Copying selected portions from http://econ.upm.edu.my/ijem/vol2no2/bab07.pdfInt. Journal of Economics and Management 2(2): 323 – 342 (2008)
Liberalization of Retail Sector and the Economic Impact of the Entry of Foreign Hypermarkets on Local Retailers in Klang Valley, Malaysia
The primary purpose of this research is to investigate the impact of liberalization of retail sector via the presence of foreign hypermarkets in Malaysia on local retailers. Both quantitative and qualitative methods (survey and interviews) were used to collect and analyze the data.
The presence of large-scale foreign retailers has a significant economic and social impact on local retailers; especially on traditional small businesses such as ‘momand- pop’ stores (Dawson, 2003; Harris, 2006; Suryadarma et al., 2007). There are positive and negative impacts on local retailers. However, studies on this specific issue have provided evidence that the impact on local retailers is mostly negative (e.g. Farhangmehr et al., 2001; Da Rocha and Dib, 2002; Tonsoboon, 2003; Hitoshi, 2003; Sang, 2003; Seong, 2003; Wang, 2003; Bianchi and Mena, 2004).
The ability of these large-scale retailers to offer a wide range of goods and services at much lower prices under-one-roof exerts a profound effect on nearby local retail businesses. In this context, small local businesses will be either forced out of the business or forced to downsize as their consumer base declines when a new large-scale retailer opens its operations in a domestic town (Renkow, 2005; Jia, 2005; Irwin and Clark, 2006).
Thailand has been cited as one of the countries in which the expansion of international retailers has caused dislocating effects on traditional retail businesses. It is claimed that the number of local retailers has declined by 2 to 3 per cent per annum during the period of 1997 – 2001 (Tosonboon, 2003).
There is widespread belief that different types of retail businesses will be affected differently by the presence of large-scale retail outlets (Stone, 1988, 1995 and 1997; Peterson and McGee, 2000; Brennan and Lundsten, 2000; Artz and Stone 2006). Small retail businesses that sell different products from the large-scale retailers will be positively affected; meanwhile, small retail businesses that sell similar products (especially those selling groceries) to the foreign retailers tend to suffer more losses due to their lack of competitiveness.
Even though most studies have focused on the negative effects of international retailers on domestic retail businesses, there are positive effects as well. The positive impact of large-scale foreign retailers on local retailers is largely in the form of the introduction of new retail channels or modern outlets, the introduction of new marketing and merchandising methods, improved information management methods, and larger investment in the modernization of the sector as a whole (Dawson, 2003). Despite some positive effects, it is generally contended that the increasing presence of international retailers in the host countries may have a depressing effect on the well-being of small local retail businesses in which the negative impact generally outweighs the positive effects mentioned above.
The best known research on Wal-Mart impacts was pioneered by Stone (1988, 1995, 1997 and 1999). Thereafter a number of studies was conducted on the similar issue by a number of scholars namely; Peterson and McGee 2000; Seiders and Tigert 2000; Davidson and Rummel 2000; Artz and McConnon 2001; Farhangmehr, Marques and Silva 2001; Da Rocha and Dib 2002; Tosonboon 2003, Bianchi and Mena 2004; Uusitalo 2004. Generally most of these studies used the same Liberalization of Retail Sector and the Economic Impact of the Entry of Foreign Hypermarkets methodology with slight variation in the scope of analysis. Nevertheless, the main theme was to examine the impact of the expansion of large retailers such as Wal- Mart, Target, K-Mart, etc. on surrounding retail establishments. The results seemed to be consistent in most studies which suggest that there is a link between the entry of large retailers and the deterioration of the local businesses. Stone (1988) undertook first study to address Wal-Mart’s impact on local small merchants in 17 rural Iowa towns. Using census data, he concludes that per capita sales increased faster in towns with Wal-Mart stores than in the average towns across the State. It also reported that the retail sales in Iowa towns within 20-mile radius declined by nearly 10 per cent after five years. The author also stressed that the impact of Wal-Mart was more ominous for Iowa’s smallest town whereby newly opened Wal-Mart stores drained as much as $200,000 a year from towns under 1000 people. It is also argued that certain type of retail outlets tend to suffer severe market share losses such as clothing, drug, jewellery, auto-part and hardware stores. This finding is supported by another similar study conducted by Stone et al. (1999) on the changes in the sales of existing businesses in local trade areas in Mississippi. The results of this study show strong evidence that the gains for Wal-Mart supercenters were matched by corresponding losses for existing businesses in the trade area.
In slightly different perspective, Artz (1999) analyzed the short-term and longterm impacts of Wal-Mart on the retail market structure in Maine. The finding suggest that there are significant changes in retail market structure in the Wal- Mart host towns as well as surrounding communities in Maine. It is argued that some businesses benefited from the presence of Wal-Mart while other businesses do not gain substantial benefit. The study revealed that Wal-Mart host towns experienced greatly increased rates of growth in their general merchandise sector after Wal-Mart arrived. Meanwhile, the retail centres of surrounding communities were also impacted by Wal-Mart, whereby the general merchandise sector in this area declined or grew at a slower rate than did the general merchandise sector in Wal-Mart host towns in Maine.
A similar study was conducted by Peterson and McGee (2000). They surveyed small retailers in several towns in Midwestern US communities three years after Wal-Mart’s arrival in order to identify how they responded to the entry. It is found that almost 52 per cent of the small retailers reported that their business was affected negatively with the arrival of Wal-Mart. Meanwhile, 48 per cent indicated that the impact was either neutral or positive. In terms of the degree of Wal-Mart’s impact on incumbent retailers (stores sales), 30 per cent of the respondents reported that sales dropped more than 10 percent, while 14 per cent of respondents claimed that their sales increased up to 10 per cent. On the other hand, Seiders and Tigert (2000) examined the impact of the entry of supercenter (Meijer, Wal-Mart, Kmart and Target) on traditional food retailer in four markets (Victoria, Texas; Gainesville, Georgia; Columbus, Ohio; International Journal of Economics and Management Omaha, Nebraska) and found that the supercenter had captured 15 to 20 per cent of the retail food business in three of the four markets studied. This study also explored the changes in consumer preference structures (store choice attributes), consumers’ willingness to make tradeoffs in choosing new formats that entered the markets, and the ability of the new formats to win on key store attributes. It is found that the supercenters did change consumer preference structures for about 20 per cent of the households. It is argued that consumers primarily chose traditional supermarkets for convenience, quality, and service, and chose supercenters for lower price and assortment, including both food and non-food one-stop shopping. Davidson and Rummel (2000) provided additional evidence that the arrival of Wal-Mart store disrupts the retailing patterns in the domestic markets. The findings suggest that Wal-Mart host towns and Wal-Mart neighbouring towns (within 15 miles) reacted differently to the emergence of a Wal-Mart. It is claimed that Wal-Mart host towns experienced significant increases in nearly all categories of retail trade after Wal-Mart presence in the town for four years, while Wal-Mart neighbouring towns experienced a decline of only a marginal increases in retail trade during the same time period. It is argued that the overall increase in all retail sales categories experienced by Wal-Mart host towns is at the expense of some local retailers/merchants.
The above discussion largely focused on the impact of Wal-Mart. Farhangmehr et al. (2001) took the first initiative to examine the impact of different retail format than Wal-Mart, which is hypermarket, on consumers and local retailers in Braga, Portugal. Generally the findings are consistent with the studies presented above. The study reveals that most local retailers perceived that the hypermarkets have affected them negatively. Meanwhile, consumers generally prefer hypermarket due to its convenience and lower prices. Recently, Tosonboon (2003) described the impact of world class distributors on the retail industry in Thailand especially on the distribution system which consists of three main parties namely; consumers, distributors and suppliers/producers. According to Tosonboon, the arrival of world class distributors such as Big C, Lotus (Tesco), Carrefour and Makro has led to closure of department stores and half of local supermarkets. Only the larger and stronger firms were able to survive. It is claimed that between the year 2000 and 2001 about half of the department stores in Thailand closed. Generally most studies on this issue have focused on evaluating the impact of the entry of large format retailers on local retail businesses. Some studies extend the scope of the issue by looking at the issue of competitive strategies and suggested some strategies that could be used by small local retailers to effectively withstand the fierce competition created by large format retailers (e.g. Da Rocha and Dib 2002; Bianchi and Mena 2004; Uusitalo 2004). For instance, Da Rocha and Dib (2002) examined the entry of Wal-Mart into Brazil and the subsequent competitive moves by local retailers’ as a foreign entrant challenged the established rules in the industry during the pre-entry and entry phases. Liberalization of Retail Sector and the Economic Impact of the Entry of Foreign Hypermarkets
A similar study was conducted by Bianchi and Mena (2004) focusing on the actions taken by Chilean retailers to defend themselves effectively against the attempts of foreign retailers to operate in their market. Chilean retailers have consistently and fiercely defended their local market from competitors and this strong competition has hindered the internationalization attempts of large multinational retailers, which have not performed well in Chile. The finding is supported by a study conducted by Uusitalo (2004) on the entry of hard-discount chain Lidl in Finland market.
In sum, even though there are not many comprehensive studies on the issue of impact of large retailers on local retailers, there is clear evidence that the entry and expansion of large foreign retailers will ultimately exert impacts on the existing small businesses. Whether the impact of this large foreign retailer on local retailers is positive or negative, it depends on various aspects as discussed in the above literature such as the type of local retail businesses, the proximity of existing business and the new entrant, the size and competitiveness of local retail businesses and whether the local business are willing to take competitive measures to withstand the strong competition from new entrant.
FINDINGS AND DISCUSSION
The Impact of Hypermarket on Local Retailers’ Businesses Based on Table 4, most of the retailers (64.4 percent) have reported that their
business was affected by the presence of hypermarkets in their business area while remaining 35.6 per cent reported that they were not affected by the presence of hypermarkets. Within the different type of retail businesses in the sample, provision shops and minimarkets are the most affected kind of stores which accounted for 42.2 per cent. This is followed by restaurant and bakery (10.4 per cent), clothing/apparel (3.0 per cent), telecommunications (2.2 per cent), bookstores and stationary (3.7 per cent) and electrical/household appliances (1.5 per cent).
Even though 64.4 per cent of the retailers in the sample claimed that they were largely affected by the presence of hypermarkets, in terms of the extent of the effect, the responses were generally mixed (refer Table 5). Thirty seven percent of the retailers responded that the extent of the impact of hypermarkets on their business is moderate, while 32 per cent of the retailers claimed that effect was very intense or competitive. The remaining 30.4 per cent of the retailers claimed that the effect was very little or marginal.
Within the type of retail businesses in the sample, provision shops and minimarkets seemed to face a very stiff competition, as 23 per cent of them claimed that they cannot compete with the hypermarkets because hypermarkets are literally very competitive due to their ability to provide wide range of products at much lower prices. Some of the provision shops and minimarket said that their business was severely affected by the presence of hypermarkets in their business area which is reflected in the fall of sales and number of customers to almost 50 per cent.
Some shop owners who previously had two or three shop lots, had to close down one of their shops as they could not compete with the hypermarkets.
More than 50 per cent of the retailers claimed that number of customer; sales volume and profit did not change much with the presence of hypermarkets, while about 40 per cent reported that it has decreased. Based on Table 6 it is observed that the reductions in the number of employees are substantial (85.9 per cent). Collectively, while a small group of retailers appears to have benefited from the establishment of hypermarkets, but majority of the retailers in the sample reported negative impact especially those in groceries business.
The findings from the survey reveal that the entry of foreign hypermarkets in a town often affects the business environment for many existing local retailers since the newly established hypermarkets, in most of the cases, take market share from the existing businesses. The survey found that some businesses benefited from the presence of foreign hypermarkets (especially complementary type of retail businesses) while others do not (specifically those retail businesses that are related to groceries). The responses of retailers in selected hypermarket host towns provided evidence of its impact on local retail businesses especially on provision shops and minimarkets.
Many smaller local provision shops unable to compete with large foreign hypermarkets have been forced to close down, however there is no statistical data available to proof this claim. In this regards, majority of provision shop and minimarkets owners have expressed their dissatisfaction on the presence of large-scale foreign hypermarkets in their business area. They claimed that there are already too many hypermarkets at the moment and asserted that the government should stop giving approval on opening new foreign hypermarkets especially near residential areas. Even though some of them have made significant changes in their businesses in response to changes in retail market structure brought about by the foreign hypermarkets, it was not known whether the changes made in the business practice has lead to improvement in sales, profit or number of customers. Nevertheless it is argued that the changes made in the business practices were not sufficient to increase their competitiveness in the marketplace. This is because there are significant differences between local retailers
and foreign hypermarkets in terms of size, economies of scale, product assortments, prices and customer services.