A ‘Dukaandaar Andolan’ in the making?

Dangerous Disruption

So, the two founders of India’s leading e-commerce company have, between them, made investments in nearly 50 companies, totalling about Rs 4,000 crore earned entirely off private equity investors. Their current stake in the e-commerce company they founded is worth over Rs 15,000 crore, ranking them both among the top 100 richest Indians. This e-commerce company has been valued just shy of Rs 2 lakh crore, though it loses upwards of Rs 2,000 crore annually. When else in history has making continuous losses allowed entrepreneurs to be celebrated as ‘entrepreneur of the year’, to go on to make loads of cash for themselves and have the capital to invest in unrelated areas?

They are not alone! This dichotomy between real income and valuation-based net-worth income has led to a peculiar shift in the way money is earned and invested today, changing the demographic and the mindset of the ‘entrepreneur’ with serious, though unmeasured, consequences.

The risk-reward proposition has indeed shifted or blurred with this illusion of worth, leading to the encroachment by men and women on unconnected businesses with unmeasured ramifications. Given the space constraint, I restrict my anecdote to one industry: About 90% of what gets consumed in our continent-sized economy flows through “trade”, or traditional distribution. Brands, heretofore, appointed distributors — small entrepreneurs, who stocked bulk inventory, then despatched goods in small quantities to shops in their area, collected cash and offered retailers unsecured credit by extending time to payback. Their property, built over years of toil, is market access. If trade is simmering with discontent today, as can be seen with the boycott of Unilever and Colgate products in specific geographies, or their investments are moving elsewhere, it’s because a new breed of rivals has arrived that play by a different set of rules.

Better-funded bulk suppliers such as Walmart, JioMart, Udaan and Big Basket (they have just announced their intent to target tier-4 cities) are flexing their superior financial muscle to win over the small shopkeeper or consumer, negating years of effort that these distributors have put in building markets. All it is likely to do is to remove the maligned middleman who, in this industry, contributes to just 5% of the value chain, and a bevy of retailers. Apps are offering as much as twice the margins and discounts to the retailer, by bypassing the distributor.

Since none of the new-age intermediaries is operationally profitable, these deep margins and discounts, it can be assumed, are backed by unfettered investor capital, of which there is no shortage at present. Recently, the Competition Commission of India (CCI) pulled up the world’s largest online store’s India operations, making it dissolve one of its invested companies in India for similar reasons. If FDI is not allowed in multi-brand retail, there are reasons for it. Unfettered investor capital is insidiously circumventing this.

Anecdotal as my evidence is, it is real and based on personal interactions with many people I know in the ‘brick and mortar’ industry across the ecosystem. A large, diversified 40-year-old business, with a turnover of Rs 1,500 crore and which earns a healthy RoI in most of its distribution-led businesses, prefers to look at venturing into the online space to create enterprise value, profitable as they already are, in the hope that easy money will come chasing them. The group’s future investments include investments in an online shopping platform rather than investments in new brands that need to painstakingly grow traditional distribution.

According to Bloomberg, investments as a percentage in the real economy are steadily falling (oil, auto, agriculture, etc) and those in the ‘new’ economy rising over the past 10 years, with the latter overtaking the former in 2021. This is natural in a new economy. But here’s the thing: Corporate investments overall have steadily dropped from 16% to 10% of GDP and the falling trend has been visible over the past five years. On the other hand, family offices (those who own these companies) have increased their private wealth allocation – investments in unlisted companies by over 100% (from 8% to 20%) over those five years, moving their capital away from physical assets, the business, the stock market, etc.

Coming back to my anecdote, at the other end, retailers and consumers will switch loyalties for short-term gain. But from a systemic viewpoint, the long term is important, and we must not shy away from the reality, which is this: India has over 12 million retail outlets, most of them being small family-run stores; 11% of the Indian population, or over 150 million people, are engaged in retailing which, next to agriculture, is the biggest employer.

If brands ignore general trade, and even if just 10% of distributors’ salespeople lose their jobs consequently, we are talking of 15 million REAL people, most of whom are unemployable in other sectors, losing their livelihoods in small towns, along with about 1.2 million traders. In a town like Chittoor, as an example, over 30% of its four million population is engaged in trade against a national average of 11%. Extrapolating, up to 120,000 people in this town alone can become unemployed. This is what the better-organised farmers protested about, at the core, against the three farm laws.

Rural households in India withstood two debilitating waves of the pandemic without much fiscal support from the government. A house help, who hails from Madhubani and whose brother lost his job during the first wave of the pandemic, acknowledged over conversations that it isn’t so much the formal financial system that helped the village survive the lockdown, but informal credit from shops that allowed the defrayment of expenses in the community. And that retailer is able to give credit because his distributor, the maligned middleman, gives him credit, in turn. Their emerging successors, under the guise of ‘disruption’ and backed by an unreal world of valuations and paper money, shouldn’t destroy what is so uniquely an Indian economic model that, inefficient as it may be, provides dignity and livelihoods to so many.

The ITC e-Chaupal initiative, perhaps, is a better way. It covers 100,000 villages and impacts over 11 million farmers, and it has invested Rs 6,000 crore over the years to enable this, and it disrupts nothing. Just adds to it. There is a need to level the playing field. Else, we will have a ‘Dukandaar Andolan’ five years hence. The signs are all there!

(The writer is a former Managing Director of a Tata Company and now runs a Corporate Finance practice headquartered in Bengaluru)