Essays and Articles: Impact of Organized Retailing on the Unorganized Sector

I have produced an extract of the study published by the ICRIER in May 2008. The study does not distinguish between foreign and domestic players and rightly so. Readers may draw their own conclusions and inferences from the findings listed below. A link to the detailed report is included at the end of this post.

The real GDP is expected to grow at 8-10 per cent per annum in the next five years. As a result, the consuming class with annual household incomes above Rs. 90,000 is expected to rise from about 370 million in 2006-07 to 620 million in 2011-12. Consequently, the retail business in India is estimated to grow at 13 per cent annually from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12. The study shows:

The unorganized retail sector is expected to grow at about 10 per cent per annum with sales rising from US$ 309 billion in 2006-07 to US$ 496 billion in 2011-12.

Given the relatively weak financial state of unorganized retailers, and the physical space constraints on their expansion prospects, this sector alone will not be able to meet the growing demand for retail.

Hence, organized retail which now constitutes a small four per cent of total retail sector is likely to grow at a much faster pace of 45-50 per cent per annum and quadruple its share in total retail trade to 16 per cent by 2011-12.

This represents a positive sum game in which both unorganized and organized retail not only coexist but also grow substantially in size.

The majority of unorganized retailers surveyed in this study, indicated their preference to continue in the business and compete rather than exit.

The Empirical Basis

The study comprises the largest ever survey of all segments of the economy that could be affected by the entry of large corporates in the retail business. The findings are based on a survey of 2020 unorganized small retailers across 10 major cities; 1318 consumers shopping at both organized and unorganized retail outlets; 100 intermediaries; and 197 farmers. In addition, a “control sample” survey was done of 805 unorganized retailers who are not in the vicinity of organized retail outlets in four metro cities.

Detailed interviews were also carried out for 12 large manufacturers, 20 small manufacturers and six established modern retailers.

The study contains an extensive review of international retail experience, particularly from the major emerging market economies.

Main Findings

Impact on Unorganized Retailers

Unorganized retailers in the vicinity of organized retailers experienced a decline in their volume of business and profit in the initial years after the entry of large organized retailers.

The adverse impact on sales and profit weakens over time.

There was no evidence of a decline in overall employment in the unorganized sector as a result of the entry of organized retailers.

There is some decline in employment in the North and West regions which, however, also weakens over time.

The rate of closure of unorganized retail shops in gross terms is found to be 4.2 per cent per annum which is much lower than the international rate of closure of small businesses.

The rate of closure on account of competition from organized retail is lower still at 1.7 per cent per annum.

There is competitive response from traditional retailers through improved business practices and technology upgradation.

A majority of unorganized retailers is keen to stay in the business and compete, while also wanting the next generation to continue likewise.

Small retailers have been extending more credit to attract and retain customers.

However, only 12 per cent of unorganized retailers have access to institutional credit and 37 per cent felt the need for better access to commercial bank credit.

Most unorganized retailers are committed to remaining independent and barely 10 per cent preferred to become franchisees of organized retailers.

Impact on Consumers

Consumers have definitely gained from organized retail on multiple counts.

Overall consumer spending has increased with the entry of the organized retail.

While all income groups saved through organized retail purchases, the survey revealed that lower income consumers saved more. Thus, organized retail is relatively more beneficial to the less well-off consumers.

Proximity is a major comparative advantage of unorganized outlets.

Unorganized retailers have significant competitive strengths that include consumer goodwill, credit sales, amenability to bargaining, ability to sell loose items, convenient timings, and home delivery.

Impact on Intermediaries

The study did not find any evidence so far of adverse impact of organized retail on intermediaries.

There is, however, some adverse impact on turnover and profit of intermediaries dealing in products such as, fruit, vegetables, and apparel.

Over two-thirds of the intermediaries plan to expand their businesses in response to increased business opportunities opened by the expansion of retail.

Only 22 per cent do not want the next generation to enter the same business.

Impact on Farmers

Farmers benefit significantly from the option of direct sales to organized retailers.

Average price realization for cauliflower farmers selling directly to organized retail is about 25 per cent higher than their proceeds from sale to regulated government mandi (market).

Profit realization for farmers selling directly to organized retailers is about 60 per cent higher than that received from selling in the mandi

The difference is even larger when the amount charged by the commission agent (usually 10 per cent of sale price) in the mandi is taken into account.

Impact on Manufacturers

Large manufacturers have started feeling the competitive impact of organized retail through price and payment pressures.

Manufacturers have responded through building and reinforcing their brand strength, increasing their own retail presence, ‘adopting’ small retailers, and setting up dedicated teams to deal with modern retailers.