New Delhi/Chennai: For years, Krishnappa Ravi navigated through north Bangalore in a motorized rickshaw packed with goods, delivering them to the doorsteps of small retailers. Ravi’s business, RK Distributors, thrived and he transformed the small wholesale venture that he started some 18 years ago with Rs25,000, into a firm that generates Rs10 crore each year from supplying products, ranging from vegetable oil to basmati rice, to the legions of small retailers in the city.
But the small-time to big-time story isn’t headed for a happy ending, at least not if you talk to Ravi.
“I do not think wholesalers supplying to the unorganized retail sector can survive much longer,” says Ravi. “I only have time till the end of this year to come up with an alternative plan.”
Thousands of kilometres away, pessimism takes centre stage every time the 60 members of the wholesalers association in Noida, just outside New Delhi, meet to discuss the state of their business.
“Every second guy is looking to switch to another business or at least have another side business as returns are (getting) squeezed in our wholesale business,” says Sushil Kumar Singhal, president of the Distributors’ Association of Noida. He says business is down almost 40% in the last several months for the distributors. And in the Capital’s Sadar Bazaar, the largest wholesale market in India, Gyan Chand Gupta, president of Federation of Sadar Bazaar Traders Associations, an umbrella organization of about 80 trader bodies, said the wholesale business has fallen almost a quarter in the last several months.
The wholesalers say they are the indirect victims of India’s latest sunrise sector —organized retailers. Hundreds of branded stores have started setting up shop in cities across the nation, part of a huge push by major companies to jumpstart an infant organized retail effort, selling everything from tea to trousers. Thousands more are in the offing from the likes of Reliance Industries Ltd, Pantaloon Retail (India) Ltd, and Bharti Enterprises.
On Friday, a Mint reporting team looked at the early impact that these branded stores, with names such as Reliance Fresh, Subhiksha, Big Bazaar and Spencer’s Retail, are having on small, single-store entreprenuers.
But, while there has been a large hue and cry in recent months against organized retail, fuelled in part by all political parties looking to curry favour with millions of small shopkeepers that dot the country, there has been little focus on the thousands of wholesalers who make a comfortable living playing middlemen, between small urban retailers on the one side, and farmers, household goods companies and cooperatives, on the other.
These wholesalers are finding that shoppers in big cities are already starting to switch from their clients, the small retailer, to branded stores. In turn, these small retailers are cutting back on their purchases from wholesalers. But, there is another trend that is quickly emerging.
The small retailers themselves are often switching to buying from their direct competition, often finding that even the retail sale prices at these mega stores are a bit cheaper than what they could get from wholesalers.
“It’s all about volume as we purchase in bulk directly,” said Ram Chander Aggarwal, chairman of Vishal Retail Ltd., which runs some 50 speciality stores and hypermarkets in various Indian cities. He says his company purchases 90% of products directly from manufacturers. “We are creating a lot of value to the consumers by bypassing the intermediaries.”
With some of the new retail chains planning hundreds of stores, their relative clout versus even a wholesaler is likely to be significant, allowing the chains to get big, bulk discounts from manufacturers.
Organized retail is just 3% of India’s $300 billion annual market but is expected to account for 20% of the total business by 2015, according to McKinsey & Co.
“We are not against consumers getting fruit and vegetables at low prices but the competition is unfair,” said R. Soundarajan, president of the Koyambedu Periyar Vegetable Market Licence Holders Association, a group of 250 wholesalers and 1,350 retailers in Chennai. He says the big players are able to offer incentives ranging from small gifts to loyalty cards to keep customers. Soundarajan said that the number of trucks delivering vegetables to his wholesale market has gone down to 200 a day from 300-350 trucks during the same season last year. Reliance Fresh’s 14 stores in Chennai have cost the wholesalers 40% of their total business, the association claims.
Thousands of vegetable and fruit shops remained shut on Friday as part of a one-day protest aimed at putting pressure on the Tamil Nadu government to use local ordinances and bar Reliance, the Tatas, the Birlas and other big retailers from selling fruit and vegetables.
Such protests are touching a chord here in Delhi as well. “We are not in favour of big industrial houses interfering in the business of small and medium class people,’’ says Anil Gupta, secretary general of Kirana Committee, a body of 2000 spices and dry fruits wholesalers in Delhi. “The industrialists should restrict themselves to opening industries and not disturb the livelihood of the poor.’’
But with big stores offering a combination of discounted prices, more variety and often shopping in air-conditioned comfort in cities where summer temperatures can touch 47 degree celsius, shoppers seem to have little sympathy for their neighbourhood street vendor.
Ram Sagar, who usually bought vegetables and fruit from a weekly discount market in Noida, recently made a complete switchover to Reliance Fresh. “I’ve stopped buying from the market,” says the 40-year-old. Housewife Kanta Garg says she saved almost Rs60 on a recent Rs600 vegetable and fruit bill at Reliance Fresh. With inflation at a two-year high in India, such savings can quickly add up for the average shopper. While the individual shopper’s behaviour will take time to add up, wholesalers see a bigger threat in those stores that are selling to other small retailers.
While Indian laws bar foreign retailers from selling multiple products directly to the consumer, they are allowed to operate fully owned wholesale subsidiaries. As a result, Germany’s Metro AG has set up wholesale operations in India. Metro services more than more than 200,000 small retailers, hoteliers, restaurants and other businesses in the southern cities of Hyderabad and Bangalore. Metro plans to open its third distribution centre in Kolkata, and has already signed up 80,000 clients.
Ramachandra Setty, who runs a 15-year-old wholesale distribution business in Bangalore, knows what it is like to be in Metro’s shadow. Setty’s Champaka Agencies has a network of 1,200 retailers to whom he supplies consumer products such as talcum powder, soaps, face creams, as well as a range of edible oils. In the three years since Metro’s entry, he says retailers who are located in close proximity to the Metro outlets on Kanakapura Road and in Yeshwanthpur have shifted to the German retailer.
“My business has dropped by 15% in the last three years as retailers who are within a two-to-five-kilometre radius of the Metro store have almost stopped picking up supplies from me,” said Setty.
In another Metro city—Hyderabad—wholesalers are also saying they feel the pinch.
“Our family has been in the business of catering to the needs of retailers for more than two decades,’’ says Sunil Kumar Jalan, proprietor of Balaji Kirana and General Stores. “It is not just wholesalers like us who are affected. Retailers are also losing their business because (individual) customers are able to get (identification) cards...at Metro quite easily.”
Manish Bhargava, head of Metro’s corporate communications, concedes that some shoppers have misused customer-registration cards, meant just for retailers to buy at Metro, in the early days of the company’s operations. Metro currently has 1.4 lakh cards in Bangalore, 92,837 cards in Hyderabad and 80,219 cards in Kolkata.
Bhargava says Metro barred more than 4,500 such cards in 2005 in Bangalore and now has a team of 150 customer consultants who keep track of purchase patterns to try and make sure products brought from Metro are ending up in retail outlets rather than directly into homes.
“This exercise helps us in weeding out those members who use the cards for other than business purposes,” he said. “In Hyderabad, we are in the process of converting the cards into photo identity ones and it will ensure that the misuse of cards will come down substantially.”
The Metro model is also likely to become more prevalent in coming months and years. The world’s largest retailer, Wal-Mart Stores Inc. is in talks with Bharti for a wholesale, or cash-and-carry business, in the country. Pantaloon, currently the country’s largest listed retailer, also plans to open hundreds of cash-and-carry megastores in rural areas throughout the country. Pantaloon has also tied up with US-based Staples Inc. to operate a wholesale chain for office supply and stationery business as well.
Many of the new retailers are making sure they create a relatively captive source for the products they sell. While India is the world’s second largest producer of vegetables and fruit, almost 40% of the produce is wasted due to improper handling and lack of storage facilities. The organized retailers are investing millions of dollars in supply chain and cold storages to ensure a direct and steady supply.
For instance, FieldFresh Food Pvt. Ltd, a joint venture with Bharti Enterprises and an investment arm of the Rothschild family of UK, is investing $50 million to produce vegetables and fruit on more than 4,000-acre land in Punjab aimed at exporting them as well as supplying to growing numbers the organized retailers. Reliance Fresh buys fresh produces directly from the farmers.in Punjab, Himachal Pradesh, Andhra Pradesh and Karnataka.
It isn’t just produce. Ravi of Bangalore’s RK Distributors sells one litre-packs of Sundrop edible oil for Rs76 to small retailers, who then add their own margin to sell it to consumers for Rs79 a litre. But Subhiksha’s discount chain offers the same product directly to consumers for Rs76, he says.
As a result, many of Ravi’s small retail clients have started demanding better prices for the products he delivers. “Wholesalers have between 2% and 3% margins in edible oils,” he says. “If I offer a small retailer a lower price, my business becomes unviable.”
Not all distributors are looking at the new wave of retailers as just a threat. After his business to small retailers for vegetable oil dried up and sales fell by a quarter in volume in three months, Bangalore-based distributor Shivaram Bhat is targeting some of the modern retailers with new set of products, such as cheese and dairy whiteners. His sales of Britannia’s dairy products have soared by 50%, says Bhat.
“Earlier, in a month, I would supply dairy products worth Rs10 lakh to large department stores and supermarkets, now in the last six months, monthly turnover has grown to Rs14 lakh to Rs15 lakh.”
But there is a downside there as well. While the credit period with small retailers is a strict seven days, the large retail chains are demanding—and getting—a minimum two-week credit period.
“Wholesalers must now have enough financial muscle to withstand a two-week credit period that often extends to three or more,” he says.
Kundan Kumar Sahu travels 30km every day from the small town of Barsaat, lugging four quintals of carrots to Kole Market, Kolkata’s wholesale market for fruit and vegetables. Amidst jostling crowds, competing vendors and discarded stocks of vegetables, he has to cry hoarse until he sold all his carrots. His daily take: about Rs1,200 from which he pays for transport and commission to the traders. Sahu has heard that Reliance Fresh has already started buying carrots from the same place where he buys his product and that has started worrying him. “Maybe in future, I would have to pay more to buy the same quantity,” says Sahu. “I would have little choice.”
Archana Rai in Bangalore, C.R. Sukumar in Hyderabad and Aparna Harish in Kolkata also contributed to this story.