Sunday, June 20, 2010

Hours of operation of Indian retail firms

Raghavendra Kamath has an article in the Business Standard today on experiments by Indian retailers at running stores for 24 hours a day.

I have often wondered about the costs and benefits of the 24-hour stores that one sees in the US. Two things come to mind. First, the response of demand to extended hours will only show up with a lag, when people reconfigure their lives to exploit the consistent availability of stores at all times of the day or night. This won't happen immediately.

Second, round the clock operation requires recruitment of multiple shifts of staff. The article (mentioned above) talks about the problems that the retailing firms are having in trying to stretch the existing staff into longer hours. This might even work for a sporadic weekend but it's not feasible in a sustained way. This is about the relative consumption of labour and capital. Once the store exists, the entire capital cost is paid: for the real estate, the inventory and the technology platform. The decision faced by the firm is whether, on the margin, it makes sense to add more labour cost so as to generate some sales from an additional shift. My first guess would be that if this is efficient in the West -- where wages are much higher than in India -- then it should surely make sense in India.

If modern Indian professional retailing firms are able to push into extended hours, then this will have two effects. First, this will increase the distance between them and the traditional mom-and-pop which cannot really function for more than 10-12 hours a day. Second, this will increase the employment that they generate.

The overall goods and services that households buy don't change when retailing formats change. But if one retailing firm moves into extended hours or to 24x7, then it will suck customers who value this convenience away from other firms. Once this starts happening, all or most stores will settle into the equilibrium with extended hours or round-the-clock operation.

15 comments:

  1. I dont know how or under what regulationals Ezone managed to run the shop for 24 hours. In Pune, Aditya Birla More and Spencers are not allowed to operate after 9pm or 10pm.When enquired,they cite government regulations.Somehow the same regulations do not apply to Kirana store whom one has seen paying the beat constables Rs 50 per month. Kirana can well work for 24 hours if there were enough customers.Many of them open shop at 6 in the morning and operate till 11 in the night.Though there are some which open between 10 to 9 with a 2 hour noon break during noon.
    How will organised retail tackle this part of the puzzle?

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  2. Hi Ajay
    I don't quite agree that the "overall amount of goods and services that households buy doesn't change when stores are open." Demand for a good or service is defined with respect to a given point in time or over a period of time. And so is the supply. Just as a haircut in the USA and a haircut in India face different demand curves, a can of beer available only between 9-9 and one that can be bought after 9 pm can have different demand curves.
    Even if you define goods very generally as the overall bundle of goods a consumer consumes, so that the choice is really between saving and consuming, the access to the bundle of goods can influence the proportion of income devoted to consumption - except if your saving is 0.

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  3. Ajay, your analysis of approaching this from a marginal economics perspective is sound but you have mentioned the competitive advantage (and its ability to pull customers) this creates almost as an after thought. Instead, I would argue that this would be a very important consideration even if the revenues from the late hour sales may not justify your average total costs or even marginal costs. The reason for this this is that its very difficult to quantify the habit effect, if I start going to store A since its open in the night, I'll probably go to them even in the day time justifying less than spectacular sales in the night.

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  4. another important cost will be that of utilities. Power consumption from lighting and airconditioning could end up costing quite a bit. The costs in India could higher than in the west, especially if generators are used. As a percent of opex, therefore, it will be much higher and a significant factor.

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  5. if they are going the 24x7 way they need to add services other than just grocery or toothpaste. I can list 3:

    a. Cooking Gas Cylinders: i work and need to always take time off or beg the neighbour to take delivery of my cylinder. if when my cylinder became due for delivery, BPCL delivered it to retail store in the n'hood, i would pay extra for it to be sent to me when i returned home.

    b. Plumbers, Carpenters, Electricians :
    Have a guy who can do all this manning the counter at the store - leaky tap = call the guyt to come repair it alongwith the material.

    c. Laundromats and Washing Machines - for people with maid troubles.
    ILA

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  6. Basab,

    Good point. So the incremental cost of running one more shift is the cost of electricity + the cost of labour.
    The facility and the inventory is free in the sense that there's no incremental cost. As long as the retailing margin times the turnover is big enough to pay for the cost of electricity and the cost of labour, it's efficient for the firm to stay open one more shift.

    Yunhi,

    My pseudo-dynamics is like this. There are two stores A and B. At first, both of them work in the day and customers are helpless at night. Then store A is the first mover and starts working the night shift. It gets some demand at first of drop-ins, and then behaviour gradually changes, and people reorganise their day putting more high-value activities in the daytime and doing the shopping at night.

    To the extent that Gurnain is right, overall consumption goes up, then that's great. But for now, let's pretend it's a fixed expenditure. In this case, when store A is the first mover, some of the night customers are its own erstwhile daytime customers, and it gains nothing - just made itself more convenient for the customer and probably increased brand loyalty. But some of the night customers were the kind who would have otherwise gone to B in the daytime. So there's a certain reduction in B's revenues and an increase in the revenues of A.

    Then B follows, also doing a night shift. At this point, both firms are offering round the clock service, and customers are choosing across them based on non-time-of-day factors.

    The interesting thing in this pseudo-dynamics is that as long as the two firms don't collude to stay closed in the night, we end up with both firms being open at night, even though the total spend of customers is unchanged.

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  7. In India, the incremental cost of running one more shift is:

    1. Cost of Labor
    2. Cost of Electricity
    3. Cost of Security enhancements
    4. Cost of getting regulatory approvals (in many places, you are just not allowed to run a shop in night beyond a cut-off)
    5. Cost of losing the customers who have offices near your shop but will switch to a shop near their home once somebody near their home starts functioning 24X7 (assuming that your stores are primarily in CBD).
    6. Opportunity cost of investing this capital elsewhere.

    Benefits would be:
    1. (Retailing margin) X (the turnover at night minus the turnover that was transferred from day to night hours)
    2. Increased loyalty (Most of these chains use reward point system and the customer will tend to always buy from one chain to maximise reward points)
    3. Great visibility to the BPO/IT audience. (Could be quantified with experience using factors such as number of people working in night in x kms of radius, conversion rate observed and average expenditure)

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  8. Nice post, as I have spent some time outside India agree on the extensive benefits from the 24 hour shops. But considering the general lack of night-time activity in India (in my opinion mainly to do with lack of transport plus fear of crime). Not sure just stores opening up 24 hours will change the behavioural pattern, plus you forget cost of security for these stores, I would think total cost of security (including losses due to robberies) might prove to be a deterrent.
    Since change in purchase patterns are required for success, which would involve people feeling comfortable shopping in the night (night markets are a different kettle of fish with different dynamics as opposed to stand alone 24 hour shops) not completely sure this model will fly in India
    On the flip-side I can see a lot of takers for the delivery/24 hour handyman service mooted by one of the other commentators.

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  9. I agree that the public goods of law and order are important in enabling rtc operation.

    But I'm skeptical about how much more unsafe it actually is, operating at night. I've been around Bombay at all times of day and night and it isn't like the nights are unsafe.

    And, the private goods of security forces are quite cheap given the low cost of labour. So think of a few security guys as one more component of the incremental wage cost of running one more shift.

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  10. True, demand will probably not increase in the long term. What you are describing is a classic price war situation, just in a different way. Like in a price war case, if the two retailers are peddling what can be described as a commodity service, their profits are ultimately going to go down to a little over zero economic profits. Great for the customer, exactly how capitalism should work.

    On the other hand, say if one of them has a distinct efficiency advantage thereby bringing better margins, that store can either increase its competitive advantage because the other retailer cannot afford to stay open late. This is of course assuming that the marginal revenues do not cover the incremental variable costs.

    I would guess though case A that you describe is probably more true here, the retailers are probably unable to compete or expand their markets in the normal scheme of things (or there is overcapacity in certain regions) and one of them just got desperate (or incorrectly assumed a certain advantage) leading to a possible price war without thinking of the game theory consequences.

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  11. Total Hypermarket (Jubilant Group) in Bangalore experiment with extended store hr till mid night. I would love to go for shopping in night (just after having dinner) but face following problem :

    1) Air conditioning is mostly switched off, it become very suffocating, it gives quite uneasy feeling.

    2) Non consistent opening of Hypermarket till mid night does not let habit to develop.

    3) Kishor Biyani Says , Indian people like to ship in crowded places!

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  12. I always go to Total after 9 pm. In fact I like the whole experience. Shorter check out lines, easy to navigate the aisles etc.

    Not sure about the ROI for Total but from a consumer perspective, it is very convenient.

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  13. http://www.commodityonline.com/news/Is-FDI-in-retail-akin-to-opening-up-the-Indian-agri-sector-36450-3-1.html

    May I know what you actually think about this content? Found no other way to reach you. Kindly forgive me if I have mis-used this comment facility...Rakesh Neelakandan

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  14. Hi, I have gone through all the points and issues that are discussed in detail. According to my view the additional cost of labor and variable costs(Electricity...etc) can be minimized excluding permit cost if the stores would take calculated decisions. Even if India becomes a developed country or change in life style of people in urban India raises the need to deliver the sale of goods or services round the clock, however definitely the number of foot fall would be much less as compared to day time. First of all there is no need to feel panic of incurring double the existing labor cost if they opt to operate round the clock, since during night shift the stores can operate with less manpower which would be quite sufficient to handle and deliver the services to the comparatively less number of customers. For example during day time there might be a requirement of five cashiers and 20 sales people, but during night shift that can be reduced as per the number of foot falls to that store to one cashier and 5 sales people. However the same can not be applicable when it comes for security issue. Secondly they can reduce their electricity bill just by using lights and A/C's optimally. The stores which are optimistic about this option can experiment it during festival seasons to take proper decision.

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  15. Can someone share the cost of opening a convenient store of size 500 sqft in major cities like Mumbai, Delhi,Bangalore and Chennai?

    thanks.

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