Danai Pathomvanich
Sep 3, 2015
A little more than a decade ago, many people assumed that big-box American, European and local food retailers would conquer Asian consumer wallets.
However, today a different picture is emerging as small-footprint franchised grocery stores are expanding quickly in the region.
For instance, in Thailand, food-retail chains such as CP 7-Eleven, Family Mart, Lawson and many similar brands are thriving with many operated as family-owned franchisees.
In a recent McKinsey article, “Modern grocery and the emerging-market consumer: A complicated courtship”, authors Peter Child, Thomas Kilroy and James Naylor said that in the 1990s, the term “modern grocery retail” was essentially a proxy for a small group of multinational grocers including Ahold, Aldi, Auchan, Carrefour, Costco, Lidl, Metro, Tesco, and Walmart.
“The prevailing expectation was that although there would be local differences due to cultural specificities, in every country the retail landscape would eventually consist of a combination of modern formats: full-line supermarkets and hypermarkets, convenience stores, and discounters.”
Wrong assumptions
These assumptions have been proved wrong as global grocery giants struggle to grow profitably in many emerging markets.
Quasi-modern-trade players such as CP 7-Eleven have captured a large consumer food segment by partnering with traditional trade-owners.
“The strategy has clear advantages: it allows a modern retailer to leverage the network and personalized service of the traditional trade while minimizing capital investment.”
These small franchised convenience-stores have also grown exponentially by taking on distinctly new characteristics.
Hypermarket’s perceived strengths
To understand the disparity between early expectations and the current reality, the authors said we must examine the roots of the two quintessential modern-trade formats: the supermarket and the hypermarket.
The hypermarket that represented the successful injection of food and grocery into a general-merchandise discount store was widely regarded as unbeatable.
“By offering tens of thousands of products in an immense building just outside or on the edge of a town or city, a hypermarket could operate at a level of productivity that other grocery formats struggled to match.”
The operators passed on these efficiency gains to consumers in the form of lower prices, which served to reinforce hypermarkets’ advantage.
Perceived strengths not relevant for much of Asia
Hypermarkets initially prospered in regions with several common characteristics that were not prevalent throughout Asia.
European and American hypermarkets thrived because their countries had good road networks and high or fast-rising car-ownership rates, a large middle class that enjoyed decent wages and stable employment, and a high proportion of rural and suburban households with enough room at home to store groceries bought in bulk.
“The hypermarket format draws heavily on consumers’ time, ability to travel, and storage capacity.”
At the same time, Asian retailers encountered an entirely different context.
“Consumers were less affluent and lived in urban areas; many didn’t own a car, couldn’t afford to travel to and from a relatively far shopping destination, had no room at home to store purchases, or all of the above.”
A new respect for localism
The authors noted that on both the demand side (what customers want from retailers) and the supply side (the means by which retailers can deliver what customers want), different factors shaped the retail ecosystem in each country.
Here in Thailand, convenience store chains such CP 7-Eleven with more than 8,500 stores appear in almost every metropolitan corner and not only deliver low-priced foods but more importantly have become convenient touch-points for regular consumer financial transactions.
McKinsey said these customers don’t necessarily perceive customer service at modern retailers as superior to that of the traditional trade.
Big box retailers are striking back
Big box retailers are nevertheless fighting relentlessly to maintain their share of the consumer wallet.
In Thailand, Tesco Lotus has expanded their small-footprint Tesco Express stores to compete with 7-Eleven.
“They realized that many urban consumers with limited budgets and smaller homes often prefer to buy small amounts frequently, both for immediate consumption and for stocking up.”
