Big retailers vs small businesses<\/p>\n
By Edy Priyono<\/p>\n
JAKARTA (JP): Public discourse on the impact of the presence
\nof large retailers on small businesses has recently heated up
\nagain, especially in connection with small businesses in the
\nretail trade sector. There are at least three phenomena which
\nhave sparked this debate.<\/p>\n
First, there have been changes in regulations on presence of
\nforeign investment in the retail business. Previously, the
\nretail trade business was still in the \"negative list\" of sectors
\noff-limits to foreign investment.<\/p>\n
But since 1998, this regulation has been changed, and foreign
\ninvestors are now free to become involved in retail trade, with
\ncertain restrictions. This has resulted in the emergence of a
\nnumber of foreign retailers, particularly in large cities.<\/p>\n
Second, there has been a tendency for large retailers to
\nexpand their operations to cities other than provincial capitals.
\nAs a result, the pattern of competition in medium-sized cities
\nhas begun to shift because of the presence of new players, i.e.,
\nthese large retailers, which previously operated only in large
\ncities.<\/p>\n
Third, there is the \"Indomaret\" phenomenon. Everybody knows
\nthat Indomaret is part of an enormous business group. But when
\nviewed as individual outlets, Indomaret can be categorized as a
\nsmall business, and it is therefore free to establish itself in
\nthe neighborhoods of the less advantaged. This is now felt to be
\none key factor in the decline of small retail outlets in
\nresidential areas.<\/p>\n
From the viewpoint of small businesses, it is clear that they
\nare now faced with an entirely different competitive environment
\nfrom the one they previously faced. The presence of foreign
\nretailers has tightened competition in the retail business in
\nlarge cities, encouraging large domestic retailers to expand into
\nmedium-sized towns.<\/p>\n
And the expansion of these large retailers has, in turn, been
\nseen to threaten the very existence of small businesses. But is
\nthis really the case?<\/p>\n
In 1998, in cooperation with the Center for Economic and
\nSocial Studies, The Asia Foundation conducted a study
\nspecifically to analyze the impact of large retailers on small
\nbusinesses.<\/p>\n
The results of this study showed that the presence of large
\nretailers does, in fact, have a negative impact on small
\nbusinesses.<\/p>\n
Small businesses are constantly being forced out of the market
\n(to \"exit\") by the presence of large retailers, which are usually
\nlocated in modern shopping centers. The meaning of \"exit\" here
\nis not simply that these businesses are forced to change
\nlocation, but rather that they actually go bankrupt.<\/p>\n
It is difficult to calculate the exit rate, because it is hard
\nto trace all the small businesses forced into bankruptcy by the
\npresence of large retailers. But the study did succeed in
\ndiscovering the characteristics of small businesses that are
\nforced into bankruptcy.<\/p>\n
Small businesses that exit the market are usually individual
\nbusinesses without formal legal status. In terms of length of
\ntime in business, on average the businesses that exit are fairly
\nold ones (11 years). In terms of their turnover, businesses that
\nwent bankrupt had an average daily turnover of Rp 318,000.<\/p>\n
In other words, the small businesses that go bankrupt are
\nusually fairly old, non-incorporated businesses with relatively
\nsmall turnovers.<\/p>\n
The negative impact of the presence of large retailers is not
\nonly in the form of bankruptcies. Of those small businesses that
\ndo survive, around 70 percent state that they have experienced a
\ndecline in turnover since the large retailers appeared.<\/p>\n
The amount of decline in turnover averages 34 percent, quite a
\nsignificant figure.<\/p>\n
In terms of characteristics, the small businesses whose
\nturnovers have declined are small businesses that sell more or
\nless the same kinds of goods that the large retailers sell. Even
\nthough their prices are not much different, the large retailers
\nare seen as providing a more comfortable environment, and so they
\nattract more customers. On average, the small businesses' number
\nof customers per day declined from 44 to 32.<\/p>\n
This decline in sales turnover ultimately has implications for
\nthe work force. Around 11 percent of the respondents said that
\nthey had been forced to lay off one or two of their employees.<\/p>\n
The conclusion can thus be drawn that what many parties have
\nfeared, i.e. that the presence of large retailers is pushing out
\nsome small businesses, is actually happening. The question is,
\ndo large retailers have only negative impacts on small
\nbusinesses?<\/p>\n
This does not turn out to be the case. The results of the
\nstudy showed that as well as having negative impacts, the
\npresence of large retailers also brings positive effects for
\nsmall businesses.<\/p>\n
But the small businesses that experience these positive
\neffects are different from those that suffer the negative
\neffects.<\/p>\n
In fact, quite a few new small businesses have emerged as a
\nresult of the presence of large retailers. In our limited
\nsample, the entry rate was 22 percent. That is, 22 percent of the
\nsmall businesses operating near large retailers were small
\nbusinesses whose appearance was stimulated by the presence of the
\nlarge retailers.<\/p>\n
Indeed, if what is counted is the existence of modern shopping
\ncenters (and not just the existence of large retailers), the
\nentry rate is even higher, around 56 percent. This means that 56
\npercent of the small businesses operating in modern shopping
\ncenters opened up because of the availability of business
\nlocations in these new shopping centers.<\/p>\n
And although they are few (around 6 percent), there are also
\nsome small businesses that have experienced increases in turnover
\nbecause of the presence of large retailers. These businesses'
\nincrease in turnover, compared with before the large retailers
\nwere present, averaged around 18 percent.<\/p>\n
The small businesses that have experienced an increase in
\nturnover are generally those that sell different types of goods
\nfrom those sold by large retailers. Or, if they do sell the same
\ntypes of goods, small businesses are able to maintain their
\nturnover by selling at lower prices or by providing better
\nservice.<\/p>\n
Although a quantitative picture was not available, it is
\nevident that a fair number of local workers have been recruited
\nby large retailers or by smaller shops in modern shopping
\ncenters. However, usually the qualifications required are higher
\nthan those generally needed to work in small businesses.<\/p>\n
The above overview shows that it is not easy to evaluate the
\nimpact of the presence of large retailers on small businesses.
\nIt is true that some small businesses have been pushed out, but
\nthere are also new small businesses that have emerged because of
\nthe presence of large retailers. It is also true that there are
\nmany whose turnover has fallen, but there are also some that have
\nhad an increase in turnover because of the presence of large
\nretailers.<\/p>\n
The study also showed that it is not the case that small
\nbusinesses are completely unable to compete with large retailers.
\nIn terms of comfort, it's true, small businesses are outclassed.
\nBut quite a few small businesses are able to sell their goods at
\nlower prices, and provide better service, than the large
\nretailers.<\/p>\n
For these reasons, the government and other parties concerned
\nshould not be overly worried about the existence of large
\nretailers. What we should be concerned about is not the presence
\nof large retailers as such, but the business practices that they
\nemploy. With the Law Against Monopolies and Unfair Business
\nPractices, the government must no longer hesitate to take action
\nagainst anyone (including large retailers) who is found to use
\nunhealthy business practices.<\/p>\n
If everything is done fairly, there is nothing to fear. If
\nsome small businesses are pushed out, the question is whether
\nthey are pushed out by unfair practices of the large retailers or
\nby other factors. Being pushed aside by fair competition is no
\nbad thing, and there is nothing to be prouder of than succeeding
\nin fair competition.<\/p>\n
The writer is economic program officer at The Asia Foundation
\nin Jakarta.<\/p>",
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