Open up the shops

BS OPINION

A large part of the sharp increase in US productivity in recent years, a McKinsey Quarterly study found last year, can be explained by the performance of sectors like retail. And within this, 'more than half of the productivity acceleration ... can be explained by only two syllables: Wal-Mart'.

Think of it: this is the sector that has a huge potential to enhance productivity and dramatically lower costs for consumers by eliminating intermediaries and using technology to cut inventories down to the minimum, and by forcing manufacturers to lower prices for consumers.

But this sector is closed to foreign investment. Indeed, as this newspaper reported yesterday, a group of secretaries is going to examine whether to open up the retail sector for high-value/low-volume businesses like medical equipment, whereas the real issue is how to open up the mass market.

As with any other sector, the reason for not opening up is the same "" domestic lobbies. Big Indian retailers, like the Tata's Trent which owns the Westside chain of stores, argue that allowing foreign retailers will spell death for the entire Indian retail sector.

At the extreme, the Trent argument is that Wal-Mart employs just 1.4 million people for its Rs 900,000 crore turnover, which is close to the size of the entire Indian retail sector, which in contrast employs 30 million people. In other words, be prepared for huge unemployment if the Wal-Marts of the world are allowed entry.

But, surely, this is stretching a point, since Indian business has not closed down en masse in the face of increased foreign competition; indeed, many businesses have got stronger.

The inroads made by small businesses, whether it is Nirma in the '80s or Cavincare today, into the markets dominated by giant global corporations like Lever are testimony to the strength of the small Indian businessman.

In any case, retailing is already undergoing a change with the advent of domestically owned shopping malls, store chains and hypermarkets; yet there has been no instance of mass closure of the millions of Indian kirana stores in localities where the big stores have come up. In cities like Bangkok and Hong Kong, big stores and corner shops flourish side by side.

The policy-maker must surely see that big store formats like Giant in Hyderabad from the RPG Group are trying to do exactly what Wal-Mart did to the US market a couple of decades ago "" buy directly from producers, and manage inventory tightly, to drive down prices.

The new competition has sparked off a variety of responses: MarginFree Markets in Kerala has small franchised stores with centralised buying, and groups of small, independent kiranas are experimenting with common buying to get bulk discounts. Don't assume therefore that the big stories will always win.

Remember what happened to Nanz (an Escorts joint venture with a European chain), and the choppy weather faced by entities like Shoppers' Stop. In short, different kinds of retail enterprises will survive.

What competition will do is drive down trade margins "" which, as studies have shown, are too high in India, and hitting producer and consumer alike.