The Wal Mart effect and the retailing race

Here is an interesting article in the online magazine, Salon, by Andrew Leonard, about the race to the bottom that Wal Mart has started, and which its clones like "Reliance Fresh" are replicating. It is estimated that Wal Mart makes a profit of just 4 cents on every dollar of sales. But its high volume, profiting from economies of scale, model has been extremely successful and is being replicated across the world.

In India retailing is fast becoming the sector to be in, and in the glorious tradition of "irrational exuberance" of a vibrant market place, all and sundry have been piling on. The massive boom being experienced by real estate in Indian cities has only added to this attraction, as business houses see the potential for a double killing. Many of those entering the market have little expertise nor their existing businesses have any linkages with mass retailing. This retail push by a number of major groups in India, seems to be another bubble in its initial stages of build up. Fast forward, three or five years and do not be surprised if we have Indian city landscapes littered with massive unoccupied retail floor space.

I do not know whether there have been enough detailed studies about the potential market for mega retailers, about the shopping trends and patterns in existing malls and mega retail outlets etc. We need more information before drawing any meaningful conclusions about the challenges and opportunities in Indian retail industry. For the time being sample this extract from the article by Andrew Leonard:

The Communist government of Kerala is threatening to ban "retail giants" from setting up shop in the Indian state. The measure, which appears to be backed by all the major political parties in Kerala, is chiefly aimed at India's version of Wal-Mart, Reliance Industries. The concern is that a proliferation of large retail outlets would drive tens of thousands of mom-and-pop shop operators out of business. Kerala made headlines not so long ago for attempting to ban Coca-Cola; the state has a long history of pursuing its own unique path to development.

Let's switch venues. The safety of Chinese-made products is in the news again today, as China's government announced that a whopping one-fifth of the products on the shelves of Chinese stores were found to be substandard or tainted. The immediate, and understandable impulse, is to blame the health hazards of Chinese products on the lack of regulatory enforcement in China, a state of affairs exacerbated by state corruption, a weak judiciary, and a general absence of effective checks and balances in Chinese society. But that's only one-half of the picture. The other half is the imperative, in the biggest markets for Chinese exports, that demands ever-lower prices for everything.

In "The Wal-Mart Effect," Charles Fishman makes a compelling argument that Wal-Mart's market power inevitably forces its suppliers to cut corners on quality in order to deliver the lower and lower prices that Wal-Mart demands. So those suppliers close their American manufacturing facilities and start sourcing their products in China -- if they don't, they'll lose their place on Wal-Mart's shelves.

So whose fault is it really that so many problems are cropping up with Chinese-made products? Of course, the factory owner in China who authorizes the insertion of toxic chemicals in toothpaste and pet food bears a heavy liability, as does the government official who looks the other way. But shouldn't the Western mega-retailers fighting for market share with their "pro-people" low prices also be held to account?

Maybe tougher safety standards and enforcement of legal liability all the way up and down the supply chain, from China to the retail store, is a better answer, ultimately, than attempting to ban chain stores altogether. But the symbolism of Kerala's "bold" move, however quixotic, is still potent. Markets left to themselves do not deliver perfect outcomes. Sometimes government has to push back.