A hidden agenda behind multi-brand retail? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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PRINTER FRIENDLY | ARCHIVES
13 JULY 2011

Shekar Swamy, the Group CEO of marketing and advertising agency RK Swamy Hansa, has written a very interesting 2-article series in The Hindu Business Line (June 16 and June 17) on why multi-brand retail may not be good for Indian consumers.

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Before we move ahead, a few disclosures.

I met Mr. Swamy for the first time in December, 2010 when Quantum Mutual Fund was looking to hire an ad agency to let investors know that there is a simpler and more transparent way to invest their hard earned savings. We selected his firm not only because of their past experience (Raymonds' and Mercedes Benz are some of their well-known clients) but - during their presentations - they really warmed up to the idea of working for an "underdog". They could see that what we had to offer was something superior (after all, some of the members of their team also invest in mutual funds!) and we were clearly on the side of the consumer, willing to fight the battle. (If you would like to see some of the Quantum Mutual Fund ads click on the web site www.QuantumMF.com)

The other disclosure is - having travelled a lot in many parts of the world - I was amused that groups like Wal-Mart or Carrefour would even want to enter India. Not because there is no market for their style of large box outlets that carry everything but because India runs at a level of efficiency that will be difficult for them to match - with their overheads of costly MBAs and consultants. For example, if I need one can of coke to be delivered to my home, I can call the kinaaraa grocery store and they will deliver the can within 5 minutes to my doorstep. And, since most Indians do not have large houses and McMansions that the Americans do, where could we possibly stock 6 crates of coke for our monthly consumption?

We are doomed to have smaller homes. With real estate prices propped up by the real estate developers and their politician friends, aided by developer loans from PSU banks, the chances of us having large homes is pretty close to zero. Therefore, with space at home a premium for the foreseeable future, the kinaara grocery store becomes our good old Japanese just-in-time inventory management system. No Wal-Mart, Reliance, Bharati, or Future Group could replace that. We have a similar situation in the pharmacy business where there is no Walgreens or Rite Aid chain but the single-owner pharmacy that supplies us our needs and may even deliver the medicines to our doorsteps.

Pay, baby, pay

But, what I failed to do - and which Mr. Swamy, also a visiting faculty at Northwestern University, has done in his articles - is to analyse the existing cost structures and place hard numbers on our messy kinaaraa world and estimate the future costs for consumers in India under an air-conditioned Wal-Mart-ruled world.

Giving data sourced from industry associations, web sites, and annual reports, Mr. Swamy makes a very compelling case to suggest that the Indian consumer would end up paying a lot more than today - and a lot closer to what the duped consumers in the US are paying.

Table 1: Mr. Swamy's data stirs the plot?
Channel mark-up Consumer Goods Garments Pharma / OTC Cookware / Kitchenware
In India 22% highest 30% branded 34% total 30% total
In West 40% average 100% minimum 100% minimum 100% minimum
Source: Shekar Swamy, Hindu Business Line, June 16 and 17, 2011

I am sure these data points are with the bureaucrats and the ministers who made the recommendation on allowing multi-brand retail under the FDI policy.

If they have it, please can they dispute the data?

Or, if the wise policy makers agree with the data, please can they explain how they arrived at their decision to recommend multi-brand retail? Is there some guarantee they have obtained from the foreign and Indian potential entrants on pricing or on limiting their profits?

Or is our government so morally and intellectually bankrupt and so keen to bow down to any western concept, that they only exist to sell out to the highest bidder?

The people who determine policy in India are so enamoured with speaking on foreign television channels, being applauded at the World Economic Forum in Davos, or being hosted by the US President, or acting as hosts to a succession of political leaders that they have forgotten why they were elected in the first place. Over the past 10 months we have had the leaders of UK, USA, Russia, Germany, and France all touch upon our sacred shores. Did they come here to drink our tap waters and prove that they can still live? Or that they can eat a curry and not get a Delhi-Belly? No, they were they here to sell their arms, their goods, and act as spokesperson for companies and for their way of life. That is their job. To sell and promote their products and their companies.

To host, to listen, to absorb, to filter, and then to decide what is best for India is the job of our representatives.

Not a nationalistic jingo

In the early 1980's DoT - under the guidance of Sam Pitroda - developed a phone exchange that could operate without air conditioning and without dust-free conditions. Yet, if my memory is correct, the contract to build out the land line exchanges went to foreign companies like Siemens and Alcatel.

In meetings with the BHEL management in the 1990's they would lament that, though BHEL had the best equipment, there was a preference to grant contracts to MNCs. Obviously! From what bank account can BHEL pay a bribe? At best, BHEL can offer a few jobs for friends and family. In what may be a totally unrelated incident, a few years ago investigators in Europe discovered a slush fund in Siemens that was used to pay bribes.

Many globally known financial firms (please rent the DVD "The Inside Job" ) get invited to increase their business activity in India despite the fact that they have, time and again, proven how well they can work against the interests of their clients and corrupt the system they operate in.

Has the government even bothered to ask each of these financial companies when they enter India to list out the fines they have paid worldwide, the settlements they have entered into, and then decide whether these firms are "fit and proper" to operate in India.

This is not a nationalistic jingo to throw all the MNCs out. This is not an "I-hate-the-West" crusade. I use and respect many western or non-Indian concepts, products, and practices. But time and again the decision making made by the wise people of New Delhi seems to be warped in opaque reasoning or in blissful ignorance.

Many MNCs have done a wonderful job in India. Suzuki, after a controversial entry, did build the people's car and is the leader in the auto market. The Hero-Honda joint-venture forced Bajaj to shape up and both companies delivered a better and more reliable product to millions of Indians who cannot rely on an unreliable public transportation system.

Levers, over the decades, has deepened the retail chains to the extent that it now faces competition from new producer who can piggy-back on the success of the infrastructure that it helped build. ITC continues to deepen its own retail build-out and pumps us with more cancer-causing tobacco products that will, one day, leave the government to pay the bill.

No, this is not a Be Indian, Buy Indian mantra.

Mr. Swamy has presented us with some interesting data to mull over - or dispute. Yet, the bandwagon and drum roll for FDI in multi-brand retail is gathering steam.

We need to address a fundamental issue: What is the overall economic and social vision of India? And then build the framework within which policy must list the guidelines for making decisions. The decisions to grant access to the coal mines, gas fields, telecom spectrum, land for SEZ, land for building new townships, and the license to crooked financial firms to grab your wallet. Be they Indian firms or multinationals.

The rich cannot get richer at the cost of the poor. They can create, they can build, and they can enjoy the wealth of their genuine enterprise.

But what enterprise is there in bribing your way through to a great business deal? It takes a dead soul, no conscience, and a desire to be on some rich-dude list to be a tycoon, Indian style.

But this is true - if we all join in the looting and become disciples and perpetuators of cronyism, we will surely be able to afford those higher prices that the organised multi-brand retail folks are about to introduce in the mall coming to your neighbourhood!


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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47 Responses to "A hidden agenda behind multi-brand retail?"

NGONGO ABEDI

Sep 21, 2012

asking for financial support

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pvpandi

Oct 30, 2011

very intersting and informative , ple forward on my mailk id for regular updates

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avinash

Sep 9, 2011

A great analysis. An economist not sold to MNC.
DR.AVINASH SINHA.

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nirmal singh

Aug 10, 2011

multi brand retail will create competition ,which will ultimatly benefit consumers.

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G.Balasubramanian

Aug 9, 2011

I live in Thailand for the past 15 years and seen the growth of shopping malls - local as well as international from very few to hundreds of them - Big C, Lotus, Makro, Carrefour, Robinson and so on. My own assessment is that Thailand has benefited a lot with the introduction of these shopping malls. If a produce in Thailand is cheaper they can export to their counter parts in other countries and vice versa. In these shopping malls you can find a range of goods - vegetables, fruits, grocery and so on from both developing countries (India, China, Indonesia, Malaysia etc) and developed countries (Australia, USA, Canada, New Zealand etc). The consumer is the one of the major beneficiaries as he can shop a week's needs - vegetables, meat, dairy items,grocery etc in an air conditioned and clean environment. He could also buy clothing, electrical, electronics, hardware etc. Above all he has a very wide choice of goods/brands in almost every possible item. These malls are one stop centre for family needs.The producers are not confined to the domestic market and any surplus production can be exported out if their produce if cost effective. The government gets tax revenues (No tax evasion). The employee wages and benefits are also much better, yet cheaper for the company and consumer as the turnover per employee is much higher than the small shops. In addition to the above these malls are open from 6 AM to 10 PM and there is ample parking space for vechicle. Most banks have their branches in these malls operating 7 days a week from 10 AM to 7 PM. Even Government offices - eg.Passport office, post office operate in some of these malls for the convenience of the customers. Some also have cinema halls, recreation facilities and other entertainments. The middle class population is absolute comfortable and satisfied with these malls. Of course, it is may not be affordable most daily wage earners, who live far away from these malls because of travel costs and they probably don't buy a week's or month's requirement at one go but they can still enjoy the luxury once in a while. The unemployment rate is less than 1% for past several years. In short, I believe these malls contribute to economic growth of all sections of the society

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Rs

Aug 9, 2011

Capitalism is not the best solution but it's the only solution. Along with regulation this is the best for consumers. Believe it or not there arerich people in India who don't mind paying more for comfort.
Besides on Swamys stats, it's comparing apples and oranges, in US. Consumer can return any product, even vegetables, that results in minimum base quality, which is not in Kiranas.

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Rajesh

Aug 3, 2011

Good article, but sad to read the comments. It's so disappointing that the reader claim that our kirana shops have improved after organized retails invasion, and yet claim that to be innovation!!! So, the guys at forum recommend that we should always welcome western companies that value humans and ethics, they offer cheap products, and you can have your pizza with lesser work! And yes, they provide jobs too. I am sure these guys would recommend handing over the charge of the nation to more democratically functioning american/european parliaments with clean, suave and bright leaders, rather than wasting their lifetime in improving our own system. Convenience matters. Organized shops take steep discounts from manufacturers and in some cases pass them on to customers, something that kirana shops can't do, and yet if kirana operators sell with 10% margin, I am not sure how they can maintain airconditioned offices. Using credit cards, keeping things clean. It's more systemic issue of an Indian entrepreneur offering basic services often in ungroomed fashion keeping things bare minimum to help him run the business. There are many homegrown businesses which have the global standards. But that needs hard work. Even in India, if a political leader determines to work honestly, efficiently, he does not need lessosn from Harvard, and yet can create new benchmark of development. Today we have the organized retail in almost each sector, but yet more Indian are staying hungry. I am strong believer that it's the organized retail that is not only setting a vicious cycle of inflation but would end up lot more blood on street than jobs.

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Sriram Gopalan

Jul 24, 2011

Mr Dayal You sound too much of a leftist here.
The Indian Corner shop guy is no better. He hoards and releases good stock only during the festivals. People don't mind paying his markups because they don't pay him everytime they buy. Most of the times the settlement is monthly. You cannot expect to get credit from a multi brand supermarket. You have to use your Credit card for that.

Multi Brand retail entry has forced our kinara shops to spruce up their ambience, respect customers time & money, stock more goods & offer home delivery which was absent some years back.It is time we welcomed multi brand retail with open arms.

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deep

Jul 23, 2011

We also need to take the employment generation capacity of large scale retail - I'm sure the employees at Bigbazar do get a much better deal than the kirana store employee - in terms of salary & working conditions.
Let there be competition - some ways we will lose; some ways we will win! (There will be stats & sceptics either way).

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Arun

Jul 22, 2011

Very interesting article and thanks for the opportunity to bring out the valuable debate. Having lived in both USA and UK for more than a couple of years and India for long, I can agree with most of the points raised on your article as well as on the other side provided in the comments. Let me add my 2 cents. Allow me to use McPPP (McDonald's Purchase Power Parity) basis. If a quick/snack lunch can be bought for USD/GBP#2 in western nations for which the all you need to do is work for just 20 minutes of your time (under minimum wages), then it seem to me that current Indian system is inefficient as we need to work a lot harder to quench our hunger. Also, I think the food expense occupies a much higher % of monthly budget in average Indian families than it is in Advanced Nations.

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