Consumption & The Role of Retail in Economic Growth(Extract based on a presentation at the CII National Retail Summit, Mumbai, November 2006)


November 7, 2006

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 development

In this evolution tangible values give way to intangible values that are much greater in magnitude with the inflexion point coming when the transition to modern retail happens. The reverse impact of modern retail on those very steps – manufacturing, agriculture and urban development – is huge. At this stage, the economic development starts spiraling through this feedback loop.

The prime factors for such a wide and deep impact of modern retail are mainly three, and all have an impact on agricultural supply, manufacturing and other SME suppliers, town planning, services infrastructure, as well as having an impact on the socio-cultural environment.

Firstly, as retailers grow larger, into chains, the need for efficiency grows. Process and system-led planning and execution become the norm. Second, a related factor, is the need for consistency across the chain since any modern retailer would wish to communicate certain core brand messages from each and every store. Both of these factors push the need for more structure into the supply base, whether farm or factory. The third major factor is the need for differentiation from competitors. The successful players start pushing more product development, private label growth etc.

All this, of course, looks like the development path followed by the Western economies over the last 150-years. Unfortunately, this seems to be the development path being pushed by a lot of people in India.

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.

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.