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From their early beginnings in North America and Western Europe, supermarkets have rapidly spread across the developing world since the 1990s. Formats in modern retailing, like small service stores, supermarkets, hypermarkets and discount stores, have expanded internationally in countries in South America, East and Southeast Asia, Africa, and since the late 2000s also in South Asia. The diffusion of modern forms of retailing have profound implications in developing countries – for existing retail stores and informal vendors, for millions of producers and intermediary traders in the respective supply chains, and for consumers.

 

Implications of Retail Modernisation in Developing Countries

(c) GIZ

Overall, societies are likely to gain from retail modernisation. It implies the use of new technologies and exploitation of economies of scale, and thus results in higher productivity, increased convenience and lower consumer prices. However, the fast roll-out of large foreign retail chains in poor countries with very traditional and low-productivity production and retail structures has the potential to destroy the livelihoods of thousands or even millions who currently earn a decent living through traditional farming or intermediary trading or sales. Moreover, manifold trade-offs need to be taken into account: what benefits certain producer or consumer groups may harm others.

 

Retail Modernisation as a Challenge for Developing Countries

Developing countries and their international development partners therefore face the challenge to mitigate the harsh effects of structural change and to assure that local stakeholders have sufficient time and opportunity to adapt to the new business environment. Ignoring retail modernisation and trying to keep modern retailers out of national markets is not desirable, because the productivity effects will fail to be realised. And it is not feasible in the long term, as an overall trend towards trade and foreign direct investment liberalisation prevails. Therefore, delaying the inevitable adaptation of local retail systems to international best practices may result in higher adaptation costs in the future. The challenge therefore is to proactively shape the way national systems adapt to the global retail revolution.

 

A Sequenced Approach for Shaping Retail Modernisation in an Inclusive Way

Our study “Making Retail Modernisation in Developing Countries Inclusive” reviews a wide range of policy options. It shows that governments have significant leeway for shaping retail modernisation in an inclusive way. Developing country governments display very different attitudes towards retail modernisation and liberalisation. Unconditional liberalisation prevails in many African and Latin American countries, while bureaucratic over-regulation dominates in countries like India, Malaysia and Vietnam. We argue in favour of a sequenced approach. On the one hand, productivity development and competition needs to be supported. On the other hand, we see the urge for fostering technological learning and for applying safeguards for the poor. Working collaboratively with retail corporations is, of course, a key element of such an agenda. But this study also presents a host of additional intervention options.

 

The Role of Public Policy and Development Agencies in Inclusive Retail Modernisation

(c) GIZ

 Public policy plays an important role in shaping this process in a way that maximises opportunities related to productivity growth and consumer convenience and, at the same time, mitigates the undesirable social and environmental effects as well as the social hardships caused by the transformation. Donor agencies can support governments in many ways as facilitators, knowledge brokers and financiers. Of course, specific policies are always dependent on the specific country context.

Creating an overall business-enabling environment will attract more corporate investment in retailing and, at the same time, it will stimulate local supply chain activities. National authorities can also shape regulations for wholesale and retail chains through

  • foreign direct investment entry requirements
  • zoning and opening hours restrictions
  • local content rules and sourcing requirements (e.g. obliging foreign investors to purchase a certain amount of goods and services locally) and through
  • food waste and environmental regulations.

Furthermore, the public sector may encourage and support the inclusion of local suppliers in retail value chains. This includes supporting small farmers

  • by offering financing and insurance schemes
  • in gaining access to fair trade labels
  • in complying with food safety and quality standards
  • in pre-processing activities such as washing or packaging. Another policy option is supporting intermediaries between supermarkets and smallholders for lowering transaction costs of supermarkets 

 

Private Sector Initiatives for Inclusive and Sustainable Retail Modernisation

The private sector also has a crucial role to play in this context. Companies may develop inclusive and sustainable business models. Reasons for corporates to develop and adopt inclusive and sustainable business models are:

  • increased customer expectations and reputation management
  • securing local product supply for meeting specific local consumer demands
  • reducing currency risks by sourcing locally
  • broadening the national customer base by preserving income opportunities for domestic retailers.cover_study

Large retail companies have already undertaken a range of actions to improve their socioeconomic and environmental effects. These include measures to: strengthen local suppliers so that they comply with certain standards and certifications, improve social conditions in their own retail activities and in their supply chains, improve the ecological footprint of retailing in areas ranging from sustainable food production and animal welfare to energy efficiency and packaging, strengthen corporate compliance, offer surplus food products to food banks, and help communities through involvement in a range of charity programmes. Donor agencies may seek collaborations with lead firms, in order to support corporate engagement for improving the socio-economic and environmental impacts of value chains.

 

More Information

This blog is a part of the March 2017 series on how businesses in the FMCG sector are including the BoP in their value chain. Read more here.

For detailed information on the topic, please access the study “Making Retail Modernisation in Developing Countries Inclusive

 

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