Saturday, December 3, 2011

Wal-Mart Invades ...

The opposition and debate on FDI in retail in India has not settled down. Amongst the primary points of opposition to the move is that large retail houses like Wal-Mart and others will wipe out the local retailers due to low prices, have a monopoly, and control the retail trade domestically. This is viewed as an invasion of sovereignty and vesting of control on an important part of national interest.

The opposition to Wal-Mart, inspite of its pre-eminent position in organised retailing, is not peculiar to India. According to the Economist the Wal-mart is the third largest employer after the US Department of Defense and China's People's Liberation Army. Out of the 10 top employers in the world, Wal-Mart is one of the three private players, the rest being Government.

The Walmart stores website announces s simple purpose for their existence - helping customers save to help them lead better lives. However, Walmart Watch doesn't totally agree. A critique of the Wal-Mart chain it claims to achieving the purpose below:

"Since 2005, Walmart Watch has educated policymakers, media and communities about the impact of Walmart in America and across the globe. Walmart Watch exists to challenge Walmart to more fully embrace its corporate responsibilities and live up to its position as the world’s retail industry leader, a position that allows the company to set industry standards for wages, benefits and beyond. To date Walmart has used its dominant position in the market place only to lower standards for American retail workers, offering what amounts to poverty jobs for most of its Associates."

The New York Times in 2003 reported "Wal-Mart Invades and Mexico Gladly surrenders" raising similar fears that ave been raised in India against FDI in retail. It reported,

"Wal-Mart's power is changing Mexico in the same way it changed the economic landscape of the United States, and with the same formula: cut prices relentlessly, pump up productivity, pay low wages, ban unions, give suppliers the tightest possible profit margins and sell everything under the sun for less than the guy next door.

Indicating its scale the report notes,

"Though it came to this country only 12 years ago, Wal-Mart is doing more business -- closing in on $11 billion a year -- than the entire tourism industry. Wal-Mart sells $6 billion worth of food a year, more than anyone else in Mexico. In fact, it sells more of almost everything than almost anyone. Economists say its price cuts actually drive down the country's rate of inflation.
Last year, 585 million people -- nearly six times the population of Mexico -- passed through its check-out lanes. With 633 outlets, Wal-Mart's Mexican operations are by far the biggest outside the United States.
Its sales represent about 2 percent of Mexico's gross domestic product -- almost the same as in the United States. Analysts say it now controls something approaching 30 percent of all supermarket food sales in Mexico, and about 6 percent of all retail sales -- also about the same as in the United States."

The polarising impact Wal-Mart has had on the Mexican "manufacturing" sector is detailed in this post. The productivity of weak firms is said to decline while strong firms exhibit higher productivity as a result of Wal-Mart's entry. Wal-Mart has, as per this report,  sharpened the difference between weak and strong firms for Mexican manufacturing as a whole.
An interesting study  in 2005 on Wal-Mart's success in Mexico draws into focus the limitations of such a success,
"However, three factors are beginning to impose limits on that advantage.  The first is the rapid modernization of a portion of the Mexican retail sector—in many cases through imitation of Wal-Mart.  Second, the polarized Mexican income structure limits the population of consumers able to shop at Wal-Mart and its subsidiaries.  Finally, repeated economic crises and stagnation have driven many Mexican consumers back to traditional and informal retail outlets.  "
Supporting the consumer choice that Wal-Mart offers, William Anderson dismissed the charges that Wal-mart destroys local communities.

The issue of entry of foreign retail has many complex consequences for the local organised retailer, the local unorganised retailer, the local community, the local producers and ultimately to the consumer. While the entry could be detrimental to the local organised retailer, it may not necessarily be disadvantageous to the local producer (who gets good prices) or ultimate consumer (choice and low costs). Experts have opined that actual experience shows that it may not be detrimental to the local unorganised retailer too due to  the heterogeneity in consumers.
In this context, one is tempted to ask - What is in national interest?
As a local Mexican summed up the effect of Wal-Mart's entry in Mexico,
"At a Mexico City shopping center, Plaza Tepeyac, José Carrillo, 36, wended his way through the aisles on a weekday morning, admiring how neatly the merchandise was displayed.

''Sometimes I go to the street markets and sometimes I come here,'' said Mr. Carrillo, an administrative aide, who lives three blocks from a Wal-Mart. ''Sure, I know Wal-Mart is a multinational company, but what are you going to do? That's globalization, and Mexico has to play the game, right? Maybe some of the profit leaves Mexico, but Mexico gets back some foreign investment, right? That's how things work. It doesn't matter to me if I'm buying from a multinational company, as long as they give me what I want.''

No easy answers, I guess.


gulzar said...

very good post srikar!

two observations...

1. i don't think we should be too concerned about the impact of this on the organized retailers. i am sure they'll adapt and the best will (and only they should) survive.

2. it can be safely said that it will be a net social and economic win in terms of its impact on organized retail, consumers, farmers, and in also in infrastructure creation. the real issue is about its impact on unorganized reatil (btw, i haven't read a good analytical, not anecdotal, article anywhere about its impact on unorganized retail.

to this extent, the strategy for its roll out assumes significance - areas, sequencing etc. While utlimately, in economic terms, organized retail is most likely to increase efficiency all round and expand consumer surplus, the critical political issue is the net job creation/loss balance.

Shiva said...

I started writing against Walmart, just 5 blogs against them and they hacked my blog. But that wont stop me from exposing these demons~


Druv said...

It was the homeland security that installed UID system in India, under the guise of fighting terrorism.

But We know that "Homeland security" only works for maximizing Walmart's Profitability.

Just when UID system in India was installed, Walmart comes in for the kill.