The $50 Shoe: Here's Why Poor Pays More Compared To Rich
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One of the reasons the economy had a great run after the World War II, despite the debt burden, was that redeeming the consumption and investment story was left in the hands of private enterprise. We did well since the governments in a manner of speaking stayed out of doing anything.
Debt as a percentage of GDP is now as high as it was at the end of the World War II. Seems that we are in similar times. Only we are not just fighting with each other; we are also fighting a common enemy.
A comeback from here is not going to be simple. I am not arguing that debt quantum is higher than it should be. We are in the midst of a humanitarian crisis, and the states need to provide for their citizens. The issue lies with how this borrowing gets used. As borrowers start to return their principle and the interest thereof, they are left with less on hand to spend. By the very nature of the transaction, borrowers spend their borrowing. That fuels economic growth. Lenders, at the same time, tend to bring the interest earnings back to the savings pool. That earning, therefore, does not fire any growth.
So how the debt is structured influences how much consumption, it will drive. Harsh terms do more damage than good for the economy. As far as terms are concerned, there are even more dynamics at play.
Terry Pratchett presented those dynamics very beautifully. “The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money. Take boots, for example. He earned thirty-eight dollars a month plus allowances. A perfect pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles. But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots at the same time and would still have wet feet. This was Captain Samuel Vimes' Boots' theory of socioeconomic unfairness.”
To fire the much-needed growth rates, younger enterprises will need to shoulder this burden. These companies will need to anchor supply chain efficiencies, wastage control, food distribution, build equipment for clean energy, design mobility solution, and other must-haves. As much as these companies shoulder the burden, what the government needs to do is see that these companies are not compelled to wear the $10 worth shoe. My argument is that currently, that is the pair of shoes these enterprises get to wear. For this discussion, I am going to focus on the 12 million strong SME segment of corner stores, often referred to as kirana stores in vernacular language.
Somehow, we seem to have made up our mind that these stores need technology solutions, making them no touch sellers. I don’t think that is an outcome that the stores are looking to achieve.
You see the affluent and tech-savvy often decide for others what they must have. We recently ran a survey with corner stores and asked them what makes them buy the $10 shoe all the time.
Here is a summary of what they had to say:
# Around 75 per cent of the respondents said that their fulfilment is unreliable, and they are often compelled to buy a lot of what they do not want, and they get nothing of what is selling the most.
# Their access to credit is left to the whims and fancies of the distributor. NBFCs and banks are not favourably disposed to them either. So even if they get a great deal from a seller, they cannot get adequate stock since there is no access to credit. The lucky ones who can access credit pay 16-18 per cent annualised as cost of capital. That is not cheap at all.
# Distributors push inventory onto them, but the damage and claim policies of the companies are very cumbersome. So, each month there is some write off which hits them hard.
# Pricing is where these stores feel the most pain. Other channels are able to offer great prices since they get to negotiate terms – price, credit, assortment, returns, merchandising spends, consumers promotions amongst others. Corner stores are on a take it or leave it basis.
With expensive purchases, uneven inventory levels, missing assortment, these stores often find ways to retain their customers by offering them higher convenience (home delivery, discounts, or credit), pushing them further low on the economics of running their business. A typical $10 shoe phenomenon. What these stores need are $50 shoes so that they can compete with organized retail. Right now, these stores are running on wet feet. And so are 30 million Indians who run these stores. These businesses can help us get out of the World War II like debt situation faster.
Should we not be working hard to make the corner stores lead better lives?