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

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

Small corner stores, called kirana, dominate retail in India. In urban areas up to 80 percent of the population is employed in retail or trade. Walmart establishing itself as a player in the region could have a huge impact on many livelihoods.

Paul Prescott, Shutterstock

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Shopping in India has never been like getting groceries in the United States.

“If we need toiletries, groceries, or even fish, meat or chicken, we just call down to the local kirana,” says Ruksana Hussain, an American from India who returns to her homeland regularly.

Within minutes the groceries are delivered by the shopkeeper, the same shopkeeper who has delivered items to Hassain's family since she was a girl. Kirana is the Indian version of a corner store and kiranas are where most Indians do their grocery shopping. There are more than 14 million of these stores in India, 96 percent of which are less than 500 square feet.

But the way Indians shop is about to change forever.

For years the Indian government has protected corner shops from foreign big box competitors. In a controversial effort to jump start a faltering economy, Indian Prime Minister Manhohan Singh recently announced that the government will allow foreign retailers a majority share in the shops they set up in the country. Within hours of the announcement, Walmart revealed plans to open up stores in cities around the country.

There is vigorous debate whether or not Walmart will be good for the developing nation. Advocates say Walmart will help India modernize its food supply chain, eliminate waste and reduce prices for millions of impoverished people. Since more than 30 percent of India's population lives below the international poverty line of $1.25 per day, there is hope that Walmart's presence in the region could have a profound impact in the global fight against poverty.

But critics warn that benefits of having Walmart will not offset the retailer's devastating impact on the millions of shopkeepers who make up 14 percent of the Indian economy. Allegations that surfaced over the weekend of violations of the U.S. Foreign Corrupt Practices Act in Walmart's India division may give in-country critics more ammunition in their efforts to oppose the retailer.

The Walmart effect

Walmart’s opponents argue that the retailer will harm the small, family owned kirana, or corner stores, that currently dominate the Indian retail market.

“We’ve seen the devastating effect that Walmart has upon workers and small retailers in America,” said Michael Bride of the North American United Food and Commercial Workers International Union in a statement released after Walmart announced its plans for India.

A Census Bureau study of the U.S. retail sector from 1976-2005 found that big box retailers like Walmart had a negative impact on small stores and overall employment growth.

Other countries have experienced similar effects. Walmart arrived in Chile in the early 1990s. Between 1991-95, about 22 percent of small food shops went out of business in Santiago, according to a 2008 study by the Indian Council for Research and International Economic Relations. The impact was even greater in Argentina, where a third of small food retailers closed.

It is unclear whether the same thing will happen in India, officials say.

“Mom and pop stores can play with the big boys,” said Swaminathan Aiyar, a research fellow at the Cato Institute. "(They) already operate with very low overhead,” he added.

Small store owners benefit from low rent, desirable locations, low labor costs and the ability to offer their customers highly personalized service.

Improving the lives of farmers

Sixty percent of India’s population works in agriculture, and farmers stand to make significant gains from foreign investment according to Aiyar. There are two primary ways farmers could benefit — higher prices and improved yields.

Indian farmers are often required by law to sell their crops to wholesale traders at a set price.

“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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