Friday, November 25, 2011

Multi-brand retail: Who gains, who loses…..

As expected, a political uproar has arisen over the government’s decision to allow up to 51% FDI in multi-brand retail. On the one hand, there are some UPA allies like the DMK and the TMC who are opposed to the government’s decision; on the other hand, the NDA’s ally, the Shiromani Akali Dal (SAD) has written a strong letter of support to the government. The usual cribbers – Left for ideological reasons and the BJP for opportunistic ones – were also out in full force yesterday. As expected, Parliament is expected to waste a few more days of the winter session on this subject.

Reforms are not easy under the best of circumstances. When the economic liberalization began under Narasimha Rao in 1991, it was not out of some strong urge to reform that the Congress had. We were pushed into it by the severe balance of payments crisis that loomed over us in those days. It took many years to dismantle the License Raj – and even in doing so, some areas were never reformed. For eg., Labor laws in India continue to remain stuck in some past era. There was much opposition even then to the liberalization process. Today, when we look back at the last 20 years, most people (without political biases!) would agree that liberalization has helped India scale up its economic performance. We have grown the economy some six and a half times in the last 20 years; taken 300 million people out of poverty; increased our forex reserves to nearly 300 billion dollars; and made India the second fastest growing major economy after China. There was very little support for reforms in 1991. But they delivered. There is very little support even now for reforms. But they too will deliver.

So who are likely to benefit from a rapid growth of organized retail?, In my view, there are three segments of people who will benefit. As the papers indicated yesterday, one segment is the farmers – who can expect to get a larger share of the price the end consumer pays. The TOI reported yesterday that farmers should get about 10-30% more than what they are getting now. The second segment that benefits is the very large segment of consumers. Prices of goods can be expected to drop by 5-10% as economies of scale and competition drive prices down. We have seen the impact of this already – even with a relatively modest presence of large format domestic stores. Pricing in Big Bazaar is cheaper for most items compared to the ordinary retail outlet. This is what drives people into the large format stores. The third segment to benefit would be educated middle-class urban youngsters who can expect to be absorbed in gainful employment in large numbers. If the IT revolution gave jobs to millions of English speaking urban youth, the retail revolution would do the same for the sons-of-the-soil youngsters (those who cannot speak fluent English). The Commerce and Industries minister, Anand Sharma says that as many as 10 million jobs can be expected to be created if modern retail picks up.

There are of course tremendous other gains from having a developed modern retail sector. Wastage of fresh produce is expected to come down by 30% or more. The back-end infrastructure including cold storage chains and transportation networks are expected to be modernized. As a friend and reader of my post (thanks Hiten! I couldn’t have put it better) yesterday pointed out in a comment: “Food Processing Industry will boom for next 10 years. SSI will rejuvenate and busines of becoming OEM for private labels will prosper. I am happy because, supply chain mngmt will come off age in our country. I am happy that heavy automotive industry will prosper. I am happy that these 52 towns n cities will expand their limits to accomodate these mega stores. I am very happy that our youth will get job that shall bring respect and individuality to their hard work. I am happy we shall finally understand the value of politeness and courtesy when these customers walk into the stores. We are going ahead with a cultural change, and that makes me immensely happy”.

Which are the segments that are going to lose out? The biggest segment is the segment called “intermediaries” – the chain of middlemen who buy from the farmers and pocket huge amounts of margins before they deliver the goods in the hands of the final consumers. The problem with the middlemen is that they haven’t added enough value to the food chain. Had they done so, many of our current problems of cold storage and rotting food items wouldn’t have arisen. In addition to the middlemen, there is a certain type of kirana stores who could lose out. Those who don’t modernize. Those who cannot improve their customer service. Those who prefer to charge high margins and keep prices high. These are the typical mid-scale kirana stores – with 200-1000 sq. ft of shop area located within prime residential colonies – who are going to be challenged. Even they can grow since the overall retail business is expected to grow rapidly in the next twenty years – provided they upgrade their facilities. The smallest retailers which make the bulk of our present retain network – cigarette and paan shops, corner stores which sell daily food items like milk and groceries, hardware shops, etc are not expected to lose at all. These are segments which provide the “last mile” connect in retail – and their place is protected.

Political parties that oppose multi-brand retail can be grouped into four types. First, there are some like the TMC who believe (wrongly) that large format stores will be harmful to the farmers. The truth – as pointed out above – is anything but. Farmers will get more remuneration in their hands. Then there are those like the DMK and JD(U) and others who believe that this will lead to more unemployment as neighborhood kirana shops shut down. As shown above, this is a theoretical possibility, but our experience till data has shown otherwise. As per an article in the online edition of The Economic Times dated June 15th, 2011: Since 2006, when most big retailers either entered the retail space or began expanding their network, sales in local kiranas have grown in the low single digits even less than the GDP growth rate, while modern trade has grown in strong double digits, though at a much lower base. For instance, sales at modern stores grew 34% in 2006 and 29.3% in 2010. Traditional stores could increase sales only 1.5% in 2006, but improved the growth rate to 6.2% last year. So Kirana stores haven’t lost revenues or haven’t shut down – only their rate of growth has slowed down. Even this, I believe is temporary as it takes a little while for them to adjust to the new realities. Kirana shops have tremendous advantages – their proximity to their customers; their personalized touch; the credit facilities they sometimes extend; the home deliveries they do etc are reasons why they continue to grow. The third type of opponents is the Left parties which fundamentally don’t like FDI – especially in the consumer sector. Frankly, I have no problem with their opposition, because their’s is an ideological opposition. If their ideology carried much weight, they wouldn’t find themselves in the pathetic political state they find themselves in right now. The last type of opponents is the BJP – a party whose core constituency is traders. The exact same mid-level traders who will be challenged by modern trade. The BJP ideologically supports FDI, but in this particular case, it is caught between a rock and a hard place.

On balance, there are more people who will benefit (consumers – more than 300 million; farmers – another few hundred millions and urban middle-class educated folks – maybe a few million) than lose (semi-organized mid-scale traders – a million on the outside). The BJP may want to ask itself whose side it prefers to be on – the hundreds of millions of consumers and farmers or the few million traders.

The real truth is that even sixty years after independence, we still suffer from a persecution complex. Persecution by the foreigner. The fear of the foreigner continues to haunt us. But I sometimes wonder if this is genuine fear; or just opportunistic politics…..

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