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How the world burnt its fingers - Outside View by Shekar Swamy

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How the world burnt its fingers
Aug 29, 2011

There has, of late, been a public relations overdrive for foreign direct investment in multi-brand retail. The bureaucrats want to move ahead with it. And politicians from the ruling party have expressed the need to build a political consensus. There appears to be a divide between the two. Those facing the electorate know the ground reality. In this matter, I hope the survival instinct of the politician prevails.

This business cannot be about ramming policy changes through, using PR. It is about the lives of people. How will they be affected? Who will pay the price? What are the likely social consequences? What can we learn from other countries, to protect India's interests?

First, some explanation about the nomenclature "FDI in multi-brand retail". A leader of a national trade group told me that many of his constituents do not even understand what it means. The phrase is classic bureaucratic obfuscation.

The bureaucrats are justifying such FDI by saying it will improve supply-chain infrastructure for perishables, which is but a fraction of the retail industry. Using this excuse, what is proposed is that the entire retail world will be thrown open to foreign retailers. They should really call it "Inviting foreign companies to compete with all retailers and traders" so that everyone understands what it means.

The foreign retailers are likely to start with dry goods, as they tend to do around the world. These dry goods can be sourced from any part of the world. Every class of retailer, across product lines - garments, footwear, home furnishings, personal products, laundry, cleaning products, pharmaceuticals, furniture, kitchen and home appliances, white and brown goods, auto parts ... you name it - will come under attack.

All sorts of retailers, and traders and intermediaries, run the risk of elimination. Manufacturers of merchandise will come under pricing pressure, and face the threat of a shut-down. All of this in the guise of improving "supply chain infrastructure", which has no relevance to these categories.

Concentration is the game

In markets around the world, Big Retail has steadily edged out smaller players, leading to unfair concentration. In the grocery business, market shares range from 20 per cent to as high as 80 per cent plus for just a few retailers. Entire countries depend on them, as they control the supply of food.

Their shares, by country, are: Sweden 86 per cent, Belgium 79 per cent, Australia 78 per cent, Germany 75 per cent, Mexico 70 per cent, Canada 69 per cent, the UK 63 per cent, France 55 per cent, Brazil 38 per cent, Thailand 32 per cent, the US 30 per cent and Indonesia 20 per cent. In Brazil, Thailand and Indonesia, these shares have been achieved in just over a decade (see Table).

Data source: Economictimes

The social upheaval comes about because Big Foreign Retailers will aim for concentration, and this results in elimination of local retailers, fewer number of stores, and less employment.

In Thailand, over 30 per cent of independent small retailers were taken out in 10 years! We have 25 million chief wage earners in retail (Source: IRS). One percentage loss equals 250,000 jobs, comprising people who are not easily redeployed. If 30 per cent is lost, as in Thailand, this would impact 75 lakh jobs and 3.75 crore people (at five people per household). Readers can make their own estimates. The most poignant example of reduction in number of stores, and employment, is in the US. Between 1951 and 2011, the population of the US doubled from 155 million to 312 million. Yet the number of stores has actually declined from 1.77 million in 1951 to 1.5 million in 2011. The number of independent stores (with less than ten employees) has declined from 1.6 million to 1.1 million in the same period (see Table).

  US population Total retail establishments Independents Chain Stores
1951 155 million 1,770,000 1,600,000 105,000
2011 312 million 1,500,000 1,145,000 350,000
(Source: Chain Stores in America, and Wiki)

It is misleading to suggest that Big Foreign Retail will enter India and improve employment. While these players will employ people, at the same time, they will be knocking off employment in large numbers in the overall economy. It is the net numbers that we should be looking at.

Protecting India's interests

Two nations that have not permitted their retail market to fall into foreign hands are Germany and Japan. While they have a concentrated retail sector, their major players are home-grown. They both have had strong laws regulating the retail sector, protecting the self-interests of the respective countries.

The centrepiece of German anti-trust legislation is the Gesetz gegen Wettbewerbsbeschränkungen, or GWB. Section 20(4) of this ‘Act Against Restraints of Competition' "bans all undertakings with superior market power from selling a range of goods, not merely occasionally, below its cost price, unless there is an objective justification for this".

In essence, this means it is illegal for German retailers to sell below cost to knock out competition. German zoning laws are strict and they ensure that big stores cannot be put up, except in designated city areas. Store hours are restricted, and big retailers have to use union labour. After a decade, and unable to turn in a profit in Germany, Walmart exited that country in 2007, taking a €1-billion loss.

In Japan, the daikibokouritenpohou - the Large-Scale Retail Store Law - came into effect in 1973 to protect small retailers. This law, unchanged till 2000, regulated the amount of selling space, store opening hours, and number of business holidays in a year.

Most importantly, any proposal for a big store had to be notified and the views of the affected parties had to be sought before approval. In effect, this reduced the build-up of big stores for decades.

Predictably, the US protested, and called the Japanese distribution system antiquated. The US missed the point completely. The law was designed to serve Japan's interests, and it did that well. There is an uncharacteristic haste in India to rush through FDI in multi-brand retail. There are ways to protect national interests. The policy guidelines that have come out do not reflect them.

The politicians would do well to understand how the 10-plus crore voters in this sector will be affected. If the policy is notified, there will be a groundswell that could well sow the seed for a government change in the next elections.

Shekar is the Group CEO of R K SwamyHansa. His area of specialization is in developing business, marketing, and communication strategies globally. He has worked with leading companies in various parts of the world and has helped them launch, manage, and grow their brands and businesses significantly. Shekar holds an MBA (Delhi), and an MS from Northwestern University. He has served on the faculty at the Integrated Marketing Communications program at Northwestern University's Medill School for the past 14 years. Northwestern University inducted Shekar into the Alumni Hall of Achievement in 2002, a rare honor.

The views/opinions mentioned in the Report are of Mr Shekar Swamy only and not of Equitymaster.

Disclaimer:

Equitymaster is an independent equity research Company. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "How the world burnt its fingers"

N.M.R.Shreedhar

Aug 30, 2011

Hi, I totally agree with the views of Mr.Shekhar Swamy. Here in Indonesia we have seen the demise of the small timers/"Mom- and-Pop" stores due to the entry of large retailers like Carrefour,Makro,Lotte--because of their financial muscle they have even elbowed out existing local supermarket stores like Hero,Alfa,Indomaret etc. I strongly feel the govt should not rush into this matter--we need to realise that such multinationals are flocking to India only to tap the huge market;with no concern for fair pricing/business practices whatsoever. Perhaps the government should study the experiences in the countries like Brazil,Thailand and Indonesia before throwing open the doors to these MNC's. regds.

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