Appetite For Consumption - Strategic Overview of the Modern Grocery Retail Sector in ASEAN
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
18
SECTOR BRIEFING
number
DBS Asian Insights
DBS Group Research • November 2015
Appetite For
Consumption
Strategic Overview of the Modern
Grocery Retail Sector in ASEAN
DBS Asian Insights SECTOR BRIEFING 18 02 Appetite For Consumption Strategic Overview of the Modern Grocery Retail Sector in ASEAN Alfie Yeo Equity Analyst DBS Group Research alfieyeo@dbs.com Andy Sim Equity Analyst DBS Group Research andysim@dbs.com Production and additional research by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights asianinsights@dbs.com Chien Yen Goh Editor in Chief Geraldine Tan Editor Martin Tacchi Art Director
DBS Asian Insights
SECTOR BRIEFING 18
03
04 Introduction
06 Gaining Traction in ASEAN
A Favourable Context
Regional Growth Opportunities
Different Formats for Different Markets
16 Getting Ahead of the Competition
Strategic Regional Expansion
Future Success Factors
23 Conclusion
26 Appendix – Country Profiles
Singapore
Malaysia
Thailand
Indonesia
The Philippines
Vietnam
DBS Asian Insights
SECTOR BRIEFING 18
04
Introduction
C
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 lowDBS Asian Insights
SECTOR BRIEFING 18
05
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.
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 needsDBS Asian Insights
SECTOR BRIEFING 18
06
Gaining Traction in ASEAN
G
rocery 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
Diagram 1: Urbanisation of ASEAN-5 populations
Urbanisation Rate Urbanised Population
2010-2015 estimates (LHS) 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%
While Source: CIA World Factbook (2014), DBS Bank calculations
population We calculate that ASEAN-5’s urbanisation rate on a population weighted average basis
growth is a is 2.3% (from 2010 to 2015), outstripping its population growth rate of 1.5%. The
fundamental population weighted average growth of ASEAN-5 has registered a rate of about 1.5% for
driver of food the last ten to 20 years. Malaysia was the fastest-growing country at 2%, followed by the
demand, Philippines (1.9%), Indonesia (1.4%), Singapore (1.3%), and Thailand (0.5%).
urbanisation While population growth is a fundamental driver of food demand, urbanisation provides
provides opportunities for modern retail to grow, thanks in part to higher selling prices of better
opportunities quality food raising the value demand in urbanised societies. This is normally backed
for modern retail by higher disposable incomes and better marginal propensity to spend. The impact of
to grow urbanisation on modern grocery retail growth is hence positive.DBS Asian Insights
SECTOR BRIEFING 18
07
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$100 per day
based on their level of disposable income. Nielsen estimates that ASEAN’s middle class
population of 190 million in 2012 (28% of the region’s population) will double to 400
million by 2020 (55% of the region’s population)2. This trend is largely attributed to
regional economic growth, which has been steady for the past ten years.
Diagram 2: Rise of ASEAN middle class population, 2012-2020
Population (m) Rest of population
800 Middle class population
700
600
327
489 8.7% CAGR
500
400
300
400
200
100 190 9.8% CAGR
0
2012 2020
Source: Nielsen estimates (2015), DBS Bank calculations
GDP per capita in ASEAN-5 countries has increased at a 23-year compound annual
growth rate (CAGR) of 2-3.5%, bringing it to 1.6 to 2.2 times that of 1990. More notably,
income per capita between 1990 and 2013 has risen by 2.4-4.2%, fuelling an increasing
wealth trend in ASEAN-5.3 GDP growth is also largely positive in these ASEAN markets: It
is expected to accelerate in the Philippines, Thailand, Singapore, and Indonesia and will
likely decelerate in Malaysia.4
Diagram 3: GDP per capita in five ASEAN countries, 1990-2013 (US$/year)
Source: ThomsonReuters Datastream (accessed July 2015), DBS Bank calculationsDBS Asian Insights
SECTOR BRIEFING 18
08
The demand 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
for imported, taken place). On a 2013 population-weighted basis, food consumption and per capita
branded, and food consumption will, respectively, grow at a rate of 9.6% and 8.6%
packaged food
items is likely to Diagram 4: ASEAN food consumption growth, 2015-2019
increase as white
collar workforces
put convenience
and comfort at
the heart of their
fast-paced urban
grocery shopping
experiences
Note: 2013-2018 forecasts for Philippines
Source: BMI Research, ThomsonReuters Datastream (accessed July 2015), DBS Bank calculations
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 5: Retail consumer expectations based on affluence
Affluence and Customer
consumer experience
expectations
Product variety
and quality
Basic products
Source: DBS BankDBS Asian Insights
SECTOR BRIEFING 18
09
All signs point Regional Growth Opportunities
to modern Traditional grocery retail still dominates in ASEAN-5 developing nations as a significant share
grocery retail of people still relies on traditional wet markets to find affordable local products. But all signs
growing in the point to modern grocery retail growing in the next few years as urbanisation advances and
next few years infrastructure improves. Modern grocery retail’s growth is already outstripping traditional
as urbanisation grocery retail’s growth of 6%. The share of modern grocery retail (versus traditional grocery
advances and retail) has increased substantially from 24% in 2009 to 29% in 2014.5
infrastructure
Modern grocery retail has grown in all ASEAN-5 markets, albeit at different rates. Currently
improves 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%.
Diagram 6: Compound annual growth rate (CAGR) of modern grocery retail, 2009/2014
Source: Euromonitor (2015), DBS Bank calculations
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 7: Modern grocery retail value in five ASEAN markets, 2015 (% of ASEAN-5
sector value of US$60 billion)
Source: Euromonitor (2015), DBS Bank calculationsDBS Asian Insights
SECTOR BRIEFING 18
10
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.
Diagram 8: Proportion of modern grocery retail, 2009-2014 (% of total domestic
retail)
Source: Euromonitor (2015), DBS Bank calculations
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.DBS Asian Insights
SECTOR BRIEFING 18
11
Diagram 9: Relationship between urbanisation and grocery retail penetration, 2015
If 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
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 10: CAGR for supermarkets, hypermarkets, and convenience stores in
ASEAN, 2009-2014
Source: Euromonitor (2015), DBS Bank calculationsDBS Asian Insights
SECTOR BRIEFING 18
12
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 inDBS Asian Insights
SECTOR BRIEFING 18
13
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
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,DBS Asian Insights
SECTOR BRIEFING 18
14
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.
Diagram 12: Number of supermarkets in ASEAN-5, 2015 (per 1 million urban
population)
Source: Thomson Reuters Datastream (2015), Euromonitor (2015), DBS Bank calculations
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 13: Number of hypermarkets in ASEAN-5, 2015 (per 1 million urban
population)
Source: Thomson Reuters Datastream (2015), Euromonitor (2015), DBS Bank calculationsDBS Asian Insights
SECTOR BRIEFING 18
15
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.9DBS Asian Insights
SECTOR BRIEFING 18
16
Getting Ahead of the Competition
K
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.
Diagram 14: CAGR growth of supermarkets, hypermarkets, and convenience
stores, 2009-2014
Source: Euromonitor (2015), DBS Bank calculations
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 breadthDBS Asian Insights
SECTOR BRIEFING 18
17
Retail of their expansion. Acquisitions, on the other hand, allow the acquirer to almost
business growth instantaneously penetrate and gain market share in markets that are unfamiliar or are
difficult to enter.
in ASEAN is
mainly driven Retail business growth in ASEAN is mainly driven by store expansion; companies with
by store strong footholds in the region are expanding to new areas, establishing new formats, and
expansion 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 generateDBS Asian Insights
SECTOR BRIEFING 18
18
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.DBS Asian Insights
SECTOR BRIEFING 18
19
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 becomeDBS Asian Insights
SECTOR BRIEFING 18
20
Satisfying decisive consumption criteria, on top of branding and packaging considerations. It is up
the demand to retailers to enhance their product offering and build customer traction while preserving
for niche and 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
specialty product affluent and demanding consumers want. Organic products, imported selections, bakery/
offerings may rotisserie items, and other similarly niche offerings are ways to keep customers from
be one way to visiting competitors.
take modern
grocery retail Diversifying Offers/Programmes
in the direction
increasingly 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,
affluent and in which customers earn direct rebates on future purchases by accumulating points.
demanding Launching private labels is another diversification area that is set to become central to
consumers operators’ growth strategies; private labels allow retailers to increase profit margins by
want 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 costsDBS Asian Insights
SECTOR BRIEFING 18
21
With the (fleet, fuel, staff, etc.). These costs will, in turn, be reflected in the retail price of
exception of products, which risks offsetting the convenience factor for consumers.
Singapore and
(ii) Securing payment and implementing delivery systems across locations. The
Malaysia, other lack of fast, secure, or reliable internet access across many locations in ASEAN is a
ASEAN markets natural obstacle to the growth of online shopping. Security systems and protocols to
do not appear ensure the integrity of customers’ payments must also be in place before they feel
ready for comfortable making recurrent online purchases. Unless both these pre-requisites are
e-commerce met, it is unlikely that the vicious cycle of consumers not making online purchases and
grocery retail 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.DBS Asian Insights
SECTOR BRIEFING 18
22
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.DBS Asian Insights
SECTOR BRIEFING 18
23
Conclusion
M
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 decadesDBS Asian Insights SECTOR BRIEFING 18 24
DBS Asian Insights
SECTOR BRIEFING 18
25DBS Asian Insights
SECTOR BRIEFING 18
26
Appendix – Country Profiles
Singapore
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.
Diagram 15: Structure of modern grocery retail sector in Singapore, 2009-2014
Source: Euromonitor (2015), DBS Bank calculations
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.DBS Asian Insights
SECTOR BRIEFING 18
27
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
Diagram 16: Structure of modern grocery retail sector in Malaysia, 2009-2014
Source: Euromonitor (2015), DBS Bank calculations
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%.DBS Asian Insights
SECTOR BRIEFING 18
28
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
Source: Euromonitor (2015), DBS Bank calculationsDBS Asian Insights
SECTOR BRIEFING 18
29
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.DBS Asian Insights
SECTOR BRIEFING 18
30
Diagram 18: Structure of modern grocery retail sector in Indonesia, 2009-2014
Source: Euromonitor (2015), DBS Bank calculations
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 andDBS Asian Insights
SECTOR BRIEFING 18
31
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
Diagram 19: Structure of modern grocery retail sector in the Philippines, 2009-2014
Source: Euromonitor (2015), DBS Bank calculations
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 ofDBS Asian Insights
SECTOR BRIEFING 18
32
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.
Diagram 20: Structure of modern grocery retail sector in Vietnam, 2009-2014
Source: Euromonitor (2015), DBS Bank calculations
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 presentDBS Asian Insights
SECTOR BRIEFING 18
33
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.DBS Asian Insights
SECTOR BRIEFING 18
34
References
1 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.
6 Euromonitor market and economic database, accessed July 2015.
7 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).
10 Euromonitor market and economic database, accessed July 2015.
11 PricewaterhouseCoopers & Kantar Retail, Retailing 2020: Winning in a Polarised
World, 2012.
12 Ibid., p.49.
13 Euromonitor market and economic database, accessed July 2015.
14 Euromonitor market and economic database, accessed July 2015.
15 Euromonitor market and economic database, accessed July 2015.
16 Euromonitor market and economic database, accessed July 2015.
17 Euromonitor market and economic database, accessed July 2015.
18 Euromonitor market and economic database, accessed July 2015.DBS Asian Insights
SECTOR BRIEFING 09
35
Disclaimers and Important Notices
The information herein is published by DBS Bank Ltd
(the “Company”). It is based on information obtained
from sources believed to be reliable, but the Company
does not make any representation or warranty, express
or implied, as to its accuracy, completeness, timeliness
or correctness for any particular purpose. Opinions
expressed are subject to change without notice. Any
recommendation contained herein does not have
regard to the specific investment objectives, financial
situation and the particular needs of any specific
addressee.
The information herein is published for the information
of addressees only and is not to be taken in substitution
for the exercise of judgement by addressees, who
should obtain separate legal or financial advice. The
Company, or any of its related companies or any
individuals connected with the group accepts no
liability for any direct, special, indirect, consequential,
incidental damages or any other loss or damages of
any kind arising from any use of the information herein
(including any error, omission or misstatement herein,
negligent or otherwise) or further communication
thereof, even if the Company or any other person has
been advised of the possibility thereof.
The information herein is not to be construed as an offer
or a solicitation of an offer to buy or sell any securities,
futures, options or other financial instruments or
to provide any investment advice or services. The
Company and its associates, their directors, officers
and/or employees may have positions or other interests
in, and may effect transactions in securities mentioned
herein and may also perform or seek to perform
broking, investment banking and other banking or
financial services for these companies.
The information herein is not intended for distribution
to, or use by, any person or entity in any jurisdiction
or country where such distribution or use would be
contrary to law or regulation.You can also read
