Top 1000 2015: Grocery-retail brands grapple with soft growth, fragmentation

Short-term promotions eating away at long-term profitability, competition and changing consumer behaviors all mount a challenge to Asian grocery names. But key differentiators to attract shoppers and boost loyalty can still be found in core industry functions. 

After years of robust double-digit growth, average FMCG sales growth in Asia has slowed. In 2014 growth only hit 4.6 per cent compared to 6.7 per cent in 2013. Volume growth in the region is less than 1 per cent.

FMCG’s lack of growth is somewhat of an anomaly in a region where overall economic performance and forecasts remain relatively positive. Coming on the back of three years of robust growth for many countries, consumption growth is adjusting to a more stable level and inflation is normalising in the majority of Asia Pacific markets, with a few exceptions. Other longer-term trends, such as decreasing household sizes, increasing household debt and prioritisation of expenditure on technology and out-of-home consumption are also playing a role.

In the face of soft growth, many chains across the region are turning to promotions to attract more shoppers, particularly in the region’s developed markets such as Australia and New Zealand where retail concentration and competition is highest. Although promotions drive short-term volume increases, their ability to deliver any long-term benefits is debatable. The challenge all retailers face is shopper expectation – once shoppers begin to expect promotions, any pull-back on the part of the retailer then creates a competitive disadvantage.

The slowdown in FMCG sales growth also coincides with fewer new store openings across the region. While new store growth averaged 13 per cent over the past five years, 2013 saw a decline to just 8 per cent, with this drop most noticeable in India, Malaysia and Korea. Conversely, while global retailer investment in new store openings fell as a result of low growth and heightened competition, healthy cross-border investment, especially in the Southeast Asia markets, is being driven by local Asian retailers.

What growth the industry did experience over the past year can largely be attributed to greater influence from convenience stores and minimarkets, especially in mature markets such as Taiwan and South Korea, as well as developing markets such as the Philippines, Indonesia and Thailand. As the popularity of small format stores increases in many markets, there has been a corresponding rise in average shopping frequency. Monthly pantry shopping, which has traditionally been the standard for many shoppers, is in gradual decline as more frequent weekly shopping trips are rapidly becoming the norm.

The share gain for small-format stores has come at the expense of traditional grocery stores and hypermarkets, which are losing share. The share erosion is happening gradually in Asian markets where well-developed hypermarket channels exist, such as in China. But shoppers increased reliance on alternative stores does not necessarily mean they will stop shopping at hypermarkets. However, the behavior does impact how often they visit hypermarkets. Hypermarkets are still the most important channel in a number of Asian countries, but over the coming years they are likely to face more challenges on the convenience front with burgeoning competition from small formats and online channels.

In the online space, a constantly expanding number of retailers, both traditional and pure play e-tailers, are launching websites and developing shopping apps to tap into consumer demand for convenience and on-the-go shopping. While it remains early days in most markets, others are beginning to see a significant up-swing. Korea is by far the most developed online grocery market in Asia and online shopping is now the country’s number one retail channel. Australia and New Zealand also have strong penetration, along with Taiwan.

In the face of shifting trends and increasing headwinds, it is more critical than ever for FMCG retailers to keep pace with consumers’ expectations. Offering competitive prices and greater convenience are the basics but improving the in-store experience and focusing on product range selections that appeal to time-poor shoppers are increasingly important differentiators that can drive story loyalty.

Pete Gale is managing director, retailer services, Asia Pacific, Middle East, Africa and Greater China for Nielsen