The Faithful Hound

Monday, April 17, 2006

Walmart in India



One of the things that I hate the most about traveling around in the US is that the cities and small towns across the country are all so standardized. Sure, some of the larger cities have their own particular characteristics and charms and the scenery varies from state to state, but on the whole America is pretty generic from sea to shining sea.
The main reason for this is the presence of national level retailers and brands that have dominated and practically shut out small scale local competition.From Starbucks, Dunkin' Donuts and Taco Bell to The Gap, Express and Macy's, practically every American city and town (except those in Vermont where large retailers are still shooed away) has the same set of merchants, dealing the same set of wares in its streets and malls.
The marketing processes employed by these retailers are so sharply attuned to the psychology of their consumers that they have persuaded Americans to spend more than practically anyone else on earth, sending their savings rate to an average of less than 1%. For instance, by using Simmons market segmentation data (just to prove that I didn’t sleep through my marketing classes), we can quickly find that suburban New England housewives are big buyers of sports utility vehicles and also that they read a lot of travel magazines and that they aspire towards higher social standing. To exploit this knowledge, retailers advertise their SUVs heavily in travel magazines in New England with ads that feature well coiffed women. Successful sales are practically guaranteed.
The high degree of consumerism that results is what keeps the American economy running, resilient to the vagaries of the market and to international pressures. Consumer spending is what pulled the country out of its last financial downturn and it has never flagged since.
While Macy's and Sears cater to the cities, no American small town would be complete without a Wal-Mart in driving distance, peddling the same array of cheap shiny Chinese products across it's six thousand stores. By purchasing $15 billion-worth of goods from China every year Wal-Mart has helped erode America's manufacturing base for consumer goods, while at the same time given poorer US consumers access to a host of products they could otherwise never afford. The company also employees 1.3 million Americans in low-paying, but readily available jobs.
Wal-Mart is now poised to expand its retail operations to India, a country with a rising middle class and increasing spending power. The move comes on the heels of Walmart's expansion into China. Wal-Mart operates 43 Supercenters in China and has two distribution centers supplying them. From just over 200 employees a decade ago, Wal-Mart has grown to 26,000 in 2005 and expects to have 40,000 employees in China (20% of whom have college degrees, unlike their US counterparts) by the end of 2006.
India's slow deregulation process currently does not allow for international retailers to set up base in the country, but this seems about to change. The country's complex foreign direct investment (FDI) regulations, which currently bar international retailers from directly entering the Indian market are slowly being relaxed, now allowing "single-brand" retailers such as Nike or Toyota to own 51 percent of their business operations in India and will probably soon also allow Wal-Mart like retailers that sell a variety of brands in their stores to operate within the country.
Local opposition is already forming to inhibit the entry of large scale foreign retailers into India, with many of the country's opponents to free markets prematurely bemoaning the end of India's small scale retailers. The fear is that Wal-Mart with its state-of-the-art supply chain, globally sourced products and heavily reduced prices will push the little village corner-shop retailers out of business.
I believe that we should welcome Wal-Mart, Sears and any other interested retailer into our country with open arms. For too long rural and small town Indians have limited their purchases to the weekly groceries and the occasional new garment for the festivals. Indians save 15% of their incomes and we do not keep our capital working.
Another problem in India is that our current agrarian economy is not operating to the best of its potential and needs to be tuned up as well as supplemented by a competent consumer economy.
When rural Indians have access to a wide variety of low cost goods - bright plastic mugs, hairclips, towels, cheap electronics, toys and other trinkets I predict that we will see a retail revolution the likes of which the world has never seen. Shrewd Western style marketing, targeting rural Indians, will help kick start consumerism outside the cities. In addition Indians already possess a naturally high degree of social competition and if Americans are constantly trying to keep up with the Joneses, then we're trying to keep up with the Joshis. In short, consumerism will breed more consumerism in rural India and this will be the last nail to be pulled out of socialist India's coffin as the country jolts back to life.
High rural demand will create a strain on supply and small Indian manufacturers will ramp up production to keep pace. Employment rates will rise as retail and manufacturing jobs are created and Western style production efficiencies will be put in place to keep prices competitive. This technology will soon spill over from manufacturing to help improve the country's vast agriculture economy that currently has wastage levels of 25 - 40% because of low quality supply chains and bad inventory management. This will reduce the cost of food and further increase the quality of life in rural and small town India.
The only drawback that I can foresee is that Indians will stop saving as much as they do and borrow more to maintain their new lifestyles. Is this a bad thing? I don't think so; not as long as we continue to produce at high levels and maintain a decent trade deficit. Wal-Mart and other large international retailers have already said that India is one of their fastest growing sourcing destinations for low cost manufacturing, so I don't see rampant rural consumerism in India resulting in huge deficits to China.
Some may point out that rural India could become a boring landscape full of generic low-price retailers. I don't think that's as bad as it sounds. It's selfish to want rural India to remain unchanged at the expense of rural Indians. A Wal-Mart near every Indian village and small town may sound unattractive, but try telling that to the local farmer's wife as she shops for a shiny new handbag.
I think its about time that Indians started enjoying their money instead of saving it up for lavish weddings and unwearable jewelery for their children.

16 Comments:

  • At 7:05 PM, Blogger wildflower seed said…

    What allows for a high savings rate? An efficient social security system and deep financial markets, neither of which India has. The mere presence of consumer goods is therefore unlikely to spur nationwide dissaving. For instance, Chinese households save so much mainly because of precautionary reasons - meaning for retirement and as insurance against uncertainties in future earnings. At a deeper level, I find the ideal of economic growth a very inadequate one. Research is beginning to show that although advanced countries have made significant improvements in per capita income over the last 100 years, levels of "happiness" (measured in terms of stress-related illnesses and also from just asking people through surveys) have actually declined. Here's the cite :

    http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/happecperf.pdf

     
  • At 7:09 PM, Blogger wildflower seed said…

    This comment has been removed by a blog administrator.

     
  • At 7:11 PM, Blogger wildflower seed said…

    Sorry, that should have been - what allows for a *low* savings rate? And the link I added goes to a rather boring academic paper. Try this link - http://www.andrewoswald.com/, click on Andrew Oswald, and scroll down for the short document entitled "The Hippies were Right All Along about Happiness" under "2006 Papers"

     
  • At 10:19 PM, Blogger Selma Mirza said…

    But would Walmart reach out to rural India? Or would it have multiple outlets in each big city?

    "I think its about time that Indians started enjoying their money instead of saving it up for lavish weddings and unwearable jewelery for their children." Nobody would agree with you more on blogspot.com than me :-)

     
  • At 10:46 PM, Blogger MockTurtle said…

    @VB - Good points and firstly let me admit I'm no economist. That being said, do you think that a large component of India's high savings rate is not so much for post-retirement security as it is for ensuring that one's progeny have a good head start?
    My focus was largely on rural and small town societies, and I think that in this context it is still pretty common for families to take care of their elderly, negating a neccessary dependence on savings or pensions.
    Speaking from limited personal experience, I feel that most lower middle class families still maintain an unusually high savings rate because they are used to an environment where good jobs are scarce and tough to come by for their children and where daughters are a burden who cannot be handed off to a husband without a substantial purse. I think it should not be difficult to expect these citizens to come down from a savings rate of close to 15%, to about 5% (invested in our burgeoning market), make minor lifestyle adjustments and still expect to live out a happy old age.
    Coming to the question of consumerism and happiness - I read the Oswald paper and it was very apt. I agree that consumerism certainly has the potential to lower true happiness, but you have to also agree that the India of the happy peasant is truly a thing of the past. Buddhist/Gandhian ideals of a community of people with limited wants and therefore limited reasons to be unhappy are all very well in theory but not easily applicable in practice.
    I visit India every year on work and last year when I was down there I had a driver who told me his story of how he had taken this job because everybody else in his village had moved to the city to make money and now he wanted to do the same thing so his parents would be proud. The seeds of competetive discontent have already been planted. I am only saying that the fruits should be enjoyed and not hoarded.

     
  • At 10:53 PM, Blogger MockTurtle said…

    @Evenstar: Walmart's target market has always been middle to lower income families, so I think that while their supercenters may still be in the cities, they will plan to set up their regular stores in smaller towns. Their products and prices usually have greater appeal to people who are less economically advantaged and they depend on large volumes of sales to make their profits.
    That being said I'm glad you agree that Indian weddings are a serious waste of money. I'm sure it would serve the new couple's best interests if a small ceremony were held and any money earmarked for a lavish wedding and jewelery were put to more practical use.

     
  • At 11:27 PM, Blogger wildflower seed said…

    "That being said, do you think that a large component of India's high savings rate is not so much for post-retirement security as it is for ensuring that one's progeny have a good head start......it is still pretty common for families to take care of their elderly, negating a neccessary dependence on savings or pensions."

    Ah, but thats inter-generational insurance for you. The reason you do not see such "implicit contracts" in western society is that financial markets allow the young to borrow and the old to lend very efficiently. The deeper question is - what is the optimal savings rate for a developing economy like India? This is an open question.

    The reason I pointed you to the happiness literature is only cautionary. Today, as India grows, the imperative seems to be to ape the kinds of developmental experience that advanced economies have had. While there are many good lessons to be learned from that latter experience, I feel that India has its own peculiarities, and that policy makers should keep these in mind when they liberalize the economy. This is already happening, actually, and the cap on FDI in the retail sector is evidence of that. Ultimately, what should matter is the welfare consequences (as in, the distributional consequences) of liberalizing FDI in the retail sector, and not the growth consequences (as in, how much per capita income went up due to the extra consumption it generated).

     
  • At 9:47 AM, Blogger MockTurtle said…

    "Implicit contracts" - that's a great observation. So, instead of putting their money into a 401K or into the market, you invest it in your progeny who are then obliged to take care of you to repay the emotional/fiscal debt.
    The only drawback I see to the scheme is that the money is not generating interest in the inter-generational transfer and a lot of it is wasted in buying goodwill (I know I keep harping on wedding expenses, but they are a significant burden to lower income families).
    Do you think the Indian fiscal system is robust enough now to allow people with savings to safely invest and those without to safely borrow?

     
  • At 10:24 AM, Blogger wildflower seed said…

    To your question, the simple answer is no. One of the critical weaknesses of the Indian economy is a very high fiscal deficit. Now normally, high fiscal deficits spell trouble because part of the deficit is financed by foreign borrowing (as in the case of US-China) but the silver lining is that most of the fiscal deficit in India is financed by domestic borrowing (thanks to the captive banking system) and also most of it is long-term borrowing (short term debt is worrisome because it requires repayment earlier than long-term debt). So there is some room to manouver. More importantly, the ability to borrow and lend safely really depends on the existence of a well-functioning and deep financial system. This India does not have yet.

     
  • At 11:41 PM, Blogger MockTurtle said…

    Fascinating. So do you see the fiscal deficit reducing with the way the stock market is booming today? I don't see a lot of people investing in low yield government bonds when they have the ability to make a lot more in stocks.
    Also, I'm assuming that tax revenues are on the rise with the economy growing so steadily and that government spending is also coming down a bit as we move away from the large public spending ways of the 80's.

     
  • At 11:18 AM, Blogger ozymandiaz said…

    You've not been to my hometown. The only brand name we have here is the sign on the state highway that runs thru town. Our grocery store is a "Hitchcock's". I'm guessing its names so because its a mystery as to how they stay open.

     
  • At 2:12 PM, Blogger wildflower seed said…

    "So do you see the fiscal deficit reducing with the way the stock market is booming today?"

    Hmmm. Not sure what you mean here. Why should a booming stock market have anything (directly) to do with the fiscal deficit?

    "I don't see a lot of people investing in low yield government bonds when they have the ability to make a lot more in stocks."

    You're right. But remember that government bonds are typically riskless (because the government can always print new money to pay off its debt, should it have a cashflow problem), whereas stocks are risky, and I think the average Indian is very risk averse. Another important question lurks - if India liberalizes *outward* foreign investment, then will Indians choose to put their savings into foreign assets, like, say, US Treasuries?

    "Also, I'm assuming that tax revenues are on the rise with the economy growing so steadily and that government spending is also coming down a bit as we move away from the large public spending ways of the 80's."

    You're right that the current fiscal deficit is really a burden from the 80s. And the government *is* beginning to take steps to reverse the deficit - by essentially tying its own hands to curb spending (for instance, the Statutory Liquidity Ratio, which required that banks hold a minimum proportion of their reserves in government bonds - thereby assuring the government of a ready source of financing - has been almost phased out). But it is not true that tax revenues are increasing. The economy is growing because entrepreneurship is thriving, but that in turn is only happening because the government has dramatically reduced profit and wealth tax rates post-1991. And we all know what the situation is with income tax evasion in India.

     
  • At 7:41 PM, Blogger MockTurtle said…

    @ozy: Wow! ...and I thought you'd be bored during your recent trip to Worcester.

     
  • At 7:47 PM, Blogger MockTurtle said…

    @VB: When I spoke of the fiscal deficit being reduced with the gains in the economy and the stock market, I was refering to the source of government debt disappearing as investors move to stocks, and to the motivation for government debt drying up as tax revenues go up and there are less public works to fund.
    I guess you're right about taxes being stagnant becase many companies and individuals avoid paying them, but I would have thought there'd be some gain due to the increase in highly paid professionals who are taxed at source. But I suppose that they are not large enough in number yet to actually contribute.
    Liberalizing monetary outflow will, as you say, be very interesting. Not sure how Indians would react to that one.

     
  • At 2:46 PM, Blogger GhostOfTomJoad said…

    Hi MT, thanks for the comments.

    And, no,I don't think you're a heartless bastard :-)

     
  • At 6:58 PM, Anonymous Anonymous said…

    My fear with India allowing foreign retailers (although inevitable) is that China will be the biggest gainer and not India. We know that most retailers would target urban consumers. It would be easier for Walmart to ship goods from China using its well established supply chain at a cheap price. Compare this to transporting the products from the villages ... the bad roads would mean longer and more tedious setup. Unfortunately, our politicians are stupid enough to stall any infrastructure project -- look at Bangalore-Mysore expressway for example. I try not to be pessimistic, but more I see the politicians, the harder it gets not to be one.

    The bottomline -- Walmart's entry to India would mean the local retailers loose business, the farmers keep chasing the elusive fish and China gets richer.

     

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