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Effects of FDI in retail

Today many unions and retailers opposed the Government of India’s plan to allow Foreign Retail Chains to open up shops in India. So I thought about putting together how Walmart, Tesco etc. will effect us.

1.Consumers:
Nobody can force a consumer to visit a small retailer, a sabji mandi, or a mega store. They will shop where ever they get the lowest price, max variety, and a good consumer experience. So a consumer can only stand to benefit from this move. They can expect the prices to go down, better selection. More and more shops will make an active effort in catering to their demands and sell their merchandise below the MRP.
Since the Consumer Inflation Index is primarily determined by the retail price, the price wars will only lower the inflation and benefit the economy. Consider this far fetched, but this lowering of inflation might actually lower the interest rates of the EMIs on Home Loans.
BTW a good economy is one where the interests of the consumers (common man) is first and not the businessman.

2.Farmers/Producer:
Currently Indian farmers often do not get the right price for their produce. The middle man/ transporter makes huge bucks at their expenses. The government might be paying them the right price, but the payment is always delayed and bribes often needs to be payed. Around a fourth of our produce gets wasted because of lack of proper handling and refrigeration. Years of neglect and lack of capital influx has started taking its toll and prices of perishable commodities fluctuate drastically.
I foresee that more initiatives like the contract farming and ITC’s E-chowpal would be taken by the big retailers (Indian or Foreign). The farmers will get a better price of their produce and huge investments shall be made in refrigeration of the perishables. Many retailers will take an active interest in helping farmers gain access to to seeds, technology and farm machines so that their quality improves. The fact that less fruits and vegetables shall be spoiled and that the Mandi’s and the middleman’s margins would go down would result is lowering in prices or perishables.

3.Government:
Big shops produce more traceable sales records and evade Sales Tax/ VAT less then the street side hawkers and small shops. This additional tax collection would only reduce the fiscal deficits. Then the turnover of the retail sector constitutes to over 65% of the Indian GDP. Even a minuscule 2% efficiency brought by this competition would only control the inflation and lead to an additional GDP growth by over 1%.
Also a big retailer is likely to pay its employees far more generously then a small merchant, so lots of new avenues of employment shall be created and more people shall be moving up the economic ladder. The government can expect more private capital influx in agricultural and logistics.

4. Labor Force.
The kirana store does employ labors to stock the shelves, home deliver goods, and as a helping hand. However these assistants never got their due share of profits. They are always underpaid. The Corporate retail is going to change all this.
The starting salary in a corporate chain is about 9,000 INR (which is about 2 times the country’s average per capita income) Imagine how much productivity gain and increase in the standard of living will happen because of this phenomenon.
A lot of underpaid assistants would move to the corporate and earn big bucks, while the scarcity hence induced would increase the wages in the whole sector and benefit the masses.

5.Retailers:
An Indian who never had any formal education is the most creative and innovative person in this sub-continent. He is street smart, a thinker and is able to smell an opportunity much before it can crop up in any analysis. He knows his customer better than any Harvard educated foreigner can ever hope to understand. In the short run he might lose some market share, but in the long run he can potentially drive most of the big foreign corporates out of business. How?

I look at a small hawker who peddles vegetables on his hand cart. His investment in Real Estate = Rs. 0/-. Usually he himself or his family helps him sell, so his labor charges and fixed expenses are also Rs 0/- (except a weekly 50p which he pays to inflate his cart tires) Compare it with a 50,000 square feet of prime retail space and 100s of employees which Reliance employs in its mega-marts.
My hawker buys his merchandise fresh every morning based on the sales data he collected yesterday evening (a delay of 10 hours) and fix his price based on customer response he received just 5 minutes ago. Now tell me who will have a better control over his inventory?

In India, it is tough to find a household which is situated more than 100m away from a retail store. A street where a hand cart does not deliver fresh vegetables. Do you really think they will be intimidated by those big stores which require an hour of driving on congested Indian streets?

BTW the small shops have one very important secret tool in their arsenal… Rent Control Act. the mall culture and indian consumerism has increased the rentals and cost of commercial property many folds. All new corporate stores pay the full market price for their new stores. While the most of the small retail shops are still paying the historical prices (which is a fraction of the real market price). Rental being the single largest fixed cost of this industry, shall be the determining factor. The small shops can use this edge to lower the prices and bleed the big corporates to deep red.

I agree these big store is a big threat to their livelihood. But stalling Fdi is not a solution to that. Already Big Bazaar, Reliance Fresh, Westside, Food World, Subhiksha etc. are opening up super markets all across the nation. Both Tata and Birla have recently raised tens of billions of dollars to fund their businesses abroad. Can’t they raise capital to do a similar investment in India? So FDI or No FDI large retail is a culture that will inevitably come to India.
The competition is always good for the country and the common man. Look at the case of Telecom, Banks, Airlines, insurance etc. Retail constitute to a very large chunk of the economy. Big retailers will only benefit the consumers, reinvigorate the economy, help the farmers and industry.
Many of the small retailers who are currently prospering might be forced to change their businesses. But the majority of them will be able to adapt to the situation and benefit from the efficiencies this culture will bring. Some of them might even grow into big chains and a lot of them will be employed by this big giants at salaries which they could never imagine.

—–
BTW while mayawati is busy protecting the small shops from the corporate retail, In reality most small shops have beaten these giants black and blue. Most retail stores are in deep losses and their return on investment is minuscule.
The corporates which were forced by market (and not mobs) to shut shop and sell the businesses off are:

1) Fabmall: owned by Trinethra Retails
They were the first to start retailing in bangalore (largely on 7-11 style) and were consistently making losses Hence had to sell their stores to Aditya Birla’s More
2) Kempfort:
Although it was very popular in the early nineties and pioneered the mall culture in bangalore, the store could not keep pace with the changing Bangalore and soon fell out of favor. So the owner had to shut shop and rent out the space.

 

street, Bengaluru South, Karnataka, India

32 replies on “Effects of FDI in retail”

i think stalling fdi is another example of the different lobbies that influence government policies… you are right, in a market scenario like ours, it might not make a difference, but down the line, when our per capita income and overall prosperity rises, retail chains might start making dents in the local kirana guy’s domain..
meanwhile, would love to see a phirang peddling on a hand cart 🙂

noone can beat the convenience and flexibility and credit sales of kirana they cant be beaten

the fact that the big sorry very big middleman lobby has a big part to play as middlemen and commission agencies and as most of them control markets or mandis and are either politically connected or politicians themselves there is strong opposition cause their margins get affected first

did u know that the current nafed boss is the largest onion wholeseller ?????
does it mean nything

//noone can beat the convenience and flexibility and credit sales of kirana they cant be beaten//
yes because of lower fixed costs (rent, wages, inventory etc) it won’t be surprised that kirana stores can beat a lot of malls black and blue.

//did u know that the current nafed boss is the largest onion wholeseller ?????//
no i had no idea about that… and what does it mean?

btw the birla made their entire initial capital in opium trading

nafed is the govts agri purchasing authority

it does all the pds buying nation i think

http://www.nafed-india.com/
from a babu website
It is an apex cooperative marketing body playing a key role in the cooperative movement. NAFED has a unique place in the agriculture sector of India being a ‘farmer friendly’ organization dealing in a wide range of agricultural commodities like Foodgrains, Pulses, Oilseeds, Spices, Horticulture produce, Cotton, Tea, Jute & Jute Goods, Poultry products, Chemical & Bio-fertilizers.

so its a good move 🙂
the agri business is headed by the guy who knows the business and not by an ignorant babu.

Hey have you played in the commodity exchange… i feel like trying my hand there

well he is pawars right hand man i think

he may not be an ignorant babu but the decisions he takes
are they for public or private/ personal good that is the question

Very good post, Ankur.
You have done a good job explaining that the common man does not need protection. He will find a way to beat the big guns in his own way and make us proud. The market is the biggest boon for a society. It should be left free to the buyer and seller to sort things out, rather than try and regulate and control. After all, both buyer and seller act in utter self-interest. whom is the government going to protect?

@ram..
thank you dude.. it means a lot.
actually whenever government makes a policy, it should have the interest of the consumers and not the rich…. but india is a socialist country where the policies favor the rich (i am in the process of writing a post on it)

@prax…
i am totally ignorant about what he has done and what his past track record is..
can you point out to some of his plans/changes.. so that i can form an opinion

nafed from top to bottom is a corrupt organization
need i say more
and doc if left to the mkts there can be chaos
guess why the world has central banks and stuff like the fda sec
etc

//and doc if left to the mkts there can be chaos//
why would you say so?
a free market ensures that the supply and demand are matched.. the transaction costs are lowered, the producers and the consumers get the best price …
looks contradictory at first glance.. but you will analyze the items which were not open to free market earlier and now r.. u will understand.

//guess why the world has central banks and stuff like the fda sec//
Food and Drug Administration and other regulators ensure that the quality and standards are maintained… you would not like a fly by night operator to sell you spurious drugs… BTW they do not control/regulate the prices

central banks are there to minimize the risk..
to ensure that the banks would just mint money and collapse.. robbing the nation and common man of their savings

agreed in an egalitarian free mkt things would be great

but there are team ups and monopolies in the real world
why then is the SEC
tell me are most currencies including dollar yen rupee yuan pound not managed???

how does the free medical mkt work
they make 1000 times profits sometimes

//but there are team ups and monopolies in the real world
why then is the SEC//
totally agree… so u and i agree that free market is great in an ideal world..
and in reality cartels and monopolies can make the best out of the free market… but then MRTP etc would come in picture….
but again SEC???? is to ensure compliance in exchanges and stock market… how does it effect the pricing?

//tell me are most currencies including dollar yen rupee yuan pound not managed???//
you will have to tell me about it… i thought dollar, yen, pound and Euro are free currencies… (when the world was on gold standard, dollar was managed)
its only the yuan, dinar, rupee etc which are managed by their respective govts.

//how does the free medical mkt work
they make 1000 times profits sometimes//
you mean the medicine or the treatment?
treatment is more or less a free market… doctors r free to charge whatever they please.
medicine is often regulated… but then the manufacturers can choose whether to sell or not to sell in that country.

good post but views not personal. all this nonsense was brought by US (read Wal-Mart) to this country and inlightened India took it as always. Corporations whether Indian or Foreign (is there any difference?) are only profit driven and trying to fool middle class consumers to grab his pocket. They have never done any good to any society anywhere in the world. Our retail is economical, friendly, convenient, ecologically sustainable and refuge for millions who do not have other option to survive in a country where there is no social security.

@dk..
welcome to ENagar… good to find some opposition after a long time.

//all this nonsense was brought by US (read Wal-Mart) to this country and inlightened India took it as always.//
well even if it was, then you can look at how the US economy and productivity benefited because of 1500 billion dollar corporation which only a couple of years ago started as a small dime store.

// Corporations whether Indian or Foreign (is there any difference?) are only profit driven and trying to fool middle class consumers to grab his pocket.//
corporations or the shop keepers… both r for profit.. and nobody has asked the middle class to buy from them… they r free to go whereever they get better prices, selection and services.

// They have never done any good to any society anywhere in the world. //
except providing goods and services, paying hefty income taxes, giving employment, constructing infrastructure.

//Our retail is economical, friendly, convenient, ecologically sustainable //
exactly what i was saying… a lot of these small stores have already bankrupted the pioneers (fabmall, kempfort)… competition is good for the consumers, for the economy everybody….. plus u should not forget that the big corporations r hiring in thousands… and also paying a generous salaries.

//and refuge for millions who do not have other option to survive in a country where there is no social security.//
disguised unemployment… this has ruined our villages now u want the cancer to spread to the rest of the country??????
the country should always aspire to raise the productivity levels of its citizens….. that is how the wealth of the nations are made

well i saw an interview of the grand old man of fed
he said that the dollar was also managed to an extent
the yen is definitely managed and so are all currencies as best as their central banks can

on sec what abt insider trading frauds , creative accounting

“They have never done any good to any society anywhere in the world.”
Dear DK:
The computer you used, the software that made it possible, the mobile you use to call for help or to romance a girl, the bus or car you use to travel, are merely just a few of the ways they (the corporations) have contributed to society. Are you living in solitary confinement? Wake up!

One of my relative raised a very good point….
Why are we talking about people rendering jobless because of this phenomenon? India is already facing acute labor shortage and in a few years this situation will only get worse… so there will be no impact on unemployment data… however the labor productivity of the country will drastically improve.
some people might be negatively effected due to corporate retail. but that is part of the business cycle, and no industry can ensure eternal existence…

@ruhi..
thanks.

@prax…
a smart guy will always find his way out.. and when the prices r controlled or worse there is dual pricing… then that smart guy has a lot more opportunity to flourish.

although u r somehow able to vindicate the retail f d i,but india being a developing country i.s not able to cop with the problems of foreign giant .specially create problems for middle class people.
.

@anonymous… to me there are 2 important stake holders the producers/farmers and the consumers/citizens. as long as both of them are getting a better deal, I am happy. and i don’t care much about the middlemen (retailers, FDI or e-commerce)

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