Thursday, August 02, 2007

The Big Buy......

A year or so ago, I had come across a report on the retail sector in India, from a top market research firm, which said that Kerala showed the greatest penetration of modern retail in India. This means that out of the total retail trade, the share of retail chains, large format stores and other types of non-kirana (mom and pop) outfits is already the greatest in Kerala. If I remember right, this share was over 40% for Trivandrum and similarly for Cochin.

Of course, this was not due to the Wal-marts or Tescos of the world but mostly on account of the proliferation of the ubiquitous "Margin-Free" chain of supermarkets. Kerala also had a great variety of one-store supermarkets, which offer groceries and household consumables in around 1000-2000 sft of space in almost all urban and even quite a few rural areas of the state. In fact, Spencers which has been in Trivandrum for almost 35 years as well as local chains like Varkeys, make up only a small fraction of the modern retail volumes. For a comparison, one should not that the corresponding presence of modern trade in metros like Delhi and Mumbai was less than 10% a year ago.

Kerala also has the distinction for being the most advanced of markets in India for almost any good. Be it FMCG, paints or cars, the Kerala customer is the most adept, choosy and aware of most marketing channels. He/she also is ready to opt for the premium end of the product range and be an early adopter. Surprised? Well, did you know that almost all the cities with the highest density of cars (no: of cars/1000 people) are in Kerala. In fact, according to last year's figures, Trivandrum with 34 cars per 1000 people stands first among large cities. And did you also know that cities like Trivandrum, Kollam and Thrissur have the highest density of Mercedes Benzes in India?

Given all this, Kerala should be an ideal launch pad for retail chains, one may say. Unfortunately, skimming the papers these days, one might think that these chains are invaders from Mars, hell-bent on exterminating the human race...so vehement is the opposition that they have faced!

And what is the reason behind this opposition? It is manifold - retail chains could wipe out small traders, they would form monopolies and squeeze the customer later, they would sell sub-standard goods at lower rates, they are foreign in origin and would repatriate profits...and they would ruin farmers by bullying them. Reasons enough to be very concerned, but are we thinking straight?

Reason One: Retail chains could wipe out small traders.

Yes they could. Or rather, there will be a significant impact of small traders. The sheer volumes transacted by retail chains like Reliance, Bharti-Walmart, Spencers, Future Group and so on, will be so big that they will be able to extract bulk discounts and price so low that individual traders may not be able to match them.

On one level, this is the market at work. The best price wins - the simplest rule of operation. Expecting this not to happen and raising a hue and cry over this transistion is like saying we should stop operating oil refineries and start buying petrol at twice the price from thousands of people each distilling crude in his backyard. We are creating more small refiners aren't we? Given the current price of petrol, that is one suggestion which will receive no welcome at all. Retail is the same story. If we let the market operate unhindered, we should be ready to bid goodbye to uncompetitive operators. However, this need not be exactly true. There are less urban areas as well product niches where small shops can easily survive. Even in the land of Walmart, the corner shop is still around. Archie and Betty/Veronica can still meet at Pop Tate's! In fact, the USP of these stores is present in their names - convenience stores!

But of course, we cannot put millions out of employment, can we? Heaven forbid, the Left is still alive and kicking! The modern retail industry will provide millions of jobs itself, but the final nett difference is still to be seen. Individual traders can regain some advantage by clubbing together and creating co-operatives which can generate scale economies. Cash-and-carry stores like Metro (already open in Bangalore) can also help small retailers source their goods efficiently and more economically.

So, it is not that small retailers can't survive the Reliance invasion, but they will have to work much harder to do so.

Reason Two: Once the small retailers are wiped out, the chains will become monopolies.

Firstly, small retailers will not be wiped out as I mentioned above. They will still be around in numbers and perhaps in an even better and more competitive shape.

Secondly, those mentioning monopoly in the plural should remember that is an oxy-moron. If they don't understand why I say that, a quick reference of the meaning of the word "monopoly" will be informative. If there are more than one retail chain in the market, as there will surely be, how will there be a monopoly. If anything, the competition will become more fierce as all of them have deep pockets and extensive appetites for market share. One need only look at markets like the US or Europe where large retailers have been around for more than a century. It is well nigh impossible to imagine setting up a price agreement with Reliance to fleece us, rather than outprice it out of the market!

Reason Three: Retail chains would sell substandard goods since they price them lower.

Pretty much as hogwash as the one above! A corporate in the retail business will have more to fear from being caught redhanded selling adulterated or substandard goods than the neighbourhood "kuttettante kada". A Sunil Mittal will be a sight less inclined to mix brick powder in the rice than the local, unscrupulous trader who will get little more than a few extra curses and grudges if he does the same.

It should be understood that retail chains do not offer lower prices by cutting down on the quality of goods. Someone recently told that if the mega Big Bazaar outlet was selling low priced goods, they definitely had to be low quality. I asked him if he knew what "economies of scale" were. The gentleman was about to explain who economies can consist of buying and selling scales and balances, when I interrupted him impolitely. In simple terms, a Big Bazaar buys 1 million bars of soap from Unilever each month and hence gets a much better price from them than our Kuttettan who buys 50 bars. And this is something they pass on to us. Also, while Kuttettan buys from a distributor of Unilever who takes it from a stockist or from a C&F agent, Big Bazaar may procure directly from Unilever and hence avoid all the margins of the middlemen.

So, a good price usually does come with good quality.

Reason Four: Retail chains are phoren...be desi, buy desi.

Simple enough to answer. By law, the FDI component in retail is strictly controlled. All global brands have to tie-up with a local partner. In fact, the only global chain to tie up till date has been Walmart, with Bharti. The vast majority of retail chains in India - Reliance, Spencers, Birla, Future, Shoppers' Stop, Westside, Next and so on and on - are pure desi.

Not that desi retailers will be any less cut-throats. A pirate is a pirate is a pirate, irrespective of the flag he flies, the Jolly Roger is always at hand! Just kidding!

Reason Five: Retail chains impoverish the kisan.

Many of us have heard of an initiative named "E-choupal" (read more about it here). It is a farmer interface created by one of India's corporate giants, ITC. ITC is procuring products direct from farmers which it processes and markets. It also markets goods and services to the farmers. So corporates needn't be bad news to the ordinary farmer.

Look at the current supply chain between a farmer who produces agricultural raw material and an individual retailer who sells the processed or semi-processed goods to you. Let's take rice as a simple example. The rice is bought by a bulk buyer who either sells it to a rice mill or has a processing unit himself. It is then sold to a bulk agent/trader who in turn sells it to a a whole-saler in a city. The wholesaler then sells it to the local retailer. All these entities extract their own margins from the price you and I pay, with the result that only a portion, maybe as low as 30% reaches the farmer.

But when a large retailer buys rice from farmers, it does it through its own buyers, processes the raw material itself or at an outsourced facility, and then transports it to its outlets. Or it could buy in bulk from a trader who in turn sources it from farmers. While the direct costs of processing and transport remain the same or are usually lower than before, the margins taken by the whole set of middlemen are either drastically reduced or even eliminated. So, even if the price we pay is lower, the farmer often gets a better deal. And the farmers are paid better not out of charity or socialistic ideals, but because this enables them to produce more regularly, in better volumes and at better quality. This makes the arrangement a win-win.

Idealistic, you may say. But if farmers were getting exploited left, right and centre by retail chains, we should see them in the forefront of the protest against organised retail. Till date, that has not been the case. And in a country with very strong and organised farmer associations, if they are not protesting, then we can assume safely that they are not complaining either.

So much for the five-fold opposition to organised retail chains. One is forced to ask why the organisations of small retailers do not get themselves organised into better shape by forming collectives/cooperatives and aggregating their operations, rather than squatting in front of Reliance Fresh outlets in Cochin and elsewhere. These days, there are more cops protecting these outlets than customers inside them. A sad state of affairs, indeed! Lol, the funniest bit was when one leader of the retailer guild claimed that they were more socially conscious, offering goods for free or on credit to the needy. I was wondering if we should test that kindheartedness. To be noted, "No Credit" seems to be the commonest wall hanging in most stores.

Even after 15 years after the start of economic reforms in India, it seems that the idea of protectionism is still embedded in the minds of many. Including the Government of Kerala, which has been making vague noises about banning retail chains from the State. What will they do next, bring a law saying we should all buy petrol from small scale industries, read converted alcohol stills?! Legally, the ban option will be untenable. As long as a business satisfies all regulations specified by various government departments, it has every right to operate. After all, Mukesh Ambani, Sunil Mittal and Kishore Biyani have every right to sell rice, sugar and soap as Kuttettan. Despite being several billion of dollars richer, they are still citizens of the same country. And you and I have the right to buy from whoever we want to. After all we are citizens too, with all the freedom guaranteed by the constitution.

Enacting legislation to ban organised retail is just a sure-fire way of burning many, many fingers. By the way, Kerala already allows direct procurement of agricultural products by the likes of ITC. So why waste paper creating new rules which will most surely get voided in a matter of days or weeks?

The ways of the old have to make way for the new. It is impossible to hold on to the cycle rickshaw, the manual harvester and local kirana store only, and still aspire to be seen as a modern society and be an attractive investment destination. Kerala already has a long, grim history of being left out in many a race where it should have finished on the podium - industries, Information Technology and so on. We very well cannot hope to be a tail-ender yet again. It is time for the Government to be proactive, anticipate the inevitable change and take steps to smoothen the transistion, rather than attempt to build a leaky dam which will not hold back the flood for long.

In conclusion, I hope all of you will go through a very interesting article on the same subject written by Economics guru (my own guru at IIM Cal) , Alok Ray, who is a Professor at IIM Calcutta. He has written along the same lines as this article (I swear I didn't flick anything!), and has looked into some angles in greater detail, such as the all-too-common comparison with China. Read on!

4 comments:

  1. Excellent analysis dude. So we have a trivandrum ambassador and corrspondent for brand IIM.

    Good...Why not start an IIM Alumni chapter of sorts in tvm. there would be quite a few ppl in technopark on theme - development

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  2. 'JUST A WORD' [if I may borrow one]

    Last year while on holiday in Kerala was amazed at the professionalim of the employees and the quality and pricing of the products sold in the 'MARGIN FREE' SHOPS.
    Do we still need these retail chains to feed on the consumerism that is unique to Kerala?

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  3. In a state where "unemployment" or "underemployment" is the norm , its hardly surprising that the political parties and other "organisations" are the ones who are really thriving .They need issues to cahoot.It is emotionalism .But I also just wonder whether we should sort of limit the entry of the very big corporates and instead promote smaller players in the field? why Tatas where not allowed to start a Bank or airline - like that .Why should Reliance be promoted - why not smaller players.Let the big guys do the big things and not scoop up the "kanji" from hapless "korans"

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  4. Nayy..these pinkos...the devil's own people will never learn..

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Thanks for your comment, I will take a look at it and put it up at the earliest.