The Truth vs Hype of Big Retail

Foreign Direct Investment (FDI) into multi-brand retail has been put on hold. But in the brief window that it almost became a reality, a fierce debate broke out, with wildly opposing claims. This is ironic, given that every claim made about its benefits or risks can be tested against the experience of almost ten years of Indian organized retail, which closely followed the western model. We take a hard look at six questions that surface repeatedly: from whether big retail helps farmers or brings down prices? To whether big retail works in India at all?

New Delhi:Has big retail worked in India?

When India's first modern retail stores opened for business about 15 years ago, they triggered breathless headlines.

But today, organised retail is only a tiny fragment of the retail market and most big players are struggling to break even.

Reliance, the biggest player in modern retail has posted a net loss of Rs 44 crore.

Reliance Fresh: 1050 Stores
Loss in 2010-11: Rs 44 crore

As for Big Bazaar, the next largest chain, its parent company has debt on its books of over Rs 4000 crore.

Big Bazaar: 214 Stores
DEBT (Future Group) : Rs 4352 Crore

The Shoppers Stop chain of stores posted a net loss of Rs 1.5 Crores in 2010-11.

Shoppers Stop: 14O Stores
Loss IN 2010-11: Rs 1.5 Crore

Aditya Birla Retail with its chain of More brand grocery stores is still loss-making even after 4 years.

Aditya Birla 'More : 580 Stores
Loss-making, Looking for investors

Some like Subhikha, which had at one time more than 1500 stores has shut down altogether.

Subhiksha: 1600 Stores
Has shut down

And the oldest modern retail chain - Spencers' owned by the RPG Group has posted almost Rs 200 crore loss this financial year.

Spencers: 220 Stores
Loss in FY 2011: Rs 170 crore

Which is why India is one of the few countries where Indian big retailers actually want their foreign rivals to come in. They claim it will bring in more funds.



Kishore Biyani, CEO of Future Group says, "I think the policy, the way it was framed was a win-win policy. The economy is going through a difficult phase, you can't just raise equity today in this market. For me I adapt 2 and a half million square foot every year. We have a capital outlay of more than Rs. 1200-1300 crore.  Capital is cash."

Experts say this is an indirect way of saying that the global big boys will buy out some of these struggling Indian companies.

Rajan Mittal, Vice Chairman and MD, Bharati enterprises says, " I think clearly in India when they come in, they will look for partners, as we already have. While the Cash-n-Carry as we call it, the model where 100% FDI is allowed, most of them chose...if you see Tesco, Carrefour or our partner, they're looking for it and they will look for Indian partners." 

But even if they do buy out or partner with Indian retailers, can the Wal Marts and Carrefours succeed? Some say the foreign players will do better, because they only do retail, unlike Indian corporates like Reliance or Birlas who don't understand retail. Even then, there are certain challenges of the Indian retail market which apply to all players regardless of nationality or experience.

Arvind Singhal, Chairman of Technopak Advisors says, "The single biggest challenge for any big box retailer or for any retailer of any size and scale is how do you find affordable real estate for retailing operations. Most parts of India just don't have enough space to start with and whatever limited real estate is available the pricing of that makes it very tough for any business to make any money out of."

And so is the Government's figure of foreign retailers waiting to invest $600 billion somewhat unrealistic?

Arvind says, "To use a cliché, the silence would be deafening as far as this so called rush of retailers and investors from other parts of the world is concerned. If we just look into the overall FDI record of India, whichever sectors we have opened up for major investment from overseas, our infrastructure sector has been open for investment for quite some time, our power sector has been open for investment for quite sometime. We haven't exactly seen a stampede of investors into India because merely allowing them to invest in India is just a starting point."

Will small traders go out of business?

The loudest and most vocal opponents of FDI  in retail are small traders who say they will go bust.

They staged similar, violent protests when the first Indian retail chains opened.

There have been many surveys over the years of the impact of organised retail on the small trader .with varying conclusions. Generally they agree that in the initial few months, small traders in the vicinity of modern stores took a hit but once the novelty wore off, things went back to earlier. We attempted a quick straw poll of our own this week in 4 major cities and found that the Indian dukaandaar after almost a decade of organised retail is largely unruffled.

Delhi:

A fruit vendor, near Big Bazaar, Wazirpur, says, "No, nothing like that, our business is as usual. We give our regular customers a good deal so they come to us."

Another, just outside a Reliance Fresh outlet in Zamrudpur says, "There is no loss. We are doing our business, they are doing theirs."

When asked if his regular customers have shifted loyalty, a kirana store owner in Zamrudpur says, "Maybe a small percentage have gone, not very significant."

In the Paharganj locality which too has a Reliance Fresh, a kirana owner says, "Those who want to go can go but our permanent customers will come here."

Chennai:

In Mylapore, near a Reliance Fresh outlet, a hardware store owner did not seem very fazed by competition though admitted to losing a little of his margin. 

Mumbai:

Near Dadar's Sahakari Bhandaar store, a general store owner says, "In the beginning there was a little but not anymore."

While a fruit vendor in Breach Candy, near a Reliance outlet says, "Business is the same as earlier."

Bangalore:

In Banaswadi locality near a Reliance Fresh, owner of a big general store says, "Reliance and all have not affected us, in very small ways only."
 
This week, NDTV's Vikram Chowdhury filed a report from Ludhiana: a favourite of organised retailers, because they can easily source fruits, vegetables and dals from  Punjab's well organised farming sector.

He reports that 4 years ago, there were more than two dozen retail outlets chains in Ludhiana but  several have shut down and the local Kirana store has upgraded itself.

Shivani Mehra, a regular customer at a local Kirana shop says, "We get a lot of facilities here.  It is close to our house, malls are very far off. We have all facilities, benefits, discounts as well as all the services. We get everything here."

Quite apart from anecdotal evidence, if any empirical proof is needed of the tenacity and innovativeness of the Indian shopkeeper, government figures say that the rate of growth of modern retail in India  has actually fallen from 27% to 15% between 2005 to 2009, while the unorganised retail has maintained a steady growth of 15% in the same period. This calls into question both the government's logic of the growth prospects of big retail in India, as well as the arguments of the traders associations who oppose it.

When asked about the number of small retailers that have shut down due to big players, Praveen Khandelwal, Secretary-General of Confederation of All India Traders' Association is unable to give even a rough figure. He says, "Well there is a basic difference between the corporate retailers and that of global retailers. Well there was a study, there was a visible impact on the small retailers, to the extent of 30%. I mean shutting of the shop is not the only thing."

The bottom line is that modern retail has not nudged out the small trader. To quote from a Cornell University study, "Retail in India is a complex mosaic of diverse small scale actors, including itinerant vendors, government outlets, cooperative markets, and small-scale corner stores. The modern retailer, so far, is a small fragment of this mosaic."
    
Will big retail help farmers?

As evening falls, we enter a village in Haryana, in Sonepat, on the outskirts of Delhi.
This is a farmer's collection centre, set up recently by Big Bazaar, to buy vegetables directly from farmers.
Our guide is K. Radhakrishnan, who set up India's first retail store for Spencers, has worked for Reliance, and now works for Big Bazaar.  
He says, "We are in the heart land of very fertile area. Abutting this village about 30-40 km radius, a lot of horticulture happens."

In the past, the villagers would take their produce to the nearest mandi and most Indian retailers would buy from there.

But now be it Reliance, Bharati, or Big Bazaar - they have set up local centres to source goods directly from farmers, after taking permission from Mandis.

The famers say they have to travel less, and get a price close to the mandi price.

Speaking of the benefits of selling produce here one farmer says, "We come here in the morning and can leave in 3-4 hours while the Mandi is in Azadpur, Delhi."

Another concurs, "Our time gets saved. Going to the Mandi takes time and is inconvenient. Here after weighing we can leave. That's the benefit."

At the nearest mandi the farmer may get the same rate as he does from Big Bazaar, but he also has to pay the commission agent as well as transport.
 

In Delhi's Azadpur Mandi for instance, a kilo of Gobhi sells for Rs. 6.75, but the farmer pays a commission of 0.40 paise per kilo, transport cost of Rs 3 a kilo, so he only makes about Rs 3.35 a kilo.

Mandi Price of Gobi: Rs 6.75/kilo
Commission: 0.40 paise kilo
Transport: Rs 3/kilo
Farmer makes: Rs 3.35/kilo

At the mandi, there is also loss through wastage as we found in Vashi mandi in Mumbai and in Azadpur in Delhi.

While at the Big Bazaar centre, farmers get tips on how to reduce wastage.

Pointing to a cart brought in by a farmer Radhakrishnan says, "This is a good example of how we should not bring it. The next step that we are going to do is send our crates to the farm. There is still destruction that is happening here because of the way its come and the way its piled up."

Orgainsed retailers say they have reduced middlemen, using local employees who travel into villages to contact farmers.

Introducing his team Radhakrishnan says, "Maruti is our head of produce and Manik our field officer. They actually work in the field and they are in touch with them the whole day. They have a schedule of visit to the farms. They are employees of the Future Group."
But this is tough going. Barring a few states, India's landholdings are too fragmented for organised retailers to get into large contracts with individual farmers.

Average landholding in India: 0.67 Acres

And so they have to follow the model of informal agreements with large groups of farmers.

Radhakrishanan says, "No we don't have a formal contract. The farmer knows every week, how much he can actually bring and we tell him roughly how much he can bring - 300-350 kilos. Sometimes he doesn't have the quantity so we buy from somebody else. And if he has the quantity, we buy from him. And he knows the payment comes on a scheduled date and the weighment here, you can see its actually done on a digital scale. So he gets a weightment and he gets a receipt here and now and he gets the payment as per the weighment."

Even those wary of the entry of multinationals' in sensitive areas like food say the entry of organised retail has its benefits, with conditions.

Economist, Sudha Narayanan says, "Wherever there is contestability in the sense that farmers have more alternatives, you certainly are going to see the farmers getting more empowered. On the other hand, that contestability need not come from FDI in retailers. It can come from say farmers markets, it can come from domestic players, it can come from domestic processors, so there is nothing unique about the FDI that is going to make the market contestable."

But for the Indian state to overstate the benefits to farmers of big retail while systematically cutting back on support to rural India, many say is unacceptable.

Harsh Mander, Member of the National Advisory Council says, "Looking at other neglected sectors like healthcare and education and feeling that somewhere the private sector is going to come in and help shift the responsibility for various sectors,. But this is the first time I'm hearing that happen in the context of agriculture so clearly. Years and years of not just systematic neglect but its almost built into this kind of growth strategy."

Will big retail modernise agri back-end?

Of the 180 million tonnes of fruits and vegetables that India produces almost a third is wasted because the government says existing cold storage units can only store 20 million tonnes.

This is where the government believes multinationals will come to the rescue - with money and technology.

In an earlier interview to NDTV in July this year, Union Minister for Commerce and Industry, Anand Sharma says, "The value chain will help the farmers, storage, cold storages, processing facilities plus the refrigerated transportation, so it is the entire chain and it will generate jobs in millions."

But will multinationals actually bridge this massive gap?
  
Praveen Khandelwal says, "Since 15 years there was FDI allowed in cold chains, no MNC came to India to set up one single cold storage in the country."
Indian retailers say that even if the MNCs are allowed to sell in the front end, it is unlikely they will build such massive backend.

Radhakrishnan says, "They will force that infrastructure to be created. They will force saying that we can't do this level of operation unless we have this kind of infrastructure. They will do it themselves or get others to do it but definitely they will make it happen."

They say that technology isn't rocket science, anyone can import it as long as there are funds.

He adds, "I mean if you have to create a cold store, it is a big capital investment, it is an infrastructure project."
     
But even if they do it will push up prices and it is not clear if India consumers are willing to pay extra.

Radhakrishnan says, "This is a fact. We do not require an infrastructure which is any different from this. Where it will change is during summers, we will have humidifiers, they'll have to bring the temperatures down as Indian temperatures will rise as much as 42 degrees. That time we got to bring it down to 30 or 32 but I am not sure that a consumer is even capable of affording a loading of cost. Even if I air-condition the whole place, the cost of the power whether I can load onto a carrot which you can buy is Rs 4-5 and make it Rs 8, I' not sure if we're ready to do that."

Until then they have come up with their own Indian jugaad like this warehouse which is being used by Big Bazaar in Haryana, low on technology, low on cost and gets the job done.

And while the entry of Walmarts and Tescos may ramp up the low tech back end operations like these, it once again begs the question: what was the government doing for all these years?

Like in Kashmir which produces a lakh tonnes of apples in a season, a fruit which needs cold storage but which only has two high tech cold storage units catering to only a fraction of the needs.

Let us now turn to the most political claim made by the Government on the advantages of big retail.
 
Will big retail control inflation?

When we interviewed Anand Sharma almost a year ago on retail FDI the focus was on its benefits to farmers.

He had said, "Over 35% of what India produces perishes. It never reaches the market. Farmers are coming to the mandis and selling in the markets."

But with price rise turning on the political heat the rhetoric on the advantage of big retail has gradually changed.

While it is true that stores like Big Bazaar advertise cheaper prices for certain foods and products but across the board, the results are mixed. As part of the same quick test in 4 Indian cities we checked prices of organised retailers vs street price and the differences were marginal.

In Delhi for instance while lower for vegetables and dals, they were higher for fruits. 


Delhi:

Commodity	Big Bazar	Street price (per kg)
Potato	8	10
Brinjal	12	14
Arhar dal	68	70
Pomegranate	140	100
Guava	40	40

In Mumbai's Reliance outlet, the prices of dry goods like dal and sugar were higher than the street price but the vegetables were cheaper.

Mumbai:

Commodity	Reliance fresh	Street Price (per kg)
Ground nut	109	88
Sugar	39	38
Moong dal	82	80
Cucumber	28	40
Sweet lime	35	50-60

In a Big Bazaar in Chennai , again some goods were cheaper and others more expensive.

And the same in a Spencers in Bangalore - almost everything was the same , or more expensive than the street price.

Chennai

Commodity	Big Bazaar	Street Price
Atta	30	31
Toor Dal	74	70
Apple	120	135
Orange	33	33
Tomato	20	18

Bangalore:

Commodity	Spencers	Street Price
Tomato	12	12
Apple	120	110
Toor dal	76	68
Sugar	35	28
Carrot	43	35

All of which questions the governments logic that organised retail will control inflation. Most retailers have to become big enough - what economists call the economies of scale, for them to seriously reduce prices. But as we have seen, orgainsed retail is tough and expensive and we are still a long way from Walmart style stores where everything is cheaper than the rest of the market.

Is there an alternative to big retail?

Reading through the reports by government or corporate chambers on the retail story of India there is little mention of the vast grassroots network of how Indians buy and sell and the success stories within those.

Amul is even today one of the most compelling examples of successful rural marketing from front end to back end with zero foreign investment or technology.

R.S Sodhi, MD of Gujarat Cooperative Milk Marketing Federation Ltd (Amul) says, "In Amul we are collecting milk twice a day from 3.1 million farmers, and we have around 16000 cooperative societies where we have bulk milk coolers, so milk is immediately poured in and cooled and then milk is transported to 40 dairy plants in insulated or refrigerated trucks where milk is processed and made into various products, and then transported through 4 different types of distribution highway."

Amul in fact argues that they have created a model which is more effective than any in the West.

Sodhi says, "Since I'm from the dairy industry, farmer in the US gets only 30-35% of the consumer dollar, same in Europe or UK, farmer gets only 36% of consumer price whereas in India in dairy, farmer is getting 70%, and in Amul, where it is very organised, farmer is getting 80% of consumer rupee. so you can clearly compare who's getting more."

India's largest network of retailers, street vendors who after years are finally getting orgainsed through networks of national and local organisations.

Arbind Singh, Co-ordinator of National Association of Street Vendors of India says, "We have a national federation, with more than 550 member organisations, so the total number of street members or paid members is 4 lakh 30 thousand from all the states in India."

On the benefits they have been able to provide to them he says, "One is that we have been able to stop the chain of eviction of street vendors when the country got the national policy in 2004 and the policy was revised in 2009. Now we are demanding for a central law for the street vendors and the government has agreed to it." 
 
And as it attempts a second round of building consensus on FDI in retail the government may well foreground not just the top end of the retail chain but the bottom of the pyramid which will give greater legitimacy to its claims that it is acting in the interest of a majority of Indians.

(Inputs and photos - Niha Masih)