The bargaining power of organized retail translates directly into higher gross margins for the retailers. At present there are a large number of independent retailers with little bargaining power vis-à-vis manufacturers, distributors and wholesalers. The manufacturers have been promoting their brands and generating consumer demand for branded products. This makes it necessary for all varieties of stores especially in urban areas to stock branded products. The manufacturers take advantage of the consumer pull to limit margins to the retailers. The retailers manage their profitability by operating on a very low cost basis. This is possible because of low rental expenses due to historical reasons and low labor costs due to employment of family members in the store. The modern stores have somewhat higher gross margins, but their net margins are not very significant for providing the cash flow required to fuel rapid growth in outlets.
The retailers can increase their power in several ways. They can invest efforts in developing their own store brands. The supermarket chain Food world has begun doing this in a limited way with food grains and pulses. Secondly, they can invest in supply chain, buy directly from the sources and eliminate middlemen. Thirdly, they can attempt to obtain volumes in buying by aggregating the requirements of various store, and bargaining for better prices by placing large orders. Although this strategy suits the chain stores, independent grocers may also get together by forming a cooperative or buying club in order to benefit from scale economies in purchasing. The retailers can also obtain several benefits from using information technology. They can monitor their stocks and sales using IT and thus manage their working capital more efficiently. They can also analyses data about customers and their buying habits and be in a position to develop marketing strategies and promotional offers to increase the customer purchasing at the outlet.
The manufacturing firms would have to develop new strategies for dealing with powerful retailers. The first change required will be one of mind-set. Negotiations with powerful retailers will have to be carried out at much higher executive levels within the firm. The new structures such as national account managers, category managers, etc. would have to be deployed for the purpose. The firms will also have to reconsider their brand promise, brand promotion and their brand building policies to deal with store brands that will be introduced by retail chains. Besides, the firms will have to re-engineer their logistics policies to meet the demands of powerful retailers for just-in-time delivery to their distribution centers or stores. New product introductions will have to be coordinated with the retail chains so that adequate shelf space is available at launch. The firms will need to carefully look at their product cost structures both in terms of variable cost and allocated fixed costs in order to maintain profitability in the face of pressures for price reductions from powerful retailers.
The Indian retail sector is largely traditional, but stores in modern format are emerging. The contribution of organized retailing in the share of retail sales in India is currently very small. Based on an analysis of retail developments in countries such as Thailand, Brazil and Greece, and some experience in India, it is possible to conclude that modernization of retailing in India would be influenced by some important factors. These factors include economic development; improvements in civic situation; changes in consumer needs, attitudes and behavior; changes in government policies; increased investment in retailing and rise in the power of organized retail. The development of modern retail will have several implications for managerial practice in manufacturing firms. Firms will need to proactively review their sales structures, brand activities and logistics policy and price structure to cope with pressures from powerful retailers.