The Indian defence services could teach the country’s top private retailers a thing or two about making money.
A chain of 3,900 stores of the Indian defence ministry’s canteen stores department (CSD) earned Rs236 crore ($35 million) in profit in financial year 2014-15, according to a report in the Economic Times on Aug.17, based on a reply to a right to information query.
For the same period, the Kishore Biyani-owned Future Retail, which runs supermarket chains such as Big Bazaar and eZone, reported a profit of Rs153 crore; the corresponding figure for Reliance Retail was Rs159 crore.
The CSD stores typically work on operating margins as low as 1%—this figure can vary anywhere between 8% and 18% for a private retailer. These canteens function on a not-for-profit basis, but their volumes are huge. In 2014-15, their turnover stood at Rs13,709 crore, according to the report, trailing that of Reliance Retail at Rs17,640 crore but ahead of Future Retail’s Rs11,149.87 crore.
A big reason to the CSD stores’ better profitability is lower overhead costs.
“CSD does not have to bear two expenses that are major operational costs for retailers—real estate and advertising,” explains Devangshu Dutta, CEO of Third Eyesight, a New-Delhi based consulting firm. That’s because they are located within easy reach of defence staff, typically inside cantonments and not in commercial locations such as markets or malls.
“Staffing and training costs are lower than private retailers since the management workforce is partially shared with the standing armed forces. CSD also has a focused, sometimes captive, audience which it doesn’t really have to fight for,” Dutta said.
These stores account for a bulk of the turnover of large consumer good companies. In fact, business from these canteens contributes between 5% and 7% of total sales for some of them, according to estimates by the Economic Times.
The country’s largest consumer goods firm Hindustan Unilever, for example, counts CSD as its biggest customer in south Asia. The same holds true for liquor major United Spirits.
Why CSD canteens?
CSD canteens were set up in 1948 as stores to ensure “easy access to quality products of daily use, at prices less than the market rates.” Their customers were serving army, navy and air force personnel, besides the retired ones and their families.
The stores have served Indians troops even during wars and natural calamities.
For instance, during the Indo-China war (1962) and the Pakistan incursions (1965), the canteens ensured swift supply of goods to Indian troops, according to the CSD website.
In the 1970s, as the number of stores increased, the defence ministry sanctioned an organized structure to manage them. Today, CSD has nearly 2,400 employees.
These stores reportedly serve some 12 million customers annually with over 4,500 products such as television sets, audio and video systems, refrigerators, soaps, shampoos, liquor, and even cars—all at prices considerably lower than market rates.
In fact, liquor is the highest-selling category and contributes 26% of CSD’s sales, followed by toiletries.
For those serving the country, these canteens are an inseparable part of routine life and brands just cannot miss out on these stores.