Economic Highlights

Retail Roller-Coaster

IT’S BIG RIDERS Vs SMALL

By Shivaji Sarkar

In the midst of the ongoing political storm which has thrown the Government into a tizzy, a moot question being asked is whether India would be able to support the retail investors. There is no denying that the country needs investment in all sectors, retail included. However, there is yet no clarity on the nature of investment. The coming decade may see an intense conflict between the big players and the small.

Industry is clearly in favour of all kinds of investments pouring in as that will add to its profits. But the nation’s political parties have different concerns—from the past to the present. Historically, investment and trade, the BJP to the Left and now the Trinamool Congress aver, have been the route for usurping political power and subjugating the country. The retreat of Alexander of Macedonia in the fourth century BC saved India from direct subjugation but within centuries many other foreign invaders were able to capture political power. The only saving grace was they settled down in the country and repatriation of profit through trade was minimal. 

What rattles politicians, even in the ruling Congress, is the experience of the British rule. They entered the country through the trade route and were able to virtually destroy its economy, indigenous technological strength and market practices. Almost all political parties, including the Swadeshi Jagaran Manch and other indigenous groups go to the extent of accusing British dominance for the heightened poverty that the nation continues to suffer.

In such a scenario, having FDI in retail is considered dangerous. Political parties promptly cite the instances of Pepsico and Coca Cola. The two soft drink giants are alleged to have virtually eliminated a score of indigenous companies through policies of acquisition, mergers and threats. Even the proposed benefit to the farmers did not take shape. In some cases, either due to excess production of tomato or potato, the prices crashed leading farmers to penury. Likewise, the experience of Bt cotton propagated by the multinationals has led the farmers to commit suicide.

Indeed, nobody guarantees that this is not going to happen in the retail business. The BJP and Left leaders have unequivocally stated that FDI in multi-brand retail would be disastrous for farmers as they would be out of business eventually.

In India, the retail business contributed around 11 per cent of GDP in 2005. Of this, the organized retail sector accounts only for about 3 per cent share, and the remaining share is contributed by the unorganized sector. The main challenge facing the organized sector is the competition from the unorganized sector.

Retail is supposed to be a Rs-450 billion business. It is presently spread across over 1.2 crore small businesses in the unorganised sector. (Some other figures say it is 4 crore). An advantage of the thriving small retail sector is low investment in infrastructure and a secured network in the neighbourhood. The services--door-to-door-- provided for say even Rs 10 worth goods create an affinity between the traders and the customers. Can any large retail shop match this? Would it be remunerative?

According to an Assocham study, the retail market in India is estimated at Rs.5,88,000 crore. Of this the unorganized market is worth Rs.5,83,000 crore and the organized market Rs.5,000 crore. This is where the battle starts. As long as the small sector is prepared to service and compete it would not be easy for the large businesses to thrive. The obvious approach, political leaders agreeing with the mom and pop-type retailers, would be to carve out strategies to eliminate them. This can be done through under-pricing products at the initial stages to “buying out” viable mid-sized establishments. This would reduce competition and ultimately would act against the basic producers, the farmers, as they would have to compromise on prices.

Partly this has been done by some Indian units of some of the large multi-nationals, who have been in the business for the past over 80 years in the country. They have created monopolies in many consumer areas and have effectively blocked all competition. New retailers such as Walmart are expected to follow suit. But Carrefour has a different tale to tell. It is so far ahead in the wholesale segment that it claims to have been supplying even say expensive mutton at one-third the price being sold in retail. And, this is the threat.

However, there is the other side too. The new investors say they have many problems to face right from infrastructure to availability of space. Real estate development, ownership of private transport, banking/credit are factors which come in the demand side. The real estate story in India is growing bigger by the day. Industry experts believe that real estate has a huge demand potential in almost every sector -- especially commercial, residential and retail. Organized retail is expected to create a demand for around 220 million square feet of space in the near future.

Another impediment is the location of these retail spaces. As cities are getting clogged, new retail venues are being created in the outskirts. This requires a transport system. However, ownership of private transport is still a big issue particularly in small townships. Whether people would like to traverse large distances to reach such stores is doubtful. On the other hand, creating spaces in commercial places would have higher costs. Would the large retailer be able to cushion it to keep prices low? Then again, credit facility too shall play a major role as its availability is more liberalized but the rates of interest are still not easy.

Likewise, as the market is likely to remain a mix of the organized and unorganized players, it is obvious that there will be competition from the unorganized and future stores. Pricing will be a crucial variable due to its direct relationship with a firm’s goal and its interaction with other retailing elements. The importance of pricing decisions is growing because today’s customers are looking for good/best value when they buy merchandise and services. Thus, price is the easiest and quickest variable to change.

This apart, the scale of operations includes all supply chain activities, which are carried out in the business. This too is one of the challenges that the Indian retailers face as the cost of business operations is very high in India. Given that this sector has only recently emerged from its nascent phase, sourcing the right talented people and training them will be another task. So far, large retailers have not proved to be ideal employers for workers, who are paid less and fired at random.

In sum, the coming decade shall be one of conflict with new ventures trying to consolidate and the unorganised sector battling it out with help from their political leaders. It shall be a roller-coaster journey for both. And inflation, a target of economic consolidation, may only zoom high. ---INFA

(Copyright, India News and Feature Alliance)

New Delhi, 22 September 2012