Understanding social costs of e-retail and monopoly

This is not about JioMart, Amazon, Walmart or the Tata Group cornering a larger pie of the Indian retail marketplace estimated to be US$2 trillion by 2030. It is not about Chinese companies like Alibaba and Tencent wanting a piece of the untapped market but retreating due to the Indo-Chinese disagreements. This is also not only about the 20 million small establishments (mom-and-pop stores/kirana stores) and the 40 million families spread across every street of the country dependent on the informal and formal retail chain. This is far more menacing.

In every crisis, including that in the pandemic year, companies investing in digital tools flourished. When demonetisation was unleashed on an unsuspecting India, a few companies like PayTM benefited. They were pitched as home-grown start-ups — David vs Goliath. Even then Paytm was not an Indian-owned company. It has investors representing Alibaba from China at one end and a Warren Buffet-backed US entity at the other.

Capital has no nationality. The jingoism about local vs foreign company ownership is simply a marketing strategy. Remember when Coca-Cola came to India, Ramesh Chauhan of Parle group raised a big hue and cry for swadeshi only to bargain for a higher price for Thums Up and sell it to Coca-Cola. Similarly, many propagating swadeshi who opposed ‘FDI in Retail’ a decade back, have now sold out their constituencies and accept it now because the politics changed, even though the circumstances have worsened. The largest trader’s body in India declaring that a revolution of e-commerce will be good for Indian small businesses is a betrayal of the small shopkeepers. If today there is a community as aggrieved as the farmers, it is that of the shopkeepers.

A report prepared in 2014 by the Federal Reserve Bank of Cleveland stated that the rate at which Americans were starting businesses had “declined significantly” over the past three-and-a-half decades and that “new establishments have increasingly been provided by existing businesses opening new locations.” Markets that used to be served by independent entrepreneurs creating businesses are now increasingly being served by the expansion of existing businesses. Over time, this depletes the independent, entrepreneurial streak that is essential for a nation’s progress. Crony capitalism generates monopolies that reduce competition, strangle innovation and disincentivise smaller businesses, which actually create jobs and economic dynamism. China first helped create Alibaba, Tencent etc. among the world’s largest companies. Now suddenly realizing that they have become a threat to it, China is taking action against them. We should learn from them.

Being procurers of goods in large volumes, big e-retail companies dictate bottom-of-the-pit prices and impose stifling terms on the manufacturers. Along with an investment in AI and process systems, their delivery price to consumers will eventually be less than the procurement price of kirana stores and this has obvious consequences. E-retail companies are not only becoming super distributors to kirana stores but will even use them for pick-up points for ordered merchandise. Simultaneously, kirana stores will be nudged and compelled to increase the minimum order size, driving up inventory costs and losses for such stores. This is a temporary arrangement and over a horizon of the next twenty years, a majority of kirana stores will close. Along with them, interdependent businesses of supply chain intermediaries and hundreds of thousands of medium and small enterprises that supply to these mom-and-pop stores will slowly cease to exist. Inevitably, as stores dwindle in numbers, consumers will find single suppliers and face a monopoly. The US Public Interest Research Group, a non-partisan consumer research organisation, looked at 750 essential items like face masks sold on Amazon’s marketplace before and after the pandemic. It found prices of 409 items increased by 20 per cent and those of 136 items simply doubled.

Many term unorganized trade as inefficient and e-commerce as efficient. But, what is efficiency? Depends on what we are measuring. Most will design a measurement matrix that is amenable to their own objectives. More often than not, the measure of efficiency is skewed. For example, monoculture can be termed highly efficient if one measures the produce yield per unit and the ease of post-harvest operations, but if human health, biodiversity loss and climate change are the objectives, it is the worst that can happen.

Every action creates losers and the social costs of such losses should be recognised. Due to their very nature, jobs in the unorganised sector are not registered and when millions are lost, they will not get documented. However, every single job addition to e-retail is documented and politicians take credit for it. This bodes ill for a nation, especially when unemployment is running near historical levels and remains its biggest challenge. E-retail businesses with deep pockets to run smaller players out of business have the ability to source and provide cheaper credit to consumers. E-retail will also dictate terms to credit card companies and e-payment platforms to retain part fees collected when customers make purchases. Sooner than later, public sector banks will lose the lucrative retail segment and begin to falter. E-retail companies will start their own brands like Amazon ‘Basics’, making cheaper stuff and forcing even big brands into submission. Amazon last week bought MGM, the Hollywood studio, for $8.5bn and as other services get added to the cart, the addictive brew becomes more ominous. Lines between e-retail and e-commerce are already beginning to blur.

The fascinating thing about e-retail is not that it is just selling merchandise, but that it is in the business of mining data and that of advertisement. Data enables corporates to target and influence individual consumer behaviour, while aggregated data allows for large-scale manipulation of markets. Data is of value for even those not selling on e-retail platforms — finance, insurance, pharmaceutical and health industry, for instance. Europe is considering legislation to address the monopolistic behaviour of big tech and to make data anonymous.

Just as earlier modern retail stores asked brands to pay a higher commission for placing products prominently on store shelves, so will e-retail platforms. Brands will be obliged to spend heavily on advertisements to gain visibility for their products. When Google was founded in 1998, the print media collected over 50 per cent of advertisement revenue; today it’s down to about 10 per cent. This year Google collected 30 per cent, Facebook 23 per cent and Amazon 10 per cent of the US digital advertisement spending. Free and independent media is one of the pillars of democracy. It survives on advertisements and is already beginning to collapse. In the USA, Facebook, a private company, denied the US President the use of a communication platform in testimony to the power of digital empires. Recently Google threatened Australia to deny access to its search engine. Today, Indian leadership gloats when they make Twitter remove protesting farmers’ posts critical of the government; it is only a matter of time before such corporations become arbitrators of forming opinions and deciding the fate of elections. This is about the survival of democracy itself.

That we need laws to keep data within the country is another important factor. It is also time to make these data companies pay every time for information they acquire from their users and have a special tax on e-commerce transactions. These can be used for skill creation, reskilling people and increasing resources for human resources so they can cope with the painful transition.

It’s not that the Government of India (GoI) could not build similarly large companies; we could. MTNL and BSNL were GoI monopolies but they were purposefully turned to loss-making public sector enterprises to benefit an aspiring private sector competitor. An opportunity was lost. There are other hopes still. India can turn, for example, the government-operated postal system India Post into a logistic hub with a UPI banking licence and a home delivery service company with a US$ 100-billion valuation. But Indian policymakers and politicians are busy quarrelling with the social media platforms, rather than creating value for the citizens.

Valuation is the key. For example, JioMart has sales of around Rs 25,000 crore but has a market capitalization of Rs 1.50 lakh crore. The capitalization in food retail in India is 5-6 times the revenue as compared to 15 per cent in the west. It will also make sense for foreign companies to retain and plough profits back into the trade in India to help their stock prices in the USA. Foreign capital adds competition and that is good. We should rather be worried about how businesses operate, how they are regulated and about the creation of oligopolies, which instead of reducing inequality will have a tendency to collude to raise prices.

Can India ensure that the system does not work for the businesses but rather businesses work for the people? Personally, one is sceptical. Regulations, enforcement and anti-trust legislation lack teeth. Institutions are being systematically weakened. Subservient establishment and short-sighted political classes across party lines have allowed a few to have a free run of the country. Only people’s activism can put off the oligarchs from having a stranglehold on the nation.

By now you may be wondering why a farmer organization is worried and writing about e-retail and the data economy. The answer is twofold. One, it needs to be discussed because no one else is talking about the larger picture. Mostly they are missing the forest for the trees. Two, more importantly, what happens off the farm matters much more for farmer livelihoods than what happens on the farm. Like it or not, only when the economy thrives, the private sector does well, and private sector employment is generated in millions per month, will the consumers have money to pay more for nutritious food and only then will farmers receive higher farmgate prices and better livelihoods. There are no two opinions about this.

(Ajay Vir Jakhar is the Chairman of Bharat Krishak Samaj. The views expressed here are personal.)