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Updated: June 5, 2013 15:29 IST

Small is big in Asia’s booming retail sector

A. Srivathsan
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BIGGER IS BETTER? Customers shop at Best Price mega store, a Bharti Walmart India venture, at Zirakpur in Ajitgarh district of Punjab. Photo: Akhilesh Kumar
BIGGER IS BETTER? Customers shop at Best Price mega store, a Bharti Walmart India venture, at Zirakpur in Ajitgarh district of Punjab. Photo: Akhilesh Kumar

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 Buckling under pressure, the Japanese government repealed the large stores law.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.

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Authors concern about certain things like size,location, pricing are already taken care of.Foreign retailers can open only where population is more than 10,00,000 (ten-lakh) and as per statistics only 54 cities are there in whole country with that population and in India we have MRP (MAX RETAIL PRICE) which cannot be altered by foreing retailers.
Also people in INDIA often buy things which are fresh and not frozen so the kirana stores will survive and also we do not buy groceries for 1 month like people in western or european country do. And above all there are big indian retailers who havent affected the small stores so how will foreign players do when we already have restriction as pointed above. This fear is just like in early 90's if computer's come jobs in Banks will be gone.
I believe this will be good for Indian economy on long run

from:  Abdul Mannan
Posted on: Oct 1, 2012 at 03:27 IST

A historical analysis . I would say writer just enummerated the fact
with measures taken by respective Government to counter it . However
it does not falsify Govt decision to open FDI in retails
1.Till now also we have big retail store like Big Bazzar , Reliance
Mart etc operating . If the decison to let open such retail chain is
justified , so what's harm in allowing opening retail chain by foreign
companies
2. I believe that we should put reasonable restriction and let them
open on cities having population greater than particular criteria.
It's not good to blindly oppose the FDI. People seems to be more blown
by emotions.
3. Right blend of control over foreign companies would also be
benefical for all
4. It would be good for customer who does not figure in any discussion
. Why we are being ignored ? We deserve better . We deserve better
better for which we paid price.Chance of getting adulateted stuff is
less in such retail store which maintain a quality standard.

from:  Pawan
Posted on: Sep 30, 2012 at 20:59 IST

FDI in retail trade will definitely sound the death knell to small
vendors and our roadside shops and many families depending on this
income will be in streets soon. On the other side many rich families
will become more richer. The gap between the rich and poor will widen
further aggravating social tensions. But UPA government is determined to
go ahead with its so called reforms. These reforms benefit whom?
Gandhiji started Dandi march to oppose salt monopoly by British
Government. We await another Gandhi to save this great country!

from:  Ramachandran V E
Posted on: Sep 30, 2012 at 17:32 IST

The analysis has some truth in it however it is one sideded. Yes some stores will be lost in big cities. However unlike the Japanese Indonesian FDI in retail Indian FDI is very different. It has safety built into it which people who oppose it conveniently forget to mention. Any investor needs to bring $100 million at the minimum out of whihc half needs to be spent on backend infrasturcture etc and rest in retail. this was not the case in other countries. Next it can only be in larger states whihc can absorb big players and not in small towns. No one in their right mind will invest 100 million in a small town in India as it will not have enough consumers to purchase however they need to bring produce from small town to large town whihc means they need to build efficient infrastucture and transposrt logistics which can only benefit farmers. Unlike these countries whihc are geographically small India is not. These countries already have heavy personal vehicle density whihc India does not

from:  svnagappa
Posted on: Sep 30, 2012 at 15:46 IST

It is plain commerce. Do Indian consumers care who sells? Whoever gives a "good deal" can get the business of our 400 million middle class. End of story. If small shops cannot sell at competitive prices and resort to price gouging at the first opportunity, they deserve to lose out to large corporations. Look at our grocery merchants that choose to sell below MRP - they are doing booming business. Indian small traders are mostly opportunistic, and they are not there to serve society by any stretch of imagination. Hopefully, with such massive competition coming in they will get their act together.

from:  B S Kumar
Posted on: Sep 30, 2012 at 13:47 IST

Thank you for an excellent analysis. What amuses one that our dear PM who is a renowned economist doesn't understand all this or he and his govt. does not care or is under severe pressure to implement this policy in India at the cost of its own people?
Even after so many excellent analyses and editorials that have been published after the FDI announcement there doesn't seem to any change in the govt.'s stand. Actually there have been many comments and assurances to counter the views published.
This govt. is doomed and will doom the country before its own demise.
I hope good sense prevails and these people see through the clear water and protect their motherland rather than buckling under forign pressure in the garb of boosting economy.
Jai Hind.

from:  kumar
Posted on: Sep 30, 2012 at 13:09 IST

This report should be read along with the article in Indian Express by S. Gurumurthy titled " Reforms at Nations cost " on 20 Sept, by all Indians and the UPA Ministers trumpetting about the benefits f retail FDI.There are ample facts and figures from experiences of countries all over the world ncluding the USA to prove that advent of large MNC retail outlets kills local small mom-n-pop stores; are not beneficial for farmers and the country in the long run .
The recent CNN IBN polls also shows that 76% of Indians oppose the idea of 'Retail FDI'.
Then why is the UPA Govt pushing 'FDI in retail ' in the name of reforms . And that also without debating it in parliament or the consensus of its allies in the coalition . Remember the Congress in 2009 elections got only 19-20% of the electoral votes and made this Govt that is standing day ,through coalition support .
So is the Congress even eligible to implement such a crucial bill as FDI in retail without debate or approval in parliament

from:  VJ NAMBIAR
Posted on: Sep 30, 2012 at 09:47 IST
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