Why regulation of organised retail is important

Financial Express, December 18, 2012

By Pradeep S Mehta

The winter session of Parliament witnessed another chaotic period on several issues, including foreign direct investment in the multi-brand retail sector. What is surprising is that the main opposition party, when in power in 2002, wanted to allow FDI in retail and the incumbent ruling party labelled it as anti-national. Now the tables have been turned around, quite funnily. Perhaps, the game plan appears to be bigger than the retail policy. On the other hand, domestic large organised retailing has already entered into our economic space, and no one seems to be worried about how they are running their business. The large retail sector has its own peculiarities and needs to be regulated in a sui generis fashion, as many countries have also done. Better late, than never.

There have been two major fears expressed—first, that large retailers will leverage their strength to bully suppliers, farmers and consumers through anti-competitive means; and second, these retailers shall push out smaller stores from the market merely through their marketing strategies, which may not be prima facie anti-competitive.

Most countries that have opened up to large retailers have dealt with both issues with mixed results. Let me begin with the competition issue. Mr SL Rao has already argued in this newspaper that a retail regulator need not check anti-competitive practices, when the Competition Act is in place. For instance, in July 1991, the Argentinian competition authority adopted a Code of Good Commercial Practices for both retailers and suppliers. They responded to this “potential stick” policy by signing the Code, the first of its kind in Latin America and probably the first in the developing world.

In Indonesia, modern retail developments prompted the government to enforce Presidential Regulation No 112 Year 2007 on Management of Traditional Market, Shopping Center, and Modern Shop, and Regulation No 53 Year 2008. Such regulations were government’s efforts to empower traditional markets, protect suppliers’ weak position, and at the same time reduce the negative impact arising out of the development of modern markets.

Countries like Indonesia, Thailand and Malaysia, which up to the 1990s had a laissez-faire policy towards the retail sector, moved in the direction of increasing restrictions on large format retailers by using a combination of laws and regulations. Thus, they created 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 were impelled by indigenous retailers. Indonesia’s Competition Commission (KPPU) also restricted companies from expanding into areas where traditional suppliers operate. Individual cities had similar restrictions. For instance, a 2002 regional regulation in Jakarta stipulates that a private market with a size of 200 square metres or less must be located at least 500 metres away from traditional markets, while mini-markets with sizes up to 1,000 square metres must be located at least one kilometre away. 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 their capital, 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 had also passed laws to restrict development of large format stores in inner city areas but it relies, like Indonesia, on competition laws to control their anti-competitive practices. However the general opinion is that both the competition and enforcement laws are lax and favour the big players.

Japan with registered retail sales of more than $1,500 billion, has legislation to protect small and medium stores from the impact of large stores, other than a very active competition authority. The Large Scale Store Location Law (SLL) gives local governments the primary responsibility for the regulation of large stores. The new regime shifts the basis for store regulation from protecting small retailers to preserving the physical environment surrounding new stores.

American companies like Kodak and Toys ‘R’ Us found these regulations stifling and thus US government applied pressure. As a result the Japanese government diluted the large stores law. In subsequent years, government revised three pieces of legislation—the City Planning Law, the Large-scale Retail Location Law and the City Centre Invigoration (Downtown Revitalisation) Act—to control the expansion of large-scale stores. The Large-Scale Retail Location Law, amended in 2000, prohibited commercial regulation, and introduced a new environmental assessment law. The purpose of this Act is to promote the sound development of a retail business by ensuring that the layout and operational method of the large-scale retail store complied with the above laws. In today’s Japan, small stores exist alongside big stores, not because of a benign large store culture but due to government regulations.

In the case of Spain, the retail trade sector is subject to a wide ranging set of provincial regulations. The restrictions bear on the following regulatory aspects —shop opening hours, seasonal sales, definitions of large retail outlets, regional licensing of hard discount stores, moratoria in retail trade licence issuance and specific taxes on large retail outlets.

In Spain, powers over domestic trade are transferred to the provinces, meaning that retailing is regulated by the provincial governments, although the central government has the power to establish basic general economic rules. Retail Trade Law 7/1996 of 15 January 1996 introduced a series of administrative requirements, including, in particular, the need for large retail outlets (2,500 sq mt or more) to obtain a second specific licence before opening, in this case a provincial licence, in addition to the municipal licence. This was justified by the impact they may have on retailers in adjoining municipalities.

Some provincial governments generally adapt their regulations to national legislation, although there are also cases in which national legislation has been influenced by provincial regulations. Many governments also have retail moratorium regulations banning large retail openings in the region for a specific period of time. Discriminatory tax regimes also are applied, i.e. bigger the floor space, higher is the tax.

In New South Wales, a province in Australia, the Retail Trading Act 2008 and Retail Trading Regulation 2009 imposes restrictions on shop trading days, i.e. shops are required to close on public holidays. The government has the power to exempt shops from trading restrictions subject to conditions or in the exceptional circumstances of the case in the public interest like the nature of the shop and the kinds of goods sold by the shop and/or the likely effect of the proposed exemption on the local economy, tourism and small businesses and other businesses in the area etc.

On the other hand, many countries went all out to attract large scale retailers. For instance, Russia and South Korea adopted a policy of tax exemption for setting up supermarkets in municipalities. Some governments have even directly invested in modern retail explicitly to modernise retail chains as well as to generate revenue for government. Moreover, Brazil and Mexico took an ‘intermediate approach’ by developing formal modern markets without providing any protection or support to traditional (informal) retailers.

In China, new retail regulations include abolition of geographical restrictions, drastic reduction of minimum capital requirements, simplified approval process and non-mandatory joint ventures. Further, foreign enterprises enjoy tax incentives according to geographical locations, which widened the choice of location and modus operandi for them. Local governments are charged with ensuring that overseas retailers comply with the regulations according to Beijing’s diktat. Retailers seeking to open new stores are also required to submit applications that conform to urban development and urban commercial development plans.

Looking at all these experiences there can be two approaches in India. The Union government can design a model retail regulatory law covering issues mainly in terms of location of the large scale stores so as to assuage the fears of small retailers, suppliers and farmers which are very critical and vocal. Alternatively, states can draft their own retail regulatory laws, because all store related regulations operate at the local level and vary in nature and number from other states. Finally, the Competition Commission of India will have to gear up and take preventive measures by preparing a Code of Good Conduct and get all large retail companies to sign on, and to take on any anticompetitive practice as and when they emerge. This could be somewhat like the Code which the CCI is developing for real estate firms, following the DLF case.

The author is Secretary General, CUTS International.

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