Organised food retailing can increase rural income

One of my batchmates from IIM C sent this article on our group mail. and the following is what happened post it...

http://www.thehindubusinessline.com/2007/06/14/stories/2007061401910500.htm

Pranav sent the following article:

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Organised food retailing can increase rural income, cut inflation: Crisil Will facilitate better supply chain management, create efficiencies
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The findings make a strong case for providing an impetus to organised retail of food and grocery.
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Chennai June 13 If organised retailing manages a deep and widespread penetration of the food and grocery sector, farm incomes could increase even as consumers pay lower prices, according to a latest study by Crisil Research. The study suggests that the resultant rise in farm incomes and in rural spending could boost GDP. Only one per cent of the Indian food-retailing sector is currently organised as against countries such as the US where the penetration is 80 per cent. Crisil estimates the total avoidable supply chain costs in the food and grocery chain at Rs 1,00,000 crore. About 57 per cent of this is due to avoidable wastage, the rest due to costs arising out of multiple storage points and multi-layer commissions. Farm realisations are, as a result of this wastage, only 35-40 per cent of the final retail price as against 60-65 per cent in countries such as the US. Inefficiencies push the final price paid by the consumer to 2.6 times that paid to the farmer. Organised retail practices, however, invest in better supply chain management and could create efficiencies by way of disintermediation and enhancement of transportation and storage facilities, which could in turn lead to reduction in commissions and lower wastage of produce, says the study. According to Mr Sudhir Nair, Head, Crisil Research, if one-third of these savings (Rs 33,500 crore ) are passed on to the consumer in the form of lower costs, it amounts to 3.5 per cent of the country's spend on food items (Rs 9,51,000 crore ). "This can play a significant role in lowering food inflation," it says. Food inflation was 8 per cent in 2006-07, while overall inflation was at 5.4 per cent. Mr Nair goes on to argue that if two-thirds of the savings from supply chain efficiencies are passed on to the farmer, farm incomes can grow by more than 37 per cent to Rs 2,50,000 crore. Crisil estimates that if farmers then spend 80 per cent of this incremental income, an additional spending of Rs 53,600 crore — nearly 1.7 per cent of India's GDP— would get added to the economy. In a teleconference with the media, Mr Nair admitted that the savings equation could be more biased towards the consumer, as against their own estimate of two-third of the savings going to the farmer, depending upon the way consumer preferences and retailing practices evolve. However, he maintained that the findings made a strong case for providing an impetus to organised retail of food and grocery. Do modern retailers in India really generate supply chain efficiencies? Mr Nair told Business Line that such players were, indeed, better in managing the supply chain. Wastages for such players were found to be about 3-5 per cent of retail price as against 15 per cent otherwise.

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I wrote:

Good English but full of Heat but no substance in Indian context....better supply chain etc is good but at the expense of Local street hawker's job...? In country like India...adundance of manpower is already a challenge in front of government to provide them with jobs...here we are talking about taking away thousands of more jobs....by giving better supply chains...we r going to give more jobs in terms of new jobs but one section of people is going to suffer for sure....and the small entrepreneur having his business is going to get uprooted... Government has to ensure the dirty price politic games should be avoided some regulations which can regulate the retail industry is getting important day by day to dave the interest of common businessman and workers workign with them.Just my personal view, you can differ!

------------------------------------------------------------------------------------------------Pranav Clarified:

Few observations on your connotation:
a) “Good English but full of Heat but no substance in Indian context..” CRISIL is Indian company incorporated in 1987. There AOF has been Indian Market and PSU on whole. Thus this is not observation from foreign player but this is study from organization with Indian roots and deep rooted knowledge of Indian businesses, culture and they are well aware of issues that lie in Indian contex towards retailing. Apart from them KSA Technopak hold the rapport at international level in market research and retailing in India. They have already roped in Pantaloon, DLF, TSV as customer. Wal-mart Bharati are on there way to use their services to promulgate their retail business, here in India. There is indian context here :).
b) “here we are talking about taking away thousands of more jobs....by giving better supply chains”
Two wrongs does not make one Right. Point here is if government is incompetent in certain areas businesses cant be restrained from growth. It’s just a perspective, on how you see thing; improving the SCM(supply chain management) in India will help consumer to avail commodities at lower prices. Also if Supply chain evolves and develops to expected level this will generate innumerous jobs. To leverage such large upcomming system ancillary business will also grow around new retail and supply chain developments. Aaian leading to more jobs and better prospects.
e.g. ANAND as an NGO removed middlemen from dairy product business, despite of doing so it created more job opportunities then what existed before and consumer had better offering at lower price.
Same was the case with Telecom industry in their days of infancy. There was huge skeptic about it but today same telecom has created huge job and business opportunities. They have enlarged the scope of business thus swelling the customer base and eventually call tariffs plummeted. Consumers are benefited with more employment opportunities.
Lastly improving the supply chain mean reducing the cost of moving goods effectively and efficiently. Although this would lead to job cuts and business loss in few sectors but this will be counterbalanced with new opportunities that will come along.
This is how I perceive this retail fiasco in India.
In business if you don’t innovate you w'll die. !!

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I clarified:

Good observations, Thanks for sharing your point of view, I appreciate the effort!

In my comments I didn't question CRISIL's credibility neither i said govt is incompetent or not. What I mean here is, Organized sector, with improved supply chains is a good thing, however in Indian context, at what cost? You have to leverage the resources best....India has manpower, as a citizen what would you want....jobs for all or jobs for only few and rest kept lurking in search of job and food? Not to mention the crime which gets fuelled.

I already mentioned that there will be new jobs created however they will not be for the people who are going to loose there jobs. Putting pressure on middle men is good to give better rates to customers, but organized retail is also playing dirty price wars of initially killing the competition wwith low prices and then increasing the prices....for these reasons, I said govt has to regulate the retail pricing.

Mr Nair's comment "if two-thirds of the savings from supply chain efficiencies are passed on to the farmer, farm incomes can grow by more than 37 per cent to Rs 2,50,000 crore." Who takes gurantee of this "IF"? Organized sector is driven by profit motives similar to unorganized sector, I don't see a reason why the organized sector would give better prices to the rural cultivators? Considering they would be investing in improving supply chains, adding infrastructre, managing their human resources, killing competition, managing initial losses etc.

Lastly Mr Nair admits "that the savings equation could be more biased towards the consumer, as against their own estimate of two-third of the savings going to the farmer, depending upon the way consumer preferences and retailing practices evolve."
So he also knows that this estimate is wrong!
However as mentioned, if govt regulates this, atleast the improved supply chains might help the rural farmer.

Hope this clarifies my point.

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