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Home > Business > Special

Retail reality: The true story

BS Reporter in New Delhi | September 19, 2007

The opposition to large retail shops seems to be growing, and broadening to take in domestic retail chains as well as the international giants that want to enter the Indian market. Admittedly, such opposition flies in the face of the received wisdom: studies based on extensive field surveys have concluded that the spread of organised retailing will not hurt millions of small mom-and-pop, or kirana, stores across the country. But the experience so far (and it is early days yet) suggests that this may not be entirely true.

News reports, including those published in this newspaper, have cited instances of small shops closing down or losing business in areas where large retailers have set up shop. So, did the earlier surveys and studies paint an incorrect picture?

Not necessarily so, since there are many factors at play. First, due to the unavailability of large amounts of land in or near city centres, the spread of big retail outlets has been fairly slow so far. Even in the areas where big retail shops have been set up, the natural growth of the market has been enough to cushion the impact on small kiranas, which in any case have lower cost structures and more flexibility than big chains. The real impact of big retail shops will be seen only when their growth after project stage, some months after opening date, is faster than the natural growth in the market.

In cities like Bangalore, the presence of a cash-and-carry segment has ensured that some part of the economies of sourcing associated with large retail chains are passed on to small kiranas as well. The kiranas also have as allies the FMCG majors who live with the knowledge that retail majors will drive tough supply bargains; in order to be less dependent on such low-yield outlets, FMCG firms have been known to offer kiranas better discounts and more credit so that they stay alive in the market and continue to provide alternative points of sale. The final result of the competition between big and small retailers will depend on how some of these factors play out.

Any policy intervention has to take into account several factors. For one, any change of technology or scale will inevitably result in market shifts, which in turn could yield to downside effects like job losses, whether it is in retailing or in powerlooms replacing handlooms. The policy response in each case has to be to ensure that there are as few difficulties in absorbing the displaced in other parts of the economy -- this implies facilities for re-training as well as ensuring that other parts of the economy grow well.

Tax breaks for enterprises employing more labour (instead of for those employing more capital) and more labour flexibility for textile/garment firms wanting to expand operations come to mind immediately as some logical policy options. Any social cost-benefit analysis must also include the benefits reaped by millions of customers across the country through lower retail prices as well the benefits to farmers once the substantial wastages in the distribution chain get reduced.

The policy responses being planned -- a cess on large retailers, or restricting them to the outskirts of cities -- are not very desirable because the government is then weighing in against efficiency. While it may be legitimate to try and ensure that small shopkeepers will not get affected, it also means that consumers will pay higher prices and that farmers will not benefit from lowered wastages in the supply chain.

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