ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Regulation of Retail: Comparative Experience

India perhaps has the highest retail density in the world. Economies of scale drive the retail sector towards rapid growth in terms of size of outlets and dominance in geographical and product markets, posing challenges for preservation of genuine competition. Growth in size also has consequences for manufacturers, wholesalers and dealers in the supply chain who face a loss of alternative marketing/retail outlets as monopolies emerge. The growth of large format retail raises serious issues for the urban environment and town planning in dense and rapidly urbanising countries like India. The need for intelligent regulation, therefore, cannot be overemphasised.

SPECIAL ARTICLE

Regulation of Retail: Comparative Experience

Anuradha Kalhan, Martin Franz

India perhaps has the highest retail density in the world. Economies of scale drive the retail sector towards rapid growth in terms of size of outlets and dominance in geographical and product markets, posing challenges for preservation of genuine competition. Growth in size also has consequences for manufacturers, wholesalers and dealers in the supply chain who face a loss of alternative marketing/retail outlets as monopolies emerge. The growth of large format retail raises serious issues for the urban environment and town planning in dense and rapidly urbanising countries like India. The need for intelligent regulation, therefore, cannot be overemphasised.

Anuradha Kalhan (a _kalhan@rediffmail.com) is Reader, Department of Economics, Jai Hind College, Mumbai and Martin Franz is a Lecturer, Department of Geography at the University of Marburg, Germany.

T
he global “retail phenomenon” of the 1990s led by firms like Wal-Mart, Costco, TESCO, Giant, Makro, Carrefour, Aeon, Ahold, Aldi, Metro and others was a result of the material and cultural developments in advanced capitalist countries. Access to cheap capital, huge economies of scale in retail trade, progressive consolidation of purchasing power over suppliers, highly efficient sales forecasting techniques, transportation and replenishment systems (that incorporate state of the art information processing and supply chain logistic systems), expansion of the suburban population and spread of consumerism across all classes were some of these developments (Gereffi 1994; Arnold and Fischer 1994).

On the other hand, the global retail phenomenon now spreading across emerging markets is supported primarily by the political economy of neoliberalism and only a few socio-economic developments comparable to those in advanced capitalist countries. The most noticeable changes are half a century of industrialisation, enlargement of the middle class and growth of national monopoly capital. The changes have come with associated sociocultural transformations, very swift urbanisation and impersonalisation of urban social relations, loss of old identities, a sense of new status definition and individuality asserted by purchase of mass produced, western designed, branded commodities (Warf and Chapman 2006).

With rapid advances in mass media, and in the science of construction and manipulation of consumer consciousness, shopping has become a leading leisure activity. Class is now more often conceived in relation to competitive emulation in consumption rather than in relation to production. This feeds back into and strengthens existing global economic and power structures, leading to a high degree of concentration and control by corporate retailers over both ends of the chain-manufacturing and consumption (Robinson 2004: 78). These are broadly the conditions within which global retailers are locating themselves in developing countries. Intelligent regulation in emerging markets is conspicuous by its absence but it can hardly be overemphasised.

This paper examines the nature of regulation in the context of developments in the corporate retail sector in India, emerging markets in some south-east Asian countries and in Germany. G erman regulation (Christopherson 2006) is considered to be the most effective, for an advanced retailing country, from both points of view, i e, the consumer and competition. The south-east Asian economies referred to help to illustrate the situation in other newly industrialised countries.

1 Retailing in Emerging Markets

During the last decade, the transformation of the retail sector has reached many emerging markets in central and eastern Europe,

august 8, 2009 vol xliv no 32

east Asia and Latin America (Coe and Wrigley 2007, Wrigley and Lowe 2002) pushed by factors like the consolidated market situation in the states of origin of the transnational retail companies, and home market saturation. However, it is the pull factors at work like the rapid liberalisation of retail policies in emerging markets that seem to be more important (Coe and Wrigley 2007; Alexander 1997). The liberalisation agenda itself seems to have been vigorously promoted by the governments and agents of these giant retailers.

The south-east Asian experience is of particular interest and concern in India where rapid changes in the sector are afoot. The retail industry in that region was dominated by wet markets and small, local family-owned stores which operated under limited municipal level regulation regarding location until the end of the colonial period (Mutebi 2007). Thereafter, the sector grew and modernised slowly, mainly with local capital and understate regulation to a greater or lesser degree. This is true for India as well.

The more sophisticated retail outlets like supermarkets first came into prominence during the economic boom of the 1980s and 1990s, experienced by south-east Asian regions in the form of joint or local ventures, sometimes with foreign retailers’ participation through franchise and technical collaborations which took advantage of lax regulatory policies. The aftermath of the 1997 east Asian financial crisis allowed a select group of multinational retail firms to gain a foothold in the emerging markets of Indonesia, Malaysia and Thailand (and also elsewhere in the region) via a combination of mergers and acquisitions, joint ventures and partnerships as many local corporate retailers suffered debt problems and local customers reverted to the traditional markets (Davis 2000).

Indonesia, for example, agreed to adopt more liberalised retail and consumer sector policies in January 1998 in exchange for financial assistance in a deal with the International Monetary Fund (IMF). Since then, the modern retail outlets, particularly the transnational, large format chains have spread rapidly in the heavily populated urban regions. There are 200 large-format retail centres controlled by transnationals in Malaysia, Thailand and Indonesia alone. The drastic changes induced in these host countries due to the internationalisation of retail and the inevitable protest by traditional retailers and intermediaries led to the issue coming up before the regulatory authorities. The most important concerns are the impact of these retail chains on local competition; elimination of small and medium-size retail and their environmentally wasteful use of resources particularly open spaces in densely populated urban centres. Notwithstanding two decades of growth, regulations to deal with international corporate retailing are few and varied with an absence of a one-stop regulatory agency (Mutebi 2007). The regulators seem to be caught between conflicting goals of promoting trade competitiveness and economic efficiency on the one hand and defending the interests of smaller firms, environmental interest groups and consumers on the other. These sectors fall under the purview of multiple ministries and departments or governmental agencies of the central and state administration like that of commerce, trade and consumer affairs. The regulatory mechanisms usually fall into the following categories (1) Competition laws, which broadly promote competition, deal with issues of market structure and functioning,

Economic & Political Weekly

EPW
august 8, 2009 vol xliv no 32

restrictive trade practices e g pricing below cost price (predatory pricing) intended to eliminate competition, issues of abuse of dominance, and price-fixing, (2) Land and property laws that restrict the amount and size of land that can be owned by individual entities, foreign entities and so on, (3) Foreign direct investment (FDI) laws that restrict the amounts and sectors into which FDI can flow,

  • (4) Zoning laws that deal with town planning, land use, and b uilding codes, (5) Municipal laws that deal with business timings,
  • (6) Environmental laws, and (7) Labour laws.
  • Countries like Indonesia, Thailand and Malaysia, which up to the 1990s had a laissez-faire policy towards the retail sector regulations, are now moving in the direction of increasing restrictions on large format retail using a combination of laws and regulations, to impose restrictions on the proliferation of multinational retailers, large-format shops and the domination of the market by a small number of retailers. In many instances these drives are being impelled by indigenous retailers (Coe and Wrigley 2007: 362f). Malaysia, for instance, imposed a five-year renewable ban in November 2003 on the construction of large format retail stores in Klang Valley which includes densely populated urban areas like Kuala Lumpur. New guidelines have lengthened the approval period for developers seeking to develop similar stores in other provincial urban areas from four months to two years and new hypermarkets are prohibited within a 3.5 km radius of city centres or housing areas. Thailand has also passed laws to restrict development of large format stores in inner city areas but it relies, like Indonesia, a lot more on competition laws to control them. The Thai competition commission has powers to search premises without a search warrant and to arrest violators. However the general opinion is that both the competition and enforcement laws are lax and favour the big players.

    While regulatory systems take time to respond to these changes, full or partial liberalisation of the retail sector has been gathering momentum in some other emerging markets from the end of the 1990s like China, Russia and India.

    2 Retailing in India

    Traditional food and grocery retailing in India (which accounts for 70% of retailing) can be best described as dominated by small, privately-owned shops and hawkers and was largely communitybased (Kalhan 2007). This sector where almost all of the retail trade occurs is referred to as the unorganised sector. It employs 40 million people and contributes 10% of the gross domestic product (Kearney 2007). Over time, India has acquired about one retail outlet per 100 people, perhaps the highest retail density in the world. In metropolitan centres, modern and organised retailing has also had a large cooperative segment (encouraged by public policy in the 1960s to combat profiteering by private traders).

    Wholesale food and grocery markets, consisting of private agents, have also been regulated and shaped by policy for the benefit of farmers and consumers from the district-level upwards in the form of agricultural produce and market committees (APMCs) or mandis (wholesale markets). Parallel to the private sector is a large publicly funded procurement and distribution system (PDS), retailing through outlets called “ration shops” where subsidised foodgrains are sold. Rapid developments are occurring under the influence of globalisation and FDI in corporate retailing (Frontline 2007). Over the past decade the sector has increasingly scaled up, with national and local capital leading the way. Many well-known large business groups like Reliance, Tata, Birla, and many lesser known ones like Pantaloon Retail, Subhiksha, Spencer’s Retail, etc, have successfully attempted entry into the sector in supermarket and hypermarket formats. Retailing in India is emerging as one of the largest industries, with a total market size of $320 billion and growing at a compound annual growth rate of 5%. India has been ranked as the most attractive market for global retailers to enter now a ccording to K T Kearney’s Global Retail Development Index for 2007 which ranks 30 emerging countries on more than 25 macroeconomic and retail-specific variables (Kearney 2007). In India food items and groceries account for 70% of the retail pie. Only 0.8% of this food and grocery market was in organised retail in 2005 but given the big opportunity, investments in this segment and consolidation of the supply chain, the penetration of organised retail is increasing rapidly. The growth rate of organised food and grocery retail which was 35.6% in 2005 increased to

    42.5 % in 2006 (Images F&R Research 2007: 74).

    The penetration of organised retail involves lobbying the government for changing regulation so as to enable greater access to real estate, greater corporate penetration of so far regulated wholesale agricultural markets and direct procurement from farmers. Significant in roads have been made in these directions particularly in the period after 1999 as is evident from the deregulation of various sectors associated with retail, the repeal of the Urban Land Ceiling Act (ULCA) which made it possible for individual entities to hold large tracts of land, and permissions for raising FDI limits in large real estate projects. The agriculture policy statement of 2000 encourages corporate participation in a largely familybased agriculture sector and amendments to the essential commodities act allows forward trading in these commodities. Many states have also passed a model agricultural produce and market act on the lines suggested by the central government.

    India still has some restrictive regulation in retail (e g, FDI in multi-product retail is not allowed) but wholesale trade has been open to FDI for the past almost 10 years. The sector has also been witnessing rapid investment by Indian corporate entities. There are various estimates, and even today organised retail accounts for less than 6% of retail out of the present total market estimated to be at $320 billion which is expected to grow rapidly to $1.5 trillion by 2025 (Time 2007). In anticipation of further liberalisation and growth in the sector, Indian business groups are expanding aggressively. FDI is already permitted in the wholesale trade sector (the German transnational retailer Metro has been in Bangalore in the cash and carry business for some years and is now entering Mumbai, the American Wal-Mart has also arrived albeit in the cash and carry format, and many single brand retailers like Nike, Reebok, and Levis have been operating in India for the past 10 years as franchisees of global players). FDI is now permitted in single brand retailing up to 51% but not in multi-brand retail. Further, deregulation of the local wholesale grocery markets has occurred under the Model APMC Act which several states are in the process of enacting (since both agriculture, and trade are state subjects) and further liberalisation of FDI in retail liberalisation is expected.

    The political debate in the country is alive to the impact of the liberalisation of this sector, particularly on the livelihood of small shops, hawkers and farmers. The need for regulation, as in the case of other south-east Asian countries stems from concerns about the effect of corporate retail on efficiency (through its impact on competition), distribution (by its impact on small shop keepers and hawkers and employment) and urban space.

    A series of public protests (which turned violent in some instances) against corporate takeover of retail in India took place in 2007 as a result of which the government is now mulling over the possibility of setting up a retail regulator to level the playing field, monitor the sector for monopolistic practices, predatory pricing, abuse of dominance and issues concerned with cornering of expensive real estate in cities. The regulator will be authorised to take preventive action or refer the cases to the newly instituted Competition Commission (Financial Express 2007).

    2.1 Competition Policy and Regulation

    Competition laws and enforcement are at the heart of retail regulation and they have been in a state of transition in India. The Competition Bill (2002) could not be implemented until September 2007 and then too in an amended form. The Competition Commisssion of India could hold its first meeting only in March 2009 and the Competition Appellate Tribunal envisaged to deal with the legal wrangles in the act is yet to be constituted. The number of supporting staff and technical experts appointed until now is insufficient. Sections 3, 4, 5 and 6 that deal with anticompetitive agreements, abuse of dominance and combinations are yet to be notified. At present the CCI is unable or unwilling to respond to rapid and profound changes in the retail sector. It undertakes market studies and projects as part of its advocacy mandate, and as of 31 March 2008, of the 16 research studies it had initiated not a single one was on the retail sector (http:// www.cci.gov.in, Approach Paper, Competition Advocacy).

    Some of the issues discussed here pertain to the retail sector specifically and others to the fundamental difference in the spirit of the old and new institutional frameworks that deal with large business houses. First, consider the special problems with the retail sector where many changes are taking place constantly and interpretation along with implementation will have little precedence, expertise or case history to fall back upon. Section 4 of the Competition (Amendment) Bill 2007, regulates abuse of dominance. To prove dominance of a corporate retailer, particularly multiproduct retailer, would not be simple because corporate r etailers deal with many products and many geographical markets. Their dominance in one geographical market may be used to enter new markets, and to do so they may use a combination of predatory pricing and high promotional expenditure. To prove that a retail firm indulges in predatory practices, i e, that it is selling below cost price may be difficult if it has vertical agreements with manufacturers or suppliers, and doubly so if such suppliers are located in foreign countries. News reports also claim that manufacturers give discounts to large retailers which they do not give to smaller ones (The Economic Times, 19 March 2009).

    august 8, 2009 vol xliv no 32

    Large format corporate retailers are routinely found selling below the printed maximum retail price (MRP) which does not legally qualify as predatory pricing, i e, selling below cost price. However, since they pay value added tax on the basis of MRP they are bearing a loss similar to that incurred in predatory pricing to drive out competition from small and medium-size retailers in the market. A news report claimed that retail chains were able to maintain low prices and attract more customers in an inflationary scenario by offering low prices for essential food items and combo-offers (where products are bundled and effective price to the customer is lower than the wholesale price). Vertical agreements (Section 3(4)) are not presumed to be anti-competition but require a degree of proof and are to be judged on the “rule of reason” test, defined as a test, of whether an agreement will lead to an appreciable adverse effect on competition. “The spurt in food prices, particularly in r etail prices which are proportionately surging ahead of wholesale prices (cereals, pulses, vegetables and fruits) over the last two years is being attributed among other factors to hoarding and the emerging dominance of multinationals in agribusiness, and c orporate retailing” (The Hindu 2002, Frontline 2008).

    Another aspect of the law on predatory pricing is that the distinction between low prices which result from predatory behaviour and low prices which result from legitimate competitive behaviour is very thin and hard to determine. To determine these costs, they are required to be constructed on the basis of inputs, and profit margins via mandatory and effective cost auditing. Such cost-related data must be available for scrutiny. Predatory pricing considered only as an abuse of dominance is also a limited interpretation because multinational corporations or other firms making an entry into the Indian markets are not dominant when they practice predatory pricing. These different aspects of interpretation are relevant at the retail end of the market where global retailers are using predation and location as the main tools of entry.

    Similarly, Section 3(3) mentions four types of horizontal agreements between enterprises involved in the same industry to which per se standard of illegality will be applied. However, corpo rate retailers in medium and large format may have horizontal agreements with property developers (two different industries) that elbow out other retailers particularly smaller ones in geographical zones.

    Mergers are another mechanism by which Indian and global retailers will consolidate their position. The initial proposal in the 2002 law asked for mandatory review of proposed mergers that would create entities exceeding a certain threshold level of assets or turnover. This faced tremendous criticism from business lobbies, and was diluted by making pre-merger notification voluntary. The Amendment Bill 2007 makes it mandatory for persons and enterprises entering into combinations to give notice of intent to the CCI. Section 5 deals with mergers, acquisitions, and amalgamations. According to Bhattacharjea (2001: 4712):

    Lack of expertise is likely to create special problems for merger review, which was deleted along with most of Chapter III of the MRTPA (dealing with concentration of economic power) by the 1991 amendment, and is now being reintroduced in the new Bill after an unsatisfactory compromise.

    He continues:

    But the Bill also allows the commission to look post-facto into a merger for which approval was not sought in advance, and to undo or modify

    Economic & Political Weekly

    EPW
    august 8, 2009 vol xliv no 32

    it if it sees fit. This unscrambling of firms’ assets is likely to be a hugely costly operation, for which there is no official expertise thanks to the non-enforcement of Section 27 of the MRTPA.

    Further, he says:

    Expertise is lacking even for ex ante evaluation of mergers, which has not been possible since 1991. Even prior to that, it was focused more on preventing the concentration of economic wealth rather than market power, and mergers were usually sanctioned or denied by the government (on grounds that can well be imagined) without reference to the MRTPC. This was part of the discredited ‘licence-permit raj’ (ibid).

    Modern merger review requires a careful balancing of the anticompetition effects of greater concentration against several possible efficiency gains, with the merging firms obviously keen to exaggerate the latter. Therefore, merger review may even have to be kept in abeyance for the time being in the case of domestic firms competing with much larger multinational firms.

    2.2 Competition Law in India

    Overall, the new Competition Act 2002, which is designed to replace the MRTP Act 1969, has a distinctly different spirit and requires a different level of expertise to ensure implementation. The MRTP Act was the product of an ideology that made the socialist pattern of society a desired objective of social and economic policy (Khurana 1981). It was passed in 1969 to ensure that the operation of the economic system does not result in the concentration of economic power to the common detriment, and dealt with monopolistic practices, restrictive practices, and unfair trade practices. The provisions for control of unfair trade practices was added in 1984, but in the post-1991 period of liberalisation of the economy, provisions relating to concentration of economic power were deleted by omitting Part A of Chapter III of the act. Only the powers to order division of undertakings and severance of interconnected undertakings were retained but even these were never used. The MRTP commission itself was virtually put into cold storage and only cases relating to unfair and restrictive practices were heard. Nothing highlights the state of neglect of competition policy in recent times as much as the fact that while the commission held 44 cement companies guilty of cartelisation between February and April 1990, and began an inquiry in October 1990 it only gave its verdict 17 years later. And even then it could only direct the firms to desist from the practice. Repeated threats have been recently issued to the steel and cement cartels in India by the prime minister and the finance minister for fixing prices and raising them to cause cost-push inflation. The situation should have been within the purview of the MRTP Commission. Despite the seriousness of the issue in an election year neither the new Competition Commission nor the other state agencies were able to generate the requisite proof and make a case for effective intervention.

    The new Competition Law and CCI do not aim to limit the concentration of economic power or to control monopolies directly but aim at (1) prohibiting anti-competitive agreements (2) prohibiting the abuse of dominance, and (3) regulating combinations. Both cover the usual three areas with a much more post-World Trade Organisation orientation and avoid areas such as monopolistic pricing and “unfair trade practices”, which are now part of consumer protection law. Unlike earlier under the MRTPC, when although 26 predatory pricing inquiries were instituted from 1970 to 1990, only two cases were finalised and desist orders were passed, anti-competitive practices such as predatory pricing are now more clearly defined. These laws are of great significance in the retail sector where corporate retail uses a combination of predatory pricing, high advertising and promotional expenses as standard competitive strategy against smaller players. The law defines predatory pricing comprehensively as “any agreement to sell goods at such prices as would have the effect of eliminating competition or a competitor”. By 1990, the definition of predatory pricing had evolved to include an “understanding by even a single seller to fix prices below appropriate measure of cost for the purpose of eliminating competition in the short run or reducing competition in the long run”. The sub-section of the law was also used to deal with cheap imports in the 1990s. The availability of evidence of actual cost and the intention to eliminate competition thus became critical to prove predatory pricing as required under the new law. Proof of selling below cost and malafide intent, however, requires inspection of internal documents and cost a uditing which is difficult more so in the case of firms located abroad. There is also disagreement about which cost should be taken into account – the marginal cost, average variable costs or the average total cost.

    The other serious lacuna is the absence of adequately trained and experienced judicial staff in matters pertaining to interpretation of new competition policy in all its complexity. “The multifarious criteria (13 each for determining dominance and the anticompetitiveness of mergers!) are often subjective, contradictory, or vague, and will be open to varying interpretations, leading to inconsistent verdicts and unnecessary harassment and business costs” (Bhattacharjea 2001: 4711). The MRTPC has been the regulatory authority since 1969 but it had little experience or expertise in dealing with the post-WTO global economic order, the multinational firms incorporated outside its jurisdiction or free imports. It is in the process of being phased out and will be fully replaced by the Competition Commission by the end of 2009.

    It is worth noting that even as early as 1965, despite the declared intent of preventing concentration of economic power there was an understanding that rapid industrialisation would lead to even greater concentration of economic power (MIC 1965). Throughout, key powers always lay with the government through its licensing policy and not with the MRTP Commissions. It did not have any powers to pass orders to control such concentration but could only prepare reports for the government which were not binding. It was the same with the law regarding monopolistic practices. Besides the MRTP Commission and the government no private individual or party could initiate an inquiry. Hence, hardly any cases dealing with monopolistic trade practices (Singh 2000) were taken up. This point labours the fact that now hardly any legal expertise exists to deal with the issue and no firm expects to be curtailed for monopolistic practices in India. The new commission will inherit most of the investigative staff, lawyers and possibly some of the members of the MRTPC for lack of an alternative expertise pool.

    “Of all the contentious issues that are being debated by members of the World Trade Organisation, the relationship between trade and competition policy is probably one of the least understood in India. While there has been extensive discussion of trade liberalisation, and also the newer issues such as intellectual property rights and agricultural subsidies that came on board during the Uruguay Round, competition policy has been on the international agenda for too short a time for its significance to be appreciated” (Bhattacharjea 2001: 4710).

    As a result, “The United States Trade Representative’s (USTR) latest Report on Foreign Trade Barriers (2001), which invariably comes down hard on any policy that impedes market access to American firms, actually ends up exonerating India on this score” (ibid: 4711). But it goes on to say that both state-owned and private firms in India engage in most kinds of anti-competition practices with impunity. The emerging situation does appear to be a free for all. Hence despite the recent improvements in the law, the dormant state of the competition policy and its implementation remains a matter of central concern. This may also be a deliberate ploy to attract foreign investments.

    In this entire transition phase of policy, large format multi product corporate retailers and their different size formats are in the process of acquiring real estate and dominant positions in geographical areas within and around dense metropolitan zones and smaller cities, elbowing out small and medium size shops (Kalhan 2007). Events on the ground are racing ahead of regulatory adaptation, so much so that competition from the small and medium type retailer in the sector may be whittled away before regulation strengthens and recognises the fact. If the new competition law is meant to protect, promote and sustain competition and protect the interest of consumers in markets, by implication it needs to protect the small and medium size range of competitors in every geographical zone. It is worthwhile to make comparisons here with the structure and response of anti-competition law in Germany.

    2.3 Urban Planning

    The state of urban planning in India is such that there is as yet no ceiling on the size or number of retail outlets that may be started in a designated commercial zone, once some basic criteria of breadth of road is complied with. The ministry of urban development at the central level has no jurisdiction over urban area planning in the states except in the case of exceptional laws pertaining to the coastal regions, forests, the Delhi region and union territories. Urban local bodies also undertake town planning, regulation of land use, planning for economic and social development and so on. Urban development departments at the state level frame development control rules for cities but these are implemented by the local government authorities. In the metropolitan regions there are multiple agencies involved with this function creating the usual problems of coordination and control. The state level planners have, as yet, not concerned themselves with the issues specific to large format retail, their desired number per unit of population, and the effect on scarce urban space and energy. The impact on traffic, congestion and local communities has also not been factored in. Hence the construction of large and small format corporate retail outlets is growing at a rapid pace and some of the largest, most expensive real estate deals in the metropolitan centres in the recent past are being made by corporate retailers.

    2.4 Relevant Labour Laws

    In India rules governing working hours and the opening hour are yet to be put in place. Large format stores commonly remain open

    august 8, 2009 vol xliv no 32

    1995 2005 0 Hypermarkets and food units of department stores Supermarkets Other food shops 27,164,819,614,481,0533

    for 10 to 11 hours including on Sunday. This puts extreme upward Figure 1: Turnover of Food Retailers in Germany 1995-2005 pressure on the effective working hours of their workforce. Each 140 state has its own shops and establishments law, which defines the

    rights and obligations of employees and employers. They also in-120 clude rules pertaining to working hours, closing and opening time, guidelines for rest, holidays, overtime, leave-casual, s ickness and 100

    maternity benefits, employment of children and women, and em

    ployment and termination in general. Registration, notice of dates

    of commencement and closure of operations are mandatory.

    The workers in corporate retail are better off than their coun

    terparts in small shops since their larger number under one roof makes it easier for them to unionise, they have written wage con-

    Turnover in Million Euro

    80

    60

    40

    tracts (to some extent higher wages), and benefits like employee state insurance and provident fund entitlements. However, the

    20

    prospects for continued-on-the-job training and upward mobility

    are extremely limited. Since they are also more educated, usually up to secondary and high school levels this is an important issue.

    Figure 2: Number of Food Stores in Germany 1995-2005

    Some sort of unions have begun to emerge in the sector and they

    80000

    negotiate working hours and bonuses.

    70000

    3 Retailing in Germany

    The development of retailing in Germany since the second world 60000 war needs to be understood in the context of state policy to en

    courage corporate retail and release scarce labour from the retail sector (it is useful to remember that in India the core issue is providing jobs and not releasing manpower). The main feature of the

    50000

    Number of stores

    1995 2005 5410035200202652338028802038Other food shops Supermarkets Hypermarkets and food units of department stores

    structural change in German retailing since the 1950s was the shift

    40000

    30000

    from predominantly mom-and-pop stores towards service stores

    20000

    and later still to self-service stores. These self-service stores were bigger and sold goods at lower prices. However, they were still

    10000

    smaller and more expensive than the supermarkets which were

    0

    becoming popular towards the end of the 1960s. On average, the supermarkets now have over 700 m2 of sales space and offer a

    Figure 3: Retail Floor Space in Million m² in Germany 1995-2005

    greater variety of goods. They have mostly replaced the smaller

    30

    self-service shops (Kulke 1992: 968). The size of the shops however continues to change: starting from the small mom-and-pop

    25

    stores (142 m2 in 1995) to supermarkets (701 m2) and towards very big hypermarkets (2013 m2) (Wortmann 2003: 2). In the middle of the 1960s hypermarkets started to increase their market share, reaching 25% in the middle of the 1980s (Kulke 1992: 968f). While

    7,711,724,315,816,416,461995 2005 Other food shops Supermarkets Hypermarkets and food units of department stores

    Retail floor space in million m2

    20

    15

    the number of shops is shrinking, the size of retail space and the total turnover are still growing (see Figures 1, 2 and 3).

    There is a strong connection between this trend and the ongoing concentration. This concentration is partly promoted by a

    10

    5

    strong competition and the merging of companies – a trend common to all developed countries – although the prevailing circum

    0

    stances and the speed of the development are different and

    different variations of the same developments can be observed.

    Source: Kreimer and Gerling 2006: 19.

    Thanks to the concentration in food retailing, the power that the food retailers have over the suppliers has grown significantly (Wortmann 2003: 3).

    Along with the concentration of retailing in Germany comes a tendency towards vertical integration of retailing and wholesale trade. This vertical integration had already widely progressed by the 1970s. The majority of German shops are part of an affiliated group of companies or an enterprise group who are doing r etailing and wholesale trade. Only 11.5% of the retailing is done by nonintegrated retailers. A notable feature of German retailing is that many of the big retailing enterprises are family owned. To name some: Aldi, Lidl and Tengelmann (Wortmann 2003: 4). Another speciality of retailing in Germany is the presence of cooperatives, initially formed at the end of the 19th century when small retailers federated to concentrate their procurement to get better prices (Wortmann 2003: 4).

    Economic & Political Weekly

    EPW

    august 8, 2009 vol xliv no 32

    During the last decades the law in Germany changed several times in reaction to the changes in the retail market, especially changes in the retail formats, impact on urban space, economic concentration within the sector and impact on supply chains, and the possibility of anti-competition agreements and behaviour. Control of the developments was attempted via laws for protecting competition, limiting opening hours and urban planning laws to deal with the environmental impact. While there is an ongoing liberalisation concerning the competition law and the opening hours, the urban planning regulation has become partly more strict – at least in some of the German federal states.

    3.1 Competition Law in Germany

    The German laws against restraints on competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) and against dishonest competition (Gesetz gegen den unlauteren Wettbewerb – UWG) include some important restrictions for retailers. In a nutshell the GWB forbids, with only very few exceptions, sale of goods below production costs. A strategy to win customers based on such so-called “loss leaders”, which is popular in the United States and Great Britain is not possible in Germany (Knorr and Arndt 2003: 18). This legislation was one of the main obstacles that Wal-Mart came up against in Germany.

    The German law against restraints on competition (GWB) is controlled by the Federal Cartel Office (FCO-Bundeskartelamt) and in cases which have only local or regional significance by the competition authorities of the different German states (Landeskartellbehörden). The FCO is an independent federal authority, and is assigned to the federal ministry of economics and technology. The FCO’s decisions are the results of a process similar to judicial proceedings. It is made up of decision-divisions which exist for each economic sector, and are assisted by the general policy department which provides advice on special competition law matters and coordinates cooperation with international competition law. The Federal Cartel Office is authorised to investigate and penalise on its own. The Wettbewerbszentrale (restriction of competition), discussed below, has judicial powers to initiate legal action in case of infringement of the law. Penalising, however, is done by the judicial system.

    Regulation for fair competition has had a long history in G ermany. The Unfair Competition Act was passed in 1912 and a powerful monitoring body (Wettbewerbszentrale UWG) was set up to promote self-regulation. Stakeholders are authorised to invoke the statutory law in case of infringement of competition rules, the recognised stakeholders being competitors, certain trade associations, chambers of commerce, and consumer associations. As an association of companies and trade associations from all sectors of industry, its aim is the advancement of trade, industry and commerce. Its members include all chambers of commerce, most trade corporations, about 600 other industrial or commercial associations and approximately 1,200 companies. It has a head office in Bad Homburg and six regional branch offices. They deal with over 20,000 complaints per year. The Wettbewerbszentrale also gives advice to its members regarding the regulations. The sheer number of complaints it recieves indicates the level of s upervision required to establish a level playing field.

    62

    Wal-Mart entered the German market in 1997 and wound up operations in 2006. One of the reasons it was forced to leave was its conflicts with German regulations. Wal-Mart was doing business in the highly concentrated but competitive German food retailing market (the top five chains account for 80% of the sales), using its usual superstore retail outlets which have an assortment of department store goods and groceries. Aldi and Lidl were its two main German competitors in the grocery segment. In May 2000, in an effort to gain market share, Wal-Mart reduced its prices for basic goods like milk and sugar below cost price making them in effect its loss leaders. The promotion continued for three weeks. Aldi and Lidl responded by doing the same. The price for milk and sugar fell by 43% per litre and 75% per kg, respectively.

    The FCO opened investigation under Section 20(IV) (2) of the law against restraints on competition (GWB). This section to date has been applied only to consumer retailing, but can be extended to other retailing and wholesale trade as well. The relevant section of the law prohibits business with superior market power in relation to small and medium-sized competitors from pricing below cost, except when such pricing occurs only occasionally and there is an objective justification for the pricing scheme. The FCO’s investigation against Wal-Mart, Aldi and Lidl found all three guilty of violating the relevant sections of the GWB. The f ocus of German law against unfair competition is on the protection of smaller German businesses (competitors), hence it encompasses predatory pricing. Clearly, it was not possible for Wal-Mart to follow the same strategies as in the US. It was accused repeatedly of violating German regulations and also fined. Wal-Mart did not fulfil the obligations of the Handelsgesetzbuch (German Commercial Law) which obliges all joint stock companies to disclose basic information about their accounting system, including a balance sheet and an annual profit and loss statement (Knorr and Arndt 2003: 25).

    In another case in 2006, the two big German supermarket chains EDEKA and Tengelmann wanted to merge their discount units NETTO and PLUS. NETTO has 1,100 and PLUS 2,900 discount supermarkets in Germany. The FCO started an investigation about the market situation and the possible role of the new market player. In 2008, it refused permission for the merger. The reason was the dominant market position that EDEKA would have reached as a 70% owner of the new chain. The FCO referred to the monopoly situation that would have come into being at a lot of destinations in Germany, should the merger take place. Furthermore, the company would develop a lot of power over the suppliers because of the high market share. However, the discussions between the companies and the Bundeskartellamt are still on and it is possible that the FCO will allow the merger with some restrictions. For example, it could ask EDEKA to sell some of its shops to a competitor.

    Again, in 2007, the “do it yourself” store Praktiker brought out an advertisement claiming that its product was cheaper than that of its competitor, OBI. OBI sued for libel. Praktiker was convicted and ordered to stop the advertisement because it was not generally cheaper than OBI.

    The political will, social capital, institutional arrangements and expertise developed over a 100-year period to deal with the expansion of monopoly capital in different sectors that is clearly noticeable here is absent in India.

    august 8, 2009 vol xliv no 32

    The following section attempts to put the German Competition Policy in context. Germany has a highly concentrated retail market particularly for food, yet the food prices in relation to income, are among the lowest in advanced industrial countries. The range of regulatory mechanisms in place will be highlighted and juxtaposed with those in India. The law against dishonest competition (referred to as unfair trade practices in India) forbids a number of marketing practices which are regarded as dishonest. These include misleading statements or advertisements about business circumstances, especially the nature, origin, manner of manufacture or the pricing of goods or commercial services or the size of the available stock.

    In a recently reported case in India a leading corporate retailer, Subhiksha claimed in advertisements that its prices were the l owest compared to rivals like Big Bazar, D-MART, and Apana Bazar, etc. Big Bazar filed a case against the advertisements and the A dvertising and Standards Council of India is understood to have given its verdict in April 2007. However, the verdict has not been made public as yet!

    3.2 Labour Laws and Opening Hours

    Until 2006, shops in Germany could remain open for a maximum period of 80 hours per week – among the shortest in Europe (Knorr and Arndt 2003: 18). They were strictly forbidden to remain open on Sundays and holidays. This legislation was specially meant to help small traders, as lack of staff forces them to remain open for shorter hours. In 2006, the legislation for shop opening hours was liberalised though there are different laws in the different German states. In most parts of Germany it is still not possible to keep shops open on Sundays.

    The working hours of employees in retailing are regulated in wage agreements which are negotiated between the trade union and the federation of employers in retail. Each federal state of Germany has its own special wage agreements and normally the working hours extend to 37.5 hours per week.

    3.3 Land Use Planning Laws

    For a long time, urban planning regulation was the main tool used to control the retailing trade. It was assumed to be sufficient to guarantee the integration in a sound urban development (Schmitz and Federwisch 2005: 18). In 1968, a regulation was introduced to protect the medium-sized retailing companies in Germany. The instrument used for this was the legislation for urban planning (Baunutzungsverordnung – BauNVO). In the heavily urbanised areas, only shops with a maximum floor area of 1,200 m² are allowed – this means a retail space of 700 m². Furthermore, there are limitations to the assortment of goods that shops built outside of the cities are allowed to sell. This political protection for medium-sized retailing companies was also helpful for the discount shops of the big retail chains – as they have normally relatively small floor areas (Wortmann 2003: 8). During socialist times, out-of-town development was forbidden in East Germany. Following the reunification in 1990, former West German planning policies were adopted in East Germany. However, there was a temporary lapse which allowed the fast development of large retailing sites in off-centre locations (Poole et al 2002: 174).

    Economic & Political Weekly

    EPW
    august 8, 2009 vol xliv no 32

    Poole et al (2002: 175) identified size controls as “the most prevalent policy tool (for retailing in Europe), with the exceptions of Britain and Holland and the absence of strict planning controls in eastern Europe”. Furthermore, the variations in the timing of initial legislation have strongly affected retail development in Europe: while it was introduced relatively early in Belgium, France, Germany, Italy and the Netherlands, it came into force in Britain, Portugal and Spain later, and has still not been introduced in some eastern European countries.

    During the 1980s, the regional planning regulation became progressively more important for the control of the development of the retail sector. The reason for this was the growing size of retail projects outside of cities, sometimes at the highways between two municipalities, more or less in the middle of nowhere. These developments not only mean strong competition for the retailers inside the city; they can also be an obstacle to the complete development of the affected cities. This is why the federal states started to include regulations for the establishment of big retail projects in their regional planning documents. When municipalities allow big retail projects, they are scrutinised to ensure that they meet the requirements of regional planning. Neighbouring municipalities can complain against violations. However, these kinds of complaints are rarely successful as the neighbouring municipality has to prove that its rights are being violated.

    In 2004, the position of the neighbouring municipalities was strengthened by a new law that was introduced to adjust German building law with European regulation (Europarechtsanpassungsgesetz Bau – EAG Bau). New big retail projects are now checked to assess their influence on the local supply. Investors in retail have to prove that their project will not end up affecting retail shops in the same or neighbouring municipality in a way that the local supply of food and other goods will be impaired, and smaller shops in the neighbouring municipalities will not close down due to the new competition (Schmitz and Federwisch 2005: 18ff). Some of these features have been adopted by emerging market economies in south-east Asia as mentioned earlier.

    4 Conclusions

    Comparative experience suggests that first, the economies of scale and scope drive the sector towards very rapid growth in terms of size of outlets and dominance in geographical and product markets. Second, this raises issues of preservation of genuine competition in the relevant product and geographical markets. Third, the dominance of corporate retailers has consequences for the manufacturers, wholesalers and other dealers in the supply chain who face a loss of alternative marketing/retail outlets as monopolies emerge. Finally, the growth of large format retail raises serious issues for the urban environment and town planning in dense and rapidly urbanising countries like India.

    Some studies of the global supply chains and retailing systems indicate the failure of regulatory policy in dealing with the growth of monoply power in what has been described as p articularly adverse outcomes for the world food system. “We might want to put our faith in various ‘competition and anti-trust commissions that exist in various countries to prevent the formation of such monopolies but such faith would be misplaced...’ . On the grounds of efficiency, economies of scale and Darwinian ju-competitors in the retail sector. Similarly, German and other southstifications consolidation is progressing steadily” (Patel 2008). If east Asian urban planning and restrictions on large format retailing the rate of consolidation is tracked within the range of food busi-are important. Indian cities are dense and unplanned. It is clear that ness after 1980 for instance, in the US market in terms of the mar-land use laws/zoning laws are not the most commonly used regulaket size of the top four corporates in each of the food sub sectors, tory devices against large format retailing and at present the land then the concentration ratio has risen rapidly across poultry, use laws in urban centres are in the most pliant condition since the beef, seed, pesticide but most steeply in retail. Market concentra-local governments implement them and they are most susceptible tion has led to higher prices of food in 24 of 33 sectors in the US. to omission and commission on behalf of real estate developers As agriculatual economist Robert Taylor testified to the Senate who, in turn, share a common interest with corporate retailers. The Agricultural Committee in 1999: since 1984 the real price of a big retailers look out for large tracts of real estate and the presence market basket of food has increased by 2.8% while the farm value of such retailers increases the price of the real estate in the neighof the food has declined by 35.7%. This has conscequences for bourhood generally. It is routine to periodically regularise unaufarmers too (Taylor 1999). thorised colonies or projects. Lax regulations and poor implementa-

    Much of the Indian retail trade (particularly grocery) still has tra-tion is a feature of India’s underdevelopment. ditional features: small family-run shops and street hawkers domi-The German experience is also distinct from the Indian one benate the situation in most of the country. However, the retail trade in cause Germany moved rapidly into corporate retailing in the face India is now undergoing an intensive structural change which could of labour shortages while in India the situation is quite the reverse: cause irreversible damage to local commodity supply chains and agriculture and retail are two large employers of unskilled labour competition. The existing regulations are not adequate to fulfil the and both are simultaneously in the process of expelling labour in new requirements. India can learn (and perhaps forestall loss of the context of overall high levels of unemployment. genuine competition and product variety) from the experience of Popular resistance from traditional retailers has forced the Indian south-east Asian countries which are improving regulatory frame-government to prolong the ban on FDI in retail (The Hindu 2008). works and some advanced retailing economies like Germany which FDI in wholesale and the growing involvement of Indian corporate are already considered more successful regulators in this sector. firms in retail is consolidating the hold of big business in the retail German competition policies in content and implementation are market the recent economic slowdown notwithstanding. The recent significant for India to the extent that they are different from other slowdown has affected the organised retail sector adversely, and advanced retailing countries like the US and Great Britain. Ger-halved its growth projections but it is inducing a spell of consolidaman policy now proactively aims to preserve small and medium tion, mergers, technological upgradation and vertical integration.

    References Chains and Global Capitalism, Praeger, West-Schmitz, H, and Federwisch C (2005): Einzelhandel port, CT Mart World (ed.) Stanley D Brunn, und Planungsrecht. Baurecht und Bautechnik

    Alexander, N (1997): International Retailing (Oxford:

    Routledge, New York. Band 14, Berlin.

    Blackwell Business).

    Images F&R Research (2007): India Retail Report 2007 Singh, J (2000): “Monopolistic Trade Practices and Arnold, J S, and E Fischer (1994): “Hermeneutics and (Delhi, Mumbai, Kolkata, Bangalore). Concentration of Economic Power”, Economic &

    Consumer Research”, Journal of Consumer Re-

    Kalhan, A (2007): “Impact of Malls on Small Shop- Political Weekly, Vol 35, No 50, pp 4437-44.

    search, 21, 1, pp 55-70.

    keepers and Hawkers”, Economic & Political

    Taylor, C Robert (1999): “Economic Concentration Bhattacharjea A (2000): “Predation, Protection and

    Weekly, Vol XLII, No 22, pp 2063-66.

    in Agribusiness”, Testimony to the United States

    Public Interest”, Economic & Political Weekly,

    Kearney, A T (2006): Retail in India: Getting Organised

    Senate Committee on Agriculture, Nutrition Vol 35, No 49, 2 December, pp 4327-36.

    to Drive Growth (New Delhi: Confederation of

    and Forestery, Washington DC, 26 January.

    – (2001): “Competition Policy: India and the WTO”, I ndian Industry).

    The Economic Times (2009): “Big Retailers Chant Economic & Political Weekly, Vol 36, No 51, – (2007): “Growth Opportunities for Global Retail-Value Mantra”, 19 March.

    pp 4710-13 ers”, URL: www.atkearney.com/shared_res/pdf/

    The Hindu (2002): “Between a Rock and a Hard Place”,

    – (2003): “India’s Competition Policy: An Assess-GRDI_2007.pdf [17.03.2008].

    17 April.

    ment”, Economic & Political Weekly, Vol 38, No 34, Khurana, R (1981): “Growth of Large Business” (New

    pp 3561-74 Delhi: Wiley Eastern Limited).

    – (2008): “FDI in Retail Sector Will Not be Allowed”, 30 April.

    Business Standard (2007): “Indian Cement Companies Knorr, Andreas and Andreas Arndt (2003): Wal-Mart in Guilty of Cartelisation”, 21 December. Deutschland – eine verfehlte Internationalis-Time (2007): “$350 Billion Retail Sector”, 17 October. Christopher, M (1998): Logistics and Supply Chain ierungsstrategie. Materialien des Wissenschaftss-Times of India (2007): “Inflation Soars to 42 Month chwerpunktes “Globalisierung der Weltwirtschaft”

    Management (London: Prentice Hall). High”, 3 May.

    des Institut für Weltwirtschaft und Internationales

    Christopherson, S (2006): “Challenges Facing Wal- – (2008): “Retail Chains Retain Low Prices to Woo

    Management der Universität Bremen, Band 25,

    Mart in the German Market” in Stanley D Brunn Customers”, 28 April.

    Bremen.

    (ed.), Wal* Mart World (New York: Routledge). – (2008): “PM Warns Steel Companies on Prices”,

    Kreimer, Tim and Michael Gerling (2006): Status quo

    Coe, N M and N Wrigley (2007): “Host Economy Impacts Monopolies Inquiry Commission (1965): Vols I

    und Perspektiven im deutschen Lebensmit

    of Transnational Retail: The Research Agenda”, Jour- and II , Government of India, 23 April.

    teleinzelhandel 2006. Köln.

    nal of Economic Geography 7 (2007), pp 341-71, 362f. Warf, B and T Chapman (2006): “Cathedrals of Con-

    Kulke, Elmar (1992): “Structural Change and Spatial

    Davis, K (2000): “The Asian Economic Recession and sumption: A Political Phenomenology of Wal-

    Response in the Retail Sector in Germany”, Urban

    Retail Change: The Implication for Retailer Mart” in Stanley D Brunn (ed.), Wal* Mart World

    Studies, 29: 6, 965-77.

    Strategies in Asia”, International Review of (London: Routledge).

    Mutebi, A M (2007): “Regulatory Responses to Large

    Retail, Distribution and Consumer Research, 10(4), Wortmann, M (2003): Strukturwandel und

    Transnational Retail in South-east Asian Cities”,

    pp 335-53. Globalisierung des deutschen Einzelhandels.

    Urban Studies, Vol 44, No 2, pp 357-79. Financial Express (2007): “Government Mulls Retail Discussion Paper SP III 2003-202 des Wissen-

    Patel, R (2008): Stuffed and Starved (London: Porto-

    Regulator to Level Playing Field”, 10 August. schaftszentrum Berlin für Sozialforschung,

    bello Books). Frontline (2007): “Retail Invasion”, 30 June. Berlin.

    Poole, Rachel, arke, Graham P, Clarke and David B

    – (2008): “Gone with the Winds of Liberalisation”, (2002): “Growth, Concentration and Regulation Wrigley, N and M Lowe (2002): “Reading Retail:

    25 April. in European Food Retailing”, European Urban and A geographical Perspective on Retailing and Gereffi, G (1994): “The Organisation of Buyer-Driven Regional Studies, 9(2): 167-86.

    Consumption Spaces” (London: Arnold).

    Global Commodity Chains: How US Retailers Robinson, G M (2004): Geographies of Agriculture: – (2007): “Introduction: Transnational Retail and the

    Shape Oversees Production Networks” in Gary Globalisation, Restructuring and Sustainability, Global Economy”, Journal of Economic Geography,

    Gereffi and M Korzeniewicz (ed.), Commodity Harlow. 7, pp 337-30.

    august 8, 2009 vol xliv no 32

    Dear Reader,

    To continue reading, become a subscriber.

    Explore our attractive subscription offers.

    Click here

    Back to Top