THE EXACTING DEMANDS OF A BUYERâ€™S MARKET
The compulsion to become Price Competitive
In the past, shortage was one of the regular features pervading the Indian economy. There was shortage practically in every sector, consumer goods, industrial goods and services. It was basically a case of production not being raised to meet the growing demand. There were several reasons for this. Many companies were going on with old plants and outdated processes, and therefore, could not increase production. Many others could not increase production though endowed with better production facilities because of the licensing restrictions. Addition of fresh capacity also was out of the question because of the license regime. In many cases, price control by the government acted as an additional cause of production shortfall. Often, price control served as a disincentive for production.
This is nicely explained by T. Thomas, a well-known Indian industry leader and former chairman of HLL. Describing the travails of those days, he says, â€˜. . . As the rigors of price control continue, honest manufacturers will find it unviable to continue the manufacture of products. They will even try to minimize their losses by reducing their production. This happened in the soap and vanaspati industries in the 1970s, which created widespread shortages and rampant black marketing.
The trade was able to sell the product at an unofficial premium of 100%, the manufacturers were forced to sell at highly controlled prices which were not remunerative. They had to discontinue production in order to curtail cash losses incurred on every ton of product. Black marketers among the manufacturers thrived o the shortages and amassed unaccounted tax-free money, which they shared happily with those who could be of use to themâ€™
To make things worse, some manufacturers, with their vested interests in shortage, deliberately promoted the shortage, creating artificial scarcities.
A sellersâ€™ market prevailed in every segment. The barriers to entry into industries and the limits on growth of firms had led to an accentuation of the sellersâ€™ market conditions. In many cases, the controls served the interests of such sellers rather than those of the buyers. There was very little emphasis on cost reduction, technology up gradation and improvement of quality and customer convenience. The buyers suffered as a result of these vested interest sellers.
From rationing to marketing:
A shift from shortage to surplus and from rationing to marketing has been a major development of the post-liberalization regime. The government has removed the controls on capacity creation and capacity utilization. Industries have been given total freedom for expansion and diversification. Decisions on investments have been left to the entrepreneurs. Controls on prices of products have also been removed. Investments have now been taking place in areas of demand as a result of removal of restrictions. Production automatically increased to meet demand.
In fact, the country has already started experiencing a transition from rationing to marketing. In several products, increased availability became a reality even before any expansion of capacities and production took place. The liberalization of imports and the reduction in import tariffs did the trick. It expedited the changeover to a buyersâ€™ market by instantly enhancing supplies.
The new buyersâ€™ market amounted to a major challenge to Indian challenge to Indian industry and business because it enjoined on them a number of exacting demands. The developments have already exposed the weakness of companies, especially the ones who were till now in a near monopoly situation, with customer at their mercy in all matters such as product availability, pricing and quality. The companies now face challenge on all these fronts.
The challenge in pricing is particularly formidable. All these years, they could blindly follow â€˜a cost plusâ€™ pricing policy, with attractive profits built in. In the new buyersâ€™ market, it will no longer be possible for firms to follow this practice and pass on all cost escalations automatically to the buyers. This reality throws up new pressures on margins and profits of the companies. Now they have to be price competitive.
The new super markets in the real sense like Big Bazaar or Giant with their establishments spread over 20,000 to more than 50,000 sft are able to give the consumers products at less than even whole sale prices. They are able to do it making a pricing contract with Importers or producers directly without any middle men. The display of products in their stores is made on the state of the art shelves and the prices are displayed giving a comparison with normal market prices. Buyers are also given incentives like buy 5 kg and get 5 kg free (Rice or sugar)