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Retail Sector

Table of Contents
Introduction................................................................................................................ 1
Logistics Cost............................................................................................................. 1
Training and Development of the Employees.............................................................2
Rent Expense.............................................................................................................. 2
High Credit Rates........................................................................................................ 2
Taxes.......................................................................................................................... 3
Other.......................................................................................................................... 3
Information Technology........................................................................................... 3
Car Parking.............................................................................................................. 3
Maintenance Cost.................................................................................................... 3
Law and Order......................................................................................................... 3

Introduction

Logistics Cost
The increase in logistical cost tends to increase the cost of the retailer. This cost is
at first imposed on the wholesaler or the distributor in the supply chain.
The transportation cost for the wholesaler or distributor is very high because the
cold storage and refrigerated vehicles are subjected to almost 25% import duty and
15% sales tax, according to a report published by the ministry of commerce.
Second reason of the increase in the wholesalers cost is the poor road
infrastructure of Pakistan.
"A source at Metro said that, when the company launched in
Pakistan, its biggest problem was building up its supply chain
infrastructure."

"Pakistans performance on most logistical indicators, including the


quality of trade and transport infrastructure, is worse than that of
other Asian countries. The transport supply chain system is not
providing the value-added services that have become the hallmark
of modern logistics, such as multimodal systems that combine the
strengths of different transport modes into one integrated system."
Thus because of these two major reasons, the wholesaler's gross margin on the
product increases, which in turn increases the end price of the product by almost
1%.
According to one report, logistics cost are almost 35-40% of the retail price.
Furthermore, the lack of efficient supply chain, leads to a problem of storage and
inventory management of the perishable items, fruits and vegetables. Thus,
approximately 30-40% of the food is wasted because of the dearth of the preserving
technology.
In Pakistan, the magnitude of post-harvest losses of vegetables
and fruits is about 35 per cent.

Training and Development of the Employees


The staff of retails (except for the SMEs) needs to be well trained and professional,
as the need for managing customer relationships is increasing day by day. Hence,
there is another cost incurred by the retailers, the training and development cost.
The charges demanded by the HR trainees calculated per employee, are as high as
PRs. 15,000/ employee.

Rent Expense
High rental cost is the second major factor of why the SMEs are not expanding in
the retail sector. Pagri is another system that is followed in the old cities of Pakistan.
In a pagri system the tenant has to pay a premium which is equal to the market
price of the property. The ownership of the property is not transferred and the owner
continues to pay taxes. Also, the tenant has to make periodic payments on monthly
basis in the form of rent, which is very less. The major hurdle that the retailer faces
in the pagri system is the initial premium that is charged.
According to a survey conducted by the ministry of commerce, 38% of the retailers
said that they have considered to do expansion within the city, while 8% of them
considered to expand their business in other cities of the country. Unfortunately the
rest of them (53%) never planned to do expansion.
Lahore
Islamabad
Jhelum

4 Marla
Rs. 25,000
1 sq. fit
Rs. 200
4 Marla
Rs. 25,000

The above rates are current. The prices vary with respect to the location and floors
of the property.

High Credit Rates


46.5% of the participants, in the survey of domestic commerce, said that the access
to finance is the major problem in the expansion of the retail. Also, 76% of the
retailers have done the funding of their businesses through their own personal or
family savings on an average 85% of the paid up capital had been raised through
family savings.
The reason lies in the fact that the SME sector (which retail is a part of), receives
only 19% of the financial system credit from the formal sector. Also, there are strict
credit policies, which further makes them reluctant to borrow from the banks.
Almost 60% of the loans actually received were up to Rs. 100,000

only.

Although the informal sector requires credibility and personal contracts, the nointerest policy makes the borrowing less costly for the SME retailers.
Also, the unavailability of the funds for the retails SME sector has an impact on the
supply chain, as the purchase of the goods depends heavily on the extension of
credit. In the same survey, almost 22% of the retailers said that 50% of their
purchases were made on credit, while 10% said that 10% of their purchases were on
credit. The distributors and the wholesalers face the same problem; hence, they
maintain strict cash basis policies for the retailers.

Taxes
Majority of the retail sector has been out of the tax net in the past years. The
owners voluntarily declare their incomes to be below the taxable income, in order to
reduce their expenses. More than half of the retailers are still unregistered.
So far, the FBR had registered around 300 retailers during first
quarter (July-September) 2014-15 under the new scheme
announced in last budget against 11,000 identified retailers
required to be registered with sales tax department. The FBR's
statement shows that around 300 retailers have been registered so
far. Whereas, there are more than 11,000 retailers who still need to
be registered with sales tax.
Type

Condition

Tax Rate

Large

Store in air conditioned


malls
Electricity bill over Rs.
600,000
Electricity bill over Rs.
240,000
Electricity bill below Rs.
240,000

Normal GST i.e. 17%


Install FECR

Medium
Small

GST of 7.5%
GST of 5%

Not registering as an official business does not only gives them an advantage to
stay away from tax, but also becomes a reason for them to avoid expansion, as they
are well aware that this growth would lead to higher taxes.
Yet due to resistance put up by the politically influential retailer
class, coupled with weak enforcement by the FBR, the government
has not been successful in bringing this as yet untaxed sector of the
economy into the tax net, admitted FBR officials.

Other
Information Technology
Under SRO 608 (1), the unregistered retailers are required to get registered in the
Sales Tax Act and are asked to install fiscal electronic cash register (FECR), which
costs around $300.

Car Parking
Car parking area is a necessity in the modern format of the retails; hence, this extra
cost is incurred by the retailers.

Maintenance Cost
Law and Order
One of the primary challenges for retailers in Karachi especially has
been dealing with the law and order situation. Transport in the city
can shut down suddenly when the violence picks up, causing many
retailers, including Naheed Supermarket, to keep high levels of
inventory. I try to maintain stocks for at least two weeks, said
Abrar.