Retail invasion

Big Business is taking control of the supply chain in India, and there is growing unease among people who depend on retailing for livelihoods.

V. SRIDHAR in Chennai

WAL-MART may not be in India yet, but its essence is already pervasive here. Even as a debate is on as to whether foreign companies should be allowed unfettered access to retail business, some large Indian conglomerates have entered the sector. There may indeed be a kernel of truth in the hyped-up slogan of launching a "Retail Revolution", which is an attempt to overturn the traditional way of selling goods. In the name of efficiency, and in the name of eliminating the much-abused "middleman", they have already established niches in urban India and are aggressively expanding their operations. And, the tension that their entry has caused is palpable.

Since late last year, when all eyes were still on Wal-Mart, Indian companies have quietly launched their retail businesses across the country and scaled up their operations significantly. Among these are the RPG Group, Pantaloon Retail, the Wadias, the Rahejas, the Aditya Birla Group and, of course, the Reliance Group headed by Mukesh Ambani. While some companies, such as Reliance, have set up their own operations, others such as the A.V. Birla Group have taken over existing retailers.

Although Reliance is by no means the only one - or even the most domineering one - its entry has caught the eye as symbolising the new wave of retailers. It has established backward linkages in the food segment, considered to be the most lucrative part of the retail business in India. It entered the grain market last year by making significant purchases of wheat in Punjab and Madhya Pradesh. Since then it has established a rapidly expanding chain of stores selling fruits and vegetables across the country. In recent weeks, small traders in Bhopal and Indore (Madhya Pradesh), Ranchi (Jharkhand) and Delhi, attacked Reliance Fresh outlets, which sell fruits and vegetables. There have also been muted protests by traders in Chennai and other cities where the fear is discernible.

Frontline's reportage from across the country documents the growing unease among different sections of society depending on retailing for their livelihoods. They also highlight the layered nature of the retail business, at variance with the popular and simplistic notion about "shopkeepers" as a homogeneous kind. Although these are still early days for Big Business in retail, it is evident that opposition to consolidation is gathering force.

As the government dithers on the question of allowing Foreign Direct Investment (FDI) in the retail sector, it has left the door ajar for Big Business to move in. The task of Big Business has been made easier by the government's failure to act as an impartial referee adjudicating a battle for India's retail turf among sections with unequal strength.

In particular, elements of the policies associated with economic liberalisation have opened loopholes for business houses to exploit. For instance, amendments by the State governments to the Agricultural Produce Marketing Committee Act (APMC), which controls the terms on which agricultural produce is procured in markets across the country, now enable large industrial houses to build their own supply chains, which is at the heart of the retail revolution.

It is no surprise that one of the main areas of conflict between the big and the small players is the mandis and wholesale procurement centres across the country. The Koyambedu wholesale market in Chennai is simmering with tension over the entry of Reliance Fresh.

There are about 15 million retail outlets in India. Of this, only 2 per cent are in the organised sector. In fact, 95 per cent of the outlets occupy less that 500 square feet of space. According to a recent report, prepared by McKinsey&Company, India has the highest density of retail outlets in the world. There are about 15 outlets per 1,000 inhabitants in India, compared with four or five per 1,000 inhabitants in developed countries.

Two aspects of the Indian retail scene stand out. The first is its duality - a large number of small retailers on the one hand and a small number of large outlets on the other. About 40 million people make a living from activities that come under retailing. The overwhelming portion of retail trade 98 per cent is through the unorganised sector, a euphemism for sales done through tiny family-owned shops, roadside eateries, kiosks at street corners, and hawkers and street vendors plying their wares on pushcarts (there are nearly half a million street vendors in urban India alone). In the language of the marketing gurus, these outlets cater to the needs of low-value, high-frequency customers.

Catering to those at the other end of the social spectrum are a small number of large retailers, operating out of glitzy malls and superstores, whose behaviour can be characterised as high-value, low-frequency consumer behaviour. It is not as if these consumers are not cost-conscious. Indeed, large retail chain stores understand that this section can be enticed with offers of "bargain shopping", resulting in higher volumes of sales ("Realities behind retailing", Frontline, February 10, 2006).

Although large-format stores are still few in number, their number has been increasing rapidly in recent years. According to the recently released A.T. Kearney's 2007 Global Retail Development Index, the organised retail industry in India is growing at the rate of about 40 per cent a year. It predicts that organised retailers, who now command about 2 per cent of the total turnover of about $350 billion (Rs.15,75,000 crore), will increase their share to over 5 per cent by 2010, when retail turnover is projected to touch $427 billion (Rs.19,21,500 crore).

The results of a survey of small trading establishments conducted by the National Sample Survey Organisation (NSSO) in 1997 reveal the precarious existence of small retailers. The average number of workers employed by more than 14 million small trading outlets was about 1.5, indicating that these units were mainly dependent on family labour. The overwhelming proportion of the units more than 90 per cent were perennial, reflecting the heavy dependence of families on retailing for livelihoods. The average value of fixed assets owned by these units amounted to a mere Rs.26,600, indicating a very low capital base. This would obviously affect their ability to stock goods and, therefore, their turnover.

The other striking feature of Indian retailing is that it mirrors the social and economic divide. The skewed income distribution reflected in the skewed consumption pattern lies at the heart of the dichotomy in Indian retailing. Data on consumption released by the NSSO in December 2006 show that in 2004 - 2005, the average monthly per capita consumption expenditure (MPCE) was Rs.1,052 in urban India and Rs.559 in rural India. It is striking that the top 10 per cent of urban spenders had an MPCE of Rs.1,880, showing how thin the upper crust of the Indian "middle class" really is. Only 5 per cent of the Indian population had an MPCE of more than Rs.2,540.

It may be true that organised retailing holds the promise of lowering prices of goods sold through large stores. There may indeed be benefits accruing from the scaling up of retail operations. Benefits may also accrue by harnessing the potential offered by information technology, particularly in the matter of better inventory management. However, the `benefits' must be seen in the context of their economy-wide ramifications.

Wal-Mart's success rested on its ability to take control of the supply chain, subverting existing channels of supply and distribution in the United States. Walmartisation - the process of consolidation of the supply chain - is the name of the game. Of course, it will be a flexible approach, taking into account the characteristics of the Indian market. For instance, it is already evident that hypermarkets in sizes large by Western standards are unlikely to be replicated in India. Instead, companies are more likely to establish chains of stores in relatively affluent neighbourhoods in urban India, selling products that are not necessarily associated with the elites alone. For example, the battle is likely to be more focussed on the food and grocery business and textiles where the demand base is wider. Business interests are also likely to factor into their calculations the political resistance to their ambitious plans.

The traditional supply chains - the distribution channels connecting producers and final consumers - were longer because companies found it appropriate in a situation where incomes were more evenly distributed. A marketing executive with a leading FMCG (fast-moving consumer goods) multinational told Frontline that this kind of distribution was suitable in a situation where demand for its products was more widely distributed across geographical space. This strategy, which can be termed as the carpet bombing technique, required a network of agents distributing the company's products. The manufacturer also invested in building and maintaining the supply chain.

However, in a situation in which the demand for manufactured products is increasingly concentrated in more tightly defined geographies, largely because of rising inequalities in income and wealth, this strategy becomes redundant. This drives the perception that costs can be cut by more effectively targeting only those consumers who have higher purchasing power.

The marketing strategy associated with this may be called the precision-bombing strategy, which facilitates a delivery channel directed at islands of affluence. Companies like Wal-Mart saw the possibilities emerging from a concentration in incomes. This is what paved the way for "Big Box Retailing", which offers discounts to consumers buying in bulk.

Kishore Biyani, CEO of the Future Group, which includes Pantaloon, Big Bazaar and Food Bazaar, told Frontline that his group's business model was based on a "careful study" of international chains such as Wal-Mart and Marks and Spencer. The company, he said, had applied it after "modifying them to suit the Indian context".

J.H. Mehta, president and CEO, Spencer's Retail Ltd, said his company "aims to buy manufactured products directly from manufacturers and agricultural products directly from farmers/millers". However, he said the company still sourced from intermediaries items whose sales were not very high.

Since widening inequalities give rise to concentration of purchasing power, large retailers, by building their own supply chain, and distributing goods through their own chains of stores, have an interest in subverting the existing supply chain. By investing in a supply chain, including warehouses and godowns, these big retailers are able to offer manufacturers increased margins. Manufacturing companies, especially the larger ones, are likely to be tempted to be drawn to utilising these new supply channels because they can avoid forgoing margins to their partners in the supply chain - distributors, stockists, clearing and forwarding agents - apart from making their own investments in building the chain.

Recent reports that Wal-Mart's warehousing division, Sam's Club, is planning an India launch, taking advantage of the provisions allowing 100 per cent FDI in warehousing, illustrate the processes at work. The subsidiary, apart from catering to the needs of the Wal-Mart-Bharti alliance, would stock a range of goods from several companies, which will enable its clients to cut costs by bypassing existing supply chains ("Wal-Mart walks in", Frontline, January 12, 2007).

It is obvious that there is a coincidence of interests among large retailers and large manufacturers. An alliance of Big Business thus drives the process of consolidation. Since the search for higher profits cannot be readily admitted, Big Business clothes this with the noble objective of eliminating the middleman in order to offer gains to consumers through lower prices.

Although some sections of organised retailing complain that high land prices have a dampening effect on scaling up operations, others see high land prices as an effective barrier to entry and competition in the sector. Moreover, they deter existing medium-sized retailers from expanding their operations. High land prices thus facilitate the drive towards consolidation.

The case of agricultural commodities is slightly different, but in this case, too, the process is driven by Big Business, which intends to take control of the supply chain. Regulations governing the market for agricultural produce typically gave the government monopoly rights over the purchase of grain and other agricultural produce. This was based on the perception that since these markets were connected to the question of food security, they could not be trifled with by private trade. Other legislation also restricted the movement of produce across borders.

Similarly, regulations governed the manner in which trading was conducted in the officially designated mandis and marketing yards where produce was auctioned. Private trade in general and reform enthusiasts in particular have been clamouring for a dismantling of these controls. Of course, the drive towards consolidation is done behind the faade of giving farmers better prices for their produce.

It may well be asked: How does it matter to the poor if the rich can buy more while enjoying greater convenience? Pankaj Jaju, a retail sector analyst with Enam, echoes this cheerfully optimistic line of reasoning. He dismisses the fear that the arrival of the big means the end of the road for the small retailer. "Not everyone is comfortable shopping in huge stores. Smaller retailers will always cater to the lower-income groups," he said.

The problem with the new supply chains is that their success depends on subverting existing channels, on which millions of livelihoods depend. However, the issue is not only of existing jobs connected to retailing. Since the new chain stores are likely to be situated primarily in urban areas with a certain critical mass in terms of purchasing power (Reliance Fresh stores, for instance, are typically located in urban localities with a sizeable upper middle class population), cheaper prices will benefit those who can afford to buy in bulk, although paying less per unit.

However, these chains are unlikely (at least in the near term) to venture into those parts of the city where its underclass lives (at least one-third of the population in Indian cities lives in slums). And, the disruption in existing supply chains means that poor folk will either suffer shortages or pay more for the same products that the affluent get at cheaper rates.

In order to promote the popular acceptance of the move towards consolidation, Big Business tends to exaggerate the gains. The elimination of the "middleman" is always a laudable objective. However, these links do not work in a vacuum.

In any case, the business model being pursued is by no means the only one possible. The same objective, of furthering consumer welfare, can be achieved through the promotion of cooperatives of producers and consumers, resulting in a win-win situation for both. But these are neither "viable" nor "workable" because they do not further monopolise profits. Several similar attempts, such as the Uzhavar Sandhai (Farmers' Market) in Tamil Nadu, had received popular appreciation even though they had limited success before they were derailed.

The State's role as an arbiter of contesting interests has been brought into question in the case of policies relating to the retail sector. It would appear that the multiple loopholes available to Big Business are a result of the dilution of the existing regulatory framework. The question of now plugging the loopholes is akin to trying to stem the flow from a dam after opening the sluice gates.

For instance, the loosening of the regime governing the market for agricultural produce has facilitated the entry of Big Business into the sector. Reliance and other players have also utilised other loopholes in the policy regime for the retail sector. For instance, Reliance, without much fanfare, had established wholesale "cash and carry" operations through Ranger Farms, which sells fruits and vegetables in bulk.

Of course, the opening up of the wholesale business had earlier facilitated the entry of Metro. Critics allege that the entry of the German company has facilitated its "backdoor entry" into the retail business.

Indeed, the permissive regime promoted by the Centre has tied the hands of even State governments that would like to pursue a more even-handed approach. For instance, although the West Bengal government has allowed Reliance to enter the retail business, it has asked the company to stay away from the foodgrain business. Chief Minister Buddhadev Bhattacharjee admitted that the legal hurdles to the entry of big business houses into retail were simply non-existent. He said, "No one can stop them from doing business in West Bengal. Once they move the court, they will get the permission to run the business." Reliance apparently wanted the West Bengal Agricultural Produce Marketing (Regulation) Act to be repealed, and this was not acceptable to the State government. However, in Maharashtra, since the recent amendments to the APMC Act, several large retailers, including Reliance and Metro, have applied for licences to make direct purchases from farmers, bypassing the APMC. Reliance Fresh, which now has more than 150 stores across 20 States, is set to launch 100 outlets in Mumbai alone.

The permissive regulatory policies have emboldened Big Business to indulge in apparently unfair practices. For instance, traders at Azadpur (near Delhi) as well as Koyambedu complain that the large retail chains procuring directly flood the "rejects" back into the mandis, thereby dampening prices there.

Large retailers buy significant amounts of produce at the Azadpur mandi, through commission agents. A senior official at the Directorate of Agricultural Marketing in the Delhi Administration told Frontline that a large retailer with a nationwide footprint had been selling agricultural produce in Delhi without acquiring a licence, which was a requirement under the provisions of the Delhi APMC Act. In fact, he said that none of the big retailers had a licence to sell in Delhi. None of these firms pay the 1 per cent marketing fee to the Azadpur mandi, which gives them an unfair advantage over other traders who buy at the mandi.

It is not as if the political establishment is oblivious to the potentially explosive situation that can emerge out of the processes set in motion by liberal trade policies. Indeed, the fact that United Progressive Alliance chairperson Sonia Gandhi asked Commerce Minister Kamal Nath to commission a study on how these policies will affect small traders shows that there is recognition that the opening up of retail to Big Business is likely to have disastrous consequences. However, there is no inkling that this recognition is backed by either political will or sagacity to roll back the elements of the policy regime that are pushing large numbers of Indian retailers to ruin.

With inputs from Aman Sethi in Delhi, Suhrid Sankar Chattopadhyay in Kolkata and Anupama Katakam in Mumbai