New Delhi: A government-sponsored study has suggested several measures such as regulation of organized retail firms to offset the impact of big branded retail chains on unorganized retail stores, which it has confirmed and quantified in terms of a decline in revenues and profits of small stores fighting large and deep-pocketed chains.
The study adds that this impact will be temporary and that its intensity will decline to nothing over a period of five years.
The findings of the yet-to-be-publicized survey—a 16% decline in sales and a similar decline in profit for those small stores located in areas where big branded stores opened—and its recommendations were shared with the government in March in a presentation by the agency in charge of it, the Indian Council for Research on International Economic Relations, or Icrier, an independent New Delhi-based think tank.
Trouble in store? The survey says small stores located in areas where big branded stores opened have seen a 16% decline in sales and profit. (Madhu Kapparath / Mint)
While the government had asked Icrier to study and map this impact, it had not asked it for any suggestions on policy measures that can help small store owners cope with competition from organized retailers.
The think tank’s other recommendations include modernization of “wet markets”, or markets for fresh produce, through public-private partnerships; creation of wholesale outlets to which farmers can sell produce and from which small stores can procure it; ensuring access and availability of credit for small stores from banks and microfinance firms; and a strengthening of the country’s competition commission’s role.
ICRIER RECOMMENDS (Graphic)
While small store owners are likely to welcome the recommendations of the study, its findings, especially the one about the decline in sales and profit, are unlikely to go down well with them despite the think tank’s finding that this decline will be a temporary phenomenon. One expert familiar with retail trends, who did not wish to be identified, said this could be on account of what is happening in the southern part of the country where organized retail is at least a decade old. Some small store owners in these cities, such as Chennai and Bangalore, have figured out ways to stay in business, this person added.
The study also found that while around 4.2% of the total number of small stores in the country down their shutters every year, less than half this, or around 1.7% of them go out of business on account of competition from big retail.
The Prime Minister’s Office commissioned the politically sensitive survey in March 2007 at the behest of the ruling United Progressive Alliance’s chairperson Sonia Gandhi. If and when the Manmohan Singh government chooses to publicly disclose the findings of the survey, it could set the stage for a showdown over the government’s retail policy. The issue is a sensitive one and several parts of the country have been roiled by protests over the entry of organized retail. Some states have placed curbs on the entry or expansion of organized retail chains.
India is home to hundreds of thousands of small shops and there has been growing concern that the government’s policies have allowed big retail unrestricted entry into the business at the cost of small store owners and their employees.
In late March, commerce and industry minister Kamal Nath said the government will study the Icrier report before allowing fully owned subsidiaries of foreign firms in single-brand retailing. India currently allows up to 51% overseas ownership in the so-called single-brand retailing business where products are sold under one brand name such as Gucci or Marks and Spencer. It couldn’t be ascertained whether Nath was aware of the findings of the study at the time he made the comment. The Icrier study, however, isn’t about the impact of foreign retail firms on small store owners but on that of all organized retail on small retailers.
Scaling up: A Big Bazaar outlet in Bangalore. According to Icrier, while the unorganized retail business grew by 11% between 2004 and 2007, organized retail grew by 20%. (Hemant Mishra / Mint)
A senior official in the ministry of commerce and industry said that although Icrier is expected to submit the report to the government by the end of the month, “it is highly unlikely” that the government will effect any changes in existing regulations governing retail because the UPA is “in election mode” and doesn’t want to touch a politically sensitive issue at a time when it is busy preparing for general elections that will be held sometime in 2009.
In response to a 22 April request for an interview to discuss the findings, Rajiv Kumar, director and chief executive of Icrier said in an email that he was in Pakistan and he would be “willing to discuss the findings” with Mint this week after consulting with his colleagues. An executive from Kumar’s office responded to a subsequent email query sent on 24 April and said the Icrier chief could not access email in Pakistan and that he was expected back in India over the weekend. In his response to the first email, Kumar also said that “...the so-called findings...” first published in Mint in December were not true.
However, the findings presented to the government by Icrier in March are exactly the same as those reported by Mint in December.
The study was conducted in New Delhi and Jaipur in the northern part of the country, Kolkata in the east, Chennai, Bangalore, Hyderabad and Kochi in the south, and Mumbai, Ahmedabad and Indore in the west. Of the 2,020 stores, 805 were in the “control group” or in neighbourhoods in New Delhi, Kolkata, Hyderabad, and Ahmedabad, where branded outlets had not opened for business at the time the survey was conducted.
Overall, across both the “treatment sample”, or stores in areas where there is head-to-head competition with organized retail outlets, and the control sample, sales of small stores were down 8% and profits 9%. In safe neighbourhoods (the control sample), sales of small stores were up by at least 2% and profit by 5.2%, while in neighbourhoods that saw head-to-head competition (treatment sample), sales and profit were down by around 16%. On an annualized basis, sales and profit were both down 10% in these neighbourhoods.
In other findings presented to the government in March, Icrier said that while the unorganized retail business had grown by 11% between 2004 and 2007, the organized retail one had grown by 20%. It added that between 2012 and 2017, small stores will grow by 10% a year while big retail would grow by 45-50% (albeit on a smaller base). As a result, organized retail, which accounted for just 4% of India’s overall retail market at the end of March 2007, would have a 16% share of the business by March 2012.
Like the senior commerce ministry official, big retail expects no change in the government’s policy. Reliance Industries Ltd, Aditya Birla Group, and Bharti Enterprises Ltd, which recently opened its first stores, are among the dozen-odd firms going ahead with their plans for the business.
India’s $300 billion (by sales) retail market is also attracting top global retailers such as Wal-Mart Stores Inc., which has a joint venture with Bharti for wholesale, or cash-and-carry stores, where India allows foreign investment, and France’s Carrefour SA and UK’s Tesco Plc. that are looking for partners.
Icrier also studied the impact of the entry of big retail on farmers, consumers, manufacturers, and intermediaries. It also studied practices in other fast-growing emerging market economies. In its presentation to the government in March, Icrier said consumers would benefit from lower prices, more choice, and better quality at organized retail stores.
Intermediaries, the think tank found, were unaffected except in the case of fresh produce and apparel. And farmers, it said, would gain by getting more for their produce and simply having an alternative channel to which they could sell.
Icrier hired research firm DRS and retail consulting firm Technopak Advisors Pvt. Ltd for the surveys. It also sought the expertise of the International Food Policy Research Institute on the global retail scenario.
As pointed out by Mint in December, people who support the current policy of letting organized chains unrestricted access to retail markets will likely point to a finding in the survey that shows that the average number of paid people working in the small outlets hasn’t declined. Icrier’s March presentation to the government says there is “overall no decline” in employment.
In its presentation, Icrier said small store owners were resorting to several measures to fight competition from organized retail stores. These include improving and enhancing stocking, lower prices, better displays, home-delivery services, computerization, and the use of electronic weighing machines.