Retailers unite against big retailers

Last week there was a state-wide protest organized by the association of small retailers and traders of Kerala. The protest was against the entrance of big retailers like Reliance and Bharti into Kerala. The irony of the situation is that you have small capitalists joining hands together to fight bigger capitalists in a fight seemingly to protect the consumers. First let me take a look at some of the major issues raised by the protesters. A major concern voiced was that the foray of national and multinational corporates into the retail sector is going to cause loss of income, and loss of jobs of people owning and employed in the small and medium retail industry. Another point was that the big retailers would lead to a collapse of the small and medium retail industry, leading to monopolies and ultimately increased prices of everyday commodities. A third issue predicted was that once monopolies were established the farmers, manufacturers and producers would be at the mercy of the retail giants and hence they would be exploited.

Some of the underlying assumptions are a) Retailers and Traders have a right to be retailers and traders and nobody can deny their rights b) The association of retailers and traders are not just fighting for themselves but also for the vast majority of people ie the consumers, c) The existing system as such is very fair to the producers - farmers and manufacturers - in terms of giving them just shares of the retail prices of the products. d) Big retailers are bad e) Multinationals in retail industry are very very bad, f) The retailers and traders form a significant percentage of the population

Before we dissect these assumptions and claims let us take a look at the economics behind this. In any economy people generate revenue by the transfer of goods and services. Correspondingly you have the retail sector and the services sector. The retail sector includes not just the retail shops that sells us the goods we buy, but also the network of systems that exist to maintain these retail stores. Similarly the services sector has the service delivery framework.

From the point of manufacture, or cultivation as the case may be, of items bound for retail trade, to the point of the retailer selling the product to the consumer, there are usually several intermediate processes and people involved in these processes. Some of these would be wholesale purchasers, regional collection centers, transporters, distributors, sub-distributors. There would also normally be several layers of middlemen between these steps.

As the goods move along these chains of people the cost increases at each level until it finally reaches the customer. By the time the product reaches the customer the cost of the product could even have gone up a few hundred percentage points over the original price at which it was bought from the farmer. There would also be other intangible value additions like advertisements, insurances etc along the way which contributes further to the final selling price of the product.

However the real value of the product for the end consumer would not have changed as much as the increase in the cost of the product. Now we could deduce three different things from this. One is that the intermediary steps from the point of production to the final sale are very inefficient in terms of value addition. The second is that if the efficiency of these processes were higher the cost of the product for the consumer would become cheaper. Finally if some of the intermediary steps were avoided and the final price being kept the same a higher price could be paid to the manufacturer or the farmer.

Retailers exist to trade, and trade they do, and their motive is to make profits. The profits that are expected by the retailers would be in proportion to their investment rather than to their livelihood expenses. This rule would apply for all but the small and samll-medium retailers. The right to earn ones livelihood is a universal right, but the means to do that is not a right. A trader has a right to earn his living through his trade. But, the moment the returns are higher than his cost of livelihood his trade will not be covered under the right.

A retailer or a trader sells at a price which will yield him the profits that he is expecting out of his business. The price would also be regulated by the prices of the product at the other retailers also governed by a similar mechanism. A reasonably big percentage of the final price of the product goes towards the overheads in the retailing process discussed above. A percentage would go to the farmer also. This percentage that goes to the farmer and the small percentage that corresponds to the small value addition to the product are the components of the price that is effectively used to maintain productive labor. The rest is used to maintain unproductive labor working in inefficient processes.

A big retail chain in the market would be operating under a different framework. The entire chain of processes from the point of procurement from the original producer to the point of sale to the end consumer would normally be operated directly or supervised directly by the big retailer. This would introduce a massive efficiency increase in the process. Also the advantage of size gives another efficiency increase in terms of the unavoidable overheads. Consequently the big retailer would be able to make two changes - one is to reduce the final selling price for the consumer and the second is to increase the purchase price from the producer.

By giving better prices to the producers big retailers promote productive utilization of labor and by increased efficiency in the retail process the deviation of capital for unproductive labor is minimized. Additionally by reducing the prices for the end customers they are provided with excess capital than if it had been not so. This excess capital could lead to higher purchasing powers and in turn better average quality of living.

Both of the above changes provide the necessary financial incentive for the producer and the consumers to embrace the big retailers. This could result in a collapse of the existing retail framework. Now this is a potential cause for a problem as it could lead to monopolies at the purchase level and at the sale level. If monopolies are established both the above incentives can be taken out or even reversed by the big retailers. However big retailers can not exist everywhere. They will establish outlets only where it would be viable to set up one in terms of the market reach and the purchasing powers of the locality. So there would be big retailers in areas where the population sizes justify the existence of the retail outlets.

The emergence of monopolies in localities where the big retailers exist is a potential risk. This risk however could easily be mitigated by good ant-monopoly laws and regulations. Additionally the monopolies could only emerge even if it does emerge and in cases where it does, local trade establishments can reemerge to bring down the prices. So even in such cases the prices of the products would be cheaper than from an average retailer and the purchasing price given to a farmer would be higher than from an average retailer. If it had not been so the small and medium retail segments could re-emerge to neutralize the situation. So it would be in the interest of the big retailers to maintain the prices at such quasi-monopolistic levels.

Finally it might be good to take a look at the numbers. In an average society the percentage of retailers and traders would be around 10-15% of the population. Even including all the support framework it cannot be more than 15-20% of the population. In the case of big retailers this number would be reduced but would still have to remain significant. This reduction however will have to result in an increase in unemployment. The excess capital saved in the system by a reduction in the costs of retail products and a higher purchasing power for the producers would result in an availability of capital for non-retail use and that would mean the service industry. So this could result in an increased growth of the service industry where the lost jobs in the retail industry could be absorbed easily.

Having said so I still have reservations about multinationals entering local retail industry as it would result in a biased cash flow mechanism in the system in the short term and the Indian economy may not be mature enough to be able to afford that. Also the emergence of Indian big retailers is going to cause a short term aberration in the equilibrium in the system leading to undesirable results like the job loss mentioned above. However in the long run both national and multinational retailers are going to be helpful for the system. Efficiency increases has to be good in itself.