Big retailers vs small businesses

Big retailers vs small businesses

By Edy Priyono

JAKARTA (JP): Public discourse on the impact of the presence
of large retailers on small businesses has recently heated up
again, especially in connection with small businesses in the
retail trade sector. There are at least three phenomena which
have sparked this debate.

First, there have been changes in regulations on presence of
foreign investment in the retail business. Previously, the
retail trade business was still in the "negative list" of sectors
off-limits to foreign investment.

But since 1998, this regulation has been changed, and foreign
investors are now free to become involved in retail trade, with
certain restrictions. This has resulted in the emergence of a
number of foreign retailers, particularly in large cities.

Second, there has been a tendency for large retailers to
expand their operations to cities other than provincial capitals.
As a result, the pattern of competition in medium-sized cities
has begun to shift because of the presence of new players, i.e.,
these large retailers, which previously operated only in large
cities.

Third, there is the "Indomaret" phenomenon. Everybody knows
that Indomaret is part of an enormous business group. But when
viewed as individual outlets, Indomaret can be categorized as a
small business, and it is therefore free to establish itself in
the neighborhoods of the less advantaged. This is now felt to be
one key factor in the decline of small retail outlets in
residential areas.

From the viewpoint of small businesses, it is clear that they
are now faced with an entirely different competitive environment
from the one they previously faced. The presence of foreign
retailers has tightened competition in the retail business in
large cities, encouraging large domestic retailers to expand into
medium-sized towns.

And the expansion of these large retailers has, in turn, been
seen to threaten the very existence of small businesses. But is
this really the case?

In 1998, in cooperation with the Center for Economic and
Social Studies, The Asia Foundation conducted a study
specifically to analyze the impact of large retailers on small
businesses.

The results of this study showed that the presence of large
retailers does, in fact, have a negative impact on small
businesses.

Small businesses are constantly being forced out of the market
(to "exit") by the presence of large retailers, which are usually
located in modern shopping centers. The meaning of "exit" here
is not simply that these businesses are forced to change
location, but rather that they actually go bankrupt.

It is difficult to calculate the exit rate, because it is hard
to trace all the small businesses forced into bankruptcy by the
presence of large retailers. But the study did succeed in
discovering the characteristics of small businesses that are
forced into bankruptcy.

Small businesses that exit the market are usually individual
businesses without formal legal status. In terms of length of
time in business, on average the businesses that exit are fairly
old ones (11 years). In terms of their turnover, businesses that
went bankrupt had an average daily turnover of Rp 318,000.

In other words, the small businesses that go bankrupt are
usually fairly old, non-incorporated businesses with relatively
small turnovers.

The negative impact of the presence of large retailers is not
only in the form of bankruptcies. Of those small businesses that
do survive, around 70 percent state that they have experienced a
decline in turnover since the large retailers appeared.

The amount of decline in turnover averages 34 percent, quite a
significant figure.

In terms of characteristics, the small businesses whose
turnovers have declined are small businesses that sell more or
less the same kinds of goods that the large retailers sell. Even
though their prices are not much different, the large retailers
are seen as providing a more comfortable environment, and so they
attract more customers. On average, the small businesses' number
of customers per day declined from 44 to 32.

This decline in sales turnover ultimately has implications for
the work force. Around 11 percent of the respondents said that
they had been forced to lay off one or two of their employees.

The conclusion can thus be drawn that what many parties have
feared, i.e. that the presence of large retailers is pushing out
some small businesses, is actually happening. The question is,
do large retailers have only negative impacts on small
businesses?

This does not turn out to be the case. The results of the
study showed that as well as having negative impacts, the
presence of large retailers also brings positive effects for
small businesses.

But the small businesses that experience these positive
effects are different from those that suffer the negative
effects.

In fact, quite a few new small businesses have emerged as a
result of the presence of large retailers. In our limited
sample, the entry rate was 22 percent. That is, 22 percent of the
small businesses operating near large retailers were small
businesses whose appearance was stimulated by the presence of the
large retailers.

Indeed, if what is counted is the existence of modern shopping
centers (and not just the existence of large retailers), the
entry rate is even higher, around 56 percent. This means that 56
percent of the small businesses operating in modern shopping
centers opened up because of the availability of business
locations in these new shopping centers.

And although they are few (around 6 percent), there are also
some small businesses that have experienced increases in turnover
because of the presence of large retailers. These businesses'
increase in turnover, compared with before the large retailers
were present, averaged around 18 percent.

The small businesses that have experienced an increase in
turnover are generally those that sell different types of goods
from those sold by large retailers. Or, if they do sell the same
types of goods, small businesses are able to maintain their
turnover by selling at lower prices or by providing better
service.

Although a quantitative picture was not available, it is
evident that a fair number of local workers have been recruited
by large retailers or by smaller shops in modern shopping
centers. However, usually the qualifications required are higher
than those generally needed to work in small businesses.

The above overview shows that it is not easy to evaluate the
impact of the presence of large retailers on small businesses.
It is true that some small businesses have been pushed out, but
there are also new small businesses that have emerged because of
the presence of large retailers. It is also true that there are
many whose turnover has fallen, but there are also some that have
had an increase in turnover because of the presence of large
retailers.

The study also showed that it is not the case that small
businesses are completely unable to compete with large retailers.
In terms of comfort, it's true, small businesses are outclassed.
But quite a few small businesses are able to sell their goods at
lower prices, and provide better service, than the large
retailers.

For these reasons, the government and other parties concerned
should not be overly worried about the existence of large
retailers. What we should be concerned about is not the presence
of large retailers as such, but the business practices that they
employ. With the Law Against Monopolies and Unfair Business
Practices, the government must no longer hesitate to take action
against anyone (including large retailers) who is found to use
unhealthy business practices.

If everything is done fairly, there is nothing to fear. If
some small businesses are pushed out, the question is whether
they are pushed out by unfair practices of the large retailers or
by other factors. Being pushed aside by fair competition is no
bad thing, and there is nothing to be prouder of than succeeding
in fair competition.

The writer is economic program officer at The Asia Foundation
in Jakarta.