Why organized retailing is good: Business Line 28th May 2008

The organised retail system enhances efficiency in the value chain. The farmer gets a better price and grows a better quality of the product; the value chain is truncated and, in the process, an organised infrastructure structure is created
The resistance encountered by the corporate foray into organised retail is not dissimilar to the impediments that have been put in the way of futures trading. One may recollect that when futures trading was banned in some critical commodities this year, the reason given was that futures trading contributed to inflation, by which consumers would be affected as they would have to pay more for food products.
The irony of the tirade against corporate retail is that it is displacing scores of retail traders, even though the consumer is paying a lower price for the same products. The consumer was the explanation for banning futures trade, while his interests have become secondary to the traders in the retail saga. This surely makes one stop to think.
There are six interesting patterns that emerge from these two issues. The first is that Indians as a rule are averse to change and would always like to have a status quo situation, howsoever inefficient or hard conditions may be. It is probably human tendency, or rather frailty, that makes us resistant to change, as we become quite comfortable with inaction. Competition fear
The second is that we are apprehensive of competition and, hence, prefer a protected set-up. Competition demands performance, which we are unwilling to work with. Further, competition erodes the oligopolistic power that is wielded by certain groups, which is not acceptable.
The third is that we abhor transparency and like systems to be opaque, as non-disclosure helps in increasing profit. This, in fact, is a corollary of the first two features of preference for the status quo and the hostility towards competition.
Fourth, whenever we talk of systems and their working, we tend to take sides and play favourites. We never ask whether the system works efficiently, but are always looking to see if some groups or participants are benefiting from the system.
Fifth, we are so used to the system of having intermediaries in our lives that we do not want to get rid of them, even though very often they do not add much value.
Last, for any progressive move, there are usually activists who come in the way and often use irrational excuses to thwart such activity. The icing is provided by the political undertones, which are always present.Benefits of organised retail
Let us examine what organised retail involves. The organised retail system enhances efficiency in the value chain. The farmer gets a better price and grows a better quality of the product; and, more importantly, is not forced to do so, and only gets into such contracts with the corporate because it benefits him.
The value chain is truncated as the intermediate layers are pruned and, in the process, an organised infrastructure structure is created.
This starts at the purchase level at farm gate and moves across the packing, transportation, warehousing (including cold storage, when required), processing and packaging stages before being delivered at the consumer’s end.
The consumer buys from these outlets because he gets the right quality at a lower price. Outlets such as Spinach, Big Bazaar, Reliance Retail and Subhiksha have been delivering quality produce at lower prices. Alongside, there are vast investments being made, which open up multiple employment opportunities of a different kind. The Government also gains substantially as all the taxes and duties are paid along the way and there are no leakages. Therefore, all the parties concerned stand to gain. However, there is one class that apparently gets affected adversely, which is the trader. Given that retail is generally unorganised, it is but natural that if there is a large retailer, it could replace several small ones. How does one tackle this issue?
To begin with it must be stated that the so called ‘mom and pop stores’, which is the name given to our friendly retail grocer, will always have their own role to play. Home delivery services, the convenience of being next door, availability of small quantities of goods (like sachets and in low denominations), credit facilities, personalised service etc are some of the benefits that retain customer loyalty to these outlets. But, to the extent that there would be some replacement of loyalty, there can be a social problem even though this is not one for Economics to resolve. But, there is a way out. The large retailers cannot be everywhere as the investment involved is considerable. The small retailers will become franchisees of the corporates and can enjoy a fixed income plus commissions. Trader-corporate link-up
Moreover, there is a growing trend of the these shops to get associated with the larger corporates such as Hindustan Unilever, Marico and Dabur, which have set up their own chains with such names as Super Value, Parivar and Mera respectively where the goods are sold to them at the same price as that to large retail chains on certain conditionality like focus on display or walking space for consumers.
Alternatively, the smaller vegetable and fruits vendors could become employees of the corporate retail chain, which is also taking place in a gradual manner. Further, the local shop owner, who is the last intermediary in the chain, can actually procure from these corporate retail stores and save on costs and sell them to the consumer.
Thus, while the mindset has to change and some adjustment made, it is certainly not going to be anywhere close to large-scale substitution taking place.Higher resistance
Opening up the retail sector was also going to be the clichéd ‘last mile’ in economic reforms. The problem is acute as the sector is unorganised; the organised sector’s adaptability to reforms has been better, though, to begin with, there were major hiccups.
Once we move to the unorganised sector, the level of resistance increases. Further, given that there is already talk of foreign investment in this sector and the carry-over xenophobia that flows in us, organised retail becomes a more vulnerable target.
But there are viable solutions, as described earlier, if we are willing to look beyond narrow interests, and we should consider them rather than impede the retail revolution waiting to happen.