Organized Retail vs. Chaotic Retail

The question is not whether FDI in Retail is good or bad, rather, is "Organized" Retail itself has any value in the economy. Organized retail is defined as a big corporate opening up multiple stores in whatever format. Chaotic Retail is retail as it exists today, with mom and pop shops mushrooming all over.

This blog analysis the question posed above thru the prism of the neutral eye, across 7 different stakeholders.

Let us first look at all the stakeholders involved in the Retail industry.

Retail Stakeholders

1.   Farmer

Farmers have the following 2 challenges:

(i)            Ensure maximum return on investment

(ii)           Ensure output (perishable product) is not destroyed i.e. ability to preserve food produce before they finally get sold off

Neither of these challenges are addressed by any retail model. The welfare state has to ensure he following three things:

(i)            there is no wastage of food produce by building and supporting adequate infrastructure (e.g. cold storage).

(ii)           Also, the welfare state must establish a fair value (price) for the all types of produce.

(iii)          More importantly, the welfare state must ensure that the farmer is equipped to sell their produce when they are harvested

Bottom-line: No impact to farmers in any retail model

2.   Manufacturer

This stakeholder group includes all types of manufacturers - from the Unilevers of the world to the small/medium entrepreneur next door. The larger manufacturers may not care who they deal with- a large retailer or a small retailer through  a distribution network. They probably may care, since the power of organized retail can grow to an extent where they can coerce the manufacturer to reduce their margins.A small to medium manufacturer, in theory, could gain, since they can sell directly to the organized retail, bypassing the middlemen and possibly increasing their margin. 

The reality is that organized retail would force any manufacturer to reduce their margins. In addition, organized retail would typically go back in the supply chain, to start manufacturing themselves. Retailer owned labels would be flooded in the stores, which could eat into market share of the other manufactures. Apart from retailer -owned labels, there is always a question of importing low cost foreign owned brands, which has a significant negative impact on domestic manufacturing and close-outs of manufacturers. However, the government can step in and control how much import or retailer-owned labels can be allowed.   

In case of Chaotic Retail, standard market dynamics kick in and there is space for everyone.

Bottom-line: Manufacturers, both big and small, will be impacted be Organized Retail, especially small to medium manufacturers. Heavy government interventions needed to establish trade imports and for retailers to go back in the supply chain and manufacture themselves via a subsidiary.        

3.   Investors (Domestic or Foreign aka FDI)

For an investor (talking about large investors, not the smaller ones) like Banks, FIs (Financial Institutions) or HNIs (High Networth Individuals), Organized Retail opens up a massive market where they can invest and mint money. An investor will always favour Organized Retail, Chaotic Retail is certainly not to their liking.

Bottom-line: Investors (Banks, FIs, HNIs) will always root for Organized retail as it offers them significant opportunities to mint more money.

4.   Consumers

Let us, for a minute, not talk about Consumers at all. Remember, the Consumer does not play the role of only  a Consumer. An average Consumer is basically a farmer, a manufacturer, an employee in an industry. I promise to talk about this stakeholder group later in this blog.

5.   Government

Apart from a host of other issues, a government must ensure people welfare (not necessarily Investor welfare, though investors are also people :-) ), keeping in mind larger interests of people and at the same time, ensure government gets its adequate due in terms of tax money. Any of the retail models offers, provided there is right control, offer fair amount of tax money to the government. However, the government has to go beyond, to make Chaotic Retail be effective - it has to invest in the infrastructure and technology, which would generate employment, and therefore, tax money.  

Bottom-line: Government tax money (revenue) is not significantly impacted in any retail model. However, Government needs to provide right support to make Chaotic Retail work, which can be a source of good employment.  

6.   Employees

In Organized Retail, there are lots of employees. In Chaotic Retail, there are relatively fewer employees; there are more entrepreneurs and employers (let us call it the E-spectrum). Let us look at the e-spectrum of the Chaotic Retail world

(i)            At the lower end of the E-spectrum in the Chaotic Retail, are less-educated folks, basically the guys who sell vegetables on the street. I don’t see how they will stay employed in the Organized Retail world. Essentially, Organized Retail pushes them to poverty and crime.

(ii)           At the medium piece of the E-spectrum are the small and medium mom and pop shop owners who are making OK money. These guys have some education. In organized Retail, they will be forced to shut shop or operate on a much lesser income. You could argue, they must innovate - but it is easier said than done. Such folks will be the sales persons or the clerks in the Organized Retail stores and backoffices.   

(iii)          At the higher end of the E-spectrum, the folks are dreaming big. Their will be severe consolidations in this segment as the market matures, some will really do well and some will be out of business. Many of their employees will be fired and some would join the Organized Retail as sales persons or clerks

Bottom-line: Many of the moderately educated employees will get re-employed in the Organized Retail. There will be no net new employment; rather re-alignment of jobs would occur

7.   Other Impacted Industries    

This category includes impacted industries like shipping, transportation, logistics, warehouses, etc. The Organized Retail model would provide a boost to the real estate/ construction business, their would be multiple stores and warehouses coming up. However, we do not necessarily need Organized Retail for this, and a welfare government should be able to launch infrastructure projects in PPP model.

Bottom-line: Shipping, Transportation, Logistics may see a boost in Organized Retail, but this cannot be the sole reason for allowing Organized Retail

8.   Consumers

As promised, we are back to talking about Consumers (4 above). A consumer wants the best possible product at the cheapest price. Organized retail does not guarantee the cheapest price, however, it does not provide a wide variety of products to consumers at all price points. Consumers would end up spending more - it increases consumerism. This blog however, will not discuss the merits or demerits of consumerism. At low end organized retail chains (think the dollar stores in the US), which will be a hit in smaller Indian towns, there would be significant health issues -  a lot of people would readily procure less expensive food products. This is terrible for the average consumers.

In a nutshell, analysing all the stakeholders, Organized Retail is not a must for pushing reforms. Rather, a welfare state, with a small amount of willingness, can usher in significant benefits without compromises any of the stakeholder group, except, of course, the investors. 

It is a myth that farmers will be benefited, net new jobs created, or infrastructure will get a boost.    

The government must implement effective governance, infrastructure and technology and guarantee     fair prices to farmers. There are lot more benefits in Chaotic Retail with some government support.

A decision is simple - depending on who the government is working for - the investors or towards becoming a better welfare state.