New and modern players have moved rapidly into the growing fast moving consumer goods (FMCG) retail market. These are the chain supermarkets and hypermarkets. However, traditional stores and open bazaars still dominate employment in the sector and push productivity levels way down. Helping them to take the step to being modern, formal businesses is the key to unlocking enormous productivity growth and to creating as many as 400,000 new jobs in the sector.
Traditional Businesses Are Pivotal
Small, independent neighborhood stores face intense pressure from the newcomers. Large, modern operators offer their customers a wide range of products at attractive prices in new facilities. Without modern methods, traditional operators can only respond by offering a narrow and incomplete product lineup at prices 30 percent higher. And, they can only stay in business without modernizing by operating informally, that is by evading taxes and other financial obligations to the state.
The progress of traditional operators will be central to the development of the sector, since they account for almost 90 percent of employment. Today, their inefficiencies hobble the industry and help pull total sector productivity down to 29 percent of U.S. levels. If they can be encouraged and guided along the path to modernization (franchises, buying groups, specialization, etc.), they will participate fully in continued rapid growth. They will also lift themselves and their employees out of today's marginal livelihoods.
The alternative for most is not status quo. Without modernization they will go out of business, sooner or later.
Distracted by Interest Rates
Modern players have their own, equally important, role to play in improving productivity.
New and modern FMCG operators bring much in the way of best practice into the sector. But, their productivity rates have been well below potential since the non-operating income opportunities offered by cash management in a high interest rate environment have been a magnet for their attention. This focus has boosted profits without improving either productivity or core profitability.
Jobs At Stake
If the government can get high real interest rates under control, modern operators will have all the incentive they need to improve productivity. In an intense competitive environment, it will be the only platform for acceptable returns.
A wide range of technical and financial assistance programs, similar to those available in the E.U., could spur traditional players to modernize. These programs could include providing a common purchasing and financial umbrella. There is almost certainly a major role for franchising.
However, no assistance programs will be effective unless the disincentive to modernize is removed. Much more effective enforcement of tax and labor laws is essential to achieve dramatic reductions in the commonplace informality of today.
The upside is enormous. The Turkish FMCG retail sector could more than double its productivity by 2015 and become a primary job creation engine in a rapidly growing economy. Launch this chapter (PDF - 583 KB)
