The risks of big retail

Traders and growers organisations are protesting against the Walmart-Flipkart deal, which they believe will result in the surreptitious entry of the world’s largest retailer into the lucrative Indian market. They are upset the deal may set a precedent and suspect that over time the policy will be diluted to accommodate foreign direct investment (FDI).

For at least eight years, this country has been debating the merits and demerits of allowing FDI in organised retail. Over years, the investment policy has been liberalised and FDI in single-brand retail is currently permitted; in multi-brand retail it is only a matter of time.

Margins under squeeze

To be sure, organised retailers are simply meeting the burgeoning demand for ‘international shopping experience’ driven by rising incomes, demographic pressure, urbanisation and evolving lifestyles.

They argue that their investment will create employment, improve the supply chain and improve the marketability of growers’ crops.

Logically, growers should be happy with the advent of organised retail because of the perceived benefits of a ready market. However, organised retail is prone to be ruthless when it comes to quality and delivery schedule. Retailers have too much at stake in the form of investment, turnover, customer satisfaction, and so on. Surely, farmers defaulting on their commitment will not be treated with kid gloves.

Importantly, we need greater scrutiny of the key question whether organised food retail will deliver more remunerative returns to growers. There are risks that need to be recognised.

Setting up large format stores is capital-intensive, given the high real estate costs.

Operational costs too are high because of relatively high wages, high cost of power, high cost of money, and so on.

On the other hand, customers are invariably cost-and-quality conscious. So, organised retail will strive to retain customers by ensuring competitive pricing and quality, if need be, by lowering the profit margin.

If capital and operational costs are high and trade margins thin, where will the retailer capture value to stay and grow in business? It will have to be, more often than not, at the back-end of the supply chain; and at the farthest end is the grower.

While organised retail provides large and ready marketing outlet for growers, there is simply no guarantee that farmers will obtain remunerative prices. If anything, they will obtain market determined prices; and they have little control over the way the market price is determined.

The cat-and-mouse game between organised retail and small farmers is often an unequal fight, given the vulnerability of the latter.

Free markets have many votaries, but often those propagating free markets may never have been subjected to the market’s cruelty. It is imperative that an appropriate policy that protects the interest of both parties is put in place.

The state can play a catalytic and protective role — for instance, by encouraging contract farming which will bring together hitherto disparate farmers.

So, a three-way partnership between organised retail, farmer groups and the government will accelerate production of market-driven standardised quality. The partnership will ensure growers are not short-changed.

The author is a policy commentator and agribusiness specialist. Views are personal.

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