Large Format Retailer, Just Another Channel Partner

Will the large format retail chains dent channel sales? Will it displace the
friendly neighborhood partner? Definitely not, if you read between the lines of
the burgeoning retail business

While the argument runs rife about how the retail boom will affect the
channel business, there is one aspect of this scenario that has escaped the
attention of most. And that is the emergence of retail as the new channel
partner.

Think about it. Who do the big retail chains, who are also called large
format retailers or LFRs, buy products from? In most cases it is from the very
IT distributors who cater to the entire channel network. This means that
technically a retail chain is just another channel partner.

Most IT distributors too are realizing the potential that retail chains hold
as their channel. This is evident from the fact that some, like Rashi
Peripherals, have now created a vertical called retail in their company
go-to-market strategy and have a dedicated team to cater to their needs. There
are others, like Ingram Micro and Salora who are dedicated retail service
managers who interface with LFRs and work out schemes and strategies with them.

The partnership

In most cases, the LFR sign up memorandums of under­standing with the
vendors directly, which outlines branding policies, display strategies, price
compensation, etc. It also includes a commitment from the LFR to do a certain
quantum of business to avail of these benefits. However, the vendor ultimately
supplies products to the LFRs through their distributors.

“All our purchase transactions are with the distributors,” informed a
business manager for IT products with Vijay Sales, a leading consumer
electronics mega store that has also forayed into IT.

Retail is one of India's fastest growing industries with a five percent CAGR and expected revenues of $320 billion in 2007

The channel

When IT products found their way to the shelves of LFRs, the channel was
perturbed thinking that this would further compound their business problems,
where they already had to deal with squeezed margins and increased competition.
But, if looked at closely, then the presence of LFRs will not have much impact
on the channel.

For one, the organized retail business is still very small in India. Said
Kapil Pansari, Business Development Manager, Rashi Peripherals, “In developed
countries, organized retailing makes for over 70 percent of the total business.
In China this segment accounts for 20 percent of the overall business. But in
India currently the organized retail market is less than three percent.”

The size of organized retailing was estimated around Rs 26,000 crore in 2004,
about three percent of the total. However, it is now set to grow at 25 to 30
percent per annum.

And if you talk about the organized IT retail market, it is as good as
negligible. But having said that, one must acknowledge that this market is
growing, and fast. According to some industry reports, the retail market for
mobile phones-handset, airtime and accessories-is already a $16.7 billion
business, growing at over 20 percent per year. In comparison, the consumer
electronics and appliance market is worth $5.6 billion, with a growth rate that
is half of the mobile market.

And even though organized retailing is likely to grow at 25 to 30 percent per
annum over the next decade, it is unlikely to increase its share beyond

20 percent. Which means that the channel business will also grow at this pace,
as per industry norms. Therefore the chances of an LFR cannibalizing the channel
are as good as naught.

Additionally, the consumer segments patronizing the big malls are going to be
different than those visiting the local dealers and IT retailers.Like Devita
Saraf, CEO,Vu Technologies, which sells high-end LCD displays, laptops and
gadgets pointed out, even today the purchase of a digital equipment is an
informed decision as against an impulsive one. “There are not many youngsters
who can walk into the big e-malls and buy a laptop or any other high-end device
using their credit card. They would like to involve their family in that
purchase decision. And they would also like to see all the brands in an e-mall
and make their purchase from the friendly local dealer,” she noted.

LFRs to help channel

On the contrary, LFRs will bring in the much-needed dose of reality check in
the channel, especially the last-mile retailers. They would soon have to ensure
a bit of professionalism in the channel.

“We have seen that most retailers were complacently doing their business. It
is time they are shaken out of this stupor and realize that the only way they
can survive is by adopting some processes and becoming efficient,” Saraf noted.

According to 'Retail in India Getting Organized to Drive Growth', a report by
AT Kearney and the Confederation of Indian Industry, retail is one of India's
fastest growing industries with a five percent CAGR and expected revenues of
$320 billion in 2007. Of course this includes all kinds of products across a
cross section of verticals. What will fuel this growth is rising incomes,
increasing consumerism in urban areas and an upswing in rural consumption,
taking the business up by almost seven percent, annually.

KSA-Technopak, a retail consulting and research agency, predicts that by
2010, organized retailing in India will cross the $21.5-billion mark from the
current size of $7.5 billion.

Deutsche Bank's research report on 'Building up India' says India's
burgeoning middle class will drive up nominal retail sales through 2010 by 10
percent per annum. The country may have 600 new shopping centers by 2010.

The Indian retail market is estimated at $350 billion. But organized retail
is estimated at only $8 billion. But don't let this figure fool you. According
to several market reports, by 2010, organized retail is expected to grow to $22
billion.

With the growth of organized retailing estimated at 40 percent (CAGR) over
the next few years, Indian retailing is clearly at a tipping point. India is
currently the ninth largest retail market in the world.

What is surprising however is that vendors and LFR expect that most of the
business will not come from the metros, but the mini-metros and smaller cities.
Like Saraf said, in these cities the 'razzle and dazzle them' factor is what
spurs people to buy the latest gadgets and gizmos. And with the economy on the
upswing and higher dispensable incomes, there is no reason why people should not
go bling bling.