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Jul, 01 2008

Shift in small retail models

The neighbourhood stores are on the threshold of benefiting from the advantages of organised retailing as the format of franchising for a small modern retailer is fast catching up. In this new dispensation the owner employee` who takes ownership of the bu

What is the key difference between a small modern retail outlet (say, Reliance Fresh or Subhiksha or More) and a neighbourhood store (typical kirana or general store)?

The neighbourhood store has distinct plus in terms of ability to relate to the consumer (possible because of the owner sitting there), ability to build in well-bonded team of assistants, servers and delivery boys sans the `corporate` tag, and the flexibility to take business decisions on varying price points, if the situation so demands. These issues, besides being absent in a small modern retail outlet, are almost impossible to bring in.

If such is the rigidity, how will it be possible for a modern outlet to work on the lines of a friendly neighbourhood store?

Here`s a possible solution:

A small modern retailer has to have size, which cannot be replicated by the smaller neighbourhood store as they mostly lack flexibility on location. A bigger size - big enough to form a sustainable model – and a well laid out ambience will appeal to certain customer profiles.

Modern retail chains should appropriate the positives of neighbourhood store onto itself. This is nigh impossible in a large elaborate `corporate` set up as employees are always on the move for better `careers` at the drop of a small compensation increase.

The best format for a small modern retailer is franchising. However, the format discussed here is a slight shift from the regular franchising concept. In layman`s terms it could be defined as an `owner employee` who takes ownership of the business, has no fixed salary but whose compensation depends on his store making or losing money and with no limits. The owner employee takes a tidy share of the profits, but does not take anything home if the business shown no profit, similar to a neighbourhood store.

The owner franchisee invests nothing in the store. The capital investment and running cost is borne by the retailer franchisor who will also provide the location and interior designs at his cost. All that is required of an owner franchisee is to run the store efficiently and without expecting any remuneration. His income comes in the form of shared profits which is agreed upon in advance. The more the profits the more he earns which is directly related to his efficiency and dedication. However, to ensure that the owner franchisee does not walk away with the capital goods or quits without notice, the franchisor may ask for an initial security deposit equivalent to the capital goods value in the store.

This retail format is a paradigm shift from the typical franchise concept in which the franchisee has to make the investments in terms of capital, location and staff. Since only a refundable security amount is required, any individual can become an owner franchisee with a franchisor`s assistance for business support.

While most retailers are open to the regular franchising model since they see it as a way to reduce capital requirement, there is also need for them to see franchising as a business model that ensures profits but not as one that reduces capital requirement. The new franchise model is ideal for both the individual as well as the retailer franchisor.

With the tax regime tightening by 2010 in uniform GST, and compliance increasing, the paradigm franchising model will be the only way forward in the mid-term for the small size organised retail.

In the next three to five years many neighbouring stores will approve of and open to the above arrangement to benefit from the advantages of organised retailing such as better sourcing, better margins, strong inventory control, training and marketing.

In all probability they will have no other choice.

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