Economic Highlights

Retail Business Scene

                                         BIG & SMALL CAN CO-EXIST        

By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

Retail business in the country, which has been dominated by the unorganized sector -– individually-run grocery stores, garment shops, medical stores etc.—is changing. Many of the known big Indian companies have entered the fray and many have decided to go it alone, without any foreign investment. Today, the Indian business houses are seeing big business opportunities in retail. 

However, there are apprehensions that they will displace the small neighbourhood stores, which would lead to unemployment.  But, a recent study carried out by Indian Council for Research on International Economic Relations (ICRIER) at the request of the Government, has clearly stated that both the organized and the unorganized retail will co-exist. There will not be any large scale displacement of neighbourhood stores and instead in the process the neighbourhood stores will also change.

   It is too early to say the shape of things that will emerge in the retail sector but the                     entry of big business houses is likely to change the 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 are not averse to the big                                 business entering it on their own.

Let us have a close look at the distribution system of manufactured products such as soap, shampoo, butter, ghee, edible oil, packaged tea, coffee etc. As the system of distribution that has developed in India since more than 50 years, the 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, he depends upon the same from the wholesaler for his products. 

Unlike the West where the retailers directly procure their supplies from the manufactures, here in India they have to procure through the wholesalers. Thus, the wholesaler has to be paid for the service he offers to the manufacturers and retailers but at the end it adds up to the cost of the product. Odd as it may sound but we thus 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 it. While it is pretty difficult to be specific about the final pricing of a product (as it differs from product to product) 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 gm 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 round 50 per cent of the printed price and would generally sell to the retailer at 75 per cent of the MRP. The product of a not so well-known manufacturer may be purchased by the wholesaler at 30 to 40 per cent of the printed price and sold to the retailer at around 60 to 70 per cent of the MRP. This way the wholesaler makes a cool profit.

If only the retailer could procure this product directly from the manufacturer, then the component of the wholesaler’s profit would get eliminated, the manufacturer would sell it at a slightly higher rate and the final consumer would buy at a lower rate.

The same applies for the agricultural produce – fruit, vegetables, grain etc.  But the farmers’ case is much worse. A manufacturer is better placed than a farmer to negotiate with the wholesaler, as the farmer is totally dependent upon the middleman for selling his produce. This is so because of various reasons. One, 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 per cent of the produce is eaten away by rats.

Two, since most of the farmers have to immediately repay what they had borrowed from the moneylenders or to the traders they are forced to sell their produce at a lower price. Moreover, the conditions of the mandis are pathetic that a farmer has to wait for a while before he is able to dispose off his produce. Most of them thus end up selling their produce through artias at a much lower price. In this case too, the middleman too makes a higher profit, the farmer gets a lower price for his produce and the 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. In fact, the world over, the retail supermarkets work on the principle of low margins and high turnover. In absolute terms they make large profits and at the same time give more money to producers/manufacturers and sell relatively cheap to the final consumer. 

Normally, the supermarkets and hypermarkets procure their supplies--both of manufactured goods and agricultural produce-- in large quantities, while maintaining their own warehouses and cold storage/supply networks. And, the international chains in particular procure their goods from all over the world for sale in various countries.

The only reason for allowing FDI in the retail market is that it will bring with it not only the expertise but also technology in running such outlets, which at the moment India is lacking. The big chains will not only source their goods and agricultural produce from India for sale in India but also for sale in other countries where they have a presence. However, there could be reservations about 100 per cent FDI in the retail market but not if only 49 per cent FDI is allowed in the retail sector. 

The benefits of organized retail are already visible.  Most of the retail chains are selling products below the MRP and even drug stores are selling scheduled drugs at 10 per cent discount. One could safely say that the days of the shopkeepers selling products at MRP are almost over.  The farm produce is selling at prices lower than what are being charged by the

Besides, the decision of big business houses to enter the retail sector ensures an intense competition, which will keep prices down. In this context it is desirable that the provision of printed MRP on manufactured products be done away with, as it is being used by shop owners to justify high price whereas MRP only means that the price to be paid by the consumer cannot exceed but it can always be lower than it.

                At worst, the people who are going to be affected by this development are foremost t                 he sole selling agents and middlemen, who go by the name of wholesalers for                         manufactured products and artia for agricultural produce. They will find                                        opportunities             within the new retail system that if emerging.  There is no  need  

               to shed tears for them, sole-selling agents/middlemen have become                                        anarchism in today’s economic context.--INFA

 (Copyright, India News and Feature Alliance)

New Delhi, 11 June 2008