Google Translate

Wednesday, February 19, 2014

Attack on Reliance Fresh: It’s All about Margins!

There is a village called Narakoduru in the coastal belt of Andhra Pradesh. Like in any other village, the residents of this village too eke out their living by tilling soil. There is, of course, a difference: they grow only vegetables. Their village is popularly known as a vegetable bowl of the coastal Andhra. This popularity has, however, not altered their lives, for like any other farmer they too suffer from poor farm-gate prices – but more silently.

Their suffering is indeed much worse, for the whole village grows the same vegetables and the entire produce has to be essentially sold to wholesalers coming from the nearby towns that too, no sooner were the vegetables harvested. The result is: they have to part with their produce for whatever price the wholesalers offer, as otherwise they have to simply dump the harvested vegetables in their manure pit, since vegetables, unlike other agricultural produce, don’t have shelf-life; nor could they afford to cold-storage them and bargain for a better price. Which means, if they don’t accept whatever price the middlemen offered, they would get nothing for their produce plus they would also suffer the loss of additional expenses in the form of harvesting charges – a double whammy?

This, in a nutshell, is what the fate of every vegetable grower across the geography is. During the periods of peak supply, the price mechanism operates still bad—the farmer gets a still worse price, while the consumer enjoys no benefit of fall in prices, for he still needs to pay whatever price the vendor fixes. This phenomenon of chilies purchased from a farmer for Rs. 4 a kg being sold to the ultimate consumer at Rs. 15 plus, remained an unresolved puzzle to farmers and consumers as well. For economists, it is, of course, a mere phenomenon of ‘cartel’—a few traders forming a strong group—monopolizing the market, and dictating both buying and selling prices.

However, with the advent of big corporates into retailing, a paradigm shift has emerged: the corporates are purchasing vegetables directly from farmers offering a price that meets their cost of production and a reasonable profit margin, and selling it to the consumers at a profit margin that normally hovers around 12-15%. The net result is: remunerative prices to farmers, and supply of fresh vegetables at decent prices to consumers. To stabilize their supply chain, corporate retailers are even entertaining contract farming, under which the corporates would be supplying improved seeds, technology and capital to farmers to grow vegetables with a promise to buy their harvest at market prices.

But this appears to be not to the liking of the existing traders. There are reports that the existing vegetable traders turned violent against the officials of corporates who had gone to Narakoduru village for buying vegetables from the farmers. There are also reports of petty traders and vegetable vendors of Ranchi vandalizing three of the five Reliance Fresh food outlets, accusing that its entry into vegetable retailing has directly affected their businesses. Even a section of political forces in the country is criticizing the entry of big corporates—Reliance, AV Birla Group, Bharti with Wal-Mart, etc.—into retailing, for in their opinion, it is sure to throw the existing petty traders and vendors out of their businesses.

A question has thus arisen: Does the entry of corporates into retailing really pose a threat to the existence of petty traders and vendors? The answer is both ‘yes’ and ‘no’. Let us first look at why the answer is ‘yes’. By virtue of their large-scale operations, corporates can create better storage and distribution facilities. They can leverage on contract farming to keep their supply chain intact. Cumulatively, they can source vegetables from the production centers in bulk and distribute across the geography with no loss in their freshness and quality. Secondly, corporates, unlike the existing traders, are known to work for a fixed margin of profit, say 13-15% and as the competition increases, even these margins are likely to shrink further. Thus, a better price is what the free market guarantees both the producer and consumer. This obviously, moves the consumers away from the existing vendors, and to that extent petty traders and vendors may lose their market share.

But, it cannot certainly end their businesses, for they can always compete with corporates who are known to operate with huge establishment expenditure vis-à-vis small traders. It only means that these traders can compete with the corporates but with less profit margins vis-à-vis what they are enjoying today. To put it otherwise, they can no longer buy vegetables at Rs. 2 a kg from the farmers and sell it at Rs.10 for kg to the consumers. Indeed, it is the petty vendors who are more competent—provided they are willing to operate at normal profit margins—to be a threat to the corporates, but not vice versa. So, small traders have to necessarily change their business model and fall in line with the changed market scenario where class politics are declining while the new social movements that are picking up speed are making the consumer the ultimate decider. “In an infinite aisle” that globalization has opened up for trade, won’t it therefore make great sense for these two classes of traders to collaborate with each other and run their businesses on an even keel?

(June, 2007)


Post a Comment

Related Posts Plugin for WordPress, Blogger...

Recent Posts

Recent Posts Widget