-end operations,” explains Raj Jain, CEO of Bharti-Walmart Best Price Cash-n-Carry, and the man in charge of putting in place Walmart’s supply chain systems and procedures in India. “We know the importance of technology,” says Rajan Mittal, chairman, Bharti-Walmart. Two years after it entered India, Walmart works feverishly to perfect its back-end systems, even while it waits and waits for FDI in retail to be relaxed so that it can open its own stores and sell directly to the consumer. For now, rules allow Walmart only to operate in the cash-and-carry segment. This is not something Walmart considers its core business globally. In every other country it operates in, Walmart sells directly to consumers.

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Walmart's India presence through its Cash n Carry operations WALMART’S EXPANSION PLANS

Investing more than Rs 500 crore for cash and carry business

To open 10 more cash and carry stores Bharti to invest Rs 9,000 crore for a total of 140 front-end stores

Retail Link, proprietary software, to be shared with all suppliers

To build an automated 400,000 sq. ft warehouse in two years

To make Indian suppliers globally compliant in the same period

Of its five cash-and-carry stores, three are in Punjab, while Rajasthan and Madhya Pradesh have one each. It plans to invest Rs 500 crore more in the next five years to open 12 similar stores by 2015 — if the retail FDI rules are not changed that is. Meanwhile, partner Bharti, whose Easy Day stores are spread mostly in six north Indian states, is investing Rs 9,000 crore, and sources say it will set up 200 more stores by 2015. Easy Day stores cannot account for more than 25 per cent of Walmart’s India turnover currently, to comply with cash-and-carry rules.

But in a way, the cash-and-carry business allows Walmart to get its systems in place to conquer the market when it is allowed full freedom. Walmart’s strength in the US, and now globally, has been its famed supply chain management systems that allows it to purchase goods and sell it to the consumer at prices lower than its rivals can. It has perfected a system that grinds its opponents to dust. It has consistently worked on processes of its vendors, while investing heavily in technology to maintain perfectly balanced inventory, good quality at the lowest possible prices. It plans to do the same in India.

The problem that Walmart faces here is it has to train vendors both to maintain quality as well as follow its processes. This is difficult as most other organised retailers do not follow such systems. Most retailers, sparing Shopper’s Stop, don’t share real time sales trends with vendors. Big home grown retailers are chary of sharing much data with their suppliers. Neither do they believe in interfering or working on the vendor’s own processes as long as the quality is acceptable and the price is right. Walmart believes in doing both. It insists on studying vendor’s processes to see how quality can be improved, while squeezing out wastages and bringing down costs so that it can buy at lower prices.

Bharti’s front-end Easy Day stores are integrated with Walmart’s Retail Link and each warehouse knows what has to be supplied at the store back end level. The category level supplies are based on a real time capture of five-day-average sales data. The data reaches the supplier and the warehouse through the software. “This allows us to track almost everything in the store and cut inventory wastage,” says Andrew Levermore, CEO of Easy Day. The benefit Walmart offers its vendors — many of who are small-time entrepreneurs until they tie up with Walmart — is big volumes and access to markets they would otherwise not be able to reach.

“Earlier I had a market only in Punjab. Now, I can distribute my products to the entire northern region thanks to Walmart,” says Rajan Arora, managing director of A-Plus, an aggregator and supplier of pulses and wheat. This Rs 45- crore firm draws 10 per cent of its net profits from Best Price Cash-n-Carry. Walmart sources say this supplier would be their preferred one in the north as the economies of scale made sense for him to be price competitive in the region.

There are others whom Walmart allows to supply across the country. For example, take Nigger Agro, the Rs 54-crore firm that makes juices and sauces. “I have signed an agreement with Walmart for supplies worth Rs 25 lakh a month,” says Satbeer Nigger, managing director of Nigger Agro. He adds Walmart allowed his firm’s name to be branded on the packaging although it was a private label. This allowed him to do business with other retailers.

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While it demands low prices from its vendors, Walmart ensures that they are paid on the dot so that their cash flows are not affected. This is a big lure for many vendors who had dealt with retailers demanding long credit cycles, and even then don’t pay in time. “Walmart is big in China, and we are building our base here; there is no reason to delay payments when they are part of our system,” says Jain of Bharti-Walmart. “I supply my own brand of noodles to several others. I have not had payment issues with Walmart,” says Ankur Malhotra, managing director of the Rs 60-lakh Nikky Traders.

But the biggest draw to become a supplier for Walmart is that if a vendor does exceptionally well, he can hope to supply to even global Walmart stores. These are the suppliers that Walmart considers the very best in class. Amit Goradia, managing director of the Rs 200-crore Jewel Consumer Care, is one such vendor. He was given the onerous task of making toothbrushes for Walmart in the US. Its private label ‘Equate’ was something that Goradia’s firm had to work upon quickly. The company now gets 20 per cent of its sales from Walmart. “I had started the toothbrush business 20 years ago to keep my wife busy. Now it has grown big thanks to us meeting the compliance requirements of Walmart,” says Goradia.

On a similar vein, Seetu Sewani of the Rs 10-crore Nitai Clothing says she learnt how to cut wastage to create value from Walmart. “I was designing clothes for a long time and I didn’t know I was wasting garment,” says Sewani. After saving more garment from tailoring, she was able to deliver more and increase margins. She will soon be supplying to the UK’s Asda stores, which Walmart bought a decade ago. “It is all about compliance when it comes to Walmart,” says Chandan Vij, managing director of the Rs 100-crore Harisons and Harlaj in Panipat. Being a veteran supplier of Walmart for the past 25 years, he supplies home-furnishing textile through Bharti-Walmart in India. “We are extremely picky about whom we choose as our vendor,” says Jain. “But once a vendor is approved, he gets a good deal.” Vendors whom BW met concur the difference in Walmart’s treatment.

So far, Walmart has only managed to test its supply chain systems in a fairly limited area — and with largely non-perishable goods. All its cash-and-carry stores are in northern states; the Easy Day stores are also in Delhi, Uttar Pradesh and Haryana. Its first store in the south will open soon in Mysore, and then it can test how well its supply chain works when stretched across the country.

The other hurdle lies in fresh fruits and vegetables, which form 30 per cent of Walmart’s turnover (only in cash and carry) here. It works with 600 farmers in Punjab to source vegetables and fruit for the cash and carry and Bharti-owned stores. Though Walmart works with farmers, Indian laws do not allow it to engage in large scale contract farming as it does, say, in the US. This could prove troublesome once laws allow it to go straight to the consumer. So far, the segment has been the Achilles heel of many retailers, including Reliance Retail.

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The Edge, And The Challenges

Should Walmart’s slow but methodical progress worry home-grown retail majors such as Pantaloons, Aditya Birla Retail, Reliance Retail and RPG Retail? It would seem ridiculous. After all, lobbying as well as political sentiments have prevented retail from fully opening up to FDI. Global giants such as Walmart and Carrefour can only operate in the cash-and-carry segment here. Also important is the fact that Indian retailers have built significant operations, while Walmart’s presence is still small in the country.

Scope for growth of modern retail in India

But a few analysts feel home-grown chains have spent much time in getting their front end operations correct and in building brands, but they have neglected building supply chain systems that can stand the onslaught of Walmart. Kishore Biyani’s Pantaloons, for example, has a bigger vendor base — over 3,000. But it has not integrated them with its own sales capture data. Even though it has its own logistics company, Future Logistics, analysts feel it lacks the sophistication of Walmart’s logistics.

Biyani is yet to integrate his 22 warehouses, vendors and the 1,000-plus stores in one seamless network. Biyani refused to comment for this story, though sources say his possible tie up with French retail chain Carrefour could see the Future group adopt similar strategies.

“Indian retailers focus on reconciliation of stock and don’t let us know how much is the actual demand,” says a supplier. Reconciliation of stock in retail means that retailers do not know how much should be supplied to each front-end store. Orders are based on consolidation of all stores combined. It is ordered by a central team sitting out of corporate offices. Analysts say some Indian retailers order more and send back excess stock. The supplier then has to bear the brunt for inventory.

“Retail business in India is complex due to diverse consumer tastes that not only vary from one state to the other, but also within a state,” says Pravin Adik, senior analyst of global retail at Data Monitor. He says technology and certain other practices help Walmart boost efficiency. The processes include automated distribution, computerised inventory systems, sophisticated barcode technology, hand-held computers, cross-docking, significant customer ties, handing over benefits to customers through lower prices and providing choice of products.

The other chain that does supplier management is Shoppers Stop, where store sales data are captured with vendors so that they know what to order and when. “This brought us out of the bad spell in 2008. Investment in our own technology has helped us build the business to what it is today,” says Govind Shirkande, CEO. He adds the firm’s customer loyalty programme can study two million members.

Analysts say Tesco, which has a tie up with Tata’s Star Bazaar, is already working on a plan to handhold vendors and integrate stores. Tesco’s first cash-and-carry will hit India early next year. Large retailers such as Spencer’s and Aditya Birla More too have access to warehouses and work with farmers, but they focus on building the front-end side of the business. The little known Namdhari Fresh, a seeds firm in Bangalore, has been able to integrate the entire supply chain too. It owns more than 300 acre farmland and has three cold rooms. But it works with retaliers in the UK to supply baby corn, chillis and red peppers. The group is quiet in India, with some 15 stores around Bangalore; 30 per cent of its Rs 200-crore turnover comes from retail.

An Uneasy Future For All
About four years ago, several analyst reports called for a coherent effort to cut costs because of a multiple supply chain in India. “There are distributors and sub distributors in India who add to the cost; cash-n-carries and retailers will eventually bypass them and offer discounts to consumers,” says Pinaki Ranjan Mishra, national leader of consumer practice at E&Y. He adds that Indian retailers have focused on building the front-end brand because of India’s supply-side problems. It is a very different business model, which has its merits, he notes. Rightly so, as Indian retailers could not work with farmers and the primary driver of the retail business for attracting customers to the store was food.

Constraints such as corporate houses not being allowed to hold more than 11 acres of farmland, being disallowed to contract with farmers in some states was too hard to crack. Even if some got permission, they have to pay a mandi cess of 4-5 per cent of the cost of the total produce sourced. Now, that is why Walmart has focused itself to working with 600 farmers in Punjab only and not in other states, where the government encourages cash-n-carries.

What does this mean for foreign retailers, even if FDI opened up? Walmart will still have to contend with the Agriculture Produce Marketing Committee (APMC) Act not being amended in each state. So, its front-end stores will still have to source from mandis and will not have an edge over kiranas to mark down prices. Also the APMC Act specifies the rules and regulations for contract farming and has been the trump card of chief ministers to win elections in a bad year.

Analysts say much of the complexities are exogenous, which retailers can’t control directly. “The remedy is to plan, set up and manage supply chain, distribution and logistics efficiently to cut operational costs, which will give them control over margins in the short term,” says Devangshu Dutta, CEO of Third Eyesight. “They have to adopt strategies to build close ties with customers and position themselves well in the demanding and price sensitive market.”

Globally, Walmart believes in the supply side of the story to be a winner in the long run. Analysts add that there needs to be a convergence of the back end and the store front as consumption would be large over the next decade. “FMCG firms have built the supply chain in India through the cluster-based approach. They tied up with vendors on the supply side and the wholesale side in every state,” says Sanjay Badhe, a retail consultant. Maybe Indian retail could have lost less money if such an approach was consistent. Indian retailers have got it right with products, but they have not been able to understand technology to map customers and manage inventory. Reliance Retail, with more than 900 stores, got it right in categories such as milk (longer shelf life), but failed in fruit and vegetable. Spencer’s got the customer segmentation right, but failed to generate sales as the 3,000-sq. ft super market stores could never compete with kirana stores. Now, it is down to 250-odd stores; it had shut down 200 stores. Then, Aditya Birla’s More too shut down 100 unviable stores and opened another 100 quickly. With 630-odd stores, it has stopped expanding and is now increasing vendor base from 45 currently to 100 for its private label.

Of course, the retail industry in India is still a work-in-progress. Walmart is pursuing one end of the Indian retail puzzle, while most Indian retailers are focusing on the other end. The great battle will start when the FDI rules are finally relaxed. Till then, Walmart is content building up its backend and perfecting its systems.

‘Modern Retail Will Not Kill Kiranas’

Bharti Group believes retail could be a game changer for India only if foreign direct investment kicks in. Bharti-Walmart chairman Rajan Mittal speaks to Vishal Krishna.

You connect back end and front end with technology. It is uncommon. How did it happen?
When we tied up with Walmart, our goal was to learn from them, as retailing is their life. Technology is important; it tells you what is really happening in the store. Retail is a business of thin margins and you should know about the costs incurred. Walmart’s motto is to “save money – change lives”. And that is possible with understanding customer needs through technology. From our telecom experience, we understand that the customer is very price sensitive, and with our partners in retail we hope to understand how we can do it in retail.

FDI in retail is yet to happen completely. What are the losses from the delay?
You cannot build supply chains overnight, it will take five years (to build it) and five more years to perfect it. At least 60 per cent of the logistics in developed countries is operated by third partiesa for retail. Here, large logistics companies will not operate as there is no scale. We talk about food shortage and wastage in our country; this can all change when FDI opens up. Retail will create jobs at every level — for high school drop-outs and also at management levels. The government should look at the debate differently. Modern retail will not kill the kiranas. In developing economies such as Brazil where they opened up to FDI 20 years ago, modern retail is only 20 per cent now. FDI makes the chain efficient and will benefit the whole ecosystem.

Will the Agriculture Produce Marketing Committee (APMC) Act impact retail in India?
States in our country should be progressive and must understand that agricultural needs ideas now more than ever. Gujarat and Punjab have been proactive in allowing corporate farming or even contract farming for large scale efficiencies in making the land yield better quality produce. So APMC Acts should not become impediments to retail or any industry that wants to work on large scale farming that will benefit the economy.

How do you see modern retail pan out in the country?
We are a young industry, and we need more people in this market to become large retail companies. It is not about one player changing retail. This is a national cause, modern retail will benefit all in the long run.

This article originally appeared in Businessworld, (Issue Dated 20 Dec 2010.)