Traditional trade's resilience in the era of instant gratification

The new age unicorn’s business model is—more the losses, better the valuation. But in the long run, it is important to have a positive cash flow and, ultimately, players with profitable and sustainable business models will survive and sustain their business

Arvind Mediratta
Updated: May 4, 2022 04:53:20 PM UTC

Arvind Mediratta is the Managing Director and Chief Executive Officer at METRO Cash & Carry India Pvt. Ltd.

resilience-in-the-era-of-instant-gratification
A bigger focus is required on upskilling the retailers and kirana store staffs to make this indigenous bottom of pyramid start-up eco-system more aspirational. Image: Shutterstock

The pandemic has transformed the traditional retail segment in the past two years more than what happened in the past two decades. Despite the hype and euphoria in the Indian market about e-commerce and quick commerce, the traditional trade has been proven to be extremely resilient and thrived since 2020.

According to recent Nielsen FMCG data, ecommerce players have gained only a minuscule share of 7.7 percent in the last quarter of 2020 (October, November, December) vis-à-vis 7.3 percent in the first quarter (January, February, March) 2020 pre-pandemic period, even in the big metro cities of India. Whereas traditional trade and the humble kiranas have gained a market share of 71 percent in the last quarter of 2021 vis-à-vis 68 percent in the first quarter of 2020. Gaining three basis points only proves the resilience of these neighbourhood stores that have adapted to the ‘new normal’ of retailing, and are still holding their ground in the Indian food and grocery market.

As per the Indian government, the unorganised sector contributes almost 50 percent of the total GDP and over 90 percent of employment opportunity. The kind of entrepreneurship that is there in any crowded marketplace in India is way more than Silicon Valley or any incubation centre. Hence, it is extremely pertinent to ring-fence the interest of this unorganised sector —the traditional retailers and small corner shops.

The Covid-19 crisis has led to dramatic shift in consumer behaviour and preferences. Customers are now deciding when, where, and how to shop—be it online, offline or a mix of both. To meet the changing consumption patterns, physical retailers and kirana shops have also adopted smarter digital tools and omnichannel modes of engagement to ensure customer expectations are fulfilled.

Why positive cash flows matter

In the traditional trade, the business model is under huge pressure. Small retailers and kiranas are facing an existential crisis competing with modern retail and e-commerce players who are operating unsustainably and losing money.

The new age unicorn’s business model is—more the losses, better the valuation. But for kiranas, their livelihood depends on the one shop they have. In retail we believe —sales is vanity, profit is sanity, and cash is reality.

However, there is lot of cash burn happening in quick commerce which is deeply impacting the new-age players’ profit and loss. In quick commerce, the average order value is Rs 300. On every order, companies are losing around Rs 150 to Rs 200 with an EBITDA of -35 percent. In addition, the health and safety of the delivery partners, the gig workers, is severely compromised in this rat race of delivering within 10 minutes. Hence, it is a matter of time before the bubble bursts and some sanity prevails. Sooner or later, consolidation in the market is inevitable. Ultimately, cash matters and one needs solid cash flows to sustain.

It is important to have a positive cash flow and, ultimately, players with profitable and sustainable business models will survive and sustain the business. This is something all players, legacy or new age, must remember while keeping their BCPs (business continuity plans) going. It is time that the government expedites the National Retail Policy to safeguard the interests of small retailers and establish a level playing field for all players including the modern trade and ecommerce.

The opportunities and challenges of the phygital world

Post pandemic, there is more acceptance from physical retailers and kiranas to embrace digital technology than it was couple of years back. Phygital has emerged as an intrinsic part of a customer’s shopping experience today, and this integration between offline and online retail is likely to grow. Kiranas have realised that the pre-pandemic ways of functioning and selling at MRP is over. They realise now that new digital tools can help them source supplies more efficiently, digitise their inventories, communicate with customers better, and reimagine the look and feel of their stores. Today, kiranas are spoilt for choice as they have the convenience of ordering from apps of several B2B and eB2B ecommerce.

But digitalisation requires significant investment; small retailers do not have access to the formal banking sector, and lack of capital remains one of the main barriers to their growth. One of the significant reasons behind the financial challenges is the lack of financial literacy. Majority of the retailers are unaware of the financial privileges given to them by the government which causes them to make impractical financial decisions. They do not enjoy creditworthiness as they do not have any asset in their name.

Since the future of retail is omni-channel, the government also needs to ensure that small retailers get access to formal banking and easier access to loans under the Pradhan Mantri Mudra Yojna scheme to facilitate this digital transition for them. In addition, the small retailers and shopkeepers need to be incentivised for digitalisation to enable more ease of doing business for them.

A bigger focus is required on upskilling the retailers and kirana store staffs to make this indigenous bottom of pyramid start-up eco-system more aspirational. Working for a digitalised ‘smart kirana’ should be aspirational for local talents in smaller cities and towns like it is for any big organised retail store. Skilling and perception management is required to address the issue of employment, entrepreneurship and the whole informal and formal in the right perspective, to create better livelihood option for them and reverse the talent migration to bigger cities.

The retail sector is experiencing the effects of formalisation and digitalisation of the economy. It has been one of the fulcrums of the India’s post-Covid-19 growth phase, and deserves its due credit. The government should consider providing retail with an ‘industry’ status and create a separate retail ministry to help address all the operational issues and for better ease of doing business for the sector. PwC notes that organised retail is slated to expand up to 30 percent by 2024, growing by nearly 50 percent by 2034. Retailers willing to go the extra mile in adapting to the new omnichannel world will be better placed to thrive in the post-pandemic’s new normal world of organised retail.

The writer MD and CEO, METRO Cash & Carry India and Chairperson FICCI Retail & Internal Trade Committee

The thoughts and opinions shared here are of the author.

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