Dr Bharat Jhunjhunwala
Few years ago, there was a hue and cry over the entry of organized retailers like Subhiksha, Reliance Retail and Wal-Mart. Oh, how things have changed! Subhiksha has downed its shutters for many months now and financial results of Reliance Retail are flat. The global recession cannot be blamed for this debacle, because organized retailer Wal-Mart is doing quite well in these times in the United States, which is the epicentre of the global recession. The sales of Wal-Mart are reported to have increased by eight per cent even though profits are a trifle down. If the troubles of organized retailers were due to global recession, Wal-Mart too should have shown signs of distress.
Indian organized retail is in trouble because, unlike in the United States, it faces competition from low-cost kirana shops. Indian organized retailers cater mainly to the upper middle class while Wal-Mart caters to the lower end. The USP of Indian retailers is not low cost. Rather it is comfort and temptation. The USP of Wal-Mart, on the other hand, is low cost. This makes a decisive difference. The upper middle class in India moves away from high-cost organized retail towards low-cost kirana shops in times of economic distress. On the other hand, the middle class in America moves away from high-cost branded stores towards low-cost organized retail in the same times of economic distress.
Why have organized retailers in India not been able to cater to the lower classes? The reason appears to be much greater spread of business capacity among the Indian people. The capacity required to run a kirana shop is available aplenty in India. Organized retail is not able to compete with these shops. According to a study undertaken by leading economic research organization ICRIER, our kirana shops have many special abilities. They are located near the consumer who is provided with the required goods in his vicinity. He saves the cost of going to the air-conditioned shop of the organized retailer located far away. One can see the shopkeepers making a note of an item that is not in their stock. Then they locate the supplier and get that item. This ability to provide desired goods takes away the attraction of going to the organized retailer.
Kirana shopkeepers provide goods on credit. They have the ability to keep a record of credit given, to remember the date when the borrower gets his salary and to make collection of the dues. Kirana shops are able to sell items in pieces. One can obtain one sheet of A4 paper from the street corner stationary shop. The shopkeeper has such low cost of service that he makes profit from selling one sheet of paper for 50 paise!
The overhead costs of the organized retailer prohibit such small sales. One would have to buy a whole ream from the organized retailer. Kirana shops are open from 6 am to 10 pm. Often owner husband and wife take turns. Both have capacity to manage the shop. Kirana shops make home delivery. They have the ability to extract various types of work from one employee. He sweeps the shop, arranges goods in the window, undertakes home delivery, brings goods from the transporter and recovers outstanding loans. Organized players have to employ a number of persons for each of these functions.
The buyer likewise appears to have greater capacity in India. She can easily compare the price offered by competing stores, to calculate the cost of travelling to a cheaper store located far away, and the benefits from special schemes. She is not lured by the temptations. The combination of high-capacity kirana shops and high-capacity buyers has enabled the shops to face competition from organized retailers.
The underlying factor that operates behind all these is mental capacity. Small shops in the United States seem to lack this ability. It is noteworthy that Gujaratis own a large number of small retail shops in the United States. They have the business capacity to manage these shops. But the American consumer appears to lack the ability to make these various calculations. Thus the same Gujarati is successful in India and not so in America.
Mainstream economists think otherwise. The main reason being suggested for the failure of Subhiksha is rapid expansion at breakneck speed. This explanation is not acceptable. If this were the case, other organized retailers like Reliance that have expanded at a slower pace should have done well. That is not the case. All organized retailers in India are in trouble. Another explanation being offered is that organized retailers relied on special schemes to tempt the customer to buy goods that he may not truly need. This appears to be true. But why did they have to rely on such schemes? Because they were not able to sell the goods in routine conditions, it would seem.
The ICRIER study points out that the average price realization for cauliflower farmers selling directly to organized retailers is about 25 per cent higher than their proceeds from the mandi. So far so good. The question, however, is this: Were the organized retailers able to successfully sell those cauliflowers to the consumers? Obviously not. Otherwise they would not be in trouble. The higher price paid by organized retailers to the farmers should, therefore, not be seen as an advantage that they have. Rather it may be that farmers are unwilling to sell to organized retailers at the same price as in the mandi. Perhaps organized retailers have more stringent quality specifications. They would specify the minimum size of the flower, maximum number of leaves, length of the stick, etc. In comparison the middleman in the mandi will help the farmer sell his goods of varying quality. Organized retailers are perhaps paying higher price because the farmer is unwilling to sell to them at the lower price! It is their inability to manage variation in quality that forces them to buy at higher price.
The crisis of organized retail in India is not because of global recession because Wal-Mart is doing well in recession-ridden America. The crisis is also not due to rapid pace of expansion because other slow movers are equally affected. The true reason of their troubles is that the business capacity of the kirana shop owners and buyers is high in India. Organized retailers are unable to provide services that match the price offered by kirana stores and quality expected by buyers. THE SENTINEL
Few years ago, there was a hue and cry over the entry of organized retailers like Subhiksha, Reliance Retail and Wal-Mart. Oh, how things have changed! Subhiksha has downed its shutters for many months now and financial results of Reliance Retail are flat. The global recession cannot be blamed for this debacle, because organized retailer Wal-Mart is doing quite well in these times in the United States, which is the epicentre of the global recession. The sales of Wal-Mart are reported to have increased by eight per cent even though profits are a trifle down. If the troubles of organized retailers were due to global recession, Wal-Mart too should have shown signs of distress.
Indian organized retail is in trouble because, unlike in the United States, it faces competition from low-cost kirana shops. Indian organized retailers cater mainly to the upper middle class while Wal-Mart caters to the lower end. The USP of Indian retailers is not low cost. Rather it is comfort and temptation. The USP of Wal-Mart, on the other hand, is low cost. This makes a decisive difference. The upper middle class in India moves away from high-cost organized retail towards low-cost kirana shops in times of economic distress. On the other hand, the middle class in America moves away from high-cost branded stores towards low-cost organized retail in the same times of economic distress.
Why have organized retailers in India not been able to cater to the lower classes? The reason appears to be much greater spread of business capacity among the Indian people. The capacity required to run a kirana shop is available aplenty in India. Organized retail is not able to compete with these shops. According to a study undertaken by leading economic research organization ICRIER, our kirana shops have many special abilities. They are located near the consumer who is provided with the required goods in his vicinity. He saves the cost of going to the air-conditioned shop of the organized retailer located far away. One can see the shopkeepers making a note of an item that is not in their stock. Then they locate the supplier and get that item. This ability to provide desired goods takes away the attraction of going to the organized retailer.
Kirana shopkeepers provide goods on credit. They have the ability to keep a record of credit given, to remember the date when the borrower gets his salary and to make collection of the dues. Kirana shops are able to sell items in pieces. One can obtain one sheet of A4 paper from the street corner stationary shop. The shopkeeper has such low cost of service that he makes profit from selling one sheet of paper for 50 paise!
The overhead costs of the organized retailer prohibit such small sales. One would have to buy a whole ream from the organized retailer. Kirana shops are open from 6 am to 10 pm. Often owner husband and wife take turns. Both have capacity to manage the shop. Kirana shops make home delivery. They have the ability to extract various types of work from one employee. He sweeps the shop, arranges goods in the window, undertakes home delivery, brings goods from the transporter and recovers outstanding loans. Organized players have to employ a number of persons for each of these functions.
The buyer likewise appears to have greater capacity in India. She can easily compare the price offered by competing stores, to calculate the cost of travelling to a cheaper store located far away, and the benefits from special schemes. She is not lured by the temptations. The combination of high-capacity kirana shops and high-capacity buyers has enabled the shops to face competition from organized retailers.
The underlying factor that operates behind all these is mental capacity. Small shops in the United States seem to lack this ability. It is noteworthy that Gujaratis own a large number of small retail shops in the United States. They have the business capacity to manage these shops. But the American consumer appears to lack the ability to make these various calculations. Thus the same Gujarati is successful in India and not so in America.
Mainstream economists think otherwise. The main reason being suggested for the failure of Subhiksha is rapid expansion at breakneck speed. This explanation is not acceptable. If this were the case, other organized retailers like Reliance that have expanded at a slower pace should have done well. That is not the case. All organized retailers in India are in trouble. Another explanation being offered is that organized retailers relied on special schemes to tempt the customer to buy goods that he may not truly need. This appears to be true. But why did they have to rely on such schemes? Because they were not able to sell the goods in routine conditions, it would seem.
The ICRIER study points out that the average price realization for cauliflower farmers selling directly to organized retailers is about 25 per cent higher than their proceeds from the mandi. So far so good. The question, however, is this: Were the organized retailers able to successfully sell those cauliflowers to the consumers? Obviously not. Otherwise they would not be in trouble. The higher price paid by organized retailers to the farmers should, therefore, not be seen as an advantage that they have. Rather it may be that farmers are unwilling to sell to organized retailers at the same price as in the mandi. Perhaps organized retailers have more stringent quality specifications. They would specify the minimum size of the flower, maximum number of leaves, length of the stick, etc. In comparison the middleman in the mandi will help the farmer sell his goods of varying quality. Organized retailers are perhaps paying higher price because the farmer is unwilling to sell to them at the lower price! It is their inability to manage variation in quality that forces them to buy at higher price.
The crisis of organized retail in India is not because of global recession because Wal-Mart is doing well in recession-ridden America. The crisis is also not due to rapid pace of expansion because other slow movers are equally affected. The true reason of their troubles is that the business capacity of the kirana shop owners and buyers is high in India. Organized retailers are unable to provide services that match the price offered by kirana stores and quality expected by buyers. THE SENTINEL
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