I recently tweeted the following

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The current assumption is that the local corner retailer (kirana) which has survived the large retail chains will continue to do well inspite of the online threat. Let’s look at some of the arguments made to support this thesis

Convenience
It is undeniable that the local kirana store offers a lot of convenience and personalized service. My own mother continues to buy grocery from the local guy and he is able to provide personalized service and home delivery at the same price. What can really beat that?

My point – is this a real differentiator for all products? The current mobile carrying generation may really not care as much about it. Now it’s true that rice, oil and other staples will still be bought from the local kirana store, but what about the higher value items – both FMCG and otherwise ?

Will the consumer not use a blend of these two options? Buy the bulky staple from the local guy as it cheaper to do so, but buy the higher value (read higher margin) items online where the price could be lower and selection larger.

What happens to the profitability of the local store which uses the staples as a loss leader to drive sales for the other products?

Credit
That’s true for a large portion of the poor/ unbanked population. But is that also true for the middle class? What happens when newer forms of banking and credit options start proliferating? Does the local kirana store still have an edge?

Personalized relationship
This is a difference no online retailer can meet ..right? Welcome to the world of data analytics. Look at Netflix and Amazon who are now able to look at your purchases and make recommendations. With the improvement in data analytics, mobile and AI, this will only get better

Trend in other markets
There is a consistent trend in several markets towards the following

– Big box stores such as Costco/ Walmart etc which sell high volume staples at very competitive prices which no online retailer can beat (yet)
– Convenience stores such as 711 which are able to provide quick convenience at a much higher price/ margin. These stores usually cater to impulse buying (snacks, coffee etc) and also stock a small assortment of staples for emergency purchases (milk, eggs etc)
– Ongoing pressure on brick and mortar stores to match the pricing of their online counterparts

The retailer’s point of view
Till now we are talking of the landscape from the customer’s point of view. If you turn this around and look at it from the retailers’ point of view, the situation can appear quite bleak.

What happens to the profitability of the physical retailer if the high value/ high margin items continue to migrate online and all that remains are the bulk and low margin items which are more efficiently served by the high volume/ low margins chain stores such as D-mart ?

The retailer still has all the overheads for inventory, real estate and labor costs which are rising, whereas the margins keep shrinking. The end result is a drop in the return on capital. What does this do to the small time and marginal store?

I have tried to raise highlight some of the points one needs to think about when trying to answer this question. I don’t think that the small store/ kirana will disappear completely, but it is quite likely that they will keep shrinking and their share of the economic pie is surely to go down.

In addition this trend will not remain limited to the local grocery stores. One can extend the same logic to any other goods which has some level of standardization and does not require a high level of touch and feel.

The above speculation is based on the current level of technology. Now combine that with ongoing developments in Artificial intelligence/ Machine learning, advances in drone tech to reduce delivery costs and finally 3D manufacturing.

Does it still mean that retail as we know now, will remain the same?
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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

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