ECONOMIC HIGHLIGHTS
New Delhi, 30 August 2007
Birthpangs Of New Retail
Order
NO STOPPING
ORGANIZED SECTOR
By Dr. Vinod Mehta
The recent attacks on Reliance Fresh outlets in Ranchi,
Lucknow and Varanasi and opposition to their entry in States like West Bengal
and Tamil Nadu shows an uneasy situation between the well-entrenched retail in
the unorganized sector and the attempts of the organized sector to enter the retail
business in a big way.
The unorganized sector fears that their interests are being
hurt and that it would lead to unemployment.
This is especially so in the case of farm produce. If the unorganized
sector is not taking it lying down, the organized sector has the money and the
patience to enter it in a big way.
What one can say at the moment is that both the unorganized
and the organized sectors are testing each other and some new kind of retail
organization will emerge in the next five to ten years which will accommodate
the interests of both the unorganized and the organized sectors. This kind of coexistence
between the unorganized and the organized retail can be seen in many of the
South-East Asian countries notably Thailand,
Malaysia, Singapore, Thailand, Indonesia etc. The retail
business in the West is mainly in the hands of the organized sector.
The important feature of the retail business in India be it in
farm produce or fast moving consumer goods like toothpaste, shampoo, soap, tea,
coffee or durable consumer goods like TVs, refrigerators has been that it is
mainly in the unorganized sector where individual owner/sellers are the main
players, unlike in the West. As far as
the farm produce is concerned the State laws insist that the produce be first
brought to the designated mandi where
the individual farmer sells it to the retailer through a commission agent.
As far as manufactured consumer products are concerned the
companies first sell it to the wholesaler known as the stockist who in turn
sells it to the retailer. Both the
commission agent for the farm produce and the stockist for the manufactured
products charge for their services which increases the cost of the product when
it reaches the consumer.
There are a few countries where there is a middleman between
the producer and the retailer. However,
in regard to the farm produce there is a general feeling that the farmer is not
getting his due while the consumer is paying more. So is this true of manufactured products.
With the farmers and consumers getting price sensitive both
are looking for a kind of organization for retail business where the middleman’s
services could be dispensed with and the money saved could be shared between
the producer and the consumer.
There are many organized
retail business models like supermarkets, hypermarkets, chain stores for
specialty products like drugs and cosmetics but the retail business model that
readily comes to mind of an average Indian is one of a super market
wherein the retailer directly buys it
from the producer and sells it directly to the consumer. This is the model which the organized Indian
business wishes to follow especially for farm produce as it sees big profit
opportunities in it.
CRISIL
in a study carried out in 2006 found that over 70 per cent of the retailing was
from the unorganized sector. At an estimated Rs.10 trillion in 2006, India's retail
industry is almost one-third the country's GDP. With food and grocery (F &
G) items accounting for more than 70 per cent of all retail sales. However, the
penetration of the organized retail in the F&G segment is negligible and
stands at around 1 per cent.
The
CRISIL report further pointed out that the farm incomes in India could
double if the organized retail enhances the farmer realizations on food items from
the current 30-35 per cent of retail price to the international norm of over 50
per cent of retail price.
Those
who are attacking the farm produce retail stores are basically the commission
agents operating in various mandis and
the small farm produce retailers. The
organized retail is directly sourcing the supplies from the farmers and since
the farmers do not have to come to the mandis
to sell their produce they save on transport, commission and other
incidental expenditure which adds to their earnings.
True,
the middleman/commission agent sees it as an attempt to cut his
livelihood. This is manifested either in
the violent attacks on the retail outlets or by using the provisions of the Agriculture
Marketing Act to prohibit the sourcing of farm produce directly from the farmers. They also fear that they would be totally
marginalized once the organized retail puts in place the cold storages and the seamless
supply chain.
Clearly,
the organized sector has to come to terms with this and find out ways to take
along these people and protect their livelihood. Going by the experience of the South-East
Asian countries the organized and the unorganized retail in the farm produce sector
can co-exist.
Interestingly,
the farm produce retail chains like Reliance Fresh, Godrej-owned Farm Fresh or
Spinach in Bombay
are selling the farm produce at much cheaper rates than the prices charged by
the street vendors. Thus, because of the
large price differentials the consumer has also developed a vested interest in buying
farm produce from the organized retail chain.
As
far as the retailing of the manufactured products is concerned, the organized
sector has already made inroads in the unorganized sector. Vishal Megamart, Big
Bazaar are some of the well-known chains. In the field of retailing of medicines too the
scene is changing; the sector once dominated by individual owners is giving way
to company owned chains of stores which are selling medicines at a
discount.
Importantly,
the unorganized sector for the retail of manufactured products so far does not
perceive any threat to its livelihood from the organized retail. One factor
which differentiates the retail of farm produce from the retail of manufactured
products is that while the farm produce does not carry any MRP (maximum retail
price) tag, the manufactured products do carry such a tag so the product bought
from the unorganized sector or the organized sector would cost the same.
Incidentally,
it may be mentioned that the MRP has become an anarchism for most of the
manufactured products as it is not serving any useful purpose except for
keeping the prices artificially high. In a competitive regime the prices of
manufactured products would remain stable without the MRP tag.
Coming
to hyper-markets. Hyper-markets source and stock a number of manufactured
products and sell them to retailers and bulk buyers like institutions, offices,
hotels, hospitals etc. just like the stockists.
The only difference is that while a stockist stocks only one product,
the hyper-market will sell all the products in bulk under one roof, saving time
and energy for the retailers and bulk buyers.
Needless
to say, it is too early to judge the reaction to hyper-markets. There is one
hyper-market, Metro, which is functioning at the moment. There may be some
protests from the stockists/distributors of manufactured products when the
Bharti-Wal Mart joint venture starts functioning from the next year. Reliance is also thinking of going into hyper-markets.
But
one thing is certain that there is no stopping the organized sector getting
into the retail business. The real shape will emerge only through a dialogue
among the vested interests. And the
change is likely to benefit the producers, the traders as well as the
consumers. ---- INFA
(Copyright India News and Feature Alliance)
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