India Retail News

A lot has been written about how Big Retail, especially FDI in Big Retail, is going to kill the millions of small retailers in India. Let us examine the problem in detail, understand its various aspects and then consider some possible solutions.

The Problem:

India has always been a land of mom-and-pop retailers with the last estimated count being 1.6 million mom-and-pop establishments throughout India. These are typically run by individuals (the wage earner of the family, with the support of the spouse, children and other relatives). Assuming an average family size of 5, we are talking about 8 million people who depend on small retail for their livelihood. The supposition is that when the Big Retailers come in, these small guys will be left with higher priced, lower quality merchandise to sell, that nobody will want to buy. And there is some truth to that. One only has to see the effect of Big Retailers in countries like China, Brazil or even the US. The only small retailers that have survived are the ones who have developed a product or service niche not provided by the Big Retailers or are in locations not of interest to the big guys

The Dynamics: A typical small retailer in an Indian city falls into one of two categories.

1. Category 1 is the rural job-seeker who ends up in the big city without any means to earn a living and gets into selling various produce on the street-corner as a last resort.
2. Category 2 is the ‘family business’ retailer or the baniya, who has been running the local ‘variety’ store for several generations. His store is more organized (relatively speaking) and sells more produce to more people.

It is important to keep this distinction in mind, since the lobbying and the noise created in recent times against Big Retail is coming primarily from Category 2. Category 1 folks do not have the means or the influence to get political parties to root for them. A study of the number of people in these 2 categories could reveal some interesting insights. My guess is that Category 1 forms 70-80% of the people involved in small retail. These are daily wage earners who get affected by the heavy rains and get bullied by the local gangs. Big Retail is indeed a serious threat to their livelihood.

The Good: The small retailer has always been part of the Indian eco-system. Most of us who have grown up in India remember buying from our local dukandaar, sometimes in good faith, sometimes checking to make sure we were not getting ripped off. He would often give us credit by writing in a notebook and claiming money only at the end of the month. He would also get a local delivery boy to deliver goods to our homes if we needed something urgently. Small retailers have innovated to some extent over the years and provide convenience that will be tough for Big Retail to match. They have developed a genuine human connection with many of their customers. The local street vendor provides the convenience of location and fresh merchandise every day, which suits Indian shopping habits much better than buying in bulk and stocking up as encouraged by Big Retail.

The Bad: When compared to organized retail, small retailers have generally provided goods of unreliable quality. There has been no such thing as a retail experience for customers and customers can be cheated if they are not careful. Also product range is limited, so customers didn’t really have much choice.

Big Retail -

The Dynamics: Big Retailers began emerging in the Western world towards the end of the 19^th century. They brought with them wide assortments and efficiencies from consolidated buying. Customers were introduced to a new experience, which included more choice and lower costs. The Indian consumer is being wowed with this today and the results are already showing in terms of profits for these Big Retailers. It’s just a matter of time before Big Retailers appear in all our big and medium cities. They have the money and the means to influence the political and economic landscape.

The Good: Big Retailers have the buying power and the supply chain efficiencies to provide customers with goods of reliable quality at a low cost. They eliminate middlemen who don’t add much value in the current setup. This means more money to the farmer or manufacturer as well. Big Retail provides customers with choice, a shopping experience and better customer service.

1. The Small Retailer – The Street vendor
2. The Small Retailer - The Family Business type
3. The Small Manufacturer
4. The Large Manufacturer
5. Last but not the least - The End Customer

Below are some ways in which they would get affected and some suggestions on how a meaningful balance can be maintained in the Indian context.

• The Small Retailer - The Street Vendor is the one who will be affected the most. Even today, he is at the mercy of the local mafia, the weather and other forces that easily disrupt his livelihood. With the advent of Big Retail, he will be left with more expensive and lower quality merchandise to sell to customers with much better options. With little or no education, the street vendors will have their livelihoods at stake.

Big Retail should be mandated (at-least initially) to provide a percentage of their produce to street vendors at a wholesale price through cash and carry formats. This will help provide street vendors with an incentive and help stem some of the protests. Metro and Reliance Retail are already doing this. The street vendors can then focus on locations not served by Big Retail. Remember, India is still not an automobile-driven economy and will probably never be. In many cases, given no difference in quality of merchandise, people would prefer to buy from the vendor across the street than travel several kilometers to buy from a Reliance Fresh store.

• The Small Retailer – The Family Business Type or “The Baniya” will also suffer the brunt of Big Retail. However, they symbolize in many ways what is wrong with Retail in India today. Most of them provide customers with a limited range of goods and poor customer service. This will change with the advent of Big Retail. However, the livelihood of a few million people cannot be ignored. There are a few options/scenarios that could play out here.
  1. These small retailers will have to differentiate themselves from the Big Retailers through product differentiation. It is easier said than done, but if we were to follow what has happened in other developing countries, that would be the best way for them to survive the Big Retail onslaught.
  2. Big Retail can be provided incentives to give preferred-franchisee status to these small retailers. The small retailers already have skills in retailing. They can be tapped by Big Retail to ensure a win-win situation.
  3. Large manufacturers could pitch in and start some “roll-up” operations of individual stores, which could stimulate the formation of some large Retailers. Home Depot in the US was formed in this manner.

• The Small Manufacturer – The small manufacturer will be in a disadvantaged position in a few years when Big Retailers begin to consolidate. The final 6 or 7 Big Retailers that survive will compete mainly on price. They will squeeze their suppliers to extract cost advantages that will then be passed on to the end consumer. The only suppliers that will survive this are the large ones. Considering the number of small manufacturers in India and their livelihoods, this is something to worry about.
  1. The small manufacturer will need to differentiate itself from the big manufacturers by providing better quality or service.
  2. The government can help the small manufacturers set up co-operatives to better negotiate with the large retailers.
  3. Large retailers can be provided incentives to outsource ‘private label’ manufacturing to these small manufacturers.

• The Large Manufacturer – The large manufacturer will have to re-think its growth strategies and dedicate resources to deal with large retailers. They will be in a disadvantaged position because of the influence the big retailers would have with customers. Private Label will also eat away from their revenues. However, that is the name of the game and large manufacturers around the world face this reality today.

Large Manufacturers in the West have grown in recent years mainly through innovation. Provide customers with a newer and better product and they will buy it, even at a higher price.

• The End Customer - There is one player in the current debate that people seem to have forgetten about – The End Customer - you and me and all our 1 billion fellow country men and women. Big Retailers will provide lower costs to the end customer, because of competition and because of higher efficiencies.

The fact that someone can buy for Rs 80 today, what they spent Rs 100 on yesterday, means an increase in purchasing power of Rs 20 or 25% more spending power for the individual. Imagine this increase in spending power spread across the population of the country and you have an entire nation with a higher standard of living.

FDI or Not:

Big Retailers, including the FDI variety, have developed efficiencies in supply chain management and technology that add definite value to the current setup. India cannot afford over 50% of its fresh produce getting wasted on the way from the farm to the customer, because of poor infrastructure. Reliance Fresh is already reported to have reduced this wastage to lower than 5% through investments in cold storages and transport. What this shows is that Indian Retailers have the power and the know-how to provide the benefits of modern Retail to its customers.FDI will no doubt accelerate this process, but there is strength in the argument that we should not give in to the lobbying power of the multi-nationals just because they are looking for growth not found in the mature Western markets. India should extract from these Western retailers what India needs, including technology, know-how and best practices not available in India currently.Once the local players have become large enough to face the competition (2 to 3 years), let it be fair game. Let the best player win. And as evident from the experience of Walmart in countries like South Korea and Germany, Retail is a highly local business. It is not always the player with the deepest pockets that wins. Ultimately, it is the company that understands the customer the best that will have the largest market-share.

The Conclusion:

Big Retail is here to stay. Assuming that improvements in infrastructure and lower real estate costs become a reality, Big Retail still has a long way to go before satisfying the highly diverse needs of the Indian population. As a result, there will be a steady-state where Big Retail will co-exist with Small Retail. The role that the government plays in the next few years will decide how quickly and harmoniously we reach this steady-state.