Policy Watch: Once promising, Big Retail's future in India is quite uncertain

Last week was full of news on the retail front. Carrefour decided to shut shop in India. Reliance Retail too decided to shut 100 Fresh stores in the country. After its split with Sunil Mittal, Walmart's plans are in hibernation.

Suddenly, Big Retail does not appear to be very promising in India.

This could be partly because of the new government's unwillingness to allow Foreign Direct Investment (FDI) inflows into the multi-brand retail segment. Or it could also be because, suddenly, big retail is coming to grips with the realisation that India is quite different from many other countries in which it has flourished. Or, maybe, it is a combination of both.

The government's reluctance appears to have been based on some very serious concerns about the adverse effects retail chains could have on the money available to small farmers. True, big retail has been talking about farmers earning more by cutting out the middleman. But a closer look shows that what the farmers are being given is not as much as they ought to be getting.

Consider some numbers. Some 40 years ago, farmers in most developed countries used to get around 60% of the end price that the customer would pay. The trade and processors together took the remaining 40% to account for processing, transportation, spoilages and fees.

Today, after the advent of big retail, most farmers in these countries get under 40%. Compare this with the 70% plus that milk processing companies like Amul, Hatsun and Heritage offer farmer-producers. In the West, one-third of the price goes to processors, one-third to retail networks and only the balance to farmers.

In India, most traders are mom-and-pop shops, hence they do not think in terms of labour charges. For them labour charges are part of the surplus the family keeps. They are willing to work on trade margins of 4-10%, and many even offer services like free home delivery, often for very small quantities.

Moreover, in developed countries, retail stores often come up outside city limits, and families have their own vehicles which they drive to the far-away superstores in order to stock up their household requirement, for a fortnight, or even for a month. In India, however, most shopping for household essentials is done almost every week, sometimes everyday.

Those who set up superstores within city limits often found the real estate or rental costs too high. Not surprisingly, whether it was Big Bazaar, Shoppers Stop, or even Reliance Fresh, all of them found labour costs unaffordable, volumes not large enough, and real estate costs crippling.

That is why, the present government is wary. It knows that these stores, in order to survive, will first try squeezing manufacturers for higher margins (big players like Amul have downright refused to provide any additional discounts to superstores). Then, they try wresting higher margins from farmer-producers, and eventually bring in their own (white label) brands to reduce the cost of purchase of other branded items.

Finally, they begin raising prices for consumers as well, but only after they have driven away competition. These are practices the present government is more concerned about than the previous government.

So does this mean that the big retail story is dead? It seems so, though it is possible that India will come out with its own variants. Already, Reliance Fresh is trying to re-design its formats by opting for cash-and-carry – possibly in large warehouses outside city limits. Such stores could focus on smaller retailers as customers.

Whatever the eventual outcome, big store-chains will not hold out the glamour that they once had. The numbers looked mouth-watering some 5-10 years ago, considering the size of an emerging middle class.

But the rental, labour costs and the cost of real estate combined to curdle such dreams.

The small trader has triumphed. And competition among small traders will continue to remain fierce.