Supply Chain Management of Carrefour Wholesale Cash and Carry

By

Amitava Manna

1|Page

Executive Summary
Cash and Carry business started in India in the year 1997 when the Government of India allowed 100% Foreign Direct Investment (FDI) in the Cash and Carry business. The significant foreign investment was noticed when Metro entered India in the year 2003. Another major entry in to this sector was done by Wal-Mart which entered India in the year 2009 in collaboration with Bharti. It was during late 2010 that Carrefour entered in to this segment. Over the last one and half years, Carrefour had opened just two stores in India, one in Delhi and the very recent one in Jaipur. But in the coming years, Carrefour has plans to expand aggressively and show their presence even in South India. The purpose of this paper is to discuss Carrefour in India. By using resource-based theory, the companys supply chain strategies are studied and analyzed. Findings Carrefour needs time to tie up with an Indian partner to start retail operations in India and how they are meeting the whole sale operations in India. The company also delayed its retail plans to focus on launching cash and carry (wholesale) operations. The worlds second biggest supermarket group by sales is negotiating with over six Indian companies including diversified business groups, retailers and mall owners.

2|Page

Table of Contents
Table of Contents..................................................................................................................................3 Introduction/Background of the study..................................................................................................4 The rise of Cash and Carry Wholesaling in India................................................................................5 Cash and Carry Business Model...........................................................................................................7 Objective of the Study..........................................................................................................................8 Scope of the Study................................................................................................................................8 Methodology.........................................................................................................................................9 Existing System..................................................................................................................................10 Data Collection...................................................................................................................................11 Data Analysis......................................................................................................................................13 Proposed System.................................................................................................................................15 Recommendations...............................................................................................................................16

3|Page

Introduction/Background of the study

The new store, Carrefour Wholesale Cash & Carry in Seelampur, near Seelampur Metro Station, New Delhi is spread across 5,200 square meter and will house over 10,000 stock-keeping units to cater to professional businesses, institutions, restaurants and local retailers. Carrefour opened up its second Wholesale Cash & Carry in Jaipur. The store in Jaipur is almost the same size as Delhi. Carrefour is also planning an entry into Agra and Meerut. Since the FDI policy in India does not allow foreign companies to open multi-brand retail stores in the country, global retailers have opted for the cash-and-carry route to establish their presence here. Since the late 1990s, the French group has been present in India with an office that buys clothes, mangoes and coconuts. This branch realizes a turnover of US$450 million and has a growth rate of 15 per cent per year. To prepare its implementation, the group asked Indias largest consumer products company, Hindustan Unilever Ltd (HUL) to send some of its key executives to Carrefour S.A. headquarters. The manufacturers of consumer goods had not waited for the big representatives of modern retailing to become established in India. LOreal has sold its shampoos since 1996 in small flasks and in bags in 200,000 selling points. To better understand how the Group Carrefour functions, especially in terms of interactions with suppliers, HUL executives spent nine months at the Paris headquarters, according to a senior HUL executive who did not want to be named, because he was not authorized to speak with the media (Malviya and Roy,2008). Having studied the Indian market for many months, the French company opened in 2007 an office in Gurgaon (in the national capital region of Delhi) with 50 people, and created two companies, wholly-owned subsidiaries of Carrefour: (1) Carrefour Wholesale Cash and Carry India Pvt Ltd (Carrefour WC&C India Pvt Ltd), which is dedicated to the wholesale trade. (2) Carrefour India Master Franchise Co Pvt Ltd which will choose an Indian company as partner to be able to create franchised shops under the Carrefour brand. Therefore, this paper aims to study Supply Chain Management of Carrefour Wholesale Cash and Carry. In this paper we outlined an approach that can determine how external factors might affect the development of Carrefour operations in Indian market. We summarize a conceptual framework that identifies the specific marketing research data requirements pertaining to the continuity and change forces, the possible competitive analysis of customer base, infrastructure, technology, core competence, supply chain and distribution network, culture and performance, relevant effects of globalization, new opportunities, competition, customer needs, mergers and acquisitions and govt. policy and legislations We also show how this information can be utilized to improve various tactical and strategic decisions that can be made based on this knowledge.

4|Page

The rise of Cash and Carry Wholesaling in India

Retail giants from the west are keen on entering the Indian market. This is hardly surprising, given that India accounts for over a sixth of the worlds population accompanied by increasing levels of economic development. Yet, given the Indian governments extensive regulations limiting Foreign Direct Investments (FDI), entering this lucrative market has proven to be an extremely challenging endeavor for foreign retailers. This situation has forced global companies such as Metro, Wal-Mart and Carrefour to get creative. The Cash and Carry wholesale business model is becoming an unconventional means of entering this emerging market. With the Indian government imposing a FDI cap of 51% in single brand retail, Carrefour and other retailers are unable to conventionally enter this market. These crippling restrictions do not apply to wholesalers, and therefore global retailers are using Cash and Carry wholesaling as an indirect way to enter Indias high-growth market. The Cash and Carry model is different from traditional wholesaling in that it involves paying at the time of the transaction, and does not include any delivery services. It caters to traders, small local shops, as well as larger businesses. It allows them to shop for a great variety of commodities and intermediate goods, while still paying competitive wholesale prices. The current retail market in India is mainly composed of kirana mom and pop type stores, which occupy close to 98% of the industry. The local kirana owners do not benefit from economies of scale, and have a limited selection of products. Moreover, the many stages of the supply chain also cause a hike in prices, mostly due to the many levels of commission at each chain link. With India supporting such a huge portion of the global population, a wholesaler can help get rid of these high distribution inefficiencies. Cash and Carry wholesalers not only create higher margins for the kirana shopkeepers, but also indirectly lead to lower prices for the end consumers. This presents a win-win scenario for the economy. India offers lucrative opportunities to these global retailers, with a population of approximately 1,155,347,678 and an ever-rising GDP. The 2006 Global Retail Development Index even named India as the most appealing country worldwide to enter the trade and retail market. The presence of Cash and Carry operations in India is currently minimal, but it is rapidly growing. Metro was first to enter the Indian market in 2003, and they now operate six cash and carry stores. Wal-Mart entered the market in 2007 by forming a joint venture with Bharti Enterprises to create Best Price Modern Wholesale, and now has five units in operation. Lastly, Carrefour entered and they now operate two cash and carry stores. Carrefour Wholesale has adapted their merchandise to meet the day-to-day needs of restaurant owners, hoteliers, caterers, fruit and vegetable resellers, kiranas, other retail store owners, offices and institutions. They even make a point to source approximately 90% of its merchandise locally. These new Cash and Carry operations stimulate the Indian economy, reduce waste, and make the supply chain more efficient. Roughly 70% of Carrefours sales go directly to small traders, with the remaining going to other Indian businesses such as restaurants, hotels, and offices.

5|Page

In summary, the influx of Cash and Carry operations has minimized the middlemen in the supply chain, allowing cheaper goods for wholesalers and retailers. With forecasters predicting that India has the potential to be forty times larger by 2050, there is abundant scope for continued expansion and development.

6|Page

Cash and Carry Business Model

Cash and Carry model was developed by Lawrence Bately (he was entrepreneur and philanthropist) from Huddersfield. Cash & Carry is a wholesale model. Although wholesalers buy primarily from manufactures and sell mostly to retailer. But somebody say that cash & carry retailer directly buys product from producer and manufacturer and then sell to ultimate consumers. Because this business model brings together small, medium and large-sized producers, farmers, agricultural cooperatives and manufacturers, with the dispersed community of hotels, restaurants, caterers, traders, retailers and small to medium business enterprises, under one roof. In this way, cash & carry operators able to make shorten supply chain (decrease the number of channel member) and reduce the high costs associated with a fragmented supply chain (estimated as high as 25% in India). Retailer will also be benefited from it. As they directly buy from producer which leads to high margin and high profits. By creating demand through high margin among small and medium business, cash and carry operates able to buy in bulk quantities which give advantages to its customers. Why companies showing their interest in this segment It is the only retail format where 100% FDI is allowed and Indian Government also recognized the benefits it brings to economies and for various player. The potential of the business is huge given the fact that the country has a very large number of kiranas, small restaurants & canteens, and a large number of farmers and small and medium business as suppliers to the industry. The cash & carry segment in India is a relatively in small fraction of modern trade. Modern trade in India makes up just about 10%-12 % of the $ 350 billion retail trade in India and there are no benchmark estimates on the potential of cash & carry formats in India. On top of that, the retail landscape is littered with carcasses of C&C players who lost the race, even before it started for some. Shoprite, a South Africa based retail major, one of the earlier movers in the country ran out of steam in late 2000. Though Indian retailers like Future Group and Reliance Retail have evinced interest in this business, but on-ground they dont have much to show. Even international players like Carrefour and Tesco and Wal-Mart had also tested the soil of Indian retail market Metro Cash and Carry India, a 100 per cent subsidiary of Metro Cash and Carry International GmbH, Germany, the first to foray into the country more than five years ago with a store in Bangalore, currently has four stores and is opening a fifth one in Kolkata soon. The Tata groups Trent, UK retailer Tesco is the latest player to enter the business, after Wal-Mart declared an exclusive tie-up with Bharti Retail last year. 7|Page

The market potential for the cash and carry business is huge, in fact, as big as the retail sector in addition to the demand from hospitality players, traders and farmers, said Mr Gibson Vedamani, CEO, Retailers' Association of India. The cash and carry model brings the small retailer into the organized channel by helping them buy in an organized manner, points out Mr Vedamani. In addition to this, entrepreneurs and retailers in Tier-II and Tier-III cities would have access to the entire range of products available in the market, he says. The cash and carry business intends to reduce several layers in the wholesale business. Retail giant Carrefour announced its entry into the Indian market by opening its first cash and carry store for wholesale distribution in Dec. 2010. The potential of the business is huge given the fact that the country has a very large number of kiranas, small restaurants & canteens, and a large number of farmers and small and medium business as suppliers to the industry, a Metro spokesman said.

Objective of the Study

Carrefour in India deals with four different store formats: Hypermarts, Supermarts, Convenience, Cash and Carry. In India wholesale cash and carry format has been implemented as of now. The product categories include FMCG, apparels, furniture and appliances. The objective of the study is to Study the FMCG supply chain of Carrefour India. Understand the Carrefours presence in various stages of supply chain. To analyze the various systems implemented and the possible areas of improvement

Scope of the Study

To understand the supply chain of Carrefour India with respect to the following attributes: Customer base in terms of revenue growth, customer retention rate and current market share Infrastructural requirements: the facilities and stores Technology implemented to efficiently manage the supply chain The core competence of Carrefour in the Indian market, to understand the differentiating factors The distribution system adopted The organizational culture, the structure and the core values To analyze the performance in terms of customer satisfaction, quality and the profitability Competitive landscape for Carrefour in Indian market The government policies and legislation in terms of the FDI in the Indian retail industry The target segments and the adopted strategies Inventory management practices Customer retention policies and the type of the supply chain implemented 8|Page

Methodology
In order to do a detailed study on the Supply Chain Management of an entity as huge as Carrefour would take months of observation, interviewing and detailed analysis. Due to obvious time, resource and authorization constraints, it was not possible for the authors to conduct similar exercises to analyze the Supply chain. Instead, a detailed interview was conducted with the Supply Chain manager of Carrefour India- Mrs. Darpan Khurana as part of the crucial primary research which is critical for studying such activities. The questionnaire which was utilized for interviewing Mrs. Darpan was obtained from Dr. V. K. Gupta and contained 51 questions which broadly fell under Continuity Factors and Change Factors. Under the Continuity Factors fell the categories such as Customer base, Infrastructure, Technology, Core competence, Supply chain and Distribution network, Culture and Performance. Similarly, the categories under Change Factors were Globalization, New opportunities, Competition, Customer needs, Mergers and Acquisitions and Government policy and legislation. Apart from primary research, there was extensive secondary research which was done in order to understand the global functioning of the various Carrefour outlets and also to validate its Supply chain execution in India. Also, the Supply chain models used by multi-brand chains such as WalMart were studied while brainstorming for a possibly improved Supply chain system for Carrefour India.

9|Page

Existing System
The Indian government permits 100 per cent FDI in wholesale cash and carry (C & C) operations wherein players are allowed to sell goods only for business purposes and not personal consumption. Cash & Carry is aB2B wholesale format where goods are purchased in cash. It is a high-volume, low-margin business and their clientele include hotels, restaurants, caterers, corporates and mom-and-pop stores. A C&C business is a business-to-business model where the size of operations is much larger than a hypermarket retailer and hence, capital costs are quite high. Carrefour is present in the fourth stage of the Supply Chain Management Buying-ProductionWarehousing- Distribution. This is where the actual delivery is carried out. There is a lot of logistics involved in this phase. It has the above light and below light concept; where above light consists of warehouses and below lights consist of shelves/products. Stock out & Sales Loss are two major concepts in this stage of SCM. Sales Loss is a result of Stock Out. Stock Out happens due to Less Buying from Manufacturers, Sudden Increase in sales, Seasonal Factors etc. Carrefours cash and carry operations shorten/optimize the supply chain and eliminate the high costs associated with a fragmented supply chain. It procures the food products and other goods from local manufacturers. Almost 90% of the goods are locally produced. This helps to keep the costs low as well as shorten the supply chain. Since the organized wholesalers and retailers are in a position to directly procure goods from the source, do away with middle men and thereby eliminate multiple profit points. The client mix of a cash and carry mainly constitutes HoReCa and mom and pop stores which typically purchase goods in bulk. Hence, a C & C model entails huge investments in inventory as it has to stock a wide assortment across verticals and brands under one roof. Currently the inventory costs in Carrefours Cash & Carry are very high. Some star products keep on changing but some stay consistent. But direct marketing (i.e. sourcing directly), reducing wastage and transaction costs (which leads to higher prices), better inventory management, and leads to higher profitability. Major share of investments are needed in sourcing and warehousing and logistics. ERP systems are being implemented almost everywhere in CCC. In order to reduce stockouts and also to improve customer service levels, it is crucial for the companies to: optimize inventory levels minimize stock levels and improve working capital management Some of the technologies used to attain the above by C & C operators across the world are Radio Frequency Identification (RFID) and smart sensors. Planogramming which is an inventory control and merchandise display technique that enables a retailer to maximize shelf-space utilization, is strictly followed by CCC. Carrefours Cash and Carry also distributes products of private labels, even though these products dont have a high growth rate in India as people are very brand conscious. By doing this, they assist unorganized retailers to increase their margins. Customer retention is being focused on by 10 | P a g e

passing on the benefits, push other products during unavailability of star products, high promotions, down rate the products etc. It is difficult to comment on the employee satisfaction in the organization as it has been just one and a half years since CCC opened in India, but it can be highlighted that none of the employees have left the company since its inception.

Diagrammatic representation of the Existing Supply Chain at Carrefour India:

Data Collection

11 | P a g e

The continuity and change factors were analyzed with respect to Carrefours Cash & Carry. Among the CONTINUITY factors, the following were analyzed: a) Customer Base Current market share (for key offerings), revenue growth rate, customer retention rate and customer management investments. b) Infrastructure Fixed assets and other facilities owned by organization, number of companies owned, global & domestic brand equity and brand liquidation costs. c) Technology Research & Development expenditure, number of patents, HR skills and training expenses on current technology. d) Core Competence Degree of differentiating advantage and future core competencies. e) Supply Chain and Distribution network Stages of SCM in which the organization is present, ERP/SCM investment, supplier development expenditure and inventory costs in terms of percentage of revenue. f) Culture Organizational structure, level of clear definition of strategy and core values of organization. g) Performance Customer Satisfaction Ratings, Profitability, Quality performance and Delivery performance. Among the CHANGE factors, the following were analyzed: a) Globalization Extent of globalization of the industry and extent of globalization of the organization b) New Opportunities Availability of new opportunities with existing technology & maturity of the existing technology. c) Competition Type of competition in the industry, substitute products available, Vertical Integration (VI) potential and level of existing entry barriers for global players. d) Customer Needs Knowledge of customer about CCCs products and services, changes in customers requirements and customer loyalty ( if measured). e) Technology Industry spend, industry adaptation and possible implementation regarding new technology. f) Mergers & Acquisitions JV/Alliances and domestic & global mergers and acquisitions in the industry. g) Government Policy and Legislation Extent of FDI allowed, import and export trade tariffs, legal barriers and government support for promotion of the industry.

12 | P a g e

Data Analysis
Continuity Factors Customer Base: Carrefour till date believes that they have a medium share of the market theyre targeting, knowing this they have a good revenue growth rate and a customer retention rate. CRM expenses as a percentage of the revenue are around the industry average. Summing up they believe they have a good penetration of their cash n carry target market in India. Infrastructure: Fixed assets & other facilities as perceived by their responses are adequate; although they have the realized the need for more company owned service outlets. Brand equity because of various accolades abroad signifies the strength they possess, although leveraging it could be a tedious job. Overall the Infrastructure is for now not a major issue as the Organization has very deep pockets. Technology: R&D expenses are significant and the HR skills comprehended presently are perfect. Fewer no. of patents and training expenses are also below average. The technology constraints are understandable as the future market prospect cant be predicted. Core Competence: Differentiation advantage is high as the perceived value to customer is high. Its been less than 4 years in sustaining the above advantage. Future core competencies identified are insignificant. Core competence is maintained presently but for steady survival in Indian Market the key will be to sustain and develop core competences in the future. Supply Chain and Distribution Network: The stages in supply chain are higher than 4 but the Org. is present in only one. Investment on supply chain as a percentage of the revenues is around 15% which needs to be increased and the Org. also realizes this as a pain point. Inventory Costs are believed to be very high, but to sustain core competence it is justified. Culture: Organizational structure is because of late entry more process based. The cost and effort in cultural transformation is significant which falls in line with the present

13 | P a g e

immaculate HR skill. Clear strategy is being followed and they have a clear vision ahead. Core values for the whole organization are focused. Performance: Performance in terms of Customer satisfaction ratings, profitability, quality performance and delivery performance is sustainable in the present scenario. Change Factors Globalization: Owing to the fact that Global brands like Wal-Mart are working the same market the extent of Global brands is high. Carrefour itself has immense presence all over the world markets, like Europe and Asia (Hong Kong etc.). New Opportunities: Availability of Technology is an advantage with Carrefour and the industry is still immature in terms of Technology. Competition: Type of Competition in the industry is ranging towards only 3 or 4 major players. As per the above mentioned competition in the market there are 3-4 substitutes to their key offering . Vertical Integration is visible all throughout the industry. Entry barriers are neutral owing to the fact that FDI may be the regulatory factor. Customer Needs: Knowledge level of customers is mediocre and requirements by the customer are under a check, though loyalty could be attracted by customizing the product. Mergers and Acquisitions: JV and alliances in the industry are almost none, except a few, though Globally Carrefour has used local players to establish in the market. Govt. Policy and Legislation: Extent of further FDI in the industry is almost nil. Legal Barriers for the same reason have a stronghold on the industry. Govt. support is insignificant.

14 | P a g e

Proposed System
Organizing the Retail Sector Since the Indian consumer is price centric, Carrefour could set up value in supply chain by making huge investments to counter the expensive real estate, a warehouse shortage, and congested roads by spending at least 20 billion rupees ($382 million) on supply systems and force local retailers to do cash purchases and give shorter credit periods wherever economically viable and thus enjoy higher discounts on the bulk purchases and pass on the advantage to the end consumer. Setting Up Base for Post Reforms Period Once 100% FDI is allowed by the Government, Carrefour need to be foresighted to make relevant local connections and set up logistics to manage its operations to implement top performing formats. They need to set up joint ventures with local producers and thus ensure supply chain proficiency. Carrefour can set up regional Warehouses pan-India whereby their outlets which are in and around the 150km radius can be replenished by the warehouses. The food, vegetables and other such fast expiring products can be stored in-house itself for each outlet. The goods which are imported, can be send to a central warehouse near the port, from where it can be taken by air/train/truck to the regional warehouses for distribution. From the regional warehouse, the products will be taken via road to the respective outlets. For smaller retail stores, the inventory requirement for them can be stored at certain CnC stores which have close proximity but a large enough storage space. Using ERP systems or similar communication tools, the stock requirement can be identified and stock can be sent to these retail stores on a weekly or twice-in-a-week basis using a milk route travel by a supply truck of Carrefour.

*Similar to Wal-Mart, Carrefour also purchases most of its goods within India. However, each store of Carrefour abroad has around 85% of its stock procured locally and has them distributed directly to each store. Carrefour believes that this flexibility of purchasing strategy does not only cater the needs of local customers, but also can lower the purchasing costs. Carrefour has, for example, already established 11 sourcing bases in big cities in China since 1995 and plans its 12th sourcing base in Yiwu, Zhejiang Province. In addition, the 15 | P a g e

empowerment also reflects Carrefours flexibility in management. However, this lack of centralized sourcing and distribution systems is considered to be problematic. Cui (2003) argues that this imperfect physical distribution systems and delay of information system development in China brings higher costs and difficulties to large retailers as most suppliers are still at the stage of workshop that are unable to provide accurate and complete services on delivering. However, as the special conditions of Chinese provincial autonomy and selfsufficiency, a centralized procurement system is difficult and costly to operate. Therefore, by relying on the distribution systems of suppliers, Carrefours flexible sourcing and logistic strategies enable Carrefour to save costs on distribution as well as catering the different needs of stores in each location.*

Recommendations
Establishment of Regional Warehouses based on the expansion With Carrefour India planning to increase their presence pan-India, having a centralized distribution system will not be that advisable especially if they decide to expand in South India also. It would be very difficult to supply products to all outlets within a specified time and the transportation cost will also be significantly high especially with the frequency of transportation of supplies to the various outlets which geographically scattered. And delay in supplying products can lead to discontent both among the retailers as well as the customers which could be a setback for Carrefour India. Therefore, it would be recommended that Regional warehouses be created so as to act as inventory storage units for all outlets nearby (maybe to a proximity of 150kms). The disadvantage would be that the various inventory holding cots would increase due to multiple warehouses thereby decreasing the efficiency of the whole system but this is balanced due to the exponential increase in the responsiveness to the needs of the clients which is critical to the successful functioning of any multi-brand retailer. Utilization of local suppliers Similar to how Carrefour in China obtains about 85% of its products from local suppliers, Carrefour India can also work on similar lines thereby ensuring close proximity to the product source and also ensuring a better understanding about the supply status, reduction in transportation and handing costs, lower prices and fresher products. Reverse supply chain integration might have to be done here wherein the local supplies be bought in bulk and distributed from the regional warehouse which acts as the primary distribution center for the particular product and it is transported from there to the other regional warehouses and outlets. This helps reduce overall costs through economies of scale and utilization of local resources. The food, vegetables and other such fast expiring products can be stored in-house itself for each outlet. Strategic establishment/renting of a warehouse near port The goods which are imported, can be send to a central warehouse near the port, from where it can be taken by air/train/truck to the regional warehouses for distribution. From the regional warehouse, the products will be taken via road to the respective outlets. This facility location is 16 | P a g e

strategic in nature as having a warehouse near to the port itself ensures that the products are stored safely and can be re-packed so as to be swiftly transported to the regional warehouses. It also reduces the transportation costs and increases the responsiveness of the system. Utilization of Cash n Carry stores as storage units For smaller retail stores, the inventory requirement for them can be stored at certain CnC stores which have close proximity but a large enough storage space. This would be beneficial especially in India as the retail stores in the major metros do not have much floor space and so it would be difficult to use too much of their space for storage purposes. In such instances, Carrefours Cash and Carry outlets which are bigger and if having a close proximity to the retail stores, can be used as storage units of buffer stock for the retail units. Based on the forecasted necessity of the stored products, the products can be supplied. Using ERP systems or similar communication tools, the stock requirement can be identified and stock can be sent to these retail stores on a weekly or twice-in-a-week basis using a milk-man route travel by a supply truck of Carrefour which will help reduce the transportation cost through its increased efficiency. The regional warehouses can also use this ERP system to keep a tab on the inventory of all products and supply/order products as per the forecasted requirements. Offering on-call order placement & stock delivery services to key distributors Though the basic ideology behind such a move would seem to be for a good Customer Relationship, it also has an Operations perspective as it implies that on obtaining a worthy order from a distributor via telephone, a vehicle should be allocated, loaded, transported and send to the required distributor so as to reach the designation within the requisite time. Timely delivery is of essence in such instances as they become measuring rods while assessing retailers such as Carrefour.

1. Conclusion
Carrefour is one of the biggest multi-brand retailers in the world and India would be an ideal market to expand in. the Supply Chain in India will not be the same as in most of the European nations due to the lack of infrastructure. Thus, the model implemented elsewhere has to be tweaked accordingly in order to suit the Indian environment. With expansion planned in India from 2 outlets to over 15, Carrefour India will have to come out with a detailed mapping of its future activities with respect to Supply Chain Management. It is hoped that the above report will help in analyzing and identifying of such a suitable network and activities.

17 | P a g e