Discussing foreign direct investment in multi-brand retail in these columns, I have made the following points: 1) Big Retail in the West is expensive; they have much higher mark-ups compared with Indian retail. 2) Western Retail is concentrated, offers less consumer choice, and charges higher prices. 3) Big Retail is not good for employment in both manufacturing (due to offshoring of production) and in retail (as they take out the small retailers).
Not surprisingly, there has been a flurry of responses questioning the views expressed. Recent news reports cite officials speaking of benefits of FDI in retail. Let us examine these so-called benefits.
MYTH ABOUT FARM PRICES
It is argued that there is a significant difference between what the farmer gets for his produce and what the consumer pays in the end. The difference is pocketed by “middlemen”.
Since foreign retailers setting up shop in India will buy direct from farmers and sell to consumers, thus eliminating “middlemen”, they will pay better prices to farmers.
The first obvious point to note is that Big Retailers are “middlemen” as well, operating with the same profit motive as any trader.
Their business model is simple – Buy Lowest, Sell Highest.
Walmart calls their sourcing EDLC – Every Day Low Cost. The argument is that when Big Retail, who are known to beat down their sourcing price, enters the market to purchase from the farmers, somehow they will ignore the prevailing prices, and out of the goodness of their heart, pay the farmers a higher price, because they are going to sell direct to consumers. This will clearly not happen.
On the other hand, Big Retail will go into the farmers' markets and will eliminate competition on the purchasing side over time to gain dominant status. Farmers will be at the mercy of Big Retail to sell their produce. Farmers' prices will get hammered down, because that is what EDLC means. This does not mean that the consumer will get a lower price; it only means that the Big “middlemen” Retail will be able to charge the high mark-ups on which their business is modelled.
The only way to preserve the farmer's interest over the long term is to ensure that there are multiple bidders for his produce at all times in the markets, to keep prices up at reasonable levels. This balance is guaranteed to be upset by Big Retail.
For farmers to get good prices, three things have to be in place: 1) Good transportation infrastructure, mainly roads. 2) Ability to store perishables, including refrigeration. 3) Timely and correct market information. India's cellphone service providers have substantially bridged the gap on point three. The other two have nothing to do with FDI in retail, as explained below.
MYTH ABOUT LOGISTICS
It is believed that Foreign Retail will improve supply-chain infrastructure and reduce wastage of farm produce. But Big Retail will invest in the infrastructure required to support their business, no more and no less.
This will not solve the issue of wastage of farm produce, because the structural problems lie elsewhere. The twin infrastructure problems in India are roads and power. The government has taken steps to improve the quality of national highways. However, the problem is that of the over three million kilometres of Indian roads, the national highways constitute around 2 per cent, State highways 4 per cent while 94 per cent are district roads and village roads. The district and village roads are State subjects, and this is where the supply chain infrastructure falls apart.
As for the power sector, with an installed capacity of 174,000 MW, the Central Electricity Authority has forecast a shortage of at least 10 per cent in FY 12 and beyond in most of the country, with peak shortages at higher levels. This leads to power cuts routinely in rural areas, making the operation of cold chains very difficult and expensive.
Big Retail cannot address the issues of roads and power. Their ability to address the fundamentals of the supply chain, and reduce wastage of farm produce, will be limited.
The biggest wastage of foodgrains is in the godowns of the Food Corporation of India, which is doing a manful job of a massive task. Yet the FCI has admitted to wastage of 1.3 million tonnes of foodgrains over the past decade, in response to a query under the RTI act. The authorities should fix this problem, instead of thinking about FDI in retail, which is fraught with negative consequences.
MYTH ABOUT COMPETITION
It is argued that Indian business houses are already into Retail and Big Foreign Retail cannot do further damage. Nothing can be more misleading than this argument. It comes from people who simply do not understand the forces that get unleashed with Big Foreign Retail.
Indian business houses' experience in the grocery retail trade is a decade old with Big Bazaar opening its first store in 2001. Their experience has not been an easy ride.
Groups like Reliance, Aditya Birla and Spencer's have declared losses of hundreds of crores, closed a number of stores in recent times, and are looking for an appropriate business model. Even with collective investments in thousands of crores, given the fragmented nature of the business, their market impact has been modest at best.
When the Walmarts, Tescos and Carrefours enter, they come in to eliminate local competition completely because their business depends on it. Their resources are limitless. The investments will be at a disruptive level. Their sourcing will be global. Nothing that Indian business has done so far will compare with this.
Neighbourhood stores will shut down in the hundreds and thousands across the country over time. The balance in the market place will be upset completely, and families and communities will be wiped out. This is not an imaginary scenario. It has happened everywhere they have gone. This is the reason why even the city of New York is fighting to keep Walmart out (see http://www.npr.org/ 2011/02/04/133483848/).
(The author is Group CEO, R K SWAMY HANSA and visiting faculty, Northwestern University, US. The views are personal.)
(Concluded)