शुक्रवार, 17 जून 2011

खुदरा व्यापार में बहुराष्ट्रीय निगमों का खेल-शेखर स्वामी


भारत के खुदरा बाजार पर बहुराष्ट्रीय कंपनियां खुले तौर पर हमला बोल रही हैं। देशी दुकानदारों का धंधा तबाही की ओर जा रहा है और केन्द्र सरकार खुलेआम बहुराष्ट्रीय निगमों की हिमायत कर रही है।अन्ना हजारे से लेकर विभिन्न राजनीतिक दल इस मसले पर चुप्पी साधे बैठे हैं। हिन्दू समूह के अखबार "बिजनेस लाइन " में शेखर स्वामी ने खुदरा उद्योग की सुंदर मीमांसा की है। हम यह लेख साभार दे रहे हैं-

In the first part of my series yesterday, I had stated that big multi-brand retailers in the West like the Walmarts and Tescos and Carrefours routinely mark up the prices on their entire basket of products by a minimum 2x, and this goes as high as 9x, compared with the retail/wholesale mark-ups in India.

The point that was made was that the efficiency of the channel should be determined by how much they charge the end consumer by way of mark-ups (which is the aggregate of the costs incurred and profits made by the channel). By this measure, I had concluded that the Indian distribution chain comprising wholesalers, distributors, stockists and retailers is among the most cost-effective and efficient in the world.

How can this possibly be?

NO CONSUMER CHOICE

Anyone who has followed business practices and rules will know the following simple truth about markets. The more consolidated a market is, providing less choice to the consumer, the more the retailer can mark up and charge ever higher prices. In reverse, the more fragmented a market is, providing ever more choices in terms of sources to the consumer, the lesser is the mark-up, as the retailers have to charge the least possible amount to be competitive and stay in business. When big multi-brand retail gets into a market, their game plan is to eliminate competition and build market clout. Let us look at two examples. In the US, the retail market size (excluding food service and automotive) was estimated at $3 trillion in 2009. Walmart clocked over $300 billion in US sales, for a remarkable 10 per cent market share. Such consolidated power, acquired over time, is used to squeeze cost on the supplier side, and improve mark-ups on the consumer side.

Walmart aims to be cheaper than other retailers, but its end goal is still to maximise returns to its shareholders. (People interested in learning about Walmart can get the book How Walmart is destroying America and the World… by Bill Quinn.)

UK's Tesco clocked sales of £61 billion ($99 billion) last year, and has a 30 per cent market share of the UK grocery store market, according to Wikipedia. This level of consolidation is unprecedented in the retail world, giving Tesco extraordinary power over both suppliers and consumers. A grocery shopper in the UK has at best a choice of two or three retailers in her vicinity (Tesco or Sainsbury or maybe an Aldi). This means, notwithstanding promotional offers, the price is always a premium, and retailers' power over the consumers' shopping pound is enormous. Their power over the manufacturer is also enormous, but that is another story altogether.

INDIAN SCENARIO

Compare this with India. We have dozens of small retailers in our immediate neighbourhoods vying for our shopping rupee. There is intense competition. Prices and mark-ups tend to be the lowest possible. We have a near-perfect market structure, where thousands of producers are providing goods to tens of thousands of retailers who are serving millions of consumers. No one really has the clout in the market to charge extra mark-ups. This is a ground-up phenomena, created by the energy and entrepreneurship of millions of small businesses. The government has played no role in organising this. The difference in market structure is illustrated in the visuals alongside.

If big multi-brand retail is allowed to enter India, what happened in the West will be repeated here. The story is well documented. A big retail outlet will be launched in an area with big fanfare. There will be lots of promotions and predatory pricing below cost of many essentials for extended periods. (Walmart has an expression for this called “Stomp the comp”, meaning sweep aside the competition.)

Consumers will be attracted by these deals, and will flock to the store. Small retailers cannot sustain loss of business for long. Most of them will fold up against this assault of big retail. It has happened without fail in every market. As the competition is wiped out, the big retailer gains clout over the suppliers and the consumers. They then get pricing power, gain control of the market, and steadily increase the mark-ups over time for maximising profits.

Against the background of the information above which is available in the public domain, one cannot help wonder how FDI in multi brand retail has been recommended by the committee, led by the Chief Economic Advisor to the

The news came out recently that the committee formed under the Chief Economic Advisor to the Government has recommended to the Cabinet that foreign direct investment in multi-brand retail (like Walmart, Tesco, Carrefour and others) should be permitted. As with any committee making such a recommendation, this one has gone on to justify why FDI in multi-brand retail would be beneficial to the country. The committee has talked about investment in supply chain infrastructure that is supposed to reduce wastage. It has stated that employment would go up, and farmers would somehow get a better pricing for their crop.

While the reasons advanced by the Committee are questionable and would hardly stand up to close scrutiny, I would not enter that debate here, since these reasons are not central to the issue. There should be one main question that should be posed to determine if FDI in multi-brand retail is justified — will such multi-brand retail reduce the cost of distribution from the producer (be it farmer or manufacturer) to the end consumer?

In marketing terms, this is known as the channel cost. In layman's terms, we can simply see it as the cost of moving/storing/financing/selling incurred between the point of production and the point of final sale to the consumer. This is the main measure of economic efficiency that we should look at.

Increase in cost

Let me answer this upfront. Multi-brand retailers like the Walmarts and Tescos will increase the cost to the consumer substantially over time, compared with wholesale/retail practices in India. There is plenty of evidence to prove this conclusively.

The increase in cost is not by some small percentage. Multi-brand retail mark-ups are at a minimum 2x, and as high as 9x more, compared with the retail/wholesale mark-ups in India. This cost is built into their model, and it is the premium paid by the average consumer in the West to get their everyday items of consumption.

Let us compare the channel cost of four categories of daily-use products that will be available through multi-brand retail:

Fast moving consumer goods like food, personal care products, toiletries etc;Clothing — textiles and readymade garments;

Over-the-counter pharmaceutical products;

Cookware/kitchenware small appliances.

Consumer goods: The distributor/stockist margin in India ranges from 4 per cent to 8 per cent, and the retailer margin ranges from 8 per cent to 14 per cent. The margin is on manufacturer's prices. They vary depending on company volume, market clout, type of product and so on. The total channel cost incurred by the distribution chain in India thus ranges from 12 per cent to 22 per cent.

In the US and Europe, the Safeways and Krogers and Tescos mark up this category of products by 40 per cent on cost of goods, depending on product type, volume, demand, exclusivity and so forth.

The channel mark up is 2x to 3x more than Indian channel/retail costs. We should not be misled by ‘Sale' prices and ‘loss-leader promotions' that they routinely employ to draw the customers.

Clothing/garments: In the Indian textile business, the combined wholesale plus retail margin ranges from 35-40 per cent on the ex-mill price. In the readymade garments business, the margin at retail in a brand outlet seldom exceeds 30 per cent of ex-factory price. Compare this to a Macy's or Marks & Spencer.

These retailers routinely mark up by 2x to 4.5x, the price at which they procure the garments. Then they offer ‘Sale' discounts of 15-30 per cent. Even comparing the ‘Sale' price, these retailers' mark-ups are 2x higher at the lowest end of the spectrum. Routinely, their mark-ups are thus 5x to 9x of what the retailers in India charge.

OTC Pharmaceuticals: In India, the pharmacies and chemists are better organised as a trade body, and the supply side is highly fragmented. Therefore, they enjoy better retail margins.

Even so, the retail chemist's margin in India is at 20 per cent. Add the distributor/stockist margin of 10 per cent, and the C&F agent's cost of 4 per cent, the total channel cost is a maximum of 34 per cent of ex-factory price. Compare this with a Walgreen's or CVS pharmacy in the US, or a Boot's in the UK. These retailers mark up the OTC products by 2x or 3x or more, and then offer some items on ‘Sale'. These big retailers' mark-ups are 6x more at the minimum, as far as channel costs go, compared to India's pharmacies.

Cookware/kitchenware: India's channel costs for this category are lower. The combined distributor/retailer margin in India for products like pressure cookers and cookware is less than 30 per cent, out of which the retailer retains 10 per cent to 15 per cent only. For the same category of products, retailers such as Walmart, Bloomingdales and Sears in the USA would routinely mark up the merchandise by 100-200 per cent of landed cost. Even ‘On Sale', at the lowest end, the channel mark up is 5x what they are in India.

Indian distribution efficient

All this evidence, available freely, suggests that the Indian distribution system, as it has evolved over the years, is among the most cost-effective and efficient in the world. For sure, our markets and bazaars do not have the polish of a mall in Europe or the US or Japan. But to the average Indian housewife, they offer remarkable value, and help her get along on low incomes. It is this balance that the proposed FDI in retail will upset over time.

Talk of investment in supply chain and back-end logistics only diverts attention from the main issue of total channel cost. The government committee should focus on what is in the best interest of the average Indian, and not be swayed by industry lobbies and pressure from foreign governments. Our markets are highly efficient, driven from the bottom up by the self-interest of millions of small traders and merchants. Let us not interfere with this and fall into the Western trap of multi-brand retail.

Government. Some of the criteria for investment are also inexplicable. For example, the committee has specified a minimum FDI investment of $100 million. That is like asking an Olympic heavy weight lifter to lift a 10 kg weight to qualify! While I respect the senior minds that have looked into this, I would venture to suggest that the role of policy in this matter should be to ensure the common good of the broadest base of the Indian population over an extended period of time measured in decades and not in years.

RECONSIDER POLICY

Policy makers should not rush to please Western governments that are lobbying hard to open up the Indian retail market. Opening FDI in multi-brand retail will ill-serve the Indian retail sector and the hundreds of millions of households struggling to make ends meet.

When the global financial crisis erupted in 2008, India was protected because the banking industry was not exposed to risk. The situation is similar in retail. Let us not bring in the bad oligopolistic structure of Western retail into India, a move which will really be irreversible and hold Indian consumers captive for times to come.

(The author is Group CEO, R. K. SWAMY HANSA and Visiting Faculty, Northwestern University, US. The views are personal.blfeedback@thehindu.co.in, बिजनेस लाइन से साभार,16 एवं 17 जून 2011 को प्रकाशित)

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