Who is afraid of FDI in Retail Industry?

First off a few facts about Walmart, everyone’s favorite retail whipping boy: Of the entire $4.3trillion retail market in US, Walmart’s share is about $300 million which is about 7% of US retail market.

The Walmart Story

While large, it is hardly price making monopoly. Walmart was able to acquire the 7% market over 30 to 40 years not from fleecing consumers with high prices but by cutting prices – rollback is Walmart’s motto. Could Walmart become a monopoly in US retail industry? Hardly, because the fact is other retails have learned what Walmart does best – using a complex IT system to manage inventory on a vast scale from factory & farmers to shelf. Now most of competition to Walmart also price products competitive to Walmart or use other methods, such as product mix, to capture higher prices from consumers. Else they wind up shops.

The biggest myth about Walmart is it hurts people. Walmart’s target market has always been, since inception, the bottom quartile of the population income group – target income group is about the half per capita income. By shopping at Walmart, low income people save 20-30% or higher percent of their disposable income to spend the money elsewhere such healthcare.

Does Walmart sell lots of Chinese goods? Sure, but who doesn’t?

If one hasn’t noticed, most manufacturing ends up in China, whether for actual production or final assembly and testing. Most other retailers sell Chinese goods too. Hypothetically, if US cut off all trade links with other countries, I’d predict Walmart will still offer lowest prices of the newly-high priced US made goods. Only thing is most low income people won’t be able to afford US made goods.

Walmart uses free trade to allow people to save. But Walmart, which runs big shops, has little to do with Chinese goods themselves. It can easily source products from India, if India government allows manufacturing to take hold by getting rid of socialist union-beholden labour laws that stifles jobs and large scale manufacturing.

Will Walmart kill kirana stores in its vicinity?

If it were free market, it is most likely that ‘ Walmarts’ would kill a few kirana stores in its vicinity. It’s not about access to capital as some have argued. Kirana stores themselves are hugely competitive with several stores at every center in an area. Most of them survive meagrely, with many selling fake products to keep up with competition and to keep up margins. And several close shop after few months or years after losing lots of money.

It is most likely kirana stores will survive not because people like kirana stores or because they are run savvy business people, but because of government mandated MSPR (manufacturer’s suggested retail price) If Walmart is forced to sell at MSPR (as government already said it will), it may still do good business because of the size of the store and choice of products, but it will be “forced” to keep the margins, extra-profit, instead of passing it on to customers.

By the way, what’s special about kirana shops that they need to be saved? They all look the same – just like all Walmarts looks the same – at least one does not get a fake tooth paste or after shave at Walmart. Imagine the corporate backlash if Walmart sells fake products compared to nonchalance of local kirana store offloading to gullible shoppers.

How about consumers?

FDI retail is good for consumers.

And also to producers. A cooperative of farmers can sell to one entity and off load all produce to it instead of worrying about shipping to wholesale markets in the cities, which are all controlled by government. When I last looked at horticulture farming, it is a non-working proposition for small farmers living away from cities. If middlemen are eating up margins of farmers, it is because they are licensed and their numbers are limited by government. There is little competition among middlemen and their commission percent is preset.

Anyway, the problem is not middlemen, but access to market for farmers (and also availability of cheap labour that government programs like NREGA took away – those interested in inflation should look at graph of inflation and roll out of NREGA timeframe). For many, cost of shipping produce to cities is higher than wholesale mundi prices. If FDI retail allows farmers to off load directly, all the better for farmers.

But why care about FDI when all these issues exist now with several Indian large retail corporations  already up and running?

Retail is tough business with little margin and mostly runs on volume. Managing that volume and product mix on a large scale is the key to success in retail. Managing scale is extremely difficult for newly started large retailers. Part of allure to FDI for these larger retailers (bizarrely they support new competition unlike Bombay club who grew fat on manipulating socialism controls) is to learn from world class players while dealing with local peculiarities of regional markets.

Many small inefficient kirana shops may close. But most street corners in any city or town will still have several well run kirana or larger retail shops serving local people for decades to come. While the poor may not benefit from large efficiently run retail stores, lower income folks, surely lot more than kirana shop owners, with tight budgets will save money to spend it on other things they need. Everyone’s access to choice will improve whether it is shrimp from Thailand (in addition to shrimp from coastal Andhra) to grapes from Chile (in middle of autumn in the north).

On inflation and actual money flows

Issue of inflation is more complicated. Just retails stores, even foreign, by themselves won’t reduce inflation, but over time efficient inventory management reduces unnecessary spoilage (a one time efficiency gain) and widely available pricing information will reduce the lag between producers production/planting plans to shelf time thereby damping inflationary pressures, if right government policies are pursued, quicker than an inefficient economy of kirana stores maintaining inventory on small tear sheets (for all those not-paying-enough-taxes-to-government folks imagine how much taxes these kirana stores are paying).

Actual money flows also will take time as most risk averse large companies will spread investments over several years (especially if politicians want to burn down their investment, and private, properties).Net effect of jobs also probably will not probably be high in the medium term, with eventual kirana causalities, but quality of jobs and pay will be lot better. Instead of working at kirana stores from 10 am to 9 pm, corporate retail jobs have fewer hours and better working conditions.

In the long term, potential for employment would be tremendous as the economy and choices grow with most small kirana stores unable to deal with demands of such an economy. Most jobs growth will be in related fields of construction and distributors, and with producers themselves. Corporate retail is already here. The FDI debate is really about how fast Indian retail industry becomes modernized using efficient modern tools verses staying small using primitive tools to run businesses – it will work for some but not for most.

If primitive tools are so good, may be we should all give back our cars and bikes, which is, by the way, hyper-competitive industry even with FDI, and get horses to keep the horse-feeders and saddle makers in business travelling few kilometers per day and never travelling beyond surrounding villages while stinging up roads with horse-you-know-what!