Even as the government has mandated foreign multi-brand retailers setting up shop here to source at least 30% from small and medium enterprises (SME), most home-grown organised retailers source less than 25% from such units. While Future Group which picks up as much as 35% of its products from smaller units is an exception, inconsistent quality and the reluctance of small units to scale up deter most retailers from tapping smaller enterprises.
A senior executive at Tata’s retail arm Trent points out that it’s hard to source quality products from vendors who are unwilling to scale up when demand picks up. The firm’s supermarket chain Star Bazaar, which earns around 20% of its top line from private labels, currently buys about 25% of its products from SMEs.
On the other hand, the company’s apparel chain Westside, which primarily sells its own brands, works more closely with SMEs, sourcing about a third of its merchandise from SMEs. “We work with more SMEs in the apparel segment, but few units deliver quality consistently and can scale up according to our requirements,” a senior executive observes. “When retailers source from SMEs, there is the danger of losing out on cost and volume efficiency,” points out Saloni Nangia, director at Technopak Consultancy.
Vendors, for their part, point out that purchases from larger retailers tend to fluctuate, making it difficult to estimate demand. According to Sunil Jain, who runs Trisis Corp and supplies home care products to Future Group, Aditya Birla Retail and Reliance Retail, smaller units need to configure their business models to make them more flexible.
Shoppers Stop’s Hypercity chain of stores, which sources about 90% of its products domestically, buys only about 15% of this from SMEs, says Mark Ashman, CEO. “Most of the merchandise we buy from SMEs is apparel as FMCG products come in from bigger organised firms with strict quality regulations,” explains Ashman. Typically, retailers source their private label portfolios from the unorganised sector. In India, private labels currently contribute barely 7% of companies’ revenues. That’s smaller than what retailers in the US, UK and France earn from private labels of about 17%, according to AC Nielsen. Although private labels command significantly higher margins – at times as much as 1,000 basis points – since marketing costs are minimal, there’s also less of a brand pull.
Future Group, which earns 15-20% of its revenues from private labels, sources products from close