In the last part we tried to cover the dynamics of the supermarket industry in Bangladesh. In this final part we will look into the sourcing methods, challenges and the ways to overcome them and take this industry further.
Raw material procurement
When a direct sourcing chain is not maintained, as depicted in the diagram above, several intermediaries take a chunk of the profits, leaving a reduced amount for the supermarket and the farmers. Typically, a 30 percent margin exists between the original producer and the end consumer. Supermarkets, via this model, command about 10 to 12 percent of this margin and farmers get about 3 to 4 percent. The rest 14 to 15 percent is taken by the intermediaries, which are about 4 to 8 in number. Except for the bigger players, who have investment to help them sustain, this anomaly has led to the closure of many smaller superstores. Sharp rise in overheads – rent, utilities, salaries and maintenance costs have also contributed. Furthermore, the market growth is also affected as higher prices mean a significant portion of the middle class is remaining untapped.
b. Supermarkets Value Chain – Direct Sourcing
In case of direct sourcing model, the number of actors in the value chain decreases to 3. This enables the supermarkets to command a higher profit margin, usually in the range of 12 to 18 percent. Naturally, it also translates to higher return for the farmers (3 to 6 percent). The rest goes on to provide competitive prices to the consumers. As for Agora, it regularly surveys wet markets so that it can match their prices. At Agora, perishables and commodities are charged at the market rate, or lower. But, proteins (fishes and meats) are still charged higher than the conventional wet markets.
In the direct sourcing model, the supermarkets have to employ rural buying agents, contract farming or co-operative models, forward purchase, transportation risks and also deduct the suppliers’ credit. Additionally, they also have to deal with post-harvest loss. A more streamlined value chain, however, would mean a larger share of the margin for both parties. Compared to India where supermarkets command a margin of almost 30 percent, Bangladesh can only entail around 12 percent.
An example of the cost saving that direct sourcing offers can be found in the table below. It shows figures from “X”‘s (name camouflaged) direct sourcing of fruits and vegetables.
*Based on averaged out sales data from Nov’12 to Jun’13
Due to the complexity of procuring different products and impending supply chain uncertainty, many supermarkets depend heavily on local wholesale market hubs including Karwan Bazar, Shyam Bazar, Krishi market and Babu Bazar for perishable and essential commodities. For Supermarkets in Dhaka, these centers act as the middle-men. For the value chain of Karwan Bazar to be enhanced, the best practices of handling foods, transportation techniques (using plastic crate boxes to reduce in-transport damage), and credit facilities have to be brought forward. If the assembled markets work via a stronger co-operation with the farmers, then the margins would improve for both parties and the unwarranted inefficiencies in the market will dissipate.
As of now, the supermarket industry captures only 2 percent of the market. Increasing awareness about food contamination, rise of income levels, and the expansion of urbanization is likely to have a constructive impact on the future of the supermarket industry. If the number of players can be decreased, the existing chain of operation will become more robust. Supermarkets will place weekly order with the sourcing firm which will in turn buy in bulk and supply to individual outlets. Large scale buying will allow firms to cut down the middle-men and ensure higher revenues for farmers and lower prices for the end clients. The sourcing firm will also engage in grading the quality of the commodities. This development, along with each shop’s ambience, product quality, and convenience factors will lure customers into shopping at the supermarkets in Bangladesh. The large portion of customers, who are generally more price sensitive, will then see an added incentive to shop at the city’s finest.
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