NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Noted economist and consulting editor for The Economic Times, Swaminathan Aiyar has written an interesting article on strategy in retail markets.

Aiyar argues that as Mukesh Ambani (one of the wealthiest people in the world), who is driving Reliance Industries? foray into retail, could learn lessons from the much talked e-Choupal project of ITC. Reliance aims to invest USD 6 billion by 2011 in retail, with sales of possibly USD 25 billion, generating over 500,000 jobs directly and one million jobs indirectly. However, the launch of Reliance Fresh outlets has faced agitation from small players and is being branded in the same space as Wal-Mart.

Aiyar writes:

An object lesson in handling the rural political economy comes from Yogi Deveshwar of ITC, who pioneered rural electronic kiosks or e-choupals. ITC saw that by cutting out intermediaries, it could give farmers a higher price while reducing its procurement costs for soyabeans, shrimp and coffee. But it also saw that it would face stiff opposition from local vested interests with political clout. So, ITC decided that every e-choupal would be run by a sanchalak, a local large farmer. Sanchalaks were trained to run kiosks on a commission basis, providing information to farmers on market prices, weather, and inputs, and certifying the quality of produce. Thus, ITC won over an influential section of large farmers.

E-choupals threatened mandis and the accompanying interests – traders, mandi labour, bazaars around mandis. As part of its strategy, ITC continued buying soyabeans at mandis, to soften the blow created by its own procurement hubs. To win over part of the trading community, ITC hired some intermediaries as samyojaks, to provide logistical links from farms to its hubs, and to manage labour, bagging and storage. By hiring samyojaks, ITC split the trading community and ensured that some factions would be on its side. ITC also hired mandi labourers for its own operations, reducing tensions there.

So, when an agitation was launched by opponents of e-choupals in Madhya Pradesh, ITC had enough rural factions on its side to contain the problem. This was a triumph. From the start, ITC worked with farmers to understand their needs. It knew how suspicious they were of big companies. Instead of behaving as a big trader, it adopted the position of a rural development agency with a commercial twist. Each sanchalak had to take an oath to serve the community, positioning e-choupals as not just a business but a public service too. Feedback from farmers has shaped the evolution of the business. This approach gradually overcame rural suspicions and built trust. ITC started small in 2000, and has gradually expanded to 6,500 kiosks today.

Creative destruction spurs economic growth, but it hurts those whose business it destroys. The onus is on Reliance to create more partners, and in doing so, get help in convincing a difficult audience of the gains from the retail initiative.