Modernization of Trading Systems
According to a research, retail markets tend to modernize from largely traditional trading techniques to modern trading techniques. As markets modernize, the share of traditional trade as a percentage of total trade declines slowly; suppliers, however, will continually need to adjust the amount of resources allocated to manage the traditional trade versus the modern trade. Smart suppliers manage this balancing act by accurately tracking (and often predicting) the pace at which key transitions or market evolution shifts are likely to occur. Three overarching factors affect the speed and nature of market transition. They include (1) consumer trends and purchasing behaviors in the market; (2) factors related to modern retail consolidation (Also called central buying, an approach in chain stores whereby all purchasing is done through a central or main office); and (3) disruptive factors such as the economy, special interests, and government regulation etc.
InPakistanthere are a number of manufacturers for various products. The normal distribution channel is that the manufacturers use their own distributors as well as independent distributors in the market, who purchase products from the factory and then deliver to the retailers and the wholesalers. On the other hand, some retailers get products directly from the distributors while some are purchasing from the wholesalers. Big cities have thousands of outlets in the market for grocery items. If we only take the example of twin cities ofPakistan, there are around 3,000 grocery outlets including the small shops inIslamabadand inRawalpindithere are around 15,000 outlets.
It is impossible for the manufacturer to reach each and every outlet so they need distributors to make the products available to the outlets. Even the distributors at times cannot reach all of the outlets, so there are wholesalers in the markets who buy the products in bulk from distributors or manufacturers. They are located in certain locations where the retailers buy the products from the wholesalers.
At the end of the day, it all depends on the relationships of the retailer; if he has good relationship with the distributors and can buy the products on credit from him and even return the unsold products, or he could buy the same products from a wholesaler like an end consumer. We can say that the markets in Pakistan are divided into 2 categories with respect to retailers; first are those who are getting the products from distributors and second are those who are buying the products from wholesalers. Distributors supply the product at the retailers shop but retailer has to go to wholesaler to purchase a product.
These consumer trends, retail consolidations, and disruptive factors heavily influence retailers growth strategies as well as the formats they are most likely to develop to sustain growth over the long term. As markets evolve, retailers adjust their formats and operational strategies to cater to differing shopper needs and trends-and thereby maximize retailers reach in an evolving market.
Advantages and Disadvantages
There are numerous advantages of modern trading system. There are 3 types of consumers who come to modern trading stores like Metro or Macro; 1) end users, 2) traders and 3) hoteliers. The system of modern trade influences the distributor business because retailers are now going directly to these stores and are purchasing products themselves at lesser prices. Modern trade is reducing the number of distribution channels from the factory to the retail shop. This subtraction of distribution channel increases the profit margins of both the manufacturer and the retailer.
It is a convenient alternative for the end users to purchase house hold items from one place at a lesser cost.
The disadvantages of modern trade is that it is adversely affecting the business of independent distributors since the manufacturer is giving different prices to the distributors and the modern trading stores .Margins of distributors have reduced and they are also loosing some of their clientele as some retailers prefer to buy products directly from these modern stores rather than distributors. Another disadvantage of modern trade inPakistanis that it has confused the end user by offering 3 different prices for the same product in the market. Those 3 pricing areas are retail shops, wholesalers and the big stores. This usually creates doubts about the quality of the products because of the price variations.
Reluctance in Modern Trading
Some of the manufacturers are now willing to enter into modern trading system but it also varies from manufacturer to manufacturer. If a company has a strong positioning of their products in retail outlets of a city, they would also be willing to sell their products in a big store. But on the other hand, if a company has weak positioning in the retail outlets, they would hesitate to sell their products in the modern trading stores. The distributors get fix percentage of profit from the manufacturer to sell their products to the retailers or wholesalers.
If we take the example of India, where consumer trends are very much similar to ours and have been the greatest influencer in forcing modern trade to develop. A significant demographic transition is now underway with a large, young, working population (median age of 24); more nuclear families in urban areas; an increase in the number of working women; and emerging opportunities in the service sector. Urbanization, higher household disposable income, and convenience one-stop shopping are other factors that are fueling this modern trade growth. Retail consolidation will slowly help drive modern trade growth as well. It is estimated that the Indian retail industry was worth about USD286 billion at the end of 2004; yet India remains one of the most fragmented retail sectors in the world with only 2% of total sales deriving from the modern trade.
As that happens, India is likely to see a significant trend toward modern trade as retailers invest in data, technology, and infrastructure to exploit and escalate potential growth. Disruptive factors particularly government regulation are unquestionably the key reason foreign players have not played an influential part in triggering retail consolidation in India. However, there is no one path to modernization; markets are not dependent on global retailers as catalysts for modernization. However there are many markets where global retailers act as key catalysts, and, in fact, capture the lions share of the modern trade. To understandIndias potential future, it is useful to look at examples of three market types, and why theyve modernized the way they did:
¢ Markets that have grown the modern trade through global players entering the market;
¢ Markets that have grown through a hybrid of global and local players; and
¢ Markets that have modernized driven almost entirely by local retailers.
The government policies play a major role in implementing modern trading system in a region. InIndia, there are some areas where the government has not allowed modern trade stores to operate. Similarly, inPakistanif the existing traders are reluctant of the entrance of modern trade stores like Metro the government has the authority to impose restrictions on such stores. Nevertheless, these kinds of stores are beneficial for the Government as they give fixed General Sales Tax (GST) and also are a foreign investment in the country.
The Core Capabilities Required for Growth
A core takeaway from studying market evolution is that, regardless of whether the retailer driving the modern trade is global or local, the capabilities they need to do that are largely the same! In addition to the overall management, a great modernizing retailer will require capabilities in six core areas to win in the changing environment.
A retailer is best served having an operating model with two key financial criteria:
¢ Generates enough cash flow to fund its expansion; and
¢ Remains relatively low debt.
Retail is a cyclical and relatively low margin business. High levels of debt and interest greatly impede a retailer in growth mode and can make running the operation difficult. Most great retailers remain relatively conservatively financed.
The retailer is able to manage the complexity of getting merchandise from factory to shelf. Indian conglomerate Reliance Industries Ltd. is aiming to get to this state through integration of an entire supply chain from farm to store, particularly with staple food commodities. Many great local retailers (e.g., HEB and Publix, twoUSregional grocery chains, and 7-11 inJapan) optimize their market position through a best-in-class supply chain, which gives them a significant competitive advantage in speed and store conditions.
Brand is all about a relevant and influential connection to the shopper. It is imperative for retailers to have a systematic understanding of their shoppers and be able to execute, both in and out of the store, based on that knowledge. In addition, the ability to tailor a portfolio of formats to meet different shopper/consumer needs is very helpful-especially in geographically, culturally, and economically diverse markets like India. Pantaloon is one of the Indian retailers that has begun to develop the data and analysis capabilities to do just that. As Indias infrastructure develops to support modern trade, the retailer will be able to do that more consistently.
As the market evolves, both retailers and manufacturers will require the capabilities to consistently understand what motivates shoppers and consumers, in order to bring together a successful retailer strategy that serves both constituents well. The intermingling of finance and brand is pricing; the right price doesnt necessarily mean the lowest, especially in some categories such as apparel, where a low price may be perceived as poor quality. Also, a rigorous understanding of which items are important to be low priced for competitive purposes versus which items can be margin enhancers, is one of the key criteria strong retailers use to grow in a market.
When discussing people, the discussion is incomplete without the right measurements in place. As people are trained to execute at the store, retailers will have to have the right set of measures to ensure great delivery to the shopper. In addition, the focus of high capability in-market retailers corporate measures are usually geared toward selling to the consumer than on buying efficiencies and leveraging scale; however, our research shows that retailers who understand this and work proactively with suppliers to optimize their mutual business tend to grow faster than the market.
In-store execution should come together as a result of the right brand message and effective operations that facilitate having the right merchandise in the right place. Often the simplicity of the message and the operation generally results in superior in-store execution, and this largely depends on people development and training. Relentless focus on execution details is the final differentiating factor for success.