New Delhi: A politically-sensitive survey, ordered by the Prime Minister’s Office (PMO) at the behest of the ruling United Progressive Alliance chairperson, Sonia Gandhi, on the impact of big, branded retail chains on unorganized individual stores has confirmed—and quantified—a significant decrease in both revenues and profits at India’s smaller retailers that are battling large, deep-pocketed chains.
It also shows that a whopping 50% of small retailers surveyed reported lower sales and 61% of all retailers pointed to competition from organized retail for their declining financial health. The scientific survey looked at some 1,600 small retailers in four Indian cities, including 800 who were within a 2-5km radius of new organized retailers. The survey also talked to 500 consumers who shop at both small as well as branded retailers.
The study (See: key figures), which is yet to be made public, will likely cause significant debate over the Congress-led government’s stance on the retail sector, including its decision to allow giant foreign retailers to enter India and the lack of a cohesive policy on allowing major industrial conglomerates, such as Reliance Industries Ltd (RIL), the Aditya Birla Group and Bharti Enterprises Ltd, which are planning thousands of stores across the country.
India is home to hundreds of thousands of small shops and there has been growing concern, hitherto only anecdotal, that the current government’s policies that allowed unfettered entry of branded, large retail chains were likely to have a devastating impact on tens of thousands of shop owners and their employees within a relatively short time.
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 that is aimed at modernizing India’s rather archaic retail formats and one that the survey shows is clearly benefiting mostly urban shoppers because of lower prices and wider choices, but, at the same time, threatening to have a large impact on small and mostly unorganized neighbourhood retailers who have been the mainstay of the Indian household’s shopping experience for generations.
Amid rising tensions, including organized vandalism and small-scale riots against branded chains, some state governments such as Uttar Pradesh have forced the likes of Reliance Fresh, a unit of RIL, to stop expanding. And a growing chorus of protests, including from its Left allies, forced Gandhi in early 2007 to write to the Prime Minister to ask if the government has fully examined the impact of its laissez-faire retail policy.
While foreign retailers such as Wal-Mart Stores Inc. and Metro AG, which ironically don’t have a single retail store operating in India (the latter has three cash and carry stores that sell to other retailers and institutions), have been the focus of many protests, the findings of the survey clearly point the finger at the country’s own, home-grown retail chains as the source of small retailers’ woes.
Gandhi’s letter forced PMO and the commerce ministry to call for a national survey, which got under way back in March. More than nine months later, there has been no official word on the final results of the survey.
Mint has independently verified that the finished survey has been sitting for about a month with the Indian Council for Research on International Economic Relations, or Icrier, a quasi-government research agency that is often used by various Indian ministries to conduct politically-sensitive surveys.
While there have been selective leaks during the course of the survey that appear to downplay the impact on small stores, Mint has also ascertained that the survey’s final data has formally concluded that unorganized retailers have seen sales fall—by a significant 16%—after big, branded stores opened within a 2-5km radius, depending on whether it was a supermarket or a hypermarket.
Meanwhile, small retailers in so-called “control” areas of the same cities—or where organized, branded retail hasn’t yet penetrated—showed a 2% increase in sales in the same period.
In other words, based on the Icrier-sponsored survey’s findings, if organized retail hadn’t opened up in the vicinity, the affected small retailers would have generated 21.4% more revenue from what they actually did. On an annualized basis, their sales decline was estimated at 10%, still a significant fall for any retailer.
Subhiksha, which opened its first store a decade ago, has crossed the 1,000-store mark
More alarmingly, profit data shows an even greater impact on small retailers, suggesting that big retail is putting the squeeze on margins at the so-called mom-and-pop stores and hurting their ability to respond to larger competition in times to come.
Those small retailers surveyed who had to contend with branded retail chains saw average profits fall 16% before and after such stores opened, but the real impact was much higher because retailers in the “control” group, who didn’t have to face such new competition, had actually posted a 5% increase in their profits in the same period.
This means that essentially there was a decline of 20% in profits for those unlucky enough to be in areas where Reliance Fresh, Subhiksha or other branded retailers have opened shop.
The scientific survey, which can be extrapolated to most of urban India, looked at four top cities—Kolkata, Ahmedabad, Hyderabad and New Delhi—and initially surveyed about 800 small retailers. Midway through the project, at the behest of other researchers, including Thomas Reardon, a well-regarded professor for agricultural economics at Michigan State University, the survey added some 800 more small retailers in the same cities, but from areas that were yet to be directly impacted by branded retail. This was done to make the survey more robust and give the government a valid survey of retailers for not only a “before and after” comparison, but also to isolate any normal declines in sales or profits that might have been unrelated to organized retail’s entry into the area. The survey also made sure that demographics and socio-economic parameters of areas in which both samples were collected were identical.
Repeated calls by Mint in the past week to Rajiv Kumar, director and chief executive of Icrier, were not returned. However, when Kumar was asked by a Mint reporter at a seminar, he declined to discuss the actual numbers of the survey. He said he has to give the report to the government before making it public.
One senior bureaucrat, who has been involved in the survey exercise, told Mint that the commerce ministry was aware that sales at small retailers had fallen 10% on an annualized basis, according to the initial report produced a few months ago, but that the ministry was awaiting the final report that includes the “control” sample data. He expected the current report to be given to them in January.
The bureaucrat, who didn’t want to be identified given the extremely political nature of the retail debate, also said there were significant divisions within the government’s political decision makers over the retail policy and added that he didn’t expect the current retail policy to change significantly irrespective of what the final study results conclude.
Indeed, many major Indian as well as foreign retailers appear to be banking on the government’s policy not changing radically anytime soon.
Wal-Mart, the world’s biggest retailer by sales, has a joint venture with Bharti Enterprises, which will open stores that sell goods only to bulk buyers who purchase for business needs. It will also help Bharti manage the logistics and supply chain for the Indian firm’s retail stores. And Carrefour SA, the world’s second largest retailer, is in active talks to license its brand for retail in India.
Under existing Indian laws, 100% foreign direct ownership is barred in retail stores that sell multiple brands to individual customers.
Not that there isn’t enough interest in the sector from local players. Reliance will open at least 1,500 grocery stores by 2011; another company, Subhiksha Trading Services Ltd, which opened its first store a decade ago, has crossed the 1,000-store mark and thrives on selling products at a deep discount. Reliance alone has plans to spend up to Rs25,000 crore for its retail venture—which will include grocery and speciality stores and hypermarkets in 6,000 towns and around 700 cities nationwide—making it the most ambitious plan in retailing in India announced so far.
Those who support the current policy of letting organized chains unfettered access to retail markets will point to a finding in the survey that shows that the average number of paid people working in the small outlets hasn’t declined significantly across the nearly 1,600 retailers surveyed, though it has fallen after the onset of organized retail. One possible explanation, however, is that there tends to be a lag between declining sales and profits, and the letting go of any paid employees, especially in the small retail environment where workers know both the neighbourhoods and the frequent shoppers, and are relatively cheap in terms of the wages they are paid. Indeed, even though organized retail is in its nascent stage, some 17% of the 800 small retailers surveyed said they had already reduced staff.
The survey also shows that the small retailers are trying to respond to competition. Some 60% of those surveyed in the clusters where branded retail has opened said they had tried to have better display of their products while just more than half of them said that they had added product lines and increased the number of brands they stock.
Despite the relatively flat employment numbers and the retailers saying they are trying to fight back, the overall trend is one of trouble for the smaller retailers. Some 83% among those facing direct competition from branded retail say their sales have either fallen or remained flat, compared with only 60% saying so in areas where organized retail hasn’t yet made inroads. And while 40% of small retailers have increased sales in areas of the four cities where organized retail hasn’t come within a 2-5km radius, just 17% in the more competitive areas say they were able to boost sales.