The downside of FDI in retail, which may be a boon to urban consumers

Mahazareen Dastur

09-December-2011

Vol 0 | Issue 1

Over the past few weeks, Indian newspapers have been consistently giving prominent display to stories concerning FDI in retail. Naysayers and others were both quick to voice their opinions on the issue. Proponents of FDI in retail have backed down for now, giving in to popular sentiment.

However, questions still abound—would FDI in retail have been a game-changer or would it have brought about the doom of many an Indian kirana store?

To me, it is evident that the urban Indian consumer would have undoubtedly benefited—mainly in terms of buying better produce at lower prices, and who wouldn’t be happy with that?

But what of the small-scale farmer at the other end of the line? Would he have stood to earn a better price for his produce, or would he have lost his daily wage altogether?

In India, where agriculture is the highest contributor to GDP and employs close to 50 per cent of the population, answering these questions correctly becomes crucial.

Price cut at whose cost?

As retailing markets have become saturated in most developed countries, such as the USA and the UK, supermarket chains have expanded with amazing speed across the rest of world, and continue to do so even today.

Across the world, as supermarket chains have grown from strength to strength, they have acquired greater power over the entire supply chain—starting from agricultural production and processing to wholesale and retailing—at many times owning and running entire farms and plantations.

This puts them in the unique position to bargain and continually press suppliers and farmers for terms more advantageous to them. This is possible given economies of scale typical of huge retailers—pile them high and sell them cheap. Indeed, supermarkets have become the ones calling the shots as far as prices are concerned.

Consider an example: in 2003, Asda, a subsidiary of Walmart in the UK, decreased its margin on bananas from 32 to 22 per cent in order to gain an advantage with a lower shop floor price, leading their competitors to respond in a likewise fashion.

However, neither Asda nor its competitors were swallowing those cuts through reductions in their own margins; instead, these cuts were passed on to their suppliers, in this case, poor plantation workers in Costa Rica. Their daily wages reportedly fell from US $12-15 per day in 2000 to US $7-8 per day in 2003, due to such manoeuvres.

In fact, as ActionAid International reports, in a perverse cycle, such actions help supermarkets earn higher margins and larger profits, thus giving them the upper hand to invest more and increase their dominance even further. So, the buy-one-get-one-free offer really means that the supplier has ended up paying for it.

Who benefits?

Furthermore, wide-ranging control over the supply chain has given supermarkets the power to choose who will supply them. Traditionally, they have preferred to buy from a small number of large farms, rather than a large number of small ones.

Such transactions are not only easier to organise for the supermarkets, they are also highly helpful in capitalizing on the more intensive production methods which often require rigorous control.

This also helps the large farms given that they, too, can benefit from economies of scale, which in itself is very important as prices of products may fall so low that any producer without such economies of scale may go out of business.

What then happens to the small farmer? According to a 2004 report by the Food and Agriculture Organization (FAO), Carrefour, France’s largest supermarket chain, switched to buying melons from just three growers in Brazil in order to supply all its Brazilian stores, and ship to distribution centres in as many as 21 countries.

Another FAO report reveals that in less than five years, Thailand’s leading supermarket chain reduced its list of vegetable suppliers from 250 to a mere 10, and between 1997 and 2001, more than 75,000 small-scale dairy farmers lost their livelihoods due to this “centralisation or consolidation of supplier bases”.

Cost to environment

There are environmental consequences as well. There are huge (and unfortunately, mostly overlooked) implications for soil quality, water resource depletion and deforestation which large-scale, intensive agriculture brings with it.

Globally known examples include the threat to orangutans in Indonesia on account of deforestation to grow ever larger oil palm plantations, the monoculture cropping of soya in Brazil, Paraguay and Argentina, and the prohibitively high usage of pesticides in banana plantations. These environmental abuses have become known mostly thanks to efforts of environmental groups such as Greenpeace.

On the flip side, the retail giant Walmart (its fiscal year 2010 sales was US $405 billion) unveiled what it refers to as its 'Global Sustainable Agriculture Goals' in late 2010. In it, the retailer pledges to “buy more from small and mid-sized farmers around the world; reduce food wastage; and sustainably source key agricultural products”.

As a country-specific commitment for India, Walmart has promised to source 50 per cent of its fresh produce through its Direct Farm Program.

As an example of the latter, there are reports of Walmart having set up 36 direct purchase bases in over 14 Chinese provinces and municipalities, benefiting 393,000 farmers to date.

The key definition would probably pertain to whom Walmart will identify as “small-sized farmers” in the Indian context.

Whatever decision the Indian government finalises for FDI in retail in the future (the question will no doubt be brought up again), it must do so keeping in mind the implications for the real common man.

Mahazareen Dastur is an environmental researcher and writer based in Mumbai

By arrangement with Down to Earth