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Why wholesale retail is a bigger opportunity for Metro in India
While some of those engaged in cash & carry retail operations might see greater promise in multi-brand retail, Metro Cash & Carry has a sharpened focus on wholesale retail and is working to ramp up its operations.
Issue Date - 15/03/2012
Wholesale retailer Metro Cash & Carry India takes pride in calling itself a “genuine wholesaler” and is happy carrying on with its business in the country. The German retail group, with $67 billion in revenues, entered India in 2003 and unlike other cash & carry players like Bharti-Walmart, Carrefour and Tesco, it isn’t losing sleep on when and how the cookie would crumble for India’s multi-brand retail. It has good reasons for putting faith in its business, which taking into account its expansion plans in the country appears to be thriving, though the company does not give out India-specific business results.

The wholesale or cash & carry retail is a $150 billion opportunity in India. This clearly is a large enough business pie for any player with a focused approach to the wholesale retail game. Another big incentive is that 100% FDI is allowed in the cash & carry model, which is a godsend for getting the wherewithal to fund building of a large distribution infrastructure and buying expensive real estate to open stores. India’s retail sector is estimated at roughly $500 billion, with nearly 90% of the market controlled by mom-and-pop stores. Organised retail has a less than 10% share of the market, but is expanding at nearly 20% annually, thanks to the emergence of shopping malls, and a 300-million strong middle class, which is growing steadily.

Unlike multi-brand retail, which might turn out to be a long wait-and-watch game for interested foreign retailers, Metro has its sights set firmly on the wholesale segment. The company is moving along a well-laid out India strategy, and is not shy of preparing for the long haul. Its strategy is different from the plans of other retail global biggies, who are more keen on flexing their retail muscles in multi-brand retail, supposedly a more lucrative space. The thinking is that returns and the gestation period in cash & carry formats is low and long term (roughly 5-6% of returns compared to double-digit returns for front-end retailers). But Metro seems to have done its homework well and is busy putting its game plan to work.

In 2010 it hired old PepsiCo hand Rajeev Bakshi as Managing Director to lend aggressiveness to the business. Metro is also looking to meet approximately 5% of its global revenue from India by 2015 (up from existing 1%). The group, which plans to open 8-10 stores in the country every year for the next four years at an investment of around Rs. 24 billion, aims to break even by 2016. “We will open 8-10 stores a year for the next four years in the larger towns and open as many as 50 cash and carry stores across the country by 2016,” says Bakshi. With a typical Metro store costing anything between Rs. 600 to Rs.700 million, that would entail an investment of roughly around Rs 35 billion. This year alone the group plans to invest around Rs.6 billion to open 8-10 stores, and it has already invested about $150 million so far in this market. All this is comparable to Wal-Mart’s India plans over the next few years. Both the retail giants are neck and neck when it comes to their expansion plans for India, though the American retailer, which operates in India under a joint venture with Bharti Enterprises, has more stores under its wing currently.

Unlike other retailers, who haven’t invested in the big cities due to the cost-factor, and are playing a waiting game in the hope of multi-brand retail opening up soon, Metro has gone ahead aggressively opening big stores in major cities. It has opened stores in Bangalore (2), Hyderabad, Mumbai (2), Kolkata, Ludhiana and Jalandhar, and entered Delhi with its 10th store. Bakshi says he sees a huge potential in a market like Delhi, and thinks it can easily accommodate five Metro stores in the near future. Asked if the company, like Wal-Mart, would like to get into the business to consumer space, Bakshi says, “Our core business is cash and carry. Internationally, our focus has been on cash and carry. We think in India cash and carry is a bigger opportunity.”

Metro is targeting cities with over 1 million in population, for the next growth phase, and has 40 potential cities on its radar. The company’s big city focus is clearly a sound approach, as it gives it easy recognition among consumers. But since cash & carry also addresses local needs (even Metro has 90% localisation in its product range of over 10,000 SKUs across stores), at affordable cost, Metro needs to ensure a strong supply chain with linkages of farm-to-fork. After all, food and grocery can be a big area, where the cash and carry format can score over the other modern trade formats (food and grocery still constitutes of roughly 60% of all retailing in India). It’s also an area where modern trade has failed to make much of an impact, as it couldn’t afford the margins to make it a success. Metro is already eying this space and FMCG products like food and toiletries constitute the bulk of the products on offer, and form a major part of its sale as well.

The other side to Metro being a genuine wholesaler is that its business is not about passive retailing. “We are very aggressive in pushing our market strategy and reaching out to our potential consumers. We see ourselves as a marketing-oriented organisation,” asserts Bakshi. The go-getting attitude is sure to help Metro as it expands its footrpint to newer cities and towns where people may not be familiar with the format and therefore be hesitant to try it out. One of the common complaints against cash & carry format retailers is that they are often confused about their target audience - whether it’s the common consumer or the small retailer. Metro, however, has its focus clear - it’s the small urban retailers who are its primary customers. The company takes pain in launching outreach programmes to tap small retailers and in advising them on how to improve their shop-fronts, and other finer aspects of shop-design and retailing. Of course, it will have to work harder at educating potential customers about the format and its advantages as it moves to more cities.

Another issue that Metro will need to pay special attention to, especially in light of India’s creaky infrastructure, is to ensure a strong sourcing network and get the locations and catchment areas for its stores right. Targeting big cities can bring in footfall, but if the dynamics of its sourcing and supply chain are not foolproof, business will surely bear the brunt of such faultlines. Metro may establish a lead over others like Wal-Mart in targeting big cities, but the latter is more obsessive about opening stores in locations where sourcing is stronger. That, in fact, will prove to be the acid test for Metro’s operations in India and will decide whether Metro’s cash & carry model carries the day for wholesale retailers in India.

Onkar Pandey           

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