“It has been said that arguing against globalization is like arguing against the laws of gravity” ~ Kofi Annan
To revive the slowdown in the Indian economy the Indian government recently announced the approval of foreign direct investment (FDI) in multi-brand retail and a few other key sectors. This decision to allow 51% FDI in retail will impact the $500 billion multi-brand retail market dominated by the small convenience stores. A number of multinational corporations like Walmart, Tesco PLC and France’s Carrefour SA , French Groupe Auchan SA are on a wait and watch mode.
Walmart is already in India in partnership with Bharti Group but only in the back-end operations. Once the FDI is passed in parliament Walmart proceed to go beyond the back-end wholesale (cash-and-carry) stores format ad face the Indian consumer at the front-end. With more retailers like Tesco PLC and France’s Carrefour SA likely to follow suit it may prove to be a game-changer for the entire Indian retail landscape i.e., the consumer, the middlemen and the traders and the small farmers.
This announcement has created a backlash from the small retailers and the middlemen who feel their businesses will shut down and there is also a fear that farmer profits would be squeezed out.
Challenges for Walmart
A plethora of rules and regulations need to be understood and adhered. Govt. policy makes it mandatory for foreign single-brand and multi-brand retail companies to meet the 30% local sourcing norm at an aggregate level in their first five years in India (it can be lower at the beginning, but that the average over five years should be 30%). This would stimulate growth and employment in small & medium size industries.
It’s not going to be easy. Multinationals like Walmart will have to take-on a complex web of strategic and operational challenges to get their products to the consumers. The weak infrastructure and communication systems will pose problems and a long gestation period to breakeven is expected.
At one extreme there are the myriad of small to medium retailers – Kirana (Mom & Pop) stores, hand cart and pavement vendors known as unorganized retailing which constitutes 98% of the retail market.
On the other end the robust network of larger modern Supermarkets and Hypermarkets like Reliance Mart, Big Bazaar, Vishal Megamart, Spencer Retail’s & Aditya Birla’s More and D-Mart which is only 2% of the market share.
Unlike the US where Wal-Mart buys from only a few hundred farmers in India they will need to create a system to contract with thousands of fragmented cultivators. For this Walmart can learn from the much acclaimed ITC’s e-chouphal value chain system of farmer to consumer.
While the $400 billion Walmart’s worldwide dominance is well known it did fail to read the market well enough in Germany and had to close shop. Similarly in South Korea it did not read the consumer mindset especially of the housewives and had to pull out.
Walmart must learn from its mistakes elsewhere and develop a vision for India that goes beyond profits. Good ethics and corporate social responsibility can become there winning “Mantra’ for India. Remember what Bohdan Hawrlyshyn the well known economist postulated:
“We must remember people are the purpose & profits are the means & not the other way around. It should not be: people are the resources & profits the purpose.”
What are Kirana stores?
He knows his customer well and even offers a month of credit as well as home free delivery services. The Indian housewife does not need to plan for a week’s shopping. A large segment of shoppers of middle and lower middle class may have small kitchen and so daily provisioning is the best way.
Some of the Kirana owners when asked about the impending threat of big box formats like Walmart do not seem undulyconcerned. The coming of super-marts and hypermarkets in the last 10 years did not hurt them. They know their strengths and the emotional connect they have with the customers.
Moreover the India is not a stagnant economy and in a growing economy there is space for both to co-exist profitably.
The Sabzi Mandi (wholesale vegetable market)
In the wet marketing chain large volumes of vegetables and fruits are brought to the Mandi from remote locations in large trucks. The gong sounds at 4am heralding the opening of the market. The middleman or trader at this point
quotes a price to the farmer based on his own judgment of quality of the product. Mostly the farmers get a raw deal and are helpless as they cannot carry the perishable items back. Retailers, vendors and handcart buy and take away their daily requirements for retail sale in the city.
The mark-up on vegetables between the Mandi to the retail end is between 200 to 400 percent.The ultimate losers are the poor farmers despite their toil and risks and the end consumer.
Some enterprising and cost conscious folk especially house wives brave the hustle bustle to the chaotic Mandi once a week. They buy the vegetables for the entire week’s requirement at wholesale price. But not many can do that.
The likely benefits
Walmart’s core competency is its sophisticated logistic system. The existing long supply chain for fruits andvegetables passes through a number of middlemen en route to the retail end. There is huge wastage due to lack of infrastructure facility such as cold chains and storage. The improved system will plug the leakages and larger volumes will move efficiently through a technology supported system. This will create more value for the consumer and the farmer. A higher farmer share of the retail price will be released. Even the traders would benefit by shopping directly from big box stores like Walmart instead of sourcing from the Sabzi Mandi.
Bharti Walmart already has sourcing arrangements with around 4,000 farmers in states like, Maharashtra, Karnataka and few other states. The produce from farmers is alsosupplied to Walmart stores globally like grapes from farmers in Maharashtra go to consumers in UK.
Bharti Walmart leverages its global value chain to provide technical knowhow and superior seeds for the farmer to produce high quality produce attracting more price.
The learning and familiarization in India through its JV with Bharti will give Walmart a head start when it finally sets its own stores.
Better and fair management of food storage, cold chains and elimination of the middleman will benefit farmers and the customer. More jobs will come up for the youth in setting-up of food processing units and for retail management. In addition employment opportunities will be generated in food, clothing, construction, packing, information technology, transport and cold storage, besides other basic infrastructure facilities.
“We must take care that globalization does not become something people become afraid of” ~ Gerhard Schroder