A case for Organized Retailing:

The Bhart-Walmart Cash 'n' Carry alliance with a 50-50 joint venture arrangement is now official. There are mixed emotions around this announcement with traders crying foul and FMCG people welcoming the move. While the traders will be affected on grounds of relative combined buying power of the duo and consequent fall in their own profitability, FMCG players like HUL are optimistic about the huge volumes this organization will generate.

While doubts have been widely cast on whether Wal-Mart-like retailing would work in India, it is altogether another question whether dewy-eyed Indian players are not already showing ambitions of emulating the US retail behemoth. Subhiksha and Reliance Fresh are only waiting to see the results of their low-hanging-fruit experiments with retail models, before launching off on bigger formats. APMCs in Bangalore protested earlier this week, governments move to amend APMC act to accommodate contract farming. Reliance collection centers in proximity to farmers have already induced a lot of fear in the traders. Indian retailers can play but foreign players cannot? Seems like we are deliberately un-leveling the field here.

While Kerala has announced on national television that it will do anything to prevent Reliance from entering God's own country, new models are being experimented in parts of Mumbai and some towns in Gujarat. In order to beat Reliance at its game, scores of store owners have formed clusters within parts of towns in order to increase their buying power. Each of these clusters will ensure similar formats so that locals in a part of the city get same price, assortments and layouts in all stores in a cluster. On closer look this is nothing but the bottom-up evolution of a chain. If the likes of Reliance pump money from their coffers and roll out store designs from their boardrooms, local merchants are pooling in together to form their own little corporation (co-operative?). If the clusters have a uniform design and operations are directed by a group of cooperative-heads, the personal touch of the local kirana owner is anyway lost. To maintain their cash flows (cooperatives can be assumed to have no huge caissons); the kirana owner's personal credit policy disappears. With the corporatisation of the local cluster (bound to happen), the individual kirana owners will lose their ownership. They would be encouraged to sit and home and count their share of the profits. Whether this model is sustainable, only time can tell.

The current times can lead to germination of Indianised models of organized retailing. It is possible that something innovative may come out of the churning happening right now. Kerala's might be a knee-jerk reaction and in time laws might be amended when the success of oragnised retailing generates happiness in the public in the rest of the country. But, these are early times and it may be several before any such things happen.

Now coming to a basic question...will organized retailing succeed in India?

Firstly, the need for organized retailing will keep the ball rolling. Not as self-defeating a statements as it seems, since India is probably one of the few countries where in one corner farmers kill themselves unable to make profits from their surplus (causing too low selling prices), while people in another die waiting for rations to arrive. FAO has capacity to store, but not the capability to maintain its storages. Public distribution system is a shame, what with kerosene, sugar and grain mafia degrading local distribution efforts. More than 35% of the produce, especially in grains and staples rots and gets wasted. There is a dire need for better mechanism to move food grains from source to destination. Oraganised retailing can provide just this bridge.

Secondly, the prices of commodities can be more controlled with better facilities and distribution systems that will be set-up by the big players. Investments made by such retailers in storage facilities will ensure constant supply of goods, especially foods, throughout the year. Fluctuations in prices (typically, they shoot up in monsoon) will be reduced and more uniformity in price and quality can be achieved. This may not happen overnight, but some form of stability in each of these dimensions can be achieved with a sustained effort of organized retailing.

APMC regime is largely hierarchical. Between the farmer and the consumer, one can expect at least 4-5 levels of agencies or middlemen, who add to the cost of goods- especially grains and fruits. To both the ends- farmer and consumer- there is little benefit. Reliance Retails has set-up collection centers in proximity to producers. One must remember that farming in India is not land intensive as in North America and some other parts of the world. In India, it is labor intensive with large number of farmers owning small patches of land producing, in some cases, largest quantities of fruits and grains in the world. To an average farmer, a reduction in the cost of transportation will make a large difference. So, instead of going a longer distance to an APMC Mandi and auctioning his produce, he would prefer to go the short distance to a predictable-price-offering at a nearby Reliance Collection Center. This ploy may already be smelt by APMCs and they may (being a government-run agency? But, let's give them the benefit of the doubt) set-up their own proximity mandi's or react by providing predictability in pricing, but in the end it will be only competition where consumer and farmer would benefit. This can be third benefit of the organized retail network.

Private sector players, and not in the least foreign chains, have the muscle and the know-how to set-up efficient supply chain systems, invest in forecasting and logistics systems to make 'all that' happen. The crawling and creeping corrupt public system has not done much in this regard in the last half-century of its existence. Yes, the e-governance is just taking off, but the attitudes and motives of those who run the system require a lot of overhaul, before any sweetness can be derived from the e-governance efforts.

Lastly, an economic benefit of allowing foreign retail chains in India is the increase in volume of exports. Currently, Wal-Mart sources about $600M from India. Compare that with USD 27B that China exports to only Wal-Mart. If Wal-Mart opens stores in India, the giant's India sourcing would grow multiple folds in a couple of years. And Wal-Mart is only the most significant example.

Flip side of the coin... (Next time).