Point of View

Of Multinationals and Retailers
Swaminathan Venkataraman

The fact is that there are many countries both developed and developing, where multi- national retailing companies operate in a big way and such countries include China and Russia. Nothing has happened in these countries, that would threaten their sovereignty or upset the employment scenario for the natives due to the presence of multinational retailers. It is totally illogical to view such companies as usurpers and probably right to view them as business houses with profit motive as their central and perhaps the only objective. No one can accuse a businessman for being profit oriented for this is a legitimate practice.

However, it is the responsibility of the government to ensure that there would not be any undue profiteering and unethical exploitative retail practices by retailers, whether multi nationals or Indians.

One of the distinguishing features of large retailers like Walmart is that they operate at low cost and high volume model. Generally, they are not interested in stocking products that do not move fast from their stores.

Many multinational retail giants have huge buying power and therefore they stock the fast moving products in their stores in good quantity investing substantial money in them. To this extent, they rely on their management capabilities and market research expertise and in the process optimizing the supply chain management. Further, they invest enormously in their own supply chain infrastructure ,as a consequence of which they eliminate most of the middle men and avoid payment of commissions to middle men at various levels.
Such strategies are the secret of their success in sustaining their place in the market. The companies lay enormous stress on building confidence amongst the consumers and the suppliers about their fairness and dependability. Therefore, it should be seen that honesty and fairness in business transaction has become the prerequisite for success and essential feature of the operations of the large retail houses, without which they cannot survive and grow.

It is not true that large retail companies operate on huge margin. It is just not possible in the highly competitive conditions, with several large retail stores and small corner stores looking for their place in the crowded market.

In view of the competitive market conditions, large retailers operate with profit margin of 3 to 5% and not more than that. This margin is very much less compared to other industries such as pharma and even the presently operating small scale retailers in India.

It is known that Walmart today has a net profit margin of only 3 to 4% in USA. On around 460 billion US dollar turnover, they make profit of only around 16 billion US dollar per annum, which is far lower than most industries.

As a consequence of having to operate at low profit margin, the multi- national retailers like Walmart operate extremely efficient supply chains and that would be beneficial to the region's economy overall.

For example, in India, people waste around 30 % of fruits and vegetables due to not having the infrastructure to move them around the country in quick time. Such wastages will substantially reduce with large retail stores in operation.

The ones who stand the most to lose due to the entry of large retail companies would be the middle men, who now squeeze the farmers and small producers and hold everyone in the supply chain to ransom. Such middle men today are accountable to no one and the government has no control over them.

All over the world, it has been seen that farmers actually like retailers, (as against the middle men) because the large retail companies with their strong supply chain management practices go directly to the farmers and the farmers can negotiate directly with them and the farmers would know as to what is the price in the end market. This condition is already there in Punjab. It is not surprising that Punjab is amongst the first to say yes to FDI in retail, as the farmers in Punjab know that they are the most to gain.

Certainly, there would be an impact on the corner stores, who now fix prices and maintain quality standards in an arbitrary manner and their profitability would be affected by the entry of the large retailers. But, they are unlikely to be wiped away as is feared now and they are likely to quickly readjust and reposition themselves and may even emerge as challenger for the large retailers in the course of time.
In fact, in most countries, the corner stores survive elegantly with large stores as there would be still need for convenience, fast shopping, door delivery etc. that the large retail stores cannot provide.

Experience in China
China allowed foreign retailers to set up their shops in 1992. Before that joint ventures or wholly owned subsidiaries were not allowed.
There was considerable policy confusion for many years with plenty of changes to the rules from 1992 onwards, regarding ownership structure between domestic and foreign retailers.

By 1997, more than two dozen foreign retailers were approved.

Today, Walmart runs more than 140 stores spread across 89 cities, Carrefour boasts of more than 150 stores.

The top retailers by turnover are still Chinese, showing that Chinese retailers can hold their own and compete in the local market in spite of the presence of foreign retailers.

White Anhui Huishang, a Chinese company involved in departmental stores holds the 8th rank, the much publicized Walmart ranks only 9th amongst the retailers by turnover in China.

Carrefour, the second largest retailer in the world after Walmart has just announced that they would be withdrawing from Singapore closing down their stores, unable to withstand competition. This shows that multinational retailers do not always dominate wherever they go, and local companies if supported can stand up and compete.

^    Indians are known for their "reverse engineering capability" and Indian retailers presently operating at small and medium scale level are likely to learn from the management practices of multinational retailers and would quickly adopt their model and perhaps would grow very fast, given the fact that they would be operating in their native country. Many large Indian retail stores would emerge in course of time and they themselves would become multi- national in character. For one thing Indians have done extremely well in international arena, whenever they have been given adequate opportunities and appropriate climate.

^    Today, food price inflation is a grave issue in India, in spite of the fact that India is self-sufficient in basic grains and vegetables ( unlike China which has to import food grains for basic self-sufficiency). This problem of food price inflation is largely caused by the present procurement, storage and distribution mechanism of the government, which results in huge loss of valuable grains and food products in storage and transit, with no alternative supply chain of adequate size in existence to divert the food grain to the needy population.

^     The country badly needs infrastructure such as high technology oriented and effective warehouses , transport systems as well as knowledge and experience of processes to manage the supply chain effectively. The government seems to be learning at a painfully slow speed at the cost of welfare of the citizens. The country cannot afford to wait for the government to learn anymore and certainly the multinational retailers, with their technology practices and investment capability, will contribute to significant reduction in the food price inflation, if not eliminate it totally.

^     Many of the retailers tend to stock their own brands ( called private labels ) in many of the product categories in order to bring prices down. Typically , large retailers tend to persuade the manufacturers to supply the products to them , which is sold under the brand name of the store, at much cheaper prices by providing them large sale outlets. Marketing, promotional and other such costs are taken out of the equation and the consumers benefit from low costs and is reassured of the quality due to the brand of the retailer backing the product. In telecom industry, it is competition that has kept prices so low for so long leading to immense producti-vity benefits for consumers.

^     Wastage in inventory throughout the chain is drastically improved due to less stocking points in the chain and better forecasting ability of all the participants. When this is extrapolated for the country as a whole, even small percentage improvements every year bring out great improvements in cost structure of the product and savings to consumers.

In fact, it is a general view that US is the cheapest place in the world to buy products. The main reason for this is that the retail stores in US have systematically become better at eliminating wastage in the operation of the retail system.

The role of the government is to ensure that retailers would not achieve monopoly size and dominate markets. Then the power structure gets imbalanced in favour of the retailer and benefits often need not be passed on to the consumer and can lead to unhealthy profit margins.

One of the key strategic strengths of India is its market size. Indian market cannot be ignored for any product and retail forms an important component of exploiting this market. Most multi national retailers would even be prepared to take losses for longer period and live with low investment returns in India in order to get a footing for the longer term.

Government of India should have the understanding and strategy to exploit the situation in India's favour by introducing more control mechanisms for the operation of the multinational retailers in India. In the policy announcement made so far, one gets an impression that the government of India is still to make control measures more effective.

Frontier
Vol. 45, No. 27, 13-19, 2013

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