- GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
- GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Predatory Pricing by New Age Companies
Context: Recently, people in the small town of Talode in Nandurbar district in Maharashtra could not buy Colgate toothpaste from their only local store.
- It was because distributors in Nandurbar district had decided to boycott Colgate’s products and not supply them to the kirana stores in Talode.
Why did distributors decided to boycott Colgate’s products?
- Nearly half-a-million of India’s distributors pick up goods from consumer companies such as Colgate and deliver them to 13 million small local stores located in 7,00,000 villages and towns across the country through a web of millions of traders and other intermediaries.
- A vast majority of these distributors and traders are small family businesses that have developed relationships with their local stores over many decades.
- All consumer goods distributors in Maharashtra were protesting against Colgate’s alleged unfair treatment of traditional distributors vis-à-vis B2B technology companies such as Reliance’s JioMart, Udaan and others.
How are B2B technology companies causing disruption?
- The kirana store generally sells a 100g tube of Colgate toothpaste to the consumer for ₹55, the maximum retail price (MRP). The distributor sells Colgate toothpaste to the kirana store for ₹45 and the manufacturer, Colgate, sells it to the distributor for ₹40.
- New age technology B2B companies have developed technologies to connect directly to the kirana stores through a mobile phone app, bypassing the intermediaries.
- These B2B companies supply Colgate toothpaste to the local store for ₹35, lower than the ₹45 charged by the distributor.
- These technology companies bear a 15%-20% loss on every Colgate toothpaste they sell to the local store.
- They deliberately offer their product at a price lower than what it costs them (Predatory Pricing), to lure local stores away from the traditional distributors.
- Further, these technology companies offer extensive credit terms and working capital to the local stores.
- In other words, these technology companies rely not just on their mobile phone app innovation but also steep price discounting and cheaper financing to win customers.
- Udaan has suffered total losses of more than ₹5,000 crore in just five years and JioMart reports even greater losses.
How is that these technology companies are able to absorb losses?
- Indian companies are able to absorb such heavy losses because they have access to copious amounts of money.
- These companies are flush with funds from foreign venture capital firms, which in turn are largely funded by American pension funds and university endowments.
- Evidently, these companies use the money to not only build new technologies but also to undercut competitors and steal market share.
- They are able to sustain huge losses for several years until they destroy incumbents and gain dominant market share. After which, they will presumably raise their prices to turn profitable.
- It is similar to what India experienced in the telecom sector with Jio.
- The flip side is that India’s millions of distributors and intermediaries have no access to such finance.
What are the challenges due to such predatory pricing?
- The issue is about illegal predatory pricing and abuse of pricing power by startups and big corporates through preferential access to easy foreign money.
- While consumers may benefit from lower prices, should the livelihoods of millions of distributors, traders and their families suffer because they do not have equal access to easy money as these technology companies.
- By some estimates, there are more than 20 million families (100 million people) in India whose livelihoods depend on intermediary roles in the consumer goods supply chain.
- The distributor, trader and the kirana store owner generally belong to the same local community. Surely, there will be social ramifications within that community for some of these families lose their livelihood.
- The conventional economic notion that lower prices, regardless of the means adopted, are a sole and worthy pursuit is under severe challenge.
- Social media companies such as Facebook give away their products for free and e-commerce companies such as Amazon sell at lower prices, benefiting consumers enormously, but also causing immense social strife and disharmony.
- Even erstwhile champions of free capital flows are now cautious about their social implications. The new Chairperson of the Federal Trade Commission in America, is seeking to frame new rules to check such anti-competitive behaviour.
Connecting the dots: