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Soaring inflation opens up new opportunities for big chains

Soaring inflation opens up new opportunities for big chains
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First Published: Fri, Apr 25 2008. 10 12 PM IST

Stability plank: A Subhiksha outlet in New Delhi. Organized retail chains say they can maintain stable food prices because they have contracts in place that enable them to source products at fixed pri
Stability plank: A Subhiksha outlet in New Delhi. Organized retail chains say they can maintain stable food prices because they have contracts in place that enable them to source products at fixed pri
Updated: Fri, Apr 25 2008. 10 12 PM IST
Mumbai: Rakesh Rane says he never spent lavishly or on leisure activities, but the recent price rise has made the Mumbai-based yoga teacher even more prudent in his spending. Rane says his weekly petrol bill has gone up Rs200 to Rs700, spending on vegetables has nearly doubled, and expenses on rice, pulses and wheat also increased.
Rane shifted from his local grocer to an outlet of Subhiksha, a store chain from Subhiksha Trading Services Pvt. Ltd; and Big Bazaar, a hypermarket chain from Pantaloon Retail India Ltd, because he believes the prices are lower there.
Stability plank: A Subhiksha outlet in New Delhi. Organized retail chains say they can maintain stable food prices because they have contracts in place that enable them to source products at fixed prices. (Photo: Harikrishna Katragadda/Mint)
Organized retailers are putting out more promotions, going further back in the supply chain or even squeezing margins to keep the customers coming even as they are singed by the price rise. While some retailers say they do not yet have the scale to control prices, they still look at the soaring inflation as an opportunity to acquire customers.
Prices for 30 essential commodities rose 5.27%, for the years ended March 2008, compared with 3.64% the previous year, according to government figures submitted in Parliament. The Food Price Index rose 7.26% for the year, denting household budgets.
“Inflation is an opportunity for organized retail,” says Damodar Mall, chief executive of innovation and incubation at Future Group, which owns Pantaloon. “When inflation forms the backdrop for my shopping, I will be more willing to go to a destination to get a better deal.”
Pantaloon is intensifying its move to tie up with oil mills, rice mills and other suppliers rather than wholesalers. This will help it procure from further back in the supply chain at lower prices.
Vishal Megamart, a discount retail chain from Vishal Retail Ltd, is trimming margins to 5- 7% on an average on food items where they are generally 5-25%, said a senior official, on condition of anonymity.
At Spencers, a supermarket and hypermarket chain from Spencers Retail Ltd, there are more promotions for essential products and more cross merchandising. For instance, one popular promotion involves free sugar with large purchases of detergent. “We are doing more promotions on food and vegetables, and staples because that drive footfalls,” says Sumantra Banerjee, managing director of Spencers. While this means they have to crunch margins, it drives more people to their stores.
The retailers say food prices stay relatively in place at their stores because they have contracts to source products at fixed prices. Almost 70% of Vishal’s food and fresh supplies come from 50 suppliers with whom prices are fixed for a year. “Unless prices are doubled or something, the supplier will continue to supply us on the same rate that is agreed upon earlier,” the Vishal executive said.
But some industry experts say organized retail here does not yet have the scale to control prices the way it can in some countries. “The reach of modern trade is limited and its impact will be limited,” says Arvind Singhal, chairman of Technopak Advisors, a retail consulting company. “If modern trade had a larger presence, it could have absorbed the rice rise to some extent.”
Some discount retailers say they already work at such slim margins that there is no scope to keep prices low. G. Kashinath, Subhiksha’s president for agriculture commodity and food sourcing, says if it sources sugar at Rs15 a kg, it will sell it for Rs16 or Rs17, leaving little room to crunch margins.
“We have to take a holistic view where we don’t charge a premium or undercut anyone,” says Banerjee. “This is a double-edged sword because if we do deep discounts, street vendors would protest immediately.”
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First Published: Fri, Apr 25 2008. 10 12 PM IST