Retail therapy: Knowing your market

After 15 years hoping to crack the local retail scene French hypermarket chain Carrefour has shut up shop in Singapore.

The mega-retailer – ranking number two in the world behind US giant Wal-Mart in terms of revenue – had earlier announced plans to shut down its Singapore operations citing, among other reasons, an outlook it said does “not allow reaching a leadership position in the medium and long term”.

It’s a challenge echoed in China by other big global retailers such as Tesco and Wal-Mart who also cite the tough competition they face from more entrenched local retail chains.

But, many of these local chains have been in operation in their home countries for years. So, the natural question arises: why couldn’t Carrefour and other retail giants build a smarter proposition in the market and in consumers’ minds instead of choosing the same position and strategy they had adopted overseas? Were they ignorant of – or oblivious to – the different market conditions prevailing in Asian cities?

Carrefour’s departure from Singapore is part of what it calls a phased international consolidation drive, including exiting markets in Thailand, Malaysia and Singapore.

In Singapore it operated two large stores, both located in central, downtown locations.

Retail concept

tesco280Mega-retailers need to change their models to crack the Asian marketMega-retailers like Carrefour typically offer a wide assortment of food items and non-food items such as appliances and clothing under one roof, thus promising one-stop shopping convenience for their consumers at a reasonable price level.

In Singapore this put them in direct competition with grocery retailers such as Cold Storage and Shop N Save, as well as appliance chains such as Courts and Best Denki.

In the sprawling cities of the US and, to some extent, in Europe, the hypermarket retail concept is built around the notion that in their shopping activities consumers incur significant travelling costs – time, traffic, and other incidentals.

So, the thinking goes, consumers would like to avoid frequent shopping trips – they buy as many things as possible in a given trip and store them up at home. Given the average size of homes in the US storage costs are relatively minor.

But in densely populated markets like Singapore, the situation is rather different. Space is precious in a typical household. For consumers here frequent visits to nearby grocery retailers are not just a better option but almost inevitable.

As a consequence Singapore’s four local supermarket chains have embedded themselves across Singapore’s residential landscape with 256 outlets averaging one for every 2.5 square kilometres of the country.

This continual replenishment process reduces the need for the big shopping trip, while conversely the frequency of big shopping trips is reduced by the higher number of ‘fill-in’ trips the household makes to local grocers.

Different proposition

Hence, mega-retailers like Carrefour face bigger hurdles in attracting customers here with their one-stop shopping proposition than they face in overseas markets.

trolley280In order to encourage consumers to visit their stores more frequently and entice them to buy big when they do, the impetus should have been on Carrefour to work smarter and revise their proposition according to the local market. But, in Singapore at least, that did not seem to be happen.

First, Carrefour’s prices were not attractive. While their stores did carry private labels, given the Western tilt in product range, prices remained generally higher. Plus, since their stores were located only in prime downtown locations, rent and other running costs were higher, putting further pressure on pricing.

Meanwhile, from the consumer perspective, visits to Carrefour stores involved significant travelling costs because of its downtown location: longer travelling time, higher parking fees and traffic congestion.

And add to that the fact that the store’s product assortment didn’t offer any unique, compelling reason for consumers to choose them over other local grocers or chains.

In contrast, the four established local supermarket chains offer a very clear proposition to the consumer targeting various segments of the market at the discount, middle-market and premium ranges.

Broad appeal

Finally, given the peculiarities of the Singapore market, how has Giant, the locally based rival hypermarket chain, been able to thrive with its nine stores while Carrefour could not manage to survive with its two outlets?

The key differentiator appears to be the fact that Giant offers their products at strongly competitive prices – a proposition that compensates for and outweighs the travelling costs incurred by consumers. Further, their product assortment seems to appeal to a broader segment of the market.

As part of Hong Kong-based retail group Dairy Farm, which also owns 113 Cold Storage and Shop N Save supermarkets across Singapore, Giant is able to achieve considerable economies of scale, with its low sourcing costs and efficient operations allowing it to offer low prices to the consumer.

So, when a hypermarket or any other retailer from the West moves into an Asian city, it is critical for them to understand the local retail set-up including the positions held by the incumbent retailers and the factors that control the consumer’s shopping behaviour.

When we consider an emerging retail market like India, where the big retailers may soon get permission to move in, they have to understand further how the infrastructure – or more precisely, the lack of it – will impact their cost of operations, in turn affecting their pricing and resulting demand.

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