March 27, 2012

India’s Big-Box Debate

India’s mom-and-pop shops fear being crushed by the Walmarts of the world. But the arrival of international, multi-brand retailers would actually benefit small stores, says Chazen Senior Scholar Rajeev Kohli.

Rebecca McReynolds
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Like small retailers around the world, India’s mom-and-pop shops fear being crushed by big-box stores. But contrary to popular belief, the arrival of international, multibrand retailers would actually benefit small stores, which make up 90 percent of the country’s retail sector, according to new research from Rajeev Kohli, a Chazen Senior Scholar and the Ira Leon Rennert Professor of Business, and Jagdish Bhagwati, a Chazen Advisor and the Arthur Lehman Professor of Economics at Columbia Business School.

Their paper, “Organized Retailing in India: Issues and Outlook,” shows that without the investment and expertise provided by outside retailers such as Walmart, India’s aging, inefficient retail infrastructure simply is ill-prepared to meet the country’s growing consumer demand. “There has been such large growth in consumption in India that over the next 10 years it will be essential for the country’s development to have a modern system of retailing in place,” Kohli says.

Protecting the Small Retailer

One of the most-quoted arguments against foreign direct investment comes from research tracking retail sales in India between 2005 and 2009. Over that period, large domestic retailers posted growth that was four times higher than that of small retailers, fueling fears that big chains will crush small shops. Not so, Kohli says. Large retailers are a relatively new phenomenon in India, so their growth numbers were coming off of a very small base. Over that same period, small retailers still captured 85 percent of the overall increase in sales.

If sales continue to grow at the same pace over the next decade, small businesses would still control over three quarters of the much larger market, and would have vastly increased its size and sales. In addition, several economic factors unique to India will protect those small shops in the future, Kohli says. For example, most of these shops are run out of homes and managed by family members, so overhead is minimal. Plus, most small stores don’t pay the country’s value-added tax (VAT), keeping costs low.

Most important, though, is the fact that three-quarters of the Indian population lives on just $2 a day, so they will buy only enough to see them through to the next pay envelope. Those consumers aren’t going to shop at Walmart, Kohli says, because local shops will sell customers two slices of bread and a third of a stick of butter. Even if workers could afford to buy more groceries at one time, only 20 percent of households own a refrigerator, and electricity is still hit-or-miss at best. “Small retailers will continue to be necessary because the income disparities are large,” he adds.

Walmart proponents point to the retailing giant’s extensive experience in designing efficient distribution systems and its willingness to provide a massive cash infusion to help build a state-of-the-art retail industry in India, Kohli says. “There is a huge need for investment in this type of infrastructure, so part of the expectation is that when you have large companies come in they have a natural incentive to invest in this infrastructure,” he argues.

Creating a Competitive Marketplace

Foreign direct investment by the big box stores also offers the hope of breaking up the procurement monopolies that currently control India’s food industry, Kohli says. India’s State Agricultural Produce and Market Committee has established a network of wholesalers who have complete control over the prices farmers are paid for their production. “If farmers don’t like the price, they have nowhere else to go,” he says.

As a result, Indian farmers typically earn one-third of the final price of their produce, compared to an international norm of two-thirds, according to the professors’ research. “One of the things that Walmart and other retailers want to do is buy directly from farmers, and competition among buyers would bring farmers higher prices,” Kohli says.

Building Efficiencies

Within the next decade, retail sales in India will increase by about one trillion dollars. This increase is twice as large as the current level of retail sales in the country. The only way for India’s retail industry to meet that demand is to allow multinational companies into the market.

More competition would solve another need, too. “The state of the country’s essential cold storage facilities, in particular, is abysmal,” Kohli says. A 2010 report by India’s Department of Industrial Policy and Promotion notes that that 25 to 30 percent of fruits and vegetables produced in the country spoil each year due to lack of cold storage facilities. Similarly, the study sites a 2010 report from the New Delhi Ministry of Finance stating that up to 7 percent of India’s food grain production is lost annually because of inadequate warehousing. Millions of tons of wheat and rice are stored under tarpaulin or left out to rot in the monsoons. New retailers with new food storage capacity could help prevent the waste, says Kohli.

Of course, the scenario of Walmart driving out small business might still play out to some degree, as it has countless times in communities throughout the developed world, he says. But India is a different market with different needs. It has a vast population that earns daily wages, cannot shop far from home, and needs small retailers with whom they have long-standing relationships. The daily call of a vegetable seller, the haggling for prices at the weekly street bazaars, the nightly paan and cigarette, and the chai shop, are part of the rhythm of Indian life. They might change, but likely not very soon, Kohli says. Meanwhile, India badly needs investments to develop a modern retailing system, which can be provided by multinational firms.

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