Comments
The entry of big retail into India could lower producers’ margins, says an international research paper.
Retail chain majors such as Wal-Mart exercise their bargaining power to squeeze producer margins on products as they buy very large volumes.
According to a research paper published by the US-based National Bureau of Economic Research, Openness and Industrial Responses in Wal-Mart World: A Case study of Mexican Soaps, Detergents And Surfactant Producers (http://www.nber.org/papers/w12457), by Beata Smarzynska Javorcik, Wolfgang Keller and James Tybout, “The long run effect of a new Wal-Mart in a region is to drive down retail prices by 1-13 per cent, depending upon the product”. In the case of detergents, the impact was about 9 per cent.
To sell goods at the lowest price, the “super-centres” of firms, such as Wal-Mart, procure goods from the most efficient small-scale local producers and convert consumers to their own ‘private label’ brands. This could force Indian and multinational FMCG and consumer companies making branded products to drop their prices.
A typical large format store in the US retails goods 5-25 per cent cheaper than neighbourhood stores.
According to another NBER study, Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart (http://www.nber.org/papers/w11809) by Jerry Hausman and Ephraim Leibtag, “Food prices at Wal-Mart are 8-27 per cent lower than at the large supermarket chains, even after discounts for loyalty card and other specials are taken into account. After Wal-Mart enters, conventional supermarkets typically decrease their prices (or do not increase them as much as in non-Wal-Mart markets) because of the increased competition.”
This strategy of using scale to procure cheap and nudge out competitors puts considerable pressure on suppliers to drive down costs. One standout feature of the super-centre business model is the emphasis on annual price reductions for key products.
Wal-Mart’s hard bargaining keeps negotiations as rigid as possible, both in terms of the bargaining environment and modifiable contract features. Once the chain has established its dominance in the market, this often amounts to a take-it-or-leave-it offer. Those suppliers that balk at Wal-Mart’s demands are simply discontinued and new suppliers brought in.
Indeed, “the appearance of Walmex was typically cited as the most important structural change to (the Mexico) market since 1990,” according to the NBER study on the retail giant’s entry into Mexico.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.