Kanika Datta: Big retail is nobody's bogey

SWOT

Much heat is being generated over the wisdom of allowing big private retailers in India. Sonia Gandhi's much-publicised letter to the Prime Minister has raised all leftists' favourite bogey: The Plight of the Poor Farmer.

Left-leaning conscientious objectors are also reluctantly talking about the predicament of the Hapless Corner Shop, otherwise known as the kirana store in north and west India. The last is ironical, since small traders and shopkeepers have traditionally been a right-wing BJP vote-bank rather than a natural left ally.

The big retailers, it seems, are responsible for inflation, for squeezing farmers and for putting small grocers out of business. Mrs Gandhi's letter suggests that a study needs to be done to ascertain how Big Retail might impact the livelihood of farmers.

Perhaps Business Standard's front page story yesterday might partially allay her fears. Just as they reacted to private wheat purchasers, farmers seem to be only too keen to sell their produce directly to the few new retail chains that have made their limited entry in the food and grocery business. Some appear to be as delighted to tie themselves in to long-term supply contracts.

So much so that arrivals of some food items""principally fruit and onions""at the major wholesale markets appear to have fallen significantly. Of course, this last point is a sensitive issue""it provides a convenient alibi to explain rising prices.

So there we have the cause and effect. Big Business is detrimental to the interests of the People. If the Big W (Wal-Mart) makes its entry as it soon will in collaboration with Bharti Retail, it is said prices will soar and small grocers will run out of business and we'll be headed for social Armageddon. Look at what happened in Europe, they point out, where the corner shop has all but become extinct.

Populist political opinion is notoriously short-term in outlook, and turning to the West (or China, as is the current fashion) for policy outcomes may not always be wise. As the past 15 years of economic reform have proved, India has a unique and unexpected way of finding creative solutions to problems when given a free playing field.

One example: the whole world (rightly) lectures India on its infrastructure constraints, yet Indian business has grown from strength to strength despite the lack.

And so will it be for retail. Let's consider the Big Retail fears. First, as the Business Standard story shows, farmers don't see the Bhartis and Reliances as threats but as opportunities to eliminate the rapacious middleman and earn better margins. Second, consumers gain because lower procurement prices mean lower retail prices.

Third, to argue that Big Retail is responsible for cornering stocks and contributing to rising wholesale prices at the mandis is specious. To start with, lower supplies are only in some categories of fruit. Vegetable arrivals at Azadpur, Asia's largest wholesale market, have not seen a fall.

Also, such Big Retail purchases are hardly significant enough to move prices. Data from the Indian Retail Report 2004-06 suggest that organised food and grocery accounts for less than 1 per cent of total retail turnover (see chart). There is no reason to suppose that such purchases would have risen so significantly in two months of 2007 as to skew prices so drastically.

It is possible to say that this situation will change, given the hyper-growth in organised retail and, therefore, the threat to small grocers and to price manipulation will rise exponentially.

My prediction on the first is that it is unlikely and I turn to two other Business Standard stories as evidence. One talks about how consumer companies are helping small grocers refurbish their shops and improve accounting and supply chain management to parry organised retail competition. Another out of Kolkata talked of how the Indian Institute of Packaging is working on a competitive strategy for small grocers for the same reason.

Certainly, the big consumer companies, past-masters themselves at extracting margins from bulk purchasing, understand that small grocers will remain a key alternative distribution network and a bulwark against the margin-sapping strengths of Big Retail sourcing agents. In other words, Big Business has a vested interest in keeping Small Business in business.

Besides, unless Indian lifestyles change really drastically, Big Retail will be a useful addition to India's retail kaleidoscope, but is unlikely to exert a monolithic influence on prices and fragmented consumer buying patterns. Only middlemen need fear their entry.