Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
Liberalization of Retail Industry in Malaysia: It’s Impact on Local Small
Scale Retailers
Nor Azila Mohd Noor* Hanissah A. Razak ** and Azli Muhammad ***
The emergence of multinational retailers in Malaysia brings significant changes to the
domestic retail scenario. In the past, retail formats such as conventional store,
minimarket and night market dominated the retail scene but the recent trend has seen
the mushrooming growth of large scale retailers namely hypermarkets, warehouse and
superstores which are mainly foreign-owned in the market place that give more choices
of shopping for consumers. The existence of large retailers brings with it the question of
dominance and implications to the local operators. This study investigates the impact of
liberalization of retail store via the establishment of large scale retailers on local small
scale retailers. Quantitative method involving survey was used to collect and analyze the
data. A total of 110 responses were gathered using area sampling method.
The
findings from this survey show that the entry of large scale retailers affects the
operations of the small local operators. The large scale retailers did impose competition
on the small scale retailers. It is recommended that some regulatory measures
especially by government agencies are necessary in order to sustain the
competitiveness of small local players.
JEL Codes: M31
1. Introduction
It is well known that in the 80’s, globalization of the world wide economy was largely dominated by
the manufacturing firms. However, this phenomenon stated to change in the early 1990s where the
services sector has started to internalize due to remarkable development made in various aspects
such as the evolution in telecommunication and information technology, the deregulation of services
industries and also the liberalization of foreign trade and investments regimes world-wide following
the establishments of the World Trade Organization’s (WTO) General Agreement on Trade in
Services (GATs) in 1995 (Kaliappan et al., 2008). Compared with other sectors, retail industry has
shown a tremendous growth where the intensified globalization of the retail industry brought about
the emergence of giant retail multinationals such as IKEA, Tesco, Carrefour and Wal-Mart. At the
early stage of growth, these giant retailers largely focused their operations in developed countries.
However, the trend started to change where in last few years they started to start their operations in
to the developing and emerging markets such as East Asia, Latin America and Central and Eastern
Europe (Wrigley, 2000; Wrigley & Currah, 2005).
The evolution of retailing all around the globe has seen many dynamic changes occurring, and the
pace of such changes differ within different environment. In line with global and market changes, the
Malaysian retail environment has also undergone the pace of evolution accelerating since the early
1990s when new retail formats introduced by foreign large retailers begin to meet the changing
needs and demands of Malaysian consumers. Initially, the retail sector in Malaysia consisted of a
large number of small outlets offering a limited variety of goods and services. According to Chan
*Assoc. Prof. Dr. Nor Azila Mohd Noor, Othman Yeop Abdullah Graduate School of Business, University Utara Malaysia
Email : azila@uum.edu.my
**Hanissah A. Razak, College of Business, University Utara Malaysia. Email: hanissah@uum.edu.my
***Azli Muhammad, (postgraduate student), Islamic Business School, University Utara Malaysia. Email:
azlizila_m@yahoo.com.my
1
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
(2006), the retail industry in Malaysia has expanded gradually due to the economic recovery and
improvement in consumer confidence. Malaysia’s retail industry has progressed rapidly in parallel to
the changes in the developed economy. However, as the economy advanced and consumers
became more mobile and well-off, the retail sector experienced significant changes whereby small
local traditional shops were later complemented by large supermarkets, department stores as well as
hypermarkets offerings variety choices of merchandise and services.
Furthermore, with the remarkable growth and relatively open Malaysian retail sector attracted the
entry of multinational retailers such as Carrefour, Tesco, Giant, IKEA, Jaya Jusco etc. into the
country. Large scale retailers such as Tesco, Carrefour, and IKEA in Malaysia have increased in
numbers. For example, till today, Tesco has opened 50 stores throughout the countries. This has
brought about widespread alarm among local small retailers especially neighborhood stores of the
likelihood that consumers no longer see a need to patronize their stores and consequently they will
be wiped out of the market. Although it is argued that the establishment of foreign giant retailers
would expand, modernize and improve the efficiency of the local small retailers, but in reality, it has
led to speculations and accusations on the likelihood of small retailers being wiped out of the retail
industry due to the competitive pressures created by these giant foreign retailers, especially where
price is concerned because they benefit from the economies of scale of bulk purchasing (Kaliappan,
2008; Roslin & Melewar, 2008). However, this issue is relatively under explored in academic circles.
There were several studies have been conducted in various countries in North and Latin America,
and emerging Asian countries such as China, Taiwan and Japan. However, to the best of our
knowledge, a very limited number of studies were conducted in Malaysian context despite of the
mushrooming numbers of large foreign retailers lately.
The rapid expansion of large retailers, which dominated by multinational companies are regarded as
threats to local small retailers (Rosmimah & Melewar, 2008). So intense is the pressure from the
small scale retailers that the government is now compelled to check the rapid expansion of the large
scale retailers, which dominated by foreign players and to impose restrictions on the number of
existence. In response to the pressure, there are now conditions and guidelines set by the Malaysian
Ministry of Domestic Trade and Consumer Affairs (MDTCA) before hypermarkets are allowed to open
in any sites (Lee, 2002). According Rosmimah and Melewar (2008), this new scenario has brought
about the need to reevaluate the development of retailing especially small scale retailers in the
country. They also noted that it is estimated that small scale stores still holds almost 49% of the
share of retail trade despite of the expanding of the hypermarkets and super stores. It is a fact that at
the moment, the retail store in Malaysia is still very much dominated by local small scale retailer. The
increasing number of foreign large scale retailers and the potential expansion of these retailers in the
next few years are worrying these small players and therefore they are resorting to various measures
to check and if possible to limit expansion of the large retailers. Thus, this study attempts to fill this
void by examining the impact of the existence of large foreign retailers on local small retailers in
Malaysia. We hope that this study would shed some lights on the impact of foreign giant retailers on
the locals and narrow the existing gaps in the literature.
2. Literature Review
There exists an acceptable belief that different types of retail businesses will be affected differently
by the presence of large scale retail outlets. Studies on the impact of large retailers to local markets
were pioneered by Stone (1997). In his study, he discovered that there was resistance from the local
markets who concerned about the competition created by large retailers. Stone (1998) then
discovered strong evidence on the effects of Wal-Mart on competing businesses. Many scholars
2
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
such as Dawson (2003); Harris (2006) and Suryadarma et al. (2007) revealed that the presence of
large-scale retailers has a significant economic and social impact on local retailers, especially on
small businesses. There are positive and negative impacts on local retailers.
From the positive side, Dawson (2003) contended that the increasing presence of large retailers may
exposed small scale retailers with a modern outlets and a new retail channel, new marketing and
merchandising approaches, better information managements methods and larger investment in the
modernization of the sector as a whole. Small scale retailers that involve in selling different products
from the large scale retailers will be positively affected; meanwhile small retail businesses that sell
similar products to the large scale retailers tend to experience greater losses due to lack of
competitiveness (Kaliappan et al., 2008). In a similar vein, the closeness of existing businesses to the
large scale retailers also plays an important role. Those small operators that are located closer to the
large retailers are likely to be affected more than those businesses that are located further away from
the new entrant (Peterson & McGee, 2000). This is probably due to the positive externalities or spillover effects of the neighboring retail businesses when consumers shop for other goods that are not
available in the large retail outlets at the surrounding local retail stores (Kaliappan et al., 2008; Zhu et
al., 2005).
Despite some positive effects, Kalappan et al. (2008) argued that it is generally contended that the
increasing establishment of large retailers, especially multinationals may have depressing effects on
the well-being of local small scale retailers in which the negative impact generally outweighs the
positive effects mentioned above (Farhangmehr et al., 2001; Da Rocha & Dib, 2002; Wang, 2003;
Bianci & Mena, 2004). This is also supported by Uusitalo (2004) who explored the competitive
reactions of local, highly concentrated grocery markets in Finland towards the entrance of a foreign
grocery retailer. He found that the most visible competitive impact of the foreign grocery into Finland
were the changes in the marketing mix variables, especially process and product range. Julio (2002)
iterated that the procurement practices of large retailers that emphasized on quality and safety
standard, packing and packaging, cost , volumes, consistency and payment practices have a big
impact on and are significant challenges for farmers and supply chains in Latin America. In the same
vein, study conducted by Surdayama et al. (2007) that measured the impact of supermarkets on
traditional markets in Indonesia found that the supermarkets had significant impact on the number of
employees in traditional markets. This is also supported by Kaliappan et al. (2008) who studied the
impact of foreign hypermarkets on local retailers in Malaysia, revealed that some businesses,
especially complementary type of retail business had benefited while grocery stores were negatively
affected by foreign hypermarkets.
A similar studies conducted by Renkow (2005) and Irwin & Clark (2006) found that the competency of
these large scale retailers to offer variety choices of goods and services at cheaper prices under one
roof exerts a significant effect on small scale players. In this context, small local businesses will be
either forced out of the business or forced to downsize as their consumer base declines when a new
large scale retailer opens its operations in a neighborhood area. This is consistent with study
undertaken in Thailand by Tosonboon (2003) who found that the expansion of foreign retailers has
caused dislocating effects on traditional retail businesses.
In sum, even though there is lack of comprehensive studies on the issue of impact of large retailers
on small scale players, there is a clear evidence that the establishment and expansion of large
retailers will ultimately exert impacts on the existing small businesses. Whether the impact of these
3
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
large foreign retailers on local retailers is positive or negative, it depends on various aspects as
discussed in the above literature.
3. The Methodology
The impact of the large retailers on small scale retailers was derived from surveys via personal
interview, Field surveys in three states in Malaysia was carried out to gather the required information.
The questionnaire largely focused on three general areas. The first part relates to the general
information of the small scale retailers, the second part focuses on the performance trend of the
respondents over a three period of years. The last part covers the perceptions of the respondents on
key elements impact of the presence of large scale retailers on their operations.
For this study, the selection of sample was made using an area sampling approach. An area
sampling is selected as this constitutes geographic clusters so that the present study follows the
requirement of the Ministry of Domestic Trade and Consumer Affairs (MDTCA), the regulator of the
distributive trade in Malaysia (Roslin & Melewar, 2008). Following the similar approach by Roslin and
Melewar (2008), those small scale retailers operating within a radius of 3.5 kilometers of the large
retailers were selected as potential respondents.
4. The findings
A total of 110 responses from small scale retailers were gathered comprising a multitude of retailers
most likely to be affected by the establishment of large scale retailers. Table 1 shows profile of the
respondents. A majority of the retail establishments in the sample were in business from 5-10 years.
Majority of these retailers (91%) were operating family business with least retail space (69%). Almost
half of the respondents have annual sales greater than USD 80000 but less than USD 100 000. The
number of workers employed by the respondents generally varies according to the type of retail
business, but in general most retail business in the sample tend to be small as they hire a very few
numbers of employees.
Table 1: Profile of the Respondents
Characteristics
Category of business
Provision shops and minimarket
Restaurant and bakery
Hardware
Electrical
Bookstore and stationary
Others
Size of the store
< 1000 sq. feet
1000-2000 sq. feet
>2000 sq. feet
Distance from large scale retailers
<1 kilometer
1-3 kilometer
> 3 kilometer
Percentage (%)
55
15
20
12
5
4
24
68
8
57
34
9
4
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
We conducted cross tabulation between type of business of the small retailers and whether these
businesses were affected by the establishment of nearby large retailers. Refer to Table 2 below,
majority of the retailers (71%) reported that the existence of hypermarkets have negatively affected
their businesses while the remaining 29 percent reported that they were not affected by the
establishment of the hypermarkets nearby. To measure the extent of effects, we divided it into three
categories that is “very competitive”, “moderately competitive” and “marginally competitive”. This is
similar method used by Kaliappan et al. (2008). When we divided the impact into different categories,
we found that the responses were generally mixed. We discovered that 52 percent of the small scale
retailers perceived that the extent of the impact of large retailers on their current business operations
are very competitive, while 18 percent feel that it is moderately competitive and the remaining 30
percent responded that the effect was marginally competitive. Within the small retailers who claimed
that they were affected by the existence of large retailers, provision shops or minimarket are the most
affected type of stores which accounted for 57 percent followed by hardware (21%), bookstore and
stationary (13%), electrical (6%) , restaurant and bakery (2%) and others (1%).
Table 2: Cross Tabulation between type of business and impact of hypermarket
Type of business
Provision shops/minimarket
Restaurant and bakery
Hardware
Electrical
Books and stationary
Others
Total
Percentage
57
2
21
6
13
1
71
The last part in the questionnaire relates to the extent of impact of large retailers on small retailers on
key elements such as sales volume, profit and number of customers for the last 3 consecutive years.
To achieve this, respondents were asked about the performance of these three dimensions whether
it increased, has not changed, or decreased after the presence of large retailers nearby. Overall, we
found that 68 percent of the small retailers reported that it has decreased or unchanged. Only a
minimum of 8 percent of the respondents gave a positive feedback on the existence of large retailers
nearby in terms of the sales volume, profit and number of customers. More than 60 percent of the
respondents reported that their customers, sales volume and profit were decreased with the
existence of hypermarkets while the remaining perceived unchanged in the three elements. To be
specific, as shown in table 3 below, it is observed that reduction of customers are very obvious
compared with the other two elements.
Table 3: Impact of large retailers on key elements of small retailers businesses
Key element
Increased (%)
Number of customers
Sales volume
Profit
2.5
3.1
2.8
Has not changed (%)
34.5
37.9
50.2
Decreased (%)
63
59
47
5
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
5. Summary and Conclusions
Undeniably, the liberalization process and initiatives given by the Malaysian government to
encourage foreign direct investment have brought significant changes in the Malaysian market in
general and in retail business in particular. The growth of the retail sector in Malaysia has
undoubtedly been affected by the establishment of giant operators who are mostly owned by foreign
investors while the small scale retailers are dominated by locals.
The findings from this survey proved that the establishment of large scale retailers in Malaysia is not
favor by the small scale local retailers. To be specific, the existences of large retailers take certain
portions of the market share of the small retailers. Our survey found that the emergence of large
retailers affects much on the provision shops or minimarkets compared with other types of business
category. This indicates that small scale provision shops were no longer unable to remain competitive
with the existence of large scale retailers and from the informal interview undertaken many have
been forced to close down. This is due to the fact that more consumers are now gradually shifting
their shopping venue from conventional stores to large retailers for many reasons. In this regards, the
small scale operators have generally expressed their unhappiness and worries on the increasing
emergence of large scale retailers and hope that the relevant government agencies should limit
giving licenses for them to operate in the residential areas for the benefit of survival of local retailers.
Even though significant transformation and efforts have been made by the local small retailers in
response to changes in the retail market structure brought by the large scale operators, it was
uncertain whether the changes made in the business operation able to sustain the number of
customers, sales volume and profits in the future. In addition, it is claimed that the transformation
made in the business practices of the small scale operators were not sufficient to increase their
competitiveness in the marketplace. This is due to the fact that there exist significant differences
between retailers and large scale retailers in terms of size, economies of scale, product assortments,
prices and customer services (Kaliappan et al., 2008).
To strengthen the position of local small retailers in the market, government and policymakers have
to play their roles to safeguard the local operators despite of the increasing expansion of large
retailers. In this regard, the government must consider appropriate policy measures to manage the
changes that are taking place in the domestic retail market and to ensure that the existence of large
scale retailers will not kill the small local players, in particular. They should take a preemptive action
by actively involved in the market to control and monitor the developments that are taking place in the
domestic retail industry and should try to get continuous feedback from local retail businesses from
time to time before permitting the large scale retailers especially foreign-owned retail businesses to
operate. In order to ensure that the market remain survive and competitive in the business
environment but at the same time still under the supervision and control of government agencies, it is
recommended that there must be a significant change in the government role from the existing
regulatory role to more of supervisory role. There should exists a continuous initiatives from the
government and regulators to educate the public in general and local operators in particular about the
economic impact of commercial development policy and also introduce policies and rules that are
more reliable and in line with the values and concerns of the local retailers and consumers.
End Notes
This research is fully funded by the Malaysian Ministry of Higher Education under the Fundamental
Research Grant Scheme (FRGS).
6
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
References
Amin, MA., MA Fatimah, and AL Ismail 2011. “The impact of supermarkets and hypermarkets from
the perspectives of fresh and vegetables wholesalers and retailers, Journal of Agribusiness
Marketing”, vol. 4, pp. 21-37.
Chan, CT 2006, 24 October. 6%
http://biz.thestar.com.my/news/.
retail
growth
seen
for
Q4.
The
Star
Online.
Da Rocha, M. and A Dib, 2002. “The entry of Wal-Mart in Brazil and the competitive responses of
multinational and domestic firms, International Journal of Retail and Distribution Management”,
vol. 30, no. 1, pp. 61-73.
Dawson, J. 2003, “Model of the impacts of retail internalization” in Dawson, J., M Mukoyama, SC
Choi, The Internalization of Retailing in Asia (Ed.), Routledge Curzon, Taylor& Francis Group,
London and New York.
Farhangmehr, ER 2001. “Hypermarkets versus traditional retail stores-consumers’ and retailers
perspectives in Braga: A case study, Journal of Retailing and Consumer Services” vol. 8, pp.
189-198.
Harris, TJ 2006. “The economic and social impact of big box retailers, American Journal of
Agricultural Economics”, vol. 88, no. 5, pp. 1311-1312.
Irwin, EG and J Clark 2006. “The local costs
http://aede.osu.edu/programs/ComRegEcon/retail.htm.
and
benefits
of
Wal-Mart”
Kaliappan. SR, R Alavi, K Abdullah, and MA Zakaullah 2008. “Liberalization of retail sector and the
economic impact of the entry of foreign hypermarkets on local retailers in Klang Valley,
International Journal of Economics and Management”, vol. 2,no. 2, pp. 323-342.
Lee, YP 2002, 4 April. 30% local product condition, The Star, p.4.
Peterson, M and JE McGee 2000. “Survivors of “W-day”: An assessment of Wal-Mart’s invasion of
small town retailing communities, International Journal of Retail & Distribution Management”,
vol. 28, pp. 170-180.
Renkow,
M
2005.
“Wal-Mart
and
the
local
http://www.agecon.ncsu.edu/VIRTUAL_LIBRARY/ECONOMIST/novdec05.pdf.
economy”.
Rosmimah, MR and TC. Melewar 2008. “Hypermarkets and the small retailers in Malaysia: Exploring
retailers’ competitive abilities, Journal of Asia Pacific Business”, vol. 9, no. 4, pp. 329-343.
Stone, KE 1997. “Impact of the Wal-Mart phenomenon on rural communities”. http://www.
Seta.iastate.edu/retail/publications.pdf.
Suryadarma, D., A Poesoro, S Budiyati, M. Akhmadi and M Rosfadhila 2007. “Impact of supermarkets on
traditional
markets
and
retailers
in
Indonesia’s
urban
centers”.
http://www.smeru.or.id/report/research/supermarket/supermarket_eng.pdf.
7
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
Tosonboon, J 2003. “The impact of world class distributors on the retail industry in Thailand” in Dawson,
J, M Mukoyama, M, SC Choi, and R Larke, .The Internalization of Retailing in Asia (Ed.), Routledge
Curzon, Taylor& Francis Group, London and New York.
Uusitalo, O. 2004. “Competitive reactions to market entry: The case of the Finish grocery retailing
industry, British Food Journal” vol. 106, pp. 663-672.
Wrigley, N. and A Currah 2005. “Globalizing retail and the new e-economy: The organizational challenge
of e-commerce for the retail TNC”. http://www.anderwcurrah.com/Geoforum.pdf.
Wrigley, N., NM Coe, and AD Currah, 2005. “Globalizing Retail: Conceptualizing the distribution based
transactional corporation” http: //.anderwcurrah.com/PHG2005.pdf.
8