There has been a lot of economic tectonic movement since the past year and we would all agree that retail has been one of the most severely hit industries. Most of the hit was due to the fact that organized or modern retail is only 5% of the total consumption in India and comprises of modern towns and cities where people are getting fired or going bankrupt. But the most important reason is the deteriorating market sentiment, the fear of dwindling personal cash flow and increase in savings.
Now, what I am writing about today is a piece of news that was released a few days by the leading modern retailers of India who claim that they are now planning to share backend functions and resources in order to lower costs and ride the storm. The news is good. I have mentioned earlier as well in my blog post 'The Downturn Brotherhood' that faced by an external threat, competitors usually shake hands to fight it together. However, the situation is a little different in retail.
It cannot be compared to Coca-Cola and Pepsi hiring a lobbyist to fight the pesticide campaign together neither can it be compared with telecom industry sharing towers. Why? Well it’s just because the real source of value lies somewhere completely different in these industries! One needs to further drill down into these pacts and realise the logical distance between the core and pact.
In retail, however, the majority of advantage has always been derived from the backend. Superior supply chain, purchasing power, optimised logistics, demand forecasting etc was always king. I don’t deny that front-end rationalization like shelving strategy, matching product characteristics with regional behaviour, location, format etc definitely are very important but it can never overshadow the advantage of a competitively better backend. Indian retail is very tricky and competitive and the players involved are aggressive. People who have stepped in too fast have got burnt on this field and are already suffering the consequences which were more to do with their impatience and lack of understanding than anything else.
One of the largest retailers in the country has no history of alliances and co-operation. They believe in backward integration which is deep -rooted in their philosophy. How can one then hope to share warehouses and purchasing with them when the only reason others are winning is because they have a better control over these factors?
My thought is this - the suggestion is honest and is the right thing to do considering the situation but it will never happen. Retailers in India can share power but never the source of power! In an industry marred with changing consumer behaviour and ever increasing value add, the stake is very high. What it takes to win here is not a single strategy but the whole package covering the entire value chain and all elements including culture working in tandem. Once the backend is exposed, the package opens for everyone to see which cannot be allowed. Low prices cannot be provided by merely competing on the front-end.
