As online grocery sales start to boom, it could start hurting the kirana stores, who may not be able to compete with online grocers due to capital and other constraints.

Tatas could face moral hazard in potential deal with BigbaskeImage credit: Picxy.com/Prudhvichowdary
Atom Opinion Thursday, December 10, 2020 - 15:44

There have been various reports that the Tata group is inching closer to buying online grocer Bigbasket. According to reports, talks are in an advanced stage for the Tata group to acquire 80% in the online grocer. Reports have put the figure for the stake at $1.3 billion from a clutch of investors including Chinese retail giant Alibaba. The deal, if it goes through, will enable the Tatas to compete with Reliance’s Jiomart and Amazon, among others for the burgeoning online grocery market.

But more than for Jiomart and Amazon, the Tatas could face a moral hazard in their planned entry into the online grocery business. This is, after all, a group that has long been known and admired for their humanity, philanthropy and strong focus on ethical considerations when making business decisions.

One of the core principles enunciated in the Tata Code of Conduct 2015 states that they will, while contributing to the economic development of the countries they operate in, “avoid any project or activity that is detrimental to the wider interests of the communities in which we operate.”

The online grocery trade presents something of a peculiar challenge in balancing business interests with wider community well being. According to a report by Boston Consulting Group and Retailers Association of India, the retail consumer market in India is estimated at one trillion dollars (Rs 74 lakh crore). Some $500 billion of this, or 50%, is reportedly grocery sales. Of this 50%, as much 90% is in the country’s kirana stores, while the rest is in the hands of players such as supermarket chains and online grocery players.

Online sales currently only comprise around 1% of the overall grocery market, but continues to grow and also received a boost because of the pandemic. Consulting firm Redseer has projected for online grocery to grow from $1.8 billion in 2019 to $18.2 billion in 2024 at a compounded annual growth rate of 57%.

Grocery currently accounts for about 15% of India’s GDP, but provides livelihood —  directly or indirectly —  to 70% of the country’s population. As many as 900 million people including farmers, agricultural labourers, retailers and a whole host of intermediaries from input providers, commission agents to distributors, sub distributors, wholesalers and all their family members depend on the grocery business for a living. However, the grocery business does not entail only agricultural produce, but also includes staples, home needs and personal care products. And herein lies the dilemma and potential moral hazard for an ethics-driven business like the Tatas.

As online grocery sales start to boom, this will start hurting the kirana stores. While some will graduate to having their goods sold through the hyperlocal delivery services such as Swiggy and Dunzo, the majority will not be able to compete due to capital and other constraints. Also those that remain small independent operations will likely find their margins under growing pressure. This, as large organised grocery suppliers, including consumer giants like Nestle, Hindustan Unilever, ITC, etc find they are able to boost their own margins by progressively eliminating the panoply of intermediaries and dealing directly with the grocery e-tailer. Some of these margin gains will be passed on to the e-tailer who in turn will potentially undercut the local independent kirana store by providing discounts the consumer cannot get elsewhere.

This potential loss of control over their livelihoods brought about by entry of big corporates is already a major concern for the farming community. And reflecting their fear is the massive protest by tens of thousands of farmers demanding that the farm laws be repealed. There is little doubt that the main beneficiaries of these laws will be the corporate sector, including those foraying into grocery e-retail.

Already in the past few months thousands of Punjab farmers have boycotted Reliance fuel outlets and burnt their Jio sim cards in protest at what they perceive as the hand of Reliance behind the change in the farm laws.

The problem of the kirana shop owner is in some ways is more complicated than even that of the farmer whose concerns can be assuaged, to a large extent, were the government agree to write the Minimum Support Price (MSP) protection into the farm laws as is being demanded. That price backstop could even help the farmer prosper by helping negotiate a better price for his produce from large organised e-retailers. But there are few such easy answers when it comes to the protection of millions of small retail traders that depend on the grocery business for their livelihood and who also form the support backbone of the ruling BJP.

This is why corporate giants entering the online grocery business with its tremendous potential will have to tread with care. More so for a group like the Tatas which has prided itself on being pioneers and leaders in ethical business practices that safeguard the interests of all stakeholders – including of other actors in the business value chain.

Going forward, would the House of Tatas -- that is present in far more businesses than Reliance -- like to risk their enviable business reputation by foraying into an area that could become a virtual political and social minefield? Those in Bombay House reportedly finalising the Big Basket acquisition should perhaps revisit the Tata Code of Conduct to answer this question before inking any deal.

Views expressed are author's own. The author is former Indochina Correspondent and Kuala Lumpur bureau chief of Time Inc’s erstwhile Asiaweek magazine. He earlier worked with BusinessWorld magazine in Mumbai.

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