In Sam we trust

While the government has been talking of opening up the retail sector for foreign players, speculation about an announcement being imminent has been sparked by Prime Minister Manmohan Singh’s meeting with Wal-Mart President John Menzer, and by his forthcoming visit to the US in July (every prime minister since PV Narasimha Rao has felt obliged to announce some opening up before heading for Washington).

Predictably, those opposed to this have raised the old fear that the 30-40 million people employed in the country’s retail sector will face the prospect of unemployment, arguing that Wal-Mart’s turnover is more or less equal to that of the entire retail industry in the country.

That this is an exaggerated fear is evident since, despite the rapid growth of the country’s organised retail sector (Big Bazaar, Shopper’s Stop, Food World and others), the kirana store business hasn’t suffered.

Indeed, the kirana versus Wal-Mart argument is mainly advanced by the large retail players in the country who fear that they may be displaced once the Wal-Marts and Carrefours come in!

The reason why the kiranas have survived Big Bazaar is the same reason why they will survive Wal-Mart: low overheads, virtually zero cash requirements (kiranas mostly buy on credit from manufacturers and their efficiency depends upon their turnaround of inventory), knowledge of the customer, and home delivery.

Big stores do get substantial discounts on buying (which is why large FMCG firms dislike chains like Wal-Mart that can exercise buying power), and so have an advantage over kiranas, but they also have larger overheads, pay higher taxes, higher wages and so on—evasion of taxes, not usually cited as a cost advantage for smaller units, is a fact of life.

So a walkover for Wal-Mart is by no means established, more so in view of the fact that there aren’t too many areas where Wal-Mart can get land for stores of the size they normally set up.

The advantage of bringing in a Tesco or a Wal-Mart is the possibility that this could develop the back end, or the supply chain, in the country.

Today, Wal-Mart’s sourcing out of China is around $20 billion, or a quarter of India’s total exports! Since a Wal-Mart supplier has to be large in size, the company’s business in India can prosper only if it develops large supply bases in the country and ensures that these suppliers are world-class.

Similarly, a Carrefour doing well in India will mean the development of a first-class cold chain from the farm to the shop.

While there is the fear that a Wal-Mart will not set up a supply chain in the country but simply use the one already established in China, this too appears exaggerated since no retail chain can run on the basis of imports, if only because import duties and transports costs act as barriers. In short, there is no reason why FDI shouldn’t be allowed in the sector.