How does their tribe thrive ?

More and more shops in Indian metros are looking like high street shops. They sell  expensive brands, products are displayed in fancy ambiance and the shops have attractive facades. They sell things like shoes, apparel, fashion, furniture and novelties. But the curious fact is that they do not seem to have too many customers who actually buy ! So, if they do not make much money; how does their tribe thrive?.

First, these shops do not invest in things that are on sale in these shops : the merchandise is funded by the vendors of the store. All that the shop owner provides in the real estate and the fancy interiors; the rest is provided by the vendors on credit. The vendors get paid well after the goods are sold by the store to its  customers in cash. In other words, the investment of the shop owner in the working capital is negative ! The shop owner in fact converts the financing provided by the vendors into real estate.

Retailing is actually a financial business. If you have an attractive shop, you can get many vendors coming to you areal estate is one of the few areas left where you can invest black money - of which there is plenty around and people who have it are looking for ways to use it rather than stash it. Hence funding is no problem. As stated above the working capital is fully funded. The unrealized returns - property appreeciation - is what everyone is after. Their only intention on a month to month basis is to break even : as long as salaries are paid and power costs are met; they are happy.

These store owners buy more real estate, buy more stock and use this higher clout to extract better price and more credit. Where does that leave the suppliers ? The suppliers have two choices - to become cost leader to compete with others, to become more innovative and different or to create a brand pull that will force the retailers to keep your stock. With decades of cost reduction, the vendors cannot really do much on costs. The pull creation is expensive. Innovation in the value chain is the real route left now to exploit.