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Birthpangs Of New Retail Order:NO STOPPING ORGANIZED SECTOR, Dr. Vinod Mehta, 30 August 2007 Print E-mail

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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