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 )

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