This article will discuss Modern trade vs. traditional trade, which includes the benefits and drawbacks of each. Topics will include Optimization of the distribution network, Growth of premium products, and the impact on traditional trade. You may even be interested in learning more additional about the differences between the two. After reading this article, you will be able to determine whether modern trade is better for you or not. Let’s get started!
General trade vs. special trade
General trade is one of the oldest types of commerce and takes up around 80% of the global economy. However, this form of trade has not been transformed nearly as much as other forms over the past five decades. The rise of e-commerce has caused some setbacks among retailers, wholesalers, and dealers. In recent years, the focus has shifted to online and modern trade, and start-ups have focused their attention on solving the long-standing problems of traditional trade.
Traditional trade refers to trading practices in which goods and services are traded over a short period of time with limited inventory. Modern trade is more efficient and widespread and involves huge, global franchise chains and luxury stores that sell products at discount prices. Unlike traditional trade, modern trade is more stable and predictable. Both types of trade are designed to meet the needs of consumers. The differences between the two trade types are largely dependent on the market conditions, as well as on how customers view products and services.
Optimization of the distribution network
Both methods of trade make use of the distribution network. The difference between the two types of trade is the nature of the network itself. Traditional trade is less organized than modern trade. Traditional trade outlets typically include smaller businesses and chains, while modern trade outlets are usually larger and comprise more organized businesses. Modern trade optimization focuses on the creation of a well-organized and efficient distribution network. Modern trade outlets include supermarkets, hypermarkets, and mini-markets.
The traditional approach to trade optimization focuses on serving localized customer demand. It’s important to maintain a high fill rate above safety stock, the minimum amount of stock needed to meet immediate demand. In addition, modern retailers are particularly conscientious about delivery windows. They create specific time-slots for every product replenishment and penalize distributors that miss these window times. Regardless of the method, modern trade optimization requires the implementation of advanced technologies, including cloud-based systems.
Growth of premium products
The growing segmentation of consumer preferences has led to the development of private labels, smaller brands, and hybrid distribution networks. In the UAE and Saudi Arabia, for example, more than six in ten consumers would pay more for healthy alternatives, while over 30 percent have bought organic and sugar-free alternatives. In the US, the same trend has been observed, although, in the United Kingdom, the share of premium products sold on promotions and deals has dropped since the Covid-19 outbreak.
Despite this trend, organized retail has also been experiencing rapid growth. Analysts have identified four primary reasons for the growth in organized retail. According to Kishore Biyani, CEO of Future Group, and VineetKapila, President of RPG Group, organized retail is outpacing the unorganized sector. Today, organized retail is growing at about 25-30% annually in India’s top cities, with the growth rate being even greater in the developed world.
Impact of modern trade on traditional trade
The rapid growth of e-commerce and organized retail is placing increasing pressure on traditional trade. This is significantly due to a lack of technology investment and modernization. This can have significant implications for FMCG brands that work with general trade outlets. Traditionally, independent local stores source goods from distributors through sales agents, while larger players often source directly from manufacturers or other large companies. Compared to traditional trade, modern trade is more planned and uses a more organized approach to merchandising and inventory management.
While traditional trade theory assumed that goods were traded between countries, it is not true. Factors of production (labor, capital, and technology) are increasingly moving across national boundaries. In fact, many of the countries that are impacted by modern trade have significant inefficiencies in the way they produce as well as distribute their goods. Furthermore, they are often forced to pay higher margins to make up for inefficiencies. These inefficiencies are visible in infrastructure, supply chain management, and back-end services.