INDUSTRY ROUNDUP New trends shape Asia Pacific grocery retailing sector

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A slowdown in consumer spending, time-starved consumers and demand for convenience are a few key trends impacting the grocery retailing sector. Peter Gale, Nielsen’s managing director, Retailer Services, Asia Pacific, points out the challenges and opportunities for Asia Pacific grocery retailers.

The grocery retailing sector in Asia Pacific is ripe with change, and no change is more evident than the shifting growth trend in the region. After several years of strong double-digit growth, packaged grocery sales contracted sharply in 2013, and the slowdown has carried over into the first half of this year.

No one country has been immune to the dramatic slowdown, with the exception of Hong Kong where volume gains have been relatively stable, thanks to consumption demand from mainland Chinese tourists.

The underlying causes of this growth shift are varied; high inflation, particularly for fuel and electricity, and rising household debt have impacted consumer spending, while decreasing household sizes and more out-of-home entertainment and dining mean smaller shopping baskets.

Fewer new stores

As sales growth has slowed, so too has the number of new store openings. New store growth in the past five years has been a healthy 13% per year on average. Last year, this figure fell to just 8%.

As the established global markets face challenges such as low growth and strong competition, the number of global retailers expanding into new countries in the region has fallen significantly. This pull-back has made way for the strengthening of regional retailers such as Lottemart, E-Mart, AEON, Lawson’s and Familymart, which are now leading the way with regional expansion, particularly in Southeast Asia.

Smaller store formats

Increasingly time-poor consumers have created a new focus on smaller format stores as a key to unlocking growth. Nowhere is this trend more notable than Korea, Thailand and Indonesia, where convenience stores and minimarkets have increased their share of packaged grocery sales to over 25%.

The Philippines looks set to follow this path, with many leading retail chains looking to invest or launch joint venture convenience store offerings in the market.

Preference for top-up shops

The advent of minimarkets is bringing about a change in the way consumers shop, with less reliance on large monthly stock up shopping trips and more occasions of smaller, top-up shops.

The preference for smaller format stores will continue as lifestyle and demographic changes, particularly shrinking household sizes, impact shopping habits. In South Korea, the number of single person households increased from 16% to 24% in the decade to 2010, and in Thailand the average household size decreased from 3.3 in 2005 to 2.8 in 2012. These smaller households are buying less bulk items, and are instead looking for products which fit their changing lifestyles and offer convenience.

The growing popularity of small format stores has come at the expense of both traditional grocery stores and hypermarkets. While hypermarkets remain the primary channel for purchasing groceries in many Asian markets, hypermarket retailers face growing pressure and competition from small format stores as well as online retailers.

Early days for online retailing

Online retailing continues to grab headlines as more retailers, both traditional and pure-play digital businesses, launch websites and develop shopping apps to engage shoppers.

Headlines aside, it is early days yet for online retailing. Shoppers in the region are more inclined to be visiting retailer websites to find deals and check prices than to be making the bulk of their purchases online. Even the in UK, one of the most digitally developed markets globally, online accounts for only 4.4% of grocery sales despite a reported growth rate of 20% for online retailing.

In the Asia Pacific region, online grocery purchasing is highest in Korea, at around 27% of shoppers. Beyond Korea, the penetration of online grocery trails off significantly, with the next closest markets – Australia, New Zealand, China and Taiwan – registering between 2% and 7% penetration.

As demand for online offerings increases, driven primarily by convenience factors, retailers continue to be plagued by the challenge of selling and delivering low margin groceries profitably. The majority of retailers, however, agree that online is now clearly a critical distribution channel they cannot afford to ignore.

Increased promotional activity

With growth in the grocery sector hard to come by of late, many retail chains are attempting to attract more shoppers through increased promotional activity, and the proportion of total spend on promotions is growing.

Increased promotional activity is most prominent in the developed markets, where retail concentration and competition are at the highest levels. The Pacific countries, New Zealand and Australia, lead the way with nearly 60% of spend on promoted products, after the figure hit the  40% mark last year and for the first time.

Asian markets are not quite at these levels but they are heading in the same direction – Singapore is already at 30% and Thailand has seen buying on promotion increased from 22% to 26% in the last 12 months.

While promotions will drive short term increases in volume, it is debatable whether they deliver any longer term benefit. More than 60% of Asia Pacific grocery shoppers claim to be active promotional shoppers, but even in the most promotion driven markets only 15% of shoppers admit to changing stores based on retailer offers.

The challenge all retailers face is shopper expectations: once shoppers begin to expect promotions, any pull back creates a competitive disadvantage.

Expectations continue to rise

Many long term trends have continued into 2014 and this is likely to remain the case next year. From a shopper perspective, the expectations around convenience and an enjoyable overall retail experience, whether in-store or online, are sure to increase.

Price and promotion will remain important hygiene factors to attract shoppers but in order to win retailers will need to focus on developing a differentiated shopping experience to stand out from their competitors.

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