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FDI in Organized Retail: a lose-lose game

15th July 2010

D. Raghunandan

The UPA government is once again attempting to completely open up the retail sector to foreign direct investment including, possibly, 100 percent FDI in organized multi-brand retail or supermarket chains. The Department of Industrial Policy and Promotion has issued a discussion paper on this subject, significantly without suggesting any upper limit on FDI. Currently, FDI is permitted up to 26 percent under the automatic route in wholesale so-called cash-and-carry operations and up to 51 percent with government approval in single-brand stores such as Nike shoes, Levi jeans or Calvin Klein readymades. These measures have been welcomed by industry, and seen by critics as the thin end of the wedge. Opening up the retail sector in India to foreign players has been a gradual process but the end-goal has always been clear, namely the unfettered entry into India of global supermarket chain stores such as Wal-Mart of the US, Carrefour of France, Marks & Spencer and Tesco of UK, Shoprite of South Africa and so on, all of whom have already established a substantial presence in India. The Indian retail market, with its burgeoning middle-class with growing purchasing power has, after the opening up of China, long been considered the last major frontier of globalized retail.

From the beginning these moves have been totally opposed by the Left and other progressive sections. Opposition has also come, albeit somewhat two-facedly, from the BJP with one eye on corporate interests and another on its major constituency of small traders who are deeply apprehensive. Arguments against have mostly centered around the potential adverse impact on the mostly unorganized small retail sector of so-called mom-and-pop stores (in India more often father-and-son stores) and the likely large-scale loss of employment in this sector. These arguments have been dismissed by proponents as being purely ideological and as going against modern trends and the opinions of experts. Arguments advanced in support of this policy by corporate houses including Indian retail chains, business associations, consultancy firms and government officials have revolved around two major propositions which, this article would show, are complete myths.

First, huge wastage in the agri-produce supply chain in India will be avoided because MNC retail giants would make the huge investments required in storage, cold-chain and transportation infrastructure and also bring in new technologies. Second, the farmer in particular would benefit from this improved efficiency and by the elimination of middle-men, the customer too ultimately benefiting through better quality produce and lower prices. A win-win scenario advanced as the gospel truth.

On the contrary, international experience has shown that, except for the huge profits raked in by the supermarket chains, organized retail has been a lose-lose scenario for farmers, small traders and wholesalers, consumers, and the environment and therefore society as a whole.

Food waste in Supermarkets    India is the world’s second largest producer of fruits and vegetables in the world after China, producing around 180 million tonnes. Official estimates are that about 25-30 percent of this produce goes waste between harvest and consumption. In theory, if fresh produce is collected efficiently at the farm-gate, and end-to-end cold-chain is maintained in storage and transportation till it reaches supermarket shelves as in developed countries, this wastage can be eliminated, translating into better prices for the farmer and lower prices for the consumer besides greater availability of the produce for processing, export and other value-addition. In practice, a very different story emerges from the West.

In the US, official data show 27-33 percent of food being wasted between farm and consumer during collection, storage, distribution and consumption! Of course, this also includes the horrendous amount of food waste generated in households and restaurants, but the amount of wastes within the distribution system is not much less.

Supermarkets themselves in the US are estimated to throw away $20 billion (Rs.95,000 crores) worth of food every year, more than twice as much as in the EU. Huge quantities of fresh fruit, vegetables and meats are routinely thrown away by supermarkets every day partly from fear of spoilage but also simply because they appear unappealing to consumers. Food products constitute 63 percent of a supermarket’s waste, according to a study by the California Integrated Waste Management Board. The logic of supermarkets dictates that they stock and display huge quantities of fresh produce, unsold stocks being simply thrown away. Supermarkets also compete with each other on the quality of their produce. This requires bulk suppliers to conduct ruthless sorting, throwing away otherwise edible but unappealing produce. In fact in the EU, prior to 2009 when a new policy came into effect, supermarkets were required by law to discard misshaped fruit and vegetables!

Supermarkets in the EU and USA are now being motivated to dispose of their wastes in an environment-friendly way in sanitary landfills or even through gasification or converting to manure, which can also generate some revenues although, of course, it would have been far better if food had not been allowed to become trash in the first place. And all this is only with respect to fresh produce. The supermarket culture of course also encourages packaged, pre-cooked or semi-cooked foods with expiry dates, huge quantities of which again get thrown away by supermarkets each year because of over-stocking. Pre-packaging of groceries and other food items also leads to huge accumulation of packaging material which has to be discarded posing a huge waste disposal and environmental problem, amounting to 5.3 million tonnes in the UK alone!  So much for the saving wastage argument!

Farmers and small traders lose    The other myth about organized retail is that it would benefit farmers and also not harm small traders who could simply shift from the traditional supply chain to the modern one linked to supermarkets. Again the facts are exactly the opposite.

The authoritative UK Competition Commission found in a 2000 study of major retail chains including Marks & Spencer, Sainsbury and Tesco that supermarkets had a poor record on treatment of all categories of suppliers, specifically that “the burden of cost increases in the supply chain has fallen disproportionately heavily on small suppliers such as farmers” (http://www.competition-commission.org.uk/rep_pub/reports/2000/446super.htm#full). Apart from prices, smaller farmers came under severe pressure from supermarkets due to the latter’s requirement for large volumes of each product, pushing farmers to grow single crops rather than the multiple produce they would usually grow to minimize risk. Similarly, insistence on or good prices only for similarly sized produce again works to reduce bio-diversity, pushes prices down and drives suppliers towards more input-intensive factory-farming. The Commission called for greater regulation and enforcement of the UK Fair Trading Code of Practice which it said itself needed to be strengthened to protect smaller suppliers from exploitation engendered by the immense power exercised by large buyers.

Numerous other supermarket practices too worked against the interests of almost all other stakeholders. Supermarket chains routinely sell some products at lower than market prices, which appears to benefit to consumers, but this puts pressure on small local stores in turn having adverse impact especially on low-income and elderly consumers who rely on local shops. Supermarkets also tend to alter prices in different branches adjusting to local rivals, “price-flexing” as the Commission termed it, again working to the disadvantage of local mom-and-pop stores. All in all, the Report said, “27 [such] practices by… major buyers operate against the public interest.”

In its January 2010 report, the UK Competition Commission concluded that the situation had not changed in over a decade, and that the practices of big retail chains continued to cause losses for farmers and small stores. The near-monopoly of supermarket chains, which procure over 70 percent of food products in the UK, enables them to “dictate prices and force farmers into trading for less and less.”  The UKCC found evidence that some chains including Tesco were bullying producers into lowering prices, a charge also leveled by the National Farmers’ Union, with dairy farmers receiving 20 percent less for milk than they did 19 years ago, and over 1,000 dairy farmers having gone out of business in 2009 alone.

FAO in its “Spotlight 2005” Report (http://www.fao.org/ag/magazine/0505sp1.htm) concluded that these trends are witnessed in other countries and regions too, showing once again that these patterns are inherent to the very logic of supermarket chains, not to some peculiarities of Western cultures. Organized retail increases pressure on farmers to produce standardized produce, pushes down prices and margins, and over time weeds out larger numbers of smaller suppliers in favour of fewer and larger “preferred suppliers”. In Malaysia, one chain that had started with 200 suppliers had whittled them down to just 30 within 2 years. Despite the famous sharp preference of Asian consumers for fresh produce from local so-called “wet markets”, big cities of Malaysia saw the share of supermarkets in fresh produce retail rise to 60 percent in fruit and 35 percent in vegetables. Similarly in Bangkok, supermarkets were selling 40 percent of fruit and 30 percent of vegetables by 2002. The FAO Report predicts that, following trends in Europe and the US, Asian markets too will witness gradual marginalization of traditional wholesalers in favour of increasingly consolidated “preferred suppliers” and “dedicated wholesalers” who would be brought into joint ventures or tied-up in long-term contracts.

The Washington-based International Food Policy Research Institute says that the heightened penetration of supermarket chains into Asia, Africa and Latin America is locking small farmers out of the supply chain and driving millions of farmers into poverty. Latin America has been the worst hit with the fastest growth in supermarkets, achieving in 10 years diffusion rates that took 50 years in the US! In Brazil, the share of supermarkets in fresh food sales went up from 30 percent to 75 percent in just 10 years between 1990 and 2000.

Supermarket culture and need for Regulation     Colossal waste and inordinate pressure on suppliers are part of supermarket culture. In Singapore, studies have found that close to 30 percent of fresh produce is thrown away in wholesalers’ sorting yards or supermarkets even before they appear on shop shelves because of ostensible defects or being otherwise deemed non-saleable. Within supermarkets themselves, food wastage in Singapore is estimated at 20 percent compared to 30 percent in the US or UK.

Indeed, supermarket waste has reached such proportions that the UK has an active Waste & Resources Action Programme (WRAP) aimed at reducing all forms of wastage in supermarkets. WRAP studies have found that many factors drive such wastage, chief among them being the very character of supermarkets and the type of shopping practices they engender. People shop more and buy far more than they actually consume simply because they can! In major urban centres, where supermarkets are often open round the clock, shoppers end up buying many other items than what they may have come in for, and more than they need. Promotional offers such as buy-one-get-one-free and other so-called multi-buy promotions means that more groceries get pushed than are consumed.

Yet the pressure exerted by the powerful retail chains is such, and the ideology of de-regulation is so strong, that of course one can barely talk of regulation in the US while efforts at regulation in the Eurozone and UK have not made much headway.

The influential UK Sustainable Development Commission (UK-SDC) in its study of policies relating to supermarkets strongly criticized the British government for allowing WRAP to leave it to the supermarkets themselves to formulate a voluntary self-regulatory set of practices to reduce waste termed the Courtald Agreement. UK-SDC stated that “too many supermarket practices are… unhealthy, unjust and unsustainable.” Needless to say, the UK-SDC report covered many other areas of supermarket operations too besides the issue of food and other waste.

An even broader ambit was covered by the UK Competition Commission whose 2000 Report cited earlier led to the proclamation of a Supermarkets Code of Practice which was later amended in 2009 to the Groceries Supply Code of Practice (GSCOP) that lays down standards and procedures for procurement, fair trade, inventories and sales, and so on.

It is indeed significant that in all the debate in India around organized retail, no industry or government body has said a word about regulation or the need for it. For all their weaknesses, it is the presence and functioning of regulatory bodies in the UK and EU, in contrast to the situation prevalent in the US, that has at least thrown up a substantial amount of data and analytical information, and brought supermarkets under public scrutiny and the possibility of at least some social control.

Last Updated on Saturday, 17 July 2010 05:27