India’s Retail Wars

In the Mint, the Wall Street Journal’s English-language paper in India, TCS Daily Editor Nick Schulz argues that the battle between large retail chains like Wal-Mart and mom-and-pop stores in India’s retail sector will ultimately be to the benefit of India’s economy — including independent retailers. While some small stores will be driven out of business, the ones that learn to adapt to the new retail environment will thrive because of the efficiency gains pushed through by competition, he writes:

. . . the current debate over the future of retail in India is too constricted. Opponents of big retailers fret that small mom-and-pop shops will be put out of business. The study reported in Mint last week shows this worry is realistic.

Proponents of large-scale retail typically counter that consumers will benefit from the lower prices large retail can provide as well as the greater range of goods. This is no doubt true. But as the McKinsey data demonstrates, there is so much more to the story.

The role multi-brand retailers play in large, modern economies is to inject knowledge and know-how into the sector and into the larger economy, touching almost every industry. Today’s most advanced retailers serve as change agents, pushing through needed business reforms that make manufacturing and other sectors far more efficient and productive.

The right answer to Singh’s question now becomes clear. Large retailers in the West have been engineering efficiency gains for the better part of the last four decades. They have been among the main drivers of economic growth. And they do, indeed, know a lot that other retailers simply haven’t had the opportunity to learn yet, mostly due to government policies protecting small retailers from competition.

There is hardly any shame in the fact that some Western retailers may know more than their Indian counterparts. Gains from trade work both ways. In the US last week, National Public Radio reported about American filmmakers and animation artists working with and learning from their counterparts in India. American industries, including Hollywood, are benefiting from the specialized knowledge in some of India’s most dynamic industries.

Given the importance of a sophisticated retail sector to economic performance, the latest row over retail’s future couldn’t happen too soon. India’s continued rise on the global stage depends on reform and advance in this sector.

In a Nov. 8 news piece for World Politics Review, Anuj Chopra reported on the retail wars in India, and highlighted some of the inefficiencies of the current system:

The Western-style stores feature long, boulevard aisles, refrigerated cases, uniformed and meticulous workers, and offer a large variety of products, from fresh produce to other consumer durables. All goods are neatly packaged, accurately weighed, and attractively priced.

India’s small mom-and-pop stores, on the other hand, are chronically inefficient, with prices 20 percent higher than they are in big stores. They buy in small quantities, lack storage facilities to keep produce overnight, and have almost no expertise in inventory control.

. . .

“Organized retail is not the evil business it is being made out to be,” said Mukesh Mehta, the Managing Director of Reliance Industries, in a statement. “India’s retail market is so huge that there is place for everybody, including smaller players.”

He also asserted that his company’s retail initiative was configured to improve supply chain and distribution efficiency, promote high-tech farming methods that bring better yields, and reduce waste.

“Currently, 30 to 35 per cent of 60 million tones of fruits and vegetables — more than the fresh fruit produce of the UK — are wasted due to a lack of storage and other facilities,” he said. “Organized retail chains will minimize such wastage.”

The debate about India’s retail sector is just another iteration of the basic debate that is at the heart of almost every argument about globalization — that of whether the benefits of change outweigh its drawbacks, whether greater opportunity for many is worth some loss of economic security for a few. As Schulz concedes, there will be drawbacks for those Indian retailers who can’t adjust to the new dynamism of the Indian retail sector, just as there are for some American manufacturing workers whose jobs are offshored to China and who can’t be easily retrained.

But economic dynamism tends to produce more jobs than it eliminates — as statistics about job creation and unemployment in the United States over the past, say, 25 years, clearly attest. Therefore, more workers will benefit than will be hurt, and consumers will gain from lower prices that result from increased efficiency.

That’s not to say that it’s not important to manage such transitions well by making sure that those that lose out have a safety net. The United States had the advantage of experiencing such change much more gradually than either India or the globe’s other rising economic giant, China, will. But, like the United States, India has a great advantage in helping to ensure that the political and social upheavals that result from greater economic dynamism can be peacefully managed: democracy. It remains to be seen whether China’s CCP’s technocrats can do without it.

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