Events & Issues

New Delhi, 7 February 2011

Retail Mark-Up

CONSUMERS TAKEN FOR RIDE

By Dharmendra Nath

Retd IAS Officer

Retail mark-up on things we buy is an area that deserves some serious consideration. It is not merely a question of some people’s livelihoods, people who sell things to us, it involves bigger stakes for the economy as a whole and its future.

Outside of taxes and the necessary handling expenses, the difference between what the producer gets and what the consumer pays constitutes the trade mark-up. It has two distinct parts, the wholesale mark-up and the retail mark-up. In case of some products there may even be a chain of wholesalers with multiple margins before the goods reach the retailer from whom we buy.

Wholesale prices are substantially documented but our information on producer prices --- the price the producer gets --- is very sketchy. Outside the mandi operations, we know very little of what the producer of fresh vegetables and fruits gets paid. We mostly hear that he gets only Rs 2 a kg out of Rs 10 or Rs 20 a kg we pay as consumers. Packaged water carries a retail margin of over a 100 per cent while the wholesale margin is extra.  

Not just farm produce, but we also do not know the producer prices of a lot of manufactured goods we use. The situation may not be as alarming but the trade margins very often far exceed the producer price and constitute a major portion of what the consumer pays.

Also, established trade channels comprising wholesalers and retailers have been in the field for very long. And they have monopolized the distribution network, maximized their profits and to all intents and purposes rule the roost. Such is their clout that people in search of power lobby with them.

True, this benefits some but works to the detriment of both the producer and the consumer at the two ends of the spectrum as also the common good. Since the producer gets a low price his incentive to invest and produce more is reduced. Thus the supply side suffers. More. The demand side suffers as the consumer curtails his consumption due to the high price. This results in double jeopardy and slows down the growth process which then leads to reduced employment.

Undoubtedly, unreasonable trade margins, of which retail margin is a part, consequently acts as a speed-breaker in our march towards progress. The direct sufferers are the producer and the consumer standing at the start and finish lines. But ultimately every one suffers as the economy is deprived of the opportunity of realizing its growth and employment potential

Pricing today is a guarded secret. We only know what comes free with what, the percentage of discount or the value of things offered free. The price of the goods in question comes last and that too only when we probe deeper under the wraps.

It is as though some kind of deception is being practiced on the consumer. The strategy seems to be: Just lure the buyer and let him not come to grips with the price/quality issue. For instance, tariffs of mobile phones are a notorious example of pricing intended to confuse and defeat comparison. Examples can be multiplied.

After all the game is being played by practiced well-entrenched old hands. They will keep doing so as long as they are the only guys around. Therefore as a public policy we must devise some strategy to meet the situation.

Pertinently, there was a time not long ago when under the Essential Commodities Act 1955, wholesale margin on goods declared essential was fixed at 2 per cent and the retail margin at 4 per cent. That sounds ludicrous today. No one is prepared to accept that.

Besides, controls are even otherwise odious. We do not stand for them as they not only do not work but are also evaded. Thus, trade has to be free to keep it clean, so there is no going back to the controls of the Essential Commodities Act. Obversely, the days of voluntary cost-plus-pricing too are over. There was a time when we paid an item’s production cost plus a reasonable margin over that. Presently, nobody believes in that kind of self-discipline.

Today’s market management teaches the theory of finding out what the market can bear and then charging a price. Which is based on the need of the consumer. Bluntly, the pricing exploits the consumer’s vulnerability. Subsequently, the prices have lost there relationship with the costs. It is no longer a calculation exercise of cost accountancy. Prices are arrived at through market surveys to gauge the strength of the demand.

Economics textbooks teach the concept of consumer surplus. Namely, the difference between what the consumer pays and what he could have paid looking to his need. Today’s market is out to appropriate most of it. And existing trade channels are trying to exploit their position to the full.

What are our options? How can we handle this situation other than through creating more and more competition?  True, old trade channels have served a purpose and they continue to do so. But they need to be rejuvenated under the unseen pressure of competition. No one should evade competition and all need greater transparency.

Competition, however, does not mean just adding more of the same, more of what already exists. It also means welcoming new initiatives and novel ways of doing business and creating fresh types of competition. We should be open to accepting malls and department stores. But they represent only one of the possibilities.

Others avenues, include internet marketing which cuts trading costs further by reducing  unnecessary movement and building-up of inventories. We also need foreign investment and technology to propel us forward.

Clearly, by creating open competition in the retail market place we can ensure that many questions and issues are addressed on a continuing basis.  Problems like, how large scale, long-term supply contracts can be negotiated? How supply chain inefficiencies can be reduced and wastage avoided? How suppliers can be paid promptly to quickly put it productive use? How to cut-off middle men and consumers better served? And better tax compliance?

In the ultimate, resistance to change is endemic but we need to realize that if these new directions representing other ways of doing business result in greater competition leading to higher prices for the producer and lower prices for the consumer then they should be welcomed for the larger good of the aam aadmi!  ----- INFA                                                        

(Copyright, India News and Feature Alliance)