Southeast Asia is one of the fastest-growing and most exciting regions in the world for grocery retailers, according to McKinsey. Adrian Ashurst, CEO of Worldbox Intelligence, looks at the developments driving the market.
The growth of the middle class is one of the major themes investment managers in Asia are targeting. It is, after all, one of the most powerful transformative structural trends shaping the world today. In 2020, an estimated 2 billion Asians were members of the middle class, and that number is set to increase to 3.5 billion by 2030, according to the World Economic Forum. By comparison, the American middle class, once described as “the consumers of last resort”, so powerful was their influence over the global economy, is expected to number just 689 million in 2030.1
While China and India account for the majority of Asia’s middle class, Southeast Asia is home to vast numbers too, estimated at around 250 million in 2023. The cohort is also growing rapidly, driving demand in airline travel and tourism, luxury products, private education and healthcare, to name a few.
Grocery retailing is another beneficiary of the region’s growing affluence, and the sector is undergoing a structural shift as Southeast Asians adopt the Western habit of bulk shopping at supermarkets rather than ad hoc purchases from local stores and street markets. Statista estimates the food and beverage market as being worth US$722.20bn in 2024 and anticipates annual CAGR growth of 6.72% over the 2024-2028 period.2
However, the sector is highly competitive, as the Boston Consulting Group (BCG) points out:
“Incumbents and small enterprises are facing growing pressure from emerging new players and practices. New channels are opening up fresh opportunities to engage customers in both online and offline spaces, while an expanding digital ecosystem creates renewed potential for partnerships and collaborations. At the same time, emerging technologies such as artificial intelligence (AI) are unlocking remarkable new dynamics in this increasingly innovative space.” 3
Digitization in particular is having a dramatic impact on the market as consumers adopt online shopping and the way retailers interact with clients. Indeed, BCG argues that changing habits, combined with the widespread adoption of digital tools like digital wallets and streaming apps, leave consumers expecting continuous engagement.
Figure 1: – Digital acceleration evident across countries in Southeast Asia and is likely to continue in future
Source: https://web-assets.bcg.com/c8/50/aecfa810456eb3aadff008d22825/future-of-retail-in-southeast-asia.pdf
New entrants winning market share
The new players include the likes of Speedmart in Malaysia, CJ Express in Thailand, and DALI in the Philippines. The disruptors are targeting both large and small formats, and are meeting with considerable success. Speedmart, for example, became Malaysia’s leading grocery retailer in 2022 – a rise achieved within the space of 10 years. The new entrants focus on competitive advantages such as low pricing and convenience.
While the number of large supermarkets is growing across the region, small-format stores continue to account for the bulk of sales – around 73% in 2022, compared with 81% 15 years ago, according to BCG. It is likely that smaller outlets will remain a powerful force for many years to come, given trends such as the growth of online deliveries and shifts in shopping patterns.
Premium brands are on the rise…
Demand for premium products and outlets is also on the rise. That is evident from the success of the Gourmet Market supermarket business in Thailand, which aims to achieve sales growth of 30% this year. The 17-strong chain is bucking the trend of weak consumer demand in Thailand by focusing on high-income and middle-class Thais and foreigners. The company offers around 30,000+premium brands through its existing outlets and has plans to open another 10 in the coming years.
…but so are value options
At the other end of the scale, hard-pressed, lower-income consumers are placing a growing emphasis on value, seeking quality products at reasonable prices. Grocery retailers that offer competitive pricing, promotions, and loyalty programmes are gaining a competitive edge in a number of markets, including the Philippines, where the Swiss-owned hard discounter DALI is growing rapidly. Having entered the market only in 2020, DALI had opened 250 stores in the country by the end of 2022, despite the challenges of Covid.
With their high population growth, sensitivity to food inflation, and high proportion of food spending relative to income, emerging markets like the Philippines are believed to offer significant potential. DALI’s stores offer a limited number of food and non-food products, mostly covering daily household needs. The company aims to provide Filipino families with good-quality products at the lowest possible prices by operating very efficiently through no-frills stores and avoiding spending on marketing. According to the ADB, nearly 50% of households in the Philippines are moderately or severely food insecure, and rising inflation has undermined their real incomes.4
Growing interest in sustainability
Sustainability is another significant theme in the grocery retailing landscape of Southeast Asia, according to ETP, a Singapore-based software company that supplies retail solutions. It explains:
“Retailers are not only focusing on profit but also on pursuing profitable, sustainable, and inclusive growth. This includes initiatives to reduce food waste, source products responsibly, and decrease the environmental footprint of operations. Consumers are increasingly considering the social and environmental responsibility of retailers when making purchasing decisions, and businesses that align with these values are poised for success.”5
Rapid growth attracts new entrants
Foreign retailers are keen to expand in the region. Last July, for example, the Japanese retail giant Aeon announced plans to open a new mall in Deltamas, a city located east of Jakarta. It will be Aeon’s fifth location in Indonesia, after opening its first in 2015.6 Indonesia’s rapid economic growth, which is powering the development of the middle class, makes it one of the most attractive markets in ASEAN. Worth around US$170 billion in 2022, Indonesia is already the world’s 13th-largest grocery market, and the fourth-largest in Asia.7
Indonesia’s grocery market is already growing by around 5–6% a year, and rising real incomes – along with structural trends – are likely to ensure this growth is maintained and possibly quickens. Drivers include a large group of young and middle-aged consumers, who make up nearly half of the population. This group is expected to develop an interest in imported grocery products, which sell at a premium.
In addition, house holds are getting smaller: one-child households are expected to account for over a third of the total by 2030, providing parents with greater disposable income to spend per child. They are likely to focus on high-quality, safe products, including those in the grocery retailing sector.
Vietnam’s robust growth brings challenges
Vietnam also offers tremendous opportunities. The retail sector in general is growing rapidly, with projections that it will increase from US$246.65 billion in 2023 to US$435.59 billion by 2028, a compound annual growth rate of 12.05%. The Vietnamese are increasingly shopping in supermarkets, where sales grew by 8.8% in 2022.
According to Vietnam Briefing, which provides insights ondoing business in the country, big retailers in Vietnam often face difficulties in buying fresh items in bulk. It explains that:
“Small-scale farms lack the resources and incentives for advanced supply chain standardization, which can lead to a poor supply of fresh inventory. A fragmented and fluctuating supplier base has been an issue that has made it difficult for supermarkets to win out over wet markets and other traditional retail outlets.” 8
In summary, grocery retailing is a rapidly growing, highly competitive and dynamic market. While incumbents benefit from the rapid growth of the market, they are also facing challenges from well-resourced foreign entrants, who are quickly adapting to key drivers of the market such as both value-for-money and premium products, online shopping, and a growing interesting sustainability.
SOURCES
2https://www.statista.com/outlook/cmo/food/southeast-asia
3https://web-assets.bcg.com/c8/50/aecfa810456eb3aadff008d22825/future-of-retail-in-southeast-asia.pdf
4https://www.philstar.com/business/2024/02/07/2331424/daligears-expansion
5https://www.etpgroup.com/six-emerging-trends-shaping-modern-grocery-retailing-in-southeast-asia/
6https://asia.nikkei.com/Business/Retail/Indonesia-draws-Asian-mall-operators-targeting-growth
7https://my.nzte.govt.nz/article/a-snapshot-of-indonesias-f-and-b-sector
Source: Worldbox Press Release
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