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Economy Nov 29, 2011

Retail FDI: Let the consumer decide

By Arjun Parthasarathy

Go to a big store in any mall and you will find that the person in front of you with hundreds of items is a so-called "kirana shop" owner.

Yes, the local retailer buys in bulk at big malls and sells it at a small profit to the local consumer. The consumer does not mind paying a slightly higher price from the retailer for the convenience he offers.

Home delivery, one-month credit and late opening hours are the reasons why consumers will continue to buy from the retailer for daily needs.

The consumer, while buying from the small retailer for his or her daily needs, will still go to the big store in the mall for monthly shopping. However, that does not mean the retailer loses business.The consumer will buy goods in bulk at the mall but continues to purchase small items from the local retail shop. It is a win-win situation for the mall, the retailer and the consumer.

The Indian retailer is smart. He has started to buy from big stores and sell it locally at a small margin. Reuters

The big debate on retail FDI is completely off-track and unwarranted. Headlines of 'mom-and-pop' stores losing business, loss of living for many retailers, etc. do not have any justification.

If the consumer prefers to buy in the mall, he does so because of prices and not due to anything else. The local retailer will have to bring down prices to levels of those offered in big stores to survive.

That means better inventory management, better people management and use of systems. The consumer benefits from paying lower prices in malls for monthly shopping; he or she also pays lower prices for his or her daily shopping requirements.

In fact, the Indian retailer is smart. He has started to buy from big stores and sell it locally at a small margin. Eventually, the retailer will also learn to stock items that go off the shelf on a daily basis, while allowing the consumer to buy bigger and bulkier items at malls.

The retailer will have less wastage of goods due to correct stocking policies and that will lead to overall efficiency in retailing.

The greater the number of big stores, the more intense the competition and lower will be the prices. The consumer will benefit with greater choices and better price discovery.

The retailer, too, will benefit as he can choose what goods to buy and from where for stocking in his store. The consumer who knows the prices of goods will not give business to a retailer who jacks up prices for better margins.

In turn, the retailer will understand that selling goods at jacked-up prices will not work and become more reasonable in pricing.

The quality of goods sold will also improve at the retail level. Big stores bring quality brands to the consumer. When that happens, consumers used to quality will baulk at buying sub-standard goods from a retailer.The retailer will then introduce better quality control, leading to improved standards in retailing.

The existing malls are good examples of how big and small stores survive. Every city now has big retail stores and any localite will tell you that a small store that has been in existence for ages continues to exist.

In many cities, small and large stores exist side by side, and in many cases, the big stores are the ones that go out of business rather than the small ones. Subhiksha is a good example of mismanagement by a large retail chain that went out of business.

At the end of the day, it is the consumer who will decide whether to keep large retail giants or the small retailer in business.

Government policies will have nothing to do with consumer behaviour. The government has to make sure that the best is available to the consumer at the lowest price and that means opening up the retail sector to world-class players.

Arjun Parthasarathy is the editor of www.investorsareidiots.com,a web site for investors.

by Arjun Parthasarathy

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