The retail liberalization debate

The decision by the Union Government of India to liberalize Foreign Direct Investment (FDI) norms in multi-brand retail trade has sparked off an intense debate about fears of the WalMartization of India and massive job losses in the trading sector.

The liberalized retail norms include 100% FDI in single-brand retail, and 51% in multi-brand retail. Among other conditions, the liberalization would be implemented in million-plus cities in first phase, fresh farm produce cannot be branded and 30% of the inputs have to be sourced from small enterprises, and multi-brand entities will have to bring in an investment of $100 million. Retail constitutes a $430 bn market in India, with organized retail forming just 10% of the total and being confined to the larger cities. It is estimated that 30-40% of fresh produce goes waste and more than half of this can be brought to the market if the proper farm-to-fork infrastructure is in place.

There are primarily five stakeholders in retail market - organized retailers, unorganized retailers, farmers/producers, consumers, and governments. It is easy to rationalize the benefits for governments (infrastructure investments), consumers (choice and better quality of produce), and producers/farmers (better prices). Given the precedence of other markets which have been liberalized, it is safe to argue that organized retailers too will adjust to the changes, improve their productivity, embrace newer technologies and processes, and become more competitive. This means that the concerns about the liberalization of retail trade can be mainly confined to the unorganized retailers. The debate should therefore be focused on its impact on them and what can be done to mitigate it.

There is a need for careful strategic thinking on the details of this liberalization policy with regard to its impact on the unorganized retailers. How do we calibrate the first wave of liberalization, so that it is initially restricted to those areas - places and products - least likely to affect them? What should be the sequence of opening up so as to minimize its adverse consequences? What should be the conditions imposed on the retailers permitted to enter Indian markets? Discussion and analysis of the liberalization that addresses these issues will considerably enrich the debate and is certain to increase the effectiveness of policy making itself.

It is unfortunate that the mainstream debate in electronic and print media on the issue has been dominated by ideological sabre rattling. There has been very little objective empirical analysis of the underlying market trends. For example, given that the central concern is about the impact on unorganized retailers, certain questions follow. What is the share of these retailers in the cities proposed for liberalization in the first phase? Where are the existing unorganized retailers located and who are their customers? Are those located in these areas likely to be swamped by the larger retailers? What is the market share and structure of existing organized retailers in these cities? Who are the typical customers of the organized and unorganized retailers?

In fact, atleast in non-food retailing, the trend towards organized retailing has already moved far ahead in many states. For example in the southern states like Kerala, long the bastion of left-wing parties, the ubiquitous chain of Margin Free shops may have already marginalized the traditional mom-and-pop stores in all but the smaller villages. The widely acclaimed Rythu Bazars in Andhra Pradesh, which seek to offer producers an opportunity to directly market their farm produce, carry within them the seeds of crowding-out middlemen and unorganized retailers of perishables.

In the larger Indian cities, the big box Indian retail chains have already captured a major share of the market from unorganized retailers. Even without foreign competition, the Reliances, Mores, and Food Bazars are already expanding aggressively into neighbourhoods within smaller cities and towns and displacing the unorganized retailers. This trend will only continue apace. However, even with this assault, given the sheer size and diversity of the markets in urban India, neighbourhood mom-and-pop shops, with a long history of personal relationships, are likely to adapt and survive.

There is an important difference between the business models of big box retail chains in India and those in US and Europe. The market for big hyper-markets and malls in India is limited for variety of reasons - cost of space within cities, limited space availability, opportunity cost associated with shopping in these often distant shops etc. In the circumstances, the preferred model of expansion will be through smaller franchises spread out across the city. In this, the domestic organized retailers have already taken the pole position and the entry of foreign retailers will be significant more for the intensified competition among them rather than for the marginalization of small unorganized retailers.

At a purely intuitive level, a carefully calibrated liberalization of retail trade, with the first phase restricted to a handful of big cities, appears to be an excellent strategy. Given the massive size of markets in these cities, it is certain to generate a significant impact on the incentives in the downstream production and procurement segments. The infrastructure investment requirement will mean that it will spur substantial investments in cold storages and go-downs, transport logistics and so on.

Farmers will be able to deal directly with these large procurers (who and their agents can be held accountable), instead of the fragmented and largely invisible intermediaries, and thereby get better prices for their produce. Consumers will benefit by way of choice and better quality. All these developments take place at the back-end of the production-consumption chain. The impact on retailers will be taking place in cities where that impact is already felt and would have deepened, albeit less efficiently and more slowly, with already expanding domestic retailers.

This entry of retailers presents a great opportunity to deploy randomized control trials (RCTs) to a natural setting. For example, given that it would be implemented only in a few cities, it would be possible for researchers to locate or design an RCT setting. The impact of the entry of foreign retailers can be evaluated objectively to arrive at answers to some of the questions raised earlier in the post.

Update 1 (6/12/2011)

Good story in the Times. Barely 6% of India’s $470 billion in retail sales takes place in organized retail stores, in contrast to more than 20% in China, 36% in Brazil, and 85% in the United States.

I also feel that shopping habits may be an important factor in how customers take to retail liberalization. People use the big retail malls for large, monthly or weekly-once, purchases. For a number of reasons, the local kirana shop would be convenient for smaller purchases. How many people in India make bulk purchases? It would be surprise if more than a small share of people would be making such bulk purchases. And these people, with or without foreign retailers, would, in these million-plus cities, by now have already gravitated to the Indian retailers.