A Revolution in Food Retailing Underway in the
Asia-Pacific Region
Modern foodstores are
an economic force in developing countries
of the Pacific Rim.
William
T. Coyle
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The
spread of modern food chains in the
Asia-Pacific region is having profound
effects on consumers, food suppliers,
and the broader economy. |
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International
supermarket chains are adding muscle
to the region’s retail revolution,
providing capital, technology transfer,
and organizational innovation. |
|
Specialized
suppliers are emerging to help modern
supermarkets do business with small-scale
producers and traditional market channels. |
|
This
article is drawn from . . . |
“Asia-Pacific
Transportation Infrastructure, Linking Food
Sources to Urban Centers,” by William
Coyle, in Amber Waves, Volume 3, Issue 4,
USDA, Economic Research Service, September
2005
Pacific Food System Outlook 2005-06: A Revolution
in Food Retailing, Pacific Economic Cooperation
Council, November 2005
“The Emergence of Supermarkets with
Chinese Characteristics: Challenges and Opportunities
for China’s Agricultural Development,”
by Dinghuan Hu, Thomas Reardon, Scott Rozelle,
Peter Timmer, and Honglin Wang, Development
Policy Review, 2004.
“Supermarketization of the Emerging
Markets of the Pacific Rim: Development and
Trade Implications,” by Thomas Reardon,
Julio Berdegué, and Peter Timmer, Journal
of Food Distribution Research, 36 (1),
March 2005 |
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Rapid economic growth and urbanization
are transforming the retail food sector in the developing
economies of the Asia-Pacific region. At the center
of this revolution is the spread of modern self-service
foodstores: supermarkets, hypermarkets, discount
and club stores, and chain convenience stores. Through
highly efficient procurement and distribution systems,
modern chain stores are able to offer consumers
lower prices, greater convenience, and higher quality
and safer food in increasingly complex, often congested,
urban markets. They are also having profound effects
on the food supply chain through their increased
capacity to trade with large and distant suppliers
and their ability to force domestic food producers
to adapt and modernize (see box, “What
Is the Pacific Economic Cooperation Council?”).
Retail food sales in the Asia-Pacific
region were about $1.8 trillion in 2005, with modern
supermarkets accounting for about 75 percent ($1.35
trillion) and traditional outlets accounting for
the rest ($450 billion). While more than 40 percent
of the region’s sales are concentrated in
the U.S. and Japan, most of the growth is attributed
to the region’s developing economies in China,
Southeast Asia, and Mexico.
In China, the traditional food
retail sector is still dominant, but supermarket
store units are multiplying, and their share of
total food retail sales is expected to increase
from 10 to 12 percent in 2002 to 50 percent by 2012.
Across Southeast Asia, supermarket sales are growing
at double-digit rates. And in Mexico, supermarkets
now account for more than 50 percent of retail food
sales, compared with less than 5 percent in the
mid-1990s.
In the developing economies of
the region, supermarkets typically first appear
in the biggest cities, catering to a limited number
of high-income consumers. Stores then spread to
smaller cities and towns, increasingly serving middle-
to lower-income clientele. Initially, supermarket
chains tend to specialize in easily storable packaged
and processed foods, sometimes including dairy products,
gradually moving into fresh fruits and vegetables,
meats, and fish.
What
Is the Pacific Economic Cooperation Council?
|
This article
presents findings from Pacific Food System
Outlook 2005/06:
A Revolution in Food Retailing, first
released at the Asia Pacific Economic Cooperation
Forum Ministerial in Busan, Korea, in November
2005. Sixteen Pacific Rim countries contributed
to the original report, which was jointly
sponsored by the Pacific Economic Cooperation
Council, ERS, Farm Foundation, Euromonitor
International, the China National Committee
for Pacific Economic Cooperation, and the
People’s Government Panlong District,
Kunming, China. The Asia-Pacific region comprises
countries on both sides of the Pacific Ocean,
including Australia, Brunei, Canada, Chile,
China, Hong Kong (China), Indonesia, Japan,
Korea, Malaysia, Mexico, New Zealand, Papua
New Guinea, Peru, Philippines, Russia, Singapore,
Thailand, U.S., and Vietnam. These countries
are also members of the Pacific Economic Cooperation
Council. |
Income Growth and Urbanization
Fuel Spread of Supermarkets
The remarkable rise of supermarkets
in developing parts of the Asia-Pacific region is
primarily fueled by rapid economic growth, which
in recent years was almost twice that of the region’s
developed economies and is swelling the ranks of
the middle classes. China now has 200 to 300 million
middle-class consumers; Mexico and Indonesia together
have a middle-class population of about 70 million.
Across the region, as per capita incomes approach
$10,000 and a country’s middle class expands,
supermarket penetration rises sharply, reaching
about 50 percent. At income levels above $20,000,
supermarket shares of total food retail sales level
off at 70 to 90 percent.
Rapid urbanization in the region’s
developing economies has also accelerated the spread
of supermarkets. The Asia-Pacific region’s
urban areas are expected to grow by more than half
a billion people in the next 20 years, accounting
for more than half of the region’s total population.
The less-developed economies of the region will
generate three-quarters of this growth, with urban
population increases of 300 million in China, 70
million in Indonesia, and 30 million in Mexico.
Supermarkets provide a one-stop
shopping experience and are more equipped to meet
the needs of higher income urban consumers than
traditional food retail outlets. They provide under
one roof a broad variety of fresh, processed, and
semi- and fully-prepared foods as well as other
merchandise and services. The supply chains supporting
supermarkets are also more efficient than traditional
suppliers and are better able to facilitate the
physical flow of food products into cities, reducing
traffic congestion and adding less stress to transportation
infrastructure.
Yet, despite the lure of modernity,
some consumers at all income levels still prefer
to shop for produce at open-air markets, where they
expect to find higher quality meats and fresher
fruits and vegetables. Prices of fresh fruits and
vegetables tend to be lower in traditional outlets
as well. But the higher produce prices in modern
supermarkets are a transitory phenomenon: prices
tend to drop as supermarkets continue to spread
and their supply chains become more developed. For
example, surveys have shown that in higher income
economies such as Korea, fresh produce prices tend
to be lower in supermarkets than in traditional
outlets.
In the developed economies, demographic
factors more than income growth affect the outlook
for supermarkets. Japan’s population, for
example, is aging rapidly and is beginning to shrink.
Supermarket chains there face increasingly intense
competition and declining profit margins. Populations
in Australia, Canada, New Zealand, and the U.S.
are also aging but at a slower pace than in Japan.
Population growth rates in these countries are boosted
by high rates of immigration and the higher fertility
rates of recent immigrants. The outlook for supermarkets
in these economies is more robust, but the sector
will need to retool itself to serve a growing share
of older and retired consumers, as well as a population
grown more ethnically diverse. In the U.S., the
Hispanic share of the population is expected to
increase to 19 percent in 2020, up from about 13
percent in 2003. Similar shifts are expected in
Australia, Canada, and New Zealand, where Asians
are the fastest growing ethnic group.
Foreign Investment Drives Supermarket
Expansion
Prominent international supermarket
chains—Wal-Mart, Carrefour (a French company),
and Tesco (from the United Kingdom)—are now
heavily invested in the Asia-Pacific region and
are instrumental in the region’s retail revolution,
providing capital, technology transfer, and organizational
innovation. Foreign companies began investing in
the region fairly recently (Carrefour in Taiwan
in 1989, Wal-Mart in Mexico in 1991, and Tesco in
Thailand in 1998), motivated primarily by higher
expected returns in the less-developed economies,
where consumer incomes are rising quickly and middle
classes are expanding more rapidly, than in saturated,
low-margin home markets. Other factors attracting
investors include lower labor costs, availability
of public services, and well-developed transportation
infrastructure, including roads, railroads, inland
waterways, ports, and airports.
Major international chains are
also motivated by the role that investment in one
country can play in the company’s global system.
Wal-Mart’s global purchasing office in Shenzhen,
China, for example, serves not just its China operations
but the company’s entire system, including
its 3,700 outlets in the U.S., for which a large
share of nonfood items is produced in China.
Foreign investment in the Asia-Pacific
retail food sector has been facilitated by market
deregulation and policy reforms implemented in many
of the region’s less-developed economies over
the last 15 years. In the early 1990s, for example,
China began to relax restrictions on foreign direct
investment in its retail sector. By 2002, China
allowed up to 65 percent foreign participation in
joint ventures, and it liberalized foreign investment
in wholesale and logistics services. In December
2004, it committed to full liberalization of its
retail sector. The response of companies such as
Wal-Mart and Carrefour has been to pick up the pace
of expansion. Wal-Mart plans to have a total of
90 outlets in China by the beginning of 2007, up
from 47 as of July 2005, and Carrefour expects to
open 15 hypermarkets (stores with a sales area of
over 2,500 square meters—26,910 square feet—with
at least 35 percent of selling space devoted to
nonfoods) a year in the next several years.
Foreign firms expanded investments
in Indonesia in 1998 after that country lifted restrictions
on wholesale and retail trade during the 1997-99
Asian financial crisis. At that time, some foreign
investors were attracted to the cheaper asset prices
and construction costs afforded by their stronger
currencies. While foreign investment regulations
in Indonesia were largely eased in the late 1990s,
some restrictions remained. For example, both domestic
and foreign modern-format foodstores are required
to locate at specific distances from traditional
outlets, with the distances determined by each store’s
floor size. Restrictions are more severe outside
provincial capitals. Even so, foreign firms such
as Carrefour and Makro are expanding rapidly in
Indonesia: from 2004 to 2005, these two firms increased
their number of outlets by 25 percent.
Other Asia-Pacific economies also
liberalized their markets in the 1990s. South Korea
and Vietnam lifted restrictions in 1996, allowing
foreign joint ventures in supermarkets for the first
time.
Foreign investment in the retail
food sector is not always a cakewalk. Some international
chains face intense competition from national retailers.
Ito-Yokado in Japan, Matahari in Indonesia, E-Mart
in South Korea, and Lianhua in China have fared
well against foreign competition. Some foreign companies
have pulled back investments in Asia and Latin America.
In March 2005, Carrefour announced the sale of eight
stores in Japan to Aeon Co., a major Japanese retail
chain. It also sold all of its assets in Mexico,
which included 29 operating hypermarkets plus two
due to open in 2005, to the Chedraui Group, a leading
Mexican retailer. Wal-Mart faces the challenges
of rehabilitating its Japanese affiliate, Seiyu
Ltd., and is rethinking its low-price strategy in
an effort to appeal to Japan’s more status-conscious
consumers.
Centralized Procurement and Distribution
Lowers Costs of Supermarkets . . .
Once supermarket chains have more
than 10 outlets in a particular geographic area,
they tend to take more control over procurement
and distribution functions by investing in centralized
warehousing and distribution centers. While such
a move might raise transportation costs in some
cases, it nevertheless lowers overall costs by reducing
handling, delivery times, and, in the case of fresh
produce, shrinkage (loss of weight or volume). Centralized
functions also increase in-store and head-office
productivity, and, through the application of information
technology, enable stores to improve sales monitoring
and inventory management. Centralization also allows
supermarkets to add products and services to meet
the demands of consumers and to spread risk over
a larger product portfolio. This diffusion of risk
allows companies to pursue different pricing strategies,
including deep discounts on some food items, to
attract customers. For some companies in China,
centralized procurement and distribution is cutting
logistics costs by as much as 30 to 40 percent.
While most small and medium-sized
chains in the Asia-Pacific region still procure
goods on a store-by-store basis from wholesale markets
and dedicated wholesalers, some have opened distribution
centers. Others are forming joint ventures and/or
participating in collective arrangements with other
companies to procure and distribute both dry goods
and fresh produce.
. . .and Broadens Their Geographical
Reach
Centralized procurement and distribution
functions broaden the geographic reach of a firm’s
business to include more distant regional and national
suppliers, displacing traditional, localized channels
in the process. Distribution centers’ use
of standardized equipment and organizational systems—such
as shipping containers, tractor trailers, pallets,
forklifts, and bar-code readers and computerized
inventory management systems—facilitates domestic
and international transactions with large suppliers
and other distribution centers. Modernization of
port facilities, a priority in many Asia-Pacific
developing countries, may also facilitate a supermarket
chain’s ties with foreign suppliers, making
it less expensive to buy food products from distant
foreign sources than from nearby domestic producers,
who may be handicapped by lack of scale or by inadequate
refrigeration and transportation infrastructure.
Wal-Mart’s distribution center
in Mexico, for example, procures avocados not only
for its Mexican stores but also for shipment to
distribution centers in other countries, including
China. The big European chains Metro and Auchan
procure exotic vegetables for sale in their stores
in Chengdu, China, from their Shanghai headquarters,
more than 1,200 miles away. The compatibility of
Carrefour’s procurement and distribution operations
across countries facilitates the procurement of
nonfood products in China, where it is the leading
foreign supermarket chain, for sale in its Indonesian
hypermarkets.
Despite such trends, most processed
food products sold by supermarket chains in the
Asia-Pacific region’s low-income countries
are still processed nationally, using either domestic
and/or imported raw materials. According to ERS
research, food manufacturers of highly processed
products generally prefer to locate production facilities
close to the point of consumption. On a global basis,
imports account for only 6 percent of processed
food sales, compared with 16 percent of sales of
major bulk agricultural commodities.
Supermarkets are most likely to
sell imported products they cannot procure nationally.
These may include out-of-season or tropical fresh
fruits and vegetables; livestock products whose
production requires forage area and grain supplies
typically found in a few land-extensive economies,
such as the U.S., Australia, Canada, and New Zealand;
and highly processed products with an exotic appeal,
like French wines and Dutch cheeses.
A Force for Modernization: Specialized
Suppliers
In response to the centralization
of supermarket procurement in developing Asia-Pacific
economies, specialized suppliers are emerging to
provide modern food retailers with larger product
volumes at lower cost. These suppliers are more
responsive to supermarket demands for higher and
more consistent quality, steady supplies, and product
innovation (see box, “Specialized
Suppliers Respond to the Revolution in Food Retailing”).
This restructuring has happened
most rapidly with dry goods and processed and semi-processed
foods, but it is also affecting fresh produce, which
tends to lag other categories.
In all less-developed economies, there exists a
technologically advanced and competitive segment
of the food sector. This sector is well adapted
to modern supermarkets and centralized procurement
systems, including those of large multinational
food companies operating in the region, like Nestlé,
the Lotte Group, and Unilever.
Modern supermarkets naturally
favor these suppliers. But in a developing economy,
a significant share of food supplies still must
come from the traditional sector, which tends to
be fragmented and often burdened by inadequate transportation
and cold storage infrastructure.
Specialized suppliers are developing
and adapting to help modern supermarkets do business
with small-scale producers and traditional market
channels. These suppliers assume responsibility
for collecting production, packaging, assuring steady
supply, and, in some cases, meeting traceability
objectives.
Specialized suppliers are also
held accountable for product quality, consistency,
and food safety—factors that strongly influence
a supermarket’s business reputation. A supermarket
must choose its suppliers carefully because lapses
in quality or food safety, even if it originates
from a link elsewhere in the food supply chain,
tend to be associated with the supermarket itself.
Consumers might react to negative information about
a supermarket by avoiding not just the outlet in
which the incident occurred, but all of a chain’s
outlets. Such a reaction could have significant
short- and longer-term consequences on firm revenues.
Government Too Has a Role in
the Retail Food Revolution
The growth of supermarkets is a
significant economic force in developing economies
of the Asia-Pacific region. Supermarket expansion
is contributing to lower food costs, higher food
quality and safety standards, and a modernized food
system. Lower food prices help sustain economic
development—consumers spend less on food and
more on nonfood items, thus providing a stimulus
to other economic sectors. Enhanced food supply
chains help modern supermarkets overcome the logistical
challenges inherent in areas undergoing rapid urbanization.
The shift to modern food retailing
has no singular path. Some markets combine larger
scale retailers, such as hypermarkets selling food
and nonfood items, with small-scale neighborhood
shops. The corporate focus ranges from large multinational
chains to companies that focus more narrowly on
a single city or region within an economy.
Specialized suppliers are emerging
as transitional change agents, enhancing the best
that traditional small-scale producers and markets
now offer. At the same time, these suppliers are
promoting upgrades to their operations by adopting
better and safer production and marketing practices,
as well as modern technologies.
Many of these changes are occurring
without direct government aid. But policymakers
can have a direct role in the modernization of the
retail food sector. Government investment in expanding
and upgrading transportation infrastructure improves
access to distant locales or food surplus areas
and enhances the flow of products to urban food
distribution systems. The reduction or elimination
of investment barriers creates opportunities for
foreign investment to modernize existing retail
outlets and build new outlets and the supply chains
to support them.
Governments can also help by lowering
trade barriers, thus making it easier for food retailers
and processors to acquire food products with desired
characteristics from sources offering those products
at the lowest price. This policy intervention may
open new markets to producers able to meet market
demands and keeps consumer food costs low.
The growth of supermarkets—largely
the result of private industry and consumer actions—presents
significant economic opportunities for developing
countries in the region. Government efforts to temper
this expansion would be difficult if not impossible.
A more favorable action by policymakers may be to
assess resources and policy options that help the
traditional sector adapt to a modernizing food system.
Specialized
Suppliers Respond to the Revolution in Food
Retailing |
Specialized
suppliers take many organizational forms to
bridge the divide between the modernizing
and traditional food sectors. They may be
large modern farms that supplement their own
production by contracting with small producers
or buying from intermediaries, including traditional
wholesale markets. Others might be companies
that specialize in procurement and marketing,
sometimes deriving experience from international
trade. In other cases, small farmers might
form associations or cooperatives, sometimes
with the aid of government, to deal directly
with modern supermarkets. Some suppliers are
expanding by contracting with more producers.
Others are consolidating by dealing only with
producers that can meet the demand for growing
volume and higher standards. The following
case studies by U.S. and foreign researchers
illustrate the variation within the specialized
supplier trend.
PT Saung Mirwan, established
in 1983 near Bogor, Indonesia, is a relatively
large vegetable and flower farm that supplements
its own production with supplies from 50 other
producers, 40 of which are small-scale operations
that average less than half a hectare of cultivated
area. The company supplies 18 types of flowers
and more than 40 varieties of fresh vegetables
to supermarkets’ central distribution
centers. The company has grown rapidly, doubling
its greenhouse capacity from 1.5 hectares
in 1991 to 3 hectares by the early 2000s.
Xincheng Foods supplies fresh
vegetables to supermarket chains in the Shanghai
area. It operates nine farms, with 1,000 hectares
of vegetable area. It also produces livestock
and fish. In 1997, Xincheng began supplying
China’s top three national supermarkets;
by 2003, it was supplying 500 supermarkets
owned by domestic and foreign chains. As much
as 20 percent of the company’s supplies
comes from its own land and greenhouses, 50
percent from 4,200 contract producers, and
30 percent from wholesale markets. The company
also rents land to grow vegetables for export
to Japan and Southeast Asia.
PT Bimandiri of Indonesia
specializes in procurement and marketing of
fresh produce, buying 30 percent from producer
groups and the remainder from traditional
channels. Since 1998, Bimandiri has been a
dedicated supplier of produce to Carrefour,
Indonesia, rapidly expanding its business
from half a ton per day in 1998 to 7 tons
per day in 2003. In 2001, it contacted a group
of 100 farmers about producing a small low-pesticide
watermelon for Carrefour. Eventually, half
the farmers were able to produce this special
watermelon, earning twice the price per kilogram
of a standard watermelon.
Malaysia’s state-run
Federal Agricultural Marketing Authority (FAMA)
began supplying supermarkets and hypermarkets
in 2000. It has contract arrangements with
more than 1,350 producers of fruits and vegetables,
livestock, freshwater aquaculture, and coconuts.
Farmers produce according to cropping schedules
designed to ensure steady supply. FAMA’s
44 collection centers supply seven distribution
centers. Supermarkets also obtain supplies
directly from farmers and wholesalers.
The Bukidnon Lettuce Cluster in northern Mindanao,
the Philippines, consists of five farms that
sell lettuce directly to fast food companies
and a cash-and-carry chain. According to the
United Nations Food and Agriculture Organization,
Bukidnon ships 10 tons of lettuce weekly.
The largest of the farms coordinates the cluster’s
business activities and serves as a liaison
with input suppliers, transporters, and buyers.
Surplus production or off-sizes of lettuce
are sold on the wholesale market. |
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