FDI in multi-brand retail in cold storage?

The Union Finance Minister, Mr Pranab Mukherjee, deserves compliments for not succumbing to the corporate lobby pressure to open up multi-brand retail to foreign direct investment; and more importantly for taking on board serious apprehensions expressed by several groups about the utility of such investment in bringing about positive changes in the agricultural marketing set-up.

From another angle, his demand for a ‘larger consensus' on the ‘complex' issue not only reflects the nervousness of the government in taking a unilateral decision, but also concern that such a decision can go frightfully wrong and wreck more damage than one can imagine. For building a larger consensus, the Centre will rope in State governments. The consultation process is sure to take several months, if not years.

A critical issue while taking a favourable decision is whether or not to regulate the organised retail. This will be an even more contentious issue. So, FDI in multi-brand retail may not actually materialise this year; unless of course greater forces return to play and influence decision-making. It is argued that opening up the retail trade, especially food retail, for infusion of foreign capital would contribute to supply chain efficiencies, improve growers' incomes and help contain spiralling prices of essential food products.

Complex reality

While one can advance theoretical arguments about the likely benefits of large-scale organised food retail, the situation on the ground is so complex that it may not permit full realisation of what the theory suggests. Currently, in addition to State governments, stakeholders in the food chain include farmers, aggregators, processors, distributors, large and small traders as well as trade intermediaries such as commission agents, apart from retailers themselves, and consumers. On its part, the corporate world has clearly seized the business opportunity by pouring huge investments into accelerating the pace of retail revolution. The target consumers are obviously those with higher disposable incomes demanding ‘international shopping experience'. Retailers are meeting the burgeoning demand by investing in malls and supermarkets. Such investments create employment, improve the supply chain, improve the marketability of growers' crops and in general contribute to heightened economic activity. Logically, growers should be happy with the advent of organised retail because of the perceived benefits of ready market.

However, not many are ready to appreciate that organised retail is prone to be ruthless when it comes to quality and delivery schedule. There is generally no compromise on this as 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.

Pricing pressure

Importantly, we need greater scrutiny of the key question whether organised food retail will deliver more remunerative returns to growers. There is suspicion, not about the intent of large retailers, but about their ability. Cost is an important consideration in the business plan of any organised retail. Setting up large-format stores is capital-intensive, given the high real estate costs. Operational costs are high too because of relatively high wages, high cost of power, 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 profit margins.

Simply put, as uncompetitive prices would drive customers away but friendly prices retain them, the retailers' degree of freedom is limited at the front-end. 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. They would obtain market-determined prices; and they have little control over the way the market price is determined. Creation of total dependency has its associated risks to which growers will be subjected. 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. Given the unequal nature of the transaction and potential for exploitation, the government needs to step in. The State can actually play a catalytic and protective role. For instance, encourage contract farming which will bring together hitherto disparate farmers.

A three-way partnership between organised retail, farmer groups and the government will accelerate production of market-driven standardised quality. Farmers should be able to obtain quality-related prices, something they never enjoyed. The partnership will ensure small farmers are not short-changed.

Small retail's plight

Small traders and shopkeepers seem to be the worst hit by organised retail and their interest needs to be protected too. Ironically, in terms of sheer numbers, the traditional 'mom-and-pop' shops will cumulatively have more customers than organised large-format retail. Location, of course, is an important criterion. Small street-corner shops may be less favoured in areas with concentration of high-income groups or upmarket customers. There may be cases of relocation under such circumstances.

The State can support small retail stay in business and earn livelihood. Imparting training to stay in competition with organised retail is necessary. For instance, small shopkeepers may explore innovative customer care methods (taking orders on telephone, home delivery of goods ordered, credit period).

Importantly, the State can help small shopkeepers access finance at concessional terms for scaling up operations, improved display and so on. The State's affirmative action will go a long way in enabling and empowering growers and small retail.