AND THE SMALL RETAILERS: EXPLORING RETAILERS’ COMPETITIVE ABILITIES

Rosmimah Mohd Roslin

ABSTRACT

The emergence of multinational retailers, especially in grocery retailing, has changed the scenario in over the last decade. If in the past, grocery retail formats such as , mini markets and night markets dominate the Malaysian retail scene, consumers are now given the choice of shopping in large retail outlets in the form of hypermarkets, warehouse clubs and superstores. Interestingly, large retail concepts are predominantly associated with multinational retailers such as , Makro, Giant and more recently, . The presence of large retailers brings with it the question of dominance and implications of changing customer preferences. This study assesses the perception of small retailers towards their abilities to compete effectively in an industry where large, multinational retailers appear to be dominating. It appears, however, that the small retailers possess distinctive qualities in relation to their strategic inputs which can essentially differentiate them from their larger counterparts. It is suggested that some regulatory measures are necessary especially by local authorities but this must not be to a point of curbing healthy competition among the different types of retailers.

Keywords: Hypermarkets, large-scale retailing, retail dominance, retail strategy

INTRODUCTION

A common feature of retailing is the dynamism of the players and both inter and ntrai competitions exist at various levels of the distribution structure. In Malaysia, the retail sector has undergone rapid changes since the early 1990s with new retail concepts emerging and competing with more traditional retail formats. Where provision and local sundry shops dominate the Malaysian retail scene in the 70s and 80s, there are now hypermarkets and ‘24-hour’ outlets. Merchandise assortment and customer convenience are some of the essential elements attracting Malaysian customers into new retail establishments.

This new scenario brings with it implications of increased competition. Existing retailers view the emergence of new and bigger retailers as potential threats, especially when a majority of the big retailers are multinationals with local partners. When size and financial capability are viewed as powerful weapons capable of killing weaker rivals, the big retailers are often perceived as the dominant channel member capable of eliminating the smaller rivals. It is however, agreed that to some extent the bigger retailers possess the capability of squashing the smaller, inefficient retailers, but there is also a need to ensure more balanced and fairer regulations so that retail development and more importantly, channels development are not curbed unnecessarily. This research assesses possible elements influencing the abilities of small retailers to compete effectively from the perspectives of small retailers in selected areas around the Klang Valley, an area where the development of hypermarkets has been most widespread.

BACKGROUND OF STUDY

Hypermarkets are not a new phenomenon to hit the retail scene having emerged since the early 1960s in Europe. Carrefour, the French leader opened its first store in 1963 (Filser and McLaughlin, 1989). It now serves over 2 billion customers in 9,000 stores located in five continents and its first Asian venture was in in 1989 (Krishnamoorty, 2002; Asian Retailer, 1994). Hypermarkets offer a wide assortment of food and general merchandise at discount prices as well as

461 the opportunity for consumers to indulge in bulk buying. This is often the attraction of hypermarkets as consumers are pulled in by the product variety and the relatively low prices.

Large-scale retailers like Makro, Carrefour and Giant in Malaysia has increased in numbers and new players like Tesco has also joined the bandwagon. To date, there are 8 Makro outlets throughout the country, Carrefour has 7 stores, Giant, 14 and Tesco is gaining in number with 3 stores and a few more in the pipeline. This has brought about widespread alarm among smaller retailers especially neighborhood stores of the likelihood that consumers no longer see a need to patronize their stores. Retail analysts however have mixed views of the influence of big retailers over smaller ones. One argument is the different merchandising strategies of each retail format in meeting the needs of different sets of customers. There is always a need for neighborhood stores for small purchases of necessary products by residential customers while hypermarkets attract bulk buying and planned purchases.

The trend towards hypermarkets and large-scale retailing has been established in developed countries in the past decade and has been putting traditional retailers and department stores under much competitive pressure, especially where price is concerned since the large stores benefit from the economies of scale of bulk purchasing (Moreira, 2002). It is this fact that has prompted a number of measures to be developed by local authorities and relevant government agencies to ensure that the smaller retailers are not jeopardized unnecessarily. Nevertheless, the sheer size and dominance of the large retailers have been perceived as posing possible threats to traditional and much smaller retailers. The increasing number of hypermarkets in Malaysia and other Asian countries has led to speculations and accusations on the likelihood of small retailers being swiped out of the retail industry. As such, the Malaysian government moved to impose restrictions on the number of hypermarkets and large- scale retailers while in , where regulations have been slacking in the past, the government has now designated certain areas where large retailers are not allowed to open.

Yet, the needs of the consumers should not be ignored whilst measures to regulate the distribution channels are developed. Changing consumer behavior patterns have dictated the need for retailers to reconsider and often realign new merchandising and operational strategies. Consumer values have also changed to reflect changes of the economy and the impact of globalize markets. The seamless markets now dictate the need for merchandise and services that meet the demands of consumers who are more exposed to global lifestyles. The wide acceptance of the hypermarkets and new large-scale retail formats suggest changing consumption patterns and consumer spending preferences. The needs of both consumers and the requirements of channel members must be balanced wisely so that the retail sector benefits from increased consumption.

The task of balancing both industrial and consumer needs is neither simple nor necessarily fair. When the needs of one party are the focal points in regulatory development, the needs of the other is likely to be affected. It is however recognized that effective measures are necessary so that all parties concerned are at least shielded from ungainly regulations. This study therefore assesses the perception of one party, the small retailers, towards larger competitors and evaluates their stand on competitive pressures and the impact larger retailers have on them in the retail industry.

REVIEW OF LITERATURE

The evolution of retailing has seen many dynamic changes occurring and the pace of such changes differ within different environments. Malaysia, for instance, has seen the pace of evolution accelerating since the early 1990s when new retail formats introduced by foreign retailers emerged to meet the changing needs of Malaysian consumers. The focus on merchandising and pricing strategies appear to appeal to consumers and large retailers are taking advantage of their ability to offer both. Unlike small neighborhood retailers, the hypermarkets are turning their attention to merchandise width and depth whilst maintaining relatively low prices.

462 In comparison to other developed nations, the in Malaysia is one form of retailing whose history is relatively new when the first supermarket was opened in 1963. Weld Supermarket opened in Kuala Lumpur in 1963 (McTaggart, 1969) to cater to the growing number of expatriates in the city. Since then, Malaysians have accepted supermarkets as part of the urban lifestyle, while rural Malaysians look at supermarkets as a more modern approach to retailing. The 1970s saw the growth of supermarkets expanding and in the 1980s competition became very intense when foreign ventures entered the retail scene. Zainal Abidin (1989, p. 101) notes that “…..in 1984, the supermarket “war” in Malaysia intensified. As more (entered) the industry, market share gets smaller and harder to maintain”. Consequently, those unable to cope with the competitive pressure were forced to close down.

Today, the face of retailing in Malaysia is further enhanced with new forms of retailing emerging to cater to the ever-changing needs of the Malaysian consumers. The hypermarkets and other large-scale retailing are now looked upon as threats to neighborhood stores and other small retailers. So intense is the pressure from the small retailers that the government is now compelled to check the rapid expansion of the large-scale retailers which are predominantly multinational firms. In response to the pressure, there are now conditions and guidelines set by the Ministry of Domestic Trade and Consumer Affairs before hypermarkets are allowed to open in any new sites (Lee, 2002).

This new scenario has brought about the need to reevaluate the development of retailing, especially grocery retailing in the country. As of December 2002, it is estimated that there are 34 hypermarkets in Peninsular Malaysia whilst the number of provision stores and supermarkets are around 29,075 stores (A.C. Nielsen, 2001). A distinct implication here is that the retail sector in Malaysia is still very much dominated by the small retailers, yet the increasing number of the hypermarkets and the potential expansion of these large retailers are worrying the small players that they are resorting to various measures to check and if possible to curb further expansion of the large retailers.

It is common for retailers to be differentiated on the basis of their retail sizes. Based on the definitions provided by the Ministry of Domestic Trade and Consumer Affairs and integrating this with other theoretical definitions (Zainal Abidin, 1989; Rosmimah and Noraini, 2002), hypermarkets are defined as those with retail sizes in the range of 60,000 to 100,000 sq. feet while small provision shops are those operating stores ranging between 1,000 to 2,000 sq. feet. The supermarkets are those with store sizes ranging between 8,000 sq. feet to 50,000 sq. feet. The supermarkets are deemed closer to the hypermarkets in terms of their retail strategies although their merchandise assortment may be somewhat limited.

Proponents of the large-scale retailers argue that to imply that large retailers compete directly with small retailers is erroneous as the difference in merchandising strategies is a good indication of their differing attraction. While one focuses on merchandising width and depth, the other clearly lacks both. A provision store for example, cannot afford to carry too many assortments and will concentrate more on fast moving necessities. An important implication here is that different retail strategies used by different types of retailers are capable of attracting different sets of target customers.

RESEARCH OBJECTIVES

The aim of the research is to:

§ Assesses sales trend and retail performance of small retailers in 2000, 2001 and 2002 when the emergence of hypermarkets in surrounding areas are more pronounced, § Evaluates retailers’ perceptions of possible changes in their operations and the management of their retail business before and after the emergence of large-scale retailers in their area, § Compare the customer profile frequenting small retail outlets with that of hypermarkets, § Assesses small retailers’ abilities to compete with hypermarkets.

463 RESEARCH FRAMEWORK

The framework that forms the basis of this study is as follows:

Retail Strategies

Number of Retailers Retailers’ Competitive Abilities

Competition

Customer Attraction

The framework postulates that retailers’ abilities to compete in the retail market are essentially influenced by factors associated with elements of the retail mix and not necessarily retail size. Although to some extent, retail sizes do influence their level of dominance in the distribution channel (Mohd Roslin, 1999), the abilities to attract final customers are dependent on the strength and superiority of retail strategies rather than dominance. Therefore, the following hypotheses are proposed:

H0: Retail Strategies do not influence the ability to attract customers. H1: Retail Strategies influence the ability to attract customers.

Ho: The number of retailers in a specific geographical area does not influence the ability of small retailers to compete effectively. H2: The number of retailers in a specific geographical area influences the ability of small retailers to compete effectively.

Ho: Intense competition does not influence retailers’ competitive ability. H3: Intense competition influence retailers’ competitive ability.

Ho: Customers’ attraction does not differ for different types of retailers. H4: Customers’ attraction differs for different types of retailers

RESEARCH METHODOLOGY

The study begins with an exploration of areas where an observation of existing large retailers provided useful inputs for the selection of samples of small retail outlets. An area sampling approach was adopted in selecting relevant respondents in the Klang Valley. The Klang valley was specially targeted for this study as this represents an area where the growth of hypermarkets and other large retailers has been most prominent since Makro joined the retail scene in 1992 and Carrefour opened its first outlet in 1994. Those operating within a radius of 3.5 kilometers of the large retailers or hypermarkets were noted as potential respondents. Relevant retailers including those operating electrical outlets, grocery stores, Chinese drug stores, hardware stores and pharmacies were targeted as respondents.

A descriptive method using structured questionnaires was utilized to assess retailers’ responses on the impact of hypermarkets in their areas. The questionnaire comprised of 4 sections where Section A assesses the demographic characteristics of respondents, Section B evaluates the sales trends of small retailers over a three year period, Section C evaluates the profile of customers and Section D analyses

464 the perception of respondents on key statements pertaining to situational factors of small and large retailers.

FINDINGS AND ANALYSIS

A total of 150 retail respondents were obtained comprising of a multitude of retailers most likely to be affected by the presence of large-scale retailers. T he profile of the respondents is noted in Table I in the Appendix. A majority (95%) of the retail respondents have started operations before 1990 in the respective locations and the presence of established retailers have distinct implications on how they perceived potential large retailers as well as existing hypermarkets in the area. In line with this, an estimation of their reported sales in 2000, 2001 and 2002 were estimated to evaluate the extent of impact the presence of new retailers, especially the large ones that have just entered the retail scene in this area, have on the small players. Their daily sales performance is noted in Figure I below.

FIGURE I: Average Sales per Day

300 250 2002 200 150 2001 100 2000 50 0 Less than RM500 RM501-RM1000 RM2001-4000 More than RM4000

Despite the report of large retailers emerging in this area in significant numbers, the sales trend of these small retailers did not indicate distinctive reduction which could imply that their customers are migrating to the new retailers. The sales trend appeared to be consistent over the three year period and these retailers have actually enjoyed positive sales growth over the three years. Those who reported their daily sales between RM2001 to RM4000 have actually increased from 27 in 2000, to 46 in 2001 and this reduced to 40 in 2002 but those who managed to obtain average daily sales of more than RM4000 increased to 14 in 2001 in comparison to just 4 retailers who stated that their sales were in this region in 2001.

An assessment of their main customers revealed that a majority is from the neighborhood. Essentially, 85% of the retailers reported that their target customers are those staying around the vicinity of their stores while only 13% indicated that office workers nearby constituted their main customers. In essence, this constitutes an early confirmation of the proposition that small neighborhood stores have a distinct customer base which can be quite different from those of the hypermarkets. To further strengthen this proposition, the frequency of visits by customers is reported by 52% of the retailers as three times a week. Being a neighborhood store, customers in the vicinity are likely to visit their neighborhood stores for necessities or essential goods that are required frequently.

To further strengthen the findings, a Factor Analysis was carried out to identify key factors considered important by the retailers in assessing their views towards the hypermarkets and their competitive ability. Table II outlines results of the Factor Analysis.

465 TABLE II Factor Analysis for Loadings >0.5

Statements Factor Factor Factor Factor 1 2 3 4 Large retailers offer a wide variety of merchandise. .662 Large retailers are the major competitors of small .714 retailers. Large retailers must be located far away from residential .715 areas. .598 Small retail shops face stiff competition from too many retailers. .634 My shop has different attractions from large retail outlets. .562 There are too many large retailers in the Klang Valley. .734 Large retailers increase the problem of traffic congestion .733 Small retail shops face stiff competition from too many .528 retailers. There are too many retailers of various types in a .522 commercial area. Customers frequenting large retail outlets are different .640 from those visiting small outlets. Customers will increase with the presence of large .698 retailers in my area.

Factor analysis identified four factors with eigenvalues above 1.5 constituting retailers’ perceptions towards their larger counterparts. Factor 1 loads around statements pointing towards the formation of effective Retail Strategies where aspects of merchandise variety, location, store size, competition and store attraction are characteristics of strategies capable of differentiating one retailer from another. Strategic inputs are indeed important to any retailers as the superiority of the retail mix determines the effectiveness of their competitive edge that will differentiate them from others. The small retailers however, agree that large retailers are their competitors although accepting the notion that they have different attractions from the large retailers.

In line with this, Factor 2 points to statements on the Number of Retailers. Statements on the existence of too many retailers in the Klang Valley and the possibility of traffic congestio n in areas where large retailers reside are valid statements that should be given due consideration. Healthy competition is often good both for retailers and consumers but too much competition may spell trouble and some retailers that are not well equipped to compete may find that their survival is threatened. This is where the local authorities play an important role in ensuring optimum numbers of retailers exist in a particular area bearing in mind the demographic characteristics and the size of the population in the area.

Factor 3 is reflective of statements concerning issues of Competition and the existence of too many retailers in some commercial areas in the Klang Valley. Competition is felt by the retailers not only from the hypermarkets but also from any types of retailers, be it big or small. Pointing the finger only to the large retailers may be unfair as the possibility of competition comes from retailers of various types and sizes.

Factor 4 relates to statements focusing on the importance of Customer Attraction where targeting to the right customers are essential in ensuring the continuity of business. Two statements that stand out in factor 4 are the differences in the profile of customers frequenting large retail outlets and the small stores and the possibility of large retailers attracting more customers in a commercial area. It has been postulated that different types of customers are drawn towards different retail outlets. Small neighborhood stores attract residential customers whilst big hypermarkets are crowd pullers capable

466 of attracting people from a distance of 5-10 kilometers on average. In addition, the purchasing patterns of residential customers patronizing their neighborhood stores are different from those who make planned purchases to hypermarkets. The tendency to buy in large quantities is typical for hypermarket purchases but neighborhood stores are visited for small, frequently purchased and necessary items.

Using ANOVA, these factors were further evaluated to assess the leve l of significance on the different types of retailers. The result of ANOVA is outlined in Table III below.

TABLE III Analysis of Variance (ANOVA)

Sum of Mean Squares df Square F Sig. REGR factor Between Groups 11.262 4 2.815 3.049 .021 score 1 for Within Groups 87.738 95 .924 analysis 1 Total 99.000 99 REGR factor Between Groups 15.836 4 3.959 4.522 .002 score 2 for Within Groups 83.164 95 .875 analysis 1 Total 99.000 99 REGR factor Between Groups 14.100 4 3.525 3.944 .005 score 3 for Within Groups 84.900 95 .894 analysis 1 Total 99.000 99 REGR factor Between Groups 15.942 4 3.985 4.558 .002 score 4 for Within Groups 83.058 95 .874 analysis 1 Total 99.000 99

The analysis revealed that all four factors are acceptable with significance levels less than .05. The F values indicate significant differences among groups and the higher the F values, the more likely that the null hypotheses are rejected. As such all four null hypotheses are rejected and H1, H2, H3 and H4 are accepted in explaining the ability of small retailers to compete with much larger retailers.

DISCUSSION

The threat felt by the small retailers with the increasing emergence of the hypermarkets is valid to some extent. Indeed, when new competitors come in, those unable to cope effectively will be forced to move out. The inference that the hypermarkets are causing customers to migrate from the small retailers to their large conducive outlets is relevant only if one is to consider the purchasing preferences of customers. Generally, the retail strategies of large retailers are geared towards bulk buying or large volume purchasing where customers plan their shopping outing. For the small neighborhood stores, residential customers will always have a need for them for the purchase of fast moving consumer goods. Thus, the target groups of both these retailers differ in terms of the frequency and purchasing patterns.

It is agreed that the number of retailers in a particular area will influence the extent of competition. Too many retailers of various formats are likely to create an unhealthy environment and some may be forced to step down. There must be proper planning on the part of local governments to ensure that an effective combination of retailers exist to meet the growing needs and affluence of customers whilst maintaining the rate of competition. Aggressive competition may mean better services and customer offerings, yet it can also kill those unable to cope. While the hypermarkets that are most visible in the Klang Valley today are thos e substantially owned by multinationals, this does not directly imply that local traders are up against the much bigger and more resourceful foreign retailers.

467 The time has come for all parties in the retail industry to reevaluate their contribution and to have a more macro view of the situation. There is a need to look at how the big retailers can essentially contribute to relevant members of the distribution channel, be they retailers, wholesalers, or even manufacturers. To the retailers, the existence of the hypermarkets is forcing them to reassess and to strengthen their strategic abilities. The supermarkets especially are more likely to feel the pinch of competition from the hypermarkets as their customer profiles are more similar to those of the hypermarkets. Unlike the neighborhood stores where residential customers still see the need to shop at local stores, there is a tendency for customers frequenting a particular supermarket to migrate to more attractive hypermarkets. This is perhaps an area of competition which retailers have to address and seek ways of improving their positions.

The Ministry of Domestic Trade and Consumer Affairs has actually develop specific guidelines in monitoring the growth of hypermarkets (Lee, 2002) but problem of implementation persists. Who is responsible to implement and monitor established procedures? Is it the responsibility of local authorities or does the Ministry need to set up specific teams in charge of monitoring the growth and impact of the hypermarkets? There appears to be a differing perception of whose responsibilities these should be as both local authorities and the Ministry seek to define and demarcate their specific functions in this area.

The strengthening of the distribution channel is more likely to occur if all parties within the distribution structure seek to work together. The presence of the hypermarkets should spell better coordination and relational implications among suppliers and distributors. The supply chain could be further strengthened through formal measures where large retailers are pulled in to assist and educate the suppliers on product quality. Retailers being closest to end-users are more likely to understand the customers and customer information can be fed back to the manufacturers to improve product offerings. It is indeed irrational to curb the growth of large retailers simply because they are considered threats to the small retailers when both could actually work side by side, each with its own specific target markets whilst focusing on establishing a more effective distribution channel. This is the vision but if political intervention persists without rational justifications, there is a tendency for the whole distribution system to topple when aggression replaces more democratic management of the distribution system. There is a dire need to look at how a win-win situation could be created and therefore ensuring a more healthy and balanced distribution management in the country.

CONCLUSION

This study explores the possibility of as sessing retailers’ attraction from a strategic perspective which implies that their ability to attract customers go beyond mere size and dominance. It has been a common practice to associate retail size with the ability to pull in customers, yet, the possibility of retailers competing effectively through planned strategies and manipulation of selected retail mix have not been explored fully. This study is an initial investigation in the retail industry where new hypermarkets are aggressively expanding the ir positions while small retailers are seeking regulatory avenues towards curbing their expansion. Although the study is not exhaustive as it focuses only in selected areas in the Klang Valley, it nevertheless provides an avenue for further discussion on the impact of larger retailers over small players in the industry. Much needs to be done especially in probing deeper into strategic developments as well as effective retail planning. This is perhaps the direction of future studies in the area.

REFERENCE

Asian Retailer (1994). Brand New Retail Concept for Malaysia, November, 28 Filser, M. And Mclaughlin, E.W. (1989). Toward a Strategic Model of Marketing Channel Evolution, in L. Pellegrini and S.K. Reddy (eds.), Retail and Marketing Channels,London: Routledge. Krishnamoorty, M. (2002). Hypermarkets Play Big Brother, The Star, 10 October. Lee, Y.P. (2002). 30% Local Products Condition, The Star, 25 April , 4 Retail Management Services (2001). Arthur Andersen Consulting.

468 Mohd-Roslin, R. (1999). Supplier-Retailers Relationships in Grocery Distribution: Case Studies in Malaysia, Unpublished Ph.D Thesis, Keele University, . Moreira, C.F. (2002). Retail Market Goes Hyper, The Star, 23 April, 43. McTaggart, W.D. (1969). The Weld Supermarket: A Study of Kuala Lumpur Shopping Center and its Clientele’, Malaysian Management Review , 4, (3), 55-64. Rosmimah Mohd Roslin and Noraini Ismail (2002), Impak Pasaraya Besar Terhadap Para Peruncit Kedai Kecil dan Pengusaha Kedai Elektrik di Ampang, Ministry of Domestic Trade and Consumer Affairs. Zainal Abidin Md. Said (1989). Retailing in Peninsular Malaysia, Kuala Lumpur: Arena Buku.

APPENDIX 1 TABLE I Profile of Respondents

Characteristics Nos. % Type of shops Grocery stores 25 16.7 Electrical stores 68 45.3 Hardware stores 17 11.3 Chinese Drug stores 15 10.0 Pharmacy 12 8.0 Others 13 8.7 Store Size < 1,000 sq. feet 29 19.3 1,000 - 2,000 sq. feet 99 66.0 > 2,000 sq. feet 22 14.7 Year Store Opened Before 1990 143 95.3 1991-1995 5 3.3 1996-1999 2 1.3 Major Customers Residential customers 127 84.7 Office/Factory workers 19 12.7 Others 4 2.7 Frequency of Visits by Main Customers Everyday 10 6.7 Once a week 53 35.3 Three times a week 78 52.0 More than 3 times a week 9 6.0

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