Online shopping is the real threat to small shopkeepers

Faced with opposition from its own allies like Mamata Banerjee, the government has shelved its proposal to allow Walmart and other multibrand foreign retailers to have majority stakes in Indian hypermarkets. Critics have accepted the bogus claim that foreign retailers will kill small Indian shopkeepers.

In fact, the Walmart model is a 20th century concept that’s rapidly becoming obsolete in the 21st century. Internet shopping now threatens the hypermarket, which may survive in small towns with low land prices, but looks doomed to becoming a minority player.

In the massive annual shopping spree during the Thanksgiving season (end of November) in the US, 39% of consumers said they bought goods mostly through the internet, against 44% who mostly bought from brick-and-mortar stores and hypermarkets. A small proportion also made purchases through catalogues. The internet proportion keeps rising.

Arvind Singhal, a top marketing guru, says that in Britain, no less than 4,000 megastores have been closed in the last seven months because of competition from e-commerce (internet sellers). That shows what the future holds.

In the US, small booksellers were decimated in the last two decades of the 20th century by large book chains like Borders and Barnes and Noble. But these chains in turn are now threatened by Amazon, the giant internet book-seller. Amazon offers the lowest prices, and also offers second-hand books at steep discounts. Borders has gone bust and Barnes and Noble is desperately seeking a saviour.

The Indian left highlights resistance in many communities in the US and Europe to the opening of new Walmarts, to preserve small shops. They ignore the fact that Walmart has been a saviour of the poor, by increasing their purchasing power. Indeed, while Walmart kills neighbouring shops, the extra money it leaves in the pockets of consumers finances extra spending by them in unrelated areas. This more than offsets the shrinkage of neighbouring shops, according to some studies. These are, of course, hotly contested by Walmart’s critics.

Many US municipalities refuse to allow Walmart to open new hypermarkets because of the threat to local shopkeepers. Yet the real threat now comes from internet shopping, which municipalities are helpless to ban. New technology and convenience are overcoming traditional regulations.

Walmart’s so-called Big Box or hypermarket model will fail in India. The Big Box requires acres of parking space, and so is typically located on the outskirts of a city or in small towns where land prices are low. Even poor Americans own cars and will drive 20 miles to a distant Walmart. But Indian land prices are astronomical even in city outskirts, making low-cost hypermarkets impossible. Only a small minority of Indians has cars, and because of traffic jams they will not spend hours to drive 20 miles to the outskirts of towns for shopping.

Small Indian shopkeepers do not have the discounting capacity of a Walmart. But they often evade sales tax and income tax, which hypermarkets can’t. Consumer theft does not hit small shopkeepers but can hale profits at hypermarkets. India is a world leader in consumer theft.

Thanks to cheap labour, small shops can provide home delivery at low cost. Many shopkeepers know their customers personally and extend them credit. For all these reasons, the aam bania will easily compete with hypermarkets in most locations. If India continues to grow rapidly, after some decades labour will become too expensive for small shopkeepers to offer home delivery. Other developments like a Goods and Services Tax may also reduce their ability to evade sales tax and income tax.

But long before these developments reduce the shopkeeper’s edge over hypermarkets, e-commerce will swamp both. E-commerce is still constrained today by limited credit card usage, but this is expanding very fast. US experience shows that e-tailers may legally escape sales tax. Municipalities cannot ban e-commerce.

The same will be true in India. Fifty million small shopkeepers went on strike to scotch foreign hypermarkets. But neither they nor Mamata Banerjee can stop e-commerce. That’s no disaster. The traditional bania is willing to stand in his shop 12 hours a day, but not his educated children. Just as the children of farmers want to get out of farming, the children of shopkeepers want to get out of retail.

We need economic reform to help them get jobs in new areas. The “Doing Business” studies of the World Bank show that India is one of the worst countries in the world in which to start a new business, get a building permit or get contracts enforced. Reforms to remove these obstacles are even more important than reforms to bring in foreign hypermarkets.