Walk down the aisles

Cheap, convenient and stocked with everything you need. Supermarkets today are growing in strength as they become the store of choice for modern consumers. Career Central takes you through how they do their business.

By Melody Tan

Supermarkets are a global force to reckon with. Across the Asia Pacific, the number of hypermarkets, supermarkets, convenience stores, and personal care stores has been gradually increasing since 2001.

The rise of the super(market) powers

In Singapore, about 80% of household shoppers spend the bulk of their household expenditure in supermarkets. Over the 2002 to 2004 period, there has been an over 8% per annum increase in the number of modern stores. Eight out of 10 household shoppers shop at FairPrice at least once every month, while Dairy Farm International, which owns Cold Storage, Shop N Save and Giant, attract six out of 10 shoppers.1

The majority of products stocked by such stores are fast-moving consumer goods (FMCGs), as seen by the variety of packaged foods, cosmetics and toiletries as well as household products. The largest US retailer, Wal-Mart, devotes more than a third of its store space to such products. These everyday necessities are brought into modern self-service store settings, to further convenience consumers who can grab what they want, pay up, and go.

Getting the goods

Supermarket chains are gaining power as they grow larger, and can assert demands on suppliers. Suppliers often face stringent entry criteria to work with supermarkets, earn small profit margins after heavy bargaining, and have limited security as they have to act upon endless requirements to keep up with the competitive market.

Typically, suppliers send product samples to the supermarkets. If the supermarket is interested in carrying the product, the purchasing manager of the supermarket meets up with the supplier to negotiate details on the price, quality, order size, payment method and promotion of the product. The supplier is also evaluated on its production capability, financial strength, credit standing and logistics and delivery capability. Due to the strong bargaining power of the supermarket, the terms and conditions are usually unilaterally determined by them. The supplier, especially small and medium enterprises, can only accept or refuse the contract. After that, the individual purchasing manager or store manager places the order with the supplier. The quantity ordered is determined by the current market situation, demand for the product and the inventory level.

Making shelf space

With the need to satisfy their burgeoning customer base, how do supermarkets decide on and allocate space for the many products that end up on their shelves?

One way is by using ‘category management’ to analyse demand within a particular product category. In category management, all decisions about product selection, placement, promotion and pricing are made on a category-by-category basis. The category managers thus play an active role in choosing which products to stock, where to place them and how to market and price them. Some supermarkets have appointed certain leading manufacturers as ‘category captains’, which are outside firms, usually a major supplier. They advise retailers on how to manage a category based on their knowledge of the product, when it will sell best, the most effective promotions and what kinds of complementary products should be displayed nearby.

‘Slotting allowances’ are also charged by some supermarkets to make room for products on the shelves. It is to offset some of the cost and risk of adopting a new product line. Also, suppliers may also have to pay a fee to keep their products on the shelves for a given period. Some retailers also charge fees to secure exclusivity, to keep competitors’ products off the shelves or relegate them to a worse position in the store.

However, major manufacturers such as Procter & Gamble simply refuse to pay any fees or allowances at all. Consumers are also thought to prefer stores with a wider variety of brands for each product category. Hence, retailers who practise exclusivity or category managers who try to stock only their products are set to lose popularity with consumers.

Prevalence of IT

Supermarkets rely heavily on IT to run their operations smoothly. From financial planning to warehouse management and store-level inventory, all movements are tracked with computer systems. Today, large supermarket retailers have taken over control of most of the supply chain. With their own distribution centres and warehouses, they can measure and control so much of the process that waiting time and costs are reduced.

Singaporean retailers are also taking to new technologies to improve supply chain management capabilities. Home-grown Sheng Shiong Supermarket has come forward to participate in the Collaborative Planning, Forecasting and Replenishment (CPFR) initiative, which is a global best practice championed by the likes of Tesco, Wal-Mart and Procter & Gamble. It involves the exchange of data such as sales and inventory status between business partners, to enable collaborative activities such as joint product sales planning, sales promotion management and replenishment planning.

Another important development is the use of bar codes and scanning to track movement of goods and to gain knowledge of who is buying what. This can help supermarkets better stock their goods as well as anticipate possible new products to bring in. They can also evaluate the effectiveness of various promotions.

Tesco, the biggest retailer in Britain, uses Tesco Clubcard, a customer-loyalty scheme that allows them to record what people are buying. This knowledge allows Tesco to give customers discounts on things that they buy routinely. Also, Tesco can adjust its shelves to suit the profile of the local area, or even the time of day. Tesco in Brixton, an area of south London settled by Carribean immigrants, sells plantains, a kind of savoury banana that can also be found in market stalls outside. Tesco stores in central London do not, but instead, they sell sandwiches to office workers at lunch time and then ready meals to them in the evening. The aim is to combine the local knowledge of the small-town shop with a multinational’s economies of scale in buying and logistics.

Private labels

Part of why supermarkets are becoming independent behemoths is also due to the fact that they are introducing their own private labels. These private labels are cheaper than ‘branded’ labels by manufacturers that they help distribute, and are at times, no less inferior in quality. An added advantage is, the supermarket retailers have the final say on where goods are placed in the store, and can put their labels in better positions. Private labels have been grabbing market share in the US by an average of 1% a year since the mid-1990s, and in UK, private labels increased market share from 16.4% to 30% from 1993 to 1998.2

This trend is particularly strong in the FMCG market. Most retailers enjoy higher profit margins on their private labels then on the leading brands that they sell, even if they managed to get a huge discount on them. While retailers cannot afford not to stock products of leading brands, the retailers themselves would like a piece of the action, especially in the FMCG market where competition is fierce and profit margins are low.

Higher acceptance of private labels comes with increased development of the modern grocery trade, as supermarkets evolve to better meet the needs of their increasing customer base. Currently, Singapore has the highest level of private label penetration across Asia, with more than half of Singaporeans being confident that the quality of private labels is comparable to those of leading brands.3 Examples of these private labels are Fairprice labels by Fairprice, and First Choice by Cold Storage. These brands are stamped on goods such as day-to-day necessities like sugar, to toilet cleaners, to tissue paper, and are sold by the respective supermarkets. Carrefour also has its own private label, Carrefour, as well as Reflets de France, which is their brand of fine groceries based on French recipes.

Market segmentation

Large supermarket chains also have the advantage of spreading their resources to target different market segments. A good example of this is Cold Storage Singapore. On top of operating 30 Cold Storage supermarkets across the island to cater to middle-class shoppers, Cold Storage also operates four Market Place stores and 44 Shop N Save supermarkets that cater to higher-class shoppers and heartland shoppers respectively. The Market Place stores include Tanglin Market Place and Jasons Market Place and offer a wide range of international imports. Shop N Save supermarkets, on the other hand offers a range of daily necessities and fresh food at low prices.

The future

The challenges that supermarkets face today is to reduce costs and improve quality while preserving margins at attractive levels. They cannot afford to provide shoddy or non-existent service in the face of more competition. Branding has to also become a management responsibility, as the supermarket has to develop a distinctive personality, a clear brand strategy and a supporting staff that collectively appreciate what the strategy means and delivers it every day on the ground. Only then can supermarkets thrive in the long run.

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