the state of domestic commerce in pakistan study 5 - retail markets

THE STATE OF DOMESTIC COMMERCE IN PAKISTAN

STUDY 5

RETAIL MARKETS

For

The Ministry of Commerce Government of Pakistan

November 2007

By

Innovative Development Strategies (Pvt.) Ltd. House No. 2, Street 44, F-8/1, Islamabad

Table of Contents

List of Abbreviations ............................................................................................................... i Acknowledgments ................................................................................................................ iv Executive Summary ............................................................................................................ 3 Section 1: Introduction .................................................................................................... 6 1.1. The Share of the Retail Sector in the Economy ......................................................... 6 1.2. Structure of the Sector ............................................................................................... 7 1.3. Profiles of Leading Retailers ...................................................................................... 9 1.4. Forecasts ................................................................................................................ 10 1.5. Regulatory Issues in the Retail Trade ...................................................................... 10 1.6. Barriers to Growth of Retail ..................................................................................... 11

1.6.1 Fiscal Impediments ...................................................................................... 11 1.6.2 Supply Chain Inefficiencies .......................................................................... 12 1.6.3 Dearth of Commercial Premises .................................................................. 12 1.6.4 Lack of Access to Finance ........................................................................... 13

1.7. Domestic Commerce Survey ................................................................................... 13 Section 2: Survey Findings for Retail ......................................................................... 14 2.1 Age of the Firm ........................................................................................................ 14 2.2 Financial Data ......................................................................................................... 16 2.3 Market Competition ................................................................................................. 17 2.4 Constraints .............................................................................................................. 19 2.5 Financing ................................................................................................................. 19

2.5.1 Source of Funds for Establishment of Business ........................................... 20 2.5.2 Loan Applications......................................................................................... 21 2.5.3 Modalities of Loan Applications .................................................................... 22 2.5.4 Credit ........................................................................................................... 23 2.5.5 Banking Practices ........................................................................................ 24

2.6 Linkages .................................................................................................................. 24 2.7 Employment ............................................................................................................ 24 2.8 Governance Issues.................................................................................................. 26 2.9 Issues of Expansion ................................................................................................ 27 2.10 Facilities for Retail Enterprises ................................................................................ 29 Section 3: Key Issues in the Retail Sector ................................................................. 31 3.1 Financing Issues ..................................................................................................... 31 3.2 Governance Issues.................................................................................................. 31 3.3 Issues in Assessing the Business Climate ............................................................... 32 3.4 Space Limitations .................................................................................................... 32 3.5 Potential to Generate Employment .......................................................................... 32 Section 4: Conclusions ............................................................................................... 33 4.1 Policy Recommendations ........................................................................................ 33

List of Tables Table 1.1: Categories of Retail Outlets ........................................................................... 8 Table 2.1: Average Monthly Revenue ........................................................................... 17 Table 2.2: Similar Enterprises Within a Radius of 1 km ................................................. 18 Table 2.3: Breakdown of Sources of Startup Capital ..................................................... 20 Table 2.4: Reasons for Not Applying for Loans ............................................................. 22 Table 2.5: Percent of Goods Purchased on Credit ........................................................ 23 Table 2.6: Patterns of Full Time Employment ............................................................... 25 Table 2.7: Patterns of Part Time Employment .............................................................. 25 Table 2.8: Expansion of Business ................................................................................. 27 Table 2.9: Reasons for Not Expanding the Business .................................................... 28 Table 2.10: Impediments to Expansion ........................................................................... 29

List of Figures Figure 1: Relative Frequency Distribution of Firm Age (Punjab) .................................. 15 Figure 2: Relative Frequency Distribution of Firm Age (NWFP) .................................. 15 Figure 3: Relative Frequency Distribution of Firm Age (Sindh) .................................... 16 Figure 4: Relative Frequency Distribution of Firm Age (Balochistan) – Firm Age ........ 16 Figure 5: Relative Frequency Distribution Number of Competing Firms ...................... 18 Figure 6: Relative Frequency Distribution of Entry Barriers ......................................... 19 Figure 7: Relative Frequency Distribution - Have You Ever Considered Applying for a Loan ...................................................................................... 21 Figure 8: Most Important Reason For Not Wanting to Apply For A Loan In The Last 5 Years ...................................................................................... 22 Figure 9: Relative Frequency Distribution of Percentage of Goods Purchased on Credit ......................................................................... 24 Figure 10: Relative Frequency Distribution of Number of Full Time Employees ............ 25 Figure 11: Relative Frequency Distribution of Number of Part-Time Employees ........... 26 Figure 12: Relative Frequency Distribution of Registration ............................................ 26 Figure 13: Relative Frequency Distribution of Expansion of the Business ..................... 28 Figure 14: Reasons for Not Expanding the Business ................................................... 29 Figure 15: Impediments to Expansion .......................................................................... 30 Figure 16: Condition of Main Access Road .................................................................. 30

Innovative Development Strategies (Pvt) i

List of Abbreviations

ABAD Association of Builders and Developers

ADB Asian Development Bank

ADBI Asian Development Bank Institute

APCA All Pakistan Contractors Association

ATT Afghan Trade Transit

BAF Bank AlFalah

BCI Business Competitiveness Index

BOR Board of Revenue

CAA Civil Aviation Authority

CBM Cubic meter

CBR Central Board of Revenue

CDA Capital Development Authority

CIB Credit information bureau

CMR Contract for the International Carriage of Goods by Road

CPI Corruption Perceptions Index

CPIA Country Policy and Institutional Assessment

DFID Department for International Development

DHA Defense Housing authority

EDF Export Development Fund

EIU Economist Intelligence Unit

EOS Executive Opinion Survey

EPB Export Promotion Bureau

ESCAP Economic and Social Development in Asia and the Pacific

FBS Federal Bureau of Statistics

FCL Full Container Load

FDI Foreign Direct Investment

FIAS Foreign Investment Advisory Service

Ft Foot

FY Fiscal Year

GCI Global Competitiveness Index

GCR Global Competitiveness Report

GD Goods Declaration

GDP Gross Domestic Product

GoP Government of Pakistan

GOR Government Officials Residences

GRT Gross Register Tonnage

GST General Sales Tax

HBFC Housing Building Finance Corporation

HBL Habib Bank Limited

HDR Human Development Report

HFIs Housing Finance Institutions

IFC International Finance Corporation

IFS International Financial Statistics

IMF International Monetary Fund

ISAL Informal Subdivision of Agricultural Land

ISO International Standards Organization

IT Information Technology

ITU International Telecommunications Union

http://en.wikipedia.org/wiki/Gross_Register_Tonnage

Survey Report on Domestic Commerce

Innovative Development Strategies (Pvt) ii

KBCA Karachi Building Control Authority

KDA Karachi Development Authority

KESC Karachi Electric Supply Corporation

KM(s) Kilometer(s)

KPT Karachi Port Trust

KSE Karachi Stock Exchange

LCL Less Than Container Load

LOA Length Overall

MCB Muslim Commercial Bank

MENA Middle East and North Africa

MOC Ministry of Commerce

MOD Ministry of Defense

MTDF Medium Term Development Framework

NBP National Bank of Pakistan

NCS National Conservation Strategy

NER Net Primary School Enrollment Rate

NHA National Highway Authority

NIE Newly industrialized economy

NIT National Institute of Transport

NLC National Logistics Cell

NTN National Tax Number

NTRC National Transportation Research Center

NTTFC National Trade and Transport Facilitation Committee

NWFP North West Frontier Province

PASSCO Pakistan Agricultural Storage and Services Corporation

PEC Pakistan Engineering Council

PHDEB Pakistan Horticulture Development and Export Board

PIAC Pakistan International Airlines Corporation

PIDE Pakistan Institute Of Development Economists

PIHS Pakistan Integrated Household Survey

PKR Pakistani Rupee

PQA Port Qasim Authority

PR Pakistan Railways

PREF Pakistan Real Estate Federation

PSDP Public Sector Development Program

R&D Research and Development

REER Real Effective Exchange Rate

REITs Real Estate Investment Trusts

RICS Royal Institute of Chartered Surveyors

SAI Social Accountability International

SBP State Bank of Pakistan

SKAA Sindh Katchi Abadis Authority

SME Small and Medium Enterprises

SPS Sanitary and Phytosanitary

SRO Statutory Regulation Order

Std Standard

TEP Total Factor Productivity

TEU Twenty-Foot Equivalent Units

TI Transparency International

TOR Terms of Reference


Innovative Development Strategies (Pvt) iii

TSDI Transport Sector Development Initiative

TTFP Trade and Transportation Facilitation Program

UK United Kingdom

UNDP United Nations Development Program

US United States

USA United States of America

USC Utility Stores Corporation

USD United States Dollars

WAPDA Water and Power Development Authority

WDI World Development Indicators

WEF World Economic Forum

WGI Worldwide Governance Indicators

WTO World Trade Organization

Innovative Development Strategies (Pvt) iv

Acknowledgment

The IDS team owes a debt of gratitude to the officers of the Ministry of Commerce for their

guidance, assistance and feedback during the course of this study. Our special thanks go out,

in particular, to Syed Asif Ali Shah, Secretary; Mr. Naseem Qureshi and Mr. Ashraf Khan,

Additional Secretaries; Mr. Abrar Hussian, Joint Secretary; Syed Irtiqa Zaidi, Consultant and

Mr. Qaseem Subhani, Section Officer, for sparing their precious time and efforts for the

study.

We feel a deep sense of gratitude for the Minister for Commerce. Mr. Humayun Akhtar

Khan, who took out considerable time from his busy schedule to guide us. It was his sincere

and deep conviction which enabled us to conduct and compile this detailed and

comprehensive study on Domestic Commerce of our country. His apt guidance and keen

analytical oversight were extremely helpful in finalizing the study and formulating the policy

recommendations.

This study has benefited from comments received from the following:

1. State Bank of Pakistan, Karachi.

2. Federal Board of Revenue, Government of Pakistan, Islamabad.

3. Planning and Development Division, Government of Pakistan, Islamabad.

4. Trade Development Authority, Government of Pakistan, Karachi.

5. (Management Consultants) Establishment Division, Government of Pakistan,

Islamabad.

6. Finance Division, Government of Pakistan, Islamabad.

7. Pakistan Institute of Development Economics, Islamabad.

8. NTTFC, Karachi.

9. FPCCI, Karachi.

10. Planning and Development Board, Government of Punjab, Lahore.

11. Planning and Development Board, Government of NWFP, Peshawar.

12. Planning and Development Board, Government of Sindh, Karachi.

13. Planning and Development Board, Government of Balochistan, Quetta.

14. Investment and Commerce Department, Government of Punjab, Lahore.

15. SMEDA, Lahore.

16. Statistics Division, Government of Pakistan, Islamabad.

1

RETAIL MARKETS*

by

SAFIYA AFTAB DR. GEORGE BATTESE DR. SOHAIL J. MALIK

* For detailed survey results, please see separate volume entitled “Basic Statistics of the Sample Survey Data”.

Innovative Development Strategies (Pvt) 3

Executive Summary

1. The post 2001 economic boom revitalized consumer spending and retail trade in the

country leading to growth in the retail sector. The introductory section of the report reviews

several reports: a report on retailing in Pakistan published by Euromonitor in 2004, a series of

reports published by the Foreign Investment Advisory Service (FIAS) and the World Bank

(one of which focused on retail in addition to the housing and tourism sectors; while another

focused on improving the business climate in Pakistan, and also addressed developments in

the retail sector) and a report by A. T. Kearney which is an analysis of the retail sector in

emerging economies.

2. The State Bank of Pakistan (SBP) reports the share of the wholesale and retail trade at

36.5 percent in the services sector. A strategic review of the housing, tourism and retail

industry conducted by the FIAS revealed that these three sectors represent more than 25

percent of the total GDP and employment, and drive the performance of many other

industries such as construction material and food processing units. According to the

Euromonitor study, retail sales were valued at 55 percent of the GDP in 2003, and accounted

for 73 percent of consumption.

3. Euromonitor’s report carries profiles and data on some leading retailers of the

country, which, though not really representative of the sector in Pakistan at large, provides

some interesting insights. Some of the leading retailers covered in the report are the shoe

giants Bata and Servis, the household items store Singer, Fazal Din’s pharmacies and Agha’s

Super Store in Karachi which is probably the oldest supermarket in the country. Pakistan’s

retail structure is “fragmented and underdeveloped” and according to Euromonitor’s report,

the sector is lagging in structure and organization even when compared to other South Asian

countries. The key barriers restricting growth of large retail outlets include tax collection

methods; high import tariffs on machinery and equipment; inefficiency in the supply chains –

particularly in that of food; and high rentals of shops in commercial areas. Consumer

protection is practically non-existent in Pakistan and product quality is highly variable with

counterfeit items being readily available – in fact some markets have earned a reputation for

selling “good quality” counterfeit items of almost the same quality as originals, but at a lower

price. The lack of regulation in the sector is a deterrent to the entry of firms which charge a

premium for the brand name.

Survey Findings for Retail

4. Existing literature on the retail sector appears to be written for urban investors, and is

styled to address concerns of international players. The domestic commerce survey conducted

for this report provides an interesting counterpart to the conclusions of these more urban-

based, macro level reports as it covers small towns in addition to large cities, and was

designed to cover key markets in all cities, such that markets catering to different income

groups are represented.

5. The bulk of establishments accounted for in the survey were relatively new which

indicated a high rate of turnover in the retail business – if a proprietor dies or goes out of

business, the business is disposed of. About 61 percent of retail establishments were not

registered at all, and almost 80 percent of respondents who had not registered their businesses

said that registration was not required. According to the survey the median monthly revenue

was estimated at Rs. 127,750 while the mean was estimated at Rs. 413,610 per month and the

maximum reported was over Rs. 31 million. The data on profits is again evident of a skewed

distribution with mean profit recorded at just over Rs. 72,000 while median profit was Rs.

20,000. Market competition was intense in the retail sector with 52.9 percent of firms saying



that up to 11 similar enterprises existed in that location, within a radius of 1 km. Almost 58.7

percent of firms interviewed reported that they had faced barriers to entry, and when asked to

rank the most important barriers, in order of importance, a significant 68 percent ranked

capital requirements as the most important barrier, with this result being consistent across

provinces. Access to finance once again came across as the most important constraint to

growth for retail enterprises, with almost 46.5 percent of respondents citing this as the most

important factor restricting expansion.

6. Of the total retailers, 76 percent had established their businesses, and the

overwhelming majority had funded the establishment of the business primarily through own

or family savings – on an average, 85 percent of the paid up capital had come through own or

family savings. The retail trade depends heavily on the extension of credit, wherein sales or

purchases of goods are affected with payment delays being implicit in the transaction,

although no interest is charged. On an average, 75 percent of retailers said they relied on

credit based transactions, and this result was consistent across provinces. Formal banking

practices were not prevalent amongst retailers.

7. According to the survey retailers, even in urban centers, tend to restrict the scale of

their businesses to their environs, and rarely venture beyond their hometowns. Retailers for

the most part restricted their businesses within the town that they were operating in, but 38

percent of respondents said that they had considered expanding their business within the

same city. Only 8 percent had considered expanding beyond their city of operation to another

city in the country, while the bulk of the respondents (53 percent) had not considered opening

another retail outlet.

8. The hypothesis was that as the services sector grows, it is increasingly absorbing both

unskilled and semi-skilled labor. However, given the small size of the average business,

37.2 percent of respondents in the retail category did not employ any paid employees at their

outlets. A further 25.5 percent employed one person full time, while 15 percent employed

two people full time. Almost 93 percent of enterprises did not retain any part time

employees.

9. The analysis of the governance data revealed some interesting anomalies. Over 93

percent of respondents agreed, or strongly agreed with the statement that they relied on the

reputations of those that they entered into contracts with. But 84 percent also agreed or

strongly agreed with the statement that contracts would prevent them from being cheated.

Data on dispute resolution indicates that retail enterprise owners are not likely to contact the

police for dispute resolution, even in extreme cases like theft or murder.

Key Issues in the Retail Sector

10. The formal finance market does not seem to have penetrated retail trade to any

significant degree, although the need for financing manifests itself repeatedly in discussions

on the sector. Businesses are not expanded due to lack of access to finance, and options for

expanding in other cities and towns are also rarely explored for the same reason.

11. Issues of governance are also prominent in explaining the preponderance of small,

sole proprietorships or family owned businesses in the retail sector. Respondents expressed

some degree of confidence in the legal system, but at the same time, expressed reservations

about entering into business with non-family members.

12. Retailers are hesitant to venture into new territory in terms of other cities or locations

due to a lack of familiarity with the “lay of the land.” There are no business support services

to guide retailers who may wish to move or expand businesses, and the excessive reliance on

informal networks makes expansion or relocation plans too risky. The same sorts of

considerations hinder entry into new areas of operation.

Retail Markets


13. In spite of the fact that the retail sector is dominated by small, one person owned

establishments, it generates significant employment, with over 60 percent of establishments

utilizing the services of full time paid employees. The sector thus has significant potential to

generate employment, and to absorb semi-skilled labor as the economy grows.

Conclusions and Recommendations

14. Banks should be encouraged by the Ministry of Commerce to look into retail trade,

and devise instruments to finance expansion of retail trade. Islamic finance institutions,

which may use instruments more palatable to stakeholders in this sector may be particularly

well placed to service the needs of the sector, given that many Islamic instruments of finance

were designed specifically to facilitate trading.

The Ministry of Commerce should work with the Ministry of Law to develop small

claims courts and enhance the capabilities of business tribunals generally, to facilitate

contract enforcement in domestic commerce.

There is a need to facilitate the growth of business support services in the country,

beginning perhaps with service provision for the few large retail enterprises and

international franchises entering the country.

The Ministry of Commerce should liaise with city authorities and recommend a review of

zoning laws to judge whether these remain relevant and appropriate.


Section 1

Introduction 1. The growth of the retail sector has recently attracted attention in Pakistan as the post

2001 economic boom has revitalized consumer spending and retail trade in the country. As a

consequence, at least two important studies have been done on retail trade in recent years,

which present a macro overview of how the sector is structured in Pakistan, what are the

main areas of trade, and what are the prospects for growth. In this section, we review this

literature on the retail sector, before going on to analyze the more micro level data from the

domestic commerce survey to get a holistic picture of the retail sector.

2. One of the most detailed reports on retailing in Pakistan was published by

Euromonitor in 2004.1 The report relied on national economic data, information from trade

associations and chambers of commerce, and data from some leading retail houses which was

largely business specific. The result is a comprehensive, though strictly macro level picture.

The Foreign Investment Advisory Service (FIAS), a joint service of the International Finance

Corporation (IFC) and the World Bank also published a series of reports in 2005, one of

which focused on retail in addition to the housing and tourism sectors; while another focused

on improving the business climate in Pakistan, and also addressed developments in the retail

sector.2 A third report by A. T. Kearney is an analysis of the retail sector in emerging

economies, and also analyzes the sector in Pakistan to some extent.3 The description of the

sector in this introductory chapter relies largely on these publications in addition to some

others, which have been referenced accordingly.

1.1. The Share of the Retail Sector in the Economy

3. The State Bank of Pakistan (SBP) reports the share of the wholesale and retail trade at

36.5 percent in the services sector and growth within these at 8 and 12 percent during the

fiscal years ending June 2004 and June 2005.4 Strong growth performance of these sectors

was attributed to value addition from the import sub-sector which recorded an exceptional

growth of 32.2 percent in overall imports leading to significant growth in the manufacturing

sector.

4. A strategic review of the housing, tourism and retail industry conducted by the FIAS

revealed that these three sectors represent more than 25 percent of the total GDP and

1 Euromonitor. 2004. Retailing – Pakistan. September. Available from the website, www.euromonitor.com 2 FIAS (2005a), Pakistan: Housing, Tourism and Retail, Foreign Investment Advisory Service Publication –

joint service of the International Finance Corporation (IFC) and The World Bank and FIAS. 2005 b. Better Business Climate Action Plan, Foreign Investment Advisory Service Publication – joint service of the International Finance Corporation (IFC) and The World Bank.

3 A. T. Kearney. 2005. Emerging market priorities for global retailers, http://www.atkearney.com/shared_res/pdf/GRDI_2005.pdf 4 State Bank of Pakistan. 2005. Annual Report.

Retail Markets


employment, and drive the performance of many other industries such as construction

material and food processing units.5 Of this, the retail sector alone contributes 18 percent to

the GDP, and constitutes about 11-14.8 percent of the official employment.6 Thus with

employment of around 4.43 million the retailing industry forms the source of livelihoods of

around 27 million people amongst the total population.7 According to another recent study,

in 2002-03, wholesale and retail trade accounted for 15.5 percent of the GDP, whereas in

2001-2002, it accounted for 15.2 percent of the GDP.8

5. According to the Euromonitor study, retail sales were valued at 55 percent of the GDP

in 2003, and accounted for 73 percent of consumption expenditure – a relatively high

proportion which is typical of low income economies where household expenditure on food

is a significant proportion of the household budget. Consequently, over 70 percent of retail

expenditure is on food, beverages and tobacco. Punjab has generally had higher rates of

retail sales growth than other provinces (8.5 percent for the period from 1999 to 2002

compared to 7.2 percent on average for the whole of Pakistan), and the province accounts for

about 60 percent of retail sales. Per capital consumer expenditure in 2003 was estimated in

the same publication at Rs. 18,378 in current prices, compared to Rs. 15,294 in 1999, which

would place annual retail sales for 2003 at about Rs. 1.9 billion. The boom in consumer

financing is postulated to have contributed towards the growth in retail sales in urban areas.

1.2. Structure of the Sector

6. Pakistan’s retail structure is “fragmented and underdeveloped” and according to

Euromonitor’s report, the sector is lagging in structure and organization even when compared

to other South Asian countries (one would assume that India is the main point of comparison

here). A significant number of retail stores appeared on the retailing horizon in the late 1990s

and earlier on in this decade. The number of outlets operating in the country increased from

1.75 million in 1999 to 2.4 million in 2003 growing at the rate of around 8.5 percent per

annum, largely due to investments by overseas Pakistanis.

7. Amongst these around 66 large retailing businesses were operating at a regional level

while the rest include kiosks and mobile units. The sector is characterized mainly by small

one or two persons retail operations. Of these stores, 63 percent are general stores, 22

percent mobile stores and 15 percent are kiosks. General stores are not only ubiquitous, but

also carry a wide range of items – in urban areas some general stores would even stock basic

electronics or fairly sophisticated children’s games in addition to groceries and items of daily

use. These stores are almost always family owned and single store operations.

Fragmentation of the market is evident in the discrepancy between the rates of growth of the

absolute number of businesses vis-à-vis the number of outlets per business. While businesses

grew at the rate of 7.9 percent over the period from 1999 to 2003, the number of outlets per

business is 1.1, growing at the rate of 0.2 percent.

8. The report by A. T. Kearney categorizes retail businesses in Pakistan into four

categories: very large, upscale, medium and very small. Table 4.1 shows the basis of this

classification. The study found that most retailing businesses fell under the fourth category,

with some medium sized businesses. These businesses are mainly proprietorships and mostly

comprise of joint-family owned stores in the latter three categories.

5 FIAS. 2005 b. Better Business Climate Action Plan, Foreign Investment Advisory Service Publication – joint

service of the International Finance Corporation (IFC) and The World Bank. 6 See FIAS 2005a and the Euromonitor report. 7 Number of members in the household as per convention is taken to be 6 as per World Bank estimates. This

figure remains a guesstimate but gives a fair idea of the importance of the retail sector. 8 See http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr121614e.html



Table 1.1: Categories of Retail Outlets

Category Size No.of Outlets

A Very Large 300-500

B Upscale 5,000-7,000

C Medium 10,000-15,000

D Very Small 75,000+ Source: See report by Strategis. Footnote 37.

9. Although there is no doubt that the retail sector is dominated by small, family owned

businesses, Euromonitor’s report notes that supermarkets, a new concept in Pakistan, are

gaining popularity in the urban areas, and are the fastest growing type outlet, albeit from a

very small base. Currently, there are only 115 locally owned supermarkets and some 70

departmental stores in the country.9 Sales from supermarkets accounted for barely 1 percent

of total retail sales in 2003, but the growth of sales from such outlets was 30 percent annually

from the period 1999 to 2003, compared to average annual growth rates of 7.5 percent for

kiosks and general stores. This trend is mirrored in the increase in average retail

establishment size which, according to Euromonitor’s report, increased from 7.9 square

meters (sq. m) per retail outlet to 9.3 sq. m in 2003.

10. Increased urbanization is expected to result in a doubling of the number of

supermarkets in the country from 2003 to 2008. Also, as incomes increase, certain sub-

sectors of retail such as beauty and personal care, interiors and furnishings and the sale of

household electronics is expected to show significantly higher growth rates than the average

for the sector, although the base of such sales will remain very low. Anecdotal evidence

suggests that the retail sector has responded to the needs of a growing middle class with a

proliferation of restaurants catering to middle income budgets coming up in major urban

centers in the last decade or so.

11. The structure of the sector also owes much to the lifestyle of the average consumer.

For instance, consumer surveys suggest that fresh food is preferred to frozen varieties even in

high income households, and people are open to the idea of shopping often, rather than

shopping for groceries monthly or bi-weekly and preserving food. Consumer preferences

may also dictate why supermarkets have not proliferated – in an economy with a highly

unequal income distribution, shopping for household items is often the preserve of household

help in high income urban areas. Vegetables and items of everyday use are generally

purchased by household help at small retail stores which are closer to the house and due to

their size and lower overheads provide fresh items at reasonable prices. The growth of

supermarkets is also restricted by the regulatory framework, where it is difficult to guarantee

product quality, and by space limitations, given the congested nature of commercial areas in

large cities. Furthermore, it is only recently that consumer spending in Pakistan has reached

the level where local business houses who traditionally manufactured top quality goods for

export have started considering opening outlets in Pakistan as the market for superior quality

consumer goods has grown in the country. Stores like Chen One (the retail arm of Chenab

Fabrics) is a case in point.

12. One area where chain stores have started to appear is in apparel. Chains of retail

outlets are few and mainly limited mostly to the fashion and apparel industry with a

significant number of supermarkets and departmental stores. Of late other smaller retail

outlets with their own manufacturing lines such as the household linen stores ChenOne, Bed

& Bath etc have emerged with outlets in all four provinces of the country.

13. The most easily identifiable chain in Pakistan is the “state-owned Utility Stores

Corporation (USC), which holds just 0.3 percent of the market.”10

The stores sell food and

9 FIAS. 2005a. Op cit. 10 A. T. Kearney. 2005. Op cit.

Retail Markets


household items, and were established to serve as a mechanism for price control. The USC

was operationalized in the early 1970s, and by the mid 1990s there were some 800 utility

stores in the retailing business. However, on account of the perceived and often realized

inefficiencies of the public sector, sustainability of the chain became a primal concern in the

late 1990s and almost half of the stores were closed down. In view of the size of these stores

and the recent increase in retail business volume in the country the government plans to

revamp the existing outlets and targets to open another 600 outlets – about 100 of which will

be operationalized in the short term.11

14. Utility stores are not profit making establishments. The nominal profits they do

charge are for the purpose of meeting their overhead expenditures. A brief analysis of

perceptions of the public and a few newspapers revealed that quality remained a key issue for

the stores to tackle. While the Managing director of the stores Brig. Hafeez Ahmed (R)

claims that, “Utility Stores retail hygienically fit, genuine, unadulterated items of correct

weight at prices lower than the market,” (see usc.com, 2006), there have been reports of

significant issues of quality in the products retailed.12

15. In terms of emerging retail formats, in addition to the recent growth of franchises, a

limited number of retailers based in large cities have started online retail operations (Liberty

Books and Nirala Sweets being amongst the more prominent examples), and telemarketing

has also been introduced in the country. However, such operations are still very limited. As

the financial sector grows, however, and use of credit cards increases, such retailing methods

are likely to become more common. A small number of retailers have introduced innovative

marketing techniques such as discount cards (mainly offered by some major bookstores),

special concessions on credit card purchases in partnership with banks, and store prizes on

expenditure of a certain amount, but such schemes are rare. Sales take place from time to

time, but these are generally market wide and do not necessarily take place at set times, as is

the practice in the West. When sales do occur, the discounts offered are generally not

substantial.

1.3. Profiles of Leading Retailers

16. Euromonitor’s report carries profiles and data on some leading retailers of the

country, which, though not really representative of the sector in Pakistan at large, provides

some interesting insights. Some of the leading retailers covered in the report are the shoe

giants Bata and Servis, the household items store Singer, Fazal Din’s pharmacies and Agha’s

Super Store in Karachi which is probably the oldest supermarket in the country.

17. Bata is probably the largest retail operation in Pakistan, given its concentration on

providing quality footwear for middle to low income consumers. Euromonitor estimates that

Bata holds 43 percent of the market share for footwear in the country. The company has

faced problems in recent years, however, due to the flood of low cost Chinese footwear in the

market and due to the recent increase in single enterprise footwear retailers. Servis has a

profile similar to Bata’s, but it caters to relatively higher income consumers. Similarly, Fazal

Din’s is the largest pharmacy chain in the country – its share of the market is very small, but

since the pharmacy retail sector is almost entirely composed of single outlet enterprises, Fazal

Din’s stands out. Singer is the country’s most prominent dealer in durable household goods,

and has benefited greatly in recent years from the boom in consumer spending. Agha’s is

once again a distinctive enterprise in that it was the first company to introduce the concept of

one stop shopping in Pakistan. Its location in an up-market central area of Karachi, and its

11 Interview with Senior Manager of the USC. 12 Business Recorder http://www.brecorder.com/index.php?id=469109&currPageNo=1&query=&search=&term=&supDate=

http://www.brecorder.com/index.php?id=469109&currPageNo=1&query=&search=&term=&supDate



reputation for stocking quality imported goods has made Agha’s a household name. Both

Agha’s and Fazal Din’s are private limited companies and do not publish their accounts, but

both have major plans for expansion which would indicate that their financial positions are

sound.

18. The report also publishes data on some smaller enterprises such as Sani’s a mixed

retail groceries and pharmacy located in Karachi, the Gourmet chain of bakeries, H. Karim

Buksh department store and Nirala Sweets. For most of the enterprises discussed, publicly

available financial data is limited as these are generally private owned enterprises. The report

hypothesizes that while leading retailers still constitute only a very small share of the market

(other than Bata, which has a significant market presence), and face stiff competition from

the plethora of small retailers, their market share is likely to grow as consumer awareness of

quality issues increases.

1.4. Forecasts

19. The Euromonitor report includes a number of forecasts for retail sub-sectors for the

period from 2003 to 2008. For instance, the report predicts that growth in food retail will be

lower than the average for retail growth as a whole – the rate of growth forecast is 1.8

percent. However, small grocery stores are expected to grow at a rate of 7.4 percent annually

as they benefit from urbanization and increases in income commensurate with the relatively

high growth rates Pakistan is experiencing. For health and beauty products (which in

Pakistan are often sold together at pharmacies), Euromonitor predicts an average growth rate

of 6 percent over the period in question, with chain stores growing at a higher rate than

independents (although it is not clear which firms the Euromonitor analysts consider as chain

stores – other than Fazal Din’s and Sani’s which are based in Lahore and Karachi

respectively there do not appear to be any reputable pharmacy chains in the country).

20. Retail sales of readymade clothing and footwear are expected to grow at an annual

average of 2 percent (the low growth is reflective of consumer preferences in a society where

women’s clothing is made to order rather than bought readymade), but the low growth will be

accompanied by significant changes in market structure, with foreign brands gaining strength

in the local market. The market for durable goods (mainly electronics) is forecasted to post

very robust growth of 5 percent per annum for the period from 2003 to 2008 and the bulk of

sales increases will come from independent retailers selling a variety of brands and a range of

items. Similarly sales of leisure goods and personal items like jewelry, books etc (which are

non-essentials) are expected to grow at 5 percent also, although the market will witness a

change in the sales structure with jewelry sales accounting for a lower share of the personal

goods market.

21. As regards types of retail outlets, sales of supermarkets are expected to grow at a rate

of 20 percent per annum, accounting for 1.4 percent of all retail sales by 2008. In terms of

actual outlets, the number of supermarkets is expected to increase by over 13 percent per

annum. General stores and kiosks which currently dominate the market will show far lower

growth rates in terms of increase of outlets, at 2.2 percent and 1.3 percent respectively.

1.5. Regulatory Issues in the Retail Trade 22. Consumer protection is practically non-existent in Pakistan and product quality is

highly variable with counterfeit items being readily available – in fact some markets have

earned a reputation for selling “good quality” counterfeit items of almost the same quality as

originals, but at a lower price. The lack of regulation in the sector is a deterrent to the entry

of firms which charge a premium for the brand name. In addition, past governments have

Retail Markets


been reluctant to liberalize the retail sector and allow foreign chains in on account of the fear

that employment would plummet with introduction of more sophisticated capital intensive

modes typically adopted by foreign producers. 13

However, this is now changing and a

number of international franchises have entered the market in Pakistan, particularly in the

food sector. However, questions about political stability and geopolitical tensions are likely

making foreign entrants cautious, as are the infrastructure impediments that retailers may face

in the form of high energy costs and lack of security of tenure of commercial property. On the

positive side though, there are no restrictions on the patterns of ownership of retail

establishments and no regulations on hours of operation etc.14

When foreign firms have

entered the market outside the food and catering sector, they have generally done so through

joint ventures – the shoe store Hush Puppies is an example as are certain garments stores. All

such activities are based in big cities where the highest income consumers are found.

23. Growth of larger supermarkets is particularly limited, among other things by high

costs of administrative compliance. These costs are estimated at over 50 percent of the

operating costs and result in very high opportunity costs on account of misallocation of

resources in the first few years of the business.

24. Euromonitor’s report claims that owners of small general stores have benefited from

the low interest rate environment in recent years, particularly as SME financing and micro-

credit enterprises have attempted to disburse funds for small businesses as part of their

poverty alleviation efforts. As reported in the next section, though, the domestic commerce

survey found little evidence of shopkeepers having taken out loans.

1.6. Barriers to Growth of Retail

25. The key barriers restricting growth of large retail outlets include tax collection

methods; high import tariffs on machinery and equipment; inefficiency in the supply chains –

particularly in that of food; and high rentals of shops in commercial areas. These barriers

have been identified in the existing literature on the retail sector, and are discussed in more

detail below, as they are presented in the literature. The findings of the domestic commerce

survey are sometimes different, and are discussed in the next section.

1.6.1 Fiscal Impediments

26. The taxation modality in Pakistan forms a disincentive to the growth of large retail

formats both directly and indirectly. Fraught with loopholes, in an inefficiently documented

economy, the tax system particularly is more favorable to smaller informal shops.15

Smaller

retailers can easily evade taxes and as a result sell their products cheaper than formal

shopping malls, which are under regulatory scrutiny and have to declare sales volumes

periodically. The 15 percent sales tax levied on the more visible super markets places the

smaller retailers at a price advantage on items sold. More than half of the respondents of the

FIAS study investigation reported the cost of administrative procedure in the formal sector to

be in the range of 11 to 15 percent of the overall revenues.16

The SBP annual report also

records the detrimental effects of general sales tax and reports that the abolition of GST on

cotton trade diverted the informal trade of cotton into formal channels.

13 FIAS (2005a), Pakistan: Housing, Tourism and Retail, Foreign Investment Advisory Service Publication –

joint service of the International Finance Corporation (IFC) and The World Bank. 14 Although some recent news items in the national press indicate that such moves are being considered as

part of an energy conservation campaign. 15 FIAS. 2005a. Op cit. 16 FIAS. 2005b. Op cit.



27. Regulatory costs also work to the detriment of retail markets in Pakistan through a

tough import tariff regime. This effect is particularly strong and hinders the development of

an efficient market for vegetables, fruit and perishable processed and semi processed food.

The effect works deeper in both directions of the link between the wholesale and retail levels

down the supply chain. Firstly, machinery such as cold storage equipment and refrigerated

vehicles for transporting food from the wholesale markets to retailers are imported and

subject to not only 25 percent import duty, but also 15 percent sales tax. While some cold

storage machinery components are being manufactured locally, maintenance and repair costs

remain high in the absence of an adequate after sales services regime. Secondly, tariffs and

import duties on machinery used at the retailers’ level such as chillers and deep freezers

further adds to costs that have to be embedded in the price of the products. According to one

estimate, landing charges for retail business increases the price of a product at retail outlets

located in commercial areas by approximately 1.0 percent of the initial price.17

1.6.2 Supply Chain Inefficiencies

28. Absence of waxing/preserving technologies and refrigerated vehicles lead to a lot of

wastage in vegetable and fruit wholesale and retail markets interface. According to one

estimate 30-40 percent of the produce is wasted on account of damage during transportation

between the farm, wholesale and retail markets.18

Lack of a well developed wholesale

market particularly for imported processed food ultimately translates into high retail costs and

by corollary, high prices. Retailers often are left with no choice but to import from suppliers

directly. While import volumes of these retailers are far too small to qualify for volume

discounts, retailers try to avail such discounts, and there is often a mismatch in supply and

demand for packaged foods and imported household items.

1.6.3 Dearth of Commercial Premises

29. Dearth of suitable premises for retail stores forms another formidable hindrance in

development of the retail sector. There is clearly an excess demand for retail space in all market

places. Ul Haq and Waqar note that “Urban zoning is particularly very unfriendly to the poor

retailer who lacks the capital to get into structured expensive retailing that in any case is in short

supply.”19

Rental as well as purchase prices for stores in commercial areas remain out of reach

of most small and medium sized retail businesses and often form a hindrance to expansion.

30. Recent consultations with retailers in Peshawar revealed the restricting practice of ‘pagri’

as a major cost in setting up or expansion of retail outlets. Pagri is a premium charge on

commercial property rental which is passed on with each sub-lease of a given premises. The

subsequent tenant may be made liable to pay the same amount as the first lessor or more than that

depending upon the relative need of the two parties and the market situation. However, the

informants added that the phenomenon was now being replaced by what was termed as ‘advance’

which remains constant for a given period of time at each sublease of premises. It was interesting

to note that, both types of payments were accepted as premium payments and were not advance

rent payment for the leased facility.

17 http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr121614e.html 18 FIAS. 2005a. Op cit. 19 Haque, Nadeem Ul and Waqqar S.1. 2006. Op cit.

Retail Markets


1.6.4 Lack of Access to Finance

31. Formal credit and financing facilities are structured in a way that leaves out small and

medium sized retailers, who are often left with no choice but to resort to informal sources. The

latter too, requires special ‘agency’ in terms of possession of collateral or simply ‘personal

contracts’ and what is usually referred to as ‘credibility.’ Participating retailers in the focus group

consultations held for the current study laid great emphasis on the need for financing facilities for

their businesses. They particularly criticized the classification of SMEs as establishments having

at least ten employees as this classification leaves them out of the loop when it comes to

eligibility for financing as small enterprises. A recent report from the SBP states that “While the

sustained and long term growth of the SME sector in Pakistan remains constrained by a number

of factors (….); by far the biggest problem facing the sector is the unavailability of adequate

financing facilities.”20

32. Lack of reliable business information and credit history, among others, constitute a major

impediment in growth of financing to SMEs, micro enterprises and agriculture. The credit

information bureau (CIB), within the SBP was established recently to extend coverage of credit

to the small borrowers, and is currently at an advanced stage of development. This will provide

middle and low income populations access to financial services and will enable them to build

“reputational collateral” as basis for loan applications. Inaccessibility of credit at the retail level

is further compounded by the same phenomenon at the manufacturing-distributor-retail link in the

supply chain. Most companies do not provide credit to distributors, and in turn distributors

generally sell on a strictly cash basis to retailers. While smaller distributors often provide credit

to retailers, the volume of such transactions remains relatively insignificant.

1.7. Domestic Commerce Survey

33. Existing literature on the retail sector appears to be written for urban investors, and is

styled to address concerns of international players. The Euromonitor report, for example, does

not mention the scope of its study, and the data and analysis seems to be heavily oriented towards

trends in large cities. This may be appropriate given that such reports are generally written as

investment advice for foreign investors and as such would focus on urban centers where foreign

investors would be more interested in operating. The domestic commerce survey provides an

interesting counterpart to the conclusions of these more urban-based, macro level reports as it

covers small towns in addition to large cities, and was designed to cover key markets in all cities,

such that markets catering to different income groups are represented.

34. The field survey on domestic commerce comprehensively covered a range of issues, both

quantitative and qualitative regarding revenues and turnover, issues of governance and financing,

and constraints to the growth of the sector. The survey, which covered 1000 retail establishments

in 14 cities (see report on Domestic Commerce Survey for details) yielded a wealth of data, the

key findings of which are reported in the following section. The questionnaire used for the

survey of wholesale and retail trade is given in Annex I.21

20 Hussain, Ishrat. 2002. Welcome Address for conference on SME Financing: Issues and Strategies.

Lahore. 21 One questionnaire was developed for wholesale and retail trade, given the similarity of the lines of query.

However, data on the two kinds of establishments will be analyzed separately.


Section 2

Survey Findings for Retail

35. Literature suggests that the retail sector is dominated by small, sole proprietorship

establishments, with a predominance of all purpose grocery stores in the markets. Of the total

establishments covered in the survey, 138 were grocery stores, 83 of these being classed as

medium sized establishments; 105 were clothing stores (of which 46 were medium sized); 78

were electronics stores; 49 were bookshops; 47 were medical stores, while the remaining stores

dealt with jewelry, computer hardware and software, fruits and vegetables, baked items, toys etc.

Only 20 percent of surveyed shops were classified as “large” by enumerators. 92 percent of

establishments were sole proprietorships, and 60 percent of owners had not tried their hand at

another line of business before starting the establishment in question. The survey results thus

lend credence to the findings of the limited literature on how the retail sector operates in Pakistan.

The key findings of the domestic commerce survey, with respect to retail establishments, are as

follows.

2.1 Age of the Firm

36. The bulk of establishments accounted for in the survey were relatively new which

indicates a high rate of turnover in the retail business – if a proprietor dies or goes out of business,

the business is disposed of. Overall a third of establishments came into existence in the last four

years, and a further quarter of establishments surveyed came into being in the last five to nine

years. This trend was particularly noticeable in NWFP, where 38 percent of the retail businesses

surveyed had been established within the last four years, indicating the relatively robust growth in

the province in that time period. Punjab data shows a similar trend with 33 percent of shops

surveyed having been established in the last four years. For Balochistan and Sindh, however, the

proportion of retail outlets established in the last four years was lower at 25 percent and 28

percent respectively.

Retail Markets


Figure 1: Relative Frequency Distribution of Firm Age (Punjab)

0 thru 45 thru 9

10 thru 1415 thru 19




50 thru 5960 thru 106

Firm Age

0

10

20

30

40

Perc

en

t

Figure 2: Relative Frequency Distribution of Firm Age (NWFP)

0 thru 45 thru 9





50 thru 5960 thru 106

Firm Age

0

10

20

30

40

Pe

rce

nt



Figure 3: Relative Frequency Distribution of Firm Age (Sindh)

0 thru 45 thru 9





50 thru 5960 thru 106

Firm Age

0

5

10

15

20

25

30

Pe

rce

nt

Figure 4: Relative Frequency Distribution of Firm Age (Balochistan) – Firm Age

0 thru 4 5 thru 9 10 thru 14

15 thru 19

20 thru 24

25 thru 29

30 thru 34

40 thru 44

45 thru 49

Firm Age

0

5

10

15

20

25

30

Perc

en

t

2.2 Financial Data

37. As expected, there was significant variation in the reported revenues of the

establishments. Revenues from retail as recorded in the survey were then adjusted for raising

factors to get national estimates of retail trade. According to these estimates, retail revenues

amounted to about Rs. 1360 billion, or about 20 percent of GDP.

Retail Markets


38. The median monthly revenue was estimated at Rs. 127,750 while the mean was

estimated at Rs. 413,610 per month, but the maximum reported was over Rs. 31 million. A

breakdown of the data shows that 70 percent of all retail establishments have average

monthly revenues of under Rs. 250,000. Table 2.1 gives the breakdown of average monthly

revenue.

Table 2.1: Average Monthly Revenue

Average Monthly Revenue

Frequency Valid Percent Cumulative Percent

Up to Rs. 50,000 216 22.9 22.9

50,000 - 100,000 210 22.2 45.1

100,000 - 250,000 239 25.3 70.4

250,000 - 400,000 119 12.6 83.1

400,000 and above 160 16.9 100

39. The data on profits is again evident of a skewed distribution with mean profit

recorded at just over Rs. 72,000 while median profit was Rs. 20,000. Profit was recorded in

two ways in the survey – as a direct question and as the difference of average monthly

revenue and average monthly expenditure (both variables were recorded in the survey, with

expenditure recorded as a breakdown of expenditure on cost of goods bought for sale,

expenditure on utility bills, wages etc). Interestingly, the average calculated profit was

estimated to be lower than average recorded profit, both in terms of the arithmetic mean

(where the mean of calculated profit was estimated at just over Rs. 54,000) and the median

(with median calculated profit estimated at just Rs. 11,000). The results seem to reinforce the

view that information on revenues and expenditure is not entirely accurate, with respondents

typically understating revenue and overstating expenditure.

40. Estimates of value added once again have to be interpreted with caution given the

probable misreporting of profits, but average monthly value added in the retail sector was

estimated at just short of Rs. 95,000. The distribution was significantly skewed though, and

median value added for the entire sample of retailers amounted to Rs. 20,000. Average value

added was a little higher than average in Punjab and Sindh at approximately Rs. 113,000 and

Rs. 111,000 respectively; while in NWFP, average value added amounted to Rs. 48,000.

41. About 62 percent of retailers had rented their premises, while 36 percent owned the

shop. Equipment and furniture etc. were generally owned. The median estimated current

value of a premises was Rs. 1.5 million, but the mean was much higher at Rs. 3.6 million.

The value of furniture and equipment in the shops paled in comparison, with median values

of Rs. 10,500 for furniture and Rs. 18,000 for other equipment. The data thus indicates that

retail establishments tend to be fairly basic in terms of fittings and accoutrements, as would

be expected for small establishments.

2.3 Market Competition

42. Market competition was intense in the retail sector with 52.9 percent of firms saying

that up to 11 similar enterprises existed in that location, within a radius of 1 km. Competition

was particularly intense in Sindh and Punjab, where approximately a third of enterprise

owners said that up to five similar shops were to be found in a radius of a kilometer. The

responses were roughly similar across revenue categories, indicating that both large and small

enterprises faced similar competition.



Table 2.2: Similar Enterprises Within a Radius of 1 km

Frequency Percent Valid Percent Cumulative Percent

Valid 1 to 5 319 31.9 31.9 31.9

6 to 11 210 21.0 21.0 52.9

12 to 25 174 17.4 17.4 70.3

more than 25 273 27.3 27.3 97.6

Do not know 24 2.4 2.4 100.0

Total 1000 100.0 100.0

Figure 5: Relative Frequency Distribution Number Of Competing Firms

1 to 5 6 to 11 12 to 25 more than 25 Do not know

Number of Competing Firms

0

10

20

30

Pe

rce

nt

43. Almost 58.7 percent of firms interviewed reported that they had faced barriers to

entry, and when asked to rank the most important barriers, in order of importance, a

significant 68 percent ranked capital requirements as the most important barrier, with this

result being consistent across provinces. The need to have personal contacts in the proposed

business was cited as the most important barrier by 10 percent of respondents, while almost

33 percent of respondents cited it as the second key barrier to entry. Government regulations

and tariffs were also cited as important barriers to entry, with 18 percent of respondents

ranking this at no. 2, and 19 percent at no. 3.

Retail Markets


Figure 6: Relative Frequency Distribution of Entry Barriers

No Yes

Difficult to enter the market?

0

10

20

30

40

50

60

Perc

ent

44. In terms of a provincial breakdown, in addition to lack of capital, the need for

personal contacts was key in Punjab, figuring as the second most important barrier to entry.

A similar distribution was found in Sindh and Balochistan. In NWFP, however, the need for

personal contacts was not mentioned as a key barrier to entry.

2.4 Constraints

45. Access to finance once again came across as the most important constraint to growth

for retail enterprises, with almost 46.5 percent of respondents citing this as the most

important factor restricting expansion. The quality of public services was cited by almost

19.2 percent of respondents as the second most important constraint, while 19.7 percent cited

taxation systems as the key constraint to growth. Interestingly, corruption and law and order

were cited strongly as the third ranked constraints to growth, with almost 26 percent of

respondents ranking corruption at no. 3, and 24 percent ranking law and order as the third

ranked constraint to growth. Overall, access to finance and quality of public services appear

to be the key constraints to growth of retail establishments, with taxation, corruption and law

and order also cited as key impediments. Interestingly, less than 15 percent of respondents

considered the lack of clear regulations on property ownership etc as impediments to growth

at any level.

46. The breakdown of constraints by province again provides some interesting

information. While in Punjab access to finance, taxation and the poor quality of public

services come out on top among the two mostly highly ranked constraints, in NWFP the lack

of clear regulations on property rights ranked quite high on the list as well. For Sindh,

property rights did not figure prominently at all, but corruption was an issue. The same was

true for Balochistan where again corruption figured prominently as a constraint.

2.5 Financing

47. The domestic commerce survey covered a number of aspects of financing of retail

activities as follows.



2.5.1 Source of Funds for Establishment of Business

48. Of the total retailers, 76 percent had established their businesses, and the

overwhelming majority had funded the establishment of the business primarily through own

or family savings – on an average, 85 percent of the paid up capital had come through own or

family savings.22

Similarly, an average of 6 percent of funds had come in the form of a loan

from a family member. The breakdown for provinces showed little variation on the prime

source of funds, which for all the provinces was own savings, but when it came to the use of

remittances to start a business, NWFP had atypical results, with 2.5 of funds for starting a

business coming from this source, as opposed to a national average of just over 1 percent.

For Sindh and Balochistan, the proportion of establishment funds coming from remittances

was negligible, reflecting the relative lack of mobility of the work force in these provinces.

The sale of assets constituted on an average almost 5.5 percent of the cost of establishment of

a business in Punjab, while in Sindh and NWFP, this was just over 3 percent, and in

Balochistan almost 4.9 percent. Table 2.3: Breakdown of Sources of Startup Capital

Province Own/Family

savings Remittances from abroad

Sale of Assets

Bank Loan

Loan from fam/friends

Private money lenders

Others

Punjab Mean 85.21 1.03 5.57 1.51 5.59 .37 .73

Std. Error of Mean

.020 .006 .013 .007 .012 .003 .006

Std. Deviation

27.309 8.430 18.282 9.796 16.133 4.301 8.083

NWFP Mean 83.46 2.55 3.62 2.39 7.98 .00 .00

Std. Error of Mean

.046 .020 .025 .020 .034 .000 .000

Std. Deviation

30.667 13.041 16.558 13.000 22.625 .000 .000

Sindh Mean 88.67 .58 3.04 .55 5.17 .84 1.15

Std. Error of Mean

.032 .010 .017 .006 .020 .009 .013

Std. Deviation

25.153 7.570 13.561 4.725 16.068 7.372 9.977

Balochistan Mean 81.81 .00 4.84 1.56 8.42 2.19 1.17

Std. Error of Mean

.089 .000 .054 .028 .061 .032 .022

Std. Deviation

27.482 .000 16.770 8.700 18.788 9.917 6.889

Pakistan Mean 85.57 1.12 4.75 1.44 5.93 .47 .73

Std. Error of Mean

.016 .005 .010 .005 .010 .003 .005

Std. Deviation

27.452 8.970 17.161 9.535 17.302 5.085 7.914

49. Provincial breakdowns for other variables also reveal interesting anomalies. Bank

loans formed an insignificant proportion of establishment costs for enterprises in all

provinces, but in NWFP, these constituted 2.39 percent of establishment costs. Loans from

family and friends were also consistent across provinces as a source of financing for business

establishment, but private money lenders did not figure in the analysis for any of the

provinces other than Balochistan, where loans from such entities constitute on an average 2.2

percent of establishment costs.

22 This was a fairly robust estimate with a standard error of just 2 percent.

Retail Markets


2.5.2 Loan Applications

50. In spite of the fact that access to finance was repeatedly mentioned as an obstacle to

growth, and an impediment when it came to starting a business, an overwhelming 91.7

percent of respondents said that they had not considered applying for a loan in the last five

years. When asked to rank reasons why they had considered applying for loans, almost 38.6

percent of respondents they did not need funds, while 45.1 percent expressed reservations

about contracting loans for religious reasons, or the belief that interest bearing transactions

are prohibited. This last response, however, needs to be interpreted with caution as

respondents were asked to rank reasons for not taking loans from a list of possible responses,

and respondents may have felt obliged to list religious reasons as key. The recent upswing in

interest based consumer finance, particularly for vehicle purchase, certainly seems to belie

reluctance to access interest based loans. Figure 7: Relative Frequency Distribution - Have You Ever Considered Applying for a

Loan

No Yes

Have you ever wanted to apply for a loan during the last 5 years

0

20

40

60

80

100

Pe

rce

nt

51. In Punjab, the religious taboo was cited by 45 percent of respondents as the prime reason

why they did not want to apply for loans, with “no need” being cited by 38 percent; but in

NWFP, where religious sensibilities are often cited to be exceptionally high, the lack of need for

loans was cited by 45 percent of respondents as the most important reason, while doubt about the

permissibility of interest bearing loans was cited as the key reason by 38 percent of respondents.

In Sindh, these two most frequently cited reasons were mentioned in almost equal proportions of

close to 40 percent as the prime reason for not taking a loan, while in Balochistan these two

reasons remained the most important, but the relative ease of taking a loan from a family member

was also cited by 15 percent of respondents as a key reason for not considering a loan application.



Table 2.4: Reasons for Not Applying for Loans

Frequency Percent Valid Percent

Cumulative Percent

Valid Not Islamic 392 42.9 43.2 43.2

Did not need 356 39.0 39.2 82.4

Use funds from friends, family and others 46 5.0 5.1 87.4

Interest rate would be too high 65 7.1 7.2 94.6

Duration would be too short 3 .3 .3 94.9

Insufficient collateral 22 2.4 2.4 97.4

Cost application too high 4 .4 .4 97.8

Procedures too cumbersome 18 2.0 2.0 99.8

Other 2 .2 .2 100.0

Total 908 99.5 100.0

Missing System 5 .5

Total 913 100.0

Figure 8: Most Important Reason For Not Wanting to Apply For A Loan In The Last 5

Years

Not islamic Did not need Use funds from friends, family and

others

Interest rate would be too

high

Duration would be too

short

Insufficient collateral

Cost application

too high

Procedures too

cumbersome

others

Most important reason for not wanting to apply for a loan in the last 5 years

0

10

20

30

40

50

Perc

en

t

52. For the data as a whole, high interest rates, and the comparative ease of getting funds

from family, friends and other informal sources were also cited as reasons for not applying for

loans, with these reasons being ranked at number two by 15 to 16 percent of respondents, and at

number 3 by about 20 percent of respondents. The complicated nature of loan applications was

a reason ranked by 18 percent of respondents at number 3.

2.5.3 Modalities of Loan Applications

53. Only 60 retailers interviewed reported having applied for a loan in the last three years.

When loans were applied for, 61.9 percent of such applications were made to commercial

banks, and almost 38.1 percent to friends or relatives. Almost 57.1 percent of loan

applications were for the purpose of expanding existing enterprises. A further 14.3 percent of

Retail Markets


loans were applied for to start up a new enterprise, while the remaining was for working

capital requirements. Of the 60 retailers who had applied for loans, 14 reported that their

loan applications were rejected. Seven respondents (or 50 percent of those whose

applications were rejected) said that insufficient collateral was the reason for rejection of the

application, while in the bulk of the remaining cases (or 5 cases to be exact), no explanation

was given. The results were more or less consistent across provinces.

54. The average loan amount asked for was just over Rs. 235,000 while the amount

received averaged about Rs. 193,000. The median amount asked for and received was Rs.

100,000. The minimum loan asked for was just Rs. 3000, while the maximum was Rs. 4

million! However, the distribution of loan amounts asked for showed that 54.8 percent of

loans requested were up to Rs. 100,000 only, and 82 percent of loans were up to Rs. 400,000.

Almost 60 percent of loan amounts actually received were up to Rs. 100,000 only.

2.5.4 Credit

55. While there is little propensity to take out loans, the retail trade depends heavily on

the extension of credit, wherein sales or purchases of goods are effected with payment delays

being implicit in the transaction, although no interest is charged. On an average, 75 percent

of retailers said they relied on credit based transactions, and this result was consistent across

provinces. Almost 10 percent of retailers claimed that up to 10 percent of their purchases

were made on credit, while 22 percent claimed that up to 50 percent of their purchases were

on credit. The table gives the complete breakdown. Table 2.5: Percent of Goods Purchased on Credit

Percent of Goods Purchased on Credit

Frequency Valid Percent Cumulative

Percent

1 through 10 57 9.1 9.8

11 through 20 84 13.4 15.4

21 through 30 87 13.8 35.0

31 through 40 56 8.9 56.7

41 through 50 139 22.1 65.1

51 through 60 28 4.5 70.9

61 through 70 24 3.8 80.4

71 through 80 39 6.2 99.1

81 through 90 12 1.9 100.0

91 through 100 103 16.4

Total 629 100



Figure 9: Relative Frequency Distribution of Percentage of Goods Purchased On Credit

1 thru 10 11 thru 20 21 thru 30 31 thru 40 41 thru 50 51 thru 60 61 thru 70 71 thru 80 81 thru 90 91 thru 100

Percentage of goods purchased on credit

0

5

10

15

20

25

Perc

en

t

2.5.5 Banking Practices

56. Formal banking practices are not prevalent amongst retailers. In Punjab, NWFP and

Balochistan, 62 to 64 percent of retailers interviewed did not maintain bank accounts for their

businesses.23 Sindh was relatively more sophisticated in this regard, which is not surprising

given the dominance of Karachi in the province, with 46 percent of traders saying that they did

maintain bank accounts. However, even amongst those who maintained bank accounts, the bulk

of traders did not have or had never used overdraft or credit facilities at banks.

2.6 Linkages

57. The hypothesis for Pakistan was that retailers, even in urban centers, tend to restrict the

scale of their businesses to their environs, and rarely venture beyond their hometowns. The data

bears this out to some extent. About 55 percent of retailers interviewed had purchased their entire

stock of merchandise from the same town, and 82 percent estimated that their entire clientele was

from the same city. Interestingly, Sindh seemed to be the most self contained province with

almost 74 percent of retailers saying that goods in stock were purchased from the same city, but

this could be the “Karachi effect” given the city’s status as the premier wholesale market.

58. With regard to the use of business related services, 81 percent of respondents had never

used engineering services, 95 percent had never used management consultants, 76 percent had

never used marketing services, 91 percent had never used accounting services and 91 percent had

never used legal or IT services.

2.7 Employment

59. The hypothesis was that as the services sector grows, it is increasingly absorbing both

unskilled and semi-skilled labor. However, given the small size of the average business, 37.2

23 Although the questionnaire asked about bank accounts for business, it allowed for the fact that for many

traders there would not be a distinction between personal and business accounts, and to the extent that traders maintained one bank account for both purposes, they were considered to be using formal banking channels for business.

Retail Markets


percent of respondents in the retail category did not employ any paid employees at their outlets.

A further 25.5 percent employed one person full time, while 15 percent employed two people full

time. Almost 93 percent of enterprises did not retain any part time employees (where part time

was defined as employees working less than five hours a day). About 51 percent of full time

employees worked 10 to 13 hours per day, and 62 percent of respondents said that none of their

employees had finished primary school, indicating that the sector for the most part employs low

skilled labor.

60. The table below summarizes employment characteristics in the retail sector.

Table 2.6: Patterns of Full Time Employment

Frequency Percent Valid

Percent Cumulative

Percent

0 372 37.2 37.2 37.2

1 255 25.5 25.5 62.7

2 160 16.0 16.0 78.7

3 93 9.3 9.3 88.0

4 52 5.2 5.2 93.2

5 thru 9 44 4.4 4.4 97.6

10 thru 180 24 2.4 2.4 100.0

Total 1000 100.0 100.0

Figure 10: Relative Frequency Distribution of Number of Full Time Employees

0 1 2 3 4 5 thru 9 10 thru 180

Number of full-time paid employees

0

10

20

30

40

Pe

rce

nt

Table 2.7: Patterns of Part Time Employment


Percent Cumulative

Percent

0 928 92.8 92.8 92.8

1 40 4.0 4.0 96.8

2 19 1.9 1.9 98.7

3 thru 20

13 1.3 1.3 100.0

Total 1000 100.0 100.0



Figure 11: Relative Frequency Distribution of Number of Part-Time Employees

0 1 2 3-20

Number of Part time employees by province

0

20

40

60

80

100

Pe

rce

nt

2.8 Governance Issues

61. About 61 percent of retail establishments were not registered at all, and almost 80

percent of respondents who had not registered their businesses said that registration was not

required. A further 14 percent cited other reasons for not registering the business. However,

about 52 percent of retail enterprises were observed to provide receipts to customers,

indicating that some form of tax liability is assumed by them. Figure 12: Relative Frequency Distribution of Registration

No Yes

Registration

0

10

20

30

40

50

60

70

Per

cent

Retail Markets


62. The analysis of the governance data reveals some interesting anomalies. Over 93

percent of respondents agreed, or strongly agreed with the statement that they relied on the

reputations of those that they entered into contracts with. But 84 percent also agreed or

strongly agreed with the statement that contracts would prevent them from being cheated.

About 50 percent agreed with the statement that the legal system was functional, in that they

had confidence that their contracts and property rights would be upheld in a business dispute

in fact a further 19 percent strongly agreed with this statement. Almost 65 percent of

respondents disagreed with the statement that people from other baradaris or ethnic groups

were likely to cheat them. Most of these responses reflect a degree of faith in the legal

system, and in formal business processes (like contracts).

63. The responses differed by province though. In NWFP, almost 16 percent of

respondents disagreed with the statement that the reputation of those they entered into

business dealings with was important. Faith in contracts was highest in Balochistan with 8.8

percent of respondents disagreeing with the statement that a contract will prevent them from

being cheated, as opposed to a national average of 14 percent. Balochistan also had the

highest proportion of respondents expressing confidence in the legal system (70 percent

agreed with this statement compared to a national average of 51 percent which agreed).

Skepticism was highest in Sindh, with 37 percent of respondents expressing doubts about the

efficacy of the legal system by disagreeing or strongly disagreeing with the statement. Sindh

showed evidence of a more sophisticated business culture on another count also, with 21

percent of respondents strongly disagreeing with the statement that people of other baradaris

were more likely to cheat them, as compared to a national average of 11 percent of

respondents who strongly disagreed with this statement.

64. Data on dispute resolution indicates that retail enterprise owners are not likely to

contact the police for dispute resolution, even in extreme cases like theft or murder. Of the

total respondents, 27 reported that their business had been disrupted by a murder case in the

last one year, but only 10 of these cases (or 37 percent) had been reported to the police.

Similarly, 121 respondents mentioned having faced a serious incident of theft in the last year,

but only 39.7 percent of these cases had been taken to the police for resolution. The findings

thus appear to contradict the earlier confidence expressed in the formal justice system.

2.9 Issues of Expansion

65. Retailers for the most part restricted their businesses within the town that they were

operating in, but 38 percent of respondents said that they had considered expanding their

business within the same city. Only 8 percent had considered expanding beyond their city of

operation to another city in the country, while the bulk of the respondents (53 percent) had

not considered opening another retail outlet. Table 2.8: Expansion of Business

Frequency Percent Valid Percent Cumulative Percent

Valid Yes, to same city 381 38.1 38.1 38.1

Yes, to other city 83 8.3 8.3 46.4

Yes, overseas 5 .5 .5 46.9

No 531 53.1 53.1 100.0

Total 1000 100.0 100.0



Figure 13: Relative Frequency Distribution of Expansion of the Business

Yes, to same city Yes, to other city Yes, overseas No

Expansion of your business to same city, other cities or overseas?

0

10

20

30

40

50

60

Pe

rce

nt

66. The key impediments to expansion was financing with 74 percent of respondents

citing lack of finances as the reason why they could not expand. Lack of market with the

alternative location, either in the form of a lack of ability to assess market demand or the lack

of a reliable network of partners also formed obstacles to expansion. Other reasons for the

lack of interest in expansion included the fear of unfair competition, and concerns regarding

finding space, staff etc. Essentially, these were issues of unfamiliarity. Interestingly,

government regulations did not figure prominently as impediments to expansion.

Table 2.9: Reasons for Not Expanding the Business

Frequency Valid

Percent Cumulative

Percent

Financing 336 73.8 73.8

Do not have the means to assess market demand 43 9.5 83.3

Do not have a reliable network of partners at other places 49 10.8 94.1

Government regulations 5 1.1 95.2

Other 22 4.8 100.0

Total 455 100

Retail Markets


Figure 14: Reasons for Not Expanding the Business

Financing Do not have the means to

assess market demand

Do not have a reliable network

of patners at other places

Government regulations

Other

Main reasons

0

20

40

60

80

Pe

rce

nt

67. Only 12 percent of respondents reported considering getting into a partnership for

expansion. Of the majority who had not considered going into partnership, 62 percent said

that they did not trust non family members when it comes to entering into business, while a

further 31 percent said that they were content with the current scale of business and did not

wish to expand. Only 8.6 percent of respondents claimed to have any interest in entering into

a franchise agreement with a foreign owned business. For the majority who had not

considered the option, 51 percent felt that the type of franchises operating in the country did

not work in areas relevant to their line of work, while almost 19 percent did not want to enter

into business dealings with strangers. About 16 percent felt that franchise requirements were

too difficult to fulfill, and almost 11 percent said that they did not know how to go about

acquiring a franchise.

2.10 Facilities for Retail Enterprises

68. Almost 79 percent of respondents said that the space they were operating in was

adequate for their needs, but 62 percent pointed out that additional space was not available,

even if they wanted to expand. Table 2.10: Impediments to Expansion


Percent Cumulative

Percent

Valid Additional space expensive

71 34.0 34.5 34.5

No room to expand (space not available)

128 61.2 62.1 96.6

Other 7 3.3 3.4 100.0

Total 206 98.6 100.0

Missing System 3 1.4

Total 209 100.0



Figure 15: Impediments to Expansion

Additional space expensive

No room to to expand ( space not available)

Other

Impediments to expansion

0

10

20

30

40

50

60

70

Perc

en

t

69. In terms of conditions in shopping areas, enumerators noted that in 60 percent of

cases, the road leading to the shopping area was in average condition, while in 16.8 percent

of cases the road was poor. Figure 16: Condition of Main Access Road

Superior Average Poor

Condition of the main access road to the shop

0

10

20

30

40

50

60

Pe

rce

nt

70. The provision of parking space was generally not up to standard, with enumerators

recording that no parking space was provided outside the shopping area in 31 percent of the

locations, while in a further 34 percent of cases, parking space provided was inadequate to

accommodate peak hour shoppers. In 62 percent of cases, no encroachments were found

outside shops, which seems to indicate increased activity on part of the local administrations!


Section 3

Key Issues in the Retail Sector

71. The survey data is extensive and lends itself to a variety of modes of analysis.

However, the key issues that the survey raises are discussed as follows.

3.1 Financing Issues

72. The formal finance market does not seem to have penetrated retail trade to any

significant degree, although the need for financing manifests itself repeatedly in discussions

on the sector. Shops tend to be established almost entirely with personal savings or loans

from family members. Businesses are not expanded due to lack of access to finance, and

options for expanding in other cities and towns are also rarely explored for the same reason.

Transactions thus tend to be limited within cities of operation, and enterprise sizes remain

restricted.

73. In general though, retail traders, while decrying the lack of finance as a problem also

seem to be wary of bank and lending institutions, including informal institutions such as

family members, as manifested in the high proportion of respondents who had not even

considered applying for loans. The dominant mindset appears to be that financing is meant

for commodity producing sectors, but wont even be an option for trading. Added to this is

the undoubted adherence of the trading community to traditional interpretations of religious

strictures against interest based transactions. There is thus a conundrum here – traders need

financing, but are not actively demanding access to finance, preferring to rely on their own

and family sources.

3.2 Governance Issues

74. Issues of governance are also prominent in explaining the preponderance of small,

sole proprietorships or family owned businesses in the retail sector. Respondents expressed

some degree of confidence in the legal system, but at the same time, expressed reservations

about entering into business with non-family members. Reputation matters strongly when it

comes to entering into business dealings with other parties, but while business reputation and

experience of business dealings can mitigate the risk of entering into business transactions with

another party, it is apparently not considered to be a sufficient condition for partnership. The

majority of respondents were not willing to expand businesses to the point where they would

have to search for non-family partners. In general, traders also seem to prefer to keep a distance

from the police, preferring negotiation as a means of settling disputes, even in relatively serious

cases.



3.3 Issues in Assessing the Business Climate

75. Retailers are hesitant to venture into new territory in terms of other cities or locations due

to a lack of familiarity with the “lay of the land.” There are no business support services to guide

retailers who may wish to move or expand businesses, and the excessive reliance on informal

networks makes expansion or relocation plans too risky. The same sorts of considerations hinder

entry into new areas of operation. In a business climate where personal contacts and first hand

knowledge of the business environment is important, possibilities for expansion are bound to be

limited.

3.4 Space Limitations

76. Space limitations are a major consideration in the growth of individual retail enterprises

with commercial areas tending to be crowded and expensive. The lack of commercial space is

likely to become a more pressing problem as the economy grows and the service sector expands.

3.5 Potential to Generate Employment

77. In spite of the fact that the retail sector is dominated by small, one person owned

establishments, it generates significant employment, with over 60 percent of establishments

utilizing the services of full time paid employees. The sector thus has significant potential to

generate employment, and to absorb semi-skilled labor as the economy grows.


Section 4

Conclusions

78. The domestic commerce survey is a first attempt to gain an understanding of key issues in

the retail sector. It should be used as the basis for more detailed study on issues of interest.

Based on the key issues identified in the survey, the following recommendations may serve to

enhance growth and development in the sector.

4.1 Policy Recommendations

79. Short Term: In the short term, the Ministry of Commerce should focus on access to

finance for retail enterprises, and devise solutions to issues of asymmetric information, which is

proving to be a barrier to the entry of financial institutions in the sector. More detailed short term

recommendations are as follows.

The banking sector is currently making record profits, and has made significant inroads in

consumer finance. Banks should be encouraged by the Ministry of Commerce to look into

retail trade, and devise instruments to finance expansion of retail trade. Islamic finance

institutions, which may use instruments more palatable to stakeholders in this sector may be

particularly well placed to service the needs of the sector, given that many Islamic

instruments of finance were designed specifically to facilitate trading;

Given that lack of information on the retail market may be a prime reason why financial

institutions have not attempted to enter the sector, the Ministry may look into the possibility

of setting up a credit information bureau for the retail sector, in conjunction with traders

associations, to facilitate formal financial sector operations in retail;

The documentation of the economy continues to be an issue and communication with

retailers on tax rates and modes of collection needs to continue.

80. Medium to Long Term: In the medium term, the Ministry needs to focus more on

developing modes of contract enforcement and dispute resolution as detailed below, in addition to

facilitating the growth of business support services.

The Ministry of Commerce should work with the Ministry of Law to develop small claims

courts and enhance the capabilities of business tribunals, including the special benches for

business law constituted under the four High Courts. In the absence of adequate measures for

such enforcement, there is excessive reliance on personal and family contacts, which

significantly hinders innovation and expansion;

There is a need to assess the functioning of alternative dispute resolution (ADR) systems,

which have been incorporated into the Pakistan Penal Code under Section 89A, and to see if

these are being used by the business community. If, as is expected, the business community

has little knowledge of such mechanisms, the government needs to use forums such as



business roundtables and the Chambers of Commerce to assess ADR needs and see if these

are being met with the new legislation;

There is a need to facilitate the growth of business support services in the country, beginning

perhaps with service provision for the few large retail enterprises and international franchises

entering the country. The provision of good business support services to prominent clients

can start the ball rolling, possibly leading to increased use of such services by middle level

enterprises in the medium term. The Ministry of Commerce can facilitate this process by

preparing databases of business support services in key areas such as IT, accounting etc, and

making such databases available to export oriented enterprises as well as chambers of

commerce and industry

The Ministry of Commerce should liaise with city authorities and recommend a review of

zoning laws to judge whether these remain relevant and appropriate. In major cities such as

Lahore and Karachi for instance, zoning regulations stipulate that 2 percent of area in

residential colonies should be designated for commercial use. However, the mushrooming of

offices and shops in converted houses and residential streets bears testimony to the need to

increase this proportion, perhaps to at least 5 percent.

81. Although most of the suggested recommendations involve the need for the Ministry of

Commerce to liaise with other departments, this is unavoidable given that most of the areas of

action identified lie within the purview of other departments and institutions. The Ministry’s

proposed domestic commerce policy should, in the first phase, focus on just the few areas

identified, with effects of proposed reform being monitored before moving on to other issues.

the state of domestic commerce in pakistan study 5 - retail markets

Economy & Finance

retail sector

retail trade

growth of retail

retail enterprises

governance issues

financing issues

key issues

regulatory issues