Supply Chains, Food Shortages and Inflation in the Emerging Markets

‘Inflation’ is the buzzword in economies around the world and more so in the emerging markets which have been witnessing unprecedented growth in the last decade or so. This leads to the central banks like Fed and RBI raising the interest rates in a bid to take inflationary tendencies head on which in-turn becomes an impediment to growth. The point to note is that the inflation in emerging markets is driven much more by the rising food and oil prices and not so much by the growing demand for goods and services. So raising interest rates may not have much of an impact in controlling inflationary tendencies.

Between the two key determinants of inflation viz: Oil and Food price increases, the former is based on extraneous factors and there is little that can be done an economy level to control it but the latter is within the ambit of the nations internal control systems and can be tackled to a large extent.

In nations like India there is a huge differential in the retail prices which consumers pay in retail stores and the farm gate prices. The differential is accounted for the middle men commissions, transportation costs, storage costs and other elements which form an integral part of the ‘Food Supply Chain’. It is  a shame that 40% of the food produced in the farms gets wasted / rotted by the time it traverses the food supply chain. A recent study by the India’s economic advisor to the Prime Minister says that a lot can be achieved by way of optimizing and enhancing the supply chain efficiencies and if done well this could have a substantial impact in bringing down the food inflation by several percentage points. The report went on further to say that the permitting FDI in multi brand retail (which means allowing the retail giants like the Wal-Marts and the TESCOs of the world to set up shop in India) will have a significant impact on reducing the food inflation.

The fears that the mom and pop stores (the Kirana stores in Indian context) will perish if the Global retail giants enter Indian shores seem unfounded if we go by the data from other emerging economies which opened up their retail markets to FDI much earlier in the game. In Mexico which opened up in 1991, 40% of all the retail stores are still mom and pop stores. In China which opened up in 2001, even today a global giant like Walmart has only 6% of the market share and is the third largest player. A local Chinese player called WuMart on the other hand is the biggest player and has 12% of the market share. The second biggest player is also a local Chinese retailer called Kangcheng with 9% market share.

The kirana stores can very well live alongside the global biggies by the introduction of ‘cash and carry’ in India. This means the Walmarts of the world will need to set up whole sale stores which will in-turn sell to the kirana stores and other smaller stores thus enabling the smaller kirana store to leverage the supply chain efficiencies of the global retailers. In addition the global players can also set up the retail stores which will sell directly to end consumers. India badly needs the investments in the areas of cold storage (both warehouses and vehicles), bringing the economies of scale in the transportation across the length and breadth of the country and leveraging the global best practices in sourcing, inventory management and just in time replenishment of the goods on the shelf. If these practices bring down the food wastages across the supply chain from 40% to 20% this will have a substantial impact on reducing the food prices as the food availability will go up by 33% at one stroke.

It is not just emerging markets which are showing resistance to the entry of the Walmarts and TESCOs. The recent edition of ‘The Economist’ talks about the travails of TESCO in the UK market where there is resistance from locals to prevent expansion of TESCO in some of the neighborhoods as they feel the pavement vendors and small shop keepers who have been there for ages will lose their livelihood. Such fears are unfounded as these expansions provide employment to many people and will boost the local economies.

In economies like India if we need to grow and leverage the progress and developments made in all sectors since the liberalization in 1991 and if we are serious about becoming the world’s third largest economy by 2030, we have no choice but to tackle inflation head on. We need to aid and abet growth in both exports and consumption in the domestic market. We need to prevent inflation from often rearing its ugly head. Encouraging FDI in multi brand retail and leveraging the globally acclaimed best practices in the area of supply chain management to bring down food prices is a sure shot way of helping this become a reality.