Modern retailers’ profits

Traditional retailers were found to purchase fresh fruit and vegetables by themselves, every day or every second day. They purchased from the mandis, where they dealt with commission agents or with traders, or from a rythu bazaar. They used public transportation or relatively simple rented or owned vehicles (motorbike, three-wheeled rickshaw, car or small truck), depending on the purchase volume. They usually did not have a storage facility or only very limited space inside the kiranas. The shop was usually run by the owner and his family, with (usually) no employee. Some bigger shops employed up to 4 workers and even up to 10 in one case out of the 12

traditional shops we interviewed. Their activities were often informal, and hired employees, if any, did not receive any specific training. Labour costs were expectedly low for traditional retailers. In addition, as mentioned in Section 6, their post-harvest losses (average of 13.5 per cent) were much higher on average than those of modern retailers (average of 6 per cent).

Four traditional retailers reported that their finances were stable and that they were currently in a good situation. Another 4 cases reported difficulties or losses in terms of profit. Those having difficulties indicated that their problems originated from a variety of factors, with only 1 mentioning supermarkets as the main obstacle. Traditional retailers’ margins per kilogramme of tomatoes is calculated to be around 42 per cent (as discussed in Section 6) and thus quite similar to those of modern retailers, as described below. Their absolute operating costs are quite evidently much lower, but available data do not allow comparing relative costs and relative margins.

Their absence of economies of scale, their higher post-harvest losses, and anecdotal evidence indicate that traditional retailers’ profits are quite low.

Furthermore, they were found to be mostly pessimistic about the future.

The 4 retailers that were explicitly pessimistic about their future mentioned considering closing their own shops, similar to what many of their peers did. One retailer explicitly mentioned that he was “scared by supermarkets”.

Only one kirana-owner remained optimistic about their future.

Estimating the relative operational costs of modern retailers and identifying trends is difficult. Most domestic modern retailers have their own buyers and purchase mostly directly from farmers, at prices slightly higher than the mandi prices. In some cases they buy from the mandis or from a mix of both mandis and directly from farmers. Most of those international modern retailers interviewed however did not have their own buyers. but dealt with independent traders and wholesalers or directly with commission agents.

Where storage and transport were concerned, there were no significant differences between domestic and international retailers. Both used various classical means of transportation and, except for 1 international retailer, never used cold storage for tomatoes (even when cold-storage facilities may have been available for imported exotic fresh fruit and vegetables). Labour costs tended to be high for modern retailers. Between 12 and 189 people were working in each outlet, depending on the size of shop. Moreover, the staff of modern retailers often received training opportunities. One international wholesaler even provided regular training to farmer-suppliers.

The average of 6 per cent waste of modern retailers is lower on average than the waste incurred by traditional retailers.

On the profit side, the situation was quite mixed. Margins calculated from estimations received in the interviews amounted to high margins of 15 to 75 per cent, with an average of 46 per cent. One individual statement however explained that usually margins were closer to 10 per cent when tomatoes were not in peak season. The value added to tomatoes may then in fact be rather a fixed added amount, between 1 and 5 rupees per kilogramme, rather than a purely proportional amount. Many expert interviews clearly claimed that “modern retailers are selling at losses” (personal communication with representatives of IFPRI, CII FACE, CAIT and Global AgriSystems, 2014).

Yet their market share is still growing.

Some specific modern retail chains have closed (for example Walmart with Bharti in India), but at the same time the total number of modern retail outlets has increased, as a response to the increase in the total number of customers.

Modern retailers did not comment explicitly on their current financial situation in the fresh fruit and vegetable segment, but one respondent did say that they were “having some profits in this segment”, presenting it as an achievement. Having said that, all reported optimism as regards a stable or better situation in the future, both for them themselves and for their modern competitors, including higher profits from tomato sales.

Evaluating the validity of the hypothesis H3(c) is thus a complicated matter. The expert interviews suggested that modern retailers were selling at a loss and had fewer profits than traditional retailers. They were said to balance their losses through higher profits in other product segments and via diversification in the non-food section. The fresh fruit and vegetable segment was merely kept in the supermarket’s portfolio in order to attract consumers and not as their main profit source. One modern retailer, for instance, indicated selling tomatoes at promotional prices or even “offering 1 kg of tomato for every total purchase above 75 Rs” (nearly 0.90 euros, as of March 2017). In parallel, the number of traditional retailers was very high and they reported many losses for their activities as a whole causing them to be pessimistic. The hypothesis could be – cautiously – rejected:

modern retailers do not have a larger profit per se than traditional retailers in the fresh fruit and vegetable segment, although traditional retailers have commonly indicated low profits, they do not sell at a loss as modern retailers do.