FDI IN MULTI-BRAND RETAIL
In the first part of my series yesterday, I had stated that big multi-brand retailers in the West like the Walmarts and Tescos and Carrefours routinely mark up the prices on their entire basket of products by a minimum 2x, and this goes as high as 9x, compared with the retail/wholesale mark-ups in India.
The point that was made was that the efficiency of the channel should be determined by how much they charge the end consumer by way of mark-ups (which is the aggregate of the costs incurred and profits made by the channel). By this measure, I had concluded that the Indian distribution chain comprising wholesalers, distributors, stockists and retailers is among the most cost-effective and efficient in the world.
How can this possibly be?
NO CONSUMER CHOICE
Anyone who has followed business practices and rules will know the following simple truth about markets. The more consolidated a market is, providing less choice to the consumer, the more the retailer can mark up and charge ever higher prices. In reverse, the more fragmented a market is, providing ever more choices in terms of sources to the consumer, the lesser is the mark-up, as the retailers have to charge the least possible amount to be competitive and stay in business. When big multi-brand retail gets into a market, their game plan is to eliminate competition and build market clout. Let us look at two examples. In the US, the retail market size (excluding food service and automotive) was estimated at $3 trillion in 2009. Walmart clocked over $300 billion in US sales, for a remarkable 10 per cent market share. Such consolidated power, acquired over time, is used to squeeze cost on the supplier side, and improve mark-ups on the consumer side.
Walmart aims to be cheaper than other retailers, but its end goal is still to maximise returns to its shareholders. (People interested in learning about Walmart can get the book How Walmart is destroying America and the World … by Bill Quinn.)
UK's Tesco clocked sales of £61 billion ($99 billion) last year, and has a 30 per cent market share of the UK grocery store market, according to Wikipedia. This level of consolidation is unprecedented in the retail world, giving Tesco extraordinary power over both suppliers and consumers. A grocery shopper in the UK has at best a choice of two or three retailers in her vicinity (Tesco or Sainsbury or maybe an Aldi). This means, notwithstanding promotional offers, the price is always a premium, and retailers' power over the consumers' shopping pound is enormous. Their power over the manufacturer is also enormous, but that is another story altogether.
INDIAN SCENARIO
Compare this with India. We have dozens of small retailers in our immediate neighbourhoods vying for our shopping rupee. There is intense competition. Prices and mark-ups tend to be the lowest possible. We have a near-perfect market structure, where thousands of producers are providing goods to tens of thousands of retailers who are serving millions of consumers. No one really has the clout in the market to charge extra mark-ups. This is a ground-up phenomena, created by the energy and entrepreneurship of millions of small businesses. The government has played no role in organising this. The difference in market structure is illustrated in the visuals alongside.
If big multi-brand retail is allowed to enter India, what happened in the West will be repeated here. The story is well documented. A big retail outlet will be launched in an area with big fanfare. There will be lots of promotions and predatory pricing below cost of many essentials for extended periods. (Walmart has an expression for this called “Stomp the comp”, meaning sweep aside the competition.)
Consumers will be attracted by these deals, and will flock to the store. Small retailers cannot sustain loss of business for long. Most of them will fold up against this assault of big retail. It has happened without fail in every market. As the competition is wiped out, the big retailer gains clout over the suppliers and the consumers. They then get pricing power, gain control of the market, and steadily increase the mark-ups over time for maximising profits.
Against the background of the information above which is available in the public domain, one cannot help wonder how FDI in multi brand retail has been recommended by the committee, led by the Chief Economic Advisor to the Government. Some of the criteria for investment are also inexplicable. For example, the committee has specified a minimum FDI investment of $100 million. That is like asking an Olympic heavy weight lifter to lift a 10 kg weight to qualify! While I respect the senior minds that have looked into this, I would venture to suggest that the role of policy in this matter should be to ensure the common good of the broadest base of the Indian population over an extended period of time measured in decades and not in years.
RECONSIDER POLICY
Policy makers should not rush to please Western governments that are lobbying hard to open up the Indian retail market. Opening FDI in multi-brand retail will ill-serve the Indian retail sector and the hundreds of millions of households struggling to make ends meet.
When the global financial crisis erupted in 2008, India was protected because the banking industry was not exposed to risk. The situation is similar in retail. Let us not bring in the bad oligopolistic structure of Western retail into India, a move which will really be irreversible and hold Indian consumers captive for times to come.
(Concluded.)
(The author is Group CEO, R. K. SWAMY HANSA and Visiting Faculty, Northwestern University, US. The views are personal. blfeedback@thehindu.co.in)
Keywords: multi-brand retail, FDI, market share, Walmart
Comments:
Mr. Swamy,
You have a very leftist and socialistic thinking. Your thought process is anti business but I am going to try to get it across to you how the large retailers have helped the inflation in this country ( USA) . I am a supplier to Walmart and several other big box stores in the US being a importer of textiles from India and china. First of all you should know that margin on grocery/food items is about 12-15% and not double as you have alleged. Big box stores have a huge buying power and they dictate to importers like me to find the best items at the best prices which we do and they in turn sell and make 15% profit so what is wrong with that. On the other hand a kiryana store in india has no buying leverage and has to pay whatever the middle men want and that price is passed on to consumer.
As you may know that30% of the food gets rotten in India due to lack of cold storage facility which only WALMART of the world can afford to build and not a kiryana store of India.
The only remedy to check the rising inflation is to let the big box store enter India and bring a new level of prosperity in India like the rest of the world.
The author has not touched upon the role of ' Middlemen ' in India.
The number of transactions involved in between 'Producer' to ' Consumer' and ultimate Add-on to the Price paid by a Consumer has to be
considered seriously before concluding on the merits and demerits of
Indian System. In particular relating to items produced by Cultivators,
that is Agricultural activities.
Hello Sekhar Swamy,
It’s nice article. But, I'll not totally agree with your conclusion.
Example 1
I purchased 2 Aquafina water bottle from my neighboring shop each Rs 15 i.e. 2*15=30 Rs. I purchased same from Reliance outlet, its only 25 Rs, on buying 2 Aquafina water bottle - They are giving discount of 5 Rs.
Example 2
Few loose items like Sugar, Mustard, etc are nice and well packed/Exp Date marked in Branded outlets - Consumer are ready to pay 30P to 1 Rs extra for the quality products
Regards,
Ram
It's well said. Allowing the Big Retails in India will make India to end up like US where for a 50 cent salt you have to drive a car and burn a quarter gallon of gas.
The best scenario is to allow the development of a local retail conglomerates. As a country develops and with the urbanization of the population retail system based on corner stores are not tenable. Bharat should go for a multi pronged approach where large private companies, producer and consumer cooperatives with individual stores have a role to play. The government should ensure the individual stores are able to compete by having access to suppliers at competitive prices. The consumer interest and the agriculture interest will then be safeguarded.
The article is written from the point of view of consumers who may be compelled to pay high prices, with less choices, in the long term. The fear of oligopoly, predatory pricing etc. cannot be ignored. At the same time, all corporates work to maximise return on investment. Further, these problems are not peculiar to retail sector. If we allow multinational conglomerates in any sector, say financial, FMCG, consumer durables and so on, that would affect domestic companies, consumers etc.(We cannot forget East India Company!). But we cannot deny entry of multi-brand retail into India on those grounds.
There are two issues the writer has not covered. One is the fair price to the farmer. Today a farmer gets a fraction what we pay at a city market. Secondly it is said that about 40% or so the farm produce, especially fruits and vegetables, get lost or rotten before they reach the consumer. The writer should have covered these two issues also. The present write-up is one sided.
Very biased, India lacks warehousing facility, the end result being the dependency on nature is too high and the prices are at the whims and fancies of the pop and mom stores. Organised retail does bring a fair bit of justice both to the farmers and to the customers. Any organisation has to make profits and thats more important, leave alone organisations even the govt has to run in profits and not in deficits. It is high time India gets its act right on all fronts including infrastructure. There is no accountability right now and thats the reason why nothing is moving as fast as it should. Bringing in organised trade will make the organisations accountable and responsible. The author statement is foul play as the same was said when the insurance sector was opened but now look at the choices now, i think it is high time we got the organised retail trade in place. Thanks
This is further to my comments made on the first part of the article. The Mumbai Grahak Panchayat (MGP) has a distribution model which works on the basis of some voluntary effort or work on the part of those who become members of a Consumer group called ‘Grahak Sangh’ and buy most of the household goods from the MGP. MGP model benefits the consumers as there is definite cost reduction and is worth a study.
My comments are in response to those made by Dan & Ram
(1) Having a perspective that blends the socialist and capitalist spirit is something that can balance many of modern societies problems
(2) The article talks about a factual comparison of 'total channel costs' in lieu of pure margins between indian and us markets. The findings are telling and presumably subject to independant verification.
(3) Reliance Retail is burning cash on its retail foray to bring customers like you that Rs.5 saving today while pushing kirana stores out of business. The longterm story of this market dynamic would change as the power moves towards the side of big retail.
The underlying intent of the article seems to be to understand and preserve what is working well in our economy / country and accordingly develop structures to develop and build on them in a globalising world. Fair point that supports a more considered, contrarian and confident approach. I enjoyed the premise of this thought provoking, factually supported and cogently presented article.
Like many of us here, I too disagree with the points of the author.
1. Is the author objecting to big Indian retailers as well? Will big Indian retailers (such as Reliance) be any benign to the local kiranas?
By opposing foreign retailers, we will be only making fat cats out of Indian retailers?
2. Per the author's comment on oligopoly and predatory pricing, a simple way to measure the success of an entity is to compare the return on equity of the enterprise. Even the behemoth, here in the US, Wal-Mart gets only 15% on return on invested capital, which is good but not spectacular as the author might want us to beleive. In order to goose up returns to its investors, it has to lever up and use supplier provided capital. Wal-Mart has been berated by its investors for its lack lustre success outside of US. Save for Wal-Mart, all other retailers are struggling. This would invalidate the author's argument on an oligopoly.
3. Food prices as a percentage of income is amongst the lowest in the US. It is in no small part due to a well established retail chain.
4. Retail consolidation will only help the government collect more in revenues and enforce standards. Does the author want us to believe that the neighborhood kirana store owner faithfully remits the sales tax collected?
5. If the market is properly structured through a vigilant competition commission, benefits of low inventory overhead and efficient supply chain will be passed on to the customers through the invisible hand of competition. No Indian telecom company is making decent money and all the benefits had gone to the customer. Retail space will be no different.
The only caveat in allowing FDI into retail is to make them source all of their products that are made in India. There is no reason to import toys (that too toxic at that) from China. If the foreign retailers come, the suppliers will come as well. The manufacturing success of China was built on suppliers following the Wal-Mart lead. India is a poor country with abundant unskilled labor. This will be a better way to grow the economy than through inflation causing schemes such as NREGA.
The article is biased. In UK for example you have many choices not one or two as the author states Tesco and Sainsbury. You have ASDA , Morrisons, Iceberg, Safeway, Spar and so many street corner Newsagents Convenience stores. Fundamentally the organisation of a multibrand retail store has deep pockets and can bring latest technology to ease customer interface apart from sourcing in bulk getting the best discount. I think those who are against the entry of Multibrand Retailing are swimming against the tide.
FDI in sigle-brand retailing has already been in practice but allowing FDI in muti-brand retailing can't be called as panacea for customer oriented cost effective approach and improvement in supply chain management.
Some economist are obsessed with short-cut measures for speedy development of indian economy.If government is really bothered about retailing then it must come-up with measures which pragmatically improve supply chain and other related issues, where-by problems leading like rotting of 40% or so farm produce, especially fruits and vegetables, which get lost or rotten before they reach the consumer,can be addressed.
However,experimentations is the only solution for novices.
Excellent article. I agree the current kirana model gives more flexibility to the end consumer, than a Wal-Mart or Reliance Fresh store. The Rs5 discount one reader talked about - will only exist till the time they get a hold on the market. Once these MNC stores are in solid grip, they will squeeze out the consumer, and will end up removing millions of people from employment. This Rs5 example is a classic case of how gullible consumers, and people are taken to ride by companies in short term, the long term effects being never taken into account. This maxim of "liberalization" and "FDI" being good for every sector and everyone is a false one, and can lead to a dangerous economical condition. Look at United States - small retailers or stores cannot even protest against Giants like Wal-Mart! Do people wish to have power removed from their hands?
I almost laughed myself off my chair on this quote:
"We have a near-perfect market structure, where thousands of producers are providing goods to tens of thousands of retailers who are serving millions of consumers."
Ten years of capitalism and they've perfected it!
The article shows a fundamental lack of understanding regarding the American retail market.
A. Swede.
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