Supermarket sales plateau as economy reopens

In the months of Covid-19 shutdown, the country's supermarket sector witnessed a 40-50 percent growth. However, the growth nearly flattened again following the reopening of the economy.

A larger number of urban people preferred supermarkets' efficient services at a competitive price when the entire economy was suffering a supply chain disruption.

But, following the reopening lower-middle income customers are staying away from superstores again, in response to their own financial struggle amid the pandemic. They mainly want to avert the additional Value added tax (VAT) on packaged products bought from the supermarket.

Industry insiders believe the VAT structure for them is discriminatory as customers do not have to pay it against purchases from traditional retail stores and therefore the industry needs a level-playing field.

"During the shutdown, supermarkets proved that it is not a luxury and rich people's destination. Around 70-80 percent of our customers at that time were from lower-middle and middle income groups, said Sabbir Hasan Nasir, the executive director of Shwapno, the country's largest supermarket chain running 140 stores.

He along with two other industry executives spoke in a webinar jointly organised by The Business Standard and The City Bank on Saturday.

The discussants said supermarket chains are faced with various problems, such as an unfavourable tax structure, high real estate cost, and an undisciplined urbanisation. 

Sabbir Hasan, however, said if the government understands the prospects of modern organised retail and adopts supportive policies to let the sector grow, supermarket chains can grow to an extent that 1,00,000 stores can be built across the country, which can add 0.9 percent to the country's GDP. 

The speakers also argued that the sector has the potential to contribute over Tk11,000 crore more to the national exchequer per year, if it can grow.

The hurdled growth track

Established in 2001, Agora is the first supermarket chain in Bangladesh. Meena Bazar joined the industry one year after Agora's inception.

The industry has been attracting investment since then, thanks to the ongoing economic development, rising per capita income, growing urbanisation and increasing business in daily lives.

Shwapno joined the race in 2008 with a large-scale business model and a huge cumulative investment.

The growth was dented in 2013 when the government imposed an additional value-added tax (VAT) on packaged products only if purchased from supermarkets and that had reduced footfalls in superstores and sales plummeted by one-third in a year.

However, the industry, with the efforts of chain companies and demand from busy urban customers, has recovered and grew.

The supermarket industry's average annual turnover growth was 35 percent in the past 10 years, which came down to 25 percent in the second half of the last decade and currently stands at 5 percent due to the discriminatory VAT structure, said Sabbir Hasan Nasir.

"For building supermarkets in Bangladesh, entrepreneurs have to import all the capital machinery. However, the tax rate is abnormally high in this area, which discourages investment in and growth of the sector," said Shaheen Khan, chief executive officer of Meena Bazar, the country's third largest supermarket chain.

"The import duty has come down to 65 percent from over 100 percent, but still it is the highest on capital machinery among industries here," he mentioned.

He also observed that too high real estate cost and a lack of dedicated infrastructure in residential areas for basic services outlets like supermarkets hinder the growth of the sector. Very importantly, unplanned and uncontrolled wet markets and groceries everywhere in the city are also hindering the growth of organised retail.

Supermarkets need to scale up to bargain with suppliers, which is important to reduce the influence of middlemen in the trade of agricultural and grocery goods for the sake of benefiting the consumers, producers and the retail chain industry itself, said Galib Farrokh Bakht, general manager of convenient store chain Daily Shopping.

Bangladesh and Sri Lanka began their journey towards modern retailing at an almost similar time two decades ago. However, structured retailing now contributes 43 percent of Sri Lanka's total retail turnover, which is yet to cross 2 percent in Bangladesh, said speakers at the webinar moderated by The Business Standard Executive Editor Sharier Khan.

The figure is 54 percent in Thailand, 42 percent in Indonesia, 58 percent in the Philippines, and 9 percent in India.

Contribution of modern trade in retail and efficiency of goods market indicates the level of economic development, said Sabbir Hasan.

Chain retailers' advantages and potentials

It is easier to monitor and regulate the structured and transparent retail chains that have IT networks and centralised databases.

Setting up of electronic cash register machines to monitor sales and collect VAT-tax at 18 lakh scattered shops across the country will be a tough job for the government, pointed out Sabbir Hasan.

However, this is much easier in case of handful chain retailers, he said, adding regulating the quality and price level at supermarket chains also is easier for the government.

During shutdown, the chains served better amid the pandemic and proved their edge and supply chain efficiency at a competitive price, he added, witnessing year on year growth.

The discriminatory VAT policy is again taking a toll as small basket customers – buying Tk100-2,000 at a time – are suffering financial hardship during the pandemic. Their footfall is declining after the shutdown, while the industry is witnessing increased footfalls of and purchases by affluent customers who buy more at a time, said Shaheen Khan.

Around 20 percent lower-middle income customers left the city, believes Sabbir Hasan.

No country collects VAT or additional sales tax only because of a product is bought from the supermarket, and the discrimination in Bangladesh must see an end, said the discussants. 

Sabbir Hasan said building one lakh organised retail stores across the country is not impossible, and in that case, the sector here will see a rational 20-25 percent share in the annual retail sales.

That would create an additional 27 lakh employment opportunities through over 12 lakh in-store jobs alongside supporting agricultural producers, SME, franchises and delivery partners creating other 15 lakh jobs.

Supermarkets endeavour to ensure safe food at an affordable price, and that also needs scale as the scale is vital for effective direct sourcing.

If the industry can reach the modelled scale it would create an economy of nearly Tk24,000 crore and add 0.9 percent to the current GDP, while the government can receive an annual revenue of over Tk11,000 crore, said Sabbir Hasan.

Need for financing

The industry is growing at the expense of investors, some of whom just began to see net profits, still at the cost of expansion. 

A Tk5,000 crore investment is now facing around Tk2,000 crore cumulative losses, while more than 50 stores and some brands like Nandan and PQS have gone bust.  

To unlock the potential of modern retail, the chain industry needs easy finances. 

Foreign investors are also eying the sector, but they are concerned about the government behaviour towards the industry and also have questions about how the industry can achieve a scale, said Sabbir Hasan. 

Considering the contribution of the industry, the government should offer companies with long-tern soft loans, alongside removing the existing hurdles, suggested the industry speakers.