S Murlidharan

Has MRP achieved its purpose?

S. MURLIDHARAN | Updated on December 04, 2011

In India, small neighbourhood shops corner a lion’s share of the retail business.

With the average mark-up in India at a whopping 40 per cent, the MRP, far from serving as a guide-post, actually confuses the customer.

It is mandatory to mention maximum retail price (MRP) on the package of products coming within the purview of Standards and Measurement Act in India. In fact, it is one of those harmless, innocuous pieces of law that begets faithful compliance without demur, almost universally, like the smug declaration of one's assets to the Election Commission in the run up to an election.

Misleading customers

The manufacturers, who are obliged to put up this information on packages meant to be sold in retail, do so with singular nonchalance secure in the smug knowledge that it is after all the job of the distributors and retailers to face competition including on the price front.

With the average mark-up (distribution margin) in India at a whopping 40 per cent, MRP far from serving as a guide-post is actually misleading and confuses the discerning customer. To be sure, most of the retailers do not sell above the MRP, but that is no big deal for the customers because they simply have no means of verifying how much it cost them (retailers). In the event, MRP has largely remained an illusory law fostering smug self-deception.

A four-litre can of paint, for example, might bear an MRP of Rs 2,000 and a customer might send a blessing skyward when he gets it from a retailer for Rs 1,800, little realising that it perhaps cost the retailer only Rs 1,200 and that a bigger retailer in the vicinity not only sells the same for Rs 1,500 but the rival brand carrying an MRP of Rs 2,200 at Rs 1,400.

Be that as it may but ironically a law that was designed to protect consumer interest, alas, has come to protect Revenue interest admirably thanks to the wily then Finance Minister, Mr P. Chidambaram, who, in 1997, decided to let manufacturers to stew in their own juice — ad valorem excise duty would be charged on select items notified by excise authorities on MRP with suitable abatements.

In one stroke, this served to end the protracted disputes between excise authorities and manufacturers on the vexed issue of what constitutes excisable value. Tangentially, perhaps, MRP has served consumer interest in a way that manufacturers obliged to pay excise with reference to MRP are no longer callous or blasé while mentioning it on the package chastened by the sobering knowledge that they would have to shell out more by way of excise duty.

The US practice

In the US, the farce of MRP is not undergone. Instead, it is the store price all the way. One can step into Target, for example, and shine the price tag on a product on one's cell-phone having the appropriate software. Presto, it makes a comparison of the price of the same product in other stores in the vicinity.

Thus, a customer is enabled to make an informed choice. She gets an opportunity to challenge Walmart, for example, especially its much-vaunted claim that its is always the lowest quotation for any product and that if this claim of it were successfully challenged, it would give the product free!

To be sure, the US and India are not on all fours and comparison between the two regimes might therefore be odious.

There are hardly any mom and pop stores there and most of the retailing is done by big retail chains that often dispense with layered supply chain and directly negotiate with the manufacturers and wangle a deal. The one who wangles the most lucrative deal is also the one who is able to give the maximum price advantage to his customers.

The Indian scenario

The Indian scenario is vastly different, with small neighbourhood shopkeepers dotting our retail landscape and cornering a lion's share of retail business, with the retail chains by and large not making much impact apart from recording reasonably heavy footfalls.

In the event, the concept of store price as opposed to MRP is largely conspicuous by its absence in this country defying inter-store comparison except, perhaps, through word of mouth.

Nevertheless, the moot question whether we should persist with the farce of MRP remains and deserves an answer. As pointed out earlier, apart from securing the interest of the exchequer where MRP-based excise regime is in vogue, consumer interest hardly seems to have been served despite the routine annual admonition on the consumer day that consumers should bargain hard with the retailers in as much as MRP is the maximum price and a customer is free to wangle a discount.

That MRP allows elbow room to the customers to bargain with the retailers has largely remained a cold comfort in a country where only bulk buyers call the shots. And bulk buyers in any case do not go to retailers.

(The author is a Delhi-based chartered accountant.)

Published on December 04, 2011

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