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Cash and carry

October 31, 2003

The stir that the German distribution major, Metro Group, has caused by opening its first cash and carry distribution centre in Bangalore, indicates that it has the potential to initiate radical change in India's trade and distribution structures.

The antediluvian condition of the trade channels in India adds to costs, reduces the competitiveness of the Indian economy and hampers growth. Change has been slow because traders make up a key constituency of the ruling BJP.

In deference to them the government has not so far allowed foreign direct investment in retailing. In India the Metro Group is not in that space, as a Wal Mart would be if it were to come in, but still the protesters are out, led most prominently by the Swadeshi Jagaran Manch.

The manch has likened the attractive prices offered by Metro to the cheese that tempts victims to the rat-trap. It fears predatory pricing that will first kill the competition and thereby create a monopoly that gets exploited.

But competition among companies like Metro -- and there are no entry barriers -- should take care of any exorbitant margins that may temporarily exist in the business.

Metro's cash and carry business is not retailing; it does not sell to the end-of-the-line consumer. It is a distributor and aggregator, which offers a huge number of items (over 17,000 initially in Bangalore) to the business buyer, be he the retailer or the company procurement manager, under one roof.

Metro's business model is built around the fact that it sells for cash and buys through its efficient procurement chain, allowing it to charge very low mark-ups.

Since it is a big buyer it is able to get deals from manufacturers and producers that the average procurer cannot. And since all these items are available off the shelf 365 days a year, the buyer shopping at Metro has more predictability in his business and can reduce his own inventory levels.

It is no wonder that large numbers of serious business visitors have been queuing up before the gates of Metro, even as stockists and distributors and their political mentors have been picketing them.

Large distributors like Metro are a boon not just to business buyers but producers like small-scale units and agricultural producers' cooperatives, which are not big or savvy enough to be able to dictate to the established supply chains.

Through a large distributor like Metro, small producers have the chance to join a modern procurement chain that rewards efficient suppliers.

There is no doubt that the emergence of large aggregator-distributors will lead to de-layering of Indian distribution, but this is to be welcomed.

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