Indian retail scenario
The urban face of the Indian retail sector has been steadily evolving over the last decade. While the speed and amount of change have been debatable, the indications have been positive. The indicators are: the growth of organised retail (modern retail); evolution of retail consumers; and changes in policy and guidelines. When we talk about organised retail, the first question that arises is, who is an organised retailer? While it is difficult to give a precise definition, to put it in context, we could say that modern retailers are those who have registered for sales tax, income tax etc, employed staff legally in the sense that they get paid a monthly salary, have provident fund and so on, and those with exposure to best practices in the industry, including the use of technology in the various facets of retail operations such as billing, credit card acceptance, superior management practices, and technology at back end operations. They make efforts towards building the store as a brand through appropriate product display, store layout, design and ambience, and visual merchandising. Their store concept should be replicable and scalable.
Where is the growth of organised retail, headed?
The figures in the Table (Growth of retail sector) suggest that organised retail is definitely going to grow. What remains to be seen is how big it is going to grow and where it is going to stop? Will the growth of organised retail consume the kirana stores and the small food and grocery stores?
Table . Growth of retail sector.
| Empty Cell | 2010 (In Rs. Cr) | 2012 (In Rs. Cr) | Growth % | 2015 Estimated (in Rs. Cr) | Estimated growth % |
|---|---|---|---|---|---|
| Total retail | 21,19,634 | 28,50,055 | 16.0 | 47,80,318 | 18.8 |
| Organised retail | 1,38,961 | 2,23,572 | 26.8 | 4,87,423 | 29.7 |
| Share of organised retail | 6.6 | 7.8 | 10.2 |
India Fmcg Retail Report.
Growth of Indian retail
If we look at the retail pie (Table ) and compare the penetration of organised retail in clothing and apparel (34%), footwear (38%) and time wear (52%) with food and grocery (1%), it gives us a picture of where distribution is today, and the major reason for the lack of growth of organised retail in India. All the large format retailers today, such as Wal-Mart, Tesco, Carrefour and so on, are big because they are in food and grocery. The point to note here is that 70% of the total disposable income in India goes to food and grocery and that is where there is only 1% penetration of organised retail.
Region-wise Indian retail market.
| Empty Cell | All India (INR Cr) | North India (INR Cr) | East India (INR Cr) | West India (INR Cr) | South India (INR Cr) |
|---|---|---|---|---|---|
| Total retail market | 19,48,916 | 5,68,556 | 4,20,405 | 4,77,472 | 4,82,483 |
| Organised retail market | 1,26,680 | 41,582 | 11,363 | 35,320 | 38,414 |
| Organised retail market in % | 6.5 | 7.3 | 2.7 | 7.4 | 8 |
| Region wise share % (total market) | 100 | 29.2 | 21.6 | 24.5 | 24.8 |
| Region wise share % (organised market) | 100 | 32.8 | 9 | 27.9 | 30.3 |
India Retail Report.
Fmcg Distribution channels
Fast moving consumer goods distribution Channels consist of three categories of entities: agents, merchants, and facilitators.
Agents promote products and generate sales but do not themselves buy and stock products. Agents can be independent or they may be employees of the company.
Merchants such as retailers, wholesalers, and distributors buy, stock, and sell goods to others in the chain or to ultimate consumers. Merchants are usually independent but some companies may have their own wholesale trading units or retail outlets.
Facilitators such as logistics service providers, independent warehouses, carrying and forwarding agents, and transporters facilitate movement, storage, and delivery of products but are not involved in promoting or trading.
Distribution channel structure in India
What are the margins (%) given to distributors, wholesalers and retailers in India for FMCG?
Distributor Margin varies from 5% to 8% (MNCs) and 8% – 12% by Regional and local companies.
Retailer margins are 10% and above but including trade schemes goes above 15%.
Wholesaler margins differ based on saleability of the product.
There are wholesalers who makes sales with 1% margin (inspite whatever more we give) to rotate the money faster and beat his local competitors.
What is Fmcg distributor ROI?
The distribution channel structure in India is largely traditional and quite unique.
The major channel components are the retail network, wholesale network, and the logistics infrastructure.
The retail network in India consists of over nine million outlets.
These include traditional outlets like paan shops; grocers or kirana stores; general stores; specialised shops for footwear, clothing, jewellery, watches, mobile phones, and consumer durables; newer formats like supermarkets, hypermarkets, and online stores; and service outlets like fast food outlets, beauty parlours, fitness centres, coaching centres, and so on.
Traditional outlets are spread across urban and rural India but the newer formats are mostly located in urban areas.
The penetration of organised retail in India which is less than 8% is quite low even in comparison to other emerging markets.
The average retail outlet in India is very small in terms of area, number of employees, and number of stock keeping units (SKUs) stocked. Traditional retail in India offers consumers a number of advantages like convenience, home delivery, credit, and personalised service.
On the other hand, modern retail offers periodic promotional offers, lower prices, wider assortment, a better ambience, and higher quality brands.
The continued existence of traditional retail in India has been based on factors such as lower rentals, lower labour costs, credit from suppliers, low or no liability on taxes, and a legal framework which prevented foreign direct investment (FDI) in retailing until quite recently.
Traditional stores have managed to hold their own against organised Indian retailers so far by making some changes in their operating practices. It will be interesting to see how traditional Indian stores will fare in future after the entry of price aggressive international retailers.
Indian retail sector: SWOT analysis
How do you increase distributor ROI?
A SWOT analysis of the Indian retail sector reveals the strengths as the higher purchasing power of consumers, a working population of 117 million with median age 29, and low retail penetration which gives scope for penetration.
The weaknesses would be the political uncertainty in the country, the regulatory requirements, and the poor infrastructure and supply chain.
The opportunities include innovation in retail formats, retail analytics, in-store experience, technology usage in retail and financial models, e-tailing (the threat to our kirana/mom-and-pop stores is more from e-tailers rather than the large stores), superior customer focus, and change in regulatory scenario.
The threats would be the availability of land and real estate, and of skilled man power. As a contrary observation, some retailers want the attrition to be high to avoid providing their employees with a career path and higher salaries, and consider a low staff turnover as the reason for their lack of growth!
FDI in retail
[Cookie man at Lulu Mall Bengaluru]
Considering the question of FDI in retail, earlier it was up to 100% in cash and carry in wholesale trading and export trading, up to 51% in single brand retail with prior approval from government.
Hence, the coming of big retail giants will create new markets, increase penetration of retail across sectors, increase efficiency in the retail sector and the infrastructure of supply chain would improve.
Manufacturer – reseller/retailer relationship.
Currently, it is the “branded bulldozers” phase. The manufacturers are strong and resellers are weak.
We do not have any strong organised retailers, who at 7.8% of the retail market, do not have much bargaining power. Over a period of time, what is best for a mature retail industry, is the position of strategic partnerships, with both retailers and manufacturers being strong and seeing value in each other.
Marketing Return on Investment
World’s leading Fmcg brands, marketers,channel partners achieve exceptional return on investment.
What’s the voodoo?
Work with Fmcg distributors to prioritize their marketing spend across geographies and products, define the right messages for their customers, and find the optimal mix of vehicles among today’s wide variety of media types.
Better marketing return on investment (MROI)
The marketing opportunity. Global marketing spend exceeds $1 trillion, which makes it between 1 to 2 percent of global GDP. Marketing spend has been rising faster than the top line for several decades. In our experience, 15 to 20 percent of marketing spend can be released through better marketing return on investment (MROI) efforts, either for reinvestment for growth or return to bottom line. That’s up to $200 billion globally per year. See McKinsey on Marketing & Sales’ collection of articles on MROI.
The challenge of marketing. Marketers face many challenges today, including high growth expectations, cutthroat competition, and the digital and social-media revolution. Embracing MROI as a discipline can help build strong brands that generate improved returns.
Fmcg Industry core beliefs
- Better MROI starts with better objectives that are based in the consumer decision journey (CDJ). Better marketing objectives, in turn, shape better metrics.
- Brand messaging is one of the most important determinants of MROI success. It is more important to be clear on the most effective messaging attributes for the given brand objective than it is to have a precisely optimized marketing mix.
- Marketing-mix analytics that don’t make sense to the end business user are useless. Marketing-mix models should be informed by industry knowledge, built with transparent assumptions, and delivered in a way that makes sense intuitively to the business user.
- Marketing-investment decisions need to factor in both short- and long-term impact. Marketing mix models, for example, can capture only short-term impact and must be augmented with long-term (brand-building) impact estimates.
- Future potential is a critical input. Spend should be biased toward future growth, and not just optimized based on past performance.
- Ultimately, driving marketing spend effectiveness comes down to capabilities, processes, and talent. Invest in your organization (not just your data) to build and sustain excellence in MROI.
Fmcg Managements step wise approach
- optimized the marketing mix of an insurance carrier by geography, distribution channel, and marketing message
- optimized both online and offline investments of a telecom provider and measured the impact of earned social media on performance
- completed a multiphase commercial transformation enabled by advanced marketing-mix modeling (MMM), including a rapid diagnostic, proof of concept, and capability building for a direct-selling company
- created transparency on the MROI of multiple brands for the board of directors of a multibillion dollar food company, with results presented to the “street”
- increased revenue for a food retailer without increasing marketing spend by applying econometrics to understand impact across all key commercial levers
Formula for R.O.I
Return on Investment
Gross Profit – Expenses = Net Profit
=
Net Profit / Investment × 100%
Poor R.O.I = Less than 24%
Medium R.O.I = 24%
Healthy R.O.I = Above 24-36%
Things To be considered in
Investment
Paid-up-stocks
Closing Stocks
Claims
Credit in market
Damages
Goods in transit
Balance amount with companies
Expenses
Office Expenses
Salary to Staff salesman-delivery man & helper
Electric-Telephone-Internet Cost
Stationery
Maintenance & Vehicle Depreciation
Bank charges
Cash discounts
Godown Rent
Misc…. Exp
The return on investment calculation is simple as expained below.
ROI = ( Revenue – Expenses)/Investment
Net Income = Revenue – Expenses.
Revenue : Its a fix margin which is given on the total purchase for the month. For e.g. is the distributor margin is 5% then on purchase of 1 CR it will be 5 lacs for the month.
Expenses : It includes the expenses occurred for the business on monthly basis.
- Salary of sales man, vehicle driver, vehicle helper, loaders, computer operator, go down staff.
- Vehicle operating cost monthly (if its owned vehicle then fuel cost will be part of of expenses, cost of the depreciated cost of vehicle will be part of investment, if its market hired vehicle then fuel & hiring cost will be part of expenses).
- Godown rent, electricity bill, stationery expenses, telephone bill, internet charges, any other administration expenses.
- Any interest on borrowed capital will be part of expenses but such capital will not be part of investment, any cash discount being given to wholesalers.
Investment : This typically includes the stock maintained in number of days( for e.g. stock holding is equal to 7 days of sales), credit given in market in number of days ( for e.g. 15 days credit, it means that credit is equal to 15 days worth of sales in the month), investment in claims which has to be reimbursed by the company ( it will be typically 5% of the monthly revenue).
Now for e.g. if the net income is 2 lacs on a monthly business of 100 lacs (1 cr) then the monthly ROI is 2%, which will translate into annual ROI if 24%. ( Annual ROI is 12* monthly net income/Investment). The investment will remain fix each month so its a fix cost which will not change. Generally a good distributor who is hardworking, fully involved in business will make 2% monthly.
Anything above 20% is very healthy ROI keeping in mind the kind of returns you get from bank on FD will not be more than 8%.
The Indian retail market is predominantly unorganized as organized retail just accounts for close to 10% of country’s annual retail business. All the major industries like FMCG, Pharma, Building material, Plywood, Sanitaryware, Tyres etc. are primarily unorganized and require state or region level distributors to penetrate their products, given the way the markets are structured and operated.
This coupled with high competition intensity in these industries, makes it extremely important for manufacturers or brands to ensure satisfaction of their distributor network.
The following are the key factors that affect distributor satisfaction:
ROI & Market Support: For majority of distributors, return on investment is the sole defining factor of their intent to continue with a brand’s distribution.
However, return of investment does not come overnight and is a factor which is nurtured over time. A brand’s involvement with the distributor to grow it and the market support provided is highly valued by distributors. The market support is usually in terms of:
Support towards key accounts, high-take off point of sales, converting competition outlets
- Increasing infrastructure like cold storage capacity, display shelves, point-of-sale material
- Help by brand in growing distributor’s business to uncharted territories
- Support on legal issues
- Ease of ordering, accuracy of order delivered
- Booking to delivery cycle
- Timeliness & accuracy of products delivered
- Ease of Quality of service by transporters
- Support by logistics in resolving issues
- Timely & clear communication of policies
- Process of raising & processing claims, communication on deduction
- Monthly account statement, redemption of promotions, credit policy
- Responsiveness by sales, finance and logistics in resolving issues
- Ease of access to company managers
- Ease of registering complaints
- Timeliness of addressing concerns
- Frequency of visit by on-ground sales force
- Sales planning, financial controls, managing external environment
- Cost management, Cost – service optimization
- Vehicle, warehouse planning and storage practices
The above key drivers can lead to highly satisfied distributors who would intend to have a long-term association as well as would be likely to recommend the brand to other distributors.
Assume FMCG company gives margin of 10 % as gross margin .
Distributor has only one product. Applicable only all transactions happens in DD and NEFT no credit is involved.
Investment — Stock investment+ Closing Stock ( lying in god-own)+ stock in transist+ Claims from the company
Fixed Expenses – Rent + Wages + Auditor fee Etc ( RS 10000)—A
Variable Expenses -diesel + EB +VAT + miscellaneous ( Rs 15000)—-B
Suppose distributor does Business of Rs 4,00,000 as turnover
10 % margin Comes to Rs .40000
so 40000-expenses (25000)(A+B)= Rs 15000 is the net profit
If Distributor had to invest Rs 300000 as a initial investment
ROI=== Netprofit/ Total investment===>15000/300000====>5 % Per month
When you calculate for the whole year 5 % * 12 = 60 % ROI per year
Predominantly FMCG Companies would ideally give 36% – 40 % as ROI Per year
How to calculate Return on investment (ROI) of distributor in FMCG ?
As a smart manager, you need to evaluate their business using ROI calculation.
How is ROI calculated for distributor in FMCG?
Calculation of ROI is always an eye-opener for distributors, it helps him/her to understand what are the improvement areas which can increase his/her ROI.
Usually, company ensures monthly ROI between 8-15 % depending upon the risk and viability. If ROI is low, distributor will quit and if ROI is high, distributor will pose a problem of undercutting in the market
Basic equation of ROI is simple: Return / Investment
Earning = Margin earned from selling (If a company gives 5% margin, then 100000 sales = 5000 earning)
Expense = Direct + Indirect expenses
Let us understand expense in more details:
E.g.
The Average stock in the warehouse (Mean or weekly average can be taken for accuracy).
Outstanding dues from the market.
Pending claims from the company.
Security deposit (Companies that provide interest on SD can exclude these from the calculation)
Calculation example for FMCG company “Himalaya Foods”:
Mr. Bharat has employed 5 salesmen at 15000/- each and 2 back-office clerks at 12000/- each.
Mr Bharat pays 50,000/- rent for warehouse and other utility costs around 8,000/-.
Calculate India Inc corporation’s ROI, if “Himalaya Foods” gives a margin of 10%.
Data to Calculate
The Margin of Himalaya Foods = 10%
Average stock of Himalaya Foods at warehouse or Days of stock kept at the warehouse = 10 Lacs
Pending claim/incentive from Himalaya Foods = 10,000 /-
Outstanding (pending payment from retailers) from market = 5,00,000 /-
(Note: 20 Lacs = 20% of 1 Cr total business of Star Sales given in the problem statement. India Inc has more than one company’s work that’s why the resources will be distributed among them proportionally)
= 20% of ( (5×15000) + (2×12000) + 8000 + 50000 ) + Fuel Cost
= 31400 + Fuel Cost = 41400 + 40000 (Assume 2% for fuel cost) = 71400
= 10,00,000 + 10,000 + 5,00,000 =15,10,000
= (200000-71400)/1510000 = 8.5 %
2. Outstanding (pending payment from retailers) from Market trend (If it is increasing constantly, it is a very bad sign)
3. Stock loss due to expiry or damage in the warehouse (It is considered as added cost)
4. Legal cost due to govt. rules and penalty during transportation
5. Depreciation of utility such as Van, Computer, etc.
6. Credit days in the market plays a pivotal role. Few companies give goods on credit to distributor which distributor pass on as per market norms. The credit days provided by company minus credit days provided by distributor in market changes the average stock value.
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