It is not easy running any business let alone that of retail which in the eyes of many looks like a walk in the park. News from the Nakumatt stable caught many casual observers by surprise and following the state of its peer Uchumi, which is still struggling to recover from the debilitating effects of poor management makes one rethink the fundamentals.
The ways of work in mass market retail have changed over time globally. In the past and probably still holding true for the single branch store in your neighborhood, the store bought goods to stock its shelves bearing both risk and cost of slow moving goods, locked capital and spoilage.
The modern modus operandi is such that big name retailers as you know them, are in the real-estate business, where they secure optimal locations that guarantee foot traffic and are often the anchor clients for major mall infrastructure projects. They then rent out or lease shelf space, with differentiated pricing depending on position, to suppliers who are charged with managing the availability of their products. The retailer commits no money upfront, is not bothered with wastage or spoilage and simply collects shelf rent and commissions on sales. So, with all odds skewed to their benefit, why such a dim forecast?
Four factors will lead to the fulfillment of pundits prophecies if the players do not adapt.
- First, increasing affinity to mobile commerce is changing the habits of consumers. While it can be arguably confined to the urban areas, the foot traffic maximization strategy will count for less and less over time.
- Second, supplier pain has triggered migration to self-owned platforms that are giving direct access to the consumer, resulting to better margins for the supplier, better pricing for the consumer and refreshed relations beyond the stock keeping unit (SKU). Smart contracts built on block chain technology can stem this migration.
- Third, the management of assets and inventory remains a capex issue that eats into already thin margins. If the first and second factors that I have identified continue to grow the liability of available inventory will be their undoing. This can very easily be turned into positive flows of non-operating revenues looking at the last mile and back haul opportunity.
- Lastly, is the failure to use data collected in truly meaningful ways. Everyone pushes a loyalty card with enviable data points collected but hardly anyone is doing any groundbreaking work even from a local context. Suppliers are now having conversations directly with the end consumer and over time that data will become visible and available, making them less reliant on a big name retailer.
The fixes are known but are charged executives open to a change in strategy? That remains to be seen.