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FDI in retail: How Walmart will reinforce the role of middle men

by Pallavi Polanki  Sep 30, 2012 09:17 IST

#agents   #farmers   #FDI in retail   #HowThisWorks   #Walmart  

While politics plays its course over the Centre’s move to allow FDI in retail, in Lalpur village in Uttar Pradesh’s vegetable belt, Pushpa, a marginal farmer, whose life and livelihood the new policy will directly impact, has more immediate concerns on her mind. She is preparing for the next harvest.

An active member of the 1,200-strong women’s farmer federation supported by a Walmart funded project called ‘Sunhara Walmart’ in Western Uttar Pradesh’s Hapur district, Pushpa’s biggest challenge, and that of other farmers like her, come harvest season, is making sure her produce finds a good market.

Will the entry of multinational giants like Walmart and Tesco into the retail space give Pushpa access to a better market for her produce?

Pushpa and Sharmista, both marginal farmers stand in front of the Federation's new collection centre that has opened at the Hapur mandi from where vegetables are supplied to retail stores. Pallavi Polanki/ Firstpost

A little background: In November 2011, the federation (Mahila Kisan Vikas Sanstha) started supplying vegetables to retail stores through Bharti-Walmart, which first procured vegetables from the women farmers and supplied them to their buyers. (Walmart in a joint venture partnership with Bharti Enterprise operates Bharti- Walmart ‘Best Price Modern Wholesale’ stores in India.)

The federation has now started supplying to Indian retail chains, as well such as Big Bazaar and Mother Dairy. A welcome development, says Pushpa, given the advantage of better prices and saving on transportation costs that direct selling to the retail chains offers.

Pushpa's only complaint: The companies don’t buy enough. To sell the bulk of her produce, Pushpa has to depend on the mandi where middle-men who charge commissions eat into her income. (Read full report here )

To increase their supply to retail companies, women farmers from the federation say they are willing to change their crop patterns to suit company demands. As of now, only 20 percent of the federation’s total produce is directly sold to companies.

But question is, with new multinational players entering the market, how many will actually buy directly from farmers? Will retail giants like Walmart and Tesco end the dependence of farmers on commission agents or end up perpetuating the exploitative system?

The entry of multinational retail giants could prove to be a double- edged sword for small and medium farmers.

Amit Kumar Singh, Agribusiness Systems International's Programme Director, Sunhara Walmart, points out that for retail giants buying directly from farmers is simply not practical. The Sunhara Walmart project is in collaboration with ASI, a Washington-based consulting organization that runs ‘Sunhara India’ projects.

“The reason no one wants to buy directly from farmers is because it does not ensure consistency in supply. Secondly, the buyer always looks for the cheapest produce. He cannot get that if he buys from farmers directly. Multinational retailers will have to depend on commission agents for their supplies. Therefore, in the post-FDI scenario, it will be very important that farmers organise themselves so that they can directly negotiate with MNC retailers,” he said.

In effect, the retail giants will only reinforce the role of the middle-man.

Besides, the traditional relationship between the farmer and the arthi (middle-man) will make sure that mandi will continue to be the farmer’s default market.

“Even if big companies enter the market, the mandi will not shut down. The farmer who are part of the federation might do business with the company, but the rest of the farmers will continue to go to the mandi. Many farmers take loans from the arthis to buy seeds and so they will not cut ties with the arthi, they will continue to take their produce to the mandi,” Pushpa said.

One of the four Sunhara Fresh retail outlets opened by the women's federation with support from NABARD in Hapur. Pallavi Polanki/Firstpost

Singh had a similar opinion to offer. “The relationship with the mandi will not break easily. Why is the arthi able to exploit the farmers? Because he knows they depend on him at the time of emergency. And that is also why farmers tolerate the exploitation,” he said.

With the entry of FDI in retail, says Singh, the system will not change.

“The difference will be that commission agents will become ‘aggregators’ for the big retail companies. And if the aggregator gets his margins squeezed by the company, he will in turn squeeze margins of the farmers,” he said.

Unless multinational retail giants attempt to build linkages with farmer communities, and work towards creating supply chains directly with famers, FDI in retail might change little for small and marginal farmers.

The federation’s success in creating a successful business relationship with Bharti-Walmart and bagging more retail clients would not have been possible without the social investment made in developing and training the farmers.

In order to create a self-sustaining business model after the project with Walmart Foundation ends, the federation with NABARD’s support has recently started retail outlets of their own – called Sunhara Fresh in and around Hapur. The four outlets opened in the last six months have already turned into profit-making centres. Plans are afoot to scale up to ten outlets by the end of the year.

“Until such time that farmers come up with a sustainable business model, they cannot give up the mandi. And that is why the retail outlet model - of selling vegetables directly to consumers at much cheaper price - that the federation has started will be a boon to farmers. Let the MNCs come. The retail outlets started by the farmers will be able to sustain themselves. At a time when there is a lot of debate over FDI and policy makers are talking about different models, this model will serve the interest of farmers best,” said Singh.

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