Big retail will not give farmers better prices, or reduce wastage. They will eliminate competition because their business depends on it.
Discussing foreign direct investment in multi-brand retail in these columns, I have made the following points: 1) Big Retail in the West is expensive; they have much higher mark-ups compared with Indian retail. 2) Western Retail is concentrated, offers less consumer choice, and charges higher prices. 3) Big Retail is not good for employment in both manufacturing (due to offshoring of production) and in retail (as they take out the small retailers).
Not surprisingly, there has been a flurry of responses questioning the views expressed. Recent news reports cite officials speaking of benefits of FDI in retail. Let us examine these so-called benefits.
MYTH ABOUT FARM PRICES
It is argued that there is a significant difference between what the farmer gets for his produce and what the consumer pays in the end. The difference is pocketed by “middlemen”.
Since foreign retailers setting up shop in India will buy direct from farmers and sell to consumers, thus eliminating “middlemen”, they will pay better prices to farmers.
The first obvious point to note is that Big Retailers are “middlemen” as well, operating with the same profit motive as any trader.
Their business model is simple – Buy Lowest, Sell Highest.
Walmart calls their sourcing EDLC – Every Day Low Cost. The argument is that when Big Retail, who are known to beat down their sourcing price, enters the market to purchase from the farmers, somehow they will ignore the prevailing prices, and out of the goodness of their heart, pay the farmers a higher price, because they are going to sell direct to consumers. This will clearly not happen.
On the other hand, Big Retail will go into the farmers' markets and will eliminate competition on the purchasing side over time to gain dominant status. Farmers will be at the mercy of Big Retail to sell their produce. Farmers' prices will get hammered down, because that is what EDLC means. This does not mean that the consumer will get a lower price; it only means that the Big “middlemen” Retail will be able to charge the high mark-ups on which their business is modelled.
The only way to preserve the farmer's interest over the long term is to ensure that there are multiple bidders for his produce at all times in the markets, to keep prices up at reasonable levels. This balance is guaranteed to be upset by Big Retail.
For farmers to get good prices, three things have to be in place: 1) Good transportation infrastructure, mainly roads. 2) Ability to store perishables, including refrigeration. 3) Timely and correct market information. India's cellphone service providers have substantially bridged the gap on point three. The other two have nothing to do with FDI in retail, as explained below.
MYTH ABOUT LOGISTICS
It is believed that Foreign Retail will improve supply-chain infrastructure and reduce wastage of farm produce. But Big Retail will invest in the infrastructure required to support their business, no more and no less.
This will not solve the issue of wastage of farm produce, because the structural problems lie elsewhere. The twin infrastructure problems in India are roads and power. The government has taken steps to improve the quality of national highways. However, the problem is that of the over three million kilometres of Indian roads, the national highways constitute around 2 per cent, State highways 4 per cent while 94 per cent are district roads and village roads. The district and village roads are State subjects, and this is where the supply chain infrastructure falls apart.
As for the power sector, with an installed capacity of 174,000 MW, the Central Electricity Authority has forecast a shortage of at least 10 per cent in FY 12 and beyond in most of the country, with peak shortages at higher levels. This leads to power cuts routinely in rural areas, making the operation of cold chains very difficult and expensive.
Big Retail cannot address the issues of roads and power. Their ability to address the fundamentals of the supply chain, and reduce wastage of farm produce, will be limited.
The biggest wastage of foodgrains is in the godowns of the Food Corporation of India, which is doing a manful job of a massive task. Yet the FCI has admitted to wastage of 1.3 million tonnes of foodgrains over the past decade, in response to a query under the RTI act. The authorities should fix this problem, instead of thinking about FDI in retail, which is fraught with negative consequences.
MYTH ABOUT COMPETITION
It is argued that Indian business houses are already into Retail and Big Foreign Retail cannot do further damage. Nothing can be more misleading than this argument. It comes from people who simply do not understand the forces that get unleashed with Big Foreign Retail.
Indian business houses' experience in the grocery retail trade is a decade old with Big Bazaar opening its first store in 2001. Their experience has not been an easy ride.
Groups like Reliance, Aditya Birla and Spencer's have declared losses of hundreds of crores, closed a number of stores in recent times, and are looking for an appropriate business model. Even with collective investments in thousands of crores, given the fragmented nature of the business, their market impact has been modest at best.
When the Walmarts, Tescos and Carrefours enter, they come in to eliminate local competition completely because their business depends on it. Their resources are limitless. The investments will be at a disruptive level. Their sourcing will be global. Nothing that Indian business has done so far will compare with this.
Neighbourhood stores will shut down in the hundreds and thousands across the country over time. The balance in the market place will be upset completely, and families and communities will be wiped out. This is not an imaginary scenario. It has happened everywhere they have gone. This is the reason why even the city of New York is fighting to keep Walmart out (see http://www.npr.org/ 2011/02/04/133483848/).
(The author is Group CEO, R K SWAMY HANSA and visiting faculty, Northwestern University, US. The views are personal.)
(Concluded)
Keywords: multi-brand retail, FDI, market share, Walmart
At whose mercy are the farmers today? Middlemen, FCI, God,Nature? Is this enviable? If one big retail is allowed it may destroy competition. So let us allow more than one big retail plus middlemen (multiple bidders!)etc. to ensure competition. Yes, roads and power are a problem in India. If big retail can tranport the goods fast and preserve them in good condition (we are not going to buy rotten apples from Walmart), we should welcome it.FCI is not a big retail nor does it buy/sell vegetables and no comparison can be made. Foreign capital having huge resources, eliminating local competition etc. are true of any business open to foreign competition. Big retail is not an exception. Big retail will not throw out the neighbourhood stores in droves. We will not go to Tescos to buy a match box or a loaf of bread or half a dozen eggs. Is there any proof of families and communities wiped out anywhere. If so it should be brought out. Making statements without supporting facts is not correct.
The picture painted is really very scary for small Indian retail businesses. I would have loved to see some comparative analysis of the scenario in the US and Europe - where the giant retailers are well entrenched and China - which leads India in allowing corporate retailers to set foot. We fear the Chinese when it comes to dependency in Telecom or Power sectors - our national interest is seen to be at stake. Perhaps, this is as important a decision as land acquisition for development. Between favouring the consumer over the producer, it appears clear that a Walmart would prefer the latter. How will the farmer be protected? Do we need a regulatory mechanism specially tailored to the Retail industry?
I think the existing big boys in Indian retail (TATA, Reliance, Big Bazaar etc) need some SERIOUS competition from the likes of TESCO, Carrefour etc. Competition does end up being good to the consumers. These professors who wax eloquent on what is not good for India may do well by not shopping in any of these shops when they are abroad. Why do they not want an Indian to shop in a Carrefour or Walmart in India?
Come on Mr. Swamy, you make it sound like the movie 2012 - End of the world scenario. The consequences of FDI in retail and their effects are overblown to such proportions that the article sounds just like a sci-fi doomsday story. Even if 10000 Walmarts and Tescos of huge size set up shop in India in the next 20 years (which is itself extremely difficult and high in number - I am a hardcore Retailer, trust me), they will manage to eliminate may be 5 - 10% of the 13 million indigenous retailers - which means we will still be dominated by the traditional retailers (80% plus). It will take centuries before India reaches a stage where big retail dominates the entire retail market. By then so many things will change including people's ways of livelihood. Or is it your contention that the most of the lower economic strata be condemned to small shops as means of livelihood forever? Will not the future generations aspire for something better? Let us not scare people unnecessarily.
This seems to be a totally biased article opposing FDI. By coining the term 'Big Retail& and backing with very subjective arguments the writer is merely creating an image of an oppressive organisation. One can clearly see the benefits being derived by the customers of some of the larger retail chains presently operating like DMart, Fresh, More etc and many more down South. The price difference between the small shop and these chains is tremendous. Economies of scale, good storage infrastructure, efficient inventory management, insurance protection are few factors which provide the so called 'Big Retail' the scope for being price competitive. The secondary benefit that will be derived by allowing FDI in retail is the enormous employment that will be created across the entire value chain. Am sure, the number of jobs that will be created will more than offset the number of small shops that will be closed. The latter also seems unlikely because of the entrepreneruship ability.
I am not an economist, but an ordinary housewife,in India.But an ordinary housewife is the only one who is likely to reflect the truth at the consumer and end level, i.e. prices and lifestyle.I also spend quite few months of a year with my children in the U.S and Europe. I am a helpless ringside witness of how destructive mega retail chains and malls are to household budgets and quality of life. These models are drawn by highly rated marketing and retail experts, based on sheafs of statistics, and who can argue against these academic presentations? But let me tell you, the neighbourhood stores, the mom-and-pop outlets,the street vendors, deliver-at-home enterprises etc are the best and most price and user friendly models of retail. No, I cannot quote statistics, but I am the user and that is my actual experience. And, so I am sure,that of billions of housewives through out the world. An honest 'on-the-ground' survey will prove this, unless of course some big business mole kills it.
Such fear-mongering by the author doesn't help the debate. The reality is that in a huge and complicated country like India, no FDI in any sector can cause the kind of havoc being predicted. The single-biggest beneficiary of FDI in Retail will be the end consumer - with more choice, better quality AND lower prices. Just because the local kirana guy has low overheads and appears stingy, consumers are fooled into believing they are getting low prices. The reality is that as a percentage of our income, we spend upto 20-30% more than our Western counterparts on food and basic staples. This is because of various inefficiencies in our supply chain leading to not only wastages, but also demand-supply mismatches and excess inventory, the price of all of which we pay. At best, FDI in Retail will improve this situation so that we begin to see price advantages in a few years from now. At worst, it may take several decades, but there is no justification to maintain the status quo.