Superstores will kill the small retailer

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8 Dec 2012

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Superstores will kill the small retailer

The rosy picture and tall claims about FDI in retail look great if one goes by the accounts coming out of the UPA Government, but they are just great on paper. Fortunately for us, there are so many studies on the ill effects of Walmart and such other megastores on local economies (research papers and the like) that we don’t need to scratch our heads thinking about it.

The claim that it will not hurt local retailers is baseless. In a zero-sum game, when there is a fixed amount of money to be spent on retail purchases by households in that area, large stores capture sizable amounts of the market and thus local retailers lose equal amounts of business as per study by Blair and Kumar in 1997.

One of the claims the UPA Government makes is that it will not hurt most of the retailers as such stores are allowed only in cities with populations of more than 100,000. While that argument alone proves it will hurt at least some retailers, let us go deeper and examine the argument more closely

Superstores require huge spaces — for building as well as for parking. A superstore may need anything between 100,000 to 250,000 square feet of building space and almost 3 times that for parking space. Given the compact nature of our cities, it would be impossible to find such open spaces within cities’ normal residential limits. Even if such spaces can be found, superstores may not go for them as customers normally like to avoid traffic and congested areas. When a superstore is opened in the outskirts of a city, isn’t it going to attract customers from the surrounding villages and suburban areas? Retailers from the surrounding villages will suffer as a result. Another side effect of superstores in the USA is the downfall of downtown areas. Once blustering retail shopping hubs, many such locations have now turned into ghost towns.

In the USA, between 1992 and 2002, the grocery industry lost 13,000 stores and thousands of jobs as per Retail Forward. As per Iowa State University study, during the first decade after Walmart arrived in Iowa, the State lost 555 grocery stores, 298 hardware stores, 293 building supply stores, 161 variety stores, 158 women’s apparel stores, 153 shoe stores, 116 drug stores, and 111 men’s and boys’ apparel stores. Fast forward these numbers 10 years from now for any given Indian city — say Pune — and think about the impact on the city as well as surrounding suburbs and villages.

When a buyer spends money on local retailer most the money stays within the community. The small retailer’s world — family, spending, suppliers, banks, schools, accountants etc. — is mostly local and so the money will circulate in the local economy and help it thrive. For the superstore nothing will be local except some of its employees, thus taking away money from the community without giving much in return. Various studies suggest that superstores return only 8 to 10 per cent of their revenue to local economies mostly in the form of payroll. The rest of the money flows out of State to the corporate headquarters (which will not be in India) and to the overseas suppliers.

Another protection given by USA Government is that superstores must source 30 per cent of the goods from India. That means 70 per cent of goods will come from other countries! This guarantees that whatever business the superstores are going to take away from local retailers, 70 per cent of that business will be taken away from local manufacturers as well. Superstores will not only hurt retailers, they will hurt manufacturing sector as well.

Currently the threat is from general merchandise superstores like Walmart, however it is not going to stop there. IKEA, a home-furnishing and kitchen store, has already made announcements to enter India. Other sector-specific counterparts like Home Depot (building material, construction), Office Max (school and office supplies), Best Buy (electronics and appliances), Walgreen (drugs and cosmetics) etc. will further alter the structure of local retail markets and force small town retailers to change their ways of doing business or force them to go out of business.

As per a study by Stone in 1997 in the USA, on the one hand, mass merchandisers threaten the survival of many small town retailers because they offer low prices and a wide range of goods all under one roof.  Research says the expansion of stores like Walmart (that offer one-stop shopping) and sector-specific stores like Home Depot have forced some local retailers to close their doors because they cannot compete with these large, nationwide chains.

But not learning from others’ mistakes seems to be a very Indian thing to do.

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  • Yoga

    Quote:” As per a study by Stone in 1997 in the USA, on the one hand, mass merchandisers threaten the survival of many small town retailers because they offer low prices and a wide range of goods all under one roof. Research says the expansion of stores like Walmart (that offer one-stop shopping) ”

    What is wrong if prices become low if one-stop shopping makes it more efficien. Isn’t that what we want isn’t that what helps the consumer eventually?

  • Manish

    This article, although well intentioned, toes a left liberal line against FDI. Fact of the matter is that it blindly toes BJP’s line on this issue. I was expecting a balanced and well researched article on the topic. Moreover, when writing such article one needs to decide whose side you are. In this case the author is only advocating interest of small businesses. What about consumer’s interest? If one compares retail market (except food items) in USA and India, one would realize that how cheap things are in USA most of the time and things are pretty expensive in India. This is possible because of the economy of the scale. One only look at the shoddy and expensive furniture sold in India (atleast in Pune). At the end of the day free market is always good for everyone. While providing protection to small retailers we’ll end up providing protection to Big Bazaars and Reliances of the world. The other argument author makes is about large space requirements. It is nothing but a red herring. These businesses are private businesses and let them decide where they rent/acquire such large spaces. We just need to make sure that zoning laws are complied with and their establishments are neither nuisance nor threat to the safety of general public.

  • Gurgaon Resident

    Yoga and Manish, You guys are only thinking in one direction about what is better for consumer. This same consumer in India is a worker as well.
    This Walmart consumer can’t spend money unless he has a job.
    Walmart will be sourcing products from China and other countries.
    Because of this, Manufacturing jobs will start going out of the country.
    Even today, China export to India is $60 billion as compared to Indian export to China which is $20 billion. So we are sending $40 billion worth of manufacturing jobs to China.

    I have lived in USA for 15 years in IT industry. It was always very cheap to buy goods at Walmart but our salary hasn’t gone up in last 12 years. It is at same level since 2000 market crash. Bonuses are going away. Wallstreet laid of 300000 workers in last 3 years only.
    If I live in USA, I would prefer to buy a $50 Made in USA shirt rather than $20 made in China shirt, as long as I keep making more every year to catch up with inflation.

    100 million people ( out of 300 million population ) in USA are on living on government welfare schemes ( like social security, food stamps ). If govt stops paying these people, there will be riots on American streets.
    Because of this , USA is having trade deficit of $1 trillion every year.
    India is also going in the same direction i.e. to become a consumer nation only instead of exporter nation like china and Germany.

    Now, you decide who is wrong , who is right ?

  • Krishna

    The article claims, “That means 70 per cent of goods will come from other countries!” – Where did the author get this fact from, if at all it is a fact? What if the Indian manufacturing sector is capable of supplying majority of the superstores requirement? If Indian manufacturing sector is not able to meet such a huge demand, what is holding it back from becoming a competent or a challenger to, say, China? Instead of a blindly opposing FDI in retail with borrowed premises, I wonder why BJP and other opposition parties are not using this chance to pressure the government to bring about the manufacturing sector reforms first. Also, I wonder if the Indian superstores have the caveat of at least procuring 30% from within India. What if Indian superstores start procuring “70%” of goods from China or other countries?

    “But not learning from others’ mistakes seems to be a very Indian thing to do.” — I would say not learning how to put forward good arguments seem to be a very Indian thing to do.

  • Manish

    @Gurgaon Resident, your arguments are like argument of Govt. of India during the license permit raj when they used to have a list of items reserved only for small scale industry. During that period, they dis-incentivised investments into such sector. Investors were unable to take advantage of economy of scale. Which was bad for everybody. Just imagine if entrepreneurs were given free hand in manufacturing in fifties, we would have had brands competing Nikes making shoes, brands competing Fisher Price making toys so and so forth. But all these years were squandered by phony protectionist policies. Protectionism only feeds and breeds cronyism. And, as a result nobody, except for few who control supply chain and manufacturing, are better off. By the way, the current FDI allowance is only limited to 51%. That means 49% of the business would be owned by Indians. The debate ought not to be about whether FDI is good or not, but rather about how it is to be regulated. If Indian manufacturer cannot produce superior quality goods, then they deserve to die. As you yourself pointed out that you work in IT. The only reason you succeed in IT is because you are world class and every one accepts that. If you were not world class your job would be going to other countries/people. The only grudge I have against the way current FDI has been implemented is that GOI has not been able to extract any concession against it. GOI should have pressured USA and other western countries to give easier access to their market to our services companies (i.e. easier Visa, or special Visa for Indians) against FDI allowance. This could also be used as negotiation chip when negotiating about Social Security Taxes Indians contribute while they work in USA (Indian looses large sum of money as this tax). The dogmatic approach of protectionism has not helped us in the last sixty years and should not now be defended.

  • allwyn

    this is nothing but hatred for the congress party! Here’s why china’s products are great for us from :

    India should GRAB WITH BOTH HANDS whatever China “dumps” into India

    Here’s a question I received on FB messaging (pl. note I usually don’t like to respond to FB messaging. Pl. only comment on this blog or send me an email).

    Why do we have import and export duties? Will import duties not inhibit good foreign products from being used in India? If they are used the domestic manufacturers will have to raise their standards… and with export duties, will it not stop valuable foriegn exchange from coming to india?

    But i have another question, will no import duty result in chinese goods being dumped in India? Will it not damage our fledging manufacturing sector.?

    Well, why do we have import and export duties?

    In the public finance model based on first principles, taxes are raised only from voters (not companies) based on ability to pay (price discrimination). Such a model allows TOTAL free trade and exchange and raises money only from voters at the end of the process by which they have made their money.

    So in such a model, there would be no export or import duties, for these merely block exports or imports, i.e. trade. And anything that blocks trade harms the citizens of a country. Fortunately, with organisations like WTO, the world is incrementally moving towards abolition of all such duties.

    I would strongly recommend the unilateral abolition of all export and import duties in India. That is one of the quickest ways to enrich India.

    Dumping of goods by China

    There is nothing more absurd in this world than the “infant industry” argument. Are Indians infants? Mental drarfs? Fools? Incompetents?

    If not, why do they produce “infant industries”? Why not “adult industries” that are able to stand on their own feet?

    The reality is that ALL infant industry arguments are a DIRECT example of crony capitalism, whereby businesses pay off politicians for favours to create monopolies for them, and protect them against competition.

    I therefore TOTALLY oppose any “infant industry” argument. So no, please don’t tell me that 65 years after independence Indians are still busy producing “fledgeling” or infant industries. It is shameful beyond imagination that grownups produce infant industries that can’t stand on their own feet. Let Indians grow up.
    The fastest way to grow up is to face COMPETITION.

    So let China “DUMP” whatever it likes on India. We benefit from this dumping in two ways:

    a) Indian consumers get products at cheap prices, and become richer

    b) Indian industry is FORCED to grow up.

    China loses in a BIG way by dumping:

    a) It is giving away its wealth at a LOSS to India.

    So go grab everything that China dumps into India. It will IMPOVERISH China and ENRICH India. Nothing better than this, is there?

    Take full advantage of China’s stupidity while it lasts.

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