Middlemen’s profits and crowding out

As in other developing countries, the literature suggests that numerous organised modern-type retailers in India attempt to cut off traditional middlemen – such as village merchants or commission agents – and source directly from wholesalers or cooperatives (Reddy et al., 2010). Therefore, among all three actor groups in the vegetable value chain, the transformation is seen to disadvantage middlemen the most. We distinguish between two main types of middlemen in India: commission agents, and traders. We will evaluate their current situation, their vulnerability and their ability for adaptation for each type. Their current profit share in the value chain will also be analysed before taking a look at their perception of their future situation and of their risk of being crowding out.

7.2.1 Commission agents

Commission agents are diversely impacted by the development of modern retailers. Some modern retailers buy their tomatoes from the mandis, directly from a commission agent (CA) or through a trader. Other modern retailers have an integrated supply chain and source as much as possible directly from farmers. In the first scenario, no significant difference in the profit distribution has been noted between commission agents supplying to traditional retailers and commission agents supplying to modern non-integrated retailers.

All commission agents interviewed were full owners of their businesses.

Their activities primarily involved limited fixed investments: their license fees were not very expensive, they rented their trading stands in the mandis on a monthly basis and they had basic facilities at their stands;

in general they did not have a transportation vehicle or used rented ones when needed; also they did not own any real storage facility. Their main source of income was the commission charged for each transaction facilitated between a farmer and a buyer. They had in general no other source of income, selling only fresh fruit and vegetables or, in the case of rural mandis in Madanapalle region, only tomatoes. As such, commission agents were highly dependent on the fresh fruit and vegetable market and on the current prices. However, as their fixed costs were very low, they did not face constraints that limited their capacity to abruptly abandon the business. Their risk-taking was also low.

Commission agents are traditionally considered to be powerful and rich.

Interviews show that the commissions they collect range between 4 per cent and 10 per cent, while having little fixed and operational costs, as mentioned above. Some experts interviewed indicated clearly that they

“make high profits at the moment, and the largest part of the profits go to them” (Representative of APCOB, personal communication, March 2014).

Other experts stressed that the fees of commission agents had to be reduced because commission agents were “involved in farmers’ activities” anyway (Representative of CII FACE, personal communication, February 2014).

When asked about their future perspectives, the commission agents interviewed gave a widely different forecast than that of the experts.

Overall, commission agents were optimistic about the future − which was an excellent indicator of their current well-being. They did not consider supermarkets as competitors, rather as potential new customers. In parallel, the total number of commission agents was still increasing, even if many agents had reportedly left the business because of losses and because according to them the market was generally “badly designed”.

Many experts predict that commission agents will be the main losers of the retail transformation in India, considering that there are “way too many of them” (Representative of UNESCAP, personal communication, February 2014; Representative of ICRIER, personal communication, February 2014).

Nevertheless, middlemen are said to be very adaptive: they “may lose at one place if they are driven out of their current place, but they will find a place

somewhere else” (Representative of NABARD, personal communication, February 2014). An FDI Watch expert explains further that

with the concentration of retailers in bigger orders, fewer middlemen are required but these last ones will become more powerful in the village. Some middlemen will be kicked out; the rest will work for the retailers as traders and buyers. (Representative of FDI Watch, personal communication, February 2014)

In short, commission agents are making high profits at the moment with apparent little risk-taking. Evidence shows that there is (currently) no difference in terms of profits between commission agents who are part of traditional value chains and those who are part of modern value chains.

In respect to crowding out effects, the share of the commission agents in the total trade of vegetables may decrease, but their absolute number may continue to increase. There are two possible reasons for this: the first is the increase of fresh fruit and vegetable consumption in the Indian diet as the middle classes’ budgets for healthier food is increasing; and second, because of the general increase in disposable incomes among Indian households.

7.2.2 Traders

We interviewed one independent trader from an international retail chain, as well as two commission agents selling mainly to international retailers (and acting as such, as traders). Their answers regarding profit distributions were similar to those of traders in traditional supply chains. All these independent traders, as well as those working in rural mandis and as those in city mandis, purchase from commission agents. They sell either to hotels/restaurants/

cafés, to traditional retailers, or to modern retailers. Similar to commission agents, traders generally have neither high fixed costs nor high investments.

The vehicles they use are often rented and they do not own personal storage facilities. Their main difference vis-à-vis commission agents is in the number of their regular customers. For traders working with traditional retailers, the total number of customers is high while the opposite is true for traders working with modern retailers (the total numbers of customers is lower). The dependency and vulnerability of traders working in modern value chains is therefore higher.

On profit distribution, a distinction has to be made between rural and urban traders. A rural trader buys the produce from a commission agent in a rural mandi, such as Madanapalle, transports it over hundreds of kilometres to

a mandi in a big city, such as the 550 km-distant Bowenpally mandi in Hyderabad, where he sells it to another commission agent.

The urban trader buys the produce from one urban commission agent and sells it directly to one or more local retailers. Numerically, margins estimated through interviews are higher for rural traders; but these margins are figures that include transportation costs, which are naturally much higher than for urban traders. As such, no clear conclusion can be made on profit distribution among rural and urban traders, and among independent traders selling to traditional or to modern retailers.

As far as the risk of crowding was concerned, interviews indicated that in general traders considered their situation to be stable despite the entry of modern value chains. Some traders we interviewed knew of other traders that had left the business but their reasons were due to factors other than modern retailing growth. The main losses of traders are said to be due “to high costs, weather, damages, and falling prices”. Supermarkets as well as rythu bazaars were not perceived as being dangerous competitors that would worsen traders’ situation.

Traders who are actually employed by a modern retailer must be considered separately. They are not middlemen but part of an integrated retailer chain, and are paid by their employer, the modern retailer. It is hence not possible to compare profits across traders. On crowding out effects however, it can be concluded that − as with the commission agents − even though their current situation is stable, the relative share of independent traders in the business is decreasing and will continue to do so with the growth of modern retailing.