FDI: The Great Wall Of Retail.

Sreenivas Jain in Daily News and Analysis wrote a piece on Foreign Direct Investment (FDI) in Multi-Brand retail titled The Myth of Big Retail. The excellent part of his article is the effect of Indian conditions on the juggernaut of Big-Box retail that he has put together. Any discussion on Big-Retail has to eventually account for Wal-Mart, which is bigger by three and the half times than its nearest competitor in terms of revenue. The issue of FDI in multi-brand retail is vexed, because it is feared it will cause large scale dislocations in a huge sector of economy where tens of millions people -retailers, grocers, vendors, truckers, cultivators, etc.- find employment. Its supporters on the other hand find it will kick start stalling Indian economy. The big Indian retailers would heave a sigh of relief awash as their balance-sheets are with red ink.  There are other objections too that emanate from the bullying behaviour of Wal-Mart.

  • Walmart has a record of violating laws protecting workers’ rights and aggressive anti-union conduct in the United States and elsewhere.
  • Walmart has a negative impact on both retail worker wages and total retail employment. University of California researchers found that “Walmart workers earn an estimated 12.4% less than retail workers as a whole.
  • In a number of countries, the presence of a Walmart store has had a devastating impact on small businesses in the surrounding areas. Studies have also found that the expansion of hypermarkets like Walmart has led to the mass closure of small businesses in the United States and other countries.
  • Supply chain intermediaries, like wholesalers and other middlemen, are also negatively impacted by Walmart. The company’s global reach allows it to source goods directly thereby circumvent existing wholesalers and distributors.
  • In the long term, Walmart pushes prices paid to farmers and manufacturers down rather than raising them, and producers unable to accept such concessions simply go out of business. The company is so large that it has the power to dictate the terms of suppliers’ contracts, including turnaround time, quality, quantity and price.
  • Source: Executive Summary, UNI Global Union.
  • Wal-Mart’s disdain for local laws is legendary: Walmart isn’t just the largest retailer in the U.S. It’s also a commercial powerhouse and the largest private employer in Mexico, the jewel of its global business empire. However, Walmart didn’t come to dominate the Mexican market without spreading around a little shady cash, almost certainly in violation of U.S. and Mexican law, according to a lengthy, blockbuster report in The New York Times. When it got the wind of NYT enquiry, it attempted a pre-emptive strike,  it informed the Justice Department and Securities and Exchange Commission that it was opening an independent investigation into foreign bribery, without providing details. Now the details are out. Here’s a brief guide to Walmart’s big bribery scandal.
Like there are detractors of big-retail, there are supporters too. The Independent Institute brought Richard K Vedder (for) and Ken Jacobs (against) for a debate on Is Wal-Mart good for America (USA)? I leave it to readers to decide who made a more convincing case. Coming back to the article by Jain, he cites a home grown example of very successful big-retail run by farmers’ cooperative -Gujarat Milk Marketing Federation – that is better known by its brand name – Amul. On the other hand in some government statistics he quotes –In fact government data suggests the reverse. From 2005 to 2009, organised  retail has shrunk from 27% to 15%, while unorganised retail has held the course at a steady at 15%– the numbers don’t add. If these figures are fractions of total retail trade, then they obviously are wrong. However, it is an excellent effort to put the debate in perspective, especially the posturing by various political parties.
^^
Of all the big reforms announced by a suddenly galvanised UPA, the one that has predictably caused the greatest political tremors is allowing the entry of multi-brand retailers into India: Wal-Mart, Tesco, Carrefour and the like. The strong opposition to the entry of the big boys of global retail is as exaggerated as the claims made by the government of the benefits they will bring. Both the pro- and anti-retail lobbies are wrong.
For starters, India has had big or organised retail for about 15 years now, not a small stretch of time.Some of the biggest Indian corporates are in this space, like Reliance, the Birlas, Godrej, RPG (Sanjeev Goenka Group) and Kishore Biyani’s Future Group. Despite this, organised retail is only 5% of the Indian retail market. The remaining 95% is still unorganised. Every one of the big players is posting losses. Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets. Which is why India is one of the few countries where domestic retail chains are actually lobbying for the global giants to come in! Why on earth would you actually fight to increase competition? Officially, Indian retailers will lapse into corporate jargon like the global players ‘will add to the value chain’, ‘will increase capacity’, and so on. In reality, it’s an open secret that many of the Indian players are hoping that the global chains will bail them out either through joint ventures or just outright takeovers.
Some argue that the Indian chains have not worked because they don’t understand retail. That their parent companies have other core specialisations like oil refining or making cement or tyres. This argument could be applied to companies such as Reliance or the Birlas, but what about India’s original big dukaandaar, Kishore Biyani? Few will disagree that someone like Biyani has a greater sense ofthe middle class Indian consumer’s shopping habits than, say, Carrefour. In an interview we once filmed in his flagship Big Bazaar in Mumbai’s Phoenix Mills, he explained why the store design actually encourages overcrowding. He called it his ‘butt and brush’ theory, a somewhat cute metaphor to describe how Indians actually prefer to shop in an overcrowded environment (where their butts can theoretically brush against each other). And yet his Future Group, the parent company of the Big Bazaar chain, is in deep trouble with debt on its books of over Rs 3,000 crore.
The real reasons why big retail hasn’t  worked in India are simple. One, a lack of commercial space. Most Indian cities, presumably the first port of call for the Wal-Marts and Tescos, don’t have the kind of aircraft-hangar size spaces that these chains need. Whatever space does exist is limited and very expensive, taking away the advantage of economies of scale needed to make big retail viable.Two, Indians just shop differently. We are used to buying in small batches, not making weekly or monthly runs as is the practice in the West. We prefer walking out of our homes to shop, not driving all the way out to a hypermarket in a distant suburb. Let’s face it, as Indian shoppers, we are utterly spoiled for choice by a range of price-sensitive (and colourful) retail options that include everything from street vendors to kirana stores, thela-wallahs and Mother Dairy outlets. Almost all of whom have no qualms in delivering even a matchbox to our doorstep. When Reliance and the Birlas couldn’t take on this vast, fragmented and inventive mosaic that is Indian retail, do Wal-Mart and Tesco have a better chance ? Which is why the government’s claims that opening up FDI in retail will bring in 600 billion dollars of investment (the figures keep changing) is utter bunkum. As one of India’s leading retail sector gurus told me, the silence is deafening — not unlike when India opened up FDI in power and infrastructure, hoping for a stampede of foreign investment which never quite came. As for those political parties claiming to get falsely outraged on behalf of the small dukaandar, here is a reality check: there is NO empirical data to suggest that the rather feeble entry of Indian big retail over the past decade and a half has led to shutting down of corner stores. In fact government data suggests the reverse. From 2005 to 2009, organised retail has shrunk from 27% to 15%, while unorganised retail has held the course at a steady at 15%. Having said that, it’s the other end of the chain which needs the greatest attention: the Indian farmer. It’s true that the prospect of organised front-end retail will liberate him or her from an oppressive dependence on middlemen-dominated mandis. And it will create a cold chain network that will reduce wastage and add value to farm produce. But for that too we don’t need Wal-Mart or Carrefour. We already have in this country a state-of-the-art network that sources from three million farmers daily, stores their product in cooling vats, converts it into a range of terrific products and transports it in refrigerated trucks to stores across the country. It doesn’t involve any foreign investment or technology. It’s owned collectively by the farmers who make the product. Everyone gains: the farmers, the members of the network, and the consumer. Our political parties will be well advised to spend less energy on empty blather about of the benefit of international retail chains. Or staging dharnas against their arrival. Instead, let them encourage the spread of this network in the states where they rule. The network is called Amul. And it was invented by Verghese Kurien. 

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2 Responses to “FDI: The Great Wall Of Retail.”

  1. Sadanand Patwardhan Says:

    One mistake Jain made in his article and I swallowed is comparing *Amul* to organised big box retail, which it is not in its entirety. Amul created a great logistic chain from farm, to factory, to market; but left actual point of sale to myriads of front-end retailers – both small & big.Sadanand

  2. Capt. Ajit Vadakayil Says:

    Hi,Every patriotic Indian who can understand simple English must read this.Punch into google search-MODERN ECONOMICS, AN EMPIRICAL VULGAR PSEUDO SCIENCE- CAPT AJIT VADAKAYILAdam Smith the supreme god of economists , was a THIEF who lifted French economist and banker, Richard Cantillon’s work. Adam Smith , the holy cow, was a CRIMINAL AND MURDERER who killed 120 lakhs ( 10.2 million ) Bengalis in 1769. See some gruesome pictures of the sunk holocaust.Adam Smith , the crypto agent, was an employed by British East India Company as the one man think tank– BEIC financiers are now back to India for FDI in multibrand retail.History always repeats itself—this is why we learn history.On the Dec 20, 2004 letter, the FAM’s foreign trade committee chairman Chandrakant T. Shanghvi said that Manmohan Singh had categorically told a delegation of the traders’ body that “we should not permit FDI in retail trade… India does not require the kind of reforms which would, rather than creating employment, destroy employment”. So now it is the Italian Queen Beee who wants it, right ?DORKS and angrez ka aulads in Indian internet disguise —keep away. Capt ajit vadakayil..

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