Asian Format Evolution Showcases A Possible Future For Grocery

Source: Howard Lake, Monday, Aug 7, 2017

Chinese online giant Alibaba has recently been proudly showcasing its Hema supermarket format. It is, the company boasts, a prime example of what it calls ‘New Retail’, a model centred on the integration of online, offline, logistics and data across a single value chain.

Executive summary

  • Demographic shifts in Chinese megacities are driving the rise of new supermarket formats combining instore experiences with O2O convenience.
  • These formats rely advanced retail technologies, low labour costs and enhanced fresh supply chains to deliver localized, socialized and digital retail experiences all from one store.
  • The format is ideal for the numerous megacities currently growing at a fast rate, not only in China, but across the Asian region as a whole, and even beyond.
  • FMCG should watch the development of such formats closely as they will require radical rethinking around NPD should such models become the regional norm.

Hema has been in operation since March 2016 and now numbers 13 outlets in total, almost all in Shanghai. The 1,000 square metre store is a blend of supermarket and food court with a strong focus on fresh produce, meat and seafood. Of its food assortment, fresh comprises about 20% of the range, though this is predicted to increase to 30% before long. The food ranges are diverse, with products from over 100 countries on the shelves.

While Hema is very much geared to experiential shopping, with half the floor space dedicated to foodservice, it also functions as an online-to-offline (O2O) hub with store-picked online orders home-delivered to addresses within 3km inside 30 minutes. The store is also cashless, with Alipay, Alibaba’s own payment system, the only payment accepted.

What’s driving the emergence of such retail models?

Urban demographic shifts in China, along with vast numbers of mobile-enabled consumers, are driving demand for faster and more convenient shopping, meaning models like Hema are becoming more relevant. As a key driver of change in this area, recent research by Alibaba shows a sharp rise in single urban inhabitants in China. A decade ago, only 4% of this segment aged 35 were unmarried. Today, this share is 21%.

The implication of this for grocery in megacities is a trend towards smaller baskets and a rising demand for convenience. Hema not only meets these criteria, but also satisfies another need for the single urban dweller: the desire to socialize. Hema’s foodservice element is designed to draw in Shanghai office workers, either at lunchtime or after work. The high-quality fresh offer is an effective substitute for the traditional Asian wet market, meaning diners can select their chosen dish first-hand to be cooked in front of them.

Out-of-home dining has been gaining popularity in China. As disposable middle class incomes rise in megacities, fewer consumers are cooking for themselves, and dining destinations are increasingly a preferred option. This has seen FMCG retail sales slow down in China over recent quarters, with increasing numbers of consumers choosing food delivery or dining out over packaged products that need preparing at home.

Why the format is ideally future-proofed

Modern Chinese demographic shifts make Hema an ideal model for megacities. In stark contrast to several innovative formats now appearing in East Asia – most notably, unmanned or automated stores – Hema requires high levels of staffing, both front-end in foodservice staff and back-end in replenishment, order picking and delivery. In China, labour costs are not yet an issue and this is likely to remain the case in the medium-term. Ensuring that the offer is highly localized is one way to maintain control on both online orders and worker numbers; restricting delivery to a radius of 3km means a Shanghai store’s catchment would be in the region of 100,000-120,000 inhabitants.

Megacities will continue to grow. China will have 220 cities of 1 million inhabitants by 2025 and 20 cities with more than 5 million. If we consider the average Hema catchment as being 100,000-120,000, the format could serve the entire population of a super-megacity (15 million ) from a total store base of approximately 40-50 outlets.

Rising urban densities, greater numbers of time-constrained consumers and high real estate costs make models like Hema a perfect example of Alibaba’s New Retail solutions. As cities grow, car ownership rates are likely to fall as fewer inhabitants want or need to spend hours negotiating traffic.

At the same time shoppers will become more sophisticated, as a rising middle class discovers healthier lifestyles and eating habits, driving demand for fresh and organic produce. Hema is already geared towards catering to these needs; its short delivery windows assuring shoppers that their basket contains only the freshest items. Much of this sourcing is being handled by Alibaba-backed fresh specialist Yiguo, which brings in produce both from domestic and overseas suppliers and has its own independent logistics chain covering 310 cities in 27 Chinese provinces. Alibaba’s own data reveals that in 2016, Chinese fresh produce sales were CNY95 billion (USD14.3 billion). By 2020, this is expected to grow more than fivefold to CNY500 billion (USD72.5 billion).

By ensuring it is ahead of the consumer trend curve, Alibaba is better positioning itself to take on its biggest rival JD.com, which currently enjoys superior perception for its fresh offer and is building out its already impressive logistics chain even further as it develops deeper collaboration with Walmart. We expect smaller formats to feature as this partnership grows and big-box begins to lose its relevance in China in the decade ahead.

A possible dominant regional format for the future

While all eyes are now on format evolution in the Chinese market, our view is that not only is this O2O urban format likely to succeed domestically, but it also an ideal model for growth beyond Alibaba’s home borders.

Since taking a controlling stake in South-East Asia platform Lazada in April 2016, Alibaba has moved fast to establish its essential infrastructure in all Lazada’s operational markets, with an initial focus on Indonesia, Thailand, Malaysia and Singapore. Priorities have been logistics development, forging local supplier ties and introducing financial services, particularly Alipay.

Grocery is also very much on the agenda. Lazada acquired Singapore e-grocer Redmart late last year, pre-empting Amazon’s recent entry by several months. It has no physical store presence to date, but this is unlikely to remain the case inside the next decade. Outside China, e-grocery has not gained traction thus far, but with many countries now embarking on intensive social modernization and infrastructure programmes, with digital transformation – often led by Alibaba itself - at the heart of such schemes, we foresee the rapid rise of a new urban middle class in SE Asian megacities like Bangkok, Jakarta and Kuala Lumpur in the coming decades. These changes will drive demand for online grocery offers that cater to their increasingly busy lifestyles.

Current Planet Retail RNG forecast data indicate that even though e-grocery sales volumes in SE Asian markets remain low, the trend rises through to 2025. What we are unable to show, of course, is how much near to medium-term impetus might be injected into grocery e-commerce by the import of full-fledged O2O formats like Hema, be that as an Alibaba-backed standalone operation, or in partnership with established local or international players in certain markets.

We see no reason why the Hema-style format will not flourish in both established and emerging markets. As a store of the future template, it neatly sits across the digital divide by combining the ‘look-and-feel’ aspect of traditional Asian grocery shopping with the convenience and speed 21st century shoppers demand. We can also see the concept as eminently transportable, and one that could work as effectively in Moscow, Mumbai or São Paulo as it does in Shanghai or Beijing. While the Amazon Go format – designed to lower staffing levels – is now being touted as one possible future for grocery retail, another altogether different future is already operational – and expanding – in China.

RECOMMENDATIONS FOR SUPPLIERS

  • The high proportion of fresh and foodservice in the Hema model puts shelf space at a premium. Brands and suppliers already working with Alibaba via Tmall have a chance to showcase their goods if they satisfy the criteria of quality, originality and being easily mutable for both store and online purchase. This may require careful consideration of packaging requirements, with factors like weight and package security all important factors.
  • Sales of food consumed on-the-go are rapidly rising in China as consumers shift from at-home dining. Relevant category specialists should consider optimizing products for easier consumption. This also applies to goods purchased online, where multi-packs can be offered for home storage and later on-the-go consumption on an individual basis.
  • FMCG should think ahead towards the likely spread of these O2O formats beyond China. Forging ties with local suppliers in emerging markets will enable agile players to be prepared for their arrival and able to move fast to ensure product availability when the time comes. Such partnerships will also deliver vital knowledge of local consumer habits and preferences.
  • While convenience will be a big driver of such formats, this does not mean price will not be a factor. In lower-tier markets where middle class demographics are still gaining a foothold, we believe enthusiasm for e-grocery will transcend class divides, enabling those with a strong value proposition to generate brand loyalty that can leveraged later as household incomes steadily rise.