Caveat Emptor: Should India beware of Wal-Mart, the predator?

I am not flatly saying, like many in the Left, that FDI in multi-brand retail will mean disaster for India. We have to be careful to take the good and keep out the bad. There are huge doubts about whether we can do it

“When you sup with the devil, make sure you have a long spoon”. India would do well to heed this proverb when the government finally decides on allowing 51% foreign direct investment (FDI) in multi-brand retail companies. 

Only one multinational worries observers: A giant which seems to be both angel and devil. It is Wal-Mart. 

If Wal-Mart was a country and its turnover is taken as its gross domestic product (GDP), it would be ranked eighth or ninth in the world. If a corporate entity can have a psyche, Wal-Mart is psychotic about two things. First, keeping the prices of its products incredibly low to give metaphorically gold-plated gifts to its customers. Second, making its suppliers deliver products at these low prices; if the suppliers cannot afford to sell at Wal-Mart’s prices and have to close down as a consequence, bad luck to them.

First, the bad news.

In the first decade after Wal-Mart opened its first mall in the state of Iowa in US, 1,845 small and medium-small shops and stores were forced to close down. All of them shut down due to the predatory tactics of Wal-Mart. 

The state lost 555 grocery stores, 298 hardware stores, 293 building supply stores, 161 variety stores, 158 women’s apparel stores, 153 shoe stores, 116 drugstores and 111 men’s and boys’ apparel stores.

All of them were forced into closure because of Wal-Mart’s predatory pricing or because they were Wal-Mart’s suppliers and could not deliver at the prices Wal-Mart demanded. (Source: Iowa State University Study on Wal-Mart)

Now the good news: A 2005 Washington Post story reported that “Wal-Mart’s discounting on food alone boosts the welfare of American shoppers by at least $50 billion per year.” It means US consumers gained $50 billion a year because they shopped in Wal-Mart which offered food items at much lower prices than any other retail giant.

Rahul Gandhi and his friends in Indian business and industry are not talking about the dark side of Wal-Mart. Rahul seems to believe that farmers in the hinterland of Wal-Mart malls, and those of other big retailers of the US, will get a much better deal than at present.  

I am not saying that Wal-Mart and other big retailers of the world should be kept out. I am not flatly saying, like many in the Left, that FDI in multi-brand retail will mean disaster for India. The point here is to highlight the good and the bad about retail FDI. We have to be careful to take the good and keep out the bad. There are huge doubts about whether we can do it. 

Wal-Mart’s competitors have tried to sue it for predatory pricing (intentionally selling a product at low cost in order to drive competitors out of the market). Wal-Mart won some cases and others were settled out of court.

 In 2003, a German high court ruled that Wal-Mart’s pricing “undermined competition” and ordered Wal-Mart and two other supermarkets to raise their prices. Wal-Mart won an appeal of the ruling. Then the German Supreme Court overturned the appeal. Wal-Mart has since sold its stores in Germany.

Wal-mart has been accused of using monopsony power to force its suppliers into self-defeating practices. Wal-mart’s constant demand for lower prices caused Kraft Foods to shut down thirty-nine plants, sack 13,500 workers, and stop producing a quarter of its products. 

Vlasic’s pickles is a classic case of Wal-Mart destroying its own suppliers. It is best to quote from a case study of Wal-Mart and Vlasic: “A gallon-sized jar of whole pickles is something to behold. The jar is the size of a small aquarium. The fat green pickles, floating in swampy juice, look reptilian, their shapes exaggerated by the glass. It weighs 12 pounds, too big to carry with one hand. The gallon jar of pickles is a display of abundance and excess; it is entrancing, and also vaguely unsettling. This is the product that Wal-Mart fell in love with: Vlasic’s gallon jar of pickles.”

Wal-Mart priced it at $2.97—a year’s supply of pickles for less than $3! “They were using it as a ‘statement’ item,” says Pat Hunn, who calls himself the ‘mad scientist’ of Vlasic’s gallon jar. “Wal-Mart was putting it before consumers, saying, “This represents what Wal-Mart’s about. You can buy a stinkin’ gallon of pickles for $2.97. And it’s the nation’s number-one brand.”

“Therein lies the basic conundrum of doing business with the world’s largest retailer. By selling a gallon of kosher dills for less than most grocers sell a quart, Wal-Mart may have provided a service for its customers. But what did it do for Vlasic? The pickle maker had spent decades convincing customers that they should pay a premium for its brand. Now Wal-Mart was practically giving them away. And the fevered buying spree that resulted distorted every aspect of Vlasic’s operations, from farm field to factory to financial statement.”

“Indeed, as Vlasic discovered, the real story of Wal-Mart, the story that never gets told, is the story of the pressure the biggest retailer relentlessly applies to its suppliers in the name of bringing us “every day low prices”. It’s the story of what that pressure does to the companies Wal-Mart does business with, to US manufacturing, and to the economy as a whole. That story can be found floating in a gallon jar of pickles at Wal-mart.”

R Vijayaraghavan has been a professional journalist for more than four decades, specialising in finance, business and politics. He conceived and helped to launch Business Line, the financial daily of The Hindu group. He can be contacted at [email protected].)

 

Comments
Shama Zaidi
1 decade ago
because of monsanto thousands of cotton farmers have committed suicide and now we want to drive kiranawallahs to do the same by letting in walmart. i mean aren't there more humane methods of population control?
LS
1 decade ago
What ever is beneficial to the common man in terms of quality products, competitive prices, ensured and non manipulated/adulterated supply of products is a welcome to India. India has faced too much of adulteration, manipulation (of common man), corruption, unethical market practices, etc etc. Its time we make a change for better.
Prakash Bhate
Replied to LS comment 1 decade ago
I agree. I repeat what I had written earlier. When the economy was liberalised in 1991, people said that it will kill the Indian industry. It became more efficient and went global. When McDonalds and KFC was allowed in, reams of paper were written on how the local eateries will not be able to withstand the onslaught of these two giants. It was McDonalds that had to come up with McTikki to survive. Local eateries continue to get their customers. When product patents were allowed, people screamed from the rooftops that the Indian pharma industry would be finished. It finally started investing in research and is doing quite well. When banks were initiating computerisation people came on the streets saying that they will lose their jobs. Today, one can bank from home. Had the automobile industry not been opened, we would still be driving Ambassadors and Fiats and queuing up for Bajaj scooters. Just the other day we read about how rampant milk adulteration is in India. If Wal-Mart can assure unadulterated milk at a reasonable price, why should it not be allowed to operate? It is high time that the Indian consumer got a level playing field. For a change.
Narendra Doshi
1 decade ago
Well said, sir.
That's the way to go. Be prepared to face what is coming so that more benefits are received by many without other losses bringing in a biased solution.
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