Author : Ajit Dayal , Article Courtesy : EquityMaster.com
Shekar Swamy, the Group CEO of marketing and advertising agency RK Swamy Hansa, has written a very interesting 2- article series in The Hindu Business Line (June 16 and June 17) on why multi-brand retail may not be good for Indian consumers.
Before we move ahead, a few disclosures.
I met Mr. Swamy for the first time in December, 2010 when Quantum Mutual Fund was looking to hire an ad agency to let investors know that there is a simpler and more transparent way to invest their hard earned savings. We selected his firm not only because of their past experience (Raymonds’ and Mercedes Benz are some of their well-known clients) but – during their presentations – they really warmed up to the idea of working for an “underdog”. They could see that what we had to offer was something superior (after all, some of the members of their team also invest in mutual funds!) and we were clearly on the side of the consumer, willing to fight the battle. (If you would like to see some of the Quantum Mutual Fund ads click on the web site www.QuantumMF.com)
The other disclosure is – having travelled a lot in many parts of the world – I was amused that groups like Wal-Mart or Carrefour would even want to enter India. Not because there is no market for their style of large box outlets that carry everything but because India runs at a level of efficiency that will be difficult for them to match – with their overheads of costly MBAs and consultants. For example, if I need one can of coke to be delivered to my home, I can call the kinaaraa grocery store and they will deliver the can within 5 minutes to my doorstep. And, since most Indians do not have large houses and McMansions that the Americans do, where could we possibly stock 6 crates of coke for our monthly consumption?
We are doomed to have smaller homes. With real estate prices propped up by the real estate developers and their politician friends, aided by developer loans from PSU banks, the chances of us having large homes is pretty close to zero. Therefore, with space at home a premium for the foreseeable future, the kinaara grocery store becomes our good old Japanese just-in-time inventory management system. No Wal-Mart, Reliance, Bharati, or Future Group could replace that. We have a similar situation in the pharmacy business where there is no Walgreens or Rite Aid chain but the single-owner pharmacy that supplies us our needs and may even deliver the medicines to our doorsteps.
Pay, baby, pay
But, what I failed to do – and which Mr. Swamy, also a visiting faculty at Northwestern University, has done in his articles – is to analyse the existing cost structures and place hard numbers on our messy kinaaraa world and estimate the future costs for consumers in India under an air-conditioned Wal-Mart-ruled world.
Giving data sourced from industry associations, web sites, and annual reports, Mr. Swamy makes a very compelling case to suggest that the Indian consumer would end up paying a lot more than today – and a lot closer to what the duped consumers in the US are paying.
Table 1: Mr. Swamy’s data stirs the plot?
|Channel mark-up||Consumer Goods||Garments||Pharma / OTC||Cookware / Kitchenware|
|In India||22% highest||30% branded||34% total||30% total|
|In West||40% average||100% minimum||100% minimum||100% minimum|
Source: Shekar Swamy, Hindu Business Line, June 16 and 17, 2011
I am sure these data points are with the bureaucrats and the ministers who made the recommendation on allowing multi-brand retail under the FDI policy.
If they have it, please can they dispute the data?
Or, if the wise policy makers agree with the data, please can they explain how they arrived at their decision to recommend multi-brand retail? Is there some guarantee they have obtained from the foreign and Indian potential entrants on pricing or on limiting their profits?
Or is our government so morally and intellectually bankrupt and so keen to bow down to any western concept, that they only exist to sell out to the highest bidder?
The people who determine policy in India are so enamoured with speaking on foreign television channels, being applauded at the World Economic Forum in Davos, or being hosted by the US President, or acting as hosts to a succession of political leaders that they have forgotten why they were elected in the first place. Over the past 10 months we have had the leaders of UK, USA, Russia, Germany, and France all touch upon our sacred shores. Did they come here to drink our tap waters and prove that they can still live? Or that they can eat a curry and not get a Delhi-Belly? No, they were they here to sell their arms, their goods, and act as spokesperson for companies and for their way of life. That is their job. To sell and promote their products and their companies.
To host, to listen, to absorb, to filter, and then to decide what is best for India is the job of our representatives.
Not a nationalistic jingo
In the early 1980’s DoT – under the guidance of Sam Pitroda – developed a phone exchange that could operate without air conditioning and without dust-free conditions. Yet, if my memory is correct, the contract to build out the land line exchanges went to foreign companies like Siemens and Alcatel.
In meetings with the BHEL management in the 1990’s they would lament that, though BHEL had the best equipment, there was a preference to grant contracts to MNCs. Obviously! From what bank account can BHEL pay a bribe? At best, BHEL can offer a few jobs for friends and family. In what may be a totally unrelated incident, a few years ago investigators in Europe discovered a slush fund in Siemens that was used to pay bribes.
Many globally known financial firms (please rent the DVD “The Inside Job” ) get invited to increase their business activity in India despite the fact that they have, time and again, proven how well they can work against the interests of their clients and corrupt the system they operate in.
Has the government even bothered to ask each of these financial companies when they enter India to list out the fines they have paid worldwide, the settlements they have entered into, and then decide whether these firms are “fit and proper” to operate in India.
This is not a nationalistic jingo to throw all the MNCs out. This is not an “I-hate-the-West” crusade. I use and respect many western or non-Indian concepts, products, and practices. But time and again the decision making made by the wise people of New Delhi seems to be warped in opaque reasoning or in blissful ignorance.
Many MNCs have done a wonderful job in India. Suzuki, after a controversial entry, did build the people’s car and is the leader in the auto market. The Hero-Honda joint-venture forced Bajaj to shape up and both companies delivered a better and more reliable product to millions of Indians who cannot rely on an unreliable public transportation system.
Levers, over the decades, has deepened the retail chains to the extent that it now faces competition from new producer who can piggy-back on the success of the infrastructure that it helped build. ITC continues to deepen its own retail build-out and pumps us with more cancer-causing tobacco products that will, one day, leave the government to pay the bill.
No, this is not a Be Indian, Buy Indian mantra.
Mr. Swamy has presented us with some interesting data to mull over – or dispute. Yet, the bandwagon and drum roll for FDI in multi-brand retail is gathering steam.
We need to address a fundamental issue: What is the overall economic and social vision of India? And then build the framework within which policy must list the guidelines for making decisions. The decisions to grant access to the coal mines, gas fields, telecom spectrum, land for SEZ, land for building new townships, and the license to crooked financial firms to grab your wallet. Be they Indian firms or multinationals.
The rich cannot get richer at the cost of the poor. They can create, they can build, and they can enjoy the wealth of their genuine enterprise.
But what enterprise is there in bribing your way through to a great business deal? It takes a dead soul, no conscience, and a desire to be on some rich-dude list to be a tycoon, Indian style.
But this is true – if we all join in the looting and become disciples and perpetuators of cronyism, we will surely be able to afford those higher prices that the organised multi-brand retail folks are about to introduce in the mall coming to your neighbourhood!
Author : Ajit Dayal
Ajit Dayal, is a well known fund manager with the distinction of managing equity assets on a global basis including the position of lead manager of the then USD 2 billion Vanguard International Value Fund.
Ajit has championed the need for India opening its capital markets to international investors since 1984 – eight years before the Foreign Institutional Investor (FII) rules were announced.
Article Courtesy : EquityMaster.com