Organized Food Retail is more effective than unorganized food Retail for customer in India at the time of sky touching inflation


By

Dr. Sudhir Agrawal
Associate Professor
Ms. Monica Bhatia
Lecturer
Ms. Rameesha Kalra
Lecturer
Ansal Institute of Technology
Sector 55, Gurgaon
 


Now-a-days world is facing a lot of crisis of food. Rates of food are touching sky. India is also facing a lot of crisis in food area. But thanks to the growing organized retail in Indian food industry, basic food items such as rice, flour, pulses, fruits and vegetables are 30 per cent cheaper on an average in organized retail stores than at kirana or small stores or at street vendors, according to a recent study. Organized retailers are able to shield consumers from the rising food process by buying large volumes at low cost and selling at low margins.

One study conducted in five big cities of India (New Delhi, Banglore, Hyderabad, Chennai, Mumbai) found that prices could be as much as 70% cheaper for fruits and vegetables, 50% for milk & 5-7% for branded flour in super markets.

Large retailers have said that they will squeeze margins & do more promotions to counter inflation, e.g. Big Bazaar, Vishal Mega Mart have announced discount on essential food products these days. Similarly, Spencers Retail Ltd has also started promotional schemes on essential products.

Research shows that 60-70% of the price formation happens between the farmer and the consumer, due to the commissions of several layers of middlemen that leads to hike in prices. Due to the impact of inflation in food and grocery, retailers are devising interesting ways to battle the surge in prices. Cross Promotion has also started in these retail stores. Rajan Malhotra, CEO of Big Bazaar introduces new promotional schemes from time-to-time. Recently he introduced a scheme of offering 20% discount on customer's food bill for every purchase of and over Rs 750. He added that this promotion would run in all the 85 Big Bazaar outlets for 11 days. Similarly other retailers like, Spinach is introducing weekend offers for products whose prices have shot up significantly & Subhiksha also continues to offer greater value to consumers by keeping prices consistently lower. Retailers, such as Aditya Birla Ltd have said they would look to renegotiate contracts with vendors, while some others have said they would tie up with suppliers rather than sourcing from wholesalers.

These big retailers offer fruits and vegetables at 15-20% cheaper than the local vendors; the gap is even wider in vegetables where prices charged by local vendors are about 30-40% more than retail outlets. Although the retail biggies are taking a hit by selling food items at lower prices, they are able to offset losses with profit made in other products, an option not available to the hawkers. Also bulk buying by retailers helps them in keeping their prices lower than street vendors.

RECENT DEVELOPMENTS IN FOOD RETAILING:

Nutraceutical Products :
In the food products' segment, 'nutraceutical products' or a hybrid of nutrition and pharmaceuticals (any fresh or processed food containing health promoting ingredients) have come into existence. Also included in the category are energy drinks & juices, preferably without preservatives. As the Frost & Sullivan study finds, the functional beverages portion is actually growing at a faster rate than the overall functional foods & beverages market. Amongst the fastest moving products are herb-based drinks, ready to drink teas and energy drinks. Fortified with vitamins, minerals & herbs, functional beverages have their appeal for diet supplementing and revitalizing promise, and convenience packaging. The sports and energy drinks market runs up revenues that add up to Rs 1200 million. Also, the packages fruit juices with added vitamins and minerals are the 'rage' and are expected to witness 'double digit growth over the next four or five years'.

Functional foods, such as folic acid fortified bread and probiotic bacteria (types of fermented milk products and yoghurt) were first launched in Japan. The market has since taken off and witnessed 'very high growth' internationally. In the domestic market, the health foods have been introduced only very recently. It's a measure of the increasing awareness and health consciousness. As per a recent report, the market for functional foods is expected to double in the next five years. The sports and energy drinks are as their 'infancy stage', but it is expected to post strong growth in the niche segment. The fortified juice market, meanwhile, is experiencing credible 'double digit growth' and is the fastest growing functional beverage item in the market.

In the near future, it is expected to grow at least 30-35% due to a growing necessity of convenience-packaged foods that serve the benefits of fresh fruits reinforced with added vitamins and minerals. As for probiotics, India being the larger producer of milk and processed dairy products, it has the potential to have the largest product line up for milk-based probiotic products. It is also a fact that market players are going the extra mile to differentiate their products, innovate and gain acceptance of the discerning consumer. The market seems propelled by the need for a greater sense of well being, without necessarily having to compromise on the frantic pace of life.

Retail Expansion: Wardhawan Group is planning to invest around Rs 3,500 crore in launching new restaurants and luxury retail expansion plans. According to Srinath Sridharan, Vice President & head-strategic alliances, Wardhawan holdings, is planning to set up 35 noodle house restaurants in India at an investment of Rs 1,500 crore in the next four years.

Mega Parks: Central Government plans to establish 30 mega food parks in different parts of the country through the public-private route. The Govt. would give Rs 50 crore per project as grant for establishing the park, while private partners would contribute the rest.

Spread of Organized Retailing in India: Organized retailing is spreading and making its presence felt in different parts of the country. The trend in grocery retailing, however, has been slightly different with a growth concentration in the South. Though there were traditional family owned retail chains in South India such as Nilgiri's as early as 1904, the retail revolution happened with various major business houses foraying into the starting of chains of food retail outlets in South India with focus on Chennai, Hyderabad and Bangalore markets, preliminarily.

FDI in food Retail: The Government is considering a proposal to allow Foreign Direct Investment (FDI) in food retail. The RatanTata-led investment commission has favored permitting FDI in food retail, specially fresh and processed fruit and vegetables, with export commitments. The Government is considering opening up the $330-billion retail market with adequate provisions to protect.

Organized food retailing can increase rural income, cut inflation: CRISIL ReportAt an estimated Rs12.8 trillion in 2006, India''s retailing sector makes up close to 40 per cent of the country's GDP. Of this, food and grocery (F&G) items account for a significant 74 per cent of total retail sales across both, the organized and unorganized sectors. An analysis done by CRISIL Research reveals that a robust, widespread and deeply penetrated organized food retailing network in India would address some key concerns facing the Indian economy today viz. limited rural prosperity and high food prices. Reduced supply chain costs arising out of lower wastage and storage costs can be shared between producers and consumers of food items as higher farm incomes and lower food prices.

The organized retail sector makes investments to reduce inefficiencies of the traditional multi-level F&G supply chain. These inefficiencies often arise out of restrictive procurement practices, and multi level storage and commissions. This pushes up the final retail prices paid by the Indian consumer to 2.6 times the prices paid to the Indian farmer. Better supply chain management implies disinter mediation, an associated reduction in commissions and a far lower wastage of goods by enhancing transportation and storage facilities. Organized retail practices, however, invest in better supply chain management and could create efficiencies by way of disinter mediation and enhancement of transportation and storage facilities, which could in turn lead to reduction in commissions and lower wastage of produce, says the study. According to Mr. Sudhir Nair, Head, Crisil Research, if one-third of these savings (Rs 33,500 crore) are passed on to the consumer in the form of lower costs, it amounts to 3.5 per cent of the country's spend on food items (Rs 9,51,000 crore). "This can play a significant role in lowering food inflation," it says. Food inflation was 8 per cent in 2006-07, while overall inflation was at 5.4 per cent.

In a nutshell, we can conclude that due to rapid growth in organized food retail market, we can control inflation in food industries due to economies of scale.

References:

1. The Times of India
2. Hindustan Times
3. The Hindu
4. Economic Times
 


Dr. Sudhir Agrawal
Associate Professor
Ms. Monica Bhatia
Lecturer
Ms. Rameesha Kalra
Lecturer
Ansal Institute of Technology
Sector 55, Gurgaon
 

Source: E-mail May 17, 2008

          

Articles No. 1-99 / Articles No. 100-199 / Articles No. 200-299 / Articles No. 300-399
Articles No. 400-499 / Articles No. 500-599 / Articles No. 600-699 / Articles No. 700-799
Back to Articles 800 Onward / Faculty Column Main Page