After cutting them out, big retail teams up with middlemen

After cutting them out, big retail teams up with middlemen
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First Published: Sat, Jan 26 2008. 01 00 AM IST

Fresh approach: From being a wholesaler, Shivaji Dhembre (front) has moved to managing fresh produce sections at Big Bazaar outlets. (Kedar Bhat / Mint)
Fresh approach: From being a wholesaler, Shivaji Dhembre (front) has moved to managing fresh produce sections at Big Bazaar outlets. (Kedar Bhat / Mint)
Updated: Sat, Jan 26 2008. 01 00 AM IST
Once a small wholesaler to the legions of pushcart vendors in Mumbai, Shivaji Dhembre is today part of the modern retail phenomenon that is sweeping across India. Dhembre manages sections that sell fresh produce in 10 supermarkets and hypermarkets of Pantaloon Retail (India) Ltd—India’s largest listed retailer has outsourced this function to him.
Similarly, tea trader Ketan Desai sells more than a dozen variants of loose tea through sales counters in 22 of Pantaloon’s Big Bazaar hypermarkets and Food Bazaar supermarkets in Kolkata and other eastern ­cities.
As organized retail starts to establish itself in India, and several deep-pocketed modern retailers look to get rid of the layers of intermediaries in the country’s supply chain, many of them are outsourcing parts of their operations to these middlemen. The retailers hope to gain from the expertise of the intermediaries. And middlemen are only too happy to do this because it gives them a part to play in the organized retail business.
“The logic is clear that if you want to grow fast, then partnering with small players (firms) that are driven by entrepreneurs is a good way,” says Rajan Malhotra, chief executive of Big Bazaar. “Some of the businesses are best left to the small players…as an organization we will take a longer time in developing expertise (in these areas).”
Fresh approach: From being a wholesaler, Shivaji Dhembre (front) has moved to managing fresh produce sections at Big Bazaar outlets. (Kedar Bhat / Mint)
Malhotra says the hypermarket chain outsources the management of the florist, optical store, photoshop, fashion-jewellery counter, among others, at its stores to companies and entrepreneurs through a revenue-sharing model.
Based on this model, Desai and his team of more than two dozen people manage the loose tea business in Big Bazaar outlets in eastern cities and pay some “commissions” on the total sales revenue to Pantaloon.
“Tea is a complex category,” says Desai. “You have to manage the quality, need tea-tasters and it’s a small category for Pantaloon to justify a team.”
Desai says he is also in talks with Aditya Birla Retail Ltd to manage the tea counter in the company’s upcoming hypermarket in Vadodara. A senior manger for Aditya Birla confirmed that the company is in a dialogue with Desai for a similar arrangement.
Generally, organized retailers blame the involvement of the middlemen, such as Dhembre, in the supply chain for increasing the prices of goods without adding much value to them. That’s the way intermediaries have been operating in India for centuries—making money between farmers and manufacturers on the one side and the small retailers on the other.
A recent report by audit and consulting firm Ernst and Young says India has six-seven intermediaries in the fresh produce supply chain compared with two-three in developed countries. These intermediaries “play a vital role in linking farmers with consumers in the traditional supply chain, but their inefficiencies raise costs by up to 3.5 times of the farm-gate (that paid to the farmer) price”, the report said.
However, with the advent of modern retailers, many intermediaries say their business has been affected in recent years because these companies negotiate better prices directly with manufacturers and producers, and can afford to sell products cheaper compared with traditional stores, who mainly buy through distributors at a higher rates.
A distributors association in New Delhi’s suburb of Noida says business of its members has dipped up to 40% over the years after several modern retailers, ranging from discounter Subhiksha Trading Services Ltd to Spencer’s Retail Ltd, opened stores in the area.
Sushil Kumar Singhal, president of the 60-member association, says at least four distributors have exited the business in the last five months. “Some people are not able to survive,” he says. “Sales are getting down day by day and the modern (retail) trade is increasing day by day.”
Some fruit and vegetable wholesalers argue that it sho-uld be mandatory for modern retailers to buy through government-run procurement markets and they should not be allowed to bypass it and buy fresh produce directly from the farmers. “Suppose someone buys directly from the farmers, then who will monitor the prices,” says Ramesh Chandra Lahoti, who heads the agriculture produce marketing committee (APMC) for Federation of Karnataka Chambers of Commerce and Industry. “Let them come to APMC and trade.” Lahoti’s reference is to the government-run procurement market.
Pantaloon says it believes in working with the intermediaries and “developing strategic relationships” in various ways rather than eliminating traditional wholesalers.
“We wanted to learn from their expertise and wanted to leverage their understanding of the market,” says Arvind Chaudhary, chief executive (food business), Pantaloon. “I think you cannot replace the arhatia (commission agent) system in India.”
Mutual benefit: Vegetable merchant Shivaji Dhembre at his Vashi APMC shop (Kedar Bhat / Mint)
A chance meeting with Pantaloon officials four years ago in Azadpur, New Delhi’s largest wholesale market for fresh vegetables, turned into crores of rupees worth of monthly business for wholesaler Sushil Kumar Gaba. He started off delivering Rs10 lakh a month worth of fruits and vegetables to Pantaloon; today, that business has swelled to Rs2 crore a month. “Today, I supply to their stores in the whole of north India,” says Gaba. “Now, I am confident I can handle as many stores as they open in the future.”
Mumbai-based HyperCity Retail Pvt. Ltd runs most of its operations itself, but the company has outsourced the operations of restaurants and the pharmacy to specialist players. Spencer’s Retail also has company-owned operations except for some specialty businesses such as a live bakery or a wine and spirit counters.
“We do outsource those specialty (areas) where we either do not have size or expertise,” says Samar Singh Sheikhawat, vice-president for marketing for Spencer’s.
However, Subhiksha, India’s largest chain of smaller discount stores, doesn’t outsource the operations of any of its categories as the company is not keen to part with its profits—partly because its business model is built around deep discounts.
“Outsourcing means sharing your profits…obviously, he (the person to whom the function is being outsourced) will take a portion of your margin,” says G. Kashinath, president of agriculture commodity sourcing at Chennai-based Subhiksha. Kashinath admits there are some “advantages” to the outsourcing model: “Unsold items will be taken by the outsourcing agents.”
However, he warns that the firms managing the businesses are “not going to give it free, and it also comes at a price”.
The ability to grow their business is one thing that attracts smaller firms to partner with bigger retailers. Stability is another.
Some intermediaries currently working with modern retailers say their businesses have become stable with assured buyers—and payers.
Dhembre used to supply more fresh produce before he switched almost entirely to Pantaloon, but there was always the risk of hawkers defaulting on payments.
“Money was a big problem with the footpath vendors as many of them would very often run away,” Dhembre says. “With Big Bazaar, I get cash payment in one week’s time.”
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First Published: Sat, Jan 26 2008. 01 00 AM IST
More Topics: Retail | India | Reliance Fresh | Middlemen | Kirana |