Economic Highlights
New Delhi, 24 May 2007 1
Eliminate Middleman
Changing Face of Retail Business
By Dr. Vinod Mehta
The retail business that has been dominated by unorganized sector,
the individually run grocery stores, garment shops, medical stores etc, is
changing. Many of the known big Indian companies have entered the fray and many
of them have decided to go it alone without any foreign investment. The Indian business
houses see big business
opportunities in retail business.
The people who are going to be
affected by this development are foremost sole selling agents and middlemen who
go by the name of wholesalers for manufactured products and artia for
agricultural produce. Recently, these artias vandalized the outlets of a
well-known company in Ranchi.
But consumers’ reaction was different; they were happy to buy fresh vegetable
and fruit at prices lower than they were paying to their vegetable and fruit
vendor.
It is too early to say the shape of
things to emerge in the retail sector but the entry of big business houses in retail is going to change the whole
retail scene in India
with far reaching implications for manufacturers, producers and consumers. The
Left parties are opposed to FDI in the retail sector but they are not averse to
Indian big business entering the
retail on their own.
Let us have a close look at the distribution system of
manufactured products like soap, shampoo, butter, ghee, edible oil, packaged
tea, coffee and so on. As the system of distribution that has developed in India over the
past more than 50 years, middleman or the wholesaler has become an important
link between the manufacturers and the consumers. Since in majority of the
cases the manufacturer is unable to handle the distribution work it depends
upon the wholesaler for the distribution of its products.
Unlike the West where the retailers directly procure their
supplies from the manufactures, in India they have to procure through
wholesalers. Thus the wholesaler has to be paid for the service it offers to
manufacturers and retailers but which ultimately adds to the cost of the
product. Thus we have a wholesale market and a retail market for the same
product.
As a general rule, a manufacturer gets relatively less for his product while the final consumer pays
relatively more for this product. It is very difficult to be very specific
about the final pricing of a product as it differs from product to product. But
as a general rule one can make the following observations: The maximum retail
price of a product is the price on which the retailer has to sell his product.
Let us take a hypothetical example: A 200-gram tube of toothpaste manufactured
by a well-known company carries a MRP of, say, Rs.80. The wholesaler would buy
this product from the manufacturer at a round 50% of the printed price and
would generally sell to the retailer at 75% of the MRP. This may vary from
product to product. The product of a not so well-known manufacturer may be
purchased by the wholesaler at 30 to 40% of the printed price and sold to the
retailer at around 60 to 70% of the MRP. This way the wholesaler makes a cool
profit.
If the retailer could procure this product directly from the
manufacturer, the component of the wholesaler’s profit would then get
eliminated; the manufacturer would sell it at a little higher rate and the
final consumer may buy at a lower rate.
The same thing goes for the agricultural produce – fruit, vegetables,
grain etc. Farmer’s case is much worse.
A manufacturer is better placed than a farmer to negotiate with the wholesaler
while the farmer is not. The farmer is totally dependent upon the middleman for
selling his produce. A large number of farmers do not have facilities for
storing their produce. Whatever storage facilities are available are so bad
that 10 to 20% of the produce is eaten away by rats.
Secondly, since most of the farmers have to return the money
that they had borrowed immediately to the moneylenders or to the traders that
they are forced to sell their produce at a lower price. Moreover, the
conditions of the mandis are so bad that a farmer has to wait for some
time before he is able to dispose off their produce. Most of them end up
selling their produce through artias at a much lower price. In this case
also middleman makes a much higher profit while the farmer gets much lower
price for his produce while consumer ends up paying more.
It is in this context that the retail outlets in the form of
supermarkets and hypermarkets are able to eliminate middleman and become the
only link between manufacturer/producer and the final consumer. Most of these
supermarkets and hypermarkets work on the principle of low margins but higher
turnover. In absolute terms they make large profits and at the same time give
more money to producers/manufacturers and sell relatively cheap to final
consumer. This is how the retail
supermarkets work the world over.
Normally the supermarkets and hypermarkets procure their
supplies-both of manufactured goods and agricultural produce- in very large
quantities, while maintaining their own warehouses and cold storage/supply
networks. The international chains, in fact procure their goods from all over
the world for sale in many countries. The only reason for allowing FDI in the
retail market is that it will bring along with it not only the expertise but
also the technology in running such outlets, which India at the moment is lacking.
They will not only source their goods and agricultural produce from India for sale in India but also for sale in other
countries where these markets have their presence.
Considering this aspect there is no harm in allowing FDI in
the retail sector. One may have
reservations about 100% FDI in the retail market but we may not have
reservations if we allow up to 49% FDI in retail sector.
The benefits of organized retail are already visible. Most of the retail chains are selling
products below the MRP. Even the chain
of drug stores are selling scheduled drugs at 10 % discount. The days of shopkeepers selling products at
MRP are almost over. The farm produce is
selling at prices lower than what are being charged by the vendors.
The decision of a number of big business
houses to enter the retail business
ensures that there will be intense competition among them which will keep the
prices down. In this context it is
desirable that the provision of printed MRP on manufactured products be done
away with; the MRP is being used by shop owners to justify the high price when MRP
only means that the price to be paid by the consumer cannot exceed but it can
always be lower than it. The competition
will ensure that the prices remain stable.---INFA
(Copyright,
India News and Feature Alliance)
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