Consumption & The Role of Retail in Economic Growth  

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November 7, 2006

(Based on a presentation at the CII National Retail Summit, Mumbai, November 2006)

View the PDF of the handout by clicking on the link at the bottom of the page.

Some years ago, a very lively and friendly conversation that I was having came to a dead stop when the other person got to know that I worked with the retail sector.

Her attitude towards me immediately underwent a dramatic change. From a normal human being, I suddenly became comparable to the “lowest of the low” on the planet. I was instantly accused of being “one of those who promote others to consume more and more, endlessly” (obviously to their and others’ detriment).

That incident seemed to typify for me the mind-set that we in India had fallen into – “dukandari” (shopkeeping) is bad, because it promotes ill-afforded consumption. We have reached that mind-set due to centuries of living a poor life pre-independence and, after independence, decades of good intent but poor practice.

Contrast that with the American philosophy that not only is consumption ‘good’ and necessary for economic prosperity – it is akin to God. In fact, from my point of view, much more to the other extreme…but that is another story.

However, the Indian attitude is certainly a strange contrast, since consumption, commerce, change are well-established and accepted in the traditional Indian schools of thought. Let me offer the two following examples, from millennia-old Indian philosophy:

Retail’s Role as an Economic Engine

If we consider the hierarchy of economic development and subsequent impact, progressively we see:

• Subsistence farming giving way to modern farming
• Cottage industry developing into larger scale manufacturing
• Small towns and poor villages transforming into a vibrant and balanced urban and rural Mix
• Fragmented retail businesses growing into modern retailing, and
• Generic merchandise paving the path for brand developmen

In this evolution tangible (touch-feel) values give way to intangible (imagined / perceived) values that are much greater in magnitude. In fact, the inflexion point really comes when the transition to modern retail happens. While the previous steps are essential for the growth of modern retail, the reverse impact of modern retail on those very steps – manufacturing, agriculture and urban development – is huge. At this stage, the economic development starts spiralling through this feedback loop.

 

    The third major factor is the need for differentiation from competitors. As the market grows and matures, competitors’ offers can start looking very similar to each other. The successful players start pushing more product development, private label growth etc. which can help them stand out in the market. This has its own separate impact on the supply chain in terms of upgradation of product in terms of features, quality and benefits delivered to the consumer.
   

All this, of course, looks like the development path followed by the western economies over the last 150-years. And from the looks of it, this seems to be the development path being pushed by a lot of people in India, presumably aiming for the same result.

However, let’s pause for thought.

Need for An Indian Model

Economic growth or prosperity can be looked at in two ways – on average how prosperous a country is (in comparison with other countries), and what is the relative position of people within the country. Economists measure the second factor using the Gini Coefficient, which essentially measures the level of income inequality in a population. (A Gini Coefficient of 100% would theoretically be completely unequal with one person holding all the income in the country, and the lower the Gini indicates that incomes are more equal within the country. The more overall prosperous countries (such as the Scandinavian countries) have also more equal distribution of income within the country, while relatively poorer countries (such as in Africa and Latin America) tend to have higher Gini figures.)

The biggest problem that I see in the current push for consumption-led growth (retail-led growth) is that the focus is totally on the first measure (per capita GDP, average income etc.), rather than on the second. After decades of almost monastic self-denial, India seems now to be swinging to another extreme – an orgy of consumption.

Let me describe what I believe the problem is.

In this focus, there is a single minded focus on earning and spending “More” – if you want to fit in you need to acquire more, if you want to stand-out acquire something different (more), if you do not have something you need to acquire it (more), and if you do have something it is always good to have (what else!) more.

   

In itself is there a problem? After all, inequality is a fact of life, and can be good because it creates ambition and brings forth creative energy. But does that mean that more inequality must be better?

If we imagine the population of India to be a cylinder or a cone, we can visualise how aspirations to a better life are pulling everyone upwards. The problem arises when the aspirations that are raised cannot be fulfilled with the income available – that vacuum creates stress in the society. This is not a problem for the future; we already have ample evidence of it in our cities with the dramatically higher rates of crime related to money and aspirational wealth / spending.

   

Referring back to the Gini Coefficient, economists have also defined a certain optimal range – if incomes are too equal, then there is little incentive for self-driven growth, but if incomes are too unequal beyond that range then social injustice and dysfunction is more widespread.

India at the moment is actually rated to be almost in the middle of the optimal range. However, the business, economic and urban models being followed are more from the UK, the USA and China. And if we see where these countries are on the Gini Index, we find them outside the optimal range – on the more unequal side.

Can we even imagine the upheaval that moving along this path could cause in a country like India?!

So what is the solution? What should the Indian model be? And what role can retailers, especially modern retailers play in this?

I believe that it is high time we start creating economic growth where the maximum people are – in India’s case that is still the villages rather than the cities. Secondly, the small scale sector is the largest sector. The government needs to look more actively at policies that encourage agricultural development and the growth of small scale sector companies. If we need buzzwords to create a wave, let’s use “Agricultural Product Outsourcing” (APO) as a buzzword; let’s drive India’s strengths in “Small Production Outsourcing” (SPO)!

Similarly, retailers need not get cowed down by the mega plans announced by the likes of Reliance and Bharti – India can accommodate hundreds, maybe thousands, of farm-to-fork initiatives.

Retailers need to shift their attention from the assumed middle class (who are actually quite rich) to the true middle class. (I’ve written elsewhere about that issue.)

Development of domestic brands is another area where retailers can have a huge impact – as we mentioned, the emergence of strong domestic brands has a huge impact on the economic profile of the country. And in most cases, the most successful brands actually grow out of small scale businesses that are commonly dismissed as mom-and-pop or pop-and-son! Modern retail can have an enormous impact in supporting the emergence and growth of these in India.

I do believe that successful retailing is not about throwing mega-bucks at real estate and advertising, or paying humongous salaries. Apologies if this sounds completely contrary to the “gung-ho” feeling that most people have about the retail sector. But the sooner we face this issue and tackle it wilfully, the better it is – for all of us, including the retailers.

We need to start looking at retailing from a completely different angle, and look at its role in creating a new economic profile of India. Retailers need to critically look at how they interact with the rest of the economy in a totally new way.

Once we are able to do that, we will also be able to make the shifts that are necessary to create a more sustainable economic environment and more widespread prosperity. And that is most definitely in the interest of the retailers. “Inclusive growth” should be more than a buzzword for retailers – it is the way for them to create sustainable growth for their own businesses.

So – in this context – if you are a retail entrepreneur, or a retail employee, what’s your resolution for 2007?

   

(c) Devangshu Dutta, November 2006

Devangshu Dutta is chief executive of Third Eyesight, a consulting firm focused on the retail and consumer products sectors. This article expresses his personal opinions and is based on a presentation made at the CII National Retail Summit, November 2006 (open PDF). The speaker panel also featured Ireena Vittal (McKinsey & Co.), Roopa Purushottaman (Future Group / Pantaloon Retail), Suman Bery (Director General of the National Council for Applied Economic Research – NCAER).