Long Read: Does Excessive Capitalism Threaten India’s FMCG Players?

by Tushar Gupta - Dec 10, 2021 01:26 PM +05:30 IST
Long Read: Does Excessive Capitalism Threaten India’s FMCG Players? Representative image (pexels)
Snapshot
  • The small distributor/retailer is as capitalistic as Reliance or Walmart, but the interests of the former should not be sacrificed on the altar of the latter’s scale.

    A level-playing field for retailers and distributors is not against capitalism, but in the very spirit of it.

Firstly, to address the elephant in the title, make no mistake, capitalism is great.

In the larger scheme of things, it ranks above socialism or the governance model where the state is supposedly the parent of every citizen, thus holding a monopoly over the food they consume, to the books they read, to the shows they watch, to the channels they watch them on, to the brand of cars or scooters they ride, and to substituting cash-transfers for enabling employment prospects as Aam Aadmi Party's (AAP) Arvind Kejriwal is currently promising in Punjab. No capitalism, no thriving fast-moving consumer goods (FMCG) industry.

A lot of people detest capitalism because they believe that it is unfair in hours of crisis, or it puts people out of business and jobs, but the truth is that it is capitalism that offers them a playing-field to begin with, and it is the fruits of capitalism that ensure employment for millions in the first place.

For those, who hold a very romanticised perspective of socialism, a history lesson of China and India, before both nations liberalised their economies to a great extent, is warranted.

To conclude the philosophical part, India needs capitalism more than ever, for it shall be an enabler for people five-ten-fifteen years from now. For India, capitalism will create employment to the tune of a few hundred million that would be needed once the fruits of ‘Bare Minimum Workable’ Socialism (BMW Socialism) have ripened.

What will drive India and Indians towards becoming a $5-$7 trillion economy is not unplanned socialism but unshackled capitalism.

So, where does it leave the All India Consumer Products Distributors Federation (AICPDF), a network of over 400,000 distributors, protesting against the FMCG companies for selling the same goods at far lower prices to the likes of Reliance JioMart, Amazon, Tata’s BigBasket, and Flipkart?

Protesting against both sides of the supply chain, the FMCG companies and manufacturers and the retail stores and monopolies, some named above, this decades-old distributor network is threatening to paralyse the supply chain.

Within this supply chain, there is a lot at stake here as well, especially for the top three monopolies, Reliance, Amazon, and Tata. Amongst the top three, India’s retail battle is now underway, with each monopoly eager to dominate the nation’s retail industry valued at $883 billion in 2020 and estimated to grow to $1.24 trillion by 2024 and $1.75 trillion by 2026.

There is also the question of digital retail. While accounting for less than 10 per cent of the FMCG sales, its double-digit growth is a testament to the future of retail.

From the perspective of economic evolution, it would be convenient to assume that the suppliers or distributors are standing in the way of capitalism, for the retail monopolies in question are ushering discounted prices, free deliveries, cashback, and overall, a routine convenience in an activity every family performs daily.

This story of ease and scale is beginning to overshadow the story of the traditional distributor network in India, still at the heart of India’s FMCG sector.

An average distributor has anywhere from 50 to 500 retail outlets assigned to them, and every popular brand has some sort of collaboration. Offering their support to the brand, these distributors, for decades, have procured goods from the FMCG companies, paying them instantly, and supplied them to the retail outlets, mostly on credit. Thus, from a monetary point of view, these traditional distributors have been enablers for countless small and medium-sized retail outlets across the country.

Even with the low margins, the distributors have backed new brands, sometimes at a personal cost, given some goods require more time to be accepted by the consumers. For many brands in the past, the difference between success and failure has been the investment by the distributors in marketing and selling it to the retailers.

The challenge is not only on the margins front. Most of the FMCG companies dictate the minimum retail price to these distributors and have strict warehousing and employee requirements. However, none of these terms exist for the new monopolies in the business, and given the opaqueness in pricing by the FMCG companies when it comes to traditional distributors versus the new monopolies, the difference in pricing is unknown.

For instance, a bottle of soda, sold at an MRP of Rs 100, if it costs the traditional distributor Rs 75, the retailer Rs 85, then the new monopolies may be getting them at anywhere below Rs 65, or perhaps, even lesser, depending on the product.

The traditional distributors are not only losing the battle in pricing but also scale. While the monopolies, flushed with credit and cash due to the scale of their business, can procure a higher volume of goods, the traditional distributor, with limits to what he can put forward as collateral, is nowhere in a position to compete.

Thus, traditional distributors are losing the battle on both fronts. This is followed by the predatory pricing practice deployed by the likes of Reliance, shifting consumers towards monopolies.

Speaking to Swarajya, Dr PM Ganeshraam, Chief Patron of the All India Consumer Products Distribution Federation (AICPDF), elaborated on the concerns of the traditional distributors. There are close to eight crore retail traders, and assuming each has a family of four and employs five people on an average, the total dependents are more than 70 crore Indians, and for them, the new monopolies present an existential threat, he stated.

However, it would be incorrect to assume that the monopolies are the antagonists here, for most of them too run a network of stores offline, especially Reliance and Walmart, which employ millions. This also includes a growing delivery fleet engaged with many such monopolies. While e-commerce in FMCG is still an emerging market, the employment in the future will be focused on delivery fleets, few offline stores, customer support, and so forth.

There are two perspectives to this discussion. Economic evolution dictates that the monopolies are doing nothing wrong, for the customer has the right to cheaper products and services. Evolution and progress come with their share of economic displacement too, as was the case with the United States and Europe, where Costco and Walmart have displaced the traditional ‘mom and pop’ stores.

The other perspective is the nature of the FMCG sector. A Reliance like monopoly was ideal for the telecom industry, given the lower number of people that were connected to the internet previously, and the way it enabled the digitisation of the economy, impacting several sectors.

Even in agriculture, the monopolies have ushered their scale of infrastructure, technology, investments, and logistics to aid the farmers, as the likes of BigBasket are already doing, and something the local middleman could not.

The FMCG stores across India operate in the vicinity of residential areas, and while they may not have the elaborate delivery fleet as the monopolies do, they do have the ease of access. They also have access to most products and brands, thanks to the traditional distributors and the network they have set up since decades. Today, if the traditional distributors are displaced by the monopolies, tomorrow, it would be the local FMCG stores.

A distinction must also be made between the cause of the protesting farmers and traditional distributors/retailers here, for it is easy to confuse the cause of the two as the same, citing the political jibe of Ambani-Adani.

Unlike the minimum support price (MSP) driven farmers of Punjab, obsessed with the socialist political setup where they get the right to free water, electricity, subsidised fertilisers, freehand to burn stubble and choke the biggest city of India, vandalise streets to prevent the entry of private sector, and that too without paying any taxes, the distributors and retailers in question are law-abiding and tax-paying citizens, generating employment and incomes at a lower level, across the country. Their protest is not for freebies, but for a level-playing field, and rightfully so.

Thus, it turns out, this is not a problem of excessive capitalism, but that of an economic shock resulting from a David-Goliath like match that would encompass half of India’s population.

Unfortunately, the country is not a manufacturing powerhouse, yet, to accommodate economic displacement of this scale, at least for another ten years.

However, the government can help the protesting distributors/retailers without banning the entry of corporations into the retail sector as it would set an incorrect precedent for other sectors, especially agriculture.

One, set a minimum retail price as a percentage of the maximum retail price to ensure no predatory pricing practices are normalised. For instance, the government can dictate that no retailer, online or offline, can sell a product at a discount of more than 10 per cent of the maximum retail price.

Same pricing rules must be applicable for a Reliance like monopoly and a traditional retailer. With time, products that do not find an audience in traditional retail stores or amongst distributors can be delisted. Separate ceilings can be considered for separate categories of products.

Two, the margins at which the FMCG companies sell products to the distributor and monopolies must be made public. From a business perspective, a monopoly procuring in bulk will always have the benefit of margins, and rightfully so, but with a fixed ceiling on the lower limit of MRP, the call would be with the FMCG companies, and the distributors and retailers will not feel the pinch.

The distributor margins, for both online and offline stores, could be fixed in proportion to the volume of goods procured.

Three, as per some reports, there are deliberations to have separate packaging for online and offline stores. This would not serve the purpose, for two simple reasons. One, the monopolies would be in a position to price the goods much cheaper. For instance, a detergent costing Rs 100 for one kilogram in a retail store would be sold at Rs 350 for five kilograms packing in an online store, thus defeating the whole purpose of a minimum retail price and fixed volume-based margins.

Thus, all denominations of packaging must be made accessible to all distributors and retailers, irrespective of their scale or offline-online operations.

The objective of the government must be to sustain a level-playing field for both the monopolies and the distributors/retailers from a pricing point of view, to begin with. Put simply, the economic intervention of monopolies in some sectors results in a net positive for the economy, as has the case been with Reliance Jio and as it would have been if the three farm laws were embraced by the protesting farmers. With respect to the FMCG sector, the story is a bit different.

The small distributor/retailer is as capitalistic as Reliance or Walmart, but the interests of the former should not be sacrificed on the altar of the latter’s scale. Monopolies, through modern technology and scalable investments, in some cases, aid the economy to run before it can walk, but in this case, the walk supersedes the run in the larger scheme of things.

A level-playing field for retailers and distributors is not against capitalism, but in the very spirit of it.

Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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