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Eliminate Middleman:Changing Face of Retail Business,by Dr. Vinod Mehta, 24 May 2007 1 Print E-mail

 

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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