Internal Trade Chapter Notes - Business Studies (BST) Class 11 - Commerce

Table of Contents
1. Introduction
2. Internal Trade
3. Wholesale Trade
4. Retail Trade
5. Types of Retailing Trade
6. Mail Order Houses
7. Consumer Cooperative Store
8. Supermarkets
9. Vending Machines
10. Goods and Services Tax (GST)
11. Role of Commerce and Industry Associations in Promoting Internal Trade
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Introduction

• Trade involves buying and selling goods or services for profit.
• Since ancient times, trade has been essential to human societies and has expanded as new products and services are developed and distributed worldwide.
• No single person or country can produce everything needed; therefore, people and nations specialise in what they can produce most efficiently and trade for the rest.
• Two main types of trade exist:
  1. Internal Trade - trade that occurs within a country's borders.
  2. External Trade - trade that occurs between countries (exports and imports).
• This chapter focuses on Internal Trade-its forms, functions, and the institutions that support it.

Internal Trade

• Internal trade means the buying and selling of goods and services within the geographical boundaries of a country.
• It covers transactions that take place through local shops, markets, malls, exhibitions, and door-to-door selling inside the domestic market without customs or import duties.
• The principal purpose of internal trade is to distribute domestically produced goods for local consumption and to make products available to consumers where and when they need them.
• Major types of internal trade:
  1. Wholesale trade - purchase of goods in large quantities for resale to retailers, other traders, or institutions.
  2. Retail trade - sale of goods in small quantities directly to the final consumers.
• Wholesalers and retailers act as intermediaries between producers and final consumers, providing distribution, storage, and marketing services that make goods accessible across a country at affordable prices.

Wholesale Trade

• Wholesaling involves selling goods to retailers, other merchants, businesses, or institutions rather than to the final consumers.
• Wholesalers act as a vital link between manufacturers and retailers by buying in bulk from producers and redistributing goods in smaller lots to retailers across wide areas.
• They purchase goods in bulk, assume business risks, provide storage and transportation, and often extend credit to retailers.
• Example: A wholesaler might buy a large consignment of soap from a factory and distribute it to grocery stores in many cities.
• Main functions performed by wholesalers include:
  • Sorting and packing goods for retail sale.
  • Storing goods to provide time utility.
  • Transporting goods to various retail outlets.
  • Promoting products and creating demand at the retail level.
  • Gathering market information and passing feedback to producers.
• Without wholesalers, producers or retailers would have to perform these functions themselves, increasing costs and complexity in distribution.

Wholesaling Process

Services of Wholesalers

Wholesalers provide important services that benefit both manufacturers and retailers. Their activities create time and place utility by ensuring goods are available where and when they are needed.

Services to Manufacturers

1. Enabling Large-Scale Production: By aggregating small orders from many retailers, wholesalers place large bulk orders with producers, enabling economies of scale in production.
2. Risk Bearing: Wholesalers buy and hold stock in their own name and absorb risks such as price fluctuations, theft, or damage.
3. Financial Support: Immediate or advance payments by wholesalers reduce the capital tied up for producers.
4. Market Insights: Direct contact with retailers allows wholesalers to inform producers about customer preferences and market trends.
5. Distribution Assistance: Wholesalers distribute products to many retail outlets, freeing producers from the complexities of direct distribution.
6. Ensuring Continuous Production: By purchasing and storing goods throughout the year, wholesalers allow consistent production schedules for manufacturers.
7. Storage: Wholesalers provide warehousing facilities, supplying time utility and reducing storage burdens on manufacturers.

Services to Retailers

1. Product Availability: Wholesalers supply a wide assortment of products from different manufacturers, saving retailers the task of contacting multiple producers.
2. Marketing Support: Through advertising and sales promotion, wholesalers help create demand for products at the retail level.
3. Credit Facilities: Many wholesalers offer trade credit to regular retailers, easing working capital pressures.
4. Specialised Knowledge: Wholesalers advise retailers on product features, merchandising, pricing and display techniques.
5. Risk Reduction: Retailers can buy in small quantities from wholesalers, minimising risks of overstocking, spoilage, or price declines.

Retail Trade

• A retailer is an enterprise that sells goods and services directly to final consumers, usually in smaller quantities for personal use.
• Retailers obtain goods from wholesalers or manufacturers and perform the final step in the distribution chain.
• Retailing methods include physical stores, telephone sales, vending machines, door-to-door selling, and online channels.
• Examples of retail selling include selling pens or books on a bus, cosmetics through door-to-door sales, or vegetables by roadside vendors - all sales to ultimate consumers.

Key functions performed by retailers:

• Buying goods from wholesalers or producers.
• Storing goods safely and providing time utility.
• Selling goods in small, convenient quantities to consumers.
• Assuming business risks associated with retailing.
• Grading and packaging products suitable for final sale.
• Collecting market information and customer feedback.
• Extending credit sometimes to regular or trusted buyers.
• Promoting sales through displays, discounts, and offers.

Services of Retailers

Retailers provide services that benefit producers, wholesalers, and consumers.

Services to Manufacturers and Wholesalers

1. Distribution Support: Retailers take products to the final market, providing place utility and final-mile access.
2. Personal Selling: Retailers perform direct selling activities to persuade customers and close sales.
3. Enabling Large-Scale Operations: By buying in bulk from producers and wholesalers and selling in small quantities, retailers allow upstream firms to focus on larger-scale production and distribution.
4. Market Information: Retailers relay customer preferences and trends to manufacturers and wholesalers.
5. Promotion Assistance: Through local advertising and in-store promotions, retailers help increase product visibility and demand.

Services to Consumers

1. Product Availability: Retailers ensure regular and convenient availability of products near consumers.
2. Information on New Products: Retailers inform customers about new arrivals and product features through displays and demonstrations.
3. Convenience in Buying: Selling in small quantities and being located close to homes makes purchasing convenient for consumers.
4. Wide Selection: Retailers stock various brands and varieties, offering choices to buyers.
5. After-Sales Services: Home delivery, spare parts, repairs and customer service enhance consumer satisfaction.
6. Credit Facilities: Some retailers grant credit to trusted customers, aiding regular consumption and convenience.

The difference between Retailers and Traders is chiefly in the role: retailers serve the final consumer, focusing on small-quantity sales and personal selling; traders or wholesalers operate in bulk and intermediate distribution.

Types of Retailing Trade

Retailers can be classified by several criteria: size, ownership, merchandise handled, and business location. The following classification highlights common types found in India.

1. Size of Business: Retailers may be large, medium, or small, depending on the scale of operations and turnover.
2. Type of Ownership: Forms of ownership include sole proprietorships, partnerships, cooperative stores, and companies.
3. Merchandise Handled: Retailers may be general stores, speciality shops, supermarkets, departmental stores, or second-hand dealers, based on the range of products.
4. Business Location: Retailers are either itinerant (no fixed place of business) or fixed-shop (operate from a permanent location).

Next, we explain itinerant and fixed-shop retailing in more detail.

Itinerant Retailers

Itinerant retailers do not have a permanent shop; they move from place to place to sell goods. They are common in residential areas, marketplaces, and near schools or transport hubs.

Characteristics

• Operate on a small scale with limited capital.
• Typically sell everyday consumer items such as fruits, vegetables, toiletries and snacks.
• Provide convenience by bringing goods close to customers, often delivering to doorsteps.
• Store inventories at home, in carts, or temporary stalls rather than in permanent warehouses.

Common types of itinerant retailers

• Peddlers and hawkers: Sell goods from handcarts, bicycles or on foot - example: snack sellers near schools or toys near residential areas.
• Market traders: Set up stalls on fixed market days selling fabrics, household items or clothing.
• Street traders (pavement vendors): Operate at busy locations like railway stations, selling newspapers, snacks and small household items.
• Cheap jacks: Temporary small shops in commercial areas selling inexpensive consumer items and offering minor services.

Fixed Shop Retailers

Fixed shop retailers operate from a permanent location and are the most common form of retailing. They range from small neighbourhood shops to large retail chains and departmental stores.

Characteristics

• Generally have more resources and better infrastructure than itinerant traders.
• Sell a wider range of goods, including both durables and non-durables.
• Provide greater credibility and services such as home delivery, warranties, repairs, credit facilities and spare parts.

Two broad categories: small shopkeepers and large retailers.

Types of Retailing Trade

Fixed Shop - Small Retailers

• General stores: Serve local residential areas with groceries, toiletries, and stationery; often extend credit to regular customers and rely on convenience and customer relationships.
• Speciality shops: Focus on a specific line of products - for example, bookshops, electronic stores or children's clothing shops.
• Street stall holders: Small permanent stalls at busy locations selling inexpensive, daily-use items.
• Second-hand goods shops: Sell used items such as books, clothes, furniture and sometimes antiques at lower prices.

Fixed Shop Small Retailers

Fixed Shop - Large Stores

1. Departmental Stores

• A departmental store is a large retail establishment offering a wide variety of products organised into separate departments under one roof.
• Each department specialises in categories such as toiletries, groceries, electronics, clothing and furniture.
• Examples in India include older names such as Akberally (Mumbai) and Spencers (Chennai), among others, as the format expanded.

Key features of departmental stores

1. Varied services: Provide extra amenities like restaurants, restrooms, travel counters and phone booths.
2. Strategic location: Located in central, high-traffic areas to attract many customers.
3. Large-scale management: Operate as larger organisations, often with departmental managers reporting to central management.
4. Retailing and warehousing: Combine retail activities with in-house warehousing and central purchasing.
5. Centralised purchasing: Buying is done centrally while sales and merchandising are managed at the department level.

Advantages

1. Attract a large and varied customer base due to the central location and variety.
2. Convenience of one-stop shopping for consumers.
3. Offer additional services such as home delivery and credit to regular customers.
4. Benefit from economies of scale through bulk buying.
5. Large promotion budgets allow effective advertising and sales campaigns.

Limitations

1. Less personalised service because of the large size and many customers.
2. Higher operating costs for services and amenities, which may be reflected in prices.
3. Risk of stock losses if demand changes suddenly.
4. May not be convenient for urgent or quick purchases if located centrally but far from some neighbourhoods.

Departmental Stores

2. Chain Stores or Multiple Shops

Chain stores are groups of retail outlets owned and operated by the same organisation (manufacturer or retailer) and follow uniform policies in merchandising, pricing and display.

Characteristics

1. Centralised procurement: Merchandise purchasing is done centrally and distributed to branches.
2. Standardisation: Uniform displays, product selection and pricing across branches.
3. Branch management: Each outlet has a manager who reports to the head office.
4. Cash sales: Many chain stores operate primarily on cash sales that are remitted to the head office.
5. Supervision: Inspectors or regional managers ensure standards are maintained.

Examples in India: Bata, Raymonds, Nirula's (historical examples of early chains).

Advantages

1. Economies of scale in purchasing and advertising.
2. Elimination of middlemen when manufacturers operate chains lowers costs.
3. Cash-only operations reduce bad debts.
4. The ability to transfer stock among outlets reduces dead inventory.
5. Risk of loss at one outlet can be offset by profits at others.
6. Lower operating costs through central administration and standard procedures.
7. Flexibility to close or relocate non-performing outlets.

Limitations

1. The product range may be limited if the chain is manufacturer-owned and sells only its products.
2. Limited initiative for local managers who must follow head office rules.
3. Impersonal service due to standardised operations.
4. Unsold stock at one outlet may result from sudden demand changes, causing losses.

Differences between Departmental Stores and Multiple Shops

• Location: Departmental stores are usually central; multiple shops are spread across locations.
• Range of products: Departmental stores carry a wider variety under one roof; multiple shops often focus on a narrower product line.
• Services: Departmental stores offer many additional services; multiple shops offer limited services.
• Pricing: Departmental stores may vary pricing by department and offer discounts; chain shops maintain uniform pricing.
• Customer class: Departmental stores may attract higher-income customers seeking convenience; multiple shops cater to mass markets.
• Credit facilities: Departmental stores may give credit to regular customers; multiple shops typically operate on a cash basis.
• Flexibility: Departmental stores can change product mix more easily; multiple shops usually maintain a fixed product line.

Mail Order Houses

Mail-order houses sell goods through catalogues, adverts or price lists sent by post. Buyers place orders by mail or electronic means, and payments are generally made in advance or by specified methods like Value Payable Post (VPP) or bank transfer.

Suitable products for mail order

• Standardised, portable and easy-to-ship products.
• Goods with stable, year-round demand.
• Products that can be adequately described and marketed through images and text.

Advantages of Mail Order Houses

1. Low capital requirement for infrastructure.
2. No middlemen - direct sale to customers reduces costs.
3. Reduced risk of bad debt with advance or cash payments.
4. Wide geographic reach - can serve customers nationwide.
5. Convenience - products delivered to customers' homes.

Limitations of Mail Order Houses

1. No personal contact between buyer and seller, which may reduce trust.
2. High promotion and advertising costs to create demand.
3. Limited after-sales service due to distance.
4. Cash-only policies may deter some buyers.
5. Delayed delivery relative to local purchasing.
6. Potential for fraud where seller misrepresents goods.
7. Dependence on efficient postal/transport services, which may be weak in remote areas.

Consumer Cooperative Store

Consumer cooperative stores are retail organisations owned and run by consumers to obtain goods at fair prices by cutting out unnecessary middlemen. They buy in bulk from manufacturers or wholesalers and distribute to members at reduced costs.

Consumer Cooperative Store

Structure and Formation

• Formed by a minimum of 10 members who establish a voluntary association.
• Registered under the Cooperative Societies Act.
• Capital raised by issuing shares to members; members enjoy limited liability.
• Managed democratically with each member having one vote.

Advantages

1. Easy to form with modest membership requirements.
2. Limited liability protects members' personal assets.
3. Democratic management provides member control.
4. Lower prices by eliminating middlemen.
5. Cash sales reduce working capital needs.
6. Convenient local locations for members.

Limitations

1. Lack of initiative, since management is often voluntary.
2. Shortage of funds limits expansion and modernisation.
3. Irregular patronage by members reduces turnover.
4. Limited managerial expertise may affect efficiency.

Supermarkets

A supermarket is a large self-service retail outlet offering a wide variety of consumer goods under one roof, with a focus on groceries and daily-use items. Supermarkets operate on low margins and high volumes.

Key characteristics

1. Wide variety of goods - groceries, household items, sometimes clothing and medicines.
2. One-stop shopping for multiple categories.
3. Self-service format where customers select items themselves.
4. Lower prices due to bulk purchasing and efficient operations.
5. Predominantly cash sales - limited credit facilities.
6. Located in central or high-footfall areas to attract large customer flows.

Supermarket Structure

Advantages of Supermarkets

1. Convenient and economical shopping with many products in one place.
2. Easy accessibility for people in the surrounding areas.
3. Wide selection of brands, sizes and varieties.
4. No bad debts due to cash sales.
5. Benefit from economies of scale, reducing prices for consumers.

Limitations of Supermarkets

1. Usually no credit facility, which may limit some purchases.
2. Limited personal attention due to self-service operations.
3. Risk of product mishandling by customers under self-service.
4. High overhead and significant capital are required to establish.

Vending Machines

Vending machines are automated units that dispense products on payment by coin, token, card or digital means. They are useful for standardised, low-cost, high-turnover items.

Key characteristics

1. Automated, no sales staff required.
2. Best suited for pre-packed consumables such as drinks, snacks and tickets.
3. ATMs are a prominent example in banking, dispensing cash and related services.

Advantages

1. Convenience and round-the-clock availability.
2. Lower staffing and operating costs.
3. Efficient for goods with predictable and frequent demand.

Limitations

1. High installation and maintenance costs.
2. No opportunity for customers to examine goods or return items easily.
3. Products require special pre-packaging to fit machines.

Goods and Services Tax (GST)

The Goods and Services Tax (GST) was implemented in India on 1 July 2017. It aimed to create a unified domestic market under the principle of "One Nation, One Tax" by replacing multiple indirect taxes and simplifying the indirect tax structure.

Characteristics of GST

1. Single comprehensive tax on the supply of goods and services charged at each stage of value addition.
2. Destination-based tax: Tax accrues to the state where goods or services are consumed.
3. Dual structure: For intra-state supplies, taxes are split into Central GST (CGST) and State GST (SGST); for inter-state supplies, Integrated GST (IGST) applies.

Benefits of GST

1. Ease of doing business: Simplifies tax compliance and reduces the cascading effect of taxes.
2. Improved tax administration: A single unified law and automated processes enhance efficiency and reduce evasion.
3. Consumer benefits: Input Tax Credit (ITC) at every stage prevents double taxation and can reduce final prices.
4. Support to sustainable development: Better tax collection provides revenue for public goods and social programmes.

How GST Works

• Input Tax Credit (ITC): Tax paid on inputs can be claimed as credit against tax on output supplies, reducing cumulative tax burden.
• Taxation at each stage: GST is levied at each stage of production and distribution; only the value addition is effectively taxed at each stage.

GST was introduced to integrate India's market, reduce tax complexity and cascading, and promote transparency in indirect taxation.

Key Features of GST

1. Nationwide applicability: Covers the entire territory of India to create a common market.
2. Tax on supply: GST is levied on the supply of goods and services rather than a tax only on manufacture or sale.
3. Destination principle: Tax is collected where consumption occurs.
4. Import treatment: Imports are treated as inter-state supplies and are subject to IGST along with applicable customs duties.
5. Tax components: CGST and SGST for intra-state transactions; IGST for inter-state transactions. Rates and structure are determined by the GST Council.
6. Tax slabs: Several rate slabs exist (commonly 0%, 5%, 12%, 18%, 28%), with certain goods/services exempt or zero-rated.
7. Zero-rated exports and SEZ supplies: Exports and supplies to Special Economic Zones are zero-rated under specified conditions.
8. Multiple payment methods: Tax payments can be made by online methods such as net banking, debit/credit card, NEFT and RTGS.

Role of Commerce and Industry Associations in Promoting Internal Trade

Organisations such as ASSOCHAM, CII (Confederation of Indian Industry), and FICCI play a significant role in shaping policies and promoting internal trade by representing business interests and facilitating coordination between industry and government.

Main areas where these associations contribute:

1. Interstate movement of goods: Advocate for uniform transport policies, vehicle regulations and improved road networks (for example, work related to corridors like the Golden Quadrilateral) to ease interstate trade.
2. Local levies and octroi: Work with local governments to ensure that municipal or local levies do not unduly hinder movement of goods and to harmonise local taxes with national trade objectives.
3. Harmonising sales tax and VAT: Promote uniform tax structures across states and the adoption of Value-Added Tax models to reduce cascading taxation prior to GST reforms.
4. Marketing of agricultural products: Support policies and infrastructure that improve farmers' access to markets and streamline agricultural marketing channels and cooperatives.
5. Weights and measures, brand protection: Encourage enforcement of consumer protection laws, accurate weights and measures, and measures against brand duplication to protect consumers and producers.
6. Excise and indirect tax policy: Liaise with the government on excise and other indirect taxes to ensure policies support industry growth while balancing fiscal needs.
7. Promoting infrastructure development: Advocate for investment in roads, ports, railways, warehouses and energy to reduce logistics costs and improve connectivity.
8. Labour legislation: Engage in labour reforms that balance flexibility for industry with workers' rights to promote higher production and employment.

Through policy advocacy, research, training, and facilitation of public-private partnerships, these associations help create a business-friendly environment that supports economic growth, market harmonisation and benefits both industry and consumers.