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Small shops losing the retail race

A survey ordered by the PMO, on the impact of big, branded retail chains on unorganised individual stores, has confirmed and quantified a significant decrease in both revenue and profit at smaller retailers.

business Updated: Dec 13, 2007 01:40 IST

A politically-sensitive survey, ordered by the Prime Minister’s Office at the behest of 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 revenue and profit at smaller retailers.

It also shows that a whopping 50 per cent of small retailers surveyed reported lower sales and 61 per cent of all retailers blamed competition from organized retail for their declining financial health.

The scientific survey looked at some 1,600 small retailers in four cities, including 800 within a 2-5-kilometer radius of new organized retailers. The survey also talked to 500 consumers who shop at both small as well as branded retailers.

The study, which is yet to be made public, will likely cause significant debate over the government’s stance on the retail sector.

India is home to hundreds of thousands of small shops and there is growing concern, hitherto only anecdotal, that the government’s policies allowing unfettered entry of retail chains are likely to have a devastating impact on tens of thousands of shop owners and their employees within a relatively short time.

Chain reaction
Amid rising tensions, some state governments such as Uttar Pradesh have forced the likes of Reliance Fresh, a unit of Reliance Industries Limited, to stop expanding. And a growing chorus of protests, including from its Left allies, forced Sonia 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.

Her letter forced the PMO and the Commerce Ministry to call for a national survey, which got underway 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 (ICRIER).

While there have been selective leaks during the course of the survey that appear to downplay the impact on small stores, Mint has ascertained that the survey’s final data formally concludes that unorganized retailers have seen sales fall — by a significant 16 per cent — after big, branded stores opened within a 2-5-kilometer radius, depending on whether it was a supermarket or a hypermarket.

Meanwhile, small retailers in so-called “control” areas of the same cities — where organised, branded retail hasn’t yet penetrated — showed a 2 per cent increase in sales in the same period.

A deeper impact
In other words, based on the survey’s findings, if organized retail hadn’t opened up in the vicinity, the affected small retailers would have generated 21.4 per cent more revenue from what they actually did. On an annualized basis, their sales decline was estimated at 10 per cent, still a significant fall for any retailer.

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 large retail chains saw average profits fall 16 per cent before and after such stores opened, but the real impact was higher as retailers in the “control” group, who didn’t have to face such new competition, posted a 5 per cent increase in profits in the same period.

This means that essentially there was a decline of 20 per cent in profits for those unlucky enough to be in areas where Reliance Fresh, Subhiksha or other big brands opened shop.

The survey, which can be extrapolated to most of urban India, looked at four 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 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.

Matter of policy
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 reporter at a seminar, he declined to discuss the actual numbers of the survey. He said he had to give the report to the government before making it public.

One senior bureaucrat who has been involved in the survey exercise told Mint the Commerce Ministry was aware that sales at small retailers had fallen 10 per cent 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 retail policy. He 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.

Getting bigger
Subhiksha Trading Services Limited, 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 has plans to spend up to Rs 25,000 crore on its retail venture, which will include grocery and speciality stores and hypermarkets in 6,000 towns and around 700 cities, 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. Indeed, even though organized retail is in its nascent stage, some 17 per cent of the 800 small retailers surveyed said they had already reduced staff.