Getting the toes wet

A large part of the jump in US productivity over the last decade, the McKinsey Quarterly estimated a couple of years ago, was due to the performance of the retail sector.

Within this, the Quarterly went on to say, “more than half of the productivity acceleration in the retailing of general merchandise can be explained by only two syllables:Wal-Mart”.

For instance, Wal-Mart’s use on a mass scale of simple technology like bar-coding has allowed it to lower its distribution costs to 3 per cent of sales, compared to 4.5–5 per cent for its competitors.

To put Wal-Mart in perspective, it employs just 1.4 million people in 5,000 stores to generate a turnover of over Rs 900,000 crore, a figure that’s close to the turnover of the entire retail industry in India, which employs more than 30 million people in some 12 million outlets.

While the Indian economy could do with a dose of Wal-Mart’s productivity, those opposed to foreign investment in retailing use precisely these figures to argue that there will be a huge job loss if Wal-Mart is allowed to set up base in the country.

Since this is a fear expressed wherever liberalisation is planned, the economic think-tank Icrier has come out with a report on the issue.

Icrier points out that while 70 per cent of the world’s largest retailers have entered China over the past decade, their share is a mere 5–8 per cent of the market; indeed, 95 per cent of the products sold in China by Carrefour, another grocery chain, are sourced locally, says the Icrier study.

While the entry of such firms has been restricted in India, the market share of large-format retail is only 2–3 per cent of the total market. Though large retailers like Wal-Mart have a greater capacity to bear initial losses than Indian players, it is difficult to see how they will crush local kirana-type operations if RPG’s Giant and Kishore Biyani’s Big Bazaar have not been able to do the same.

For, apart from the tax advantage that small kiranas enjoy (as high as 28 per cent, according to a study done by Planman Consulting for Icrier) since they often escape paying sales tax as well as income tax, other factors that restrict the growth of large-scale formats are the unavailability of land thanks to outdated zoning laws, and the near absence of a well-developed supply chain to procure materials.

The head of a large US-based fast foods chain talked recently of how it had taken his company five years to develop a reliable supplier for cheese!

The government has, however, managed to sidestep the tricky issue of labour displacement and come up with a plan that could give the country the best of both worlds.

It proposes that big brands, like Pizza Hut or McDonald’s or Nike, be allowed to enter the market on their own (instead of through franchisees as is allowed today). While the job-loss impact of this can only be negligible, the benefits in terms of increased investment and productivity will be quite high.