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.