The vociferous supporters of corporate retail in India seem to believe, or would like us to believe, that there is no previous experience of corporate retail anywhere in the world to learn lessons from. In this guest post, SHANKAR GOPALAKRISHNAN analyses available data on the experience of the entry of corporate retail globally, to outline the disastrous consequences it has had everywhere it has been introduced. On the basis of extensive research, he concludes: “The growth of corporate retail not only will not address the key problems plaguing India’s economy today – it will greatly exacerbate many of them. In particular, the crisis in agriculture, environmental destruction, declines in land productivity, urban unemployment, price volatility and unequal access to resources would all be worsened by unchecked growth of corporate retail.” Shankar’s article follows.
In the flood of rhetoric following the government’s decision to permit FDI in retail, the actual reality of what this will mean is being lost. For that it is necessary to look at international data and what it shows about the claims being made. Commerce Minister Anand Sharma’s letter offers a good place to start. His claims can be summarised as follows:
Corporate retail fueled by FDI will result in investment in cold chains and therefore in lower prices by “eliminating middlemen.”
Corporate retail will not threaten small retailers, who find “innovative ways to coexist”, and will generate employment
Corporate retail will benefit farmers and producers by ensuring a “remunerative price.”
Corporate retailers will remain restricted to some areas and some sectors.
There are already corporate retailers in India and there is therefore no problem in permitting FDI.
Not one of these claims is justified by the available data.
Lower Prices and Investment in Cold Chains
In the sector that requires cold chain infrastructure most – fruits and vegetables – data from developing countries often shows that prices in supermarkets are generally higher than from existing retailers. Certainly, there is no data that shows consistently lower prices from corporate reatilers.
Thus:
In Thailand, they are estimated to be 10% higher (1).
In Argentina, data showed consistently higher prices for fruits and vegetables in supermarkets (the difference being about 14% through the 1990’s), though this difference was falling (2).
In 2000, in Mexican supermarkets, prices of lemons, tomatoes and oranges were significantly higher than in traditional markets, while in all other fruits and vegetables they were identical or slightly higher (3).
In Vietnam, in 2002, it was found that prices in supermarkets across all categories were around 10% higher(4).
The concentration of power in the hands of a few companies by no means leads to lower prices. In the US, supermarkets raised tomato prices by 46% between 1994 and 2004 while real prices paid to producers fell by 25% (5).
In the Indian experience, the entry of corporate chains into wheat and grain procurement has coincided with increased speculation and increased prices.
Regarding investment in cold chains and reduction in wastage, it should be remembered that the international food industry – controlled by the same chains currently advertised as sources for FDI – wastes almost half of the food it procures (6).
No Effect on Small Retailers or Employment in Retail
The Minister and the government here is playing a simple verbal trick. The fact that some retailers “continue to coexist” does not in any way mean that most small retailers will not be pushed out of business.
Indeed, the data is exactly opposite to the claim that there is no evidence of harm to small retailers. Here are citations and figures:
In Brazil, share of street markets in fruits and vegetables declined by 27.8% between 1987 and 1996; in dairy sales, share of dairy stores fell by 27.8% and open air markets by 53.3% (7).
Argentina: Number of small stores dropped by 64,198 between 1984 and 1993 – 30% of the shops in the country. Employment in retail sector dropped by 26% in the same period (8).
Chile: between 1991 and 1995, ‘traditional’ food and beverage retailers declined by approximately 20% in all segments (9).
Indonesia: between 2002 and 2003 – just one year – number of ‘traditional’ grocery stores fell by 154,148 stores, or 9% (10)
Latin America: supermarkets now control 60% of food retail (11).
East Asia other than China: 63% of processed / packaged foods controlled by supermarkets, estimated 30% of fresh foods (12)
The oft-cited example of China is irrelevant, as Chinese food retail is entirely different as shown below:
From 1959 till late 1980’s, private retail trade essentially banned in cities, all retail was taken over by public state owned enterprises
In 1992 (rise of supermarkets just beginning), state owned large networks accounted for 41.3%, cooperatives / collectives 27.9% and private enterprises (i.e. Small retailers mostly) 20% of market – hence completely incomparable to Indian situation (13).
In all situations big retailers begin with rich population but do not remain confined to them – always attempt to expand into smaller towns, reaching poorer segments etc. In Latin America, Asia and Africa in general: “there has been a trend from supermarkets occupying only a small niche in capital cities serving only the rich and middle class to spread well beyond the middle class in order to penetrate deeply into the food markets of the poor.” (14)
Benefits to Farmers
Most purchase for corporate retailers occurs through contract farming. This actually has negative impacts on most farmers.
All studies of contract farming and corporate food retail show that small and marginal farmers are unable to access the supply chain (15)
More than 90% of India’s rural population has less than 2 hectares of land and 79% are either landless or own less than 1 hectare. Practically all of these people will be excluded from the corporate supply chain.
Those left out of corporate sourcing may find themselves competing for a much smaller market and essentially being driven out of existence. Thus, in Argentina, the number of dairy farms fell from 40,000 in 1983 – around the time when corporate transformation of the supply chain began – to 15,000 in 2001 (16) .
There is no reason that purchases by a small number of companies is going to lead to higher prices for producers. An Oxfam study (17) shows that real export prices for South African apples fell by 33% from 1994 – 2004, and Florida tomato growers found their real prices falling by 25% over same period – while consumer prices in the US rose by 46% at the same time. Data currently says that four or five companies control 40% of the international trade in several types of produce, including grains, edible oils, coffee, cocoa and bananas.
The same study by Oxfam shows that conditions for agricultural workers in supermarket suppliers is very bad, because of the intense pressure placed on farmers to reduce prices, guarantee ‘quality standards’, handle last minute changes in contracts and absorb discounts, promotions, etc. passed on to them.
Abuses of power by corporate retailers include:
delayed payments (example from Argentina here (17)
arbitrary quality standards (Oxfam 2004 study cited above has very good examples including, for instance, sudden demands that apples should be exactly 65 mm rather than 63 mm),
passing on of costs for discounts and promotions to producers (Vietnam for instance (18)
and simple default on contracts, as has happened in India (several studies, some with a lot of data; a summary reference is Jayati Ghosh and CP Chandrasekhar here (19)
Global sourcing of fruits and vegetables puts intense pressure on producers to reduce prices to compete and to satisfy the requirements of the corporate retailers (FAO 2005 study)
Corporate Retailers Already Exist, So FDI Will Not Cause Additional Damage
This is simply an irrelevant argument. The small presence of corporate retailers in India’s markets today is a reflection of the fact that in themselves, corporate retailers offer nothing in the sense of retailers that allows them to out-compete the existing system. This is why the entry of FDI has been shown to be the single determining factor that permits large-scale expansion of corporate retail in developing countries.
The large quantities of money that FDI provides permit retailers to displace existing suppliers and establish monopolies or oligopolies when purchasing produce; to absorb losses and hence fix lower prices until the competition is wiped out, whereupon prices will be raised (i.e. predatory pricing); and to pressurise governments into bending regulations and subsidising their activities (the latter is already visible among existing corporate retailers).
The simple reality is that, if corporate retailers were simply going to grow alongside the existing system without displacing anyone and purely because of their better results, they would have done so already to a great extent. Why have they failed?
Ignored Issues
Most of the debate ignores the structural requirements of corporate retail and what this will mean. Inherently, in order to make profits, corporate retailers need massive economies of scale in order to offset their very high overhead costs (in contrast to the low overhead, decentralised existing system). Some of the resulting impacts include:
Privileging good looks and long durability over taste and nutritional value, so as to permit price hunting and delayed sale of produce: The result is that, as is widely known, fruits and vegetables in supermarkets tend to have less taste, are lower in nutritional value, and are often picked when unripe. This is one reason for rapid growth of the “organic food” market in the industrial countries.
Massive increase in use of energy and water for processing, packaging, and transport: The international food industry is now recognised as a major contributor to climate change. Better storage is certainly necessary, but the requirements of corporate retailers far outstrip the actual need. They are not interested merely in storing of food but in being able to source from very long distances and in storing as long as necessary (in order to speculate on prices). The result is that the energy spent on production and sale of one kilogram of rice in the US is 80 times the energy spent by a farmer in the Phillippines. One fifth of all energy spent on transport in the US is spent on transport of food (20). Can India afford this kind of expenditure of energy and water?
Sharp rise in use of pesticides, additives, preservatives and other chemical agents to increase the shelf life of food, with attendant health consequences: For much the same reason as above. Contract farming in particular usually involves a sharp rise in total inputs, destroying the fertility of the land and leading to increased pollution and other problems.
The growth of corporate retail not only will not address the key problems plaguing India’s economy today – it will greatly exacerbate many of them. In particular, the crisis in agriculture, environmental destruction, declines in land productivity, urban unemployment, price volatility and unequal access to resources would all be worsened by unchecked growth of corporate retail.
[For a more detailed argument on corporate retail and analysis of this data, please see an earlier article: “Corporate Retail: Dangerous Implications for India’s Economy”, published in Economic and Political Weekly on August 8, 2009.]
1 Shepherd, Andrew W. (2005). “The implications of supermarket development for horticultural farmers and traditional marketing systems in Asia”, Paper presented to FAO Regional Workshop, Kuala Lumpur.
2 Ghezan, Graciela; Mateos, Monica; Viteri, Laura (2002). “Impact of Supermarkets and Fast Food Chains on Horticultural Supply Chains in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
3 Schwentesius, Rita and Gomez, Manuel Angel (2002). “Supermarkets in Mexico: Impacts on Horticulture Systems”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
4 Hagen, James M. (2002). “Causes and Consequences of Food Retail Innovation in Developing Countries: Supermarkets in Vietnam”, Working Paper. Ithaca, New York: Cornell University, August. Available online at http://www.cornell.edu.
5 Oxfam (2004). Trading Away Our Rights: Women in Global Supply Chains. Oxford: Oxfam.
6 “The International Food System and the Climate Crisis”, Seedling, GRAIN, October 2009.
7 Farina, Elizabeth M.M.Q (2002). “Consolidation, Multinationalisation and Competition in Brazil: Impacts on Horticulture and Dairy Products Systems”, Development Policy Review. Oxford:Blackwell Publishing, Vol 20:4.
8 Gutman, Graciela (2002). “Impact of the Rapid Rise of the Supermarket System on Dairy Products Systems in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.
9 Faiguenbaum, Sergio; Berdegue, Julio A.; Reardon, Thomas (2002). “The Rapid Rise of Supermarkets in Chile: Effects on Dairy, Vegetable and Beef Chains”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
10 A.C. Nielsen (2004). “Small Grocers in Asia Surviving Onslaught of Retail Chains”, Press Release. New York: ACNielsen, June 16.
11 Reardon, Thomas and Berdegue, Julio A. (2002). “The Rapid Rise of Supermarkets in Latin America: Challenges and Opportunities for Development”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.
12 Reardon, Thomas; Timmer, C. Peter; Barrett, Christopher B.; Berdegue, Julio (2003). “The Rise of Supermarkets in Africa, Asia and Latin America”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, Vol. 85:5.
13 Hu, Dinghuan; Reardon, Thomas; Rozelle, Scott; Timmer, Peter; and Wang, Honglin (2004). “The Emergence of Supermarkets With Chinese Characteristics: Challenges and Opportunities for China’s Agricultural Development”, Development Policy Review. Oxford: Blackwell Publishing, Vol 22:5.
14 Reardon, Thomas; Timmer, C. Peter; Barrett, Christopher B.; Berdegue, Julio (2003). “The Rise of Supermarkets in Africa, Asia and Latin America”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, Vol. 85:5.
15 For Vietnam Cadilhon, Jean-Joseph; Moustier, Paule; Poole, Nigel D.; Tam, Phan Thi Giac; Feame, Andrew P. (2006) “Traditional vs. Modern Food Systems? Insights from Vegetable Supply Chains to Ho Chi Minh City (Vietnam)”, Development Policy Review. Oxford: Blackwell Publishing, 24:1.
For Chile, Faiguenbaum, Sergio; Berdegue, Julio A.; Reardon, Thomas (2002). “The Rapid Rise of Supermarkets in Chile: Effects on Dairy, Vegetable and Beef Chains”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
Globally Boselie, David; Henson, Spencer; and Weatherspoon, David (2003)“Supermarket Procurement Practices in Developing Countries: Redefining the Roles of the Public and Private Sectors”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, 85:5; Reardon, Thomas; Timmer, C. Peter; Barrett, Christopher B.; Berdegue, Julio (2003). “The Rise of Supermarkets in Africa, Asia and Latin America”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, Vol. 85:5.
FAO Study Shepherd, Andrew W. (2005). “The implications of supermarket development for horticultural farmers and traditional marketing systems in Asia”, Paper presented to FAO Regional Workshop, Kuala Lumpur.
16 Gutman, Graciela (2002). “Impact of the Rapid Rise of the Supermarket System on Dairy Products Systems in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.
17 Oxfam (2004). Trading Away Our Rights: Women in Global Supply Chains. Oxford: Oxfam.
18 Cadilhon, Jean-Joseph; Moustier, Paule; Poole, Nigel D.; Tam, Phan Thi Giac; Feame, Andrew P. (2006) “Traditional vs. Modern Food Systems? Insights from Vegetable Supply Chains to Ho Chi Minh City (Vietnam)”, Development Policy Review. Oxford: Blackwell Publishing, 24:1.
19 Chandrasekhar, C.P., and Ghosh, Jayati (2003). “Is Corporate Farming Really the Solution for Indian Agriculture?”, Business Line. Chennai: Kasturi and Sons, December 16.
20 “The International Food System and the Climate Crisis”, Seedling, GRAIN, October 2009.
KAFILA - COLLECTIVE EXPLORATIONS SINCE 2006 
See also Navdanya Research Foundation’s extensive report Corporate Hijack of Retail.
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So why is it bad only when foreign retailers enter the picture? Foodworld, Spencer’s, Reliance etc have been in the retail space for 15 years and more, and they also offer deep discounts and everything; that doesn’t stop anyone from going to kirana shops. If the welfare of the small shopkeepers was so paramount, why allow these Indian retailers to work?
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Rex has simply restated the exact argument that has been demolished in Shankar’s well-researched post above – see the section “Corporate Retailers Already Exist, So FDI Will Not Cause Additional Damage”.
This comment was approved only in order to state that further comments of this sort will not be approved, which do not engage with the argument given here, but simply come back in a knee-jerk response, glibly pouring out all the standard defences of FDI in retail, that this post has already shown to be utterly hollow.
You can read and and hear those standard arguments everywhere else. On kafila we want another point of view, one that has no space at all in the mainstream media.
Of course, thoughtful disagreements with the substance of the post are always welcome.
(This is not a ‘kafila’ decision, but my personal decision as the one who posted the article).
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Nivedita, it’s all very well to put out studies of this in other countries, but India is made up of far more than its metros. Do you really envision Walmart and others making inroads in Jalandhar, Bilaspur, Pudukottai, Burdwan and other smaller towns and villages?
There was similar fear mongering around 15 years ago when McDonald’s appeared, spelling doom for Indian street food because of their hyper efficient supply chain and how our traditional eating habits were under threat.
McDonalds’ is not perceived as the cheapest option for food here the way it is in its home country; there are dirt cheap dhabas and smaller places that can offer better value for money and traditional meals as well.
Today both of them exist, and both cater to vastly different sets of people.
Walmart’s model relies on having huge floor space, and the fact that Americans don’t mind driving miles to go shopping.
Our country is dotted with thousands of small time retailers who have known their clientele for years, offer personalized service and home delivery. People who currently shop at Indian retail chains may shift their loyalty, but in the long run who wants to spend hours in a supermarket queue for casual purchases?
India is much more than a handful of metros and Tier 1 cities, and their unique situation does not make it easy for setting up giant supermarket chains. Retail chains and corner shops have coexisted, and will continue to do so.
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the problem with the indian retail sector is that we lack the technical expertise and capital,while the former is equally shared between the indian corporates and government but the later is available in plenty with corporates . also since these retail giants do have a desi touch and also since most of their source is from our own land they were not able to displace the kirana shops but with global giants like walmarts,tesco et al the sitution is just the reverse-http://www.dailymail.co.uk/news/article-1394087/Is-end-Mom-Pop-stores-Mini-Wal-Mart-express-stores-coming-town-near-you.html
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reply to rex Obviosuly you did not read the article carefully. And if you did, you did not reflect at all.
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One of the problems with corporate retail, including the existing set-up of FoodWorlds, Reliance, Spencer, etc is that real estate plays a critical part in the pricing and the overall operational dynamics. To elaborate, most of these chains require storage and retailing space which is a huge cost factor in the pricing of the products that reach the end consumer (and that also indirectly determines the quality of products procured and reached to the consumers). During the recession in 2009, many of these franchise retail stores wanted to shut down because they could not afford the expensive rents, but they were locked into 3 or 6 or 9 year leases which meant that they could not get out of the lock-in period without paying a penalty and/or facing court cases. In some cases, the owners of the franchise push the retail stores to continue despite the losses they suffer because the image of the chain has to be retained (just like in the real estate industry where you have to continue construction despite the markets being down so that the construction activity keeps up the perception that the markets are doing well or at least picking up).
There are already waves of concern among the existing retail chains about what will happen to real estate costs when the FDI in retail is opened up. It is important that we pay attention to the implications of FDI in retail policy on land and property markets, property values and the overall economy.
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@rex: This is indeed a major factor, and probably one of the key reasons for the profusion of malls in several cities despite the fact that so many are making losses.
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Very illuminating and timely article.
Congrats to the author.
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Eye opener.
But there must be the other side. Otherwise the proposed system would have ceased to exist in those countries
.Where ids the catch? bala
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My basic problem with this sort of analysis is that it is not desirable to generalize that therre will be only negative impacts based on some case studies in different countries. It is possible that the industry that favors FDI can cite success stories to counter this. The question is what has been the impact of/experience with chains like Big Bazar, Reliance in India. have they negatively affected farmers? have they resulted in loss of jobs. I know it may be difficult to quantify but some analysis with data will help. Given the fact that there is enormous wastage of vegetables and fruits in this country investing in supply chain and
infrastructure can reduce that. If private sector does that it may help farmers and consumers. On the other hand those who criticise such FDI should also suggest alternatives like co-ops, local food systems supported by consumers and come up with some meaningful suggestions. I am tired of vague generalizations presented as critiques
because they stop with that. I have seen and shopped in western retail chains in China and they are patronized by chinese although their presence might be limited. I wont be surprised if China offers them opportunities to open more stores.
FDI in retail can have +ve & -ve impacts.One side talks of the -ve side while other side
highlights +ve side. The real effect may be in between. But let us not forget that the presence of KFCs, McDonalds, Pizza Huts has not displaced traditional hotels. Perhaps a section of Indians are customers of both and the proof is in the increasing levels of
obesity :(
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Please see consolidated reply below.
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Unfortunately, this ‘detailed study’ completely misses the big picture, indulges in statistical scare-mongering using selective data and have one believe that the fundamental laws of economics don’t make sense. I don’t know whether the statistics is verified or verifiable, but I assume them to be 100% accurate.
Lower Prices and Investment in Cold Chains:
So, basically these guys sell inferior products (less tasty, lower nutritional value, unripe etc.) at higher prices, as much as 14% higher, while providing not even convenience – the kirana store is across the street whereas the corporate retailer is a good 10 km drive on pot-holed, congested roads – and still drive out competition. They must be some sort of marketing wizards. If there is a Nobel prize for marketing, these guys should be awarded it without debate.
We didn’t know that the international food market is controlled by Walmart, Tesco and Carrefour. Thanks for enlightening.
Effect on small scale retailers:
None of the statistics say how the overall market in its entirety moved. Did it expand or decline? How does that percentages look in absolute terms? Did the share of the small sector increase or decrease in absolute terms? Whatever be the answer, there is nothing unusual in businesses going out of ‘business’, given the scale of changes in the market. The question is whether the consumers are benefited as a result. The markets are and should be consumer oriented.
About the Indian small scale retailers, it is stated many times that the segment they cater to is different from that targeted by the big retailers. As an example, 70% of the shampoo sold in the country is sold in small sachets. Cigarettes are sold loose (they are not meant to be, by the way).
Benefits to Farmers:
Practically all of these people will be excluded from the corporate supply chain as if they have access to any supply chain today. The mandi system is a corrupt system riddled with goondagiri and abuse of power. Corporate retailers can’t make the situation any worse.
Data currently says that four or five companies control 40% of the international trade in several types…
Wow! Bless those souls who collected that data. Those evil corporates each has a huge market share of.. 8-10%. Let us see how some other evil entities do in their markets. Intel – 80.6% of the microprocessor market. Microsoft: 85% of the desktop OS market. Nokia – 31% of the mobile phone market (was 38% last year). The idea that if a business entity has X% of the market share it also has X% “control” on the market is nothing but an artefact of journalistic sleight of hand and socialistic education. This is what I call statistical scaremongering.
Abuses of power by corporate retailers..
As if none exists in today’s system. Ask any farmer. I did. One of my colleagues has a sugar-cane farm in the Belgaum district of Karnataka. All these tactics listed here are employed by the politically connected sugar mill lobby as of today.
Corporate Retailers Already Exist..
Far from ‘demolishing’ the argument, the author hasn’t even attempted to give an unconvincing answer, apart from asking another question. Why indeed corporate retail fail? What parameters are different for the multinationals? Is it this:
The large quantities of money that FDI provides permit retailers to displace existing suppliers and establish monopolies or oligopolies when purchasing produce; to absorb losses and hence fix lower prices until the competition is wiped out, whereupon prices will be raised
How many times have we heard this kind of argument in the context of privatization/liberalization? Did it ever happen in real life anywhere where free markets exist? Only academics who don’t have the foggiest idea how businesses and markets work in the real world would make these kind of arguments.
The growth of corporate retail not only will not address the key problems plaguing India’s economy today
Here we can agree, minus the ‘not only’. India ranks a miserable 124 in the economic freedom index. With FDI in retail industry, we may move up a notch, to get ahead of Pakistan. FDI in retail is a hesitantly taken baby step in the right direction and there remains hundreds of miles ahead, before we sleep or whatever.
The opposition to FDI is in fact economic nationalism dressed up as some higher principle. Though the left misses no opportunity to berate the Hindutva guys for their nationalism, the economic/resource nationalism of the left has been far more insidious to the nation.
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I am amazed at this long winded comment. Have you heard of cartels? Do they exist? Do they exist when certain large players corner the market and drive away the small competition? Do they rig the prices to a much higher level? If the answer to all these questions is no, I will hail your comment. If the anwer is yes (everyone knows that cartels do exist and that they can and do rig prices) your comment is not worth reading.
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murali pls feel free to explore this piece from Amartya sen and Jean dreze about the relative impact of liberalisation on indian economy, without any prejudice and you will know for sure -‘all that glitters is not gold’
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The article is quite a bit aggressive in projecting the consequences of corporate retail as a flood tide of negative, cascading side effects. I say projecting, because there is no other market with such retail density or as expansive as this one. With this line of “interpolatory” reasoning, you might as well claim arbitrage/futures trading/speculation in the food market by institutions abroad is driving up prices, and that the government should condemn these practices.
Can someone actually do an impact analysis with India’s retail density, the consumer trends relevant to 2011, with data from existing corporate retail in India and retail conglomerates in other countries? That would be much better than saying X had Y side-effects in Z, and so should cause the same effects in K, learning from the past or not.
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Quite agree with the concerns laid out in the article. However- just to consider the opposite side to this. Bringing in the context of a flagging agriculture industry in India that is extremely inefficient in managing the supply-chain between the producers and the consumers- there maybe valuable lessons to learn from these retailers. It would be in their best interests to help set out the infrastructure, storage systems for the products they source. The farmers may truly benefit by streamlining systems.
In a labour-abundant market like India, this would trigger a highly needed boost to our local manufacturing industry that will no longer have to worry about retailing its products. The retails would trigger a demand for locally manufactured products since they would be cheaper than what they outsource from say, China or Taiwan (unlike the case in US where labour has always been expensive). If Walmart is smart (sure they are), it would be in their best interests to explore(exploit?) what India has to offer and re-formulate their strategies instead of blindly replicating their business models from elsewhere.
Regarding the ethical issues mentioned in the article (climate change, health hazards, monopolization) can’t they be handled in the form of checks and balances laid out in the form of government regulations? Based on lessons learned from the fallouts of these models around the world? (The govt. has promised that it would review these every 6 months.)
Basically, I am questioning if we are throwing the baby out with the bath water? Is there something that the FDI brings to the table that can handle India’s no.1 challenge- mass employment? I see the potential along with the hazards. Your thoughts, please!
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In Vietnam, in 2002, it was found that prices in supermarkets across all categories were around 10% higher (4).
Just out of curiosity, I looked up the reference, an article by James Hagen. It can be found here [pdf file]. The complete quote from the article is the following:
Initially, the modern stores catered primarily to expatriates and Viet Kieu
(foreign nationals of Vietnamese origin), and food at these stores has fixed prices that are
often viewed as about 10% higher than prices at traditional markets, but they also have
frequent promotions which can eliminate or reverse the price differential.(Saigon Times
Daily, Feb. 6, 2002). The stores generally have evening hours, and some are
experimenting with 24 hours, and a few have recently announced plans to be open during
the 2003 lunar new year (Tet) Holiday week, when most retail operations are closed.
What is clear from the quote is that the caveats surrounding the “10% higher price” have been removed. That would be fine if you can argue that the caveats are minor. But that does not appear to be the case. Firstly, if a shop is catering to a very particular clientele (the Vietnamese equivalent of the NRI), then you would expect prices to be higher there. This phenomenon is observed in India itself. Secondly, if there are frequent discounts (as is claimed), then surely that has to be factored in. And thirdly, the stores appear to be offering additional services (24 hours service, for example) which also has to be factored in. If a store is offering you the flexibility to shop at any time you want, then you would expect them to charge for it by adjusting their prices appropriately.
All these issues make the 10% figure highly suspect. I have not bothered checking the other sources but I will say that this distortion does not speak highly of Mr. Gopalakrishnan.
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I presume Shankar will come in on this, but Suresh, I’m intrigued by how much you make of the “caveats”. What does that paragraph you quote say in simple English? That the prices are generally 10 percent higher in supermarkets, but they have “frequent” promotions (i.e. not all the time) which “can” (not DO) eliminate the price differential. After this, you quickly hedge your bets by saying, after all, why shouldn’t they have higher prices, they cater to a more upscale market and offer longer hours! So which is it, Suresh, are their prices lower, as claimed, or are their higher prices justified? You cant have it both ways.
All these issues and this very strange reading of one para make your biases amply clear, and what is suspect is not the 10% figure, as you claim, but your motivated misreading.
That article is not even anti-corporate retail, overall. It has positive things to say about the possible benefits in an ideal situation, but the author is honest, and cannot help but place before us these damning facts.
I wonder if you came across this paragraph while you were searching diligently for something to grab on to:
“it is likely that retail modernization will also have negative consequences for some traditional retailers, producers, and distributors. As modernization serves to concentrate a
fragmented food system, it is also conceivable that eventually a concentrated food sector could result in higher food costs and less choice”.
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Just to add on to what Nivedita has said, the note does not anywhere claim that prices in corporate retailers are always higher in every circumstance. It merely points out that experience shows that corporate retailers quite often do not result in lower prices – which is the central plank of the government’s claims. The reasons for that may be varied but that is not relevant. When a claim is being made that they will result in lower prices because of their investment in cold chains, the data shows that this is far from always true. Incidentally, the other cases do not have as many caveats as the Vietnam one. Since doubts are being cast on distortions in the case of the other sources, here is the direct quote from Shepard 2005 (quoted with respect to Thailand): “Prices of fruits and vegetables at Thailand’s supermarkets were found to be about ten percent higher than at wet markets, although this may be due to higher quality. N. Poapongsakorn, presentation at FAO/AFMA/FAMA workshop.” (footnote 3, page 2) No mention of NRIs (NRTs, one should say) or 24 hour markets there. I’ll add in the other quotes later.
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Something that people tend to forget is that cost competitivesness is different from sustainability. I live in Chennai and as a middle class citizen I have a house with a water tank and sump. In the summer when there is a shortage of water we get water from far off places, we pay the cost of transport + a profit to the water delivery service. Here we arn’t paying for the water at all. Often poor people who do not have the scale to get or store water pay a much higher price for the same water.
When developed countries talk about efficiency they are talking about cost efficiency and often they do not care about sustainability, because they have small populations and because there source of raw materials is often third world countries run by dictators.
Let us for example take the case of cold storage, the big retailers can get large land allotments, and govt gaurenteed electric supply at nominal prices. We have a power shortage here already, and in Chennai there is a scheduled outage of power. Small bussinesses will run on inefficient and expensive diesel generators.
The real reason why we have an inflation is because the government failed to spend its money wisely when times were good. We did not upgrade our roads, electricity, energy supply, and even in sectors like education where few policies would have given large returns were completely neglected. For any country that is undergoing a change the efficiency of its work force has to be constantly increased, which has not been the case with us.
The government instead choose to throw around money like there is no tomorrow. We failed to build any enterprises that are internationally recogonised. An economy based on consumer driven growth is just a lie sold to the third world. And if you would like to know how “free” the freemarket really is, take a look at the porponents in western europe, USA or Japan. Their economies reak of protectionism, micro management, huge subsidies, government backed lobbying.
I am not entirely against FDI in retail and I think someday if not today we may have to get there. But seeing that such a move is primarily due to lobbying by multinationals, recent agreements with USA on IP and the governments inability or refusal to use its size to make international trade favourable for us is telling. Like the nuclear deal this could be just another give all for nothing.
And why don’t we already have the “technology” and the “efficiency” that are supposed to come with Wallmart/Ikea. Why does it need a monopoly or controlling stake before they bring in their “secrets”. Why should we trust them so much when thay can not. Is it because they are backed by / controlled by their governments.
Yet another case that is worth mentioning is to compare sustainable terrace farming over hilly regions of asia that has sustained several generation though infertile to start with, versus the large scale intensive chemical farming, and factory style animal husbandary which are unsustainable though very profitable until the land gets poisoned or mad cow disease takes over.
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very well written and apt too. i too is sceptical about the timing of our govt’s new found love with walmart and the likes.but not having the technical know how is a big problem not only in retails but in most other sectors also. we have to invest more in research to stand on our feet in the international arena
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couple of data here doesn’t make sense .. for example, in Argentina… supermarkets are providing goods at 10% higher than market and yet 30% of small stores got wiped off ?
if goods are consistently costlier in super market, why would our Indians abandon small stores ?
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they won’t charge higher price initially, they start with low prices, later on every one become used to silence shopping. For small stores 3 months are enough to wipe out if they do not get income out of it, but big retailers can survive even up to 3 years with low prices, by that time most of stores will wipe out. Then they decide the price what ever they want.
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Apologies for the delay in responses. I’m giving a consolidated response here to the issues that have been raised. First, this is not an analysis of either Indian retail or even of the impact of FDI in retail – there is an attempt at that in the EPW article that is linked from this note. This is a note, a summary of data that shows that the government’s claims are not justified. I hope to follow up with another note on the Indian context and available data on that, including on the impact of existing corporate retailers. Regarding these comments:
“These are statistical generalisations that don’t convey the full / analytical / complete picture” (@Murali, @Anjali, @ravi) I would agree with you if this note was an academic analysis, but it is not. The government has just made a major policy move that threatens to significantly alter India’s economy – and has justified it with generalisations about benefits. The note points out that in a significant number of cases which shared Indian conditions (wastage, “unorganised” retail systems, etc.), the experience does not match with the government’s claims. The question is: when these kinds of experiences exist, why should anyone accept the government’s claims? As for more detailed arguments and an attempt at a broad picture, please see the article. Incidentally, the cases that are always cited by corporate retail supporters – the industrial countries and China – certainly have very little in common with Indian conditions.
“How do corporate retailers succeed if they are more expensive?” (@Murali, @Ravi Shankar): First, the note is not saying that all prices are always higher in corporate retailers. It is pointing out that the government’s claims are unjustified. The government constantly blares that we need corporate retailers for investment in infrastructure, which will reduce prices and wastage. What infrastructure? Obviously not roads and railway tracks. “Cold chains,” then. For what forms of produce are cold chains relevant? Fruits, vegetables and other perishables. In these areas, there are numerous instances where either nothing happened or the opposite happened. As such, the greatest benefit the government is advertising becomes highly dubious. As for why corporate retailers have a negative effect on small retailers, prices are not the only factor. Non-corporate retailers, especially small ones, face far higher regulatory and credit costs; regulations in particular are a problem in most developing countries, as in Indian cities (consider the extremely high share of hawkers’ and vendors’ income that goes to bribes to the police; the regular evictions, demolitions and sealing drives; the extreme shortage of allocated market and commercial space; etc.) Credit costs are sky high for small retailers. Corporate retailers, on the other hand, easily get regulations bent (the Vasant Kunj malls case was the most glaring example, the very opening of retail FDI another), and have access to much cheaper finance. They leverage the latter through “loss leader” strategies, where certain products are priced very low in order to draw consumers even as others are kept high (walk into any McDonalds to see this in operation); through opening large numbers of stores, including loss making ones, in the initial expansion in order to build brand equity and wipe out competitors; and through spending heavily on unrelated aspects (e.g. “status symbol” publicity, visual quality of produce, and even misleading health campaigns, as has been exposed repeatedly – why do you think cans of baby formula now carry statutory warnings that it is NOT better for your child?). Small retailers simply cannot compete with all of this together, and most of it will not fall within the narrow legal definition of predatory pricing, though much of it is in in practice.
“Corporate retailers can’t be worse than the existing system” (@Murali, @Anjali): Certainly the existing system has extreme problems. The point in this note is that the evidence does not show that corporate retail will do anything about those problems; rather it shows (as argued out more fully in the article) that they will make them worse.
“No alternative is proposed” (@ravi): Again, that was not the point of this note. The article contains some discussion of possible alternatives; I’m not discussing them here as the comment is already very long, but can do so if others would want that.
“There’s enough space for all” (@Murali, @Anjali Iyer): If there was indeed enough space for all, those experiences of declines in small retailers would not exist. As for “benefits to consumers”, Murali, this note is addressed at the government’s claim that small retailers will not be harmed.
“40% market share doesn’t mean anything, does predatory pricing happen anywhere, need to move up on the economic freedom index” etc. (@Murali): If in 2011 you still think that cartels don’t exist and predatory pricing doesn’t happen, I have little to say. Try looking up the investigations into Walmart’s practices. And please don’t talk to your office mate sugarcane farmer to find out the impact of corporate retailers on “farmers.” This is exactly the kind of nonsense the government is peddling in the name of “farmers.” There is no homogenous category of “farmers”, and the top 3% not only are not representative of the others, they have different interests.
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No doubt you raised some pertinent points, however I would be very much interested in statistical comparison with current Indian setting, as that is what we want to change. FDI in retail is no panacea, but would it push the envelop is a major question.
I want to know if organized retail would move the livelihood standards upwards or downwards. You have made the point of fallacy of retail claims, however that still does not provide the argument that which is more worse of two options, retails as it exists in India or retail with international players. Question still remains open!
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UK: “Across the country local shops have been wiped out by supermarkets. This is an issue for the right as much as the left” http://www.guardian.co.uk/commentisfree/2011/may/03/supermarkets-kill-free-markets-communities
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Walmart, Walmart. South Africa worries about job losses.
“here was a strong likelihood that the merger would result in a “significant replacement of domestic purchases with imports” given the scope of Walmart’s global purchasing power and global sourcing strategy and given that centralised procurement was a pivotal feature of its business model. This would affect the entire value chain from the suppliers of raw materials and components to the suppliers of finished products.” http://www.businessday.co.za/articles/Content.aspx?id=148967
Walmart isn’t even the cheapest anymore: http://online.wsj.com/article/SB10001424053111904253204576510503450823240.html
And how well is Walmart doing anyway? “The verdict rendered by today’s 2011 Q4 report from Walmart couldn’t be clearer: with same-store sales for Walmart U.S. declining by 1.8%, market saturation in rural and suburban communities, and the continued challenges to meaningful growth in new urban markets due to community opposition, Walmart is no longer a growth company.” Good enough reason why they need more markets and India is the way to go: http://walmartwatch.org/blog/archives/with-1-8-growth-in-fourth-quarter-same-store-sales-is-walmart-still-a-growth-stock/
Here’s a whole list of research work that has shown what Walmart and other supermarket chains do: http://www.newrules.org/retail/key-studies-walmart-and-bigbox-retail
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great work pal
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Is Walmart covering up inventory losses? http://thewritingonthewal.net/?p=11890
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Look at the other-side of the investment. The govt. gets benefited since currently no kirana store pays the tax while they use all the facilities by govt.
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Even if it is someone’s view that FDI in retail is good for India and Indians, there’s more compelling reason why we should not rush through this decision – http://www.firstpost.com/india/manmohan-singh-and-the-bogey-of-consensus-147369.html
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I think the original article raises several pertinent points. FDI in retail is surely NOT an unmitigated blessing, any govt’s claims to this effect must surely be regarded as preposterous. However, reflexively saying NO to FDI in retail is also not a panacea to all ills.
A country which runs a persistent current account deficit and, which urgently needs to step up infra investments across the board, will have to be more pragmatic.
While small mom and pop stores are one of the pillars of India’s employment, protecting them indefinitely is not economically rational or even sustainable. When a country opens its economy to foreign capital, it puts in place several riders. What must be debated more vigorously is the nature and scope of these riders.
The textile sector is a prime example of a space that has enjoyed preferential treatment- reservation, prioritized purchases, tax breaks, TUFS (low cost credit schemes) and protectionism. Result- the unorganized textile sector has seen its TFP (Total factor productivity) decline over the past decade. Whats the relevance of this comparision you may ask? Only serves to show that in an increasingly globalized world closeting domestic players of any sort and in any sector is NOT sustainable.
Previous posts correctly point out the hippocrisy of western economies that prop of their own agri sectors through generous subsidies. Yet the western world is mired in a debt crisis, largely owing to these sorts of unsustainable schemes, which are becoming increasingly untenable.
Capricious middle man and fragmented land holdings are old age ills in Indian agri. Resolving them is a bigger challenge and surely will have greater beneficial impacts and that too over a smaller time frame. Only rational resolution I see is a proper SEQUENCING of reforms, so that these basic agrarian reforms are carried out first, and then retail FDI is allowed in stages.
Previous posts have talked about how FDI increases competition for factor inputs and raises their prices. But hasn’t this led to windfall gains for land owners and an attendant wealth effect that has also played a small part in spurring economic growth? Based on this argument, no form of foreign capital should be allowed in the economy. Are we prepared to live in this kind of economic order? Think N. Korea, Burma…
As for land, land prices in India are the victim of an artificial scarcity, created by a myriad of government regulations, land zoning policies, with scant regard for market realities. FDI admittedly may exacerbate this. However Has anyone asked, of this “employment” mom & pop stores create…what is the incidence of disguised unemployment? wouldnt some of the workers employed here (part time I might add, labour laws is another subject which raises my heckles, more in another post), actually prefer to work elsewhere? If the entry of FDI creates local employment (providing employment to the local community could be a rider), should it be discouraged?
India is regarded as a very attractive place to do business at this point, we must leverage this to the hilt, to ensure that we put in place as many riders as possible, to smoothen the transition for participants in the domestic economy. But those who think we have the luxury of saying NO indefinitely are being very naive (at best) or ignorant of today’s socio-economic realities.
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pragmatic thought but will it sell in . i think the best way to go about is by using the CHINA model where they allowed 26 percent FDI which was increased to 51 percent in 12 years ,courtesy THE HINDU. this gave the local retailers get adjusted to the demands and pressures from the big MNCs and with government help they successfully defended their livelihood.And their lies the catch-thorough regulation and government intervention with foreign capital will be beneficial
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Shekhar Swamy, Group CEO, R K Swamy Hansa, and Visiting Faculty, Northwestern University, US, wrote in Business Line on December 1, 2011, that FDI will wipe out small traders.
Here are some excerpts:
The manner in which the policy is outlined is itself a dead giveaway that the policymakers are well aware of the pitfalls. They have practically declared that this is a policy designed to support big capital and the predatory multinationals in retail.
ONLY BIG CAPITAL IS WELCOME
The minimum amount fixed for foreign investment is $100 million — more than Rs 500 crore. Only the big guys have this kind of capital. The Commerce Minister says that the big foreign retailers will invest not millions, but billions. This is precisely the danger…
As they build scale, the foreign retailer can go into any mandi or market and buy up the entire supply of whatever is available there. All those dependent for a living as participants in the supply chain — traders, retailers, goods handlers, others — will be rendered jobless. The government has explicitly said that it wants the produce to go from farm-to-fork through a big foreign retailer, and they want the current supply chain to be eliminated. Advantage: big foreign retailer, by policy….
RURAL INDIA UNDER THREAT
The foreign retailer is restricted to opening stores in large cities. This is no problem as any foreign company will only start in the big cities. The real issue is on the sourcing side. The policy permits them to purchase locally all agricultural produce, including fruits and vegetables, pulses, fresh poultry, fishery and meat products, and sell them unbranded in their stores. They can virtually corner the trade in the rural areas, as they scale up…
SELF-CERTIFICATION?
All compliance (for backend investment, procurement from small sector) is through self-certification of the foreign retailers, as per declared policy. This process of self-certification is touchingly naïve. The government that views all Indian businessmen, companies and traders with a huge dose of distrust is quite happy to repose its trust with a bunch of big foreign retailers, who are defendants in hundreds of litigation cases all across the globe. Advantage: big foreign company again….
Read the full article here.
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I mean what can go wrong in the rural sector from what they have today. My family has worked through the local mandis for almost 20 years, I can bet international retailers can never be as exploitative as the Indian supply chain as it exists. If it goes away, it is only a good thing an nobody is going to shed any tears.
Rest of the article raised some good points.
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To respond to some of the later comments. The point yet again is simple: certainly the Indian economy has a range of serious problems, including severe underemployment, the current account deficit, etc. The question is whether FDI in retail will address any of these issues. I fail to see, for instance, how FDI in retail will address the current account deficit (beyond the initial investment flows): if anything, by weakening our productive base and linking it to volatile international prices, it will worsen the current account deficit. As for rising factor costs, the benefits of real estate speculation are hardly being captured by small or marginal landowners, who in any case mostly require their land not for its value as an asset but for its value as security (this apploies equally to urban areas). FDI in retail will certainly not address this. As for the universal panacea – “government regulation” – I find this remarkable. Let’s remember that advocates of FDI in retail claim the government is incapable of regulating mandis, traders, small retailers, and of creating basic infrastructure – hence we need FDI in retail. Now apparently this very government will be capable of implementing regulations against large corporate chains and multinational investors – in order to protect disorganised, dispersed small farmers, workers and small retailers? If this was true, why on earth is FDI being permitted right now in the first place? Even if one grants all the claims about the beneifts of FDI in retail, would not the first act of such a government be to put in place these safeguards and protections – against the existing exploitation – and permit FDI then? The very fact that FDI in retail is being permitted in such a ridiculous fashion – behind the backs of Parliament when it is in session – shows that it is doing so under pressure. Indeed, it has admitted as such, and so have its supporters in the media; the sole and only justification for doing so was that corporate leaders were complaining about “policy paralysis.” Apparently a letter from 15 corporate captains is worth more than the entire house of Parliament. And this governemnt is going to regulate corporate retailers to defend those whose interests no Indian government has ever defended? Don’t make me laugh.
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What is required for sustenance must be produced, i.e supply should meet the demand in a feasible way. If anything that motivates people and encourages production should be promoted. If Indians need to find out the ways to save farmers from making suicides we need to take some steps that tell them wait, there is a way out…we need to see if there is something that our farmers miss or ourselves miss which could be learnt from others’ success. Our laziness, reluctance to learn new things should not be a barrier for experimentation.
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