Vantage point

Tuesday, November 28, 2006

Kirana Will Still Rule

So Walmart is officially in India now. The Indian Left has predictably started making noise. I suspect a lot of left-leaning-human-face commentators will also shed barrels of tears bemoaning the imminent death of the small Indian shopkeeper. They will write about how Walmart got a "backdoor entry" into India.

But is this tie-up, which has Walmart managing only the back-end supply chain and procurement and Bharti managing the front-end, only a convenient arrangement to scale the policy barriers? Or is it something more? A strategic decision? I suspect it is more of the latter than the former.

All those who expect big retailers like Walmart to come in and devour small kirana shops should pause and think. Can Big Retail really do that? Just look at what the average kirana store offers the average Indian household. Firstly, it is just a stone's throw away. So anytime the family needs something, it is easy to just stroll over and get it, even if it is as paltry as a loaf of bread. Secondly, there is the trust about all the items being fresh and reasonably priced at the friendly neighbourhood kiranawalla. Thirdly, there is free home delivery, usually on a bicycle, for the regular monthly supplies, colloquially called "ration". And fourthly and most importantly, there is credit. Since the shopkeeper knows the families in the vicinity well enough, he can actually extend credit based only on the jottings made in a tiny pocket-sized plastic-covered notebook.

A vast majority of middle class India still shops from one of the millions of tiny kirana stores for precisely these reasons. And there is no way Walmart or even the local big retailers like Foodworld, Big Bazaar or Reliance can lure away a chunk of the middle class big enough to make the kirana store go out of business for at least another few decades.

The small segment of the population which has made Foodworld and Big Bazaar run successfully is the very upper-middle-class. Families in this segment have a car so they can plan weekly or biweekly trips to the big shops. These families actually purchase a lot of packaged food items and it makes sense for them to travel that extra distance. These families don't need credit. And yet even these families will still buy a considerable proportion of their groceries from the local kirana stores. This segment of the population is small. It is growing, but it is not growing nearly fast enough to gobble up the main clientele of the kirana store - the middle and lower-middle class.

Walmart surely understands this. It has learnt from its mistakes in Korea, Japan and Germany. Supply-chain principles may remain largely uniform all over the world. But retailing has a very culture-specific flavour. Taking the same modus operandi that worked in the US and superimposing it in other countries will not work. And if Walmart failed in countries like Korea, Japan and Germany, which Americans at least have some understanding of, can they dream of a retail success in a country as complex, diverse and confusing as India?

The threat from Bharti-Walmart or Tata-Woolworth is not to the friendly neighbourhood baniya, but to purely desi retailers like Big Bazaar and Foodworld. These desi retailers have been raking in the moolah because the upper middle class has grown in the last 5 years or so, there has been a rise in salary levels in that segment, and there isn't enough competition. With more players entering, competition will hot up. And margins will surely go down.

Another bogey being raised regarding Walmart is about their ruthless procurement tactics which squeeze every penny out of the suppliers and the manufacturers. Let us assume for the sake of argument, and for the brevity(!!) of this post, that such tactics are evil, and harmful to the local economies. Even if we assume that, organised retail does not and will not, for several decades, have the marketshare big enough to get a clout to actually pull off those tactics in India.

So comrades, unless it is Big Bazaar and Food World that you consider the meek and weak, do us all a favour and shut up. The desi baniya will continue to do well for ages to come. And the day that Big Retail is actually poised to capture marketshare of the Indian retail industry big enough to drive the baniya out of business, is the day that the economic indicators in this country will have changed so much that communism will exist only in museums and history textbooks.