McKinsey examines a Vietnamese supermarket sector set to explode

19 April 2018

As the Vietnamese economy continues its upward momentum, punctuated by a growing middle class and increasing urbanisation, the strategy and management firm McKinsey & Company has asked the question: what is the recipe for profitable growth in Vietnam’s grocery market?

While the Asian region bounds toward global economic dominance as a whole, there remain distinct differences in the nature of the its varying economies, even within Southeast Asia alone. The emerging ASEAN economies are growing at a rate of up to three times faster than their comparatively advanced regional neighbours, with Vietnam, currently tracking at above 6 percent annual growth in real GDP (compared to Singapore’s ~2%), among them.

A common feature of these emerging economies is the combination of a growing middle-class with greater discretionary income and more discerning tastes, increasing urbanisation, shrinking households, and a relatively time-poor citizenry with less flexible schedules and a need for convenience. Vietnam is no different, and while traditional grocers still dominate locally, the shifting lifestyles and consumer demographics indicate that the country’s immature supermarket sector is primed for explosion.Grocery spending in Asia per capitaFurther fuelling the prospect for rapid growth is the country’s relatively low modern-trade grocery-spend per capita, just a little above Laos and Bhutan and currently lagging Indonesia and the Philippines. Yet, according to a recent McKinsey & Company analysis on the state of Vietnam’s grocery sector, once certain GPD per capita levels are reached, the average spend on modern groceries typically sky-rockets – such that advanced economies like those of Japan and Hong Kong record vastly greater rates of modern grocery shopping with only the small incremental gains in GDP per capita past the tipping point.

With such conditions in place, the consulting firm predicts that the modern trade market in the country will grow at a rate faster than its per capita GDP, noting that the overall grocery market has already been growing at 15 percent annually since 2012 – with the expectation that the double-digit growth figures are due to continue. As it stands, the supermarket segment still commands the lion’s share of the modern sector, but the hypermarket and convenience segments are growing at a rapid clip, recording a CAGR of 22% and 49% respectively in the five years to 2017.Supermarket and hypermarket growth in VietnamBut while the demand for modern groceries may well be about to boom, the question remains – how can the big retailers capitalise, especially in a crowded market and with further respect to the unique market challenges of Vietnam, such as rising real estate costs, a still persisting culture of open street-markets, and a fragmented and shifting supplier base. Additionally, the report argues, the rise in disposable incomes will likely be fastest among young urbanites who eschew car ownership, such that the old US and European growth models will not readily apply.

To date, the report points to a crowded local supermarket landscape marked by low productivity and thus overall profitability. The average industry sales per square metre generated in Vietnam stands at roughly $2,500. As a contrast, the sector in Singapore generates over $8,500 according to the same metric, while in the more economically comparable Philippines the sales-rate is pushing close to $4,000 per square metre.Sales productivity of Asian supermarketsThe present focus on expansion in Vietnam along with the scramble for market-share has contributed to this relative lack of profitability. The report notes that, “Both outside-in interviews and in-market observations point to low gross margins, driven by the necessity to compete against wet markets, intense competition between players on promotions, and supply challenges for fresh items.” The big players have already ceded 15% of the total market share in just the past five years, and the competition doesn’t look to be slowing, with aggressive new challengers recently joining the fray.

So what’s the remedy – or, rather, recipe – for profitable market growth? McKinsey cites three prevalent strategies to date – the dominant low-price model, the focus on upmarket premium space, and a recent ‘winner take all’ expansion approach – and offers its own take on the keys to success and need for distinctive performance in six specific spheres;

A clear value proposition that works economically – i.e. not attempting to excel in every dimension such as price, assortment, and service; rigorous productivity management to maintain profitable gross margins – which will require consistent pricing and value proposition and ongoing discipline; championing quality where it matters most, as a point of difference to wet markets; the careful management of footprint and expansion to avoid a downward spiral and an investment in data analytics to gain a competitive edge, and, finally; to prepare for the more intense competition and market disruption still to come.

Excessive technology can be counter-productive in new retail, says S.POINT

05 April 2019

Technological advancements have in recent years opened the door to ‘new retail’ – but an overreliance on technology can be counter-productive for retailers, argues Steven Jiang, Managing Partner of Shanghai-based innovation consultancy S.POINT.

Moving beyond just a buzz-word, the ‘new retail’ business model has outright boomed in recent years, most notably driven by Chinese e-commerce giant Alibaba. Striving for the seamless integration of offline and online shopping channels, together with a mesh of big data, logistics, marketing and distribution, the emergence of new retail has been undoubtedly enabled by rapidly evolving intelligent technologies.

But, as Steven Jiang, Managing Partner and Vice President of Shanghai-based product innovation consultancy S.POINT notes, not all enterprises have the strong technological genes of Alibaba. Jiang contends as such that enterprises in the new retail space can have a tendency to over-rely on technology, with its excessive application and misapprehension of the space producing effects counter to intentions.

“Developers with a misunderstanding of new retail are over-dependent on technology and believe that technology changes and solves everything, which is an extreme obsession with technology,” states Jiang. Rather, new retailers should as a starting point consider scenarios across the shopping and buying life-cycle and the combination of human and technological elements to create a seamless customer experience.Excessive technology can be counter-productive in new retail, says S.Point“New retail should pay particular attention to the sense of balance to connect technology with customers to create a better experience – as the application of excessive technology leaves no room for the development of the relationship with customers,” says Jiang. “The key lies in the insight into customer scenarios, and only by understanding and extending scenarios for their consumers can organisations have the chance of winning new retail opportunities.”

An MBA graduate from the MIT Sloan School of Management and former consumer and industrial goods consultant with Booz & Company, Jiang was a founding member of the China Industrial Design Institute and now serves as Managing Director for S.Point, a 1997-founded Chinese consultancy and Cordence Worldwide member with offerings in consumer research, product definition & design, product delivery, go-to-market strategy, and innovation capacity building among other provisions.

With respect to his contentions on new retail, Jiang points to the modern self-serving vending machines that have emerged in the past few years, which are very advanced in terms of technology but haven’t been entirely successful – separated as they are from consumer scenarios. “Consumers will not approach technology proactively,” he says. “Only when technology is made close to customers’ needs can it find its market.”

Noting that the center of shopping has shifted from the merchandise in traditional retail to customers in new retail, Jiang concludes: “Enterprises hoping to grasp new retail should understand traditional retail from the heart – i.e. consumers see the product first, then recognise the brand, and compare prices in the end. If consumers cannot see the product or understand the product it will be very difficult to push sales . . . the key to new retail lies in creating new and more scenarios to increase the value of the merchandise.”