10 reasons why FDI in Retail is a bad idea.

The explosion of opinion on the issue of Foreign Direct Investment in the retail sector in India has confounded most of us with dubious data, incorrect analysis and obfuscatory lobbying. Time to set the record straight. 10 good reasons why it is a bad idea.

  1. FDI in retail is a non-critical area of intervention. Nobody in urban India is suffering for lack of ‘access’ to food or grocery items. If at all it is the public distribution system that is diseased with corruption and needs to be replaced or removed. Access to food is an issue in the remote and rural impoverished areas of the country, where as the fine print tells you, FDI in retail will not be implemented. Comparative examples that try and portray an opposition to FDI in retail as regressive are not only misplaced, they are patently suspect.  [Montek Singh Ahluwalia of the Planning Commission included, who suggested that arguing against FDI in retail was like complaining that the taxis would dislodge theTonga]. To imagine that FDI in retail exemplifies a progressive mindset shames us into thinking that an ability to buy in the comfort of a twenty  thousand square feet air conditioned space is more indicative of progress than providing similar quality housing for its citizen or schools for our children. The taxi took over theTonga for reasons of speed and protection from the elements. FDI in retail projects no such benefit. We already get what we need for our daily needs through local general stores and local big format stores. The gloss of a shiny international brand name atop a store is not enough of a differential.
  1. Middlemen are key to distribution. The myth about ‘farm-to-store’ supply chain should end with the simple fact that middlemen will not be removed from the operation but that existing middle men will be replaced by bigger, more organized, more prosperous middlemen. Anyone who knows the business of distribution knows that there is nothing called a direct sale from farmer to retail, unless it is self-owned farm by the retailer. The process requires a minimum of three transactions. From the farmer to the transporter, to the distributor and to the end supplier. There are middlemen even if you make a direct purchase and underwrite the farmer’s produce and each point of contact costs something to keep his or her services going. The middleman is not an enemy of the state. The middleman is being paid for services rendered, his is not a free lunch. He is the conduit that makes delivery possible. Removing middle men, as is being claimed by votaries of FDI in Retail does nothing for the families of those who will be obliterated by the new model that will take over: the retailer will have his own middle men in the system, and that is all the difference there will be. The argument advanced by many including some farmer lobby groups that there are 4 to 10 layers of middle men between producer and retail are not only humbugging they are undermining free market movements where nobody can get in line unless he performs a function. The other charge, that a policy failure produced such layers of middlemen can be countered with a simple answer – FDI in Retail cannot remedy a policy failure. It is the government’s job to fix that, not Walmart’s.
  1. Farmers will not get better prices. The idea that the farmer will get a better price for his produce if FDI in Retail is allowed is a baseless suggestion. The open market does not work on altruism and social service. It negotiates the best for itself so it can corner the most for itself. Farmer suicides are not because they cannot sell, as is being written about by irresponsible columnists and business leaders but because they are unable to get remunerative prices for their produce qwing to poor quality produce due to lack of proper crop management or crop failure, an inability to pay back their loans or make ends meet and lose their land. To suggest that foreign retailers would be so teary eyed at the plight of farmers that they would offer a premium on produce which is available at less is plain childish. Fact is that the markets, if allowed to function without controls, will take their own route to price discovery. And remember, the more clout a buyer has, the lesser the seller gets per capita. That is a law of the free market. FDI in retail cannot do any more than local big format retailers are already doing. Those that argue that FDI in retail will bring succor to farmers and reduce prices for consumers need to explain why, when there are home grown large format retailers, that is not already the case. How can you expand on a theme when you admit that it is not working? The farmer is only an emotional hook in the pro FDI lobbyist’s scheme. The truth is that more than 70% of revenues of large format stores come from non-food items where the farmer does not even figure. All the stories in media about farmer unions supporting the move are motivated through two straight facts: lobbying with a generous dose of cash infusion into these unions by food majors and retail chains and the other more important fact – they are right about some farmers in their areas, specially Punjab getting a better deal. But the cost of that is this: big retail and food processors alter crop selection to have farmers produce to order. So, because Pepsi needs potatoes for their chips, farmers skip the Dal season and other such produce in favour of extensive cultivation and specialization towards potato cultivation. Now they are right – that particular farmer is doing well – contract farming is profitable, but in effect an entire range of products are now in short supply. Precisely why Dal and cereals and vegetables are becoming costlier by the day. This is apart from the other real problem – corporates do not like dealing with a dozen small producers. So they focus on one or two large producers and create conditions for the rest to either submit to a larger contractor or just sell the land and move out of business.
  1. Brands compete to secure market share. Market share can only be secured at the cost of another existing competitor. It is equally naive to imagine that the anomalies of predatory pricing will be taken care of once the sector is open to competition. Let us understand the idea of competition. All competition starts from a baseline price point. The base line price already exists with the current prices the farmer gets. All competition is normally over and above that base line. Nobody sells below his purchase price. But what is being debated here is the ability of the big retailer to sustain losses for a long period of time by selling under cost to dismantle competition owing to deep pockets. Brands will go on a losing spree to corner market share. That is an old principle. Walmart will sustain losses to counter Carrefour and a Carrefour will do the same to contain another competitor. In a fight of such giants, the small retailer and the kirana shop owner of today stand no chance. As a caveat, one should be wondering what the local large format stores would face and why they are supporting a policy shift that could hurt them. After all, Spencer and a number of smaller retailers hardly stand a chance in the face of a Walmart. Well the reason is simple: The only reason you hear some of them support the idea is because [a] some want to raise money from markets abroad to run their unprofitable enterprises for a little longer until they hope to break even [b] access cheaper funds which the Government and its fiscal laws have made almost non remunerative or [c] hope to be taken over and bought out. Note that the retail business is cut throat and many large-format or branded stores have already folded. Subhiksha inSouth India and Vishal and Sabka Bazaar in the North come to mind immediately. Most of the existing local large format retailers who support the idea are folks who are looking for a bail out or hoping to sell their operations on the back of decent valuations.
  1. Big Retail cannot co-exist with small retail. That big retail can coexist with kirana is a flat impossibility. It can’t because big retail alters the playing field permanently. The instruments of small retail are redundant in the schema of big retail. The grammar of big format selling influences the buying habits of people. The kirana sells on the basis of daily consumables of a middle class. The big-format pushes for bulk sales, weekly big purchases where you buy four when you need one simply because it is priced in an attractive deal for the day. The kirana and the small retailer cannot bundle promo packs because it can’t deal directly with producers. Big retail is habit altering. It is not an alternate, not an expansion of choice but a modification of the manner of consumption and sale. Big retail does not encourage balanced consumption but exists on the principle of overuse, and excess. Big retail altered the psyche of an entire generation of Americans – consumers, producers and manufacturers alike. The idea that shopping can be a weekend activity, where you load up on supplies for a week comes from a country where joint families are not known, buying fresh vegetables daily is unknown, where women don’t cook and burgers are staple diet. Weekend buying leads to storage. Which leads to oversized freezers; which leads to more frozen food, and to more heat-and-eat dishes, and the spiral of the other problems of plenty. Indians don’t consume like that and there is much to be said about buying fresh and local, as the world is now discovering.
  1. Big Retail is one big cause of food inflation. That food inflation will be curtailed with FDI in Retail is a plain lie. Food inflation has to do with supply side shortages and distribution bottlenecks that have mostly to do with government policy in each case. The advent of big retail will not induce any farmer to grow more food or make any dent in the fossilized mechanisms of food procurement and distribution policies of Government. The truth remains that agriculture has suffered for long, that farmers do not get remunerative prices and that they are unable to pay back whet they have borrowed. Food inflation is a derivative of the paralysis of government and states and nothing to do with FDI in retail. We’re talking about FDI in retail for God’s sake, not FDI in agriculture. The other startling aspect of FDI in retail is that it is being sold as the answer toIndia’s farming woes. Congress MP Jyoti Mirdha has pointed out that the FDI introduced in the agriculture sector in 2006 is yet to show any progress, so where is the basis for moving on to FDI in retail. What FDI could not do for agriculture directly, it will do through FDI in retail is a bit of a big joke.
  1. Consumers do not get better prices. Consumers will get lower prices is another figment of the lobbyist’s fertile imagination. Prices never come down. Big bazaar or Walmart, prices never come down. The argument is a facetious assault on the principle of growth and inflation. Big retail can at best sell you cheaper potatoes or five such items carefully selected on seasonal variations or bulk deals with producers cheap for only a week and no more. For everything else you buy from them, you will pay more. That is how big retail works. To qualify this, read this comment from a KPMG expert who was arguing for FDI in retail:  “To draw consumers, [big] retailers squeeze suppliers and ensure efficiencies in categories that drive foot falls. They balance it out by enjoying higher margins in categories where impulse buying is high”  [Anand  Ramanathan quoted in Economic Times,1st Dec 2011] The reason there is no data on this is because it is not in the interest of big retail or big media to support the idea. Think about infrastructure and overheads. A large format retailer, if it is not within an existing mall and aims to be the size of Walmart stores will have to put up its own air-conditioning plant, parking, galleys, staff, vans, transport, machinery and processes that simply cannot offset any purchasing bulk deals to support the idea of cheaper prices.   That prices of food items are cheaper at big retail outlets is also not without a serious caveat. Comparing prices is not the only criterion: you have to compare quality as well. Has anyone ever bought fresh vegetable produce from a big retailer – nobody will accept that quality from a local vendor. The jargon about cereals and selected stuff being cheaper is sketchy at best and the reason there is no data on this is because nobody wants to reveal the modus operandi of selective discounting by big retailers as a marketing tool rather than any real principle of lower pricing. The survey published in a newspaper is an in-house attempt which does not answer to the most fundamental discrepancy – why does every survey attempt at comparing prices of chosen commodities at kirana stores with big retail outlets: how about comparing one big retail outlet with another and explain why they do not conform to the same price principle across the board?
  1. Big Retail kills small jobs. More jobs will be created when big retail comes in is a fallacy and a purposeful falsehood. For an economy where 80% of the population engaged in trade and local retailing is self employed, how do the numbers stack up if you dislodge even 20% of that population. Does any math support the theory that any number of big retailers in a city likeDelhi will be able to support 5 lakh people who will progressively be thrown out of business due to their advent? For a government that is unable to provide employment in big cities with reasonable opportunities, the impact in smaller ones will be unmanageable. The 30% caveat that is being bandied about as a bulwark against large scale displacement of local producers is also a charade because it does not concern itself with produce but infrastructure investments that big retailers must make, [as a safeguard, in the Government’s weak words] without explaining that these could be the plywood and the roofing they use to set up their retail stores or the marble tiling and the bathroom fixtures or even the trucks they buy. So what protection is this worth? Then again, even if this were to be reworded to ensure that the 30% limit pertained to produce and not infrastructure, which gigantic micro management agency would pore over their account books to determine this on a daily or monthly basis?
  1. Big Retail is relative to Real Estate. Retail is a first cousin of the real estate industry. Already the calculators are out fantasizing about the acreage these new big format retail marts will need and the newer malls that will be coming by design around such anchor stores. Big Retail loves Big Development and vice versa. The upshot is that the already skewed real estate market will only get more out of control and housing for middle classes and the ordinary folks that much farther. Big retail creates the grounds for large scale property price hike throwing up a new spiral of inflation in real estate space – a totally unregulated, unbridled, black money haven. Another reason why the smaller retailer will have to pack up and move – can’t afford the real estate.
  1. FDI in Retail is a political hot-potato and a non-issue. The political expediency attributed to the opposition on the issue of FDI in Retail is actually misdirected and it is the government of the day which should be under a cloud of suspicion for the timing of this move. If this is about proving that there is no paralysis in governance, it is plainly a bravura act which should be set aside for the moment. On the other hand, if this passes for reform, how about we discuss instead FDI in education, a sector that holds the key to prosperity for this country and its future generations. If this is a sop for theUS and the rest of the west, let us learn from their mistakes – profligacy in consumer spend and consolidation of business are dangerous instruments in the economic life of a country. Let us not bail out those who would take us down the precise route that landed them in hell. India must decide if it wishes to trade its cultural, dietary and social habits for the old western paradigm of conspicuous consumption and whether it can stave off the easy charm of easy money and draw a new plan where the farmers are attended to immediately, incentives woven into their crop cultivation habits, offer remunerative prices which keep him engaged and allows him to prosper. This pandering to the urban consumer with the idea that he will have more choice and better pricing is a charade and its bluff must be called. The urban consumer they are talking about probably earns Rs 5 Lacs annually on average and is already spoiled for choice. If it is all about saving a few rupees per kilo on a packet of Ariel detergent, is it worth sending a man out of work for that? Can a Government which cannot provide jobs afford to argue with that? All the media support for FDI in retail is connected to their advertising potential and business cross holdings. Media houses are naturally not saddled with the responsibility of finding employment for the burgeoning population of the country and they must be excused their fit of greed. The best way to test their integrity is to ask if they are okay with FDI in media.

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Picture credit: disinfo.com

 
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Comments
22 Responses to “10 reasons why FDI in Retail is a bad idea.”
  1. Krishna says:

    1. FDI is a critical area for the benefit of people at large. It helps bring down the prices. If it doesn’t, the small kirana model will not die.

    2. What’s wrong in bringing some organization in middlemen if they can bring in more efficiencies by cutting the depth of the supply chain? And thereby pass on the benefits to the consumer. It frees up lots of people and lots of capital that can be used in other ventures and help the country grow. Nobody is claiming that middle-men will be completely eliminated. The number of middle-men will be cut-down and their operations will be streamlined. The one’s who exist, they should earn the return that is commensurate with the risk their capital (both money and ingenuity) assumes. And for heaven’s sake stop thinking you are the only smart one on this planet. Nobody will be “obliterated”. They are people. And all people are remarkable creatures in that they can acquire new skills, take up new ventures and flourish. All they need is some encouragement and faith in their abilities, which you don’t seem to have.

    3. Amul. Read the story of collective bargaining. That is where you can help, if you really really care for farmers.

    4. You have no clue about the extent to which chains like Subhiksha, More, SabkaBazaar and friends were/are clueless about operational efficiencies. And… Good, let them fight while the consumer stands to gain.

    5. Big retail can co-exist with small retail. Big retail cannot offer highly differentiated and niche products, it cannot cater to niche market segments. Because, their model relies on realizing economies of scale. That is where the small retailer can come in. Generic vs. specialized.

    6. What about price volatility? What about technologies? Such as cold-storage, better warehouses, frozen food? You are missing it completely. Do you know how much food is wasted in India due to improper storage facilities? No body is in the business of charity. In fact not even charities. The government should start by asking, what is the incentive for FDI’s to improve agricultural output?

    7. Let’s not debate about prices of products where there is lot of subjectivity, like potatoes. Check the prices of finished products at D-Mart. And try comparing them with the local Kirana store. Or even prices at Reliance Mart and check what the Kirana store has to offer. The prices at Kirana stores are far higher. Why do you need 20 Kirana stores, 5 hardware stores, 5 medical stores, 2 toy shops, 10 apparel shops… all within a radius of 400 meters, all doing the same repetitive dumb thing again and again? One well organized shop with lean operations is enough for the area. Why do you need a zonal dealer, then a state level dealer, then a district level dealer, then a town level dealer, then an area level dealer, all minting millions just because they got the rights to do so and nothing more? And this is for each brand, company, sometimes product category within a brand etc. And eliminating many of these folks is where the efficiencies are going to come from. And that’s why buying at Wal-mart’s is going to cost lower if they are allowed to source directly from the manufacturer.
    And even going by your argument, which anyways is flawed, if people are not going to pay lower prices, then at least they will not waste their time and burn petrol (which we are importing and causes green house gas emissions) running from shop to shop filling their basket. D-Mart’s and Big-Bazaars are then offering the convenience of one-stop-shop.

    8. More jobs will be created if Big retail comes in. Because the displaced dealers, distributors and Kirana shop owners, who are replete with cash, will start other ventures. And these other ventures will create job opportunities. That is how economies expand. That is how GDP of a nation expands. It won’t go up if all the people of a nation are tied up doing the same job for ever with no scope for improvements. There is already an acute shortage of labor in the manufacturing sector. Some of these folks can get in there and improve the output of the economy.

    9. Real-estate prices will come down. The reality is that most of the Kirana store owners are not paying their taxes properly. Many of them make close to a couple of Lakhs a month. And this is all black money that is bringing down the revenue for the government. And this black money is finding its way into real estate and is causing the bubble. FDI in retail will cut this black money supply. By the way, what are we comparing here? The real estate area needed for retail Vs. real estate area that is needed for residential purposes? Is there any comparison there? By the way, all the small undifferentiated Kirana, medical, apparel etc. stores that will perish will be adding massively to the supply of existing real-estate bringing down the prices.

    10. In reality, it’s a non-issue for political leaders. Its definitely an important issue that needs the support from common people. Yes, FDI in education should happen. But this is not happening because of govt. institutions like AICTE, UGC etc. that want to tightly control education. And private players in education was not allowed until recently. Now this has become possible but only in a very few states.

  2. Krishna says:

    I tend to agree with Gaurav, Rajendra and others and disagree with the author. Its ‘creative destruction’ that has to be encouraged and nurtured. Why should somebody be protected? Just because they had the capital and they moved in before others did? Just because somebody got the dealership for say Dabur products in an area, does not mean he/she should be protected for ever so that they can make a few lakh rupees each month. While the consumers pay high prices to feed the inefficient supply chain. If somebody has a better idea to bring in more efficiencies to the suppy-chain that helps millions of consumers, he/she should have the freedom to pursue it. That is creative destruction.

    Its protectionism that’s the most unhealthy to any economy. And usually the perpetrators of protectionism are the ones who stand to loose their cozy money minting machines. That is, the established businesses.

    If big retail kills small jobs, it does not mean the people who lost their jobs are going to stay unemployed for ever. They will soon pick up other skills, enter into newer ventures and flourish. Freeing up and improving the productivity of the labor force is central to the progress of any nation. In the same vein, why don’t you oppose the internet where you are happily publishing your retro ideas? Email is killing the humble post-office and along with it millions of jobs. It’s killing the jobs of tens of thousands at BSNL, MTNL employees. It’s killing the media.

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