Every month, Santosh Hegde does what households typically do. He visits his neighbourhood store for his monthly shopping. But this automobile component manufacturer doesn’t shop for soaps and cereals. He buys steel. Not in the same shop, of course. He goes to an Essar Steel Hypermarket and buys 50 to 100 tonnes of steel. Earlier he would travel 200 km from his base in Nashik to Mumbai or Pune to buy his steel. Now, the goods are delivered the next day to his shipping address.
Ever since the first mill began rolling out steel in India about a century ago, the metal has been distributed in just one way — from the mill to the trader, who acted as a middleman, and then to the customer. Two years ago, Essar Steel cut out the middleman by opening a network of retail outlets. Today, Essar claims it has a 20 percent market share in flat steel products and the 185 Essar Hypermarkets in as many cities have played a major role in this.
The decision was not easy. “It was [being done] for the first time in India and possibly, in the world,” says Vikram Amin, marketing director, Essar Steel, which makes 4.6 million tonnes of steel a year.
The logic was simple. Auto and consumer goods industries are the biggest consumers of steel. But many of the manufacturing hubs, especially the smaller and medium ones, are not well connected to their raw material source. The move saw Essar creating new customers out of these small and medium entrepreneurs.
“This year we will be selling 30 percent of our output, or 1.2 million tonnes of steel, from these retail shops. Now selling through this retail network is like hedging your production when market is volatile,” he says.
“We also sell steel directly to big customers in infrastructure and energy sectors. But the economic downturn has hit their projects, which in turn has reduced their demand for steel. Not so for our retail customers,” says Amin. Most of its customers require small amounts of steel, sometimes as little as 2 tonnes. But traders sell nothing less than 20 tonnes at a time.
Now customers like Hegde go to the local Essar retail outlet, select the size and quantity they want, and buy. The outlet has a warehouse from where it sends out the goods in trailers. Like any supermarket, it delivers the goods for free within a day. “Earlier, we had to wait for at least three weeks for the goods to be delivered [from the traders],” says Hegde.
The change in waiting period was not the only one for Hegde and others. They had to bargain for quality and price when buying from a trader, whereas now they get their purchase certified by the company. Moreover, each of Essar’s 185 retail outlets updates its price list monthly.
U.S. Bhat, secretary, Darukhana Iron Steel and Scrap Merchants Association — a traders body — is unfazed by the new competition. “Traders have the flexibility to give discounts. Moreover, traders double up as lenders for their customers. Can these retail outlets provide credit or sell on credit?” he asks.
Sensing the need, Essar Steel has tied up with two commercial banks to provide credit for its retail customers.
It plans to expand its retail network to 650 outlets by the year-end. It is using business software from SAP AG to anticipate customer demand. “If a size 34 is selling more in a Levi’s store, then its manager will stock more of it. Now we can adjust our stock in each of the outlets according to the local demand,” says Amin.
He concedes that the retail initiative has brought about a change in the mindset of the company. Anand Halve, co-founder and CEO, Chlorophyll Brand and Communications Consultancy, points out that the biggest change they will have to make is when altering the marketing network from business-to-business, to business-to consumer. “In the B2B space, it is all about delivering at the right cost, getting logistics right etc. But in the B2C space, they will need to focus on customer service, smaller lots and working with different requirements. Their success will hinge on making that mindset change to being more consumer-centric,” says Halve.
But Essar Steel already has competition. JSW Steel has entered the fray with its own retail network, JSW Shoppe that opened its first retail outlet in Hubli, Karnataka, in July 2008. The country’s second largest steel producer has since opened 18 retail outlets and plans to have 50 by March 2009, and 600 in the next two years. Up to 25 percent of its production will be sold through the retail network, says Sharad Mahendra, vice president, marketing. “We are averaging sales of about 800 tonnes of steel per month per outlet and this should increase to about 1,000 tonnes by the end of this financial year,” he says.
This has changed the dynamics for an industry where products were sold in bulk and transported in heavy trucks. Now small has become big, thanks to the retail initiative.
Essar Steel Chairman Shashi Ruia
Two years ago, the company decided to sell steel directly to customers, pioneering a network of retail hypermarkets in India.
Who Are the Customers?
Small and medium manufacturers that typically buy in small quantities
How Do Customers Benefit?
Like any supermarket, the stores deliver the goods for free and within a day. With traders, the customers often have to wait for three weeks.
What Does Essar Gain?
The off-the-shelf style has made the market more dynamic, lessening the impact of a global metldown.
The traders have the flexibility to give discounts. They also double up as lenders for their customers. The retail outlets need to find a way to meet the credit needs of its customers too. Also, the marketing culture will have to change as they are now selling to the ultimate customer, not the trader.
(This story appears in the 17 July, 2009 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)