Modern
grocery and the emerging-market consumer: A complicated courtship
In some emerging
markets, the response to modern grocery formats has been tepid. What’s a modern
grocer to do?
Just 20 years ago, modern grocery retail appeared poised to
conquer every consumer market in the world. Ambitious European grocers, having
blanketed their home countries with supermarkets and hypermarkets, began
setting their sights on growth both within and beyond the continent. They held
particularly high hopes for China, India, and other emerging markets, where
fast-rising consumer spending seemed to presage an unprecedented demand for
gleaming new stores with large assortments, wide aisles, and bright lighting.
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. It was
widely presumed that these retailers’ entry into any market would lead to the
demise of the traditional trade—the family-owned grocery chains, small
independent stores, and informal merchants that at the time accounted for the
vast majority of grocery sales in emerging markets. 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.
These assumptions have been proved wrong. Global
grocery giants are struggling to grow profitably in many emerging markets.
Traditional trade has proved remarkably resilient. And the market and channel
structures taking shape in individual emerging economies are distinct from one
another, following no obvious pattern.
Why did this happen? What, if anything, did
multinational grocers do wrong? And what does it mean for the future of modern
retail in emerging markets?
The hypermarket’s shortcomings
To understand the disparity between early
expectations and the current reality, it’s useful to examine the roots of the
two quintessential modern-trade formats: the supermarket and the hypermarket.
The hypermarket in particular—whether in its European form (in which food
anchors a massive selection of nonfood items) or its North American one (the
“supercenter,” which represents 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. Hypermarket
operators passed on these efficiency gains to consumers in the form of lower
prices, which served to reinforce hypermarkets’ advantage.
In their first forays into other developed
markets abroad, major retailers relied heavily on the hypermarket format. When
French retailers Auchan, Carrefour, and Promodès opened hypermarkets in Spain
during the first years of Spanish economic reform, they quickly captured a
large fraction of that country’s overall grocery sales and dictated the market
structure that remains in place to this day.
Expansion across
Europe was an exciting growth prospect, but even more enticing to retail
leaders and investors was the growth potential of emerging markets. Over the
years, that potential has become even clearer: by 2025, we expect emerging
markets to account for $30 trillion in consumer spending, or nearly half of
global consumption.1
When multinational grocers entered emerging
markets, they again relied on the grocery formats that were working so well in
the developed world. But, in retrospect, it’s clear that the countries in which
the hypermarket prospered had several characteristics in common: 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.
Also, those markets had grown to maturity at a time when many women didn’t
return to work after having children and therefore had time during the day to
drive to and from the store. The hypermarket format draws heavily on consumers’
time, ability to travel, and storage capacity.
In emerging markets, 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
Further complicating matters, emerging markets
weren’t just different from developed markets; emerging markets also differed
from one another in nontrivial ways. That was true in the 1990s and it remains
true today. Based on our research—which involved in-depth study of the retail
sector in ten developing countries in Asia, Eastern Europe, and Latin America,
as well as interviews with more than 20 local retail and consumer experts and
analysis of channel-growth data in these markets—we’ve developed a perspective
on the factors that have hampered the growth of modern trade in emerging
markets.
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 shape the retail ecosystem in each
country. Together, these factors produce wide variability in the level of
modern-trade development in countries around the world.
On
the demand side, for instance, food-shopping habits have turned out to be
largely localized and deeply entrenched. Emerging-market consumers tend to
prepare their own meals and cook more than their peers in developed markets do,
and they are accustomed to shopping at open-air market stands or small
neighborhood grocery stores that offer a familiar selection of fresh food and
household staples. They don’t necessarily perceive customer service at modern
retailers as superior to that of the traditional trade. Customers of
India’s kirana stores—small, family-owned retail shops in or
near residential areas—already benefit from personal service from the store
owner, free home delivery, and credit and cash rebates if they remain loyal.
On the supply side, a big factor is the
informality of traditional trade: many small retail businesses rely on unpaid
labor from family and friends, pay no rent because they own their storefronts,
and don’t pay corporate taxes. Modern retailers cite this informality as a
major challenge when competing with local retailers. A European hypermarket
chain found that its considerable operating-cost advantage from better sourcing
and supply-chain processes was canceled out by the fact that it was paying
taxes while local competitors were not.
Another major factor affecting modern trade is
public policy. India’s restrictions on foreign direct investment have limited
the growth of modern retail there; in China, by contrast, city governments are
assessed on the level of economic activity and foreign investment they attract,
which makes them biased toward supporting modern trade. As a result,
modern-trade penetration in China’s largest cities has grown significantly over
the past 15 years.
A further supply-side factor in emerging
markets is the fragmented supplier base, which places a natural limit on the
benefits of scale. A retailer can’t source products as efficiently as it would
in a mature market because it must buy from a complex network of regional and
local entities. And even retailers with a national buying team won’t easily
find national manufacturers who are eager to partner with them—a point we pick
up on later.
Incumbent advantage is yet another powerful
factor shaping retail ecosystems. Today’s market dynamics tend to become
tomorrow’s market structure—so, for example, in markets in which a highly
efficient wholesale system serves the traditional trade, it becomes much harder
for modern grocers to gain a foothold. That said, wholesalers can also be
vanguards of modernization. In Turkey, for instance, some Bizim Toptan stores
have developed a substantial retail business. These wholesalers-cum-retailers
illustrate the fact that ecosystems in emerging markets are partly shaped by
players that can concentrate and coordinate a critical mass of what otherwise
is a complex set of routes to market.
Seven strategic levers for success
In parts of the world where the market
structure is itself still in a formative stage, retailers need a bespoke
strategy. Our research and experience suggest seven strategic levers that lead
to success in emerging markets. These levers—having to do with delivering what
consumers want, working effectively with other players in the ecosystem, and
generating lasting productivity advantages—reflect perennial concerns for
retailers everywhere, but they are especially critical in helping retailers
secure a profitable future in the world’s fastest-growing economies .
The levers are by no means comprehensive. For
one, they don’t touch on digital technology, which may well be just as
important in emerging markets as in developed ones; indeed, rapid adoption of
smartphone technology may allow emerging markets to leapfrog more mature
markets and reconfigure the value chain farther upstream (for example, by
giving smaller suppliers direct access to national and even global markets).
Rather, we draw attention to areas that we believe require deliberate action in
emerging markets.
1. Prioritize
proximity.
Urban consumers with limited budgets and
smaller homes often prefer to buy small amounts frequently, both for immediate
consumption and for stocking up. And where trading space is constrained,
proximity formats offer a more realistic prospect of economic returns for the
retailer. Modern retailers can benefit from their experience operating smaller
urban formats in developed markets—banners such as Albert Heijn’s AH to Go in
the Netherlands or Tesco Express and Sainsbury’s Local in the United Kingdom.
One market in which
small-format stores have been the major driver of modern-trade development is
Indonesia. Sales through the convenience-store channel are growing at a rate of
more than 25 percent per year across the country. In fact, the increasing
dominance of convenience stores, known locally as mini-marts, has led to a
contraction in the number of supermarkets and hypermarkets. The mini-mart
chains mimicwarungs, which are small family-owned retail or restaurant
businesses that play a central role in Indonesian social life. Although the
mini-marts are run by modern retailers—in addition to leading national chains
Alfamart and Indomaret, international players such as Circle K and 7-Eleven
have moved into the market—the customer’s experience in mini-marts is not so
different from that in warungs.
2. Keep prices low—and
make sure consumers know.
The prediction that emerging-market consumers
would initially shop at discounters and then “graduate” to supermarkets hasn’t
come true. Discounters, or retailers that exhibit at least three of four core
discounter characteristics—low prices, limited range, low-cost store retrofits,
and ultra-simple operations—have more than held their own against supermarkets.
In Turkey, for example, discount stores are the fastest-growing channel,
largely due to the success of local companies such as A101, BIM, and Şok
Perhaps the success of discounters shouldn’t
be so surprising, given the stature they enjoy even in one of the largest and
richest retail markets in the world: Germany. Low-price stores can establish a
dominant position in markets that are going through rapid increases in
disposable income (as was the case, of course, in postwar West Germany). When
the first modern-trade stores to open in a market are discounters, they can set
price expectations permanently.
Other modern formats
can also compete on price, but they have to work harder to get consumers to
notice. Our research suggests most modern retailers don’t get full credit for
the value they offer. This is the case with Indonesia’s hypermarkets, which
typically are cheaper places to shop than warungs but haven’t
been able to convey that message to enough consumers. Some common modern-trade
practices such as high/low pricing can actually undermine a retailer’s value
message. In Peru, where bodegas and market stands account for some 80 percent
of grocery sales, we found that modern retailers—despite often having lower
full-basket prices than traditional retailers—nevertheless lag behind
traditional retailers by more than 15 percentage points in consumer perception
of low prices.
3. Obsess over
productivity.
In markets where labor costs are low, it can
be difficult to retain a relentless focus on productivity. But wages are rising
fast in emerging markets and bad habits are notoriously hard to unlearn.
Retailers that have been obsessed with productivity have achieved striking
results. BIM’s decisions on new-store openings in Turkey are driven as much by
logistics-network optimization as by local demand attractiveness. BIM follows a
“mushroom” expansion model: it grows to high density in specific neighborhoods
within a city, using retail formats that require low capital expenditures. The
high density of deliveries has allowed it to solve the small-format logistics
puzzle that has tripped up many big-box players.
Corporación Favorita in Ecuador offers another
example of operational excellence: its just-in-time inventory model of daily
deliveries essentially eliminates backroom stock. To ensure full control of
store operations, it eschews direct store delivery, managing all flows through
its central warehouses. This focus on operations has enabled the company to
successfully manage a complex format portfolio.
4. Make the business
case to manufacturers.
A rarely discussed obstacle to the expansion
of modern trade in emerging markets is the fact that established manufacturers
don’t have much incentive to do business with modern retailers. Branded
manufacturers enjoy high margins supplying small shopkeepers, who have little
negotiating leverage. Why would they want to jeopardize that business in favor
of modern-trade retailers with initially limited volumes and terms that are
often less vendor friendly (especially if the retailer is a subsidiary of a
global company)?
To woo major manufacturers, modern retailers
may need approaches that are as creative, collaborative, and mutually
beneficial as those they employ in developed markets. One argument full-line
modern retailers can make is that branded manufacturers ought to support them
rather than discounters. After all, in markets where discounters dominate,
consumers can shift en masse away from branded products toward private-label
goods.
5. Educate policy
makers on the benefits of modern trade.
As mentioned earlier, government intervention can
play a critical role in how, and how quickly, modern trade develops. In China,
the strong central mandate to provincial and municipal authorities to create
the necessary infrastructure for modern retailers—not just thousands of miles
of new roads, but also urban planning that integrates modern-trade requirements
into traffic patterns and real-estate zoning—has yielded extraordinarily rapid
development.
Modern-trade players would do well to
communicate the benefits of modern retail to government officials. They could,
for instance, make a strong case that modern retailers can do a better job than
traditional trade in providing safe and cheap access to high-quality food and
household goods.
6. Consider partnering
with the traditional trade.
One growth strategy for modern-trade players
involves partnership with—rather than competition against—the traditional
trade. 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.
Eurocash in Poland is an example. Although its
cash-and-carry stores and distribution centers play a wholesaler role, Eurocash
also welcomes traditional-trade retailers as franchisees under its abc
convenience-store banner (approximately 6,000 stores) and its Delikatesy
Centrum banner (approximately 1,000 stores). This franchising approach has
allowed Eurocash to grow quickly and profitably. Another example of partnership
with the traditional trade comes from Grupo Éxito in Colombia: small retailers
that join its Aliados Surtimax network receive Surtimax signage and fixtures,
access to Grupo Éxito’s portfolio of private brands, and business and
management training. Grupo Éxito has rapidly built a network of more than 500
stores at an extremely low capital-expenditure rate of less than $500 per
store.
7. Adopt a city-based
strategy.
When a market is in a
relatively early state of modern-trade development, national borders can be
unhelpful in scoping and designing a retail network. Rather, retailers should
concentrate on getting to scale in cities or city clusters.2 Thus, Supermercados Guanabara, the market leader in Rio de
Janeiro, has confined itself to the metropolitan area and operates just 23
stores—yet it outperforms formidable competitors, including Carrefour and
Walmart.
In China, some
retailers have chosen to concentrate first on one city or city cluster, be it
Shanghai or Shenyang, before expanding nationally. Similarly, modernization in
India’s retail sector will most likely happen through a series of players
expanding in individual cities and states, rather than through a “big bang”
national expansion plan.3
For any modern retailer, success in emerging markets isn’t
guaranteed. Our research confirms the complexity and local specificity of
market development and the degree to which it depends on initiatives taken not
just by retailers but also by governments, manufacturers, wholesalers, and
others in the local retail ecosystem. International retailers thus need to
become experts at local tailoring. That said, operating in emerging markets
still unquestionably requires excellence in core retailing competencies:
marketing, merchandising, supply-chain management, and talent development, to
name just a few. Retailers that excel in all these areas in the context of
markedly different emerging-market structures will, in a sense, have conquered
the world.
By Peter Child, Thomas Kilroy, and James Naylor
http://www.mckinsey.com/insights/consumer_and_retail/modern_grocery_and_the_emerging_market_consumer_a_complicated_courtship?cid=other-eml-alt-mip-mck-oth-1508
