Kerala Ban on Organized Retail – What’s the Logic

Kerala is all set to ban organized retailing. An article in the FT quotes C. Divakaran, minister for food and civil supplies:

The mood of the people is against the entrance of Reliance in the retail sector. We are going to add some powers to the state government to restrict or prevent these monopoly houses in the state-level retail sector.

Mr. Divakaran’s keen appreciation of the ‘mood of the people’ is absolutely correct. Most consumers would love to pay more for their groceries. They know that they can’t afford it themselves but will willingly sacrifice 10% of what they spend every month in order to protect the livelihoods of their local seth log. Most of the seth log have gotten fat and happy with the booming growth in Indian cities, but the aam admi in the same cities understand that they must suffer and pay more for their daal chawal to keep the seth log in their gaddis.

Right…and pigs fly.

IEB has a post shedding some light on the economics of organized retailing. If you boil it down here’s how organized retailing especially grocery retailing works:

Organized retail invests in the business. Not just in the stores but also in procurement, food processing and the supply chain. As a result they squeeze inefficiences out of the supply chain and develop higher value products. More value is created (consumers spend more on better products) and less is spent on distribution (economies of scale, less spoilage etc.). The benefits are shared between the consumer and the producer. I believe that in a competitive environment the organized retailer actually makes less as a % than unorganized retail. The reason why a Subhiksha can price HLL goods so much cheaper than the corner kirana store is not so much that HLL gives it to Subhikhsa cheaper (there is some of that too) but primarily because Subhiksha knows how to make money by turning inventory faster at a rock bottom margin.

That the farmer also benefits is less intuitive, but a little thought will clear this up as well. HLL’s bargaining position vis-a-vis an organized retailer is very different from HLL vis-a-vis a small kirana store. This means a lower margin for HLL. But a farmer’s bargaining position does not change substantially with an organized retailer. From a situation where a local trader monopolized procurement from his fields because of indebtedness or other reasons, the farmer now deals with a large corporate buyer. But at least he has a choice now. On the other hand, the organized retailer’s efforts to develop infrastructure (like a cold chain to reduce spoilage) and new products to expand the market (like organic produce) will result in greater value for the farmer’s crop.

There is zero economic logic in this upcoming Kerala ban on organized retailing. But there is heaps of political logic. Start with the fact that Kerala is a net consumer of agricultural goods. The economy is driven by service industries and receipts from foreign based workers not by agriculture. So the farmer lobby is small and weak. Small spells “few voters” and weak spells “little money to spare for campaign donations”. The merchants lobby on the other hand is both large and strong. They have much to lose. And they are vocal. They have street power and money power.

So sorry all you pensioners in Kerala. If you were hoping to finally be able to afford your medicines because you won’t have to swallow the horrendous markups of your local chemist, it was just too good to be true. Your government cares more about the chemists and their markups and less about you. And it cares nothing about progress.

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25 Responses to Kerala Ban on Organized Retail – What’s the Logic

  1. Vivek says:

    And this from the “most educated” state of ours!! Heaven help us.
    Based on the what few friends I have from Kerala, they have no qualms about flying to the Gulf and working there – but apparently, the very thought of a ‘BIG’ corporate / captialist type setup, just does not go down well with folks in the state.
    Might be interesting to see what a poll on the ‘streets’ reveals about the aspirations/wants of the common man.
    Maybe Reliance should try and do a setup that looks like a battered, poor-off set of poople struggling to make ends meet – might just allow for the ‘mood’ of the people to change for the better.

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  2. Shefaly says:

    Basab: To suggest the farmer will have choice is not borne out by experiences in other countries with organised large retail chains and their interactions with farmers. The UK is a good example where farmers are only afloat because of huge subsidies.

    That the farmer may remain economically at the same place, if not worse, is more true. Large supermarkets in the UK regularly reject vegetables based on appearance and do not always return the produce thus wasted to the farmers since produce from many sources has been mixed. The farmer gets paid for what was accepted. You do the maths, as they say in America. So my money is on that the farmer gets screwed, if you will pardon my French.

    Organised retail is a mixed blessing for society, and this is just the first stage of introspection and pushing and pulling. The debate has not settled yet in the countries where this happened many decades ago and I do not think it will do so at any greater speed in India. Thanks.

    Vivek: I am sure you meant the ‘most literate’ state. Literacy and education are not tautological nor are they interchangeable.

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  3. Shashikant says:

    In Kerala, comrades are opposing the retail giants (homegrown or otherwise) because they don’t want competition. See this and this.

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  4. Vivek says:

    Shefaly: I stand corrected “literate” is the word I meant to use. Thanks.
    While I agree that there is no concrete or direct relation between literacy and education – I would tend to believe that some of these literate people also have access to sources of information that might allow them to know the whole plot regarding capitalism – the good and the not so good. Of course, no guarantee that literacy in itself is leading to an education – but then thats a tragedy. A mindset borne out of informed belief is one thing – one borne out of ignorance/lack of a balanced view etc is another. One can hope our fellow citizens make informed choices and not otherwise.

    As far as organised retail is concerned, I think its a winner. The urban boom Indian metros are experiencing is phenomenal (I am told 3000 new entrants to Mumbai each day), Infrastructure is anyways sorely lagging. Anyone who can provide consumers with a semblance of convenience, comfort and value has got ir right. Things are crowded on the roads now – Imagine things once the famed 1 Lac car is launched!
    Regarding success / failure of the model, It will probably mimic the standalone shop/store Vs Mall scenario. Both exist today and both do business – But I suspect as years go by, we will see more malls and less shops open up. On the same lines with organised retail – The consumer will get the bread (in AC comfort and car parking), the chains will make a profit and some of the existing players in the current model, will either adapt to the new world, or continue a contained presence or in the worst case perish.
    What I can hope for is some amount of foresight by the chains, in trying to ease the process of change/adaptation for all who stand to loose the most – but then thats waxing philosophical (or is that Philanthropic).

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  5. Shefaly says:

    Vivek:

    Thanks for your thoughts. My observation here was solely about the effect on the farming community.

    I cannot disagree with what you write about urban congestion and convenience. In a highly segregated society such as India, other considerations have also have to make their way on the agenda. After all the 1-Lakh car is hardly within the reach of the vendor of fruit on an open stall by the road! So WHOSE convenience, comfort and value is to be prioritised? And why?

    Someone on LinkedIn recently surveyed purchasing habits in independent stores versus large organised retail chains. All replies are here:
    http://www.buyindependent.org/would-you-rather-spend-less-money-on-an-item-at-wal-mart-or-target-or-would-you-spend-more-on-the-same-item-at-an-independently-owned-business-in-your-community/

    My reply which he liked particularly and marked as best answer was as follows:

    QUOTE
    Depends on the need.

    If I run out of milk, while the kettle is on the boil, my local business gets the business. If I want a newspaper on Sunday morning, I don my overcoat and run to my corner shop.

    But if I am out of cash and need a sandwich, I will go to a shop that allows me to use a debit/ credit card. In the UK many corner shops often do not accept plastic and like a chain reaction, they lose business, then they have to charge more for retail products like chocolate bars and bottles of water and lose more business. They assume since business value would be small, banks would charge them large % merchant fee per transaction. None has ever conducted a survey with their regulars..

    And buying locally does not always mean fewer environmental miles. DEFRA in the UK has published data showing that large supermarkets use larger trucks to transport goods and fewer miles are accrued per pack, than sometimes in local businesses do. Sometimes it is better to buy Spanish tomatoes imported to the UK than those grown in the UK in artificially-lit greenhouses. UNQUOTE

    Now I no longer live in a large city where I can run to any corner shop. So I plan my shopping, buying some on the internet for home delivery (naturally not a corner shop) and if I miss something, I walk for 10 min to my nearest corner shop rather than 20 min to the nearest large retail store.

    Alas, access to information may not always mean that the information will be accessed and used to inform decisions and choices. 🙂

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  6. Basab says:

    Shefaly, big retailers may not be everyone’s darling in developed markets at this time. But in a market like India those reasons don’t apply. In India if organized retailing brings infrastructure development and market access the entire supply chain starting with the farmer gains. In developed markets it is now down to a zero sum game between producers and retailers.

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  7. Krishna says:

    Kerala has a left government in power and if they let in a Reliance without as much as a whimper, they stand to lose their cadres.

    Eventually all politicians give in when `handled’ well. We are talking of Reliance here… Need I say more?

    That said, organized retailing has its own pitfalls too –

    a) While land prices have soared, the rentals have become exorbitant.

    b) Poor slotting means having to peddle perfume right next to a smelly pizza hut !

    c) Footfalls do not always mean customers. It’s the A/c indoors that they are after.

    d) Local vendor means easy, informal access. Housewife needn’t even change or put on footwear or spend Rs.25/- by rickshaw to buy vegetable for Rs.50/-

    [ P.S. – India’s first mall CROSSROADS recently was put on the block after retailers walked out citing bad business ]

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  8. Venkat says:

    Here is an article from ET on Reliance Retail’s entry in WB.

    http://economictimes.indiatimes.com/News/CompaniesA-Z/R_Companies_/Reliance_Retail/Reliance_bags_Kolkatas_Park_Circus_deal/articleshow/2107823.cms

    On the one hand, one communist state seems to be opposing organised retail, and on the other another communist state seems to be encouraging the same. Though it remains to be seen, if organised retail will meet the same fate in WB as in Kerala. There definitely seems to conflict of thoughts/ideals among the same group of communist leader.

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  9. Shefaly says:

    “But in a market like India those reasons don’t apply.”

    Basab, I am sure there is a line of logic behind this. I am not sure I get it though…

    When, in environments with large agricultural subsidies, where farmers live on subsidies and not on profits from their produce, it has boiled down to a ‘zero sum’ game between retailers and producers, why would that not come to pass in India, where farmers have even less leverage to fight back and to continue fighting?

    I hope to hear your views further. Thanks.

    Like

  10. Basab says:

    Shefaly, my comment was not worded well. I took out a couple of sentences and it stopped making sense!

    My point was that in India there are ample opportunities for retailers to participate in improving the supply chain. The systemic savings from this can be shared between farmer and retailer. In the west such opportunities aren’t there. It boils down to just a zero sum game – squeezing the producer for better prices.

    The other question of whether the bargaining position between a farmer and the retailer in India will change with organized retailers. On this, I would go out on a limb and say that in the poorer states, it wouldn’t change for the worse. Most farmers in poor states have very little choice in who they sell their produce to. Often they are indebted to the local trader. Rarely do they have market access (roads, transport) where they could sell their produce to the best bidder in a mandi. If an organized retailer comes along his choices will likely increase or stay the same. His bargaining position can’t get any worse.

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  11. Saumitri says:

    Hmmm… Shefaly’s comments seem to point to some right concerns. Here’s an article from Businessworld that talk about some aspects of this issue:
    http://www.businessworld.in/content/view/2080/2145

    Like

  12. Siddharth says:

    Its a natural law that ‘what works for you may not work for me’. I would like to congratulate the Kerala govt for their agility. Its good to know that govt.s can act too. Its a better way than under the table laws. Let the consumer decide what works. I think Basab feels all organized sector is saintly. I bet Reliance will still squeeze profit from producers. Subhiksha may be a unique example but all other A/C marts I have seen are expensive — they are for the rich. In our class based society, I don’t see a maid buying her grocery in the same store as her employer. Lets put it another way — Who visits McDonald’s in India, and who vists McDonald’s in US? I am more inclined with Shefaly’s line of thinking. The gap between these 2 views is that of theory and practice.

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  13. Surya says:

    From an aesthetics point of view, Big retail will bring a kind of sameness to all places, a sense of familiar deja vu which one gets in the US, all mall developments look the same and have the same Target, wal-mart, Tom-thumb and Albertsons.

    Kerala has Varkeys and Big Bazaar in the organized retail sector.In fact the roof of Big Bazaar got blown off in the kerala rains, some pointers to same strategy not working everywhere.

    California is against supercenters. So local communities like contra costa county can express their disfavour of supercenters. I agree that its not right for a minister to take sides, but kick-backs might be the norm. There are some companies which are know to grease palms more easily.

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  14. Basab says:

    Saumitri, I actually think the article supports my pov quite well! More choices for the farmer means better prices.

    In this mad scramble, loyalty is at a discount. That’s what the cooperative sector giant Mother Dairy is discovering to its chagrin. The milk cooperative, which diversified into fruits and vegetables (F & V) in the 1980s, is losing its traditional suppliers as retail chains with deep pockets woo them with hefty premiums.

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  15. Shefaly says:

    Basab: Thanks for clarifying. You and I were arguing our points from two perspectives – you from market inefficiencies that need managing, and I from a broader policy perspective.

    However I do think Siddharth raises an interesting point, which echoes one of my questions – Whose needs are to be prioritised? And why? And additionally, how will those who cannot afford to buy in these supermarkets cope?

    In the mid-1990s, I was a customer at one of the first such chains selling packaged products in NOIDA. It was called NANZ. I do not know if it exists now but what I do remember clearly that I was a rarity; not many from my employer’s firm shopped there and the price differential was significant. I feel the same now about places like Spencer Food Plaza etc on my visits to Bangalore where curiosity takes me to such places..

    Of course, I think the debate is not settled. I also think that the questions being raised in the UK and the US will be raised in India too. It is a rite of passage that every country learns its lessons from scratch rather than learn from others’ experiences and be prepared in policy, enforcement, monitoring terms.

    Thanks.

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  16. Basab says:

    Shefaly, Organized retailing doesn’t have to be of the variety which caters to the upper middle class only. The next time you’re in India have a look at Subhiksha. The prices there are much lower than at the neighbourhood kirana stores. so much so that a few years back, the chemists association in Chennai organized demonstrations protesting the low prices on pharmaceuticals at Subhiksha!

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  17. Shefaly says:

    Basab: I agree and also hope that is not the case going forward. This time I shall seek out a Subhiksha and check it out. Thanks.

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  18. Saumitri says:

    Basab, since you posted this comment and Shefaly wrote in, I have been thinking and studying about this issue.

    So, in theory, as far as choice for the consumer is concerned, I agree with your thought. I am sure Subhiksha and others can do what the low-cost airlines has done to air-travel in India. Infact they can do more and do what Wal-Mart has done for the US.

    My concern is more for the other end of the chain – the producers of stuff, and in this case, the farmers. As in the case with Wal-Mart, their reputation of sourcing goods and exploitation, as you will be aware, is not really very good. I fear the same for companies like Reliance. Anyone who has used Reliance’s services in telecom in India, for example, knows that they provide pathetic service quality and get through on the clout of their scale and more (political connections??). If someone like Reliance uses the same clout in retail, while prices for the consumer will certainly be low, the exploitation for the producing chain will be equally high. I am sure Subhiksha and the others can’t match Reliance’s scale as of now.

    I have been involved in research in villages and a few years ago spent time studying the producing chain – from the farmer to the “mandi” in Maharashtra. There is a pretty clear hierarchy of middlemen involved and these middlemen come in at the earlier part of the chain before the stuff reaches the mandi, which is where the retail chains buy from. So, even if these retail chains bring low prices, they will not affect the farmer at the beginning of the chain in terms of choices or prices. Infact they might only end up squeezing the whole chain during times of crop failure, if there is no alternative market to sell stuff that’s not acceptable to these chains. Also its difficult to get rid of these middlemen, because these guys actually provide value by providing simplistic information, aggregating, transporting and then bargaining on behalf of the small farmer.

    Now, I haven’t studies Mother Dairy’s model, but it seems that they have been able to reach the farmer with lesser middlemen than the others, mainly because of their welfare model. Also, its possible that the middlemen structure in North India is not as efficiently organized.

    In the absence of much thought given to the producing end of this value chain, I am sure you are going to see the state step in (as in Kerala), albeit at the cost of choice and price advantage for the consumer.

    So, though I am not overtly in favor of protection for the farmer, I foresee resistance from the state (especially a left ruled state like Kerala), as long as the suspicions about exploitation of the farmer remains.

    Unfortunately though, the community that will benefit the most from state activism against retail is the “kirana” shop owner which has exploited consumers for long.

    But then, since the middle class is ready and on the upswing in India, the retail industry can’t be stopped. It will just face
    some minor setbacks but will be there soon.

    Consumers be happy. Farmers be cautious.

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  19. Dilip says:

    I feel that as for the end consumer, the prices will be more competitive in India than it is today, in a typical organized retail chain. This is because of burgeoning economies of scale, which the retailer can leverage to beat the middlemen down on prices… and hopefully the retail model will evolve over time, whereby, the shopping experience can be more pleasurable for the consumer, while coming at a lower monthly budget. Of course, the corner kirana store will continue to get business for the “emergency” purchases, and the line for credit for the millions who will not own a credit card in the foreseeable future. Remember that the kiranas most often thrive based on a corase form of “microcredit” given to the typical rural and small-town consumer.

    From a middleman’s perpective, assuming that the organized retail’s share of consumer market goes up to, say, 20% of the overall retail market in 10 years’ time, then their business profit margins on that 20% will certainly be affected. This is one major reason for our seeing a lot of resistance and opporsition… pure lobbying…

    As for retailer, it is
    1) a matter of getting economies of scales to such a level that they actually start making money by increased leveraging in procurment as well as covering their ever-increasing fixed costs. This will be interesting to see, because, unlike in the west, the reatly market in India is going through the roof in terms of cost escalation..
    2) a matter SUSTAINING consumer interest by getting them to come back to the same store time and again… in the face of ever increasing competition… and to be able to wean away people who depend on credit for shopping by the kiranas…. this , again, remains to be see… at the moment Reliance Retail and others are only skimming the cream of the market… the real test will be when they fan out to Osmanabad or Usilampatti

    As for the farmer, his lot is NOT going to change at all, unless is in a position for collective bargaining. I do not buy the arguement that building infra. for storage and transportation will help the farmer… it is indeed naive to think so… from my experience in my ancestral village, corporate invest in cold storage and transportation purely for their benefit, and nothing gets passed back to the farmer… lot continues to be exploited… the only change now is, it is a body corporate doing it , as oppossed to the typical middlemen…

    The only way the farmer’s lot can improve is by by building collective bargaining at the village/ taluk level… something like the NDDB movement or the Anand milk movement… until that happens, we can continue to expect the cotton farmer in Wardha District to commit suicide, even as the consumer pays 2500 rupees for a 100% cotton business shirt in a hep show room in South Extension.

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  20. Krishna says:

    Soumitri,

    “I am sure Subhiksha and others can do what the low-cost airline has done to air-travel in India.”

    Not for long. Neither the low cost swath nor the club class luxury can be carried too far as a scaleable business model. Consolidation will soon play catch up since markets mature in the middle ground between competition and consolidation. You know how the LCC scene has changed after two recent mergers – Jet/Sahara and Kingfisher/AirDeccan. Now between these two, they have 60% market share and forming a Cartel’s just a ritual.

    But don’t be so sanguine about the Kerala’s Left either… as I had commented earlier, it’s a left govt. that plays to the cadre gallery for a while before succumbing to lucre. It’s the same Left that crafted a Nandigram (batting for TATA) and defended it as if it was just “a wart on the left eye brow of an ant”.

    So the name of the game is each one to himself. Allegorically one can’t bet that a Wal-Mart/ Reliance/Future Group will not gobble up Subhiksha. When that happens, the farmers should be ready to hold fast and bargain hard. Kirana guy will make up the grey market wild card.

    Consumers – can of course vote with their feet….!

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  21. Siddharth says:

    on a different note (looking at the customer end), can anyone verify this please? US retail chains accept returns / exchanges – no questions asked. has anyone ever experience the same service level in any mega store in India? I want to highlight that if customer centric behaviors can be different, the producer centric practices will not be the same either. each company builds its practices based on local psychology. there is not even a single corporate or man made law that is universal in nature; the only universal law is the divine law. it is needless to state the operating space of reliance or walmarts. both are businesses for profit. some win. some loose. i just hope that all share the pie ethically.

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  22. Siddharth says:

    i just wanted to add that being anti establishment is not a necessary ingredient in the recipe for reason. give due credit to subhiksha but not at the cost of anybody else. and certainly learn to regard the government. if you have a constructive suggestion, write to the minister. Inspiration: kanwal rekhi and India’s telecom sector.

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  23. Saumitri says:

    Krishna,

    On the low-cost airline, i would wait and watch. But I do see your point and infact it had been there at the back of my mind ever since i watched the interview Mr.Mallaya gave along with Mr. Gopinath.

    However, I think the Nandigram issue is not as simple as the media has projected it for you. The Left in Bengal today is not the same Left in Kerala. The Achuthanandan government’s economic policies are now shaped by a very conservative man (can’t remember his name off the cuff) who belongs to a group that is opposed to the Bengal CM.

    Also keep in mind that the Left in Bengal has not responded to the industry out of love for it. In the past 5/10 years thousands of villagers from Bengal have been forced to migrate to Delhi, Mumbai and other cities to work as rickshaw pullers, house-maids, sex-workers in brothels and so on. The effect has been devastating. Employment in cities have crippled the Bengali lower middle class. Buddhadev and his government has had to do this out of sheer need. So while Nandigram was done in haste, it is also a necessity for the people of Bengal, especially the lower and the lower middle class, which is the Left’s major power base.

    Having said this, I do think that as far as retail is concerned, the benefits of the large retailer for the consumer will have to be balanced with the interests of the small producer(farmer) and until that happens as a result of the retailer himself making efforts at a shareholding pattern (implicit in the Mother Dairy model), governments will step in either out of necessity or to keep their vote-banks happy.

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  24. Pingback: 6 AM Pacific » Blog Archive » Old Retail vs Farmers - Now It Gets Interesting

  25. senthil says:

    I was surprised by the language. You may want to review it.

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    The position will be responsible for application of advanced text mining, text classification and search algorithms to enhance the functionality of the Gridstone (GSR) proprietary framework .It will be responsible for implementation of the proprietary techniques with the help of a team and delivering high end solutions.

    Job Responsibilities & Deliverables:

    Define the roadmap for application of text mining, text classification and innovative data search techniques.

    Work with the architect and software developers to define project scope and product features
    Create and execute project work plans and revise them to meet changing needs and requirements.

    Manage day-to-day operational aspects of the project and scope.

    Ensure completion of project related documentation.

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