The economic dogma of low prices, regardless of means, is being challenged as the only and worthy pursuit
Last week, and suddenly, people in the small town of Talode in Maharashtra’s Nandurbar district could not buy Colgate toothpaste from their only local store. This was because the Nandurbar distributor decided to boycott Colgate’s products and not supply them Grocery Store in Talode. In addition, all consumer goods distributors in Maharashtra were protesting Colgate’s alleged unfair treatment with traditional distributors face to face B2B technology companies like Reliance’s JioMart, Udaan and others.
break the flow
India’s nearly half a million distributors pick up goods from consumer companies like Colgate and deliver them through a web of millions of merchants and other middlemen to 13 million small local stores located in 700,000 villages and towns across the country. Most of these distributors and merchants are small family businesses that have developed relationships with their local stores over several decades.
Grocery The store in Talode sells a 100 g tube of Colgate Toothpaste to the consumer for a Maximum Retail Price (MRP) of ₹ 55. Nandurbar distributor sells Colgate toothpaste to Talode store for Rs 45 and manufacturer Colgate sells it to distributor for Rs 40. This is a illustrative but typical example of the current supply chain for consumer goods products in India.
Enter the new age technology B2B companies. They have developed technologies to connect directly Grocery Store at Talode via mobile phone app, bypassing middlemen. They supply Colgate toothpaste for ₹35 at the local store, which is less than ₹45 charged by the distributor. Obviously, the people of Talode will also benefit from these lower prices at their local stores.
Unable to match such prices and facing the threat of losing business, distributors in India claim these are unfair practices and want manufacturers like Colgate to stop supplying goods to technology companies. Colgate has refused to do so and hence the distributors have decided to boycott its products.
Barely ‘creative disruption’
According to the Austrian economist, Josef Schumpeter, new innovations that disrupt an existing process and render incumbents redundant is generally a healthy process of ‘constructive destruction’. But if this disruption is driven not solely by technology innovation but through pricing power, will it remain healthy?
These technology companies take 15%-20% off on every Colgate toothpaste sold to the local store. They deliberately offer their product at a price lower than what it is worth, in order to lure local stores away from traditional distributors. In addition, they offer broad loan terms and working capital to local shops. In other words, these technology companies rely not only on their mobile phone app innovation, but also on steep price discounts and affordable financing to win over customers.
Udaan has suffered a loss of over ₹5,000 crore in just five years and JioMart has reported an even higher loss. Indian companies are able to bear such huge losses as they have abundant funds. These companies are flush with money from foreign venture capital firms, which in turn are funded largely by US pension funds and university endowments. To put it bluntly, a US senior citizen is discounting Colgate toothpaste for a Talode villager, displacing a Nandurbar distributor, thanks to what economists call global capital inflows. Such capital flows promote innovation and reap huge consumer benefits which is the neo-classical economic theory.
The flip side is that millions of distributors and middlemen in India do not have access to such finance. They are typically small businesses built over several decades, pledging their personal assets as collateral in exchange for meager bank loans. These small companies are cut off from the endless stream of free foreign money that ushered in new age ‘startups’ and set up large corporates. Obviously, these companies use the money not only to create new technologies but also to undercut competitors and steal market share. They are capable of incurring heavy losses for many years until they destroy the ruling elite and gain a major market share. After which, they will probably raise their prices to make a profit. This is similar to what India experienced with Jio in the telecom sector.
This practice, called predatory pricing, is illegal in most countries, including India. Behind the veil of technology innovation of these startups is the blatant abuse of pricing power. If this were truly ‘creative destruction’, these technology companies with their innovative apps and efficiency would lure the Talode store owner to take a loss on every sale and offer cheap finance.
While consumers may benefit from lower prices, are the livelihoods of millions of distributors, traders and their families affected simply because they do not have access to the same easy funds as these technology companies? Distributors and traders in Nandurbar and Grocery The store owners in Talode belong to the same local community. Surely, the dislocation of some of these families will have social effects within that community?
a global problem
Certainly, this is not just India’s problem, but a global problem. The traditional economic notion that low prices, regardless of the means adopted, is the only and worthy pursuit, is under serious challenge. Social media companies such as Facebook offer their products for free and e-commerce companies such as Amazon sell at low prices, which benefits consumers greatly, but at the same time creates enormous social conflict and disharmony. The new chair of the Federal Trade Commission in the US, Leena Khan, a strong critic of the abuse of pricing power by technology companies, is calling for new rules to stop such anti-competitive behavior.
What is India facing
But in the case of India, there is an additional complication of foreign capital inflows. Large amounts of free money printed in the US are finding their way into India’s stock and start-up markets. Access to this capital is only available to a small fraction of Indian businesses, but the livelihoods of millions of Indian households are threatened, as is the case with distributors, creating huge income and social inequalities. Even erstwhile proponents of free capital flows are now cautious about its social implications.
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To be clear, this is not a Luddite argument against e-commerce or technological innovations. The issue is about abuse of pricing power through illegal predatory pricing and preferential access to easy foreign funds by startups and large corporates. According to some estimates, there are over 20 million households (100 million people) in India whose livelihoods depend on the role of an intermediary in the supply chain of consumer goods. If suddenly these families get displaced and are left stranded, it can cause huge social unrest in the country. Perhaps, residents of Talode may be willing to pay a little more for their tube of toothpaste if they learn that some families in their community are being put into misery by free American money.
Praveen Chakraborty is a political economist and president of the Congress Party’s Data Analytics
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