Is Cooperative Retailing an alternate to FDI in Retailing

Small to medium enterprises will lose business as they cannot compete with bigger companies. The big companies have better negotiations power with suppliers and thus offer items at lower price than the competition. These are some of the most common arguments that are heard against FDI in retail.

It is a well known fact that even bigger retailers have competition among themselves. Convenience is definitely one of the first things that most consumers would consider when it comes to grocery shopping. This convenience is offered by neighborhood stores or Kirana stores.  Even in other countries, the concept of neighborhood stores has coexisted with supercenters and hypermarkets. The bakala stores in Saudi Arabia, convenience stores in USA are examples of this.

Though convenience is a major factor in shopping preferences, it takes a back seat when it comes to cost. I come across many instances daily when my parents prefer specific shops for particular items. For pensioners like my parents, even the 2 to 3 Rupee difference in price makes a huge difference.

 We have seen examples of how the same item can be purchased at a lesser price in a Walmart or a Big Bazaar store. Thus the fears of small retailers about losing business stands valid.

The strategy behind offering an item at low cost is due to the order size itself. A Big Bazaar may order 100 cartons of Surf powder in a single order compared to a super bazaar that may order 10 cartons and a kirana store that may order ½ a carton. A CPG company like P&G which measures performance factors like GMROI, GMROF will agree to sell the same item at a better price to any retailer that makes a bigger order. It makes more sense from the producer’s point of view to please a buyer with a better buying capacity.

An interesting factor that I have observed is that a good number of Indian consumers prefer to buy in small quantities. Infact it is told that Unilever plans to replicate the sale of shampoo sachet inother markets.

As a matter of coincidence the 51 % FDI in retail was announced at a time when the Father of Indian cooperative movement and White Revolution Dr Varghese Kurian decided to depart from this planet. The cooperative movement that he started in 1965 under the brand name of Amul changed the lives of many individual milk providers and helped establish India as the largest milk producer. Today Amul is the most established and sophisticated milk dairy. Their investments in technology and processes were trend setters for the global dairy industry. Today we are seeing similar successes in the poultry industry in India as well.

If the unorganized dairy and poultry industry could emerge as a organized industry I don’t see any reason as to why the unorganized retail industry in India cannot become organized.

Excerpts from an article in http://www.amul.com/m/dr-v-kurien

The first Dairy Co-operative Union in Gujarat was formed in 1946 with 2 Village Dairy Co-operative societies as its members. The number of member societies has now increased to 16,100, with 3.2 million members pouring milk every day- twice a day. Today, the Billion Dollar GCMMF has emerged as the India';s largest integrated dairy products manufacturing and marketing organization. NDDB, formed by the efforts of Dr. Kurien ensured replication of Amul Model across India. Thereby, it played an instrumental role in increasing the milk production of India significantly. India';s milk procurement has increased from 20 million metric tonnes per year in the 60s to 122 million metric tonnes in 2011. 

Examples from the past like the residential cooperative society, workers cooperative society, and the cost advantage that they offered are good examples of success of cooperative movement in retail. These societies also gave the customer the option to pay in installments.

Small to medium retailers should start becoming innovative and explore possibilities of creating a cooperative union so that they could establish themselves as lucrative customers to CPG companies and other suppliers. This will not only help narrow the gap between producers and consumers and also offer operational efficiencies. It will also level the play field and fears of losing business could end up being just a perceived fear.

 .

.

FDI in Indian Retail & My Observations

I recently happened to go to a roadside shop in Channapatna to buy some wooden toys. The shopkeeper gave me his visiting card and told me that I can order online as well. It was a similar experience some days ago at Shringeri where a shopkeeper selling, home made food products like chips, sweets, pickles also mentioned about his online store.

On a day when we are having the Bharath Bundh against diesel price hike and FDI in retail, shopkeepers in rural and semi urban areas like Mr Yoganand http://www.indiamart.com/channapatna-toys/ or Bhatru of Shringeri are examples of changing face of the Indian retail industry. Their rich elder brothers in the industry may invest in sophisticated IT systems, management graduates, real estate and marketing but the native, average, rustic counterpart is not lagging behind.

At the outset I assume that with FDI in retail the competition may increase but the Indian consumer would still prefer to visit his neighboring Kirana store that gives him the luxury of ordering through telephone, delivery at door steps according to convenience and also the facility to get credit without having a credit card. An Indian consumer may still prefer shopping for vegetables and fruits in Gandhi Bazaar or Hopcoms over that at organized retailers because he is sure that he gets fresh produce from unorganized retailers.

Consumers may prefer organized retailer for their apparel shopping, shopping for life style products, luxury items, etc.

What needs to be seen is the impact of FDI on the producers. If the retailers decide to source their merchandise locally then the local producers would benefit from the same. Going by experiences of garment factories in Tirupur I am told that a number of them have closed down as their earlier customers now look at other Asian countries for their supplies. Cost factor could just be one of the reason for this change in sourcing. It needs to be investigated if there are other factors that led to this shift. 

I personally feel that the government should also think at introducing measures that will help local producers (farmers, manufacturers) compete with the international market and produce world class materials. Probably a clause should be introduced which makes it mandatory for retailers to source at least 60 % of the items from local producers. That way we could look at creation of more jobs and revenue with in our country than look at big MNC's to create these jobs.  

If we continue to produce high quality optimum cost products on our soil, I don't see any reason as to why we cannot further fuel ourselves as the most preferred destination for business and sourcing.  The need of the hour is to create a perfect balance between agriculture which is our main backbone and industrialization and generate revenue by making them self sustainable.