By Hardik Harsora, Co- Founder of Effex Business Solutions
This article was originally published by Entrepreneur.com,
Mumbai, Feb 2017 – Regardless of pundits’ predicting the inevitable doom of the retail sector, it dominates the Indian market, and will continue to do so for years to come. The majority of India’s population is located in villages with poor, or no access to digital platforms. Plus our mentality of “dekho, parkho, khareedo” will continue to fuel retail dominance. No wonder the retail segment is expected to double its growth in the next 5 years.
Principal – license owners of products in India, and manufacturers – companies and retailers will step into the arena with ambitious plans.
Both entities form a key part of the retail industry. Of course, wholesalers and C&F agents contribute to functioning of the retail sector also. But principal companies and retailers are the only entities concerned with products and services reaching the customer.
For the remaining post, we will shed light on challenges both these players face.
Challenges for Principal Companies
Principal companies face many challenges in their pursuit of growth and sustenance. But their main challenges can be broken down into 3 avenues. They are:
- Identifying Channel Partners
The biggest challenge for manufacturers is aligning with the right channel partner (read retailer). ‘Right’ here implies a retailer who gets the desired reach and revenue, and whose goals are in sync with those of the principal company.
The lack of effective processes to guide manufacturers in this step is stark. Principal companies must profile their preferred retailers on parameters like reach, sales experience, reputation, goal alignment and more. They might create a mental (or paper) image of such retailers. However, translating this paper image into real life is immensely challenging and exhausting for them.
When principal companies falter at the most important step, almost certainly, the channel partner does not meet their expectations.
- Investment
Investment is another parameter where it’s important but challenging for principal companies to see eye-to-eye with retailers.
Principal companies might set their eyes on aggressive expansion in a geographic area. But the retailer they want to form a business relation with might not be so keen.
For instance, a furniture manufacturer might want to stock 20 units of a specific item with each retailer. But the retailers might not be keen, because this involves investment of space and inventory liability for them. At such times, the principal company must choose whether he wants presence in the geographic area (at the expense of quantity), or sales.
Taking this decision is a big challenge for principal companies. It’s difficult for them to predict how lucrative or expendable a location will be in the long run.
- Collection
Collection of revenue also poses a huge challenge for principal companies. For instance, they might enter a transfer pricing agreement with retailers. This means they push their goods to retailers for a certain cost, and demand the retailers pay them within the credit period. They don’t focus much on how the retailer recovers his cost and profit.
But if a retailer misses one payment, he won’t pick more goods until he has cleared it. This means a slowdown in sales for the principal company.
Designing the ideal collection and pricing model with their retail partners is another massive challenge for principal companies.
Challenges for Retailers
Retailers also face many challenges while engaging in business relations with principal companies. Obviously, their challenges are different. Some of the most crucial ones are:
- Choosing the Right Mix
Retailers want to stock multiple brands to ensure their outlets stay functional and profitable. But a challenge for them is to choose the right mix of brands to partner with. They might partner with a brand whose goods do not move off the shelf quickly.
That leads to many cascading effects, one of which is inventory management.
- Inventory management
It’s not difficult to guess the inventory needed for popular goods. But for no-so-popular goods, inventory management is challenging but essential.
Retailers might be lured by a higher margin offered by new principal companies who want to grab market share. But how much of that inventory sells depends on the principal company’s marketing, reputation, product demand and customer support.
The more time goods spend on shelves and in warehouses, the more the revenue of retailers is impacted. Their concept of mota mota hisaab largely stifles their growth. This is because beyond a point, they cannot focus on specifics or strategize deeply.
- Visual Display
Merchandize display is the make-or-break for any retail store. Steve Jobs spent agonizingly long working on every element of Apple retail stores for years. The results are for us to see.
A retailer shouldn’t doesn’t just make visual merchandising attractive. He must ensure that the goods he stocks are properly visible. Failure to do this results in a revenue loss for his business.
For instance, if a lesser known brand gets visual preference over a more popular one, the latter could reduce its business arrangement with the retailer. This could lead to revenue losses for the retailer, since it’s easier for a popular brand to find other cooperating sales partners.
Parent companies also face challenges when it comes to visual merchandising. They instruct their sales teams to conduct periodic audits, because this ensures that parent companies are in the know of how their products are displayed at retail outlets. This, in turn, has a direct correlation with their sales. However, parent companies find it challenging to have control over the audit cycle, and whether they are conducted accurately.
Summing Up
The ideal business environment is one where principal companies and retailers don’t just grow individually, but together also. With a topography like India, retailers are crucial for principal companies, and vice versa. With the growing demand for better goods, it becomes increasingly important with each passing day for both entities to overcome these challenges and forge a strong business partnership
