Making retail businesses competitive
Grocery shopping is entering a new age with the advent of global retailers like Makro and Metro. The French retailer Carrefour is also expected to open up a hypermarket in Lahore, making its own mark on the retail landscape. But while a blessing for thousands of shopaholics, they are also ringing an alarm for thousands of small to medium-sized retailers, who are competing in the same market place.
While these local businesses may not be adversely affected in the short run, they are likely to see a decline in their sales and profitability over the next few years, owing to opening up of these mega retailers all over the major cosmopolitans, their competitive prices and wide product variety and the consequent change in consumer shopping patterns, who are increasingly shifting to these new stores.
The phenomenon of wiping off small businesses due to opening of mega-retailers is not new and has been witnessed in the West. In US, specifically, it is also sometimes termed as the Wal-Mart phenomenon, named after the worlds biggest discount retailer, which revolutionised the shopping landscape over the last 46 years. The news of opening up of a mega retailer like Wal-Mart is the worst nightmare for a small retailer in the United States, as it does not have the muscle to compete with these enormous corporations due to their massive marketing budgets, low prices and variety of products. This is exactly what is likely to happen in Pakistani retail market.
With increasing competition and introduction of global retailers, the industry is likely to witness a wave of consolidation, eliminating several small to mid-sized retailers in this race of competition. Moreover, these trends are just the beginning, with the likelihood of more and more global retail chains eyeing the Pakistani consumer market. In 2005, Pakistans foray for the first time into the A. T. Kearneys Global Retail Development Index, an index of 30 emerging retail markets that are attractive for investment, was a clear indicator that Pakistan is very well on its path to becoming an attractive destination for global retail chains.
Such a scenario may be very beneficial to the overall market, as it makes the industry more competitive, offering consumers variety of choice at competitive prices, this may at the same time serve as the death warrant to a number of small-to-medium businesses in the long run, who will find themselves helpless in this competition, based on their limited capacity to compete. Not only would their size be a disadvantage for them to compete with their giant counterparts in terms of costs, but their traditional approach of doing business can also prove to be a drag for them in adopting new business practices.
These retailers however, can put their act together right now and come up with appropriate measures to counter this upcoming threat. The sooner they realise this threat the better theyll be able to counter it. The only answer to this threat lies in enhancing the business competitiveness of these retail business enterprises.
Competitiveness at the firm level can be broadly defined as the ability to compete effectively with its competitors in the market place. Enhancing competitiveness for these SMEs however is easier said than done. Not only does it require awareness of this threat and a change in general mindset but also necessitate a few concrete steps by these enterprises as well as by the government.
Industry collaboration, for instance, can serve as a highly effective tool to counter competition from the big retailers. This collaboration can be geared towards forming buying groups or consortia for collective purchasing and bulk-buying. Such an association will allow these small retailers to enjoy almost the same margins as enjoyed by their big brothers. The idea of forming buying consortia is not new and has been tried and tested in various countries and across several industries. Such a step however, is hindered by the traditional competitive mentality of our retailers, and must be preceded by some confidence-building measures.
A good first step can be to strengthen the existing market associations, which can then be used to develop these cartels. At a later stage, these cartels can also be used to launch private brands offering greater value to the consumers in terms of low prices, while offering healthier margins to the retailers.
Retail promotions come next, which is an area that has traditionally been ignored by our retailers. While the trade promotions, offered by consumer good companies to retailers, as well as consumer promotions, offered by these companies to consumers through the retailers, are common in the marketplace, any retail promotion from the retailers end is a rare phenomenon.Such promotions coupled with limited local advertising, however, have the potential to do wonders for any retailer.
Due to the similarity in product offerings, most of these retailers are either competing on prices or sometimes due to personalised relationship with the clients. However, through well-designed promotions, such as off-shelf price discounts, product bundling, loyalty programmes, coupons, etc., these retailers can compete well in the market place and even snatch the consumers from other retailers.
Several strategies have been developed in the West to design excellent promotions, providing value to the customers but at the same time increasing the customers basket size. These promotions can also help the retailers in getting rid of the unwanted inventory, which causes a drag on their working capital.
Operational excellence is another area, which can greatly help an enterprise in squeezing hefty margins from the existing business. This excellence can be achieved through better inventory management solutions, POS (point-of-sales) software, restricting shop-lifting and wastages, etc. A heavy focus on customer relations is also a critical factor to make the small retailers more competitive.
Although most of these small retail store owners have personalised relationship with some of their clients, very often they are resistant to go out of the way to serve their clients. Some of the problems faced by the customers are in the area of product returns, which is a normal practice in the West but has been severely resisted in the local retail market. Introduction of such practices, however, is likely to go a long way in enhancing customer loyalty.
Considering that 14.67 per cent of our labour force is employed by the retail and wholesale trade segment (including hotels and restaurants) and it contributes substantially to our GDP, this must be a high priority area for the government.
Some of the immediate steps, which can be taken by the government, are to sensitise the SME sector about this upcoming threat, through awareness campaigns and educational seminars, launching capacity-building initiatives for industry associations as well as for individual business enterprises and offering financial incentives.
Government organisations like SMEDA can forge partnership with educational institutions to offer retail management training for these retailers and these programmes can be offered through trade and market associations. Providing financial support for selected areas is another area, which can motivate these SMEs to adopt state-of-the-art business practices. Business Support Fund, a project established by ministry of finance and SMEDA and funded by Asian Development Bank, is already providing financial assistance to SMEs for procurement of business development service on a matching grant basis.
While the modalities of this model might raise a few questions, the initiative is helping a number of SMEs in addressing their business needs. Such projects can also focus on targeted interventions, ranging from simple cookie cutter solutions like developing and implementing ERP solutions for these small-to-medium retailers to more innovative initiatives, such as enabling the retailers to transform their businesses into multi-outlet enterprises, through better monitoring and control systems.
The government should also encourage other international donor organisations to focus on the retail sector and dedicate some of their technical assistance funding within their economic growth portfolio and enterprise development programmes on enhancing the retail competitiveness, especially within the SME segment.
While the government should encourage the FDI flow through these global retail chains, it must also consider strengthening the SME segment within the industry, providing employment to millions of people.
Making retail businesses competitive -DAWN - Business; May 05, 2008
