Pakistan's Domestic Retail Commerce Study

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

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=

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.
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
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 4
5 thru 9
10 thru 14
15 thru 19
20 thru 24
25 thru 29
30 thru 34
35 thru 39
40 thru 44
45 thru 49
50 thru 59
60 thru 106
Firm Age
0
10
20
30
40
Percent
Figure 2: Relative Frequency Distribution of Firm Age (NWFP)
0 thru 4
5 thru 9
10 thru 14
15 thru 19
20 thru 24
25 thru 29
30 thru 34
35 thru 39
40 thru 44
45 thru 49
50 thru 59
60 thru 106
Firm Age
0
10
20
30
40
Percent

Figure 3: Relative Frequency Distribution of Firm Age (Sindh)
0 thru 4
5 thru 9
10 thru 14
15 thru 19
20 thru 24
25 thru 29
30 thru 34
35 thru 39
40 thru 44
45 thru 49
50 thru 59
60 thru 106
Firm Age
0
5
10
15
20
25
30
Percent
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
Percent
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
Percent
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
Percent
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
Percent
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
Percent
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
Percent
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
Percent
Table 2.7: Patterns of Part Time Employment
Frequency Percent
Valid
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
Percent
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
Percent

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
Percent
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
Percent
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
Frequency Percent
Valid
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
Percent
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
Percent
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.

Pakistan's Domestic Retail Commerce Study

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Pakistan's Domestic Retail Commerce Study