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Jakarta Post

Who buys from modern grocery retail stores?

A century ago, the self-service grocery retailing format was born

Vishal Narayan (The Jakarta Post)
Singapore
Wed, November 15, 2017

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Who buys from modern grocery retail stores?

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century ago, the self-service grocery retailing format was born. It was considered “modern” because relative to full-serve mom-and-pop stores, consumers could touch and feel a vast selection of products in a clean and pleasant ambience, and complete the shopping experience without having to interact with a storekeeper.

Fast forward to today. The mention of modern retail might conjure up images of online ordering and doorstep delivery of any item you need to make dinner. Indeed, online food retailing is growing fast in much of the western world, but is yet to pick up steam in much of Asia.

And what is considered modern in one country may be viewed as traditional in another. For instance, while self-service large format stores are a common sight in some Asian countries like Singapore, they are a fairly new phenomenon in emerging Asian markets as India, Indonesia and the Philippines. Despite their fast growth, large format self-service grocery retailing still occupies a small share of the overall grocery retail pie in many parts of the developing world.

My research at the National University of Singapore Business School involves studying modern grocery retail in developing markets. Along with my co-authors Vithala R. Rao and K. Sudhir of Cornell University and Yale School of Management respectively, we attempted to ask a simple yet unanswered question. In counties dominated by small mom-and-pop stores for centuries, who adopts modern grocery stores and why?

Conventional wisdom would suggest that rich households would be the first to try out such innovative stores. After all, they have greater disposable income. Many of them also seek greater variety than poorer families for whom spending within a budget might be more important.

Traditional stores given their small size cannot compare with large stores in terms of product variety.

Moreover, given a choice between rich and poor consumers, marketers the world over have often preferred to serve rich consumers. For this reason modern stores often tend to be located in relatively affluent neighborhoods — making it more convenient for richer consumers to reach them.

But the modern food retailing in the west portrays a different picture. Economies of scale afford huge cost advantages to modern retailers which they pass on to consumers, thus offering cheaper products to less affluent consumers. They are often located in rural areas, which tend to be poorer than their urban counterparts. This is a major reason why Wal-Mart continues to be the world’s largest company by revenue despite the relentless onslaught of online retail. Wal-Mart’s revenue in 2016 was larger than the entire GDP of Thailand!

So are the rich more likely to adopt modern retail in developing markets or poor consumers? The answer is both! After analyzing almost 8,000 grocery shopping trips in urban India, from consumers belonging to various socioeconomic classes (SECs), we found an interesting V-shaped relationship. The upper and lower SECs (mostly the rich and the poor) are more likely to shop from modern retail than the middle class.
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Rich consumers are often busy, and do not have much time to shop.

Over 43 percent of modern retail revenues come from lower SECs and 29 percent from upper SECs. What’s even more surprising is that as modern retailers open more stores and lower prices in the future, the share of the middle class is projected to shrink at the expense of upper and lower SECs.

Why is that? Rich consumers are often busy, and do not have much time to shop. So they appreciate the convenience of traveling short distances to shop for groceries.

If modern stores continue to open stores in affluent neighborhoods, they can continue to expect increased patronage from such consumers. On the other hand, poorer consumers do not mind traveling long distances, as long as they can buy cheaper products. So despite having to make the long trip to a modern store, such consumers shop from there because of a perception of lower prices.

Does this perception of lower prices of modern store match with reality? Not really! While modern stores offer some products at lower prices, other products are cheaper than traditional stores. One might wonder why the “every day low price” strategy of western retailers does not find traction in developing markets. It turns out that the retail economics of developing economies are quite different.

Rents in urban areas tend to be quite high, lack of an adequate logistics infrastructure raises costs, traditional stores might not be liable to pay taxes owing to their small size, and wages tend to be higher at modern stores. So offering lower prices is not easy in this part of the world.

Beyond business implications, our findings also bear on policy making. The value of modern retail is not restricted to the rich and elite, as conventional wisdom suggests, but to the lower middle classes as well.

In some countries, there is opposition to the expansion of modern under the belief that traditional stores will be adversely affected. But this is short-sighted as it ignores that for several product categories, lower middle classes are the key beneficiaries of modern retail growth.

So what can retailers in Indonesia learn? India and Indonesia face several similarities: large concentrations of population, high real estate prices in urban areas, cheap labor, and large swathes of price sensitive poor consumers.

Given these similarities, traditional retailers in Indonesia might consider focusing on their core strengths: a strong relationship with their loyal clients, and a low cost operation which enables prices parity with modern retailers. On the other hand, modern stores might do well to consider focusing on one or two consumer segments.

Our research suggests that the lower socioeconomic class might perhaps be a stronger source of revenue growth than the rich.
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The writer is associate professor in marketing at National University of Singapore (NUS) Business School. The opinions expressed are his own.

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