Retail's tug of war: India needs smart policies for ecommerce, local retail

Retail is changing in character, and India is undoubtedly at the forefront of this development globally. It is quite evident that consumers in India have taken to ecommerce in a big way. My home, for instance, has shifted almost completely to ordering online — so much so that even the maid is doing so. And if stories are to be believed, tier-III and tier-IV cities, as well as rural India, are also seeing rapid growth in online ecommerce. No doubt, the Unified Payments Interface (UPI), Aadhaar and other components of India’s digital public infrastructure have helped drive this growth. Easy access to good quality digital infrastructure has enabled startups and small and medium enterprises (SMEs) across India to jump on this bandwagon and build technical capacity.

 

To me, what is most important is that a large range of products is now easily available for the mass market. Ragi biscuits, ghee made traditionally, palm jaggery, semal pillows, khus mats for the cooler, and scores of other niche products that would have been impossible to obtain across India can now be standard purchases. Our consumption behaviour is consequently changing rapidly, with far more variety than was the case only a few years back. And as the consumption variety increases, so are the opportunities for the scores of small entrepreneurs, collectives and even non-governmental organisations (NGOs) who supply these goods.

 

A few centuries ago, it is said that there was little retail in rural India, barter and other forms of quid pro quo marked transactions in rural economic relationships. Even in urban India, customers typically approached known shopkeepers. The relationship was fairly intimate, with repeated interactions and credit being prevalent practices.  Consequently, the retailer has historically also been an important creditor for Indian customers. The informal sector has also been brilliant in providing a menu of services that even the most sophisticated modern retail is unable to match.  All of these practices have come about because — unappreciated by many — traditional retailers have innovated, for they are closest to the Indian customers and understand their needs quite well.   

 

The retailer in India traditionally provides a low-margin service, frequently provides credit, and may source merchandise for specific needs. There is a lot of resilience in such an operation. For instance, when cash disappeared during demonetisation, this same resilience came into play. The relationship of trust between the vegetable seller/retailer and the customer ensured the supply of food, while the relationship between wholesalers and vegetable vendors ensured that their flow of food did not stop. No payments were made, simply verbal IOUs, since that was the need of the hour.  During Covid as well, when uninformed policemen would indiscriminately stop vendors, this same set of retailers ensured the flow of food to many underserved areas. Note that the lockdown rules allowed retail, but in the interiors of slums and inner cities, it was the small, and largely informal vendors who serviced customers. The point is not about human interest, though there is that element too, but that there are economic imperatives that keep this form of delivery functioning despite low margins and many difficulties.

 

And so now we are faced with this unfortunate conflict — the large gig economy players providing a phenomenal range of goods at low prices versus the small retailer, not always but sometimes informal. There are some similarities between the two.  Just as in traditional retail, we have those who may be mobile and those who are fixed to a place, so too does ecommerce provide such options. Just like traditional retail was always innovating (home delivery from the kirana store appeared in the last millennium), so is ecommerce, changing with quick commerce and 10-minute delivery being the latest offering. So then what is the difference? And why might this distinction be important?

 

The biggest difference between the two classes is that traditional retail operates within the framework of a market, where there are many vendors and there are many people they may source from.  Most importantly, historically, the barriers to entry have been limited for this segment. This ensured high levels of competition and low margins. It is argued by some that this form of retail could not innovate enough, as it never had adequate surpluses to enable innovation.  The new e-commerce is, however, mostly an oligopoly. A few large players compete with one another and with the traditional retail industry, using large-scale operations and stronger bargaining power to ensure low-cost merchandise sourcing.

 

Despite being around for some time now, most such ecommerce players are not profitable. Are these ecommerce losses part of a diabolical strategy to eliminate traditional retail and then raise prices later? If true, it would be good policy to either tax this form of retail higher or place regulatory or policy hurdles in its growth. If, on the other hand, that is not the case, then policy would need to study how best to ensure that the employment, innovation, and price outcomes of this new form of retail are promoted. 

 

Economics literature provides some insights.  The first is related to the form of competition. It is difficult for firms to sustain high profits when they compete on prices. In the ecommerce space, service differentiation would need to be very high for ensuring sustained high profits. Second, profits can be high in the long run only when entry into that segment is difficult.  Given that there are a multitude of both domestic and global players, that’s already taken care of — unless the incumbent firms collude to divide up different customer or product segments among themselves. Third, if indeed the objective is to eliminate conventional retail, future entry of small retail players would have to be prevented. Given the dynamism of the small entrepreneur, how might that be ensured? 

 

On the face of it, the answers to each of the above three questions are self-evident. But another question needs to be introduced to this equation. How can policy ensure that traditional retail innovates and prospers? Note that traditional retail, whether of the kirana variety or in the informal sector, does create surpluses, serves customers, innovates and, of course, creates employment at a massive scale.  Therefore, good retail policy would enable them to be more dynamic. Such policies would probably include a range of well-known solutions, including adequate space, easier credit, freedom from corrupt municipal inspectors and local policemen, and fewer regulations.

 

But arguably the most important policy contribution would be to empower traditional retail and ecommerce to work with each other. For instance, what might enable conventional retail to access the lower-cost merchandise available to ecommerce firms? Similarly, what might enable ecommerce players to access the customer knowledge and networks of local retailers? If that were possible, then the benefit of long-term trusting relationships and customer knowledge of traditional retail can complement the scale economies and process-driven methods of ecommerce. We are already seeing such models being piloted. How can policy help in their rollout?

   

The author heads CSEP Research Foundation. The views are personal