Nirupama Soundararajan: The real story of retail

India should not be afraid to encourage modernisation in the retail sector says, Nirupama Soundararajan

It is surprising why there are doubts about the resilience of the traditional Indian retailer. The ICRIER report on the "Impact of Organized Retailing on the Unorganized Sector" provides clear evidence of the competitive spirit of the kirana stores. Sunil Jain ("Making retail work", June 23) quotes accurately from the ICRIER report when he writes that the kirana stores' turnover falls by 22.8 per cent in the first year of the opening of an organised outlet near the store. But his subsequent interpretations do not accurately reflect the facts contained therein.
 

Shop of small things
Age of Organised Outlet	Sample Size	Turnover Growth (%)	Profit Growth (%)
Up to 1yr	913	-22.80	-23.50
Above 1yr up to 2yrs	551	-7.50	-6.30
Above 2yrs up to 3yrs	196	-7.40	-9.90
Above 3yrs up to 4yrs	130	-8.30	-8.10
Above 4yrs up to 5yrs	39	-1.90	-12.60
Above 5yrs	170	-0.30	-0.80
Total	1999	-8.00	-8.90
Note: Figures are annualised for All India Source: Table 5.6, pg 71, Chapter 5, Impact of Organised Retailing on Unorganised Sector. (www.icrier.org)

The percentage declines in turnover in year two and three and so on, and annualised figures are computed using the turnover of the previous year. Let us assume Kirana A has a turnover of Rs 100. At the end of the first year his turnover is Rs 77.20 (22.8 per cent decline.) In year two, Kirana A faces only a 7.5 per cent decline in turnover which currently is Rs 77.20 (and not Rs 100 as Jain assumes.) It is evident from the ICRIER results that the rate of decline in turnover decreases with time, as both the kirana and the organised outlet co-exist. While Jain writes "....for the two scenarios to be compatible, kirana sales would have to start rising dramatically after the fall in the first year and ICRIER isn't saying that", the ICRIER report, in fact says just that! Through competitive responses from the kiranas, the decline in turnover drops from -22.8 per cent in the first year to -0.3 per cent in the sixth year. As the organised and unorganised retail co-exist, there is an increase in competitive response from the kiranas and turnovers begin to show a positive trend, as is already visible in south India.

Jain explains how organised retail will benefit consumers and generate savings to the tune of $ 60-80 billion but that organised retail will also result in increased unemployment. While the first fact is in tune with the findings of the report, the second is completely contrary to survey results. It is true that unorganised retail accounts for 37 million jobs in India. But what Jain fails to note is that this 37 million is split into 16.08 million in rural India (where the presence of organised retail is negligible) and 18.98 million in urban areas. Urban India, in this context, includes Tier I, II and III cities and organised retail has its presence primarily in Tier I and Tier II. Assuming that two thirds of the 18.98 million (12.65 million) are in Tier I and II cities and a higher figure of 75 per cent of these retailers (9.48 million) are in the vicinity of organised retailers, and further assuming a 20 per cent closure (which is consistent with international experiences in some developing countries) the number of unemployed people will be 3.7 million (assuming each kirana has two people manning the store.) Organised retail's front and back-end alone will generate 1.7 million jobs. Taking into account the job opportunities that will be created at all levels of the supply chain including small manufacturing, food processing, construction, packaging and cold storages, the 1.7 million may well double. But, of course, all this is an assumption.

The survey results indicate no change in employment rate in the unorganised sector. In fact, there is an overall increase in employment albeit a marginal 0.8 per cent per annum. This marginal rise in employment is consistent with the competitive response of the kiranas, that hire more people in order to further improve upon their comparative advantage of home delivery. Modernisation of the unorganised retail sector, which means upgrading infrastructure and supply chain thereby making the entire supply chain more efficient, will create more employment opportunities. If provided better access to credit, kiranas will expand business and generate greater employment by hiring more people to better serve their customers. Results show the rate of closure of unorganised retailers on account of organised retail is only 1.7 per cent compared to 50 per cent in the USA or even the earlier assumption of 20 per cent. There is also no change in the employment figures of the unorganised retail sector even in the 'control sample' (survey of retailers not in the vicinity of organised retailers), unlike turnover and profit, where there is a clear increase, consistent with the growth in the economy.

In a seminar held by B-School BIMTECH a few weeks ago, Praveen Khandelwal, general secretary, All India Traders Association, made a fair demand for a level playing field for kiranas, if they are to compete with the organised retailers. The ICRIER survey results indicate 53 per cent of the unorganised retailers want to stay and compete and 43 per cent would even like their children to continue with the same business. Thirty seven per cent were willing to avail bank loans to expand business but only 12 per cent actually had taken bank loans.

The organised retail sector can take care of itself, but the unorganised retail sector requires public policy. ICRIER's policy recommendations are directed towards nurturing and modernising the unorganised sector to bring them to a level playing field.

Improve access to credit for kiranas to expand and compete.

Encourage the formation of retail cooperatives to help increase kiranas' bargaining power and exploit the advantages of bulk buying.

Modernisation of wetmarkets to scale-up operations and improve the efficiency of the supply chain.

Formation of 'private codes of conduct' which may be incorporated into enforceable legislation.

Strengthen the Competition Commission's role to prevent collusion or predatory pricing on the part of the organised retailer when dealing with farmers, manufacturers or even consumers

A simple uniform license regime to facilitate the growth of organised retail to deal with increasing demand and to avoid inevitable bottlenecks in retail if left only to unorganised retail.

Consumers and farmers gain significantly from the growth in organised retail. ICRIER survey results indicate:

Consumers continue to shop from both organised and unorganised retailers.

22 per cent of the consumers shopping at organised outlets want unorganised retail outlets.

34 per cent of consumers shopping at the kirana want more organised retail outlets.

All consumers agreed that the unorganised retailer is part of the community.

Farmers receive 25 per cent higher price realisation and 60 per cent higher profit realisation when they sell directly to organised retailers instead of the mandi.

The initial decline in turnover and profit smoothen out over time as organised and unorganised retail begin to co-exist. The various positive externalities are:

Improvements in logistics and infrastructure

Efficient supply chains

Better quality produce

Increased revenue for the government through taxes, and

Lower wastage

Clearly this is a positive sum game. Modernisation in retail in India has started late. India can therefore learn from various international experiences and not be afraid to embrace this development in the retail sector.

The author is a research associate with ICRIER