Experience so far

Print edition : December 30, 2011

UNWANTED CUCUMBERS OUTSIDE a greenhouse in Algarrobo in Spain, in May, after they were said to be the source of a bacterial infection in Europe. The squeeze on farmers' margins is likely to tighten as supermarkets become concerned with safety and quality as they are with cost, says a study by the FAO. - SERGIO TORRES/AP

Global experience in retail trading by MNCs does not tally with the presumptions on which the UPA government's FDI policy is based.

IN the course of the debate on the need to permit foreign direct investment in retail in India, two arguments have been advanced often. The first argument is that large organised retail is good for not just consumers, who would benefit from lower prices owing to cost efficiencies and competition, but also farmers, who would be the beneficiaries of a stable demand for their produce at reasonable prices. The second is that the segment of large retail that would be able to deliver these benefits to consumers and producers would be the international retail giants with deep pockets and experience in structuring the supply chain to deliver these benefits.

This case that the presence or entry of international retail giants helps ensure reasonable prices for the consumer, remunerative prices for the producer and profits for the intermediary is ostensibly based on the international experience in both developed and developing country contexts. This is indeed surprising since, in practice, the relative gains derived by participants in market economies is known to depend on the market power of the participants concerned. Besides the fact that international retail giants would by their very definition be powerful, the structure of the supply chain varies across countries.

Consider the food economy for example. Within the United States, the supply chain has at one end an industrial agriculture with large farmers known to be subsidised substantially by the American government and at the other the end large retailers who have control over significant segments of the supply chain from farm to table. Concentration in the retail trade has increased substantially. The share of the top eight stores in total U.S. grocery store sales increased from 26 per cent in 1992 to 50 per cent in 2009, and the top 20, from 39 to 64 per cent.

In other countries, including most developing countries, the structure is more complex. Foreign chains have entered and have been expanding, but the retail space is still shared between traditional retailers and modern chains. An abiding feature of the experience with this kind of system has been that the appearance of the large, modern chains does not lead to the upgradation of the traditional, unorganised retail sector but to its being bypassed, with attendant implications for employment and livelihoods. This dualism, which sees quality and environmental standards languishing in unorganised retail, then becomes the basis for its displacement by larger organised retail as incomes rise.

Since the U.S. is the typical case of the operation of organised retail, it is here that its effects at both ends of the chain should be visible. The scene is, however, distorted by the subsidies for agriculture, which remain large and have not fallen after the implementation of the Agreement on Agriculture under the Uruguay Round. However, these subsidies are partly needed because the giant retail chains that dominate the procurement and distribution of food products have enhanced their margins at the expense of farmers. Aggregate food expenditures in the U.S. rose from $833.2 billion in 2000 to $1.2 trillion in 2009, or by an absolute $370 billion. On the other hand, cash receipts from farm marketing increased from $197.6 billion to $282.2 billion, or by $85 billion. These divergent levels and trends can be explained by the costs of processing, the margins for marketing, and the profits associated with large, organised retailing. During the 2000 to 2009 period, for example, the United States Department of Agriculture estimates that the farm share of the retail price fluctuated between 23 and 28 per cent in the case of fresh vegetables and 25 and 30 per cent in the case of fresh fruits.

Not all of that huge difference can be attributed to processing costs, transportation and storage. According to one estimate, advertising, rent, interest and profits accounted for 15 cent of every dollar spent on food.

But these are in normal times. An analysis after the food crisis of the 1990s had this to say: Farmers can see themselves being reduced from their mythological status as independent producers to a subservient and vulnerable role as sharecroppers or franchisees. The control of food production, both livestock and crops, is being consolidated not by the government but by a handful of giant corporations. While farmers and ranchers suffered three years of severely depressed prices at the close of the 1990s, the corporations enjoyed soaring profits from the same line of goods. Growers are surrounded now on both sides facing concentrated market power not only from the companies that buy their crops and animals but also from the firms that sell them essential inputs like seeds and fertilizer. In the final act of unfettered capitalism, the free market itself is destroyed. (William Grieder, The last farm crisis, The Nation, November 20, 2000.)

The situation in Europe, where smaller retailers have not been completely wiped out, is also telling. According to an official report prepared in June this year by the French government's food price watchdog, the profit margins on food sold in supermarkets are hugely inflated. By comparing the prices charged to customers with the wholesale prices charged by producers, the report argued that the supermarkets were squeezing producers by paying lower prices but were not passing on the gains to customers. Moreover, when wholesale prices fell, customers ended up paying just as much or even more. Margins on apples and bananas stood at around 140 per cent, and for carrots and lettuce at 110 per cent. The margin on pork loin had risen to 55 per cent from 39 per cent a decade ago.

In developing countries, such as those in Asia where the supermarket revolution has been under way for some time now, the evidence is that competition hurts producers most. Concerned with quality and standardisation, the chains look for preferred suppliers who can ensure regular supplies. But while the investments needed for realising these tend to be high for small farmers, competition among them to tie up with a chain keeps prices down.

In East Asia, the supermarket share of retail food sales had ballooned from less than 20 per cent to around 50 per cent over the decade ending around 2005. In the process, small farmers were squeezed out since supermarkets tended to subcontract only to a few large suppliers who could meet their demands on quality, standardised production and quantity. Over a short period of less than five years, Thailand's leading supermarket chain reportedly slashed its list of vegetable suppliers from 250 down to 10, cutting out the small farmers.

In the event, farmers who are supposed to benefit are put under huge pressure as they have to meet the changing requirements and standards, or eventually exit from farming. Meeting standards for quality and reliability requires high levels of investment in irrigation, transportation, storage facilities and packaging technology. But this requires technology, access to credit, training and information. As a result, the poorest producers, who constitute the majority, lose out in a market that is increasingly monopolised by the supermarkets.

Thus, a study conducted five years ago in Asia by the Food and Agriculture Organisation argued that fierce competition among supermarket chains forces them to seek ever lower product and transaction costs and to minimise risk. For producers, this means that the chains will not contribute to the kind of farm-level investments needed if small farmers are to participate in new markets. The squeeze on farmers' margins is likely to tighten as supermarkets become as concerned with safety and quality as they are now with cost.

Thus, irrespective of the structure of retail markets overall, the presence of large international giants does not help all producers and consumers but harms many of them. The worst hit are the poorest of producers.

The global experience by no means tallies with the presumptions on which the United Progressive Alliance (UPA) government's FDI-in-retail policy is based.

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