Old Retail vs Farmers – Now It Gets Interesting

A couple of months back, I wrote about Kerela’s ban on organized retailing. Most readers agreed that it was wrong-headed. But there was some skepticism about my claim that organized retailing would be beneficial to the farmers. Well, here’s the tangible evidence.

Over the last two weeks, UP has seen a backlash against organized retailing. Small retailers took to the streets and then the usual ensued – shuttered markets, burnt buses, much TV coverage. An earlier post of mine on Street Power is here. Chief Minister Mayawati took notice. That is, if the goons in the streets were not from her party anyway. She quickly rolled back some policy changes which allowed organized retailers to directly procure farm produce from farmers. “60% of the state’s farmers were against this policy” claimed the UP state government.

Not particularly surprising. The Kerela government did pretty much the same thing, including the sound bytes. “The mood of the people is against the entrance of Reliance in the retail sector” was how they put it.

But in unfolding events in UP, surprise, surprise, the farmers are threatening to take to the street as well. According to Business Standard, farmers around Lucknow, led by the Bharatiya Kissan Union, claim that they are incurring huge losses due to the closure of Reliance Fresh.

“It’s an all-party affair and we are united in our fight for the opening of the Reliance stores as never in history the vegetables grown by us fetched such a fabulous price as given to us by the reliance’’, said Ravi Singh, a farmer.

I totally love this. Democracy at work, is what this is. If this thing snowballs a little I’d like to see what Ms. Mayawati does. I don’t know the caste equations here, which matter in a state like UP, but other things being equal, farmers will have an upper hand – more votes – although it is possible that the spark you see coming out of BKU is actually just a few landed farmers incited by Reliance Fresh.

But I hope that is not so. I hope that this is the beginning of an organized response from farmers, who are the affected parties here, opposing wrong-headed legislation.

If any further evidence is required that organized retailing helps farmers, read this piece about how fruit exporters are facing a margin compression because big retailers are pushing farm produce prices up.

“Retail chains such as Reliance Fresh, Subhiksha and Adani are offering better prices to farmers. We are left with no other option, but to match the prices being offered by the retail majors. This has eaten into our margins by at least 10 to 15 per cent,” said Nitin Mathur, CEO, Locus.

I feel your pain Mr. Mathur, but I’ll be shedding no tears.

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8 Responses to Old Retail vs Farmers – Now It Gets Interesting

  1. Pingback: Retributions » Farmers Want Big Retail!

  2. Ranjit says:

    Hi Basab,

    3 points about Reliance fresh (or any other such retail chains):

    a.There has been protests in TN about reliance accepting only very high quality farm produce. What I heard is that they filter out vegetables or fruits they find unsuitable for their quality standards from the produce , leaving the farmer to sell the leftovers to someone else.

    b.Give me one reason, why these biggie retailers won’t start squeezing the farmers as and when all other smaller players are eliminated from the market and all that the farmers would be left would be to sell to this biggie Retailers.

    c.Lastly, personal experience at the Reliance fresh outlet at chennai. They have built their shops around residential areas.Otherwise quite neigbourhoods have suddenly become flooded with vehicles and people. No parking facilities, no space to handle the kind of crowd that pours in..clearly, Mr Ambani has more than just supply chain optimization in mind for counting profits.

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  3. Basab says:

    Ranjit,

    We discussed pricing power in my earlier post on this subject right after Kerela banned organized retail. My stand was that pricing power would not shift further away from the farmer and it could actually move towards him. The news seems to indicate that it that is the case.

    Quality of produce (picking the best, leaving the rest) are all forms of price negotiation. Why shouldn’t farmers and transporters be encouraged to produce and deliver higher quality produce? Only a price premium (or a penalty, depends upon your pov) will encourage that.

    Lastly, city zoning laws should address the issue location of retailers. Again, that is not a reason to discourage or ban organized retail.

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  4. Ranjit says:

    Yes, Agreed. But isn’t the whole fight about not allowing organized retailing to hit India in it’s current form.
    We don’t have proper city zoning laws here,agricultural practices are still pretty old & farmers are not quite educated enough to understand the nuances of too-hi funda methodologies.

    So I guess, a little bit of discouragement of bombarding the market with organised retailers should be done. At least in the form of serious checks & balances .

    My last point on the location and parking/other problems was more to stress on the fact that these people don’t have concerns about farmers and aam junta too much on thier heads as them seem to give the impression. Ahemm.. Sorry Basab, but by way of ‘Organised’ retailing , all I could see at the R fresh outlet was more of chaos & confusion ! (At least at the customer end)

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  5. Siddharth says:

    Any market is made up of demand (people), public information (media), supply (industry) and compliance (government). I believe blog commentators, as observers, possess an analytical interest. The stakes for other active participants is livelihood.

    Ban by Bihar, UP or Kerala govt.s in the name of farmer protection is a facade for gratuity demanded by them. Reliance has taken over 2000 villages and can monopolize them anytime.

    The debate now is who’s right? But both the options, Govt. or organized retail, are problems in India. There are very few businesses in India (TATA is the only one that comes to mind immediately) that follow the path. When the Govt. opens the sector, the bad businesses start operations first. So, it be better to keep organized retail out rather than make it worse.

    Also, the appeal of organized retail is wholesale. Indian consumption needs are different. We buy 4 eggs and not 2 dozen, we need 500 ml of Milk, and not 4 liters. Our population does not have cars, our streets do not have parking lots. So, by not having organized retail, we do not loose anything.

    Having said that, the Indian system of “mandi” should be improved. online mandi or making the process more transparent is a reasonable solution. e.g. e-chaupal by ITC.

    In Summary, we should organize the purchase from the farmer, but leave alone the distribution to the end consumer. And dont mix the two.

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  6. Kelpie says:

    Hi! While there can be various arguements for and against on organised retailing and pricing dynamics, there are a few core issues which are at play here.
    1) Inefficient Supply Chain through Government’s intervention or multiple layers. All through the past, agricultural produce went through various hoops before it reached the kitchen(s). All these only increased the cost, rejection, decay and losses. Short circuiting producer and consumer is the best thing that can happen. How can be debated, but not why.
    2) Farmers – they constitute the best part of India’s GDP (India is still an agrarian economy in a way), population and most importantly the largest vote bank in the largest democracy. By simple logic if they can meet the consumer they get the best deal, as the market will determine this in any case. No way can any govt ensure a higher price table (Govts usually fix lower than market, thus leading to phenomena like Black Markets etc. I am not saying veggies come into the black market please, just the controlling act enables it).

    Thus by stepping out of the way, letting the Farmers meet the demand populace or its best representative is the best gift the Govt can give the Farmers. And simplifying the supply chain and short circuiting demand and supply can only make it more efficient. Ideal state is better prices for farmers, lower prices for consumers (lower inflation too, as the basket usually has lots of edible stuff:)).

    There was a news article a few years ago on how Pepsi with its Lays plant had done wonders for the Potato farmers in the North, increased their productivity, and thereby their profits too.

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  7. Williams says:

    Basab,

    It’s one of the more accepted axioms in economics and strategy that whenver a few parties are buying from a large number of people, the power of pricing lies with the fewer parties. This phenomenon has played out in multiple ways in the past, the most recent being Wal Mart muscling up even large consumer product companies like P&G. Microsoft treating even Intel like cattle is a well reported story.
    If organised retail is offering better prices to farmers now, it is purely an entry strategy and not a long term trend. The long term trend will be that they will reduce prices for the consumers by driving down the procurement price. They will be in a great position to do this if they can become the exclusive buyer from groups of clustered villages. A monopoly that will be as effective as Microsoft’s if you consider the costs the farmer will have to bear to find an alternative buyer.
    Short term trend may be positive for farmers but the long term pressure is coming and will begin to appear in couple of years when organised retail gets it act sorted out.

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  8. Shankar says:

    Basab, this is such a timely post. Thanks for taking it up. But I will disagree with Williams analysis, because of a few specific reasons:
    1. Farmers in India- across states- have many supports given by the govt and they are politically important, and hence you can’t compare them with P&G or Intel. Your assumption is that India can have have only 1-2 large retail players, and they will control everything – not true.
    2. From real business experience in Organized Retail and Contract Farming, I will say the farmers will benefit from any market forces that they can directly interact with. In fact Organized Retail + Supply Chain integration gives a kind of demand visibility to farmers which they just don’t have today. Farmers are appreciating this guidance.

    I say there is plenty of room to eliminate middle men and share the profits with both consumers and food producers/farmers. Organized Retail will crush the middlemen in the chain – and that’s business.

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