The nature of the grocery industry across the Association of Southeast Asian Nations (ASEAN) has evolved significantly. While traditional trade still dominates most markets, ongoing revenue growth of 7 to 10 percent a year is mostly fueled by the rising penetration of relatively newer, modern formats, especially convenience stores and supermarkets (Exhibit 1). It’s tantalizing to chase such growth, but pursuing scale without considering the bottom line may place retailers at a competitive disadvantage, especially when compared with those who instead balance growth and profitability while retaining the ability to reinvent their business models as they grow.
Two themes guiding growth
The top-line numbers are impressive: revenue growth among grocery retailers is projected to be 10 to 12 percent annually in Indonesia and Malaysia, with Vietnam and Thailand each growing around 7 percent annually in the next decade.1 The Philippines and Singapore are expected to grow less rapidly because the penetration of modern store formats in those markets is relatively higher.
So what is driving this expansion? Two common themes have emerged across all markets. First, the convergence of formats between traditional and modern trade has resulted in the disproportionate growth of small modern formats. Second, consolidation and localization are prevalent across markets. At this stage, regional (cross-border) expansion has been limited, likely because most strong players have found enough headroom in their own markets.
1. Stronger tailwinds for small modern formats
Across the region, convenience stores and neighborhood supermarkets have become more popular, while family grocers are increasingly locating their stores in residential areas, moving away from the earlier growth model that prioritized dense, high-traffic urban centers. Both chains and independently owned outlets have adopted some of the elements of modern trade.
Yet revenue growth is not homogeneous across formats. Overall, we expect a more rapid expansion of small modern formats, which more effectively meet consumer needs. ASEAN shoppers have lower rates of car ownership than their counterparts in the United States or Europe, as well as less disposable income for large-basket purchases. For both of these reasons, ASEAN shoppers tend to favor stores near their homes that offer a wide and reliable product assortment for daily needs, and they also tend to make more frequent visits for smaller individual purchases. For example, in the past few years, the likes of Bách Hóa Xanh in Vietnam and Alfamart and Indomaret in Indonesia have outpaced market growth. This overall trend within modern trade encompasses two models:
- On-the-go retailers in dense urban areas. Convenience stores tend to cater to urban shoppers and rely heavily on high-traffic locations, on-the-go consumption, ready-to-eat food, and a small selection of packaged food and drinks (with more limited fresh-food offerings). In Malaysia, for instance, convenience stores have evolved into three competing concepts: lifestyle retailers, such as FamilyMart and KK Super Mart; minimarts, such as 99 Speedmart; and stores linked to gas stations, such as Shell Select. While we believe more formats will emerge to address other potential consumer needs, all of the above formats have common features: they are typically located in dense urban areas, achieve elevated sales productivity, and can generate relatively high gross margins (which is necessary to cover their significant fixed costs, especially rent and staffing).
- Core daily needs in residential areas. Small supermarkets and minimarts have become popular in Southeast Asia, especially in Indonesia and Vietnam. They represent a different value proposition. These stores are typically 150 to 500 square meters in size, catering to most of the core daily needs of households—including fresh food—with product assortments totaling 2,000 to 5,000 SKUs. Companies such as CJ in Thailand and 99 Speedmart in Malaysia, for example, have sought to pivot to this concept when expanding beyond dense urban areas. Compared with convenience stores, small supermarkets and minimarts are scaling faster because they offer a path to growth beyond high-traffic locations in megacities and benefit from lower structural costs, which enables them to achieve profitability. In Indonesia and Vietnam, for instance, industry experts expect small semi-urban minimart formats to be closer to profitability than pure convenience stores.
Interestingly, the industry is starting to see a convergence between traditional and modern retail in which some mom-and-pop stores grow into large family grocers to complement market stalls and other niche outlets. These stores feature a broader product assortment, fixed prices, and a shopping experience closer to that of modern retail, in which people enter the store to shop. Family grocers in rural and suburban areas have the same appeal as a minimart, featuring an acceptable assortment, cashiers, shelves organized by product category, shopping assistance, and transparent pricing. They are also well supported by consumer goods manufacturers and their distributors, receiving a fair share of trade spending, access to consumer promotions, and regular visits by merchandisers.
Corporate retail players have spotted this opportunity and are developing business models to help modernize traditional trade by extending their loyalty programs and distribution networks to family grocers. For example, VinShop-affiliated grocery stores in Vietnam receive sourcing assistance and can offer the VinID loyalty program to shoppers. And the country’s Co.opSmile modern grocery stores by Saigon Co.op are a hybrid format of modern minimarts and traditional grocers.
2. Consolidation and localization within countries but with limited regional expansion
Another distinctive feature in recent years among the markets we analyzed has been industry consolidation. In most markets, we observed strong national champions leading the growth of modern retail by expanding their footprints, adapting their formats, making strategic acquisitions, and localizing offerings to cater to their core shoppers. Some forays by nonlocal players have been observed, such as in convenience stores in Vietnam and the Philippines and hypermarkets in Indonesia, yet the bulk of the market share and growth seems to reside with established local companies.
Several factors have contributed to the success of domestic players in ASEAN countries. First, the regulatory environment may have encouraged foreign players to focus their investments on larger stores. For example, Vietnam requires investors to apply for an “economic needs test” for each individual store opened, while Indonesia and Malaysia have explicit constraints on the ownership of smaller stores. Second, local players have been consistently better at directly addressing local shopper needs, reinventing formats, and rapidly tailoring their assortments. Finally, local insights and on-the-ground decision making have been critical, allowing retailers to identify and capture the best locations. These capabilities are even more important as some local retailers begin to own parallel business units that develop commercial real estate.
Going forward, these national champions may look for cross-border growth opportunities. Some Southeast Asian retailers—such as Central in Vietnam and Alfamart in the Philippines—have already invested across markets. However, companies are likely to continue relying on local strategic partners and acquisitions to enable true cross-country growth. For example, Central in Vietnam partnered with local retailer Lan Chi Mart to expand its footprint in smaller cities, while Alfamart joined forces with SM in the Philippines.
Meanwhile, as core players experience some degree of consolidation, the expectations of the growing local middle class are evolving, leading to more polarization (for example, rising demand for premium fresh products on one end of the spectrum and demand for economically competitive offerings on the other). Paradoxically, this consolidation also leads to more niche opportunities and a fragmentation of the value propositions in the long tail,2 with the rise of more specialized offerings by premium grocers and category specialists (for example, butcher shops, dairy stores, and cuisine specialists), as well as the possible emergence of discounters.
As core players experience some degree of consolidation, the expectations of the growing local middle class are evolving, leading to more polarization.
Six ways disruption will further shape the industry
The grocery retail market will continue to evolve considerably in the years ahead in response to changing consumer behavior and preferences, with incumbents seeking to adapt their strategies and new market entrants altering the competitive landscape. We have identified six fundamental trends and disruptions that could help reshape the industry across Southeast Asia (Exhibit 2):
- The rise of small formats. The rise of small formats has consistently fueled growth in local markets, especially in Indonesia and Vietnam. This redistribution of the revenue pool can attract new entrants seeking to capture market share from established retailers. For example, CJ Express in Thailand, 99 Speedmart in Malaysia, and Bách Hóa Xanh in Vietnam are relative newcomers that have built significant momentum.
- Polarization. The growth and diversification of the consuming class in Southeast Asia has resulted in early signs of polarization. Premium retailers such as Jaya Grocer and Village Grocer in Malaysia, Annam Group in Vietnam, and Farmers Market and Ranch Market in Indonesia have enjoyed increased demand. So far, discounters have only made limited inroads given the strong presence of traditional trade among more price-sensitive consumers.
- Rural expansion. The expanding consuming class outside of core urban areas portends faster expansion in rural areas. This demand could give rise to a new competitive set. For example, Vietnamese players Lan Chi Mart and Bách Hóa Xanh built their market share outside of main city centers and helped to redistribute the market’s revenue pool. In Indonesia, leading minimart retailers have captured market share in rural areas and tier-two cities.
- The growth of e-grocery. E-grocery retailers have captured a limited share of the market to date, but they could rapidly challenge established players. Retailers’ own websites and those of aggregators (for example, GoMart, GrabMart, Pandamart, and Shopee Supermarket), as well as social commerce, are on the rise. Social commerce can take many forms, including platforms specializing in group buying, social-media networks integrating sales mechanisms, and smaller sellers communicating directly with customers via chat features. Many retailers are also using dark stores3 to accelerate delivery speed and support the rise of quick commerce (delivery within a couple of hours or even minutes).
- Consumer behavior strategies. Loyalty and ecosystem strategies have emerged as a powerful force in some markets and are reshaping consumer behavior. While retailers continue to own their consumer databases and innovate to develop stickier relationships, consumer goods companies are also participating in retail to build their ecosystem. Direct-to-consumer strategies (both online and offline) have emerged as a clear trend. For example, TH Group and Vinamilk are experimenting with physical retail in Vietnam.
- Electronic B2B (eB2B) platforms. Several Southeast Asian markets are witnessing the rise of eB2B platforms,4 which help shore up the competitiveness of mom-and-pop stores. This evolution, particularly prevalent in countries such as Indonesia, can slow the rise of modern trade, especially in rural areas.
Charting a path to profitability
The dynamism of the grocery industry is only half the story. Retailers also need to focus on costs, margins, and operating models (Exhibit 3).
From 2010 to 2019, most ASEAN retailers focused on grabbing a share of the market and riding the tailwinds of modern trade growth. For all the momentum in ASEAN grocery, however, profitability has proved elusive and inconsistent across formats (Exhibit 4). Indeed, while championing different formats has accelerated the growth of retailers jockeying for position in the marketplace, they still find it difficult to turn a profit. A case in point: many hypermarkets in Indonesia and some convenience-store chains in Malaysia and Vietnam still do not break even.
Recent macroeconomic developments, such as rising inflation and frequent supply chain disruptions, are putting additional pressure on formats that have yet to reach scale in specific countries, such as convenience stores in Vietnam. Among grocery retailers, the traditional single-minded pursuit of growth and scale shows signs of shifting, with some retailers bucking this trend. For example, Co.op Mart in Vietnam, AEON in Malaysia, and Puregold in the Philippines have managed to sustain annual operating profits over time. Their success is due in part to their long-standing operation in the market, which enables them to focus on controlling costs, determining a suitable profitability equation, and negotiating with suppliers from a position of strength.
Emphasizing operational excellence
We expect retailers to take further action to achieve profitability through a greater focus on operational excellence, in which the store network is a large component. Our analysis indicates that two areas have the potential to capture net cost savings totaling around 8 to 12 percent of revenue. First, assessing end-to-end store operations can eliminate non-value-added work, automate labor-intensive tasks, and optimize the operating model—even in markets where the cost of labor is relatively low. Second, retailers can rationalize their store network and reduce overall real-estate costs while identifying underpenetrated areas in which to build or buy stores. For example, between 2017 and 2019, Vietnam’s VinCommerce opened nearly 1,000 outlets annually, including both its supermarket and minimart formats. However, after Masan acquired the company in 2019, 750 outlets were closed, and VinCommerce’s supply chain was revamped to break even by fourth quarter 2020.
In addition, retailers should actively review commercial terms with suppliers to design a profitable portfolio, including finding a balance for the space of their own brand in each category. Retailers have become more willing to aggressively push suppliers to offer larger discounts (including in the back margin) and move to new vendors if their prices aren’t met. In addition, they have been more proactive in putting together teams of category leaders to make tough decisions on specifications, demand, and costs to drive this effort. Increasingly, leading retailers are paying even more attention to structural costs such as rent, indirect procurement, and payroll. Retailers can form creative partnerships to address these areas. For example, Alfamart collaborated with Pertamina to develop Bright Store, a minimart concept in gas stations that makes use of Pertamina’s existing real estate.
Across operational-excellence levers, digital transformation is critical to achieve profitability. Retailers need to consider how they can harness emerging technologies and rich, granular customer data to transform the in-store customer experience and the efficiency of store employees.
Making progress on the digital journey can have a pronounced impact. Stores that are already profitable could double EBIT margins, with the added benefits of improved customer experience, better employee engagement, and an easier-to-run store (Exhibit 5). For stores that have yet to break even, the strategic use of technology and a thorough diagnostic can speed the journey to profitability.
To achieve growth and profitability simultaneously, retailers must take a wide range of variables into account, including market dynamics, the competitive landscape, and format types. Continued disruptions will make the task even more difficult. Yet by maintaining a laser focus on changing customer preferences in different markets and promoting operational excellence, retailers can make progress on both fronts.