Eonomics Adda, French Toast, Chocolate Cake, Kebabs and the issue of FDI in Retail

I find scraps of overheard conversations, casual adda, heated arguments with amateurs provoke my thoughts better than reading through the tedious lines of non interactive curriculum. The “adda” over tea, cakes and kebabs at my cousin’s house last evening was over the FDI in retail. Cousin is a management person from India’s top of charts business school and accordingly has served as a CEO for several years till his recent retirement. For reasons of his training in management, he obviously supports the FDI in India’s retail business. His arguments in favour of the case are impeccable and assuring. On paper and logic, FDI in retail will help eliminate the middle man and given the scandal of onion, sugar and dal prices, it is expected that his margins when divided between the farmer and the consumer will help the former recover high prices and the latter afford discounts. The FDI would set up food stores across the country with their large capital base and what it would sacrifice by way of margins would be made up by volume. In fact the FDI can amass very large volumes of sales and this is the precise reason it can compromise on unit margins giving more to the producers and charging less for the consumers. On paper, there is nothing better than the FDI, a liberalized India’s answer to the decline of the PDS.

What then are the flipsides to this story? The problem with retail is that more than the price of goods, retail chains must carry within their costs of the real estate they occupy. The crux of a retail business is not sourcing, shelving and selling; it does its business to create a real estate value. On the one hand, departmental stores seek suburban properties to avoid rents in the city; on the other hand, they dare not go too far into the moors into the sparse population because they would lose customers. Large retail needs a certain frequency of footfalls for stocks to be sold before expiry dates. Retail stores must maintain certain level of stocks which requires a certain level of purchases, only possible in areas of relatively higher population density. A smart retail business CEO can alternatively think of smaller chains across the country; possible but that would increase the transport costs rather high. FDI in retail cannot compromise on the level of its profits because FDIs must be indifferent to the level of profits with respect to alternative avenues of investments; retail cannot afford to offer returns lower than what the FDI would have earned elsewhere. Hence whether in Mograhaat of Paschim Bangla or in the cities in Pennsylvania, investments should earn as much. This makes retail stores that come up with FDI money locate themselves within the limits of the city rather than in the obscure villages or district towns.

Within the city then FDI creates a new value for real estate and it is through the route of the real estate value that the local kirana shop in India gets displaced. Bill Quinn in his book on Walmart tracks down how the retail giant has changed the rules of the game for procurement, stocks and stores and even employment leaving everyone worse off than before. I am not so sure that in India this will quite be the case for Walmart’s lethal power will be absorbed and quelled in India’s chaotic diversity and inequality. Walmart cannot attack the local kirana shops the way it drove the Mom and Pop shops out by buying off their wares and selling them initially at a loss and then when the small shops disappeared, Walmart increased prices because it was a monopoly. In India, this is fortunately not the case but the kiranawallas are still displaced because of the push that outfits like Walmart bring forth. The local kirana, if it is owner run, suddenly discovers a new price for his retail outfit sells the space and exits the business just to be in the same relative position in the income distribution curve. This is how, an Arambagh, a retail chain financed by a poultry initiative in my locality of Dover Lane in Kolkata has displaced all the retail shops down the lane including the age old chemists! The kirana shop just another furlong down, rented out by my cousin mentioned above, has completely changed his wares. I used to get roasted peanuts for my father, locally produced and packed in cellophane; now he doles out a company packaged tin at ten times the price. He only keeps stock of exercise notebooks and notepads that are branded and hence four times the price of the stationery I used to live off all through my college days. In this way, my cousin’s shop keeping tenant has changed the commodity composition from an affordable bundle into a more expensive one thus trying to keep margins at par with Arambagh.

The shop on rent could have still kept cheap stocks inviting higher turnover, but due to the limitations of space and difficulty in acquiring more space due to the rise in real estate value, he maintains his level of stocks but increasing the value and margins on those stocks in order to be at par with the Arambagh store; he has to be at par with Arambagh otherwise he cannot source his stocks from the pool of wholesalers. In this way, whatever connections the local cottage industries had with the market are severed off. Interesting that the FDI really never asks the kiranawallahs to close down, they raise real estate prices through which the retail business is reorganized to sell high end products for luxury consumption of people in the higher brackets of income. In a localities of south Delhi like Hauz Khas and Green Park, one finds zip repairs, tailors, blanket cover makers, suitcase repairs, local barbers, plastic goods stockists, simple furniture stores selling packing wood shelves and folding writing tables disappear to yield spaces for Costa Coffees, Nokia mobiles, Madonnas and others most of which do not constitute a part of everyday consumption. My everyday life is disorganized, my routine gets upset at having nowhere to go if I have to fix the zip of my jacket or stitch my bag up. FDI in retail has a strange way of raising my levels of anxiety because life has become so disorganized around me with the disappearance of the support services I used frequently.

I have tried an interesting exercise; I carry the same list to the Matri Store inside Aurobindo Ashram complex and Big Apple in Hauz Khas and my bill in the former is at least a hundred rupee less every time. Retail shops do not sell cheap, they keep the relatively more expensive stuff so that even after discount you end up buying dear. Soaps like Rexona, Hamams are replaced by Doves and Pears, the cheaper toothpastes are replaced by the more expensive brands, so that even with dollops of discounts you end paying them more. The discount trick does wonder to convince a naïve mind that they are being very considerate. My grand aunt insists that she will arrange good quality rice at an affordable price for me from Big Apple but the store only sells bags of ten kilos. Bulk packaging is yet another way in which retail chains dupe the customers.

The proponents of FDI in retail insist that it gives a good deal to the farmers. Farmers lobby in India is indeed one of the main supporters of FDI in retail. The middlemen have fleeced them so much that for most farmers incomes from farms no longer keep them in the social strata that they were used to. The FDI sourcing helps them be free of the middlemen. However if the real estate prices in cities shoot through the roof and household income growths are slower than the price of real estate indices, farmers may face a stagnation in the prices at which the retail stores procure from them. They return to the starting position, having nowhere to go. Farmers growing coffee and tea for chains like Starbucks and Costa Coffee are tapped from all over the world; when Sri Lanka demands a better deal, the chains source from India. When Indian tea growers shut shop with rock bottom auction prices, they move to Africa and the cycle of robbing Peters to pay the Pauls go on. FDI in retail has a crucial link with real estate prices and it is through this link that they create all the confusions that there is to do.

 

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About secondsaturn

Independent Scholar. Thinker and not doer. Too lazy to succeed. Indifferent towards career. But pursues excellence.
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