FDI in retail—III ?

Illogical claims on controlling price rise
by  MNCs?

By Dr Ashwani Mahajan ?

One of the major arguments put forward by the government in justifying its decision to open retail sector for Foreign Direct Investment is that it would control inflation. Perhaps the common people reeling under inflation may welcome any policy that provides relief from inflation. But why the government is pushing this policy despite opposition from almost all non-Congress political parties, whether in government or in opposition, social organisations, labour and farmers’ organisations, forces us to verify the claims of the government in this regard.

What Government claims?

Government says that, bringing multinational giant retail companies into retail sector in the country would reduce the distribution cost of the goods. Government claims that these companies procure goods from farmers and manufactures directly and therefore the margins earned by the intermediaries would be eliminated. Benefit of lower cost of procurement would be passed on to the consumers and therefore these MNCs would be able to bring a check on inflation. Government also claims that these companies make use of latest technology in handling the material, supply chain and distribution. This can help in reducing the prices paid by the consumers. Government even claims that these companies can even pass on the benefit of their efficient system to the small retailers.

Government claims are devoid of any research

Though government makes this rhetoric, it has failed to give any basis for its claims. Even the sponsored researched reports of ICRIER have failed to justify this policy on these grounds. Even committee of secretaries has also repeated the same argument without any basis from international experience. Interestingly Inter-Ministerial Group (IMG) headed by chief economic advisor Kaushik Basu was also found arguing for opening up of multi brand retail to FDI on the pretext of controlling food inflation. It said that the government should consider such liberalisation at the earliest as “India’s retail sector continues to be primitive and there is evidence that there are large losses that occur as products pass through the supply chain from farm to the retail customer.” It argued that because of dated technology and managerial methods used to move products from one part to another there is value erosion that occurs all the way which, in turn, raises the prices that consumers have to pay. Therefore, IMG argued that reform in this sector can be an effective inflation busting measure. Whereas IMG has failed to give any basis for their recommendation, Food and Agriculture Organisation of UN has given a contrary research finding, that these MNCs are actually causing a big loss of food material for various reasons, as detailed in my earlier article (issue dated 8.1.2011, Organiser). Therefore, this argument of ING is not tenable. If we go deep into the arguments of the government and its officials, they are actually not based on their own research. These arguments are in fact ‘borrowed’ from the sponsored reports of multinational retailers like Walmart, Tesco, Carrefour.

Higher mark-ups of retail giants

In India margins of wholesalers and retailers are much less than the mark-ups of multinational retail giants. Higher mark-ups of multi-brand retailers are in-built in their business model. Mark-up is difference between the consumer prices and production costs. For comparative analysis of mark-ups of small Indian retailers and that of multi brand retailers, let us take different product groups separately. In case of consumer goods, like food products etc., margin of distributors and wholesalers is between 4 to 8 per cent and that of retailers is between 8 to 14 per cent. This margin is added to the production cost. Therefore, channel cost of distribution chain in India is between 12 to 22 per cent. If we look at multi brand retailers, their mark up on procurement price is nearly 40 per cent. In case of garments segment in India, total margin of wholesalers and retailers is between 35 to 40 per cent. However, the experience of multinational retailers shows that they put a price tag on garments of 2 to 4.5 times of their procurements price. As such their mark-up is 5 to 9 times of Indian retailers. In case of drugs and medicinal product we find that margin of retailers is up to 20 per cent, wholesalers up to 10 per cent and of C & F agents is up to 4 per cent. On the other hand, multinational retailers like Boots (UK) and Wallgreens (USA), have a mark-up of  2 to 3 times that of their procurement price. Therefore their mark-up is at least 6 times that of Indian retailers. In case of kitchenware, Indian small retailers’ channel cost is hardly 30 per cent, whereas retailers like Walmart etc. put a mark-up of 100 to 200 per cent on their procurement price. As such in case of kitchenware mark-up by multinational retailers is at least 5 times more than small Indian retailers. If we consider these mark-ups in different categories, then even if they announce sales from time to time, their prices would be much larger than the prices charged by present day small retailers. This is due the fact that these multinational retailers enjoy monopoly power, as there are only a few retailers (normally not more than 5) in any country.

As already stated above higher mark-ups of organised retailers (MNCs), built-in their business model, are due to the fact that process of retailing involve much higher costs as compared to small retailers. Though they maybe able to procure goods at a lower price by exploiting farmers and manufacturers due to their monopsony (monopoly as a buyer) power, but they may not be able to sell cheap in the long run, as they face high selling costs in terms of rentals of stores, warehousing and cold storage, other fixed costs and high rate of profiteering. In the words of Shekhar Swamy these multinational retailers open their stores with much fun and fare, announce lower prices for products sold in their stores, and will continue to sell these products at those prices till competition from small retailers is totally finished. It is an open secret that multinational retailers sell their products at ‘predatory prices’ to wipe-off competitors. Predatory price strategy has been adopted by these giant international retailers world over, wherever they had gone. Predatory prices are the prices, much lower than the procurement prices. This is made possible by their deep pockets. We understand each of these international retailers control significant share of markets in their respective areas of control, in countries, where they are operating. This makes their financial muscles strong. We cannot imagine small shopkeepers incurring loss even for a month in order to keep them in competition with international retailers, but we see these international retailers ready to forgo billions of dollars to push small retailers out of business, as they are eying on more than  22 lakh crore of rupees of Indian retail market.

(The writer is Associate Professor, PGDAV College, University of Delhi).?