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DBS Group Research • November 2015DBS Asian Insights18n

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SECTOR BRIEFING

Appetite For Consumption

Strategic Overview of the Modern Grocery Retail Sector in ASEAN

DBS Asian Insights SECTOR BRIEFING 1802

Appetite For Consumption Strategic Overview of the Modern Grocery Retail Sector in ASEAN

Alfie Yeo Equity Analyst DBS Group Research [email protected]

Andy Sim Equity Analyst DBS Group Research [email protected]

Production and additional research by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Chien Yen Goh Editor in ChiefGeraldine Tan EditorMartin Tacchi Art Director


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Introduction

Gaining Traction in ASEAN

A Favourable Context

Regional Growth Opportunities

Different Formats for Different Markets

Getting Ahead of the Competition

Strategic Regional Expansion

Future Success Factors

Conclusion

Appendix – Country Profiles

Singapore

Malaysia

Thailand

Indonesia

The Philippines

Vietnam

Introduction hanging consumer behaviour is transforming the way developed markets’ grocery retailers operate. The global retail landscape as a whole is becoming more and more consumer-centric, a trend that is pushing modern retail – convenience stores, supermarkets, hypermarkets, department stores, and

malls – to reshape operational, financial, and brand models to better fit their consumers’ increasingly complex wants and needs.

This evolution of the global retail business has been rapid. As retailers develop across the world, they move beyond delivering basic products and services and start catering to customers’ specific preferences in terms of product variety and quality. Greater demand for safe and healthy food products has influenced suppliers’ and retailers’ product lines, while satisfying customers’ expectations of a holistic shopping experience has become increasingly critical.

This new reality creates imperatives for retailers looking to harness new potential growth opportunities. Being well integrated across physical, digital and media touch points is no longer an option; rather, it is a key trait that better connected and more mobile consumers expect and demand across segments and markets. Understanding where they sit on that continuum will allow retailers to leverage as many consumer-centric opportunities as possible, no matter how well established they may already be in their respective segment/market.

Some of these trends are particularly visible in Asia, where economic growth and development have led to rapid urbanisation, rising incomes, increased consumer spending, and higher expectations. All of these factors are quickly transforming lifestyles and, in turn, are fast increasing the demand for quality goods, personalised services, and unique retail environments. With the exception of Singapore, penetration of modern retail remains low in emerging ASEAN economies, a reality that can translate into many potential growth opportunities for regional grocery companies. Indeed, ASEAN’s middle class population is expected to grow to about 500 million people by 2020, which means retail channels in Southeast Asia are set to shift from simple and traditional operations to more modern and complex formats.

Companies in the five key ASEAN (ASEAN-5) economies of Indonesia, Malaysia, the Philippines, Singapore, and Thailand are constantly strategising to better capture customers’ attention. Whether it is expanding to new areas, establishing new formats, introducing new product lines, or multiplying their economies of scale, store network expansion and improved operating efficiencies are key success factors that enhance cash flow generation abilities and increase profitability.

The advent of online grocery shopping, for instance, is an important long-term trend to watch for in the region. It is still a relatively new concept in many emerging ASEAN markets and challenges abound. Challenges for e-commerce retailers include low

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internet penetration, difficulty in delivering fresh products to consumers in a time- and cost-efficient manner, little faith in online payment systems, many potential customers outside of established/connected urban clusters and a transport infrastructure that is not sufficiently reliable, to name but a few – but there is room for the sector to take off in the region.

This report first examines the various ways in which the modern grocery retail sector is growing in key ASEAN markets. It then analyses the various expansion trends that can be harnessed by industry players to reach even more emerging consumers. The report concludes by evaluating the various ways modern grocery retailers can seamlessly integrate themselves into their shopper‘s consumption habits by strategically using real-time consumer data. The appendix provides an in-depth assessment of the trends and opportunities in modern grocery retail in each of the ASEAN-5 countries.


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The global retail landscape is becoming more and more consumer-centric, a trend that is pushing modern retail to reshape operational, financial, and brand models to better fit their consumers’

increasingly complex wants and needs


Gaining Traction in ASEANrocery retail in the ASEAN-5 markets has been progressively transitioning from traditional to modern channels thanks to economic growth and development. New opportunities are being created in the sector, spurred by the urbanisation and modernisation of city centres, the rising incomes of a growing middle

class, and the ever-changing consumer habits within the region. All of these factors have generally led to a greater demand for better quality goods and personalised services, as well as more holistic retail environments.

A Favourable Context

The favourable economic and demographic context in which ASEAN-5 populations are living is a key driver of growth for modern grocery retail. Indeed, as populations become more affluent and urbanised, middle class consumers emerge and consumption habits/priorities evolve.

Urbanisation processes take different shapes and paces across ASEAN-5 populations. Individual urbanisation rates range from 1.32% in the Philippines to almost 3% in Thailand. Apart from Singapore whose entire population is urbanised, the share of urbanised populations in these countries has much headroom to grow: The percentage share of urbanised populations is just over or under 50% in Indonesia, Thailand, and the Philippines.1

We calculate that ASEAN-5’s urbanisation rate on a population weighted average basis is 2.3% (from 2010 to 2015), outstripping its population growth rate of 1.5%. The population weighted average growth of ASEAN-5 has registered a rate of about 1.5% for the last ten to 20 years. Malaysia was the fastest-growing country at 2%, followed by the Philippines (1.9%), Indonesia (1.4%), Singapore (1.3%), and Thailand (0.5%).

While population growth is a fundamental driver of food demand, urbanisation provides opportunities for modern retail to grow, thanks in part to higher selling prices of better quality food raising the value demand in urbanised societies. This is normally backed by higher disposable incomes and better marginal propensity to spend. The impact of urbanisation on modern grocery retail growth is hence positive.

While population growth is a

fundamental driver of food

demand, urbanisation

provides opportunities

for modern retail to grow

Urbanisation Rate 2010-2015 estimates (LHS)

Urbanised Population 2014, % of Total Population (RHS)

Indonesia 2.69% 53%

Malaysia 2.66% 74%

Philippines 1.32% 44.5%

Singapore 2.02% 100%

Thailand 2.97% 49.2%

Diagram 1: Urbanisation of ASEAN-5 populations

Source: CIA World Factbook (2014), DBS Bank calculations

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According to Nielsen, the middle class is defined as the category of people with the financial means to make purchase decisions of between US$16 and US$100 per day based on their level of disposable income. Nielsen estimates that ASEAN’s middle class population of 190 million in 2012 (28% of the region’s population) will double to 400 million by 2020 (55% of the region’s population)2. This trend is largely attributed to regional economic growth, which has been steady for the past ten years.

GDP per capita in ASEAN-5 countries has increased at a 23-year compound annual growth rate (CAGR) of 2-3.5%, bringing it to 1.6 to 2.2 times that of 1990. More notably, income per capita between 1990 and 2013 has risen by 2.4-4.2%, fuelling an increasing wealth trend in ASEAN-5.3 GDP growth is also largely positive in these ASEAN markets: It is expected to accelerate in the Philippines, Thailand, Singapore, and Indonesia and will likely decelerate in Malaysia.4

Diagram 2: Rise of ASEAN middle class population, 2012-2020

Diagram 3: GDP per capita in five ASEAN countries, 1990-2013 (US$/year)

Source: Nielsen estimates (2015), DBS Bank calculations

Source: ThomsonReuters Datastream (accessed July 2015), DBS Bank calculations

0

100

200

300

400

500

600

700

800Population (m)

Middle class populationRest of population

489

190

327

400

2012 2020

8.7% CAGR

9.8% CAGR

The general trend of a rising and more affluent middle class is expected to drive the growth in food demand in ASEAN (except in Singapore, where this dynamic has already taken place). On a 2013 population-weighted basis, food consumption and per capita food consumption will, respectively, grow at a rate of 9.6% and 8.6%

Consumer demand trends will also evolve thanks to increased exposure to international products; the demand for imported, branded, and packaged food items is likely to increase as white collar workforces put convenience and comfort at the heart of their fast-paced urban grocery shopping experiences. In order to increase the number of potential growth opportunities, modern grocery retailers will have to adapt not only their product offerings but also their shopping environments to be more conducive and more organised than traditional retail.


Diagram 4: ASEAN food consumption growth, 2015-2019

Diagram 5: Retail consumer expectations based on affluence

Note: 2013-2018 forecasts for PhilippinesSource: BMI Research, ThomsonReuters Datastream (accessed July 2015), DBS Bank calculations

Source: DBS Bank

The demand for imported, branded, and

packaged food items is likely to

increase as white collar workforces put convenience and comfort at

the heart of their fast-paced urban grocery shopping

experiences

Affluence and consumer expectations

Customer experience

Product variety and quality

Basic products


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Regional Growth Opportunities

Traditional grocery retail still dominates in ASEAN-5 developing nations as a significant share of people still relies on traditional wet markets to find affordable local products. But all signs point to modern grocery retail growing in the next few years as urbanisation advances and infrastructure improves. Modern grocery retail’s growth is already outstripping traditional grocery retail’s growth of 6%. The share of modern grocery retail (versus traditional grocery retail) has increased substantially from 24% in 2009 to 29% in 2014.5

Modern grocery retail has grown in all ASEAN-5 markets, albeit at different rates. Currently worth about US$60 billion, the sector has grown by a total of 12% compound annual growth between 2009 and 2014 in Singapore, Malaysia, the Philippines, Indonesia, and Thailand. At 18%, the greatest growth was in Indonesia, followed by the Philippines at 12%.

In terms of value, modern grocery retail is most important in Thailand, where the sector represents US$24 billion, followed by Indonesia at US$16 billion.6 This general upward trend is expected to continue throughout the region thanks to the growth of urban middle classes. We forecast each of ASEAN-5’s modern grocery retail sectors to continue growing by 2-8% from 2014 to 2019.

Diagram 6: Compound annual growth rate (CAGR) of modern grocery retail, 2009/2014

Diagram 7: Modern grocery retail value in five ASEAN markets, 2015 (% of ASEAN-5 sector value of US$60 billion)

Source: Euromonitor (2015), DBS Bank calculations


All signs point to modern

grocery retail growing in the next few years as urbanisation advances and infrastructure

improves


Modern grocery retail penetration is lowest in Indonesia and the Philippines at 16% and 28% in 2014, respectively. These two countries have large rural populations, significant land areas, and poor infrastructure, but have high potential headroom for growth opportunities. At 43% and 45%, respectively, Malaysia and Thailand have encouraging modern grocery retail penetration rates; high enough for the market to be dynamic but low enough for future growth to be possible. Singapore, meanwhile, is fully urbanised; at 71%, the penetration rate of grocery retail is highly saturated, which means growth opportunities are relatively limited.

Based on our findings, there seems to be a direct relationship between urbanisation and grocery retail penetration. Singapore is fully urbanised (100%) and has high modern grocery retail penetration (71%). At the other end of the spectrum, Indonesia and the Philippines are urbanised at less than 55% and have low modern retail penetration (28% and less). Nevertheless, growth and penetration rates show that growth opportunities are more likely to stem in Indonesia and the Philippines.

Indeed, if these two countries manage to complete large-scale urbanisation and infrastructure overhauls, they will provide the largest headroom for businesses to grow the modern grocery retail sector. This is especially true if sector leaders manage to find and capitalise on the most adequate retail format for each retail market.

Diagram 8: Proportion of modern grocery retail, 2009-2014 (% of total domestic retail)


Different Formats for Different Markets

The growth of modern grocery retail is driven by different retail formats in each ASEAN market. It is driven by convenience stores in Thailand (including suburban areas), by hypermarkets in the Philippines, by supermarkets in Malaysia, and across all store formats in Indonesia.7 Across the five key ASEAN markets, the fastest growing format was convenience stores (30% CAGR), followed by supermarkets and hypermarkets (12% and 10% CAGR, respectively).

Diagram 9: Relationship between urbanisation and grocery retail penetration, 2015If Indonesia and the

Philippines complete large-

scale urbanisation and infrastructure

overhauls, they will provide the

largest headroom for businesses to grow the modern

grocery retail sector

Source: CIA world Factbook (2015), Euromonitor (2015), DBS Bank calculations


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Diagram 10: CAGR for supermarkets, hypermarkets, and convenience stores in ASEAN, 2009-2014



Convenience Stores

The lower cost outlay and smaller unit size required to establish a convenience store ensures faster penetration in both urban and suburban areas. They usually operate 24 hours to capture “after hours” and “to go” demand and have a relatively narrower range of products – tobacco, media, ready-to-eat and fresh food, packaged beverages, quick services, and personal/essential items – compared to supermarkets and hypermarkets. Shoppers at convenience stores may conduct repetitive top-up shopping and typically do not stock purchases at home.

Where stores operate round the clock, the prices of products are normally higher than supermarkets and hypermarkets to compensate for late night and last-minute availability. Their higher average selling prices, combined with their typically smaller floor areas, result in higher sales per square foot than bigger retailers. 7-eleven is the largest convenience store brand in ASEAN with over 10,000 outlets.

Generally speaking, convenience stores are easier to set up than supermarkets or hypermarkets. Both floor area and capital requirements are lower, which makes them a relatively straightforward way to penetrate traditional channels and introduce modern formats into the markets. This is particularly true for rural areas and other places with lower population densities and higher suburban populations. For all these reasons, convenience stores are ASEAN-5’s fastest growing format, especially in markets with low store-to-population ratios such as Indonesia and the Philippines.8

Convenience stores are at a particular advantage in Indonesia, where people already go to traditional warungs for daily items ranging from cigarettes and beverages, to snacks and other food items. Outside of urbanised areas like Jakarta, the population continues to visit wet markets for fresh food in the morning, but warungs play an important role in day-to-day purchases. We believe warungs can easily modernise into convenience stores, as they only require small traditional shop spaces to operate and consumers are already comfortable visiting these small shops for specific purchases.

Convenience stores also have room to grow in Thailand, a vast and predominantly rural country where the number of convenience stores per million people is higher than other ASEAN-5 countries but lags behind Hong Kong, New Zealand, South Korea, and Taiwan. Chain-operated convenience stores like 7-eleven are common in Thailand, sometimes concentrated immediately next to or across from each other.

Consumers in Thailand still visit traditional markets for fresh food, but they tend to supplement their purchases by visiting the nearest convenience store. Wet markets remain predominant as they are where consumers find fresh food relatively cheaper than in


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supermarkets and they operate longer hours than in other countries (Singapore, Malaysia, and Indonesia). Purchasing fresh items from wet markets is therefore very convenient, while other items are easily accessible in convenience stores. Being small, convenience stores are able to fit in tight urban or suburban spaces and offer almost everything from groceries and food products to other items (newspapers, bill payments, purchase of air/bus tickets, insurance, mobile phone top-up, etc.) just “down the road” at any time. Making purchases at a convenience store is generally a less time-consuming activity than making long and scheduled trips to supermarkets and hypermarkets.

Supermarkets/Hypermarkets

Supermarkets are where consumers in higher-density areas (city centres and satellite towns) are able to replenish and stock up on the fresh and packaged food items they use daily. They are typically self-service, more organised, and offer more product variety than traditional grocery retailers. Many supermarkets across ASEAN can be found within shopping malls and highly built-up suburban towns. Supermarkets are more prevalent in high population density areas such as Singapore, downtown Bangkok, Kuala Lumpur, Jakarta, and Manila due to higher building densities.

In terms of supermarket penetration, Singapore is the most saturated market among ASEAN-5 countries. It is indeed fully urbanised with limited room for modern grocery retail to scale, but modern grocery retail is still growing ahead of traditional channels,

Diagram 11: Number of convenience stores in ASEAN-5, 2015 (per 1 million urban population)

Source: Thomson Reuters Datastream (2015), Euromonitor (2015), DBS Bank calculations


albeit at a low rate. Wet markets still exist in Singapore, but they operate only in the mornings. Supermarkets, meanwhile, allow consumers to purchase fresh products after working hours, sometimes even 24 hours a day and offering a wider selection of high-end products than convenience stores. As such, it is the preferred grocery shopping format for the working crowd. Hypermarkets are less common in Singapore due to space constraints.

Hypermarkets carry a wider variety of products, including furniture, electrical and electronic products, outdoor equipment, automobile accessories, etc. Hypermarkets are commonly found in big-box formats, due to the product variety they offer and the higher volume of inventory they carry. Hypermarkets dominate in suburban areas with lower population densities where space is not an issue, such as the nearest outskirts of key city centres.

Diagram 12: Number of supermarkets in ASEAN-5, 2015 (per 1 million urban population)

Diagram 13: Number of hypermarkets in ASEAN-5, 2015 (per 1 million urban population)




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Hypermarkets dominate in Malaysia, as Malaysian towns tend to be more spaced out and it is common for people to go on weekly grocery shopping trips in cars and on motorcycles. Big-box hypermarket developments abound in Malaysia as town layouts facilitate their establishment and as they are seen as a convenient one-stop shop with a wide selection of products and services. Supermarkets supplement hypermarkets in more urbanised city centres, while convenience stores offer 24-hour service for emergency/last-minute needs.

In Singapore, retailers such as NTUC’s “FairPrice xtra” offer a hybrid shopping experience between a supermarket and a scaled down hypermarket. FairPrice xtra is found in shopping malls, but carries a slightly wider range of products than supermarkets. This can be an alternate hypermarket shopping experience in a high-density area. Based on country and city sizes, hypermarket growth is more likely to take shape in Malaysia, Thailand, Indonesia, and the Philippines. The Philippines seems particularly apt for the hypermarket form of modern grocery retail; hypermarkets there have grown at a five-year CAGR of 19% and the low rates of urbanised population and urbanisation (44.5% and 1.32%, respectively) provide early expansion opportunities for modern grocery retailers.9


Getting Ahead of the Competition ey modern grocery retailers in the region include 7-eleven Malaysia, Sheng Siong, Hero, Giant, Starmart, and Big C. Most of these operators and their parent companies are market leaders in their respective segments and already have a significant network of stores in various ASEAN-5 countries. These companies,

as well as others in the modern retail space, are set to continue expanding organically or through strategic acquisitions.

Strategic Regional Expansion

In grocery retail, business growth normally takes place through three main drivers: Store expansion, same-store sales growth (SSSG), and/or higher margins. Store expansion can be a function of available real estate, partnership opportunities, or a lack of presence in certain markets. SSSG is the backbone of retailers’ core growth and is mainly driven by differentiating factors such as promotions, enhanced product variety, footfall, and longer operating hours. Lastly, margins are determined by different types of costs: Operating (rental, labour, marketing and promotional expenses, etc.) and direct (cost of food products and inventory), all of which can be influenced via operating scales.

Store Expansion

Store expansion can be organic (using one’s own resources to expand) or acquisitional (acquiring competing chains). More often than not, companies look to grow organically wherever possible as this model gives them more control over the pace and the breadth

KDiagram 14: CAGR growth of supermarkets, hypermarkets, and convenience stores, 2009-2014



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of their expansion. Acquisitions, on the other hand, allow the acquirer to almost instantaneously penetrate and gain market share in markets that are unfamiliar or are difficult to enter.

Retail business growth in ASEAN is mainly driven by store expansion; companies with strong footholds in the region are expanding to new areas, establishing new formats, and introducing new product lines. Key grocery retailers currently expanding across the region include Sheng Siong, 7-Eleven Malaysia, Dairy Farm, CP All, and Big C Supercenter.

In Singapore, Sheng Siong is already present in 38 locations with the target of operating 50 stores island-wide. Because of their direct impact on store profitability, rental rates are a key expansion consideration; new stores are preferably opened in or around Housing and Development Board estates and other strategic locations that allow rents to remain low.

Based in Hong Kong, Dairy Farm International is focusing on growing in North Asia, through a combination of store expansion and strategic acquisitions. Dairy Farm recently acquired a supermarket presence in Macau with its purchase of San Miu Supermarkets and in China with its 20% investment in Yonghui Supermarkets, adding to its network of 7-Eleven convenience stores, Mannings health and beauty stores, and Starbucks cafés.

Big C Supercenter is also growing its store count, albeit at a slower pace. The Thailand-based company has reduced its hypermarket store expansion plans for this year – from three new stores to one – to prioritise the renovation of existing stores and the enhancement of its fresh food distribution centre. Also in Thailand, CP All plans to aggressively expand its network of 7-eleven convenience stores to 10,000 by 2018 to maintain annual profit growth of 15%, all while focusing on growing sales of ready-to-eat food and lifting gross profit margins.

Same-Store Sales Growth

Same-store sales growth (SSSG) is generally driven by various factors including advertising and promotional activities, seasonal opportunities (holidays and festivals), consumer spending and income levels, real estate maturity and rejuvenation, pricing, operating hours, footfall, competitor positioning, and sales channels. In ASEAN, SSSG is generally low at 0-8%, with top-line growth mainly driven by store expansion. Store expansion has enabled ASEAN’s leading grocery retailers, at 15% revenue growth, to slightly outperform Euromonitor’s historical growth CAGR of 12%.10 We believe this is attributable to market leaders deploying more financial resources into growth than smaller modern grocery retailers.

Higher Margins

While store expansion drives revenue, an efficient operation improves margins, cash flows, and profitability. Grocery retailers are constantly looking for ways to generate

Retail business growth

in ASEAN is mainly driven

by store expansion


positive working capital and improve operating efficiencies, be it by maximising revenue per square foot, improving working capital cash flows, making logistics more efficient, wholly owning distribution centres, or expanding margins through higher-value products or minimised costs. For most grocery retailers, the key questions are whether they will obtain longer credit from suppliers at lower costs and how fast they will be able to turn over high volumes of the inventory for cash.

Dairy Farm is the largest pan-Asian retailer with presence across more than ten countries and over 5,000 stores including supermarkets, hypermarkets, convenience stores, health and beauty stores, and home furnishing stores. Its strong balance sheet allows it to acquire companies and expand much faster than smaller players. Its operational scale has also allowed it to generate above-average gross (30%) and net margins (4.6%), versus peer averages of 22% and 3.8%, respectively.

Smaller players usually do not have sufficient bargaining power with suppliers to purchase inventory on longer credit terms. Players with no scale may even have to purchase inventory on cash terms, resulting in negative operating cash flows. But smaller scale may not necessarily be a disadvantage; in many cases, medium-sized players can be more nimble in their growth strategy and quickly reorganise when there are changes in the operating landscape. Sheng Siong, for example, was able to use part-time workers to alleviate potentially higher staff costs when the Singapore government implemented higher foreign worker levies.

Evaluating Key Players in ASEAN

Based on objective criteria of working capital management, cash flow, margins, and growth, Sheng Siong, Big C Supercenter, Dairy Farm, CP All, and NTUC FairPrice are among the most efficient retailers in ASEAN. With the best operating matrices in all four areas, Sheng Siong and Big C Supercenter stand out. They are closely followed by Dairy Farm, NTUC FairPrice, and CP All, all of which have decent net margins and generate positive working capital.

Best profitability – Sheng Siong and Big C Supercenter have by far the best net margins because of strong gross margins and efficient operational expenditures. Both players have no debt and have lean operating costs. Most of Sheng Siong’s stores are located in suburban areas which are have relatively cheaper rents, while Big C has the support of rental income in its operations.


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Best working capital management – Big C, CP All, NTUC FairPrice, and Dairy Farm International have the best working capital management thanks to their operating scales. The Thai players each have more than 500 stores, while Dairy Farm and NTUC FairPrice respectively have the biggest network of stores regionally and in Singapore. This has given them slightly better bargaining power with suppliers (for payment) and with credit card companies (for collection). The key difference for these companies is in the number of payment days, as all of them sport longer-than-average payment days with suppliers.

Best cash flow – Sheng Siong and Big C generate operating cash flows well in excess of their earnings and revenue. It is, however, noteworthy that Dairy Farm and NTUC FairPrice also generate decent operating cash flows due to their working capital management abilities.

Future Success Factors

Regardless of size, efficiency, or market positioning, grocery retailers will all face a common set of challenges in the next decades. How and when they respond to these challenges will determine their capacity to expand their businesses and to support the growth of the modern grocery retail sector in the region.

Understanding Local Preferences

Modern grocery retail vastly differs between and within ASEAN markets. The grocery retail landscape in Singapore is, for instance, vastly different from Indonesia’s and may even vary greatly between Indonesian cities/regions. Different demographics, consumption patterns, incomes, appetites for high/low-end goods, and modern retail adoption bring about different needs, habits, and priorities. Some localised factors that can determine the success or the failure of a modern grocery retailer include consumer tastes, localised products, sourcing and procurement, trade agreements for importing food products, income levels, acceptance of imported labels, shopping habits across the various formats, most appropriate locations, etc.

Adapting to Consumers

Evolving consumer demographics impact the way modern retailers can try to reach out to their customer base. A more affluent middle class, for instance, will not only drive higher demand for food, it will also have much higher standards for food quality. Food safety, health properties, nutritional value, and origin of food sources are set to become


decisive consumption criteria, on top of branding and packaging considerations. It is up to retailers to enhance their product offering and build customer traction while preserving the margins for supplier and retailer. Satisfying the demand for niche and specialty product offerings may be one way to take modern grocery retail in the direction increasingly affluent and demanding consumers want. Organic products, imported selections, bakery/rotisserie items, and other similarly niche offerings are ways to keep customers from visiting competitors.

Diversifying Offers/Programmes

Loyalty programmes and targeted promotions improve sales and boost customer traction, and can be sponsored by suppliers. By far the simplest programme is the point system, in which customers earn direct rebates on future purchases by accumulating points. Launching private labels is another diversification area that is set to become central to operators’ growth strategies; private labels allow retailers to increase profit margins by offering the same quality/variety that mainstream brand names already offer consumers but at lower prices. This is a particularly delicate strategy to implement in Asia, where supplier/retailer relationships are steadfastly built and where consumers are attached to brands (private labels in Dairy Farm and Sheng Siong currently represent less than 10% of all product offerings).

Harnessing E-Commerce

Online grocery shopping – by far the most promising but also the most difficult trend to harness – is set to slowly but steadily change the modern grocery retail sector in ASEAN. There are a number of advantages to grocery retailers of moving physical stores online: Savings on rental costs, reallocation of resources to more cost-efficient activities, streamlined operations, consolidation of a brand’s web presence, etc.

For consumers in ASEAN, however, a number of obstacles remain. Online shopping may be taking off for non-food products in developed cities and places with high internet penetration, but the practice still needs to prove itself with regard to (i) the mechanics and economics of delivering fresh food at affordable prices to consumers, and (ii) the development of reliable payment processes and viable delivery systems in hard-to-reach areas.

(i) Defining the mechanics and economics of delivering fresh food. Freshness of food products (refrigeration, conservation) and reasonable delivery times (viable distribution networks) are the main challenges to mass adoption of online grocery shopping. Unless products available for online purchase are limited to packaged grocery items with longer shelf lives and expiry dates, preserving product freshness and quality during the delivery process is likely to come with significant added costs

Satisfying the demand for niche and

specialty product offerings may be one way to take modern grocery retail

in the direction increasingly affluent and demanding consumers

want


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(fleet, fuel, staff, etc.). These costs will, in turn, be reflected in the retail price of products, which risks offsetting the convenience factor for consumers.

(ii) Securing payment and implementing delivery systems across locations. The lack of fast, secure, or reliable internet access across many locations in ASEAN is a natural obstacle to the growth of online shopping. Security systems and protocols to ensure the integrity of customers’ payments must also be in place before they feel comfortable making recurrent online purchases. Unless both these pre-requisites are met, it is unlikely that the vicious cycle of consumers not making online purchases and retailers not offering online solutions will be broken anytime soon.

Physical grocery retailers are already prevalent in key areas of key cities, making it easy and convenient for consumers to physically choose and purchase grocery items: Supermarkets already occupy prime locations in densely populated cities, hypermarkets already capture remote and satellite suburban areas, and convenience stores already dominate every corner of cities, including their most inaccessible locations. In such a context, it is hard to see why ASEAN consumers would change their purchasing habits and adopt a virtual medium that has yet to prove its time and cost efficiency. Indeed, not all countries are ready for e-commerce. With the exception of Singapore and Malaysia, other ASEAN markets do not appear ready for e-commerce grocery retail. Low internet penetration, underdeveloped logistical infrastructure, and little trust in online payment systems are some of the key impediments to the growth of online grocery retail.

O2O and QR Code Shopping

Internet access and online shopping practices may not be equally distributed across all ASEAN markets, but there are other ways to progressively grow the acceptance and user-friendliness of online grocery shopping. Online-to-offline commerce (O2O) and mobile shopping through QR codes are two such means.

O2O is a means to direct online users to offline physical stores. With O2O, the customer can (i) buy products from the shop after conducting online research; (ii) pay online and collect the products from the shop to save on delivery charges; and (iii) find out-of-stock products that may not be displayed or marketed in the physical store. Whether sales come from mobile sites or mobile apps, O2O initiatives can be integrated into mobile users’ daily lives, making it easier for consumers with limited internet access but high mobile network usage to make online purchases. The “click-and-collect” service, which allows consumers to order online and pick up in physical stores/kiosks, is already proving time- and cost-efficient for consumers as well as for retailers in the US and Europe.

With the exception of

Singapore and Malaysia, other ASEAN markets do not appear

ready for e-commerce grocery retail


Mobile shopping through strategically placed QR codes started in Korea in 2011. Pictures of supermarket shelves were plastered on subway platforms with QR codes allowing busy commuters to shop for groceries over the virtual platform while waiting for trains. Items would then be delivered or picked up by customers at a time and location of their choice. QR shopping saves consumers time as they can shop while going about their daily lives and allows retailers to save resources (shelf space, manpower, transaction fees) as their products and cashiers are virtual.

Both of these practices are still in their infancy stages in the various developed markets in which they were first tested/implemented, but could be a potential e-commerce opportunity for modern grocery retailers in ASEAN. We believe it is only a matter of time before key ASEAN players find a way to turn these embryonic e-commerce offerings into economically viable opportunities for both service providers and consumers. Developed cities with higher internet penetration and relatively fluid physical mobility – Singapore, Kuala Lumpur, and Bangkok – will likely see some types of e-commerce take off first.


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Conclusion odern grocery retailers today face a complex set of realities they must adapt to and prepare for if they want to grow the sector in key ASEAN markets. Expansion in terms of number and size of stores is one side of the equation. Reaching new segments of consumers and satisfying their ever-evolving

needs is another equally important and perhaps more difficult task.

According to a PricewaterhouseCoopers/Kantar Retail report on the long-term prospects of retail in mature markets, the segmentation, compartmentalisation, and polarisation of the retail landscape are the key challenges retailers of all sizes will have to overcome in the next few decades11. Important consumer drivers will no longer be limited to optimal store location, enjoyable ambiance, or even product variety/pricing. Offering customers more personalised and contextualised experiences will require retailers to become expert multi-channel and multi-platform communicators who can build loyalty by not only understanding market fragments and their accompanying patterns of growth, but also by operating and managing “glocally” (on a global scale with attention to local needs).

The same report highlights that Big Data – large and complex sets of data that come from multiple sources – can help modern retailers learn a great amount about their shoppers with insights that go well beyond their transactional behaviours. Indeed, the real battlefront for modern grocery retailers will not be about who can grow a retail brand the fastest and in the most locations; it will be about who can gain the most detailed and intimate understanding of their consumers (income and demographic specificities, habits and behaviours, preferences and priorities, etc.).

Successfully re-purposing such information could allow retailers to “integrate these insights into the demand chain and into enhanced customer service models. They will address the challenges to their economic models and adapt their frame of mind on store formats, employment models, and return on investment.”12 In short, winning retailers and suppliers alike will be able to leverage insights and data to manage the complexity and diversity of their retailing operations.

It is not clear yet if such practices and results will take shape in Asia in the next few years. But it is certain that they have the potential to disrupt the current dynamics in the modern grocery retail sector and maybe even topple unprepared industry players.

The segmentation, compartmentalisation, and polarisation of the retail landscape is the key challenge retailers of all sizes and across

all markets will have to overcome in the next few decades

M



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Appendix – Country ProfilesSingapore

Overview

Singapore is the only ASEAN country with an established modern grocery retail market. Its highly urbanised landscape is well penetrated with modern channels accounting for 70% of retail value. As a whole, the grocery market grew at a steady pace of 3.2% CAGR from 2009 to 2014. Supermarket and hypermarket segments observed the fastest growth with 3% and 6% CAGR, respectively, in the past year. Traditional formats, however, are not likely to be eliminated soon due to government support of wet market development and customer loyalty from the older generation.

With a 54% share, modern grocery retail is led by supermarkets13. Chain operators continue to gain share in the supermarket segment at the expense of small independent players. Major players are positioned to target different consumer groups in order to grow both the industry and their share of the pie. For instance, some NTUC FairPrice outlets now operate 24 hours to effectively compete with convenience store retailers. With outlets located mainly in heartland areas, Sheng Siong has become synonymous with mass market and budget buys.

Convenience stores have good penetration in Singapore but face tapering growth. Within ASEAN-5 markets, Singapore is only behind Thailand in terms of population per store. Despite its small size, Singapore is full of convenience stores that can be found within a few hundred metres away from each other. Headroom for growth will therefore be more limited than for supermarkets and hypermarkets.

Diagram 15: Structure of modern grocery retail sector in Singapore, 2009-2014



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Outlook

We expect supermarkets to grow ahead of hypermarkets and convenience stores. Headroom for growth will likely come from longer operating hours (24 hours), an improved product mix, a move toward more premium and high-end products, and outlet expansion into undeveloped residential areas such as Punggol. Operators, including specialised online grocery retailers, have rolled out online platforms, but we believe it will take time for e-commerce to catch on in the grocery segment.

Malaysia

Overview

Modern grocery retail has relatively high penetration in Malaysia, but traditional grocery retailers still collectively make up 59% of the total market. Traditional formats saw sluggish value growth at a 2.5% CAGR between 2009 and 2014, reflecting how small retailers and wet market operators are unable to compete on price with supermarkets and hypermarkets. As a result, consumers are shifting to modern channels, particularly toward the supermarket segment, which recorded healthy on-year growth of 15%.14

Rising consumer demand for convenience drives healthy growth for convenience stores. Three operators constitute 99% of convenience stores’ market share, with 7-Eleven owning a 76% share of the pie. The rising KK Super Mart is arguably the most nimble and aggressive among its peers; it has kept its average outlet size small but has achieved the highest sales per floor area as well as the fastest expansion in sales, outlets, and floor area. These factors led to a 6% gain in market share, whereas 7-Eleven lost 8%.

Diagram 16: Structure of modern grocery retail sector in Malaysia, 2009-2014



Supermarket growth, meanwhile, is slowing. Premium chains like Cold Storage have been negatively impacted by weak consumer sentiment and soft economic conditions. Consumers are price-sensitive, preferring to shop at hypermarkets offering lower prices. Mydin was the only operator to gain share, as it has aggressively expanded its footprint in the relatively untapped market of East Malaysia.

Outlook

Our outlook is positive for convenience stores and hypermarkets. Convenience store retailers such as KK Super Mart and 99 Speedmart are likely to sustain growth given their aggressive outlet expansion to meet demand for convenience. Unlike KK Super Mart, 99 Speedmart caters to the low income and migrant worker population in high-density neighbourhoods. Hypermarkets, particularly market leaders Giant and Tesco, are likely to benefit from a growing base of price-sensitive consumers as they are able to provide a wide product offering, competitive prices, and an expansive distribution network.

Thailand

Overview

With a 57% market share, traditional grocery retailers lead the sector, but modern operators come close.15 Traditional operators still dominate because consumers value their fresh food offerings, particularly in rural areas, whereas modern retailers are largely located in the cities. Modern grocery retail continues to grow, dominated by a handful of domestic and international chain retail players, making it challenging for new entrants without partnerships and strong financial backing to enter the Thai retail market.

Diagram 17: Structure of modern grocery retail sector in Thailand, 2009-2014



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At 9% and 10%, respectively, supermarkets and convenience stores saw the fastest on-year growth. The convenience store segment enjoyed the fastest growth among modern channels; 7-Eleven and Tesco Lotus continue to sprout across the country to meet rising consumer demand for quick and convenient meals. Operators already firmly implanted in the country can set up stores fairly easily with low capital and small selling areas. Compared to its peers, 7-Eleven is able to expand more effectively in terms of outlets and sales as it has the smallest average store size but highest sales per square metre.

Even though hypermarkets offer more attractive prices, Thai consumers increasingly prefer supermarkets for the convenience and wide product range. Unlike supermarkets, which are located in urban zones, hypermarkets are generally situated in the outskirts and thus cater almost exclusively to consumers in these areas. Despite intense competition, hypermarket operators such as Tesco are likely to sustain positive growth on the back of domestic consumer demand and expansion into metropolitan regions.

Outlook

High internet and mobile penetration in Thailand have allowed major supermarket and hypermarket operators such as Big C, Tops, and Tesco Lotus to launch online retail platforms. However, these channels have yet to reach significant sales as consumers are used to physically shopping for groceries. We foresee consumers shifting more and more of their daily purchases to online and mobile channels over time, but not for another few years.

Indonesia

Overview

Indonesia offers plenty of headroom for modern grocery formats to grow; the value growth of Indonesia’s grocery retail grew by 61% in five years (2009-2014). With 84% of the market, domestic traditional operators still dominate, particularly in rural areas with inadequate infrastructure to support growth of international modern retailers. However, modern channels are gradually gaining share by expanding outlets and offerings. Convenience stores, for instance, enjoyed the fastest on-year value growth at 19%, followed by hypermarkets at 16%.16

Convenience stores continue to see robust growth and penetration. The popularity of convenience stores across the country, including in rural areas, is largely attributed to the low capital required and established franchise schemes available. Convenience stores such as Indomaret are fast replacing traditional warungs, tapping into the low- and mid-income level groups by offering competitive prices. Although traditional pasars and warungs will lose market share over time, they will not be wiped out as they seek to serve the low-income population.


We expect slower growth for the supermarket and hypermarket segments despite their popularity among the mid- to high-income groups. Hypermarkets offer reasonable prices for a broad offering of groceries and non-groceries, whereas supermarkets provide premium products at higher prices. While absolute sales for supermarket and hypermarket channels have been on the rise, slower growth is expected as high capital and sales areas required for operations pose barriers to expansion.

Outlook

Given the weak penetration of modern grocery retail in Indonesia, it is perhaps not surprising that a handful of modern retail operators have jumped on the e-commerce bandwagon to widen their reach. Recently launched innovative initiatives – such as Click and Drive, Carrefour’s drive-through concept service, and Alfaonline, Alfamart’s e-commerce service for urban consumers who wish to avoid queues and traffic jams – have received many positive responses. Regarding the internet retail landscape, it is set to evolve over time with the emergence of pure internet grocery retailers such as Sukamart.

The Philippines

Overview

Generally speaking, the weak penetration of modern grocery retail presents opportunities for further growth. The ubiquitous “mom-and-pop” stores, locally known as sari-sari stores, collectively form the traditional grocery retailer segment that still dominates the grocery market at 72% share in terms of sales value. However, its growth is outpaced by modern grocery retail formats that are starting to thrive thanks to urbanisation and

Diagram 18: Structure of modern grocery retail sector in Indonesia, 2009-2014



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shifts in preferences toward more accessible and convenient retailers. At 31% and 12%, respectively, convenience store and hypermarket retail recorded the fastest on-year growth.17

The convenience store segment is the fastest growing among modern retail formats. The environment is increasingly competitive and saturated with international players due to rapid outlet growth, particularly in Metro Manila. 7-Eleven continues to be the leading retailer with a 63% share of the market, successfully strengthening its position through strategic outlet expansion and localisation in areas with less penetration, such as Cebu City. The new Japanese entrant, Family Mart, has also heightened competition although it has not yet shown significant impact in shaking the market.

Outlook

Within the modern grocery retail space, the supermarket segment saw a 7% decline in value share over the past five years (2009-2014), in contrast to the 6% gain made by hypermarkets. This is due to a consumer preference for convenience and intense competition from hypermarkets in terms of price and outlet expansion.

Vietnam

Overview

Traditional grocery retail is deeply entrenched in Vietnam; purchasing from traditional small grocers is an ingrained habit and consumers are generally budget-conscious. Because of

Diagram 19: Structure of modern grocery retail sector in the Philippines, 2009-2014


these preferences and also because of the country’s low urbanisation rate and income levels, traditional retail formats distinctly dominate the grocery market (96% share).18 Car ownership is also relatively low, making it difficult for consumers to go to large shopping centres in areas located further away.

The convenience store segment, meanwhile, is the fastest growing channel. The growth is fuelled mainly by experienced foreign entrants as well as Vietnam’s young urban entrepreneurs who look for apt locations near universities and schools, where students are likely to look for breakfast and snack options. In 2014, the segment recorded 40% on-year value growth. Excluding the downfall of the G7 Mart brand in 2011, the segment saw a healthy five-year CAGR of 38.7%. Saigon Union and Family Mart lead the segment with about half of the market share.

Supermarkets and hypermarkets continue to grow. Alongside modernisation, both supermarket and hypermarket segments saw double-digit five-year CAGR growths in terms of retail sales and outlets. However, growth is slower compared to the convenience store segment as expansion of these distribution channels requires higher capital, adequate infrastructure, and a shift in consumer behaviour.

Outlook

Competition is set to intensify in the years ahead, but the overall growth potential is huge. The Vietnamese government has opened the market to free trade, inviting competition between existing and new, local and foreign, players. This will bring about a rise in new players, as well as heightened modernisation and urbanisation. Young urbanites present


Diagram 20: Structure of modern grocery retail sector in Vietnam, 2009-2014



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untapped growth potential, especially for the convenience store segment, given the rise in income levels and the rising importance of mobility and all-hour availability. While these consumers are also likely to be tech savvy, the impact of online grocery retail is likely to remain negligible as it will take a long time for the wider population to integrate new technologies into their day-to-day purchasing habits.

References1 Central Intelligence Agency, The World Factbook, 2014.

2 Nielsen, ASEAN 2015 - Seeing Around the Corner in a New Asian Landscape, 2014.

3 Datastream, ThomsonReuters Datastream, Accessed July 2015.

4 DBS Bank, Economic Forecasts for 2015-2016.

5 Euromonitor market and economic database, accessed July 2015.



8 DBS calculations using Thomson Reuters Datastream and Euromonitor market and economic database (both accessed July 2015).

9 DBS calculations using CIA World Factbook (2014) and Euromonitor market and economic database (accessed July 2015).


11 PricewaterhouseCoopers & Kantar Retail, Retailing 2020: Winning in a Polarised World, 2012.

12 Ibid., p.49.









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