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Apr, 17 2011

EXPECTATIONS, CHALLENGES & STRATEGIES FOR 2011

Year 2011 is the Chinese year of rabbit. It is expected to be full of surprises although as of now, it looks very timid and fluffy. We asked retailers and small business owners certain questions to gauge their expectations from the year and here's what th

Most of the small businessmen and retailers surveyed were of the opinion that they would be focusing on primarily two things; first, retaining and growing the current customer base (23%) and second, reducing cost and saving money (22%). Therefore, there is a growing consensus that even though the consumption is up, inflation will still challenge small businesses to focus on cost-cutting. At the same time, previous years' focus on retail expansion will remain the same, as 22 per cent of the small businesses surveyed intend to develop more business through greater horizontal growth.

Where would they spend their budget?

Small businesses are in no mood of increasing their marketing budget or taking a risk by adding new product in the portfolio. Rather they intend to spend on new technology (37%) and hiring more employees (25%). As the businesses plan to expand, the demand for skilled labour will also increase. And since businesses are less cynical about investing in new technology, there lies great opportunity for technology companies to develop more small business-friendly products. This year, most of the small business owners do not expect economic conditions to change much. They are neither expecting any good news nor a bad one.

Challenges & strategies

Now, here are the challenges to be confronted in 2011 and industry experts' take on the strategies to fight them.

Challenge 1: Inflation

Rising inflation could pose serious challenges to retailers, considering price hike has its own constrains. High inflation will directly affect input cost and lower margins. Global food supply to India has been adversely affected due to natural calamities in some parts of the world. The impact of post-harvest relief would fade away, leading to further price rise. Rising global commodity and crude prices will have a direct bearing on the Indian consumer. Aggregate demand pressures due to rise in rural incomes, change in consumption patterns, supply bottlenecks and stagnant output and productivity levels in agriculture would continue to keep food inflation high and sticky. Higher inflation could also impact consumer spending, with spending on non-essential products witnessing a downfall.

Experts' take: Self-restrain, discipline

On rising inflation affecting working capital requirement, Ratan Jalan, Founder and Principal Consultant and a renowned franchising expert, says, “The hard fact is that difficult times will require smarter and hardworking approach to manage resources, be it inventory or receivables.

Harminder Sahni of Wazir advisers and retail strategists agrees that working capital is going to be a major issue this year for all players across the supply chain. With rising interest rates, everyone is likely to push this additional cost to the supplier or customer. He suggests, “It won't help the overall business, as the cost will add to overall increase in price or shrinkage of margin. The only way to tackle this issue is to manage the supply chain better and make every rupee work all the time and work harder and not sit idle, either at shelf or in transit or in warehouse.”

He further explains the importance of investing in technology. “For this to work efficiently, invest in to build seamless supply chain. Unfortunately, most of the retailers and suppliers still work in silos and it creates buffers and bottlenecks everywhere and immense leakages that add to the needs for working capital. Another aspect is wherein retailers try to offload this problem on vendors, assuming that they have saved cost at their end, not realising that next time on, vendors are bound to build this cost in.”

Harish Bijoor, CEO, Harish Bijoor consultants, says, “There will be two simultaneous developments in the Indian market. The first is, the Indian GDP is due to grow at 8.6 per cent. This means that significant economic activity is going to result across the three sectors of the economy, which spans agriculture, manufacturing and services. The biggest growth is slated to occur in the realm of services and the smallest in agriculture. This means lop-sided development. The hollow part of the economy grows and the solid part remains static, if not shrinks.”

He says the second development would be that inflation will rise. There is a pressure on money. Domestic bills are going to be on the rise and food inflation will be the biggest worry. This means prices of all goods and services that revolve around food will be on the rise, he adds. “It also means that disposable income is going to be more and more food-geared, which would in turn mean lesser money for everything else. Cash-flows are bound to be affected. I, therefore, believe that retail must focus on "roti-kapda-makaan-telecom" retail. This means that retail which focusses on basic needs and wants will do well on cash-flows. Items of greed and desire will do less wonders on this count,” sums up Bijoor.

A crucial strategy that Bijoor recommends for retailers is, “Leverage your retail business to have a firm footing. Do a 90:10 skew across basic versus luxury. Insulate yourself well.”

Challenge 2: Shrinking margins, increasing working capital

Increasing input cost will increase working capital requirement with business still at the previous levels. In other words, you might need additional cash to keep the business running every month.

Experts' take: Think twice before you leap

Jalan suggests, “Products and services, which offer significant differentiation, will command premium and shall be the best insurance against difficult times. Retailers will need to focus on more innovative approaches in offering their services. A simple "me too" approach to business will not survive against increasing costs, as the market will not allow you to raise prices.”

Sahini recommends a more proactive approach. “The key role of retailer as the single point of contact with consumer is to predict and estimate demand much more accurately, so as to give feedback and inputs to the supply chain at the back. If the retailers invest in this particular function, many issues will be resolved. However, retailers are going to the other extreme, wherein they are washing their hands off this responsibility and wanting to work on SOR (sales or return) model, wherein all the risk is being off-loaded on to the brands. That's the reason why brands don't offer better margins to retailers and keep the real margins,” he says.

Bijoor, however, doesn't consider shrinking margins a cause of worry for everyone. Most prominently for anyone who deals with food and beverages. The old obscene margins will not accrue for a while till inflationary pressures ease on the domestic wallet. “Retailers need to re-orient their cost strategies on the count of what they spend as irrelevant cosmetic expenditure. This means that shop re-fits and retrofits will need to get into longer cycle-time rather than shorter. Be prepared to see boring old stores last longer than before, from the consumer end.”

Challenge 3: High interest rate

Monetary tightening is expected, as the RBI would continue to hike both the repo and the reverse repo rate in the forthcoming monetary policy review. The hike in policy rates reverse is expected on the grounds that inflationary pressures are still looming large on the Indian economy and it is one of the key responsibilities of RBI to ensure price stability in the country. The surveyed economists see money supply (M3) growth to be around 16.9 per cent during 2010-11.This might mean lower credit availability as well as costlier short-term loans.

Experts' take: Not the biggest worry

Bijoor, however, believes that this might not bother retailer. “This is not a worry. I say this because the roll-over of money is going to be fast. Businesses that depend on a daily turnover of cash will never worry on this count. Business will be robust in terms of turnover but short in terms of margin. Businesses that do not borrow more than seven-day working capital requirement will still do well. Those that go into longer borrowing cycles will find it tough.”

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