The Metro model

A report by the Karnataka government to the Centre, that the state is losing revenue as a result of the operations of Metro Cash and Carry, suggests that the controversy over the company and the nature of its business has not died down.

The Karnataka report stops short of accusing the company of wilfully violating the terms of its licence to do business, but argues the company could be more careful.

Readers will recall that Metro has been accused by local groups of stepping into the retailing end of trade, which its licence does not permit.

The conclusion seems to be that Metro is both guilty and not guilty, but that the company should be allowed to continue its business.

Meanwhile, it is interesting that Metro's business model has evoked interest in other states and, according to its managing director, some state governments have requested it to open shop in their territory.

They have even promised to change their laws to allow Metro to sell fresh agricultural produce, it is claimed. If true, this would seem to validate Metro's contention that its business model will not come into its own, and the full economic benefits from its operations will not be realised, until it is able to store and sell fresh produce.

Its two stores on the outskirts of Bangalore are not allowed to do so. Metro argues that it will be a boon to farmers if they can sell their produce to it, as they will be linked to a distribution channel that gives them better value for their produce, as well as upgrade to the demands of quality buyers.

Storing fresh produce is important to Metro because it becomes a more attractive proposition to an important set of customers, hotels and restaurants. State governments that can look ahead presumably see in Metro the potential for their farmers to get good value.

Who is against Metro? First, of course, there are the traders and distributors who see the threat of losing business because of the de-layering of Indian distribution channels.

It goes without saying that distribution in India remains inefficient because of too many layers (as a McKinsey study found years ago, thereby affecting both producers and consumers); many small players are simply not able to take advantage of modern logistics.

Swadeshi groups like the Swadeshi Jagaran Manch are also hostile to Metro. But this is not all. Large retail chains coming up in India also seem to feel threatened by Metro.

Though they don't cater to the same customers, Metro's contention is that its business model is in fact beneficial to the small retailer, the owner of the corner store.

He can buy all that he wants from one location, daily or even twice a day, at attractive prices (Metro is a big buyer and buys on credit while selling against cash), thus reducing his inventory costs while being assured of quality. If the small retailer thrives, large chains do not.