In the course of the debate on the need for permitting
foreign investment in retail in India, two arguments have been often
advanced. The first was that large organized retail is good not just
for consumers who would benefit from lower prices due to cost efficiencies
and competition, but also for farmers who would be the beneficiaries
of stable demand for their produce at reasonable prices. The second
was that the segment of large retail that would be able to deliver these
benefits to consumers and producers would be the international retail
giants with deep pockets and experience of structuring the supply chain
to deliver these benefits.
This case that the presence or entry of international retail giants
helps ensure reasonable prices for the consumer, remunerative prices
for producers and profits for the intermediary is ostensibly based on
the international experience in both developed and developing country
contexts. This is indeed surprising since in practice the relative gains
derived by participants in market economies is known to depend on the
market power of the participants concerned. Besides the fact that the
international retail giants would by their very definition be powerful,
the structure of the supply chain varies across counties.
Consider the food economy for example. Within the US the supply chain
has at one end an industrial agriculture with large farmers known to
be subsidised substantially by the American government and at the other
the end the large retailers who have control over significant segments
of the supply chain from farm to table. Concentration in the retail
trade has increased substantially. The share of the top 8 stores in
total US grocery store sales increased from 26 per cent in 1992 to 50
per cent in 2009. That of the top 20 from 39 to 64 per cent.
In other countries including most developing countries the structure
is more complex. Foreign chains have entered and have been expanding,
but the retail space is still shared between the traditional retailers
and the modern chains. An abiding feature of the experience with this
kind of system has been that the appearance of the large, modern chains
does not lead to the upgradation of the traditional, unorganised retail
sector, but to its being bypassed with attendant implications for employment
and livelihoods. This dualism, which sees quality and environmental
standards languishing in unorganised retail then becomes the basis for
its displacement by larger organised retail as incomes rise.
Since the US is the typical case of the operation of organised retail,
it is here that its effects at both ends of the chain should be visible.
The scene is, however, distorted by the subsidies for agriculture, which
remain large and have not fallen after the implementation of the Agreement
on Agriculture under the Uruguay Round. However, these subsidies are
partly needed because the giant retail chains that dominate the procurement
and distribution of food products have enhanced their margins at the
expense of farmers. Aggregate food expenditures in the US rose from
$833.2 billion in 2000 to 1.2 trillion in 2009, or by an absolute $370
billion. On the other hand, cash receipts from farm marketing increased
from $197.6 billion to $282.2 billion or by $85 billion. These divergent
levels and trends can be explained by the costs of processing, the margins
for marketing, and the profits associated with large, organized retailing.
During the 2000 to 2009 period, for example, the USDA estimates that
the farm share of the retail price fluctuated between 23 and 28 per
cent in the case of fresh vegetables and 25 and 30 per cent in the case
of fresh fruits. Not all of that huge difference can be attributed to
processing costs, transportation and storage. According to one estimate
advertising, rent, interest and profits accounted for 15 cent of every
dollar spent on food.
But these are in normal times. An analysis after the food crisis of
the 1990s had this to say: "Farmers can see themselves being reduced
from their mythological status as independent producers to a subservient
and vulnerable role as sharecroppers or franchisees. The control of
food production, both livestock and crops, is being consolidated not
by the government but by a handful of giant corporations. While farmers
and ranchers suffered three years of severely depressed prices at the
close of the 1990s, the corporations enjoyed soaring profits from the
same line of goods. Growers are surrounded now on both sides - facing
concentrated market power not only from the companies that buy their
crops and animals but also from the firms that sell them essential inputs
like seeds and fertiliser. In the final act of unfettered capitalism,
the free market itself is destroyed." (William Grieder, "The
last farm crisis", The Nation, November 20, 2000)
The situation in Europe, where smaller retailer have not been completely
wiped out, is also telling. According to an official report prepared
in June this year by the French government's food price watchdog, the
profit margins on food sold in supermarkets are hugely inflated. By
comparing the prices charged to customers with the wholesale prices
charged by producers, the report argued that the supermarkets were squeezing
producers by paying lower prices, but were not passing on the gains
to to customers. Moreover, when wholesale prices fell, customers ended
up paying just as much or even more. Margins on apples and bananas stood
at margins around 140%, and for carrots and lettuce at 110 per cent.
The margin on pork loin had risen to 55% from 39% a decade ago.
In developing countries, such as those in Asia where the supermarket
revolution has been underway for some time now, the evidence is that
competition hurts producers most. Concerned with quality and standardisation,
the chains look for ''preferred suppliers'' who can ensure regular supplies.
But while the investments needed for realising these tends to be high
for small farmers, competition among them to tie up with a chain keeps
prices down. In East Asia, the supermarket share of retail food sales
had ballooned from less than 20 percent to around 50 percent over the
decade ending around 2005. In the process, small farmers were squeezed
out since supermarkets tended to sub-contract only to a few large suppliers
that can meet their demands on quality, standardized production and
quantity. Over a short period of less than 5 years, Thailand's leading
supermarket chain reportedly slashed its list of vegetable suppliers
from 250 down to 10, cutting out the small farmers.
In the event, farmers who are supposed to benefit are put under huge
pressure as they have to meet the changing requirements and standards,
or eventually exit from farming. Meeting standards for quality and reliability
requires high levels of investment in irrigation, transportation, storage
facilities and packaging technology. But this requires technology, access
to credit, training and information. As a result the poorest producers
who constitute the majority lose out in a market that increasingly monopolized
by the supermarkets.
Thus, a study conducted five years back in Asia by the Food and Agriculture
Organisation argued that ''fierce competition among supermarket chains
forces them to seek ever lower product and transaction costs and to
minimize risk. For producers, this means that the chains will not contribute
to the kind of farm-level investments needed if small farmers are to
participate in new markets. The squeeze on farmers' margins is likely
to tighten as supermarkets become as concerned with safety and quality
as they are now with cost.''
Thus, irrespective of the structure of retail markets overall, the presence
of the large international giants does not help all producer and consumers,
but harms many of them. The worst hit are the poorest of producers.
The global experience by no means tallies with the presumptions on which
the UPA government's FDI-in-retail policy is based.