The Race for Expansion

Motta’s, which started operations in 1986 as a single-floor store selling basic grocery items, now has three floors and has acquired two stores in DHA called The Mart by Motta’s. Diamond Superstore, which started in 1958 as a kiryana selling aata, has seven branches in Karachi, including one with a food court and a children’s play area; Naheed Supermarket (known for introducing pre-packaged masalas and pulses to the market) began as a 1,000-feet square outlet and Lahore’s Al-Fatah began operations in the 1940s (under the name Al-Hamra) and now has 23 branches. All the above believe they have barely scratched the surface of Pakistan’s modern retail sector.

A number of local modern trade stores, along with mid-sized and smaller general stores, have opened and/or expanded, especially following the launch of international modern trade (IMT) stores, such as Carrefour, Makro and Metro in the 2000s. According to Muhammad Ibrahim, Owner, Motta’s, once IMTs entered Pakistan, people realised that the grocery store business was not limited to a traditional general store experience; consumers could be offered more convenience and variety and the business was profitable and "cash-rich." Mohammad Sheikh, Director, Al-Fatah, adds that market expansion in the last couple of years has been “aggressive” especially during the pandemic. “If you are uncertain about how long the pandemic will last, the best business to invest in is groceries,” he says.

In 2020, Pakistan’s food and grocery retail market had total revenues worth $52.6 billion, representing a compound annual growth rate (CAGR) of 8.1% between 2016 and 2020, according to a report, Food and Grocery Retail in Pakistan. Although the market value of the modern retail sector cannot be adequately estimated due to the industry being largely undocumented, store owners agree that it has been expanding pre- and post-Covid-19.

“In the beginning, consumer needs were limited – people would shop at kiryanas or neighbourhood general stores – but now their expectations are changing. For example, as people become more aware of global cuisines, they want to prepare non-desi food, such as pastas and burgers at home and there is a rise in demand for those ingredients,” explains Sheikh. As a result, established stores like Al-Fatah, Diamond Superstore, Motta’s, Naheed Supermarket and many others have kept evolving by revamping their stores, opening more branches and investing in product variety to stay above the competition and meet consumer demand. Although 225 million Pakistanis have access to more than two million retail outlets, of which approximately 800,000 are grocery retail stores (kiryanas, kiosks, department stores, supermarkets and medical-cum-general stores), the ratio of grocery stores to the population is still not enough.

“Compared to our population, the number of operational stores is nothing – one to two percent maybe. We are at the infancy stage, so even if 1,000 stores like Naheed Supermarket open in Pakistan, there will still be room for growth”, says Munsub Abrar, Director, Naheed Supermarket.

Although investing in the grocery retail business remains an attractive proposition, what are the intricacies involved in opening and maintaining an LMT store and how sustainable is the business for new players?

1 Investment
It can cost between Rs 20 to 30 million (small, basic stores) to Rs 80 to 100 million (large-scale stores) to open a grocery store, depending on the size, type of furnishings used (fixtures, equipment, etc.) fixed costs (rent, salaries, etc.) and product inventory.

2 Location
To determine the location, stores pinpoint where their target audiences reside/shop and analyse their buying power. Naheed Supermarket, for example, first opened in Bahadurabad because at the time it was a central location and people from the upper-middle class were moving into the area. Similarly, Al-Fatah opened their second branch in Y Block, DHA, Lahore, because the area was becoming popular for housing and shopping for SEC A and B.

Looking at the LMTs, their customer base consists mainly of people aged 25-50 from SEC A and B with middle to high level incomes. The store will survey the most in-demand brands in their potential area (with help from brands and research firms) and decide on the product inventory. Stores with multiple branches cater to different consumer segments, depending on where they are located (inventory is directly proportionate to the product demand in the area). Sheikh explains: “If we are opening a store in Bahria Town, we will ask big FMCGs, such as P&G, Reckitt and Unilever, where and what their sales are in that area. Then, we identify the type of store we want to open – a small, mid-sized or flagship. In Allama Iqbal Town, for example, where consumer buying power is not that strong, but the area is densely populated, we will not stock top-tier beauty brands like Huda Beauty or Benefit; L’Oreal and Maybelline will be the premium beauty brands there.”

Aurora’s Retail Survey (conducted between June 20 to July 10) shows that while 37.2% of consumers (700 people mostly from Karachi and Lahore), consider it important for a grocery store to be located near their home or office, 47.1% prefer shopping at major supermarkets, even if it is not close to their home or office and 26.4% say they used to shop at small general stores but now shop at a new supermarket located close by; 15% say they shop at a small store nearby.

3 Layout
With increased consumer interest in a non-traditional shopping experience, stores have invested accordingly by working with brands, interior designers and light consultants to create an ambience, rather than the basic “buy, pay and leave” model of the small/general stores. Al-Fatah’s biggest store in Gold Crest Mall is inspired by UK’s Waitrose and offers a “whole experience”, starting from wooden flooring and grey and green colours (“a fusion of nature/freshness and the future”) to the product display and how the store smells. Raheel Moghani, CEO, Diamond Store, agrees that catering to changing trends is important and although it is difficult to revamp older branches, Diamond have ensured their new ones are up-to-date aesthetically.

4 Product Supply
There are two models for this. If it is a perishable item (frozen food), it will be a direct delivery from the manufacturer to the store. Non-perishable items, like shampoos, are delivered to store warehouses, from where a dispatch plan (to the store’s multiple branches) is made, depending on how much the product requires replenishment.

5 Stocking Products
To acquire and replenish products, large-scale stores deal directly with manufacturers, while smaller stores work with distributors. Sheikh says “If we feel there is a huge demand for a new product, we will approach the manufacturer and if they have a new product which they think will work at the store, they will approach us.” Stores also tend to do their own market research to find out what is trending among customers.

“We do our own market research to find out more about a brand’s market standing. We carry out quality checks, check the product’s traceability, what the company is known for and if it is a new setup we try to visit their offices. We prefer to communicate with the manufacturer as distributors are mostly inclined towards logistics and are not very involved in store promotions or customer awareness,” says Abrar.

Customer demand is usually determined through word of mouth and what people are saying on social media. Cosmetics brand – The Ordinary for example – became popular recently and when consumers started asking stores like Naheed Supermarket and Al-Fatah about it, the stores ended up stocking the brand’s entire range. Another example is Korean instant noodles which became “a thing” after they came into Pakistan and people wanted to try something other than Maggi and Knorr.

6 Has There Been a Change in Consumer Preferences?
According to Abrar, consumer behaviour has remained unchanged post lockdown, including the increased home cooking trend. People are trying new products such as marinades and other food ingredients usually purchased by the restaurant industry. Decent Store (Lahore) and Diamond Store meanwhile say customers have generally become more health conscious and are favouring such products. Al-Fatah and Naheed concur by saying that although the basic grocery segment is the most popular in terms of sales, health and beauty is becoming a close second, resulting in more stores importing international beauty brands.

7 Easy To Open, Difficult To Maintain
According to Abrar, despite the growth in grocery retail, it is not always sustainable. In Sheikh’s opinion “stores are closing at the same rate they are opening… An example is Condis Superstore, which expanded into 10 branches in one year but then closed down almost all their branches.” Moghani believes that because supermarkets are a “complicated supply chain business… the key to survival is economies of scale… the more the expansion, the more the chances the business will survive.”

8 Narrow Price Margins and Overhead Costs
There are several reasons why new stores are closing. In Pakistan, the price margins for local packaged grocery items are razor thin, as by law, manufacturers are required to print product prices; so, in the case of a five rupee Peek Freans’ ticky pack, the store can only sell it for just under five rupees, leaving a tiny margin. Unlike other retailers which succeed on brand uniqueness, at the grocery level you pretty much get the same variety everywhere – and there are no major differences in prices.

“Companies do not have the leverage to increase the product’s price, so they decrease the size of the product. The competition is so cut-throat that we cannot afford to make a mistake – we are working on margins of one to two percent and if we make a mistake on the margins our entire base is affected,” explains Moghani.

To combat the price margin issue, many stores go for ‘mass selling’, whereby they sell products at the lowest margins possible to sell more – but this is not a sustainable model for everyone. However, since imported items (to some extent) are priced at better margins, although their daily sales volumes are considerably lower, stores have begun importing and stocking non-essential items, such as health and beauty products, electronic appliances and toys, as their price margins leave more room for manoeuvre.

9 Product Demand and Buying Power
The bigger stores have the advantage of their customers’ buying power. Sheikh explains that smaller stores cannot sell Coke or Pepsi at the same price that larger stores do as the latter get a better price from the company as they sell more products. “If there is a customer who buys 100 bottles from you and one who buys five, you will prefer the 100-bottle customer and agree on their terms as well.”

10 Staff
Trained staff are hard to find and most of the training is done by the stores themselves. Moghani says retail is a tough business as the hours are long and include weekends and national holidays (“everyone else is off on Sundays… we do most of our sales on Sundays”). He adds that even a single store requires a large labour force, because of the range of tasks involved, which go from operating a computer and handling inventory software to manual labour.

11 Keeping up With Competition
Store owners agree that staying relevant is key and they must keep evolving, whether by expanding, investing in aesthetic changes to cater to the changing customer shopping experience or offering incentives, such as loyalty cards and working with brands on special discounts. Sheikh emphasises that their most loyal customers are the older generation but they need to cater to the new generation by keeping up with what they want.