Southeast Asia’s retail landscape has evolved significantly over the past two decades. Historically, this region has been dominated by traditional trade (TT) channels such as wet markets and mom-and-pop stores. Also referred to as ‘warung’ in Indonesia and ‘sari-sari’ in the Philippines, these small stores have been the cornerstone of grocery retail by providing basic necessities for local daily life.
However, in recent years, the region has observed a shift in its retail landscape. These findings are explored in detail in Boston Consulting Group’s (BCG) latest report, Revolution and Reinvention: The Future of Retail in Southeast Asia.
With surging middle-income growth and urbanisation, modern, organised retail outlets––sprawling hypermarkets exceeding 5,000 square metres (sq m) with over 15,000 stock-keeping units (SKUs)––have become a hallmark of suburban life, selling everything from tomatoes to televisions. These large retail formats have been a game-changer for pricing and value. High sales volumes have traditionally enabled these mega-retailers to procure goods at lower prices, resulting in savings that are often passed onto consumers in the form of better value deals.
Death of the Hypermarket
Despite the once promising value proposition and market share of large format stores, hypermarkets and supermarkets are now on a decline––mirroring a trend already observed in Europe a decade ago. Several factors are contributing to this change, including the scaling of e-commerce and food delivery services, increased urban densification, and shifting consumer consumption patterns and values.
As a result of these changes, the operational model of traditional large format stores is also under strain due to their expansive inventories and high overhead costs. This burden was made heavier by the impact of COVID-19, which shifted shopping behaviours towards online platforms and convenience-driven options within an accelerated timespan. As volumes decline, these retailers struggle to keep consumer footfall high enough to support their existing business model. Current inflationary pressures further exacerbate this situation, undermining their low-price advantage.
Convenience is King
As Southeast Asia’s retail landscape undergoes profound shifts, small format grocery retail—stores occupying less than 500 sqm (10x smaller than your typical hypermarket)—have emerged as an attractive model for increasingly time and cash-strapped consumers.
Despite their smaller footprints, small formats appeal to consumers through their pricing strategy. These stores often mirror, or even undercut up to 30%, the price positioning of larger modern trade players. Additionally, convenience is their main value-add as these stores can usually be found in neighbourhood locations, serving as local solutions for quick, affordable shopping.
The sustainability of the small format model lies in its operational methods. These stores often streamline their offerings, carrying ~3,000 SKUs, which is 5x lesser than what is found in traditional large formats. Additionally, they have a no-frills service model with minimal in-store labour, basic shelving and refrigeration, and fewer product categories, with a focus on long shelf-life products. By limiting their range and size, small format retailers can maintain relentless cost efficiency due to their reduced capital expenditure (CAPEX) and operational expenditure (OPEX). Their lean approach also enables them to pass on savings to customers while maintaining sufficient margins to sustain and grow their businesses.
Today, small format grocery retail is the fastest growing retail format in Southeast Asia, appealing to consumers who favour smaller, more frequent purchases. With a 7% annual growth rate from 2018 to 2022, small formats outpace other retail channels like hypermarkets (which saw a 4% decline) and supermarkets (that only grew 2%) to carve out a significant and expanding model in the market.
In countries such as Malaysia, Indonesia, and Thailand, small formats have risen to become the dominant retail format, standing as significant challengers to traditional incumbents. A prime example of this is CJ Express in Thailand. As part of the Carabao Group, a leading player in the Sports & Energy drink sector, CJ Express has shown remarkable growth, amassing US$500 million in revenue with 900 stores spread across Thailand. Their ambitious vision sees them doubling this number to 2,000 stores by 2026. Each store is strategically located primarily in outer cities, community, or industrial districts, with a recent expansion drive into Bangkok.
Unlike franchise models, CJ Express are company-operated stores, indicating a deep-rooted investment in their growth. Their commitment to this retail format is further underlined by their plans for an initial public offering (IPO) in 2023, aiming to raise up to US$800 million. Unlike traditional players who have mainly focused on convenience and proximity, CJ Express and other emerging retailers are leaning into a more aggressive, differentiated strategy that hinges not just on convenience but also on value-based pricing to attract consumers.
Staying Relevant in a Changing World
As Southeast Asia’s retail landscape continues to evolve, embracing strategic adaptation is key for retailers wanting to thrive. A clear network strategy is important; targeted footprint expansion will allow retailers to reach consumers in both urban and rural areas, ensuring that growth is achieved in a focused yet sustainable manner.
Furthermore, the digital era demands a bold presence. Retailers must enhance their digital presence and ramp up technology investments. In a world where consumers are increasingly seeking omnipresent engagement, an integrated and engaging online platform is no longer a luxury, but a necessity. This involves not just a website or mobile app, but a comprehensive digital strategy encompassing marketing, sales, customer service, and a suite of convenient services such as instant delivery and online payment options.
Finally, current inflationary pressures and changing consumer behaviours underline the importance of a strong orientation towards value in both product offering and portfolio. Beyond products, customers are also seeking value in the form of affordable prices, high quality offerings, and a satisfying yet convenient shopping experience. In response, retailers must craft a portfolio that meets these demands while offering cost-effective and appealing selections.
The future of retail in Southeast Asia remains dynamic, presenting both substantial opportunities and critical considerations for those aiming to build enduring businesses. As we look to the coming decade, it is evident that the disruptive forces at play will continue to intensify and influence entire operational frameworks. To remain relevant, retailers must proactively embrace change and align their business models with emerging trends to arise as competitive players in this transformative era.
Jason Moy, Managing Director and Partner, Boston Consulting GroupJasryn Ng, Principal, Boston Consulting Group