The Hindu Business Line : Retail: Bonanza or trap?

THE story is told by the late Mr Prakash Tandon, former Chairman of Hindustan Lever, in his memoirs of Unilever considering company-owned retail shops taking control of their retail distribution in India back in the 1950s. After all, their brands dominated every housewife's grocery shopping, so why not reach her directly instead of through middlemen such as stockists and retailers? They would sell higher volumes — in addition, they could collar the additional profit margin earned by the trade as well.

A wise British director and old India hand, stepped in to quash the idea at once. "Do you really think you can store, distribute, finance the merchandise and collect the money economically, all in something under five per cent of the turnover and make a go of it?" he asked.

He pointed out the unique capability of the average bazaar trader of making do with very little, which no international firm could emulate, let alone better. The company eventually concluded after some debate that the existing arrangement worked well and needed no major intervention. How they must thank their lucky stars for it!

The fact is, few organised manufacturing companies anywhere in the world have made much headway with owning the distribution channel entirely. Why is this so? It is not only that they can never hope to match the lower wages and costs of operation of small businesses, but also that the latter's flexible, simple and non-bureaucratic ways, besides local knowledge of markets and customs, are inimitable.

What the big guns bring to the task are primarily the scale economies and larger scope of operations. They command discounted pricing in buying the merchandise as demonstrated already in India by the likes of Food World and Nilgiri's. They could specify the supplier's quality, and arrange for special inputs and raw materials, thereby supporting the special prices and widening the margins available to them, far beyond what the small store owner could do.

Where design and formulation are important, as in clothes and shoes, even production can be exclusive. This is the secret of the success of Wal-Mart, Marks & Spencer's and JC Penney and others of their kind. The arguments in favour of organised large-scale retailers are quite different from those dealing with the manufacturer running the outlets.

In fact, the history of marketing can be re-interpreted as the story of shifting balance of power amongst brand owner-manufacturers, wholesalers, and retailers. Branding started with the middleman identifying the quality and signalling reliability of what he sold. The company names still reflect the names of such original owners.

A John the cobbler or Bill the Butcher (or Lever the soap maker) would establish his firm starting with a high street shop in his native town and expand from there.

Eventually they took to own manufacturing and companies were named after them (be it Rolls-Royce or John Player's) and their sons. The retailing revolution of the latter half of the last century wrested the power back — not to a small family shop but to an organised company as sophisticated in its methods as the brand owner himself; and soon became brands in themselves.

Mass merchandising of today is merely an extension of the same process of sharing or competing for power. When the size of the chain is large enough, the local businessman becomes the franchisee owner of the chain of outlets; and the store brand is itself competition to the manufacturer.

The pendulum has swung much faster where widespread rising middle-class prosperity and suburban living have made self-service shopping the order of the day. Whether Indian retailing will go the same way is very doubtful given our very different demographic profile.

Our thinly spread market potential calls for new versions of mass retailing. It may well have to focus equally on low price bargains with good quality rather than upmarket, stylish shopping spaces everywhere. To assume that retailing developments India would go the US and Europe way, is to overlook a far more complex reality.

S. Ramachander

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