Organised retail involving FDI and international players can lead to a shrinking of traditional small merchant trade. That is bad news for political parties and governments. When discontent among traders brews, they act. A. Srivathsan looks at how Japan, Indonesia and Thailand responded, using zoning laws and size regulation as a control mechanism.
Look East to find out what happens when foreign retailers set up shop. Asia’s recent economic history is one of epic battles between big international retailers and small traders. Across the region, governments that opened the door to big stores as they restructured their economies or sought better ties with the West, had to eventually step in to prevent their own small trade from being swallowed up.
Japan, which registered retail sales of more than $1,500 billion, has legislation to protect small and medium stores from the impact of large stores. Small traders comprise a large portion of the Liberal Democratic Party’s support base. In 1973, Yasuhiro Nakasone, then the Trade Minister, assured them that the government would “nurture” small and medium-sized companies and “increase resistance” to foreign capital. He introduced a new large stores law that gave powers to local authorities to regulate retail outlets sized between 500 and 1,500 square metres. The authorities could insist on changing the size of the store, working hours and even the number of holidays in deference to small stores.
American companies such as Kodak and Toys “R” US, which were trying to enter the Japanese market, found these regulations stifling. The U.S. government, through the U.S.-Japan Structural Impediments Initiative, put pressure on their behalf and even took the matter to the WTO in 1995. Buckling under pressure, the Japanese government repealed the large stores law.
The gates open, upwards of $1 billion of American investments flowed in — but not without consequences. Between 1997 and 2004, the number of large stores grew at the rate of about 3 per cent on average. In the same period, the number of small stores declined at the rate of 2 per cent on an average (Research Institute of Economy, Trade and Industry, Tokyo, 2009). The loss of livelihood became an important political issue. In 2007, the government revised three pieces of legislation — the City Planning Law, the Large-scale Retail Location Law and the City Centre Revitalization Act — to control the expansion of large-scale stores. The country had come full circle in about 10 years. In today’s Japan, small stores exist alongside big stores, not because of a benign large store culture but due to government regulations.
Indonesia, which registered retail sales of more than $290 billion, also learnt the lessons the hard way.
As part of IMF’s $43-billion rescue package for the country after its 1997 financial crisis, the government agreed to implement a series of reforms, including opening of the retail market, lifting restrictions that had until then prevented foreign retailers from operating in provincial capitals and other large cities.
Biggies such as Carrefour arrived and large-scale stores spread throughout the country. A study conducted in 2007 found that the sales in supermarkets grew an average of 15 per cent while sales in small stores declined by 2 per cent a year between 1999 and 2004 (SMERU 2007). The negative impact continued. In 2009, Jakarta Post, quoting the Indonesian Market Traders Association, reported that the turnover and occupancy rates of traditional markets dropped by 60 per cent and 40 per cent respectively between 2005 and 2009.
This compelled the government to pass two major regulations — one in 2007 and the other in 2008 — to protect small traders. The new rules established categories of stores based on sizes, stipulated a minimum distance between large and small stores, permitted hypermarkets only on arterial roads, prevented supermarkets in local neighbourhoods and regulated their working hours. Another important rule prevented large stores from selling select goods at prices lower than in the nearest traditional market. Reports of poor implementation of rules abound, but the fact is that Indonesia learnt that large stores had to be overseen.
Thailand, with retail sales of more than $100 billion a year, is another Asian country grappling with the issue of proliferating large stores. Like Indonesia, it too went through a financial crisis in 1997 and sought IMF help. Policy changes followed. Foreign companies bought struggling stores from local companies and fuelled a retail boom.
In the process, the share of the traditional markets reduced from 74 per cent in 1997 to 42 per cent by 2001 in sale value. In 2002, a survey done by Thailand Development Research Institute revealed that traditional retail outlets in a one-km radius of a hypermarket suffered.
When the small traders started to complain, the government brought in a draft law in 2007 to regulate strictly the location of large stores using zoning laws.
Foreign investors complained that the new law would make Thailand a most unattractive destination for investment. The bill was never passed.
But the small Thai traders succeeded in pushing for amendments to the zoning laws. In 2003, the Public Works and Town and Country Planning Department prohibited large retail stores of 1,000 square metres or more within 15 km of commercial town centres.
The question to ask is why these Asian countries, which invited foreign retail under duress or otherwise, have regulations on size, location, working hours, pricing and other aspects of large retailers.
Evidently, that is because they poach on the clientele of the small and medium stores. Their deeper pockets gave them an unfair advantage to mobilise resources and acquire prime space for their high-volume, low-margins business model.
Forced by political circumstances, Asian governments tried to provide a level playing field, framing regulations to balance everyone’s interests. Even though the results have been mixed, the fact remains that foreign or even local investment in large retail is a real issue for those who are disadvantaged by it.