In a research paper titled ‘Retail evolution: positioning for modern trade growth’, MVI (a WPP research firm specialising in retail insight) explains that a country’s retail trade generally modernises in one of three ways: the entry of foreign owned players, in the market; the acceleration of modern trade growth by local players or via a hybrid approach, whereby both global and local players grow in parallel lines. In the last few years, Pakistan’s retail sector has become a compelling case study of the hybrid approach.

Although every type of business, from food to clothing to books, has evolved at the retail level, the change has been swiftest and most apparent in terms of supermarkets/kiryana stores. On the one hand, modern trade is on the ascendant with global chains such as Carrefour, Metro and Makro either expanding or consolidating. In tandem with these international giants, locally owned supermarkets and retail chains are growing in size and influence. However, at the lower end of the spectrum, the kiryana trade, which is the backbone of Pakistan’s grocery retail trade, is also flourishing and some sources suggest that the number of kiryana stores is growing by two to three percent annually. Thus it is safe to say that the retail trade is finally coming of age in Pakistan.

The value of retail

Pakistan’s retail sector, like that of most South Asian countries is largely disorganised and therefore mostly undocumented. Figures on its exact size can vary significantly, making it necessary to treat any number as a mere guess-estimate.

Nosherwan Ali, Director Sales Modern Trade, Unilever Pakistan puts the total figure approximately $35 billion (about 17% of GDP).

However, a GAIN (Global Agricultural Information Network) Report issued by the USDA Foreign Agricultural Service on the Retail Food Sector in Pakistan sheds more light on the turnover of different types of stores.

According to the Report, kiryana stores have an estimated annual turnover of three billion dollars; domestic convenience stores (utility stores, cash and carry’s and CSDs) have an estimated turnover of $200 million, whereas modern markets (hypermarkets and supermarkets) have an estimated turnover of $176 million.

It is important to note that there are over 700,000 kiryana stores spread across Pakistan. Therefore, although kiryana still accounts for 70% of all grocery purchases in the country, modern retail – in spite of its comparatively limited presence – contributes 18-20% in terms of sales, a number which may be even higher in certain food categories.

Consumer trends dictate the growth of modern retail

The scope and influence of modern trade is growing for a number of reasons. The fragmented and disorganised nature of Pakistan’s retail sector is a great attraction for foreign retail chains, which see this as an opportunity to carve a niche for themselves in an emerging market.

However, modern retail expansion essentially boils down to macroeconomic factors and consumer spending patterns and Pakistan certainly has a large enough population (180 million) and enough per capita consumption ($836.3) to warrant retail expansion of any kind (modern or otherwise).

According to figures published by Planet Retail (a global resource on retail), per capita consumer spending in Pakistan increased by 37% between 2006 and 2011. Per capita grocery spending increased by almost 30%, whereas per capita non-grocery spending increased by a vibrant 46%. While the average Pakistani still spends 42% of his/her income on food products, spending on beauty and personal care products (a category which has grown by over 300% in the last six years) and consumer electronics and durables has increased sharply. Add to this the twin trends of rapid urbanisation (five to seven percent annually) and an increasing shortage of time to search for individual items at different stores and you have the perfect case for the expansion of modern retail stores. These stores offer the convenience of buying several different types of items under one roof and in recent years, they have seen a gradual increase in the value share of non-grocery items as a percentage of total sales.

Foreign retail chains and local supermarkets are cashing in on this trend by adding better value for money (bigger trade discounts in exchange for better brand visibility) and an improved shopping experience to the equation. These factors appeal especially to the salaried class of people who, as a trend, now prefer to do their grocery shopping on a monthly basis.

The trajectory of modern trade growth

It is essential to understand the trajectory of modern trade growth in order to assess its impact on brands and traditional retail.

According to Ali there are various stages in the evolution of modern retail, the first of which is the land-grab stage. This involves a sharp growth in the number of modern trade outlets and generally lasts about four to five years. Ali believes that Pakistan is currently at the tail-end of the land-grab stage but points out that if economic indicators improve, another land-grab wave could occur with more local supermarkets and international players entering the market (recent newspaper reports suggest that US retail giant Walmart may be eyeing Pakistan).

The land-grab is generally followed by a consolidation stage, where having captured the top line, modern retailers look for bottom line expansion. This too is happening in Pakistan as Metro and Makro seek to consolidate their merger in early 2012. Smaller supermarkets may attempt to follow the same path if bottom line profits do not materialise.

Improvement in the bottom line will eventually lead to expansion, and once modern retail has gained enough momentum, supermarkets and hypermarkets will have to create a positioning for themselves, be it in terms of food, health or beauty. A good example is the extremely saturated American retail environment, where Walmart and Target are known for being discount retailers, Whole Foods Market emphasises natural and organic products, Trader Joe’s is famous for specialty foods, and so on. Once this type of saturation and specialisation starts taking place, it will open up the retail market to specialist foreign players (think Watsons, Dairy Farm etc.).

Traditional retail comes under pressure

A prime reason for the rise of modern retail is consumer demand for a better and quicker shopping experience. However, kiryana stores have not lost their value or influence in this environment. Ali says the key to understanding the usefulness of different types of retailers in a multi-channel retail environment is by recognising consumer shopping behaviour at any given point in time.

“When consumers go shopping, they have what we call a ‘shopping mission’. If the mission is to buy their monthly groceries, then a supermarket is the ideal destination. However, for a daily or weekly trip, which generally consists of ‘meal for today’, corner shops and kiryana stores are still the most convenient destination.”

Kiryana stores are also still of prime importance in the rural areas where modern retail has made no in-roads, and is unlikely to do so at least in the near future. But as urbanisation increases and more supermarkets are established in urban and semi-urban areas, they will also attract the population from the surrounding areas and this could pose a potential threat to traditional retail. Furthermore, as more foreign players enter the market and existing chains expand their presence, modern retail will account for greater sales volumes, making it necessary for smaller retailers to reassess their business model in order to remain profitable. Retail experts say that in the years to come, urban kiryana stores in particular, will have to understand their strengths – daily meal items, mobile and internet cards, etc. – and focus on those, instead of trying to be all things to all people.

Interestingly – but perhaps unsurprisingly – kiryana stores tend to disagree with this assessment.

Yazdi Setna, who runs a store in Empress Market (established by his great grandfather) sheds some light on the matter. Here it is worth pointing out that most large hypermarkets and supermarkets (at least in Karachi) compare their prices to those charged at Empress Market in order to prove to their customers that they are getting a better deal in modern retail.

Setna’s view is that he doesn’t need to change his business model. Although he is cognisant of the fact that modern retail provides a better shopping experience, he doesn’t think the big stores are well managed, nor do they have a clear idea of what customers really want.

“The great advantage of a small store is that we give our customers personalised service and I am very aware of what people want. These supermarkets and hypermarket are run by big fellows who do not interact directly with people and don’t know how the retail business works in this country.”

Brands are under pressure

Regardless of the truth contained in Setna’s statement, Pakistan’s retail environment is modernising quickly, putting brands and FMCG companies under immediate and direct pressure. No doubt the self service modern retail environment can work in a brand’s favour as it allows customers to look at, feel and in some cases even smell what they are buying. However, because supermarkets and hypermarkets can carry anywhere between five to 20 different brands of the same product, the competition is also far more intense.

By virtue of this large variety of brands, FMCGs have lost their bargaining power with the modern retailer. While the kiryana stores depend heavily on being able to stock the brands of certain MNCs and large local companies to achieve their targeted turnover, large retail chains have no such dependencies. Ali explains the situation thus:

“The small retailer thinks his business is highly dependent on a few suppliers. On the other hand, the big players will tell you, ‘you are only a small percentage of my turnover’. So their bargaining power increases.”

Therefore, small retailers are brand focused, while modern retail is category focused. Every square foot of shop space is crucial to the large retail chain, so if the top or bottom line in a particular category is suffering, the retailer will expect brands and the companies behind them to provide incentives and activities that will jumpstart sales for the entire category, not just their own brand.

The combination of stiff competition and reduced bargaining power has made it necessary for brands to look beyond offering trade discounts and view the retail environment in a more strategic light. Also, in an increasingly cluttered media landscape, it makes good business sense for marketers to start taking retail (also known as ‘the last mile’) more seriously than they have done so in the past.

Afzal Shahabuddin, MD, Resource Edge (a retail strategy consultancy) says that a good retail strategy is about understanding the retail landscape and how customers shop.

“Marketers need to understand what the consumer’s ‘hot buttons’ are when they are buying a brand in a particular category, and then devise their strategy accordingly.” (For more, see ‘Selling the experience’ on page 8.)

What happens next?

The swift change in Pakistan’s retail environment is being precipitated by the demands of urban (and to some extent rural) customers who (as a result of media exposure) are expecting more value from both the brand and the shopping experience. This presents great challenges and opportunities for FMCGs and retailers.

In the context of the brand, integration between ATL advertising and in-store promotion is now more important than ever before. This may seem like stating the obvious but even Shahabuddin (who has worked with major FMCGs) admits that many brands get this wrong, because there is a lack of communication between the marketing and sales departments.

FMCGs also need to start thinking in terms of a multi-channel strategy, because as the retail environment develops, it is becoming increasingly obvious that one size does not fit all and what works for the kiryana store will not fly in a supermarket. The need for a multi-channel strategy will only become all the more pressing in the future as specialist retailers enter the market.

Ali understands that as a result of the changing nature of retail, the moment of truth when the consumer interacts directly with the product has also changed.

“The entire marketing mix – all the P’s of marketing – comes into play at modern retail making it an extremely challenging environment.”

Richard Voon, Chief Strategy Officer, Adétude Activation, explained this situation quite articulately in an interview with Aurora (July-August 2010), further underlining the need for a solid retail strategy:

“At the last mile of marketing, where the consumer interacts directly with the trade, most FMCG companies are helpless. Everything they have done before can go to waste in about 2.8 seconds.”

Modern trade itself also faces several challenges. Customers are drawn to supermarkets and modern retail spaces in search of convenience and to some extent by the novelty factor. However, what they really seek is an improved shopping experience, particularly in terms of product selection and customer service.

Although modern trade channels provide more variety than the corner kiryana, the quality of products (especially fresh and frozen goods) is occasionally questionable as a result of poor storage and lack of attention to shelving and detail. Getting these elements right requires the presence of trained staff that are comfortable in a large retail setting, and are knowledgeable in terms of handling customer complaints and queries.

Mubashir Jalili, VP Development, MAF Hypermarkets (the company behind Hyperstar) admits that this is still a huge problem.

“We train our staff thoroughly, but there are days when 10 cashiers or merchandisers don’t show up; this means we have to get quick replacements who are not necessarily properly trained, and this is what causes the problem.”

Another area where modern retailers need to exercise vigilance is in pricing. The advantage of supermarkets and hypermarkets is based on the premise that because of their large scale, they are able to negotiate better prices with brands and wholesalers and by reducing their own margins, are able to offer better prices to customers. Unfortunately, many large supermarkets and retail chains choose not to pass on the benefit to the customer in order to improve their own bottom line. In today’s complex social media environment where random customers are connected to each other, this can be a potential recipe for disaster. Furthermore, as the market becomes more competitive and the number of players increases, customers will quickly separate the wheat from the chaff and shun retailers who do not offer price benefits.

Finally, the success of modern retail (and in fact the retail sector as a whole) will depend almost completely on meeting customer demand in every conceivable way. The lack of proper measurement and documentation in this sector will present challenges, as expansion will depend upon insight and research into consumer spending patterns.

For those brands and retailers that get it right, there are rich pickings to be had.