Impact of Organized Retailing on the Unorganized Sector - May 2008 study conducted by ICRIER

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.

• Entry of organized retail is transforming the logistics industry. This will create significant positive externalities across the economy.

• Small manufacturers did not report any significant impact of organized retail.

Link to the pdf version of the detailed report of the study

Why FDI in retail is good for India

Poor Manmohan Singh. Dammed if he does not, dammed if he does. A few weeks ago, several captains of Indian industry along with political opponents for chorus, slammed Manmohan Singh for complete paralysis in government. Last week saw the introduction of several key policies related to economic reform, in particular to FDI (Foreign Direct Investment) in the aviation and retail sectors. The political opponents this time joined by some of Manmohan Singh’s UPA government’s key allies slammed him yet again.

The opposition came from the usual suspects and along expected lines. The communists opposed as they do anything that has even the most remote US connection. Several regional parties (with the exception of the Akali Dal in Punjab), mostly allies of the UPA, opposed. So did the BJP, which is the main opposition party.

Fundamentally, the opposition is based on two issues – first, that allowing FDI in retail would result in local small stores (known as kiranas) being driven out of business and their owners (kiranawalas) will be driven out of jobs and livelihood. Second, the manner in which the government introduced the policy – by pushing for its approval directly by the cabinet and not first introducing it on the floor of the house, was not right.

I am going to ignore the second issue and focus solely on the first one. For my starting arguments, I need to go back in time.

It was in the mid to late eighties that desktop computers were making their presence felt in India. The then government had decided to go in for massive computerization in the banking and government sectors. Employees, threatened by the prospect of losing their jobs, took to the streets. In hindsight, it was a good thing to happen. Those employees that decide to adopt, flourished. The others decided to opt for fat VRS (voluntary retirement schemes) and flourished as well. I do not recall distressed bank employees from that time with shattered lives, at least not in large numbers and on account of computerization.

So should we have not gone in for computerization because of a perceived loss of jobs? Today’s generation of bank and government employees would most likely take to the streets if we were to suggest that we go back to the pre-computer era. Not to mention the total collapse of our financial systems.

In those very same years and before, ready-made garments were the preserve of the well to do. Most middle income families, such as mine, bought cloth and got our shirts and trousers stitched from the local tailor. The branded apparel industry has come a long way since those days of the 70’s and early 80’s. I don’t think my sons will ever visit a tailor’s shop in their lifetime, but Shantaram Tailors still stands firm on the prime LJ Road, Shivaji Park, Mumbai. How come? For even though, families such as mine, have moved up in the economic strata, a new set of families from lower down have come to replace us. Shantaram Tailors will continue to have a clientele; it is more likely his children will dis-own the business before the clientele do so.

Both the examples I have citied are relevant examples of what impact FDI will have in the retail sector. We also need to acknowledge that single brand or multi-brand retail is not a new phenomenon in India. Big Bazaar, Reliance Fresh, More, etc are well established players and now recognizable brands in these sectors. They have been around for several years and have not driven the kiranas out of business. Infact most of these continue to struggle with their operations and profitability due to lack of efficiencies. And this is where the FDI comes in. What the sector needs is not more store fronts, but better infrastructure, especially in the area of what is referred to as the “cold chain” (distribution and storage of perishables). Better infrastructure will result in:

a)    Better prices for produce. Farmers and SME’s will be the direct beneficiaries.
b)    Significant reduction in wastage, especially of perishables, infact there will now be a better chance of perishables reaching remote store fronts.
c)    Increase in quality of goods for the consumer – fresher produce
d)    Decrease in prices for the consumer

Note, I have not listed the clichéd “elimination of vested interests and middle-men”. To my mind, vested interests are never eliminated, they are just replaced.

So, all this is fine, but what about the jobs? Or kiranas going bust? Here is a mental exercise. Try transplanting a Walmart store in any locality of a major Indian city that you live in or know of. Try Mumbai as an extreme. Doesn’t fit, does it? Not going to happen. The typical large Walmart store is just not going to come up in Indian cities due to sheer space constraints or due to the cost of land and construction. The chances, that a large store, which will suck all the kirana stores in its vicinity out of business, is hypothetical. Or try calling them for your regular fix of thepla, dhokla, bhakarwadi et al. There will still be housewives from Lajpat Nagar colony in Delhi, who will lower a basket using rope from the second or third floor and have it filled with their choice of vegetables from the local vendor. Consumer habits are so entrenched, that not everyone is going to queue up if and when a Walmart store opens in Lajpat Nagar.

It is my contention, that by the time such a threat of job losses or business going bust, if at all it materializes, children belonging to kirana families will on their own accord opt for newer and better paying career opportunities.

Let us not be blind to the benefit that this policy will bring and kill it on a presumption. And for the nay-sayers who drop the example of how mom and pop shops went bust in the US, I would like to point them to corner shops that still adorn much of the US: 7-Eleven. Food for thought?

For an impartial reading of the impact of Organized Retailing on the Unorganized Sector, refer to this post.