02 December 2011

FDI in Multi Brand Retail

Did you know that for every cauliflower that you buy at Rs 10 a piece, the farmer who grew it gets only Rs 3! Approximately 70% of the price we pay for our aloo, tamatar and pyaaz is ironically eaten up in the grossly inefficient supply chain through which the aloo moves from the farm to your shopping cart.

The debate on FDI in multi brand retail still rages on, both inside and outside Parliament. Way back in 2004-05, in B school, I and two other guys had presented a mini project titled “Should Wal-Mart enter Dubai?” Not many people know that yours truly did his MBA in Retail Management (sometimes even I struggle to believe it!). This pedantic pedigree, although of no use to me today, still offers me a vantage perch from which to objectively view Indian retail landscape and an informed base to frame my opinions on. Without any more preludes, let me unequivocally proclaim that I am overwhelming in favour of opening India to foreign direct investment in multi brand retail, with requisite riders.

Any decision making process should involve the steps 1) Gather information, general knowledge on the subject 2) Collect as far as possible accurate data 3) Convert data and information into insights 4) Synthesize insights into pros and cons 5) Consider probabilities of occurrences for these pros and cons 6) Weigh the pros and cons 7) Decide. The detractors and naysayers from the anti-FDI brigade are politicians and lobbyists who are simply playing to the gallery. Most of them are not following the simple step 1 to 7 process above, instead using unfounded presumptions to leapfrog at their decision

Let me assay an explanation (using the steps 1 to 7) how I have arrived at my unequivocal, overwhelming conclusion. In order to do this, let us see how the pre FDI and post FDI supply chains will look like.

Pre FDI (current): Farmer – Commission Agent – Govt. regulated APMC Market Yard – Trader – Wholesaler - Kirana Store – Consumer

Post FDI (future): Farmer – Wal-Mart owned/operated Market Yard – Wal-Mart store – Consumer

The argument from the anti FDI camp stems from a simple comparison of the pre and post supply chains. According to them, the middle part of the chain will be eliminated. There are about 1-2 crore kirana stores in the country. Similar magnitudes of numbers can be contemplated for the traders/ functionaries at the market yard. This is the basis of their doomsday outlook. It is not entirely wrong but importantly not totally correct either. In fact, the truth leans towards the latter.

If we try to understand what value does each step or each participant in the supply chain add, one can easily see why the anti FDI argument stands on weak ground. Let’s begin with the farmer, who in all probability adds the maximum value as an originator of the chain. He produces the crop and gets a price for it. Next in line are the commission agents. These are simply aggregators of the crop who operate under a license from the government controlled Agriculture Produce Market Committee (APMC) mandis or market yards. Their commissions are also decided by the government and typically varies from 6-9%. Although they may perform several other activities as well, these agents primarily add value by aggregating the crop produce from several distant villages and farms into the nodal mandi or market yard. Next in line is the market yard itself with its multitude of participants. Each market yard, apart from its organization hierarchy of betel chewing, tambakhu spitting govt. babus, also has weigh men or tola and laborers or mathadi, The weigh man’s (also authorized by the state governments) job is to simply weigh the crop accurately with standard weights and measures, certify the same and take a fee in return. That’s it! The system has engendered highly unproductive job roles. The labourer or mathadi as the name suggests, carry the sacks or lots of grains on their head for loading/unloading from trucks. As an aggregate ecosystem, however, the market yard does add immense value. It helps in collecting, grading, sorting, weighing and price discovery of the farmer’s produce. Next in line are the notorious traders. These simply buy from the commission agents/farmers and sell it at a profit to the wholesaler for onwards distribution. The plethora of malpractices which afflict our agricultural landscape e.g. hoarding happens at this step in the supply chain. Naturally this becomes the strongest link in the chain, which means a powerful lobby, which means a demanding vote bank. The political parties (namely BJP) who derive substantial support from this trader community are naturally opposed to bringing FDI.

If we stop here and try to understand the impact of FDI on each of these market participant based on the value they add, its clear the traders, commission agents, wholesalers will get hit the hardest, in that order. The weigh men, the bonded labourer by virtue of services they give, will simply get absorbed in the new world.

The last link in the chain – the ubiquitous galli ka kirana store needs special attention and discourse. What is the value proposition which the neighborhood mom & pop stores offer? Superior customer relationship, free home delivery, credit facility and convenience of being around the corner. The Wal-Marts and Carrefours of the world can not even remotely match these qualities of the kirana store. Hence, it is a foolishly obstinate argument which states foreign retailers will wipe out all kirana stores. Even from a pure marketing angle, I would disagree. The market segments which each format caters to is so distinct that they can both happily co-exist for decades till India’s growing economic prosperity finally pushes the population in the lower rungs of our income pyramid firmly upwards. Wal-Mart will never open shop in a Sadashiv Peth in Pune or Indiranagar in Bangalore or Bandra in Mumbai. They will typically locate themselves on peripheral ring roads where real estate is cheaper. While it is true that some kirana stores will loose out, but those numbers will be dwarfed by the sheer scale of employment which a Wal-Mart will generate.

That is the good side, there does exist the bad side too. One genuine concern is the fear of oligopsony. An oligopsony is a market place with too many buyers and very few sellers, something like a cartel. One scenario from the anti FDI camp which deserves merit is initially everything will be hunky dory for the farmer who will get higher realizations and the consumer who will get wide choices; but after 5 years the market will witness a cartelization and the re exploitation of the farmers. This is where the ‘rider’ part is so critical in India’s FDI policy. The Congress’ current proposal is at least an attempt to avoid such possibilities. Commerce Minister Anand Sharma even hinted at an independent regulator for retail, if the need such arises. He was pretty clear when he agreed to such a possibility and said we would have to make course corrections along the way, but we won’t know that until we do it in the first place!

There is one last point which in my language, I call – ‘aspirational benchmark’. This point has been largely ignored in all ongoing polemics on this issue of FDI. India is a poor country. Vast, unimaginable numbers of its population are still in the metamorphosis of being upwardly mobile. The process has been excruciatingly slow. If the millions of Indians cannot go abroad and see how the Wal-Marts work out there, why shouldn’t we bring the ‘foreign world’ in our back yard and show it to our people. Just a few days ago, MORE hypermarket store opened near here where I live. Owing to its location which is in close proximity to a lower middle income population, every other day I see scores of young and old take their first tentative steps on the escalator in the hypermarket. The joy on their faces from experiencing something new is priceless. I see ragamuffin schoolgirls with unwashed faces, scraggy hair squeaking in delight at their ‘access’ to a whole section of imported chocolates, even though they cannot buy it. I see poor people learn to use the shopping trolleys which they ‘own’ for the brief period they are in the shop. These are aspirational experiences for the lower rung of our population.

That is one more mouth to the already deafening din of voices on the FDI issue. These are my views; we live in a free country so everyone is entitled to one. I hope this policy gets to see the light of the day. I would love to re visit this article after 10 years with benefit of hindsight to ascertain the 2011 Manmohan Singh led Congress government’s Foreign Divine Investment or Foreign Doomed Investment

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Blogger NN kuchh to bolti...

So there is mulch in the system.

What you call inefficiencies in the supply chain are jobs that pay. Why do we need a Wal-mart to come and "create" these jobs? Everybody knows Wal-mart is a pathetic paymaster. Do you really believe you, the consumer, or the farmer will get the benefits of that 70% cost saving?? Your international retailer is still going to buy the gobi at Rs.2 and sell it at Rs. 10. pay the employee 50 paise. and send the rest home.

The fears of the local grocers of being put out of business are also not unfounded. Towns in the US are still fighting cases against wal-mart for ruining their economies.

Finally, you're description of the current state of retail is restricted to just one supply chain. There are other branches like your reliance fresh'es, spencers, d-marts, big bazaars, Metros etc. Do you think they do their sourcing the same way? I do my veggie shopping at a local mandi here. Some of the guys that sell there grow their own fare - nothing gets fresher than that. Hey and that's an experience for me greater than going up an escalator in a mall.

Saying opening the market for FDI's will solve our problems is like saying, we cant fix it. There are simpler solutions. An inefficiency in the market is just a beautiful business opportunity. I say we oppose this FDI nonsense and write a business plan. Whatsay we put that "pedantic degree" of yours to use?! :)

10:17 AM  
Blogger 666 kuchh to bolti...

@NN - I never knew grandmothers can be so naughty! No problem, I am happy to reverentially provide counter arguments against your points

1. "Your international retailer is still going to buy the gobi at Rs.2 and sell it at Rs. 10. pay the employee 50 paise. and send the rest home" - did u miss my with requisite riders? In order to avoid this, I have said later on that its crucial the government puts the right policy framework oiled carefully to the last nut and bolt. Secondly Wal-Mart may be a pathetic paymaster in US or developed world. In India things are going to play out differently. Labour laws in India are the legendary bane of all MNCs!

2. "The fears of the local grocers of being put out of business are also not unfounded. Towns in the US are still fighting cases against wal-mart for ruining their economies" Again comparing an apple with an orange. Its completley misplaced when you use US parables to fortell Indian eventualities.

3. "Do you think they do their sourcing the same way?" - Yes, in majority states the current APMC act allows agriculture produce to be sold ONLY in govt regulated market yards. So our reliances, big bazaars, in these states, follow the first supply chain which i have shown

4. "I say we oppose this FDI nonsense and write a business plan. Whatsay we put that pedantic degree of yours to use?!" - I would say we support this FDI nonsense and then write a business plan :-)

10:52 AM  
Blogger NN kuchh to bolti...

hehehe, yes, yes, only grandmothers have the time. so my serve?

1. really, govt regulation? isn't that the cause of the mess in the first place? btw you missed the first question.

2. if you cant learn from the past, then you cant learn. next you're going to say just because coke and pepsi killed local colas purely through money muscle is also irrelevant. What you are calling a parable, Sir, is a case study. You will never find a case study for exactly the situation you are in but you've got to draw parallels.

3. So if the rules of the game are flawed, why would it be different with a new player? Won't the APMC act apply to the FDI retailers too? if the govt is bending the rules for the FDIs why cant it do it for the locals? (genuine question)

1:56 PM  
Blogger 666 kuchh to bolti...

@NN - give me a case study which objectively proves that the jobs destroyed are greater than the jobs created in any of the South Asian countries like Thailand which have opened 100% FDI - and i will read it with interest. Dont even talk of what Wal-Mart does or does not do in the US.

your last point is really a good one and yes genuine. And here in lies the tragedy. let me answer this in bold letters to overemphasize. FDI IN RETAIL IS USELESS IF THE STATES DO NOT AMEND THEIR RESPECTIVE APMC ACTS TO ALLOW RETAILERS (FOREIGN OR DOMESTIC)TO BUY DIRECTLY FROM THE FARMER. In essence, the real power to implement is with the states and not the centre! In a democratic environment, those few states who see value in this will go ahead and amend their legislations, those who do not will not! Why should there be a blanket no FDI for whole country.

4:20 PM  
Blogger NN kuchh to bolti...

:D..i resisted replying.

Agar milega to i will definitely share. Par all i'm saying is India can create those jobs without FDI too, nobody else needs to "create" them. And as you pointed out too, the only road block is the legislation. Toh let's fix that na! table toot gaya hai to naya kursi se kya hoga? table theek karo na! Fix the APMC act and the hoarding issue.

And why do we hate middle men so much? Not all jobs need to be value additive in an economy. And with our population we need to tolerate a little more of such jobs in the market. We need the mulch.

I'll rest my case here. Anymore discussion on my part with just be iterative, as it already has become.

1:13 PM  

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