European grocery retailers have struggled with the realities of the scope and scale of operations in Asia Pacific, with British retailer Tesco became the latest to depart the region, selling off its Thailand and Malaysia businesses to CP Group in a deal that valued the business at US$10.6 billion in March 2020.
The trend began in 2018 when French grocery giant Carrefour, German supermarket operator Metro and Spanish’s chain Dia started selling off or taking lesser control of their China operations to their joint venture partners.
Another British retailer Marks & Spencer also sold its retail business in Hong Kong and Macau to its franchise partner Al-Futtaim of the UAE after exiting China in 2016.
Tesco had previously sold its remaining stake in its Chinese joint venture to its state-run partner China Resources Holdings for £275 million (US$355 million) in February 2020 and withdrew from South Korea in 2015.
Chris Zhou, the general manager for Mindshare’s MPower team in China explains this is happening because, with Chinese consumers’ disposable income upgrading, so too have their consumption trends. This means the Chinese no longer see price as the primary concern while shopping.
Instead, high-quality products, produce, innovation and sensorial experiences lead the way. As a result, a number of local premium grocery chains – both online and offline – have witnessed explosive growth around China.
“Take Hema, China’s leading online grocer owned by Alibaba as an example, they have built a rich offline-to-online experience, combining digital solutions in-store, allowing consumers to shop and pay seamlessly while providing a mobile-rich app alternative with incredibly fast and flexible delivery options,” he tells The Drum.
“In addition, China has witnessed an uptick in the number of small-scale grocers specializing in imported products in its first-tier cities, tapping not only into these cities’ thriving ex-pat communities but also China’s high-end consumers.”
He adds: “While local brands have been pumping millions of money into creating these unique, seamless digital shopping experiences, foreign grocery brands in Asia have kept their focus on pricing. As a result, they’ve failed to create the services and experiences Chinese consumers have come to expect, struggling to compete.”
In agreement with Zhou was Jacob Cooke, chief executive officer at Web Presence In China Marketing + Technologies, who pointed out Carrefour, for example, did not do anything with the layout of their stores to appeal to local consumers.
“Most of these others were the same, unfortunately. They don't localize for the region and that rarely works,” he tells The Drum.
Alex Woodford, the vice president, client partner for APAC at Essence, points to issues with product fit and business terms as another reason why the European retailers were not winning at the same rate in Asia compared to their home markets.
For example, it is typical for local retailers to own the land or property. However, some international grocery retailers set up smaller outlets over 10 years ago and chose to lease rather than purchase. The rising rents contributed to a retraction from China.
“Equally, the international and local management at certain foreign grocery retailers may not have seen eye to eye, resulting in decisions that were not best placed to succeed in the local market,” he explains.
“Tesco is known for adapting to local preferences, such as in South Korea, once its largest market outside of the UK. For example, Tesco had earlier introduced virtual stores in South Korea by transforming the walls of subway stations and bus stops with poster displays of products, resembling the aisles and shelves of a Tesco store.”
“Commuters could then scan the QR codes of products via a smartphone app and get their purchases delivered to their doorsteps. This was based on the local insight that the typical tech-savvy commuter did not have the luxury of time to shop at a brick-and-mortar store.”
He adds: “As such, localisation takes into account not only the actual products but shopper experience and technology adoption as well. The lack of sufficient localisation implemented by many foreign retailers, due to home market business needs or goals, can lead to a downward cycle.”
While the European grocery retailers have struggled in APAC, their American counterparts, namely Walmart and Costco, have fared much better.
Pointing to the example of Walmart, Danica Burke, the general manager for APAC at Fst, notes that the American retail giant uses three formats to deliver a diverse offering and accessibility - the regular supermarket (1200sqm and 8000 SKUs), the large hypermarkets which are six times larger than the regular supermarkets. There is also the membership-only Sam's Club that has had a presence across China since the mid-nineties.
“Walmart is a big American name, and Chinese buyers traditionally keep their eye on what is going on in the states and not Europe,” she explains to The Drum.
“European retailers have little to no brand awareness nor history in the market and are not competitively priced against local options. But also, they do not usually offer high-end, luxury food items either, unless there is a well-known provenance or prestige story.”
“I still see Carrefour in full French packaging on the shelves of Cold Storage in Singapore. That tells me they are only catering to the French ex-pat population and may therefore potentially have less interest in catering to the local population.”
She continues: “French and English cuisine in the home does not work in most Asian homes - their kitchens are not geared for that type of cooking - most do not have ovens. European or Western brands adapting products to cater to 'local' tastes are a somewhat arrogant and colonialist mindset that should be approached with caution and sensitivity. Well-loved FMCG brands have become household names over time.”
What was these grocery retailers’ e-commerce strategy in APAC?
User experience is key in e-commerce and is optimised by APAC e-commerce platforms, especially those from China, from day one. In fact, they played a significant role in shaping the behaviour of savvy online shoppers in China, according to Woodford.
He notes that originally, many European grocery retailers would use their own e-commerce platforms and delivery mechanisms. However, given the tough market competition and local providers like Alibaba and JD.com already had the much-needed reach, some switched their strategies to partnering with these platforms.
“In hindsight, by going and using local from the outset, the boom in local e-commerce may not have overtaken foreign providers’ share and may have continued the competition to win,” he says.
Some European retailers also failed to combine their operations with Alibaba’s finance platform Alipay and Tencent’s super app WeChat, instead of relying on their ageing customer relationship management systems built around membership card, something that feels like a lifetime ago for Chinese consumers.
Carrefour notably worked on integrating with WeChat to drive digital communications. However, because they failed to create a rich content operation, they were not able to attract a large fan base.
“Beyond just groceries, any foreign retail brand operating in APAC and China needs to have a slick digital and e-commerce operation to survive. Brands that have been slow to react and adopt these operations have struggled to survive, with the majority exiting China,” explains Zhou.
According to Ramzi Chaabane, the head of strategy and business at MediaMonks in Shanghai, Carrefour also tried to form a partnership with Tencent in January 2018. But innovations, such as payment by facial recognition, were not enough to raise the bar.
"While the memorandum of understanding signed with Tencent and Yonghui, a brand of small supermarkets specializing in fresh food, provided for an investment, discussions dragged on. Finally, it’s Suning who takes the cake, with a more attractive offer, according to a source at Carrefour," Chaabane explains to The Drum.
"Carrefour has been too slow to adapt to online commerce and the new competition from tech players like Alibaba that have entered the traditional distribution market. Carrefour’s mobile application was slow, delivery unreliable and service very poor, sometimes it took several days to be delivered."
Walmart, on the other hand, as an example, did really well. They were more digitally advanced in China than any other market and invested fully in a business-to-consumer e-commerce website called Yihaodian that provides people with a platform to shop groceries online.
“My guess is that their North American team could stand to learn something from their China team because it’s so successful and forward-thinking,” remarks Cooke, noting that Walmart’s Sam’s Club app today is successful in China as well.
What other roadblocks did European grocery retailers face?
In APAC, provenance plays well in markets like Singapore where there are discerning buyers who will be attracted or interested in a product by reputation alone.
French wine and cheese, New Zealand and Australian meat and dairy, Norwegian Salmon may all be well known, but the exact brands may not be, and cross-selling other produce that country does well is not a simple leap in the mindset of the in-market consumer.
Burke notes with more households being pressured to purchase online due to social distancing during the coronavirus pandemic (Covid-19), there are vast opportunities for disruption and new players who can cater to a more localised, niche, responsive and personalised level as food security at a household level is a growing concern.
“Grocery retailers have incredible customer data which they generally squander. Why are retailers and grocers not doing more to guarantee service, stock and delivery to their regular and loyal customers?” she asks. “One interesting new player to watch in Singapore is the bulk whole foods chain Scoop, from Australia.”
Woodford says it is imperative that international grocery retailers establish a clear strategic differentiation, whether it is a competitive advantage or positioning, for themselves, compared to local players as well as other foreign retailers in the market.
“It is always possible to find a successful path to differentiation, such as by identifying the right signal that drives growth. It may be that at the time of market entry, the level of consumer and market insight, or signals, to identify differentiation and growth were not accessible, and therefore not strategically deployed by foreign grocery retailers,” he explains.
“With many markets experiencing e-commerce domination by a few key players, and with future consolidation on the cards, foreign grocery retailers without the clearest of differentiators will increasingly struggle.”
For example, Costco, which is known for providing perhaps the best range of foreign goods and high-quality produce. While they have kept largely to a pricing strategy, it is their range and quality that has allowed them to keep hold of their target audience.
They launched online first in China in 2014, demonstrating to customers who they are and how they are unique. Doing that online first means it required much less of an investment than brick and mortar. Then, they went to brick and mortar once customers understood what the offering is.
The result? It was overwhelmed by the crowds that had descended on its newly opened store in Shanghai in August 2019, forcing it to suspend operations because of safety concerns.
Key lessons for foreign grocery retailers
For other foreign grocery retailers eyeing the APAC market, the first area to look at is a partnership, according to Phil Adrien, the managing director in the creative and content group at Dentsu Aegis Network.
Secondly, buck the hypermart trend and start with a few smaller, well-designed “local marts” in key neighbourhoods that are staffed with a bright, helpful and personable butcher, barista, cheesemonger and florist in smart, well-designed uniforms.
“Why fight my consumers when I know they are on these grocery delivery platforms? Could we look at building our brand through partnership? Let’s strike up a partnership and have some of our private label products featured six-twelve months in advance of our brick and mortar launch. This could be a fertile testing period to understand what parts of our product portfolio are garnering demand,” he tells The Drum.
“These hypermarts and all tech grocery retail concepts have forgotten a key role that the grocery store used to play in people’s lives, which is to foster community and connection. Sadly, copy and pasting concepts from Europe is not going to cut the mustard.”
Sean Liao, founder and chief executive officer of Imaginato emphasise home-field advantage should not be under-estimated because that what was happening early on, as foreign grocery retailers turned a blind eye to it and were more focused on the appeal of the ‘massive market’.
He explains the major Chinese e-commerce operators are connected to practically the entire population and have immense amounts of data to target, analyse trends and set price points. Also, the vast ecosystem of online services for consumers means these operators have become thoroughly entangled with the online lives of most Chinese netizens.
"The failure of these foreign retailers can be attributed to either a lack of localization strategy, or poor execution against the super-aggressive competition, or a combination of the two," he tells The Drum.
"Without a localization strategy, foreign companies, whether grocery retailers or ride-sharing apps, will find it almost impossible to keep up with the unrelenting onslaught of competition. Uber quit the fight against Didi, and foreign online travel agencies like Booking.com and Airbnb continue to struggle in China."
"The exceptions, though, are the brands that could establish themselves as a premium lifestyle brand, like Apple or Starbucks. Competing online in China means a race to the bottom. Winning market share means utilising discounts, vouchers, freebies, and huge sales to gain market share."
He adds: "Events like 11.11, 12.12 have even spilled over to South East Asia and other parts of the world. This was not likely something foreign grocery retailers were expecting to face. It'd be difficult to be a net positive contributor to growth from their China operations with this happening year after year."
Ultimately, they must create clear digital eco-systems, with a priority focus on UX design to make the consumer experience convenient and attractive and look towards quality and superior product offerings as a means of differentiation.
If looking to maintain offline shopping, focus on creating a value-add experience that differentiates it from online shopping, and finally, integrate all of their consumer touchpoints and media to drive traffic and maintain buzz.
Using real rigour in analysing opportunities and understanding consumer signals at the most granular level would give foreign grocery retailers a real edge. Additionally, notes Woodford, past examples tell us that letting go of the home market’s traditional way of working to adapt to local needs is imperative for success.