What do you do with Sam

Updated: Jan 24 2002, 05:30am hrs
Read the latest issue of the McKinsey Quarterly, and two facts hit you immediately. One, a very large part of the phenomenal post-1995 jump in US productivity can be explained by the performance of sectors like retail. Two, to quote McKinsey, more than half of the productivity acceleration in the retailing of general merchandise can be explained by only two syllables: Wal-Mart. High praise, but understandable, considering that in 1987 Sam Waltons retail chain had a market share of just 9 per cent but was 40 per cent more productive than its competitors. By 1995, Wal-Mart controlled 27 per cent of the market and its productivity lead had widened to 48 percent. And, by 2002, one of its top rivals, K-Mart, has filed for Chapter 11 bankruptcy.

Ironically, this very stunning success of Wal-Mart is being used by both sides of the pro- and anti-entry of foreign retailers debate currently raging in the country. The government set up a Group of Ministers to examine the issue, but the group has still been unable to finalise its view. Indeed, foreign presence in the retail trade will bring in vital foreign investment and, more important, invaluable expertise. After all, the rapid increase in productivity can only help the Indian retail sector, and will also benefit customers as prices get driven down.

On the other side, the argument is made, at its extreme, that Wal-Mart employs just 14 lakh people in 5,000 stores to generate a turnover of Rs 9,00,000 crore, a sales volume thats almost equal to the entire retail industry in India the Indian retail industry, though, functions out of 1.2 crore outlets and has an employee base of more than three crore. Hence, the argument goes, if the Wal-Marts of the world are allowed in, 2.86 crore people will be out of a job immediately; the US and European experience does show that small retailers have been put out of business whenever a Wal-Mart has set up shop in the vicinity.

Yet, thats an argument over-stretched as it assumes all Indian retailers will simply curl up and die. It doesnt take into account the fact that almost all major global brands have failed to make a serious impact in the Indian market, whether its cigarettes like 555 or jeans like Levis. Even Coke recognises today that its largest brands are those created by Ramesh Chauhans Parle Group. Besides, thats what competition is all about the best survive, and thats good because scarce resources get utilised better.

That said, it would be foolish to ignore the warnings on Wal-Mart, best dealt with by Bob Ortega who covered Wal-Mart for The Wall Street Journal for five years (the book is, tongue firmly in cheek, titled In Sam We Trust). Ortega tells you about Wal-Marts sharp practices, its contempt for local laws, deliberate lying about using sweatshops and paying below-legal wages, withholding documents in court cases and even using its muscle power to destroy competition.

In April 1999, a judge in Texas slapped an $18 million fine on Wal-Mart for hiding evidence against them in a parking-lot rape case after the plaintiffs attorneys showed it was at least the fifteenth time in three years that the firms attorneys had been caught withholding evidence. A month later, Wal-Mart paid $134 mn to settle another case after a San Antonio jury said the firm had acted with malice in forcing a newly-acquired subsidiary to scrap a business agreement with a Mexican wholesaler that Wal-Mart saw as competition. In August, Wal-Mart paid $6.4 mn to settle a federal case in which company executives twice ignored court orders to stop selling fake Tommy Hilfiger clothing.

In 1991, New Yorks labour inspectors found labels for Wal-Mart brands being made in illegal sweatshops where immigrants had put in a months sewing without getting paid. Wal-Mart promised to cut off suppliers who did this, yet in January 1999, it was among 18 US retailers and clothing makers sued for conspiring with contractors to use forced labour to make clothes on the island of Saipan. Lured by fancy wages, workers were trapped once they arrived, paid huge amounts for housing and rent and ended up owing the company the equivalent of ten weeks wages at the end of a years hard labour. In another instance, Ortega says Hills Brothers made special coffee cans for Wal-Mart that looked like the cans Hills sold elsewhere, but held five ounces less coffee, effectively letting Wal-Mart advertise a lower price for what looked like the same product.

None of this, however, is to say that a Wal-Mart shouldnt be allowed into India for, as the McKinsey study details, Wal-Marts efficiency improvements, and its innovations such as the big box format and using electronic data interchange with suppliers, are legion. However, our regulatory and legal agencies need to completely retool themselves in order to deal with, and then eliminate, such practices. For, such practices arent unique only to foreign retailers/firms for every Wal-Mart, Enron or Andersen, youll find a host of Indian firms doing more of the same. Its business after all.