Walmart comes to India: Can mom and pop stores play with the big boys?

Published: Wednesday, Nov. 28 2012 7:03 a.m. MST

“By the time it reaches the consumer, the produce will have been marked up by three to four times, but nearly all of that goes to the middlemen, not the farmer,” said Jyoti Thottam, an Indian correspondent for Time Magazine. Since Walmart’s model is to buy directly from farmers, they can afford to pay higher prices. By doing so they believe it is possible to increase farmers’ income by 20 percent in five years.

To meet its demand for produce, Walmart also plans to help farmers improve productivity. For example, it can help spread simple technologies and best practices, like the use of stakes to prop up tomato plants, said Aiyar. Ironically, doing so could eventually lead to the loss of agricultural jobs. In modern economies like the Unites States or Japan, less than 5 percent of the population is employed in agriculture.

This isn't necessarily something to worry about, according to Vivek Dehejia, an associate professor of economics at Carleton University in Ottawa, Canada. Walmart will bring new kinds of work to the region, he said. So many people in India work in agriculture because they don’t have better options, he added.

From farm to store

Bypassing the entrenched network of middlemen won’t be easy, Aiyar said.

“Those who argue that foreign direct investment will bring succor to farmers and reduce prices for customers need to explain why domestic large-format retailers haven't been able to remove the middlemen,” Aiyar said.

“Distribution requires at least three transactions, from farmer to transport to distributor to retailer,” said Sanjay Kaul, a Delhi-based political and economic blogger. “The (foreign) retail stores will just have their own middlemen."

Infrastructure is another barrier to efficiency in India. It takes a mango truck 65 hours to travel the 854 miles between Mumbai and New Delhi because of traffic jams, toll plazas and provincial borders, according to estimates by Deloitte consultants. During the roughly three-day trip, 30 percent of the produce will spoil. The Indian Institute of Management estimates that traffic issues cost India $5.5 billion annually.

If Walmart wants to make money, they’ll need to invest in roads, refrigeration units and storage facilities. Yet, critics worry about having a foreign company provide infrastructure that is the government’s responsibility: “Can we expect Walmart to build public roads or fix them when they break?” Dehejia asked.

Customers

A price study by MIT economist Jerry Hausman found that by shopping at Walmart consumers save 25 percent on their food budget. For families that spend a large portion of their budget on food this makes a significant difference. Hausman found that shopping at Walmart for groceries can provide a poor family the equivalent of a 6.5 percent boost in income.

But these savings may not hold for Indian families. Walmart will have to put in air conditioning systems, parking, buildings, transportation and machinery.

“Purchasing items in bulk won’t offset those costs ... so (they) will inevitably be passed on to customers,” said Aiyar.

The cost of real estate in urban areas is also astronomical, according to Aiyar, another cost the customer will end up swallowing.

While the impact of Walmart on Indian consumers remains to be seen, one thing is certain: “Indians are hungry to taste the global economy,” said Dehejia.

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