Will FDI in retail be good for consumers?

This article was first published in Moneylife Magazine and www.moneylife.com on October 25th, 2012

http://www.moneylife.in/article/will-fdi-in-retail-be-good-for-consumers/29272.html

Wal-mart or Tesco may fail in India but consumers must get a choice

At 6am on a Tuesday, the wholesale market for vegetables—Bowenpally Monda (Hyderabad)—is already humming with activity. When talking to a commission agent about their cornering a share of the farmers’ profits, the agent asks, “While statistics are available and the media quotes the number of farmers who have committed suicide or number of farmers who have become impoverished or their condition has worsened, does any government institution or any institution have statistics on how many intermediaries have gone bankrupt? How many people have entered the trading business and lost money and, hence, quit? How much bad debt is there in intermediation? If this statistic is compiled, one would realise that intermediation is not an easy job.” In this, and possibly other markets, the intermediaries or commission agents perform a very important function—that of taking financial risk.

Others from his trade join in to ask: “Why should a farmer worry about what the others are getting? If a farmer gets Rs2 and he has invested only Re1, it’s good business. He makes 100%-200% return on his investment. Any project should be measured on the basis of return on capital. Intermediaries do not make money on each transaction. They make money once in a while. That’s part of the game. Sometimes, they make a killing; on other days, they barely break even or make losses. Volumes bring them money. Their average margins are wafer-thin.

Across the country, debate is raging over foreign direct investment (FDI) in retail and the entry of larger players like Wal-Mart and Tesco. The traders do not seem to be concerned about this. One of the agents asks me, “How is a Reliance or an ITC less smart than Wal-Mart?”

Reliance has the deepest pockets in the country and did hire the best talent in the world for its retail operations. But Reliance Retail has been a fiasco. While one can argue that Reliance has always operated in the industrial arena and does not have a mindset for retail, what about ITC? ITC is a thoroughly farm-consumer market company with deep pockets and deep understanding of the entire value chain. They have worked with farmers at the grassroots level for over 100 years in India. Yet, their fresh retailing business has not been successful.

What is the problem? And can Wal-Mart and others handle it? The CEO of a company, who does not want to be named, which is into large-scale commercial farming, says, “Either the market is more efficient than is believed or the market has not evolved to a point where models of large retail chains can be absorbed in the system.”

It is often said that in India 30%-40% of the fresh produce gets wasted. I once heard Damodar Mall, director of strategy-food at the Future group, which pioneered organised retail business in India, say that in a country like India where people make serious living out of rag-picking, nothing is thrown away. Nothing is wasted. “Yes, the value of the produce can be better preserved. But the cost of retaining that value through refrigeration or pre-cooling, etc, versus the value saved is not financially viable.”

The natural chain is far more efficient. Apples are a classic example where cold chain can be applied. They are produced only in one part of the country and consumed across the country. Concentrated production and distributed consumption. Companies like Adani and Concor, have invested heavily in the cold chain. Yet, cold chain has not become entirely successful.

The marketing and distribution channels have designed themselves in such a way that it is very close to ‘Just-in-Time’. In the US, food habits are more or less uniform throughout the country. In India, every 300km, eating habits are completely different, determined by production in the local catchment which, in turn, depends on the soil, agro-climatic conditions, etc. So the production and consumption is more localised. While there are products like paddy and wheat which are produced in one part of the country and consumed across the country, fruits and vegetables, especially vegetables, are localised. Except for onions and potatoes, few products move further than 300-400km in the country.

When asked about the impact of FDI on the mom-and-pop kirana stores, the CEO, who prefers to be called a farmer, says “Mom-and-pop stores will flourish. They will not go anywhere. In fact, in places where the retail chains set up shop, the mom-and-pop stores will become even more efficient. The Indian trader is very smart. There are several instances where when organised retailers like Reliance run a promotion on tomatoes, for, say, Rs5 per kg, the corner shop vendor comes and buys 10kg and stocks it in his shop. These promotions result in losses for organised retailers and gains for the small shops.”

The guidelines for FDI in retail impose limitations too. Outlets can be opened only in cities with a population of one million and above; 50% of the investment should be for backward linkages. These are tough conditions to meet.

Also, the regulatory and procedural hurdles are not going to be easy for foreign investors to manoeuvre around. Even a simple food-processing unit needs anywhere between 15-20 licences/permissions from agencies/authorities such as electricity, pollution control, labour, fire safety, panchayat, taluka, weights and measures, etc. They are needed and should be there. But the way they are monitored and the way the system operates, it is very difficult to start and operate a project.

The retail pie is obviously very big and everyone can benefit from it. But it’s only fair to give the consumers a choice. If a Wal-Mart or a Tesco is more efficient and offers cheaper products, then why should the customer suffer? Whether they will be able to do so is a big question; but it is worth giving them a chance for the sake of the consumer.