ORGANIZED UNORGANIZED VS RETAIL: Essay Topics

English_Master February 20, 2016 No Comments

ORGANIZED UNORGANIZED VS RETAIL

Making an Issue of a Non-Issue

Organized retailing, in India, refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax. Etc. These include the publicly-traded supermarkets, corporate-backed hypermarkets and retail chains, and also the privately owned large retail Businesses.

Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, e.g., the local mom and pop store, owner manned general stores paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

Organized retailing was absent in most rural and small towns of India in 2010. Supermarkets and similar organized retail accounted for just 4% of the market.

Most Indian shopping takes place in open markets or millions of small, independent grocery and retail shops. Shoppers typically stand outside the retail shop, ask for what they want, and cannot pick or examine a product from the shelf. Access to the shelf or product storage area is limited. Once the shopper requests the food staple or household product, they are looking for; the shopkeeper goes to the container or shelf or to the back of the store, brings it out and offers it for sale to the shopper. Often the shopkeeper may substitute the product, claiming that it is similar or equivalent to the product the consumer is asking for. The product typically has no price label in these small retail shops; although some products do have a Manufactured Suggested Retail Price (MSRP) pre-printed on the packaging. The shopkeeper prices the food staple and household products arbitrarily, and two consumers may pay different prices for the same product on the same day. Price is sometimes negotiated between the shopper and shopkeeper. The shoppers do not have time to examine the product label, and do not have a choice to make an informed decision between competitive products.

India’s retail and logistics industry, organized and unorganized in combination, employs about 40 million Indians (3.3% of Indian population). The typical Indian retail shops are very small. Over 14 million outlets operate in the country and only 4% of them being larger than 500 sq ft (46 m2) in size. India has about 11 shop outlets for every 1000 people. Vast majority of the unorganized retail shops in India employ family members, do not have the scale to procure or transport products at high volume wholesale level, have limited to no quality control or fake-versus-authentic product screening technology and have no training on safe and hygienic storage, packaging or logistics. The unorganized retail shops source their products from a chain of middlemen who mark up the product as it moves from farmer or producer to the consumer. The unorganized retail shops typically offer no after-sales up port or service. Finally, most transactions at unorganized retail shops are done with cash, with all sales being final.

Until the 1990s, regulations prevented innovation and entrepreneurship in Indian retailing. Some retails faced complying with over thirty regulations such as ‘signboard licenses’ and ‘anti-hoarding measures’ before they could open doors. There are taxes for moving goods to states, from states, and even within states in some cases. Farmers and producers had to go through middlemen monopolies. The logistics and infrastructure was very poor, with losses exceeding 30%.

Through the 1990s, India introduced widespread free market reforms, including some related to retail. Between 2000 – 2010, consumers in select Indian cities have gradually begun to experience the quality, choice, convenience and benefits of organized retail industry.

India in 1997 allowed Foreign Direct Investment (FDI) in cash and carry wholesale. Then, it required government approval. The approval requirement was relaxed, and automatic permission was granted in 2006. Between 2000 to 2010, Indian retail attracted about $ 1.8 billion in foreign direct investment, representing a very small 1.5% of total investment flow into India.

Single brand retailing attracted 94 proposals between 2006 and 2010, of which 57 were approved and implemented. For a country of 1.2 billion people this is a very small number. Some claim one of the primary restraints inhibiting better participation was that, India required single brand retailers to limit their ownership in Indian outlets to 51%. China in contrast allows 100% ownership by foreign companies in both single brand and multi-brand retail presence.

The Retail Business in India is currently at the point of inflection. As of 2008, rapid changes with investments to the tune of US $ 25 billion were being planned by several Indian and multinational companies in the next 5 years. It is huge industry in terms of size and according to India Brand Equity Foundation (IBFF), it is valued at about US $ 395.96 billion retail is expected to garner about 16-18% at the total retail market (US $ 65-75 billion) in the next 5 years.

Growth After 2011

Before 2011, India had prevented innovation and organized competition in its consumer retail industry. Several studies claim, that the lack of infrastructure and competitive retail industry is a key cause of India’s persistently high inflation. Furthermore, because of unorganized retail, in a nation where malnutrition remains a serious problem, food waste is rife. Well over 30% of food staples and perishable goods produced in India spoil because poor infrastructure and small retail outlets prevent hygienic storage and movement of the goods from the farmer to the consumer.

The economist forecasts that Indian retail will nearly double in economic value, expanding by about $ 400 billion by 2020. The projected increase alone is equivalent to the current retail market size of France.

In 2011, food accounted for 70% of Indian retail, but was under-represented by organized retail. AT Kearney estimates India’s organized retail had a 31% share in clothing and apparel, while the home supplies retail was growing between 20% to 30% per year. These data correspond to retail prospects prior to November announcement of the retail reform.

India Retail Reforms

Until 2011, Indian Central Government denied Foreign Direct Investment (FDI) in multi-brand Indian retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets, to sell multiple products from different brands directly to Indian consumers.

The Government of Manmohan Singh, Prime Minister, announced on 24th November, 2011, the following

  • India will allow foreign groups to own up to 51% in ‘multi-brand retailers’, as supermarkets are known in India, in the most radical pro-liberalization reform passed by an Indian cabinet in years;
  • Single brand retailers, such as Apple and IKEA, can own 100% of their Indian stores, up from the previous cap of 51%;
  • Both multi-brand and single brand stores in India will have to source nearly a third of their goods from small and medium-sized Indian suppliers;
  • All multi-brand and single brand stores in India, must confine their operations to 53-odd cities with a population over one million, out of some 7935 towns and cities in India. It is expected that these stores will now, have full access to over 200 million urban consumers in India.
  • Multi-brand retailers must have a minimum investment of US $ 10.0 million with at least half of the amount invested in back end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing to considerably reduce the post harvest losses and bring remunerative prices to farmers.
  • The opening of retail competition will be within India’s federal structure of government. In other words, the policy is an enabling legal framework for India. The States of India have the prerogative to accept it and implement it, or they can decide to not implement it if they so choose. Actual implementation of policy will be within the parameters of state laws and regulations.

Indian Retail Reforms on hold

According to Bloomberg, on 3rd December, 2011, the Chief Minister of the Indian State of Paschim Banga Mamata Bannerjee, who is against the policy and whose Trinamool Congress brings 19 votes to the ruling Congress Party-led coalition, claimed that India’s Government may put the FDI retail reforms on hold, until it reaches consensus within the ruling coalition. Reuters reports that this risked a possible dilution of the policy rather than a change of heart.

Single-brand Retail Reforms Approved

On 11th January, 2012, India approved increased competition and innovation in single-brand retail.

The reform seeks to attract investments in production and marketing, improve the availability of goods for the consumer, encourage increased sourcing of goods from India, and enhance competitiveness of Indian enterprises through access to global designs, technologies and management practices. In this announcement, India requires single-brand retailer, with greater than 51% foreign ownership, to source at least 30% of the value of products from Indian small industries, village and cottage industries, artisans and craftsmen.

Social Impact and Controversy with Retail Reforms

The November 2011, retail reforms in India have sparked intense activism, both in opposition and in support of the reforms.

Critics of the Indian retail reforms announcement are making one or more of the following points.

  • Independent stores will close, leading to massive job losses. Wal-Mart employs very few people in the United States. If allowed to expand in India as much as Wal-Mart has expanded in the United States, few thousand jobs may be created but millions will be lost.
  • Wal-Mart will lower prices to dump goods, get competition out of the way, become a monopoly, then raise prices. We have seen this in the case of the soft drinks industry. Pepsi and Coke came in and wiped out all the domestic brands.
  • India doesn’t need foreign retailers, since homegrown companies and traditional markets may be able to do the job.
  • Work will be done by Indians, profits will go to foreigners.
  • Remember East India Company. It entered India as a trader and then took over politically. There will be sterile homogeneity and Indian cities will look like cities anywhere else.
  • The government hasn’t built consensus.

Supporters claim none of these objections has merit. They claim

  • Organized retail will need workers. Wal-Mart employs 1.4 million people in United States alone. With United States population of about 300 million, and India’s population of about 1200 million, if Wal-Mart-like retail companies were to expand in India as much as their presence in the United States, and the staffing level in Indian stores kept at the same level as in the United States stores. Wal-Mart alone would employ 5.6 million Indian citizens.
  • KPMG – one of the world’s largest audit companies – finds that in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post China opening its retail to foreign and domestic innovation and competition. In absolute terms, China experienced the creation of 26 million new jobs within 9 years; post China announcing FDI retail reforms. Additionally, contrary to some concerns in China, post retail reforms, the number of traditional small retailers also grew by 30% over 5 years.
  • India needs trillions of dollars to build its infrastructure, hospitals, housing and schools for its growing population. Indian Economy is small, with limited surplus capital. Indian Government is already operating on budget deficits. Beyond capital, Indian retail industry needs knowledge and global integration. Global retail leaders, some of which are partly owned by people of Indian origin, can bring this knowledge.
  • Wal-Mart, Carrefour, Tesco, Target, Metro, Coop are some of over 350 global retail companies with annual sales over $ 1 billion. These retail companies have operated for over 30 years in numerous countries. They have not become monopolies. Competition between Wal-Mart-like retailers has kept food prices in check.
  • Comparing 21st century to 18th century is inappropriate. Conditions today are not same as in the 18th century. India wasn’t a democracy then, it is today. Global awareness and news media were not the same in 18th century as today. Consider China today, it has over 57 million square feet of retail space owned by foreigners, employing millions of Chinese citizens. Yet, China hasn’t become a vassal of imperialists. It enjoys respect from all global powers. Other Asian countries like Malaysia, Taiwan, Thailand and Indonesia see foreign retailers as catalysts of new technology and price reduction; and they have benefitted immensely by welcoming FDI in retail. India too will benefit by integrating with the world, rather than isolating itself.
  • With 51% FDI limit in multi-brand retailers, nearly half of any profits will remain in India. Any profits will be subject to taxes, and such taxes will reduce Indian Government budget deficit. Many years ago, China allowed FDI in its retail sector.
  • States have a right to say no to retail FDI within their jurisdiction. States have the right to add restrictions to the retail policy announced before they implement them. Thus, they can place limits on number, market share, style, diversity, homogeneity and other factors to suit their cultural preferences.
  • Inbuilt inefficiencies and wastage in distribution and storage account for why, according to some estimates, as much as 40% of food production doesn’t reach consumers. Fifty million children in India, malnourished. Food often rots at farms, in transit, or in antiquated state-run warehouses. Cost-conscious organized retail companies will avoid waste and loss, making food available to the weakest and poorest segment of Indian society, while increasing the income of small farmers.
  • Indian small shops employ workers without proper contracts, making them work long hours. Many unorganized small shops depend on child labour. A well-regulated retail sector will help curtail some of these abuses.
  • The claims that there, is no consensus are without merit. About 10 years ago, when opposition formed the Central Government, they had proposed retail reforms and suggested India consider FDI in retail. Retail reforms discussions are not new.