Grocery retail in Asia: Thriving in changing consumption patterns

| Article

Consumers, regardless of markets, continue to face headwinds due to inflation. In Asia, it topped 6 percent since the beginning of 2022 and accounted for most of the spending growth in fast-moving consumer goods (FMCG).1 Rising sales revenues therefore potentially contributed little to the bottom line of both grocery retailers and FMCG companies.

To better understand evolving consumption patterns and the wide-ranging implications on grocery retail in Asia, we analyzed eight markets, with a focus on three areas (see sidebar “About the research”):

  • How is the overall spending in the FMCG market shifting, including basket size and frequency?
  • How has consumer purchasing behavior changed by product category, channel, and store format?
  • How have these shifts affected the margins of grocery retailers, e-tailers, and FMCG companies?

Our research and analysis offer insights on which grocery retail and FMCG leaders can draw to craft effective strategies tailored to consumer needs in each market.

Each market has its own momentum

Asia is an amalgamation of markets with different spending power (GDP per capita varies from $2,000 to $33,000), levels of urbanization (ranging from 37 to 85 percent), and digital penetration. An examination of these markets indicates most have grown but at different rates (Exhibit 1). While Indonesia, Malaysia, South Korea, and Taiwan saw slowing growth in consumer spending on FMCG, India, the Philippines, and Vietnam are experiencing robust growth. Thailand experienced a decline in spending, with consumers shifting to value potentially due to inflation and the increased penetration of modern grocery.

Spending on fast-moving consumer goods continues to grow in 2023 across most markets.

Inflation fuels rising consumer spending on FMCG

Total spending on FMCG increased at 6.1 percent per annum in 2023, a faster rate compared with the past two years (Exhibit 2). The bad news is that most of the growth was the result of rising prices caused by inflation—upward of 6 percent in five of the eight markets. The good news is that, across the region, consumers have largely been resilient and maintained their spending levels on FMCG. Since inflation peaked in most markets in June and July 2023, consumer confidence has started to improve. Our latest ConsumerWise survey reported rising consumer optimism in India and South Korea.

Inflation drove the majority of growth in fast-moving consumer goods spending in 2023.

Basket size and frequency show diverse patterns across markets

The drivers of growth differ across markets, which can be grouped into three archetypes. In South Korea and Taiwan, the average basket size (also referred to as spending per trip) was four to five times larger than in other markets (Exhibit 3). These markets, along with Indonesia and Malaysia, saw an increase in average basket size, but the frequency of visits dropped considerably. In the Philippines and Vietnam, the frequency of trips and basket size both increased. By contrast, consumers in India and Thailand favored more frequent visits but had declining basket size.

Shifts in basket size and frequency differ significantly across markets.

The traditional question of right assortment mix, format planning, and location selection still remains relevant. For example, in selected markets, retailers and FMCG companies could look to expand their assortment with an eye toward capturing more spending from fewer visits. Using data to develop a deep understanding of consumers to shape decision making could set leaders apart.

How have consumption patterns changed across markets?

Our analysis identified five notable consumption trends across the region, but understanding the nuances by each market will be critical for grocery retailers and FMCG leaders (Exhibit 4). In this section, we dive into consumer preferences across categories and price points as well as formats and channels.

Five critical consumption trends are shaping Asian markets.

The quest for value deepens, but the actual purchase volumes response varies

Since 2022, persistent inflation has led Asian consumers to hunt for cheaper alternatives (Exhibit 5). We see a dichotomy at play when it comes to quantity: consumers in fast-growing markets such as Indonesia, the Philippines, and Vietnam maintained their purchasing volume, whereas consumers in markets such as Malaysia and Thailand pulled back on the volume of goods they purchased.

Inflation was persistent across markets, but consumer responses on downtrading and volume diverged.

The emphasis on value is also evident in the growing popularity of promotions. Consumers in markets where modern grocery penetration is high (Malaysia, South Korea, Taiwan, and Thailand) preferred to purchase goods as part of a promotion nearly 29 percent of the time, an increase of one to two percentage points over the previous year. This behavior mirrors trends in the European Union and North America, where modern grocery (including online) accounts for a higher share of the market and relies heavily on promotions.

Since shopper behavior varies by market, what is the right answer for value for an average Asian consumer? Is it the right time for leaders to rethink their brand strategies (including private labels) to win with value-conscious consumers? What could they take away from Europe and North America, where higher promotions and private-label penetration have enabled discounters to gain market share? The answer seems to be different for each market. (For more, see sidebar “Aggregated consumers are downtrading, but there is silver lining for premium products in most markets.”)

Nonfood discretionary categories shine

In difficult times, the higher-end discretionary categories (such as electronics) suffer most, but consumers will shift part of their discretionary spending to smaller rewards—with beauty usually being the top category. This “lipstick effect”2 has been documented during recessions and is evident across Asia (Exhibit 6). As one indicator, sunblock and hair color purchases were among the top three fastest growing in most markets.3 In markets where eating outside of the home was preferred and is now returning to prepandemic levels, such as Malaysia, South Korea, Taiwan, Thailand, and urban Vietnam, consumers have reduced spending on food categories (food, beverages, and dairy). On the other hand, in markets with a greater share of low-income households—India, Indonesia, the Philippines, and rural Vietnam—shoppers continued to spend more on food and beverages for in-home consumption.

Consumer spending on home and personal care increased but was mixed across food categories.

Consumer spending on dairy declined in Indonesia, Malaysia, South Korea, Taiwan, and Thailand. During the COVID-19 pandemic, dairy’s perceived role in strengthening immunity and its increased consumption at home during lockdowns temporarily spurred its popularity, but spending has since returned to prepandemic levels. In most markets, dairy is estimated to experience high growth in the coming years.

To increase basket size across markets, retailers could maintain their overall assortment while identifying priority categories that boost overall spending. How do retailers think of merchandising when consumer baskets are shifting? Where should retailers invest to understand consumers by micromarket and improve the resilience of their supply chains to enable stores to remain stocked with the right product in the right size at the right time?

The transition to modern brick and mortar is slowing down everywhere but Malaysia and Thailand

The adoption of modern grocery (including the online channel) has slowed down in the fastest-growing markets while remaining positive in more mature ones (Exhibit 7). This pattern goes against conventional wisdom, which would have predicted faster growth in markets with lower modern trade penetration, and illustrates the complexity of modern retail in Asia.4 The growth of modern grocery networks failed to keep pace with other channels during COVID-19, resulting in a decline in market share. Malaysia and Thailand—two markets with a higher share of modern trade—experienced continued growth of modern channels. This trend could be attributed at least partially to online shoppers returning to offline channels, whose distributed network of stores offers enough convenient options for shopping close to home.

Slowing adoption of modern grocery and a decline in traditional grocery make way for online to grow.

The slowdown of modern grocery is due not only to shifting consumer preferences but also to limited store expansion by retailers trying to balance growth and profitability. According to Euromonitor, net new supermarkets and hypermarkets in the region increased by just 1 percent in 2022 compared with the previous year. A modern retailer looking to scale in these regions should ensure the right store density and format in every neighborhood.

Traditional grocery remains relevant in India, Indonesia, the Philippines, and Vietnam due to the channel’s inherent advantages of convenience and proximity. In these markets, the adoption of channels such as online remains low due to either limited digital penetration (in India, for example) or fewer players in the market (as is the case in Vietnam). Interestingly, a fourth channel is emerging in select markets: South Korea and Taiwan experienced increased sales from the direct (door-to-door) channel, while Vietnam saw a spike in gifting.

Small formats offer hope for modern grocers in some markets

The contribution of brick-and-mortar stores to modern grocery differs dramatically across markets (Exhibit 8). In Malaysia and Taiwan, for example, modern grocery commands a significant share of sales, but it has yet to catch on across India, Indonesia, and Vietnam.

Growth in modern grocery is driven by small formats in markets where large formats are saturated.

Retailers with large-format stores (hypermarkets and supermarkets) were the first to enter most markets, which are now largely saturated. Not many remaining locations can both attract customer traffic and grow profitably.

Small formats have fueled growth in some markets: convenience stores in Thailand, minimarkets in Malaysia, and now smaller supermarkets in Vietnam are among the best-known examples (see sidebar “Smaller is better in Vietnam”). Only a few retailers have achieved initial success with smaller formats because of difficulties in drawing consumers, adapting assortment, or calibrating sustainable unit economics. These formats could continue to benefit from strong momentum in convenience across markets; shoppers are embracing them as retailers improve store networks and address the need for proximity.

One solution for modern grocers could be to partner with traditional stores to tap into the need for proximity. In turn, modern grocers could support them in modernizing and digitalizing some of their operations to remain competitive.

Could format innovation accelerate the growth of physical grocery retail in Vietnam? How could retailers best learn from success stories such as Thai convenience stores or Indonesian minimarkets (see sidebar “Convenience stores are a growth engine for modern grocery in Thailand”)? Could new formats emerge in the coming year (such as medium-size suburban malls, which have cropped up in Vietnam’s tier-2 cities)?

Online continues to gain share across markets, but its growth has slowed

The growth of online grocery has slowed across all markets as consumers return to brick-and-mortar stores, drawn by the convenience of visiting nearby locations.

Consumers across most markets have stepped up their number of shopping occasions of online purchases, which has had an impact on basket size (Exhibit 9). Shoppers in Malaysia and India have significantly cut down on basket sizes, while those in Indonesia, Philippines, and rural areas of Vietnam have made minor decreases.

Online is still growing, but its pace has slowed across the region.

In our ConsumerWise survey, six in ten consumers reported using omnichannel and showed higher intent to continue. Still, omnichannel’s ascendance has yet to achieve scale in most markets, with the exception of South Korea and Taiwan.5

Shrinking basket size has increased margin pressure for the e-tailers and omnichannel players. To date, online platforms continue to be unprofitable for most players, in part due to the persistently high costs of customer acquisition and promotion. The consumers primarily shop online to find deals and discounts, which also creates challenges for retailers. To accelerate growth once again, online retailers could seek to unlock profitability and rethink the channel’s value proposition, since a value play remains unsustainable.

Some markets have already seen such moves. In China and Vietnam, online channels are deploying “shoppertainment” (the combination of e-commerce and entertainment) to acquire and engage new customers. In India, quick commerce (delivery in one hour or less) is competing with offline stores on convenience, though this model’s viability has yet to be established. In Thailand, leading retailers have been consistent in experimenting with omnichannel offers (including broader forays beyond online grocery, such as loyalty and marketplaces) and are seeking a path to profitability that may not be far away.

Retail media networks (RMNs) have helped the bottom line of online platforms, especially in Europe and North America. Could scaling them help unlock profitability?

How these shifts have affected margins of retailers and FMCG companies

Collectively, these five trends have further squeezed the inherently low margins of grocery retailers. The prospects vary by market for both grocery retailers and FMCG companies (Exhibit 10). In Malaysia, South Korea, Taiwan, and Thailand, a perfect storm of declining volumes, consumer downtrading, and inflation has eroded margins. For example, in South Korea, the online channel’s high contribution and promotion activity have increased cost to serve.

Grocers and fast-moving consumer goods companies continue to face margin pressure in markets dominated by modern trade.

In faster-growing markets such as India, Indonesia, the Philippines, and Vietnam, higher volumes have contributed to growth in FMCG spending. While downtrading could still be a concern, retailers have protected overall volume by expanding beyond high-density urban cities into rural and tier-2 cities. Sales productivity, measured by retail sales per square foot, has improved across all markets over the past three years, an indication that retailers are focused on trying to strike a balance between scaling and driving profitability.6 Should retailers explore further opportunities for improving efficiency across the value chain or look at divesting alternative, higher-margin business models?

FMCG companies are also facing tighter margins compared with prepandemic levels because of higher inflation. While inflation is expected to fall in the coming months, FMCG companies should still consider adopting lean operating models while continuing to adapt their value propositions to increasingly discerning consumers (see sidebar “Sustainability matters in South Korea when it comes to daily consumption”).

Charting a path to profitable growth

Shifting consumer preferences and macroeconomic trends in Asian markets—namely inflation—have increased the complexity for retailers and FMCG companies as they seek to manage conflicting priorities. Meanwhile, the pace of innovation has accelerated in the region, with new formats, more automation, and increased options to diversify revenue sources. Executives have powerful, proven ways to trigger profitable growth, but setting the right priorities in a dynamic environment can be tricky.

Organizations that tailor their strategies to local consumer tastes, innovate beyond their core offerings, and build selected capabilities across their operations would be well positioned for profitable growth (Exhibits 11). To get started, retailers operating in the region could gain strategic clarity across three dimensions by answering the following questions:

  • How should the value proposition evolve? How can we maintain the right assortment to increase basket size in the face of fewer visits in select markets? What are the implications for category strategy, private-label development, or the automation of some category choices?
  • How can we reach the customer profitably and reignite growth in a slowing modern retail landscape? What adjustments are needed to store formats? Which omnichannel model could increase margin?
  • How do we enable the next phase of growth? How do we adjust our capabilities and operating model to align with our strategic priorities? How can we source the right talent in an increasingly competitive market and invest in new technology?
Retailers must reinvent across three dimensions to drive sustainable growth.
Explore a career with us