It’s a little disappointing to see lack of political will to infuse much needed capital in the Indian economy. I am not going to pretend that I have the whole FDI in retail issue figured out but there are some glaring factors that should not be neglected when assessing the impact of Government of India allowing Big-Box stores to enter the Indian markets. The one that makes me doubt the success of the big-box concept is actually beyond the “last mile logistics” described by Girish in his post.
A big-box retail chain’s success depends heavily on cost efficiency and that includes the cost that consumers incur in reaching a big-box store from their house or workplace. According to a technical paper, The Diﬀusion of Wal-Mart and Economies of Density (see Table 4) by Thomas J. Holmes, the average distance to a Wal-Mart store is approximately 6.9 miles (~11 Kilometers) for census block groups (US) with a population of 500,000 people in a 5 mile (~ 8 Kilometer) radius.
In the Indian context, it is difficult to assume that these Big-Box stores would be located in the center of Metros and Tier-2 cities due to shortage for land, congested roadways and high property rates. Under these constraints, it is reasonable to assume that the 11 KM average distance to a Wal-Mart or any other big-box retail store will hold true in the Indian context as well. That gives rise to the question; will Indians travel 11 KMs to buy their groceries & household supplies? To answer this question, I dug up some data on travel behavior in the US and stumbled upon the National Houshold Travel Survey (See Table 5). According to this survey, the average trip length for “shopping” was 6.5 miles (10.4 KM) in the US.
Unfortunately, similar data for India is not available. To overcome this limitation, we can use someother data do a “smell test” on the feasibility of Big-Boxes in India. According to the World Bank, the US has 820 automobiles per 1,000 persons whereas India has 15, that’s right 15 automobiles per 1,000 persons. In other words, while almost every American owns a vehicle, on average 50 Indians share one vehicle.
So, if Americans who on average own approximately 0.82 (or 1) vehicle per person, travel 10.4 KMs for their shopping trips, how far do you think Indian’s,with an auto-ownership of 1.5 vehicles per 100 persons, travel to buy their groceries and household supplies? It’s difficult to answer this question without a household travel survey. However, we can consider other metrics that could help answer this question.
According to a paper presented by Madhav G. Badami, GeetamTiwari and Dinesh Mohan (Chart 2), approximately 36% of trips in Delhi were made by non-motorized modes of transport (walk & bicycle) while approximately 79% trips were made by non-motorized modes and public transport.
* Reproduced from the paper entitled Access and mobility for the urban poor in india: bridging the gap between policy and needs.
In light of this data, it appears that a Bog-Box store would have to sell products at prices that negate the cost of covering a distance of 11 KMs (to reach the store), if they wish tocompete with neighborhood mom-n-pop stores.
As Girish mentions in his post, Big-Box stores depend of economy of scale, and that applies both on the buying and selling side. Big-Box customers don’t make that trip to the storejust to buy one toothpaste or a dozen bananas, they usually go there to buy goods that last them for at least a week. That means, those who don’t own a car would have to make more than one trip a week to buy goods that would last them a week. In other words, a big chunk of the 79% trips (walk, bicycle & public transport) won’t find it viable to shop at such stores.
Even those who own vehicles would think twice before burning petrol at Rs63/Liter, won’t they?I concede that this data is based on a survey conducted in 1995 and mode shares have changed considerably, but we are still light years behind the US levels of auto-ownership (which may not necessarily be a bad thing).
That may raise a question; is Wal-Mart stupid to express interest in the Indian market under these circumstances? The answer is no. Big businesses don’t enter foreign markets expecting to break even in a short term. The idea is to build a presence in a growing market, remember buy-low sell-high?
The other question that may arise is, what if these Big-Box stores change their approach and open numerous mini-Big-Boxes scattered throughout the City? Such a move would blunt their economy of scale considerably unless they come up with a stellar strategy to counter this impediment (online stores).
Even if Big-Box stores force mom n pop shops out of business, it would mean that you and I would be buying goods at a much cheaper price, i.e. Rupee would go farther than it goes now. When our Rupee goes farther, we will be consuming more and increased consumption results in increased employment which fuels a cycle of consumption and employment growth. Doesn’t sound so devilish does it?
Before concluding, I would like to highlight one issue that bothers me the most about these stores. If they succeed and manage to develop a huge customer base like in the US, will our transportation infrastructure be able to handle the extra traffic?
Based on some empirical formulae developed by Institute of Transportation Engineers, a typical Wal-Mart store which on average has an area of 108,000 square feet, is likely to generate approximately 6,100 round trips a day. This additional traffic on our roads will increase roadway maintenance costs and congestion.
Who will pay for alleviating congestion and maintaining our roads then? In the US, such Big-Boxes (or any new development for that matter) is required to share the fiscal burden of maintainingexisting levels of service on roadways impacted by their development. It’s usually pro-rated based on their share of traffic on adjacent roadways. It will be interesting to see if our political parties raise this/such questions now before letting them in and prosper without sharing the burden.
Tags: FDI in Retail